tl;dr

Background: In the U.S. Justice Department’s (DOJ) recent suit against Google and the Federal Trade Commission’s (FTC) latest complaint against Amazon, both antitrust agencies allege these large technology firms behave anti-competitively by preventing their rivals from reaching the “scale” needed to compete effectively.

But… achieving scale or a large customer base does not, in itself, violate antitrust law. Private companies also owe no duty to allow their competitors to reach scale. For example, Google is not required to allow Bing to gain more users so that Bing’s quality can improve. Google and Amazon’s competition for users at the expense of competitors is central to the competitive process. To make an effective antitrust case, the agencies must delineate how Amazon and Google allegedly abuse their size in ways that harm competition and consumers.

KEY TAKEAWAYS

‘SCALE’ LACKS PRECISION IN ANTITRUST

Antitrust regulators often cite “scale” in recent complaints against large tech companies. Instead of throwing that particular term around loosely, the enforcement agencies should detail precisely how firms allegedly abuse scale to harm rivals. 

Does scale unfairly raise barriers to entry? Does it impose costs on competitors? In both of the cases cited above, the alleged harm is the direct costs imposed on competitors, not the firm’s scale. After all, scale can be just another way of describing the firm that produces the highest-quality product at the lowest price. Without greater clarity, enforcement agencies would be unable to substantiate antitrust claims centered on “scale.”

To prevail in court, the agencies must articulate precise mechanisms of competitive injury from scale. Broad assertions about nebulous “scale advantages” are unlikely to demonstrate concrete anticompetitive effects. 

SCALE ALONE IS NOT AN ANTITRUST HARM

It has long been recognized that simply “achieving scale” and becoming a large firm with significant market share or production capacity does not constitute an antitrust violation. No law prohibits a company from growing large through legal competitive means. The agencies know this. The FTC argues that its complaint against Amazon is “not for being big.”

While scale can potentially be abused, it also confers significant consumer advantages. Basic economic principles demonstrate the benefits of size or scale, which may allow larger firms to reduce average costs and become more efficient. These cost savings can then be passed on to consumers through lower prices. Larger firms may also be able to make more substantial investments in innovation and product development. And network effects in technology platforms show how scale can improve service quality by attracting more users. 

Scale only becomes an issue if it is leveraged to restrain trade unfairly or in ways that harm consumers. The restraint is the harm, not the scale.

PREVENTING SCALE IS NOT AN ANTITRUST HARM 

Preventing a competitor from achieving greater size and scale is not inherently an antitrust violation either. Companies routinely take business from one another through price competition, product improvements, or other means that may limit rivals’ growth. This is a normal part of market competition. 

For example, if Amazon achieves sufficient scale that allows it to offer better prices or selection than smaller e-commerce websites, that may necessarily limit those competitors’ scale. But this does not constitute an antitrust harm; it is, instead, simply vigorous competition. An antitrust violation requires the firm to take specific actions to restrain trade or artificially raise rivals’ costs. Similar arguments hold for the DOJ’s case against Google over the company paying to be the default search engine on various mobile devices. 

Unless the agencies can demonstrate precisely how a company has abused its position to undermine rivals’ scale unfairly—rather than winning business through competition on the merits—their complaints will struggle to establish antitrust liability.

COMPETITION INCREASES CONCENTRATION, WHICH MAY LOOK LIKE SCALE

Regulators often assume that large scale enables anticompetitive behavior to harm smaller rivals. Economic analysis, however, demonstrates that scale can benefit consumers and simultaneously increase concentration through competition.

Firms that achieve significant scale can leverage resulting efficiencies to reduce costs and prices. Scale enables investments in R&D, specialized assets, advertising, and other drivers of innovation and productive efficiency. By passing cost savings on to consumers, scaled firms often gain share at the expense of higher-cost producers.

As search and switching costs fall, consumers flock to the lowest-cost and highest-quality offerings. Competition redirects purchases toward scaled companies with superior productivity and lower prices stemming from economies of scale. This reallocates market share to efficient large firms, raising concentration.

Greater competition and the competitive advantages of scale are thus entirely consistent with increased concentration. Size alone does not imply anticompetitive behavior. Regulators should evaluate specific evidence of abuse, rather than assume that scale harms competition simply because it leads to concentration.

For more on this issue, see Brian Albrecht’s posts “Is Amazon’s Scale a Harm?” and “Competition Increases Concentration,” both at Truth on the Market. 

ICLE Director of Competition Policy Dirk Auer joined as a panelist in a webinar organized by ECIPE on platform regulation and merger policy in the EU, and the implications for member states’ attractiveness for digital investment. Video of the full panel is embedded below.

