Category Archives: Antitrust

Time for a Federal Price Gouging Law?

Amazon’s vice president of public policy, Brian Huseman, calls for a federal price gouging law in a recent post over at Amazon’s in-house blog. This is a bad idea for several reasons.

One is that there are already effective ways to reduce price gouging without regulation. At Amazon, Huseman writes, “We deploy dynamic automated technology to proactively seek out and pull down unreasonably priced offers, and we have a dedicated team focused on identifying and investigating unfairly priced products that are now in high demand, such as protective masks and hand sanitizer.”

This should be a competitive selling point for Amazon, not a call for more regulation. Regulations, remember, are made by the government we have, not the government we want. Amazon’s technology and in-house policies are almost certainly more effective than what Donald Trump, Nancy Pelosi, or Mitch McConnell would enact during an election year and a pandemic. Company-level policies are also more adaptable than federal-level policies as technology and circumstances change.​

In fact, if Amazon isn’t already doing so, it could license or sell its anti-price gouging technology to competitors for a profit. Price gouging is unpopular, and companies that fight against it look good to customers. Amazon does not need federal regulations to force this business opportunity into being.

Looking at price gouging legislation from Amazon’s perspective, but without the public relations filter, they stand to gain three things from a federal price gouging law:

  1. Regulatory certainty. One federal standard is easier to follow than dozens of state standards.
  2. Liability protection. Amazon will face fewer price gouging lawsuits if the company is cooperative with legislators, or even has a hand in crafting the rules.
  3. Rent-seeking, which is economists’ term for using government for unfair advantage. Price gouging legislation is a way for Amazon to raise rivals’ costs without having to improve its own offerings. Amazon has already invested in artificial intelligence algorithms (AI) and in enforcing guidelines for its third-party sellers. Many of Amazon’s competitors have not, especially the smaller ones.

There is something to be said for the first two items, though there are also arguments against them. But the third item, rent-seeking, is anti-competitive behavior at its worst. One of the primary reasons CEI opposes antitrust regulation, for example, is that antitrust regulations themselves are a major rent-seeking opportunity. Big companies routinely game the rules to thwart competition. Price gouging legislation is another example of the same rent-seeking process. These initiatives happen when companies compete in Washington, rather than the marketplace.

Other Factors

Amazon’s call for a price gouging bill might be part of a larger effort to get itself out of antitrust crosshairs. Ironically, such a bill would make retail less competitive. Not only would Amazon raise rivals’ costs, legislation would prevent companies from competing with each other to offer price gouging policies their customers most prefer.

The timing is as bad as the idea itself. Retail sales declined by 16.4 percent in the month of April, the worst ever recorded—for the second month in a row. Retailers have enough to deal with without having to spend resources complying with new rules their competitor helped to write.

There is a federalism angle, as well. A federal rule would impose standards on more than a dozen states that intentionally refuse them.

Prices Are More than Money

As any good economist will tell you, money isn’t everything. Prices are a lot more than money. Every good has a mix of both money and non-money prices. Price gouging legislation is ultimately ineffective because it only reduces ­money prices during a crisis. Tamping down on those means more severe non-money price increases. These cannot be legislated away.

A high money price causes people who don’t urgently need toilet paper or hand sanitizer to hold off until later, when the price goes back down. That leaves more left over for people who need it now. This matters a great deal during an emergency. On the other side of the equation, that same money price increase also induces producers and distributors to go the extra mile, often literally.

What about non-money prices? One example of a non-money price is when a good becomes harder to find. You might have to drive to a store further away or do some deep digging online for some potentially shady sources. Queuing and waiting lists emerge or shipping times might take longer. These things don’t cost money, but they still have a price. They are not measured in dollars, but in wasted time, extra hassle and stress, and lost opportunities. These non-money price increases leave people with less time left over for other things such as job searches, home schooling, or even taking some time for self-care.

Shortages will happen during a crisis. That is unavoidable. The question is how to deal with them. Just as pushing on a balloon doesn’t change how much air is in it, squeezing down on money prices with a price gouging regulation doesn’t actually do anything to stop price increases. It mostly just redirects them to non-money areas.

What is the correct mix of money- and non-money prices? That is a subjective value judgment. There is no truly right or wrong answer, which is another reason why federal price gouging legislation is bad policy.

