Business & Economics

Antitrust From the Gilded Age to the Technology Age

Instead of panicking about the size of influential U.S. corporations, policymakers should keep the focus on consumer welfare

Some policymakers want to slay the “Goliath” of big business, but the truth is more complicated. Image Credit: Gebhard Fugel (German, 1863-1939), “David Against Goliath”/Wikimedia Commons

We are living in a time of unprecedented innovation. From the rapid development of COVID-19 vaccines and near-automated diabetes care devices to affordable electric cars and pocket-sized supercomputers known as smartphones, consumers are far better served now than they have been at any point in history.

A number of factors, including globalization and “permissionless innovation,” have played a role in these amazing developments. But consumer-focused antitrust enforcement also has helped, giving U.S. companies broad leeway to innovate and grow without the threat of overbearing regulation. Indeed, until recently, companies have not had to face the burden of excessive and arbitrary enforcement of U.S. antitrust laws. This is due largely to the fact that for the past 50 years, antitrust enforcement has been guided by the consumer welfare standard (CWS), which looks at how a company’s conduct affects consumers.

Unfortunately, the CWS, along with the enforcers and judges that use it as a guide, has come under attack for failing to vigorously enforce the antitrust laws, leading to widespread market concentration across the economy. The CWS is also blamed for the rise of big technology platforms, record profits in the form of “monopoly rents” and “exploitation” occurring on the platforms.

When Big Was Bad

Nowadays, if a company attempts an action (such as a merger, an agreement or an attempt to monopolize a market) that is likely to harm consumers by raising prices or diminishing output, quality or innovation, then the conduct is seen as anti-competitive, and the government will initiate an antitrust enforcement action against the company.

Other business conduct, however, is generally seen as beneficial to the economy. For example, if a manufacturer acquires a distributor—a process known as a vertical merger—and is able to integrate the two businesses to reduce costs, this will tend to lower prices for consumers. Similarly, a merger or other agreement may be designed to reduce a business’s manufacturing costs, increase output and thus reduce consumer prices. These cost savings are known as efficiencies and generally offset any claims that a company’s conduct is anti-competitive.

This deference to an efficiencies approach has not always been a given. From the passing of the Sherman Act in 1890 (which began the era of federally enforced antitrust statutes) until the 1970s, enforcement was often inconsistent. Because antitrust statutes used broad language, the first 80 years of enforcement saw judges interpreting the statutes largely without a guiding principle, leading to disparate rulings. In some cases, companies were charged with breaking the law for setting prices too high, while at other times keeping prices too low would get companies in hot water. The fundamental thinking until the 1970s was that big business was bad, and it was the government’s duty to rein in the “trusts” no matter the economic consequences.

Between the end of World War II and the 1970s, the U.S. economy was characterized by low levels of private innovation. While there were significant advances in aviation, electronics and medicine, these gains were largely attributable to large public investment. Because there was significant uncertainty around antitrust litigation and private ownership after the trustbusting era, companies had little incentive to privately innovate. In particular, antitrust precedents discouraged mergers and restrictive contracts, such as exclusive dealing or minimum/maximum resale prices, designed to generate efficiencies. Given the regulatory climate, innovations were not likely to be sold or incorporated into an existing business, nor were they apt to attract enough capital to effectively compete (but not so effectively as to be deemed “unfair”). There was no real incentive to find the next big thing.

The Consumer Welfare Standard

In contrast, since the late 1970s, there has been a distinct shift away from the previous regime of antitrust over-enforcement. This was due in large part to the enforcers and courts embracing the consumer welfare standard as the guiding principle of antitrust enforcement. The CWS weighs a company’s conduct based on its effect on consumers, not on other businesses.

Previously, if a business’s conduct produced high-quality, low-cost products but made it difficult for producers of inferior goods to compete, then the company producing the “better” product could be punished. There was little consideration of the effect on consumers, who through vigorous competition gained access to higher-quality and lower-priced goods; the mere fact that one company was suffering because of another’s success was cause enough for action.

The CWS flipped this attitude on its head and placed consumers at the center of antitrust law. No longer did companies face enforcement action simply for giving consumers a better product or lower prices. Businesses were incentivized to continually innovate so they would not be outdone by their competitors. Some ventures might collapse because they were not innovative enough or attuned to consumers’ changing tastes, but this process, known as creative destruction, is fundamental to the health of the economy. This cyclical process keeps the wheels of the economy moving, rewards innovation and focuses on improving consumer outcomes, leaving less nimble and innovative companies in the dust.

Social Media and Market Concentration

Some argue that large multinational corporations have an unfair advantage in the economy, and their mere entrance into a new market will push smaller firms out. But the competition between some of the largest firms in history tell a different story. For example, in 2008 MySpace had over 115 million users and was valued at over $12 billion. Facebook, having entered the market soon after, effectively competed away MySpace’s market share after 2008 and maintains the top social media spot to this day. The popular story of the social media giant generally stops here, with Facebook gaining a “monopoly,” buying up every other competitor and unfairly competing in the market.