Abstract

It is always an appropriate time to reevaluate, reexamine, and question the optimal scope and shape of our antitrust institutions. For example, the United States is peculiar in having two distinct antitrust enforcement agencies. More peculiar still, the agencies have both common and unique functions. For example, both the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) review mergers pursuant to Section 7 of the Clayton Act and enforce Sections 1 and 2 of the Sherman Act through civil actions. At the same time, the Division alone is responsible for criminal enforcement of the Sherman Act, and the FTC alone enforces the Clayton Act provisions that prohibit tying and unfair methods of competition. Layered atop the peculiar dual jurisdiction of the FTC and DOJ at the federal level is a remarkably complex and decentralized system of competition enforcement authority distributed among myriad federal sectoral regulators, state attorneys general, and private litigants.

This article asks whether the current distribution of competition functions in the U.S. can be improved by some reorganization or other reform. We answer in the affirmative and propose several changes — perhaps the most significant being consolidating the competition functions of the FTC into the Antitrust Division. We also propose stripping the Federal Communications Commission of authority independently to review mergers, as the Congress did with regard to the Department of Transportation in view of its similarly poor performance reviewing airline mergers. Our more general proposals regarding the authority of sectoral regulators over competition should not be overlooked, however; it would do much good and has little or no downside.

Read at SSRN.

Abstract

What are the welfare implications of markup heterogeneity across firms? In standard monopolistic competition models, such heterogeneity implies inefficiency even in the presence of free entry. We enrich the standard model with heterogeneous firms so that preferences are non-separable in off-market time and market consumption and show that this changes the welfare implications of markup heterogeneity. In this context, homogeneity of markups is neither necessary nor sufficient for efficiency. The marginal cost of the marginal firm is weakly inefficiently high when off-market time and market consumption are complements and inefficiently low when they are substitutes, and the equilibrium allocation devotes weakly too few resources to firm creation. However, when off-market time and market consumption are perfect complements, markups are heterogeneous across firms and yet the equilibrium allocation is efficient.

The U.S. Justice Department’s landmark antitrust case against Google has wrapped up, leaving the parties to await Judge Amit Mehta’s bench-trial decision in the matter.

But based on the arguments presented and the publicly available evidence, the government has not made its case that the company committed “monopoly maintenance.”

Read the full piece here.

ICLE Senior Scholar Eric Fruits joined Supermarket News‘ SN Off the Shelf podcast to discuss the proposed merger of Kroger and Albertsons and the likelihood that the Federal Trade Commission will attempt to block the deal. Video of the full episode is embedded below.

The European Commission late last month published the full list of its “gatekeeper” designations under the Digital Markets Act (DMA). Alphabet, Amazon, Apple, ByteDance, Meta, and Microsoft—the six designated gatekeepers—now have six months to comply with the DMA’s list of obligations and restrictions with respect to their core platform services (CPS), or they stand to face hefty fines and onerous remedies (see here and here for our initial reactions).

Read the full piece here.

In order to promote competition in digital markets,^[1] Latin American countries should not copy and paste “solutions” from other jurisdictions, but rather design their own set of policies. In short, Latin American countries—like my own, Peru—should not “put the cart before the horse” and regulate markets that are not yet mature.

Read the full piece here.

Abstract

In this article, we examine one mechanism through which enforcement innovation occurs and is passed into practice at the U.S. antitrust agencies. Our main thesis is that agency economists are uniquely situated to produce, adapt, and disseminate new methodologies that improve enforcement accuracy because of the multiple and conflicting roles they play. Agency economists are trained in academic PhD programs to value methodology above application, and to read and publish in academic journals. They know how to narrow questions, so that they can be answered precisely, using theoretical and/or empirical models. But when they arrive at the agencies, these economists trained in academic PhD programs are thrust into decision-making roles where they must render judgments on messy, real-world cases, typically with imperfect knowledge, and often in conflict with agency attorneys, political appointees, and/or the economists and attorneys who appear on behalf of parties. How to manage this process in a way that produces growth (useful innovation) is a primary institutional challenge for the antitrust agencies.

We focus on the organizational structure of the U.S. antitrust agencies with an eye toward isolating the factors that encourage or discourage the development and application of useful, innovative economic tools. Specifically, we examine how the relationship between academia and the agencies and the dual responsibilities of research and casework serve to encourage what has become known as “enforcement R&D,” the development and application of new methodologies for screening and evaluating mergers, and for quantifying the expected harm to competition of various behaviors.

See at SSRN.