Public opinion is pretty well set against price gouging. Importantly, though, most anti-price gouging activists have likely not considered the tradeoffs they would pay in steeper non-money prices. Some of them would likely change their mind if they did. Pollsters should find out. Corporate PR departments would likely change their tune quite a bit based on the results.

Federal price gouging legislation would not stop price increases or alleviate shortages. It would sharply increase non-money prices during emergencies and drive some economic activity into black markets. Companies can set their own price gouging policies without regulation, as Amazon has proven with a mix of AI and sanctions against violating sellers. The rent-seeking aspect of potential price gouging legislation is worth considering for people concerned about business ethics and about large companies gaining an unfair advantage over smaller rivals.

In short, a price gouging bill is #NeverNeeded. Congress has already passed enough harmful flash policy. There’s no need for still more.

Antitrust Enforcement in 4-D

Antitrust regulators have long concerned themselves with horizontal and vertical competition, as well as the depth of market concentration. Now they are entering the fourth dimension: time.

The Wall Street Journal reports that “The Federal Trade Commission on Tuesday ordered Amazon.com Inc., Apple Inc., Facebook Inc., Microsoft Corp., and Google owner Alphabet Inc. to provide detailed information about their acquisitions of fledgling firms over the past 10 years.” These deals, which regulators approved at the time, might be undone after the fact.

This is likely illegal. Both federal and state governments are prohibited from making ex post facto laws punishing past actions that were legal when committed. This is a complicated legal question, however. Antitrust law usually comes in the form of judicial decisions, not congressional legislation. The Sherman Act, for example, is only two pages long. Its use of key terms is so vague that judges have been defining and redefining those terms at will for more than a century. In an antitrust case, it is not enough to have truth, justice, and the merits on your side. You must also have the judge.

If regulators follow through with their ex post facto threats and judges agree, they will create enormous uncertainty in the mergers and acquisitions market. Buyers risk prosecution if a deal works out better than expected. The potential chilling effect on competitive behavior is obvious.

Moreover, many of the technologies from years-old acquisitions are so thoroughly merged with the buyer’s operations that unwinding the deals is simply unfeasible. It would be like trying to turn a book back into a tree.

The whole scheme highlights fundamental problems with antitrust law. To see why, let’s step back and take a larger four-dimensional view.

Time

Companies have long risked prosecution for both present and future behavior. But to reach back into the past ex post facto is something new. For example, if a company’s present size is too big for regulators’ tastes, they might break it up. That in-the-moment concern motivated Standard Oil’s 1911 breakup despite its declining market share. It also ended the government’s protection of AT&T’s monopoly in 1984, when regulators decided to allow competition, although in a weird, top-down way. Those cases did not create new offenses out of years-ago actions that were legally permissible at the time.

Antitrust regulators are also concerned with the future. If a company is doing nothing wrong now but might do something bad in the future, some regulators believe they have cause to act now. This is called the incipiency doctrine. For example, if Sprint and T-Mobile merge, will the wireless market become too concentrated, leading to potential future bad behavior? Regulators asked the question. Courts said no, and my colleague Jessica Melugin agrees. Other mergers have been blocked because of possible future effects, as has happened twice with Staples and Office Depot.

Now the distant past is coming into play. Over the last decade, the bigger tech companies, such as Google, Facebook, and Amazon, have bought out as many as 400 startups that had developed promising new products, technologies, or business models. Many of the deals fell below the minimum dollar-value threshold for an antitrust investigation. Regulators approved all of the deals they did examine.

Most of these deals ended up being duds; the rule of thumb is a 90 percent failure rate. But after a decade or so, some of the acquisitions turned out to be important to the bigger companies’ success. Facebook’s 2012 acquisition of Instagram is one example. As Facebook’s primary user base gets older and grayer, Instagram is keeping the company relevant with younger people. Countless algorithms and other under-the-hood technologies that now power different parts of Google and Amazon’s operations were originally developed at acquired firms. Now regulators are mulling undoing these past deals, which were previously approved.