This incomplete story, however, disregards the rise and fall of competing networks from similarly large companies. Google+, the social media arm of Google, was expected to be a formidable competitor to Facebook, leveraging all the data Google had collected since its inception to tailor the experience perfectly to every user’s wants—yet it lasted only 8 years and peaked at 200 million users. Vine, owned by Twitter, was once the most downloaded video sharing app, attracting 200 million users. Snap, the messaging and video sharing service, is still around but has failed to maintain the skyrocketing growth that made it a household name.

The current threat to Facebook’s “empire” is TikTok, which is projected to reach over 1 billion users by 2025 and saw an 800% increase in users two years after its launch. These companies demonstrate not only that there is no lack of competition, but that there is more entrance to and exit from the market in the past decade than ever before. Additionally, TikTok’s ability to become a serious competitive threat since 2018 seriously undermines the notion that Facebook’s dominance of the market is unshakeable.

The same individuals who bemoan the rise of technology platforms are also advocating to expand antitrust enforcement authority. By resurrecting the “big is bad” mentality and blaming large companies for everything from inflation to democratic upheaval, they seek to invoke the populist spirit of antitrust’s earliest days, when Supreme Court Justice Louis Brandeis was on the bench. The self-labeled Neo-Brandeisians hearken back to a time when market concentration was seen as the enemy of a free and stable democracy.

This idea of freedom from market concentration, however, represents a paradox that was first highlighted in the 1970s and continues to this day. By relying on the government to break up the largest, most successful companies, businesses are essentially insulating themselves from competitive pressures. If the government will break up a company after it attains a certain level of success, why would competing firms attempt to out-compete their rival? All they would need to do is wait for their rival to continue succeeding, while doing just enough themselves to stay in business. In due time, the government would eliminate the competitive threat they faced.

The same thinking applies when companies seek to innovate for their own growth purposes. If a company is too innovative and too competitive, effectively gaining market share by only “good” means, eventually the government will see it as a threat and will break it up. Under this system of over-enforcement, companies have every incentive to stay small and tamp down innovation. In fact, staying under the radar may be the only way to survive.

Concentration and Industry Dominance

The post-1970s American rejection of the “freedom from concentration” philosophy has coincided with U.S. domination of the world’s most innovative industries. This domination has not, as Neo-Brandeisian commentators allege, come on the back of exploitation, diminished competition and increased concentration. In fact, claims of reduced competition and increased concentration have been shown to be false.

The U.S. has become a global economic power because of the permissionless innovation economy that it has maintained for the last half century. Specifically, companies were allowed the space to grow, innovate, reduce prices, increase quality and perform a host of other consumer-welfare-enhancing acts without fear of harmful governmental intervention.

The EU has lagged behind the U.S. in innovation, in many respects due to its large regulatory barriers to entering markets and its interventionist mindset. The head of the EU’s competition agency noted in a statement last year that the U.S. approach to antitrust under the new administration is converging with that of Europe, and the current American leadership agrees. This rules-based, interventionist approach to antitrust is clearly the Biden administration’s model, and it is designed to fix the “permissive” antitrust regime that the administration claims has been the norm since the 1970s.

Permissive, though, is not the same as permissionless. Permissive implies, incorrectly, that the previous regime allowed anti-consumer behavior to run rampant throughout the economy. While antitrust enforcement numbers have waxed and waned over the decades, regulatory agencies have always brought a number of cases per year, cracking down on companies’ illegal behavior.

The “permissionless” approach uses a light touch, applying targeted enforcement to cases of genuine competitive harm, following the economic evidence to ensure consumers come out on top and staying out of the way at other times so that barriers to entry are low. Maintaining a company-neutral approach to enforcement is key to a permissionless system; just because a company is big does not mean it should have to play by a stricter set of rules.

The only way to ensure that innovation and growth remain vibrant is to stick to the CWS and practice a policy of permissionless innovation. Companies large and small are treated equally and fairly under this system, and despite what some officials may claim, anti-consumer conduct does not run rampant. Companies of all stripes are incentivized to compete as vigorously as possible, cater to consumers’ wishes and innovate to sell more products.

A world of plentiful consumer choice, fulfilling the demands of all consumers, is possible if the government sticks to enforcing antitrust laws with consumers in mind. When policymakers pursue other priorities, such as bailing out unsuccessful businesses or enforcing “fairness,” consumers necessarily suffer. The past 50 years have featured innovation-led U.S. economic growth and conferred major benefits on American consumers. But without a permissionless innovation mindset and the CWS, the economy will have a harder time maintaining this record of success in the future.

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