The Horizontal, Vertical, and Depth Dimensions

Regulators should instead use a simpler framework with fewer dimensions. To show why, it is worth asking basic questions about business organization. What if Google or Facebook had come up with the successful technologies in-house, rather than having bought them from elsewhere? Would that be an offense? If not, why should developing them via buyouts be treated differently? This is similar to the lesson from economist David Friedman’s Iowa Car Crop story. It is a distinction without a difference.

My theory is that these sorts of multi-dimensional concerns are rationalizations that distract from the main issue: size. In our extended (and imperfect, but useful) analogy, this is equivalent to the depth dimension. Arguments about ex post facto enforcement or different horizontal and vertical arrangements are, in the end, really about size, or the depth of market competition. What appears to be four-dimensional regulation actually concerns one dimension.

Distractions from the Real Issue: Size

Many members of the Neo-Brandeisian antitrust revival are open about believing, like Justice Louis Brandeis, that large size is an inherent antitrust offense. The arguments investigators are floating about different past, present, and future actions, or about different places along the horizontal and vertical dimensions, are only intended to apply to companies of a certain size or to markets with fewer than a certain number of competitors.

Even the number of competitors in a market is a problematic measure. (I earlier gave two reasons why here and here.) A third way to look at it is this: In a way, startup tech entrepreneurs eager to sell out are similar to independent contractors, similar to the way a company might outsource its payroll to an outside contractor or a family might outsource household repairs to a handyman. Sometimes doing something in-house is better. Sometimes it’s not. Every case is different. But doing something in-house means fewer, and larger, firms in the market. Outsourcing means more, and smaller, firms. One arrangement is not inherently more competitive than the other, yet antitrust regulators treat them differently. This is not a coherent position.

Circumstances also change over time. Maybe a company’s in-house R&D team loses a key person or is stuck in a rut. Sometimes a fresh perspective from an outsider might be helpful. Maybe a contractor is too far away from her customers to communicate with them effectively. Maybe a company is having trouble coordinating multiple outside contractors. In these cases, bringing the contractors in-house could make the companies more competitive, even as it reduces the number of firms in the market.

Competition Is a Spectrum and a Process, Not an On/Off Switch

Even within the outside contractor model, there are lots of places along this vertical dimension. Maybe one company contracts with a startup. Another licenses a startup’s technology and brings it in-house but doesn’t buy the company itself. Maybe the license is exclusive; maybe it isn’t. A third company hires the outside person with the bright idea but doesn’t buy her company. Maybe that person’s team and their equipment are necessary to make the most of that idea. If that’s the case, maybe a buyout is easier, and likely cheaper, than hiring away one or two key people. Maybe another company makes overtures to a horizontal competitor or certain of its employees.

Here we find there are angles between the purely horizontal and the purely vertical. Again, competition is not a binary switch, fully on or fully off. It is a spectrum with all kinds of in-betweens. Competition is a complicated, evolving process with nuances that don’t neatly fit into categories.

Every case is different. Nobody knows in advance which possible course of action is the right one—or if there even is a right one. Remember, as noted, mergers have about a 90 percent failure rate—and each and every one was entered into with confidence.

Here is another way to put it. A company with in-house counsel has essentially bought its own law firm. For antitrust purposes, how is that conceptually different from using an outside attorney? These are two different places on the spectrum of vertical integration, but they irrelevant to market competition.

There are similar concerns for the horizontal spectrum. Some cases require multiple attorneys. What if attorneys from competing firms collaborate on the same side of a case? What if some mix of in-house and outside attorneys work together? The result is the same. People or companies who need legal services buy them in the manner of their choosing. That is not a proper antitrust issue.

Same goes with the mishmash of mergers, acquisitions, and divestitures that have characterized the tech industry for decades. Regulators are only making incoherent multidimensional arguments now because the companies are bigger on the one dimension they really care about: size.

Conclusion

Whatever names we give to the ways big and small companies interact with each other, the end results are not that different. Someone sells something and someone else buys it. The sellers might get paid as employees, vendors, or contractors, or maybe they just take the money and move on to something else.

Why some of these arrangements are considered legitimate antitrust questions while others are not is an important question. Regulators have not given a compelling answer, nor are they likely to.

A final point worth remembering: The reason firms exist in the first place is not to enable or restrict competition. It is to reduce transaction costs. There is no magic number of firms that accomplishes that goal. And if there were, it would constantly move as tastes and technology change. It would certainly move faster than the speed of antitrust litigation. Competition is an ongoing discovery process.

Antitrust regulation fails along all four dimensions—the vertical, the horizontal, depth, and time. It should be entirely repealed. At the very least, the Justice Department should immediately stop its search for ex post facto offenses against Amazon, Apple, Facebook, Google, and Microsoft.

For more problems with antitrust regulation, see Wayne Crews’ and my paper, “The Case against Antitrust Law.”

William Dalrymple – The Anarchy: The East India Company, Corporate Violence, and the Pillage of an Empire

William Dalrymple – The Anarchy: The East India Company, Corporate Violence, and the Pillage of an Empire

The East India Company (EIC) was one of history’s largest monopolies. Its story is relevant to today’s antitrust debate, and the larger question of where the private sector ends and the public sector begins. Dalrymple seems eager to paint a portrait of capitalist and corporate greed, but the facts won’t quite allow it. He grudgingly allows that the EIC was not a free-market institution, but he often insists on treating it that way just the same.

The EIC was a public-private partnership from the start, and received government bailouts. It had de facto taxing authority in India, a power no fully private company enjoys. The EIC had its own 200,000-strong army, twice the size of the British army. The East India Company was a government in everything but name, and it acted like it, to the point of toppling India’s existing government in 1765 and replacing it with itself.

Contemporary economists and philosophers such as Adam Smith and even the conservative Edmund Burke opposed empire and its accoutrements not just on moral grounds, but on fiscal grounds. Ventures such as the EIC cost the government more than they made from it.

Dalrymple doesn’t go into this as much as he should, but the EIC’s story shows that there is no bright line where the private sector ends and government begins. This kind of philosophical discussion would have been very useful for clarifying his message.

The lessons from the East India Company’s story apply to today’s climate of too-big-to-fail, bailouts for politically connected industries, and subsidy programs for businesses big and small. All of these nearly always come with political strings attached, and mix together the public and private in ways few outside of the economics profession expected. Beneficiary companies become executors of government policy, rather than engines of value creation.

In the EIC’s case, this meant corruption, coups, atrocities, war crimes, and racially motivated mass murders. Today’s rent-seekers’ interests are mostly limited to greed, fortunately. But they are still worth fighting about, and EIC’s cautionary tale is useful for that fight.

Steven Levy – In The Plex: How Google Thinks, Works, and Shapes Our Lives

Steven Levy – In The Plex: How Google Thinks, Works, and Shapes Our Lives

A corporate history of Google from its founding up until 2011 or so. This book was written with the cooperation of Google’s founders, so it is not an objective history, nor should it be treated as such. It is still useful. A sequel may also be in order before too long. Since this book was published, Google has created its own parent company, Alphabet, and diversified into areas from video to maps to driverless cars. It is also undergoing multiple antitrust investigations, and growing ire from right and left populists could have massive consequences for consumer welfare, innovation, and for competition policy going forward.

Google has changed quite a bit since its early days, but anything violating the consumer welfare standard is difficult to find in here—though, again, this book is not an objective history. If anything, fear of regulatory reprisal put a damper on some of Google’s innovative ideas almost as soon as they realized the company would be a success. That, as opposed to market share for searches or advertising, is evidence of consumer harm.

Some of Google’s early mistakes and learning experiences still loom large today, such as its acquiescence to Chinese censorship.

Levy also has a forthcoming book on Facebook out in January 2020.

Antitrust in the Washington Post

My colleague Jessica Melugin is quoted, and Wayne Crews’ and my paper is linked to, in Tony Romm’s column about the state-level Google antitrust investigation being headed by Texas’ state attorney general:

But the timing of the states’ latest investigation — and the optics of their announcement — still triggered criticism that the attorneys general hoped to leverage their work for political gain. The Competitive Enterprise Institute, a advocacy group that opposes antitrust law and has received contributions from Google, blasted the probe in September as an exercise that would “benefit state AGs’ political ambitions, but impose harmful costs on consumers, businesses, and the economy.”

The whole article is here; Jess’ statement is here; the paper is here.

Automaker Antitrust Investigation Is Wrong Way to Fight Cartels

The Justice Department is launching an antitrust investigation against Ford, Honda, VW, and BMW,  alleging that the automakers colluded on a deal with the State of California to follow its stricter fuel economy and emission standards, rather than looser federal standards. My colleague Marlo Lewis has argued that automakers are obliged by statute to follow the federal standards, not the state standards. He also correctly argues that cartels can only be propped up with government support. A few more words about cartels are in order.

For the sake of argument, let’s assume that Ford, Honda, VW, and BMW, have, in fact formed a cartel. By themselves, they do not have the power to sustain it. A federal antitrust case against the carmakers aims at the wrong target. The proper solution is to rein in California’s government, which should not have cartel-making power in the first place.

Cartels need government support because they contain the seeds of their own destruction. Cartels raise prices by restricting supply—when something becomes scarcer its price goes up. That extra profit margin gives each cartel member an incentive to cheat by increasing supply on the sly. The more they do this, the more they undercut the high cartel price. In other words, self-interested companies acting selfishly naturally undo their own cartels.

Of course, this illustration only holds if the cartel’s participants control the entire market, or close to it. This is not the case with Ford, Honda, VW, BMW, and California. The two biggest automakers, GM and Toyota, are not part of the agreement. Neither is Mercedes-Benz. They can choose to differentiate their cars’ fuel economies from what the cartel members have agreed to. If consumers prefer these cars over the cartel members’ cars, then the cartel is lost, even with government support from California.

For these two reasons, the antitrust investigation against automakers should be dropped. And as Marlo also points out, the same arguments that apply to reining in California’s cartel-making powers at the state level also apply to federal CAFE standards. For more on why cartels are unsustainable without government’s help, see Wayne Crews’ and my recent paper, and other resources at antitrust.cei.org.

State Attorneys General Launch Antitrust Investigations, Forget ‘Relevant Market’ Fallacy

Facebook and Google are facing separate antitrust investigations from publicity-seeking state attorneys general from both parties. New York’s Democratic attorney general is heading a joint investigation into Facebook for its “dominance in the industry and the potential anticompetitive conduct stemming from that dominance.” Texas’ Republican attorney general is heading another joint investigation into Google, for what The Wall Street Journal describes as “potential harms to consumers from their information and ad choices being concentrated in one company,” as well as potential anti-conservative bias.

Both investigations have fallen for the relevant market fallacy. In short, a company’s relevant market is usually larger and more competitive than antitrust regulators allege.

For example, as a method of communication, Facebook competes with text messages, video calls, phone calls, and emails, as well as in-person interaction. Social networking is one part of this larger relevant market.

As a way to spend leisure time, Facebook’s relevant market is larger than social networking. It also includes movies, sports, books, music, restaurants, and more. Again, Facebook does not have a monopoly. It can even serve as a complementary good, giving its competitors an unintentional boost. It is common for fans to follow and comment live in chat groups during a sports game or new episode of a television show. Not only that, but this is also often done using Facebook’s competitor Twitter—hence the term “live-tweeting.”

As a media aggregator, Facebook’s users each have more power over sharing what content to share or click on than does Facebook itself. It also competes with Twitter, Google, and thousands of other sites, from major news organizations such as The New York Times and The Wall Street Journal, to news aggregators such as the RealClear family of sites, to smaller outlets covering special interest topics such as local news, pop culture, or niche hobbies.

Nor does Facebook have a monopoly on photo sharing. It shares this market with Google Photo, Shutterfly, and more private sharing options such as Dropbox and other cloud storage services, and even simple email attachments.

Google’s relevant market is larger than a traditional search engine page. Every Uber ride involves an Internet search to pair riders and drivers. These searches do not use a Google algorithm, and would not work if their customers’ information was “being concentrated in one company.” Netflix, Hulu, and Spotify searches do not use Google. Nor do dating sites, which compete with each other based on proprietary search algorithms, as do many other popular search-based Internet services.

The relevant market fallacy also applies to allegations of anti-conservative bias against Google. If Google acquires even the reputation of serving unreliable search results, consumers can turn to competing options by simply typing a web address into their browser. And the relevant competitive market, as noted above, is not limited to search engines. News aggregators, consumer review sites, and other relevant content sites are legion, and easy to find, even for relatively uninformed users.

Conservatives eager to combat perceived bias should also heed the conservative icon Barry Goldwater’s advice that a government big enough to give you everything you want is a government big enough to take away everything that you have. It is easy to imagine the government power conservatives seek today being used against them tomorrow. The relevant news cycle is much longer than the most recent negative headline about President Trump.

Additionally, eight states, including Texas, have already previously investigated Google for antitrust violations, in conjunction with the Federal Trade Commission. They dropped their investigation in 2013 after finding no violations, despite 18 months of searching.

Market conditions change rapidly, but the weakness of a potential antitrust case has not. As recently as this July, Iowa’s attorney general told Bloomberg News in a revealing moment of honesty, “We are struggling with the law and the theory” in developing antitrust cases against big tech companies. There is a reason for that—one of them being the relevant market fallacy. These antitrust investigations serve the interest of attorneys general’s political ambitions, not consumers.

For more reasons to drop the investigations, see Wayne Crews’ and my recent paper, “The Case against Antitrust Law.”

Tyler Cowen – Big Business: A Love Letter to an American Anti-Hero

Tyler Cowen – Big Business: A Love Letter to an American Anti-Hero

Big businesses are not perfect, and Cowen gives several examples. This is not a hagiography. Instead, Cowen argues that most people underestimate the amount of good that big businesses do. They make possible affordable communications, books, culture and art (and the supplies needed to make them), transportation that expands employment options for workers, safe and diverse food supplies, architecture, and more. As with many of Cowen’s books, it reads quickly and easily, almost a little too much so. When he offers the occasional insight, take a minute longer than he does to ponder it. This has been received as the prolific Cowen’s best book in some time, and I agree with the sentiment.

On the Radio: Antitrust

On Sunday morning from 8-9 AM PT, I’ll be on the Bob Zadek Show talking antitrust regulation. He has a promo article with a link to listen live here. See also Wayne Crews’ and my antitrust paper.

Antitrust Basics: Think Long Term, Not Just Short Term

This is the seventh entry in the “Antitrust Basics” series. See below for previous posts.

Moore’s Law states that computing power doubles every year and a half or so. An antitrust case against IBM, by contrast, lasted for 13 years, never reached a decision, and was eventually dropped because the original issue had long become obsolete. Markets are ongoing-long-term processes but antitrust cases are often short-term reactions to temporary situations—even if they sometimes last so long as to outlive the problem they seek to address.

Today’s Neo-Brandeisians and right-wing populists calling for an antitrust revival are not the only analysts prone to short-termism. Robert Bork, famous for his antitrust skepticism, writes on p. 311 of his 1978 book “The Antitrust Paradox”:

Antitrust is valuable because in some cases it can achieve results more rapidly than can market forces. We need not suffer losses while waiting for the market to erode cartels and monopolistic mergers.

Bork’s statement focuses on short-term results while ignoring long-term underlying processes, and has several other problems besides. How do regulators and judges know which cases are causing consumer harm and which are not? How do they ensure cases are chosen on the merits and not for politically-motivated reasons?

Cases also often take years to resolve. Assuming regulators do identify a valid case, how would they, and the judges who hear the case, know if market activity could address the problem by the time the case is decided? Do the benefits of regulatory action exceed the court and enforcement costs? Are the affected companies in a position to capture the regulators?

More to the point, does the short-term benefit come at a greater long-term cost? An enforcement action now could have an unforeseen deterrent effect on future mergers, contracts, and innovations, including in unrelated industries. The consumer harm from these could well exceed the short-term benefits of a short-term improvement on market outcomes—assuming that regulators are consistently capable of such a feat.

In the 1969-1982 IBM case, regulators eventually gave up, however belatedly. But this is not guaranteed to happen in every case. And who knows what consumer-benefiting innovations IBM could have developed with the time and resources it ended up devoting to defending itself in this case?

As the Justice Department and Federal Trade Commission conduct their investigations into Facebook, Google, Amazon, and Apple, they should keep their limited abilities to answer such questions in mind—as well as their bosses’ short-term focus, which rarely extends beyond the next election cycle.

For more, see Wayne Crews’ and my paper, “The Case against Antitrust Law: Ten Areas Where Antitrust Policy Can Move on from the Smokestack Era.” Further resources are at antitrust.cei.org.

Previous blog posts in the Antitrust Basics series: