The Great Democracy

by Ganesh Sitaraman

  A century later, we are now in a second era of monopoly power. Four airlines now control 80 percent of the market. Three drug stores control 99 percent. Four beef companies control 85 percent. The Fortune 100 now makes up nearly 50 percent of GDP, with the top twenty firms capturing more than 20 percent. Commentators across the ideological spectrum have noticed and criticized America’s monopoly problem: from progressives like Joe Stiglitz and neoliberals like Bloomberg’s Noah Smith to conservative Breitbart columnist Virgil and establishment centrists at the Brookings Institution and the Economist. Even Congress has gotten involved, with members of the House creating an Antitrust Caucus and the Senate Judiciary Committee holding hearings on the goals of antitrust in 2017. There is such widespread interest in corporate consolidation because people recognize that the concentration of economic power is a threat to both the American economy and to freedom and democracy.6

  The concentration of economic power harms consumers, increases inequality, and stifles economic growth and vibrancy. Monopolists have the ability to hold consumers hostage, raise prices, and deliver worse-quality goods and services. In a wide-ranging study, economist John Kwoka has shown that despite regulators’ predictions, corporate mergers over the last few decades have led to an increase in consumer prices. Rising concentration also contributes to widening inequality. As megacorporations use their market power to squeeze suppliers and consumers to gain higher profits, those benefits accrue to wealthy executives and shareholders. Economists have also found that concentrated markets lead to lower wages for workers. In addition, the rise of monopolies threatens innovation and entrepreneurship. Powerful companies don’t want competition and are likely to use their market power (and political power) to stop, delay, or otherwise prevent innovators from gaining traction. In recent years, economic researchers have confirmed this: the rate of new business formation is plummeting, and consolidation is an important factor.7

  Economic power is also a danger because it turns into political power. The larger the company, the better able it is to contribute to political candidates, lobby legislators and regulators, dominate trade associations, hold cities hostage for economic giveaways, and shape the law to favor their interests at the expense of everyone else. Unlike small businesses or ordinary individuals, megacorporations have the resources to hire lobbyists to rig the law in their favor—gaining tax breaks, creating regulatory loopholes, and watering down campaign finance restrictions. When laws and regulations are created to rein them in, they can hire armies of lawyers to fight the government in court—sometimes for years—in order to delay or reverse sensible checks on their power. And even if they lose in court, they can still hire thousands of lawyers to help them exploit every loophole and ambiguity, something smaller businesses and individuals simply can’t do.8

  Why did policies the that brought an end to the first era of monopoly power fail to prevent the rise of this second era? The answer comes down to three factors: ideology, the structure of the antitrust agencies, and the emergence of new industries, namely digital technology.

  The first failure was one of ideology. The United States had a robust anti-monopoly philosophy and movement from the founding of the country through the mid-twentieth century. But starting in the 1970s, a group of professors—largely lawyers and economists centered at the University of Chicago—adopted a new neoliberal approach to antitrust. The Chicago School argued that bigness was not a problem at all and that antitrust had nothing to do with political freedom, economic power, or even competition. The only thing that mattered in antitrust law was the welfare of consumers, and this was measurable by looking at prices. As a result, they focused antitrust law on reducing consumer prices and increasing economic efficiency, even if that meant allowing megamergers to create behemoths that had more power than most governments. Over the course of the neoliberal era, the Chicago School’s approach came to dominate antitrust law and policy.

  The second failure is in the structure of government agencies tasked with policing competition. In most areas, Congress passes laws commanding federal agencies to regulate—the EPA regulates clean air and water, the National Highway Transportation Safety Administration regulates safety in cars and trucks, the Consumer Products Safety Commission regulates children’s toys. In each case, the agency is empowered to use its considerable expertise to make regulations that set standards or regulate specific practices. Courts are able to review these regulations, giving deference to the substance of the regulation as long as it is within the agency’s discretion and the agency has used its expertise to come to a reasoned decision.

  Antitrust doesn’t work this way. Although the Federal Trade Commission has the power to make regulations, just like other agencies, it has failed to take up this role. Instead, the FTC and the Department of Justice take companies to court. What this means is that the Supreme Court—a group of unelected, unaccountable judges who have no expertise in business generally or in any specific sector of the economy—get to set antitrust standards and policies. Judicial lawmaking in this arena also ties back to the ideology problem. Normally, the courts provide a check on regulatory agencies, which utilize their expertise and follow a transparent process for making regulations. In antitrust, because the courts have no expertise, they have to rely on the parties in the case to teach them about markets and competition during litigation. A skewed set of intellectual inputs, and limited public participation, leads to judicial lawmaking that is disconnected from reality.9

  The FTC itself is also badly designed to ensure the vigorous enforcement of antitrust law. The FTC is a multimember commission composed of five members with no more than three from any one political party. This design means that it is almost impossible to have a majority of active, aggressive regulators on the commission for any length of time, given compromise in the appointments process. And when the commission takes a strong action, minority commissioners often write dissents that legitimize opposition to regulations and act as a guide or roadmap for ideological judges who want to strike down those regulations. Taken together, a multimember competition agency is a roadmap for inaction and delay, weak regulations, and ultimately reversal of those weak regulations. In contrast, single-director agencies accountable to the president have significant benefits. They unify power, thereby empowering an active and energetic director to undertake serious actions. And they unify responsibility and accountability, creating a focal point for organizing the opposition against a failing director or one ideologically opposed to strong regulation.10

  Beyond the FTC’s own shortcomings, further problems arise because the FTC and Department of Justice share power. The division of labor across these agencies is haphazard and problematic. For example, the DOJ addresses agriculture, but the FTC covers food retailing. Both agencies have power to review proposed mergers. But the division of sectors hasn’t been set by law and is frequently the subject of turf wars between the agencies. This division also means duplicative costs, inconsistencies in the application of the law, and confusion in the merger clearance process. In theory, division could mean competition and a higher standard of enforcement. In practice, it has meant the opposite: weaker enforcement and ineffective administration.11

  The third failure has been a failure to adapt. Antitrust enforcers have not adapted to the rise of the most important industry of the twenty-first century: technology platforms. New technologies can often seem unprecedented, and it takes great effort to learn about how particular companies and industries work. Add to this neoliberal ideology and the structure of the antitrust agencies, and the result is that regulators have allowed numerous technology mergers to go forward and a variety of anticompetitive behaviors to go unchallenged, despite the fact that they run afoul of antitrust principles.12

  Reversing the second age of monopoly power requires bold action along a variety of dimensions: challenging the ideology that has dominated antitrust for decades, reforming the substance of antitrust laws, and understanding and regulating new techn
ologies. First, the FTC should be relaunched as a new Anti-Monopoly Agency (AMA), with a single director rather than a multimember commission. The second big change concerns what this new Anti-Monopoly Agency should do. To align with the normal model of regulation, the new AMA should be required to use its rulemaking power to define and specify violations of the antitrust laws—just like agencies in every other sector do. In exercising this power, the agency should abandon the neoliberal consumer welfare approach, with its narrow approach to prices, and return antitrust to protecting and promoting a competitive economy. The third change is to take on the technology platforms.13

  Regulating Technology

  One of the central questions of our time is how democracy will survive the rise of gigantic technology companies. In recent years, people around the world have recognized the need to regulate the technology sector. Scandals about data breaches and transfers, Russian infiltration and fake news, uncompetitive market practices, and constant surveillance have sparked widespread concern. It has gotten so bad that even tech company CEOs have been forced to admit that their companies need to be regulated. Apple’s Tim Cook said, “Some well-crafted regulation is necessary.” Facebook’s Mark Zuckerberg acknowledged that the question isn’t whether to regulate but “How do you do it?” The answer turns out not to be as hard as one might think. It will take three steps: regulating the platforms as utilities, breaking up tech companies through antitrust laws, and ending the business model of surveillance.14

  Start with platforms. Technology platforms require a special sort of regulation because they have power over their users that most other companies lack. In many sectors, companies compete with one another on price and quality to sell products or services. Technology platforms, in contrast, often play the role of intermediary, connecting consumers with other sellers and advertisers, but many of them simultaneously compete directly with successful small businesses who rely on their platform.

  Take, for example, Amazon Marketplace. John Q. Public can make custom bracelets at home and sell them on Amazon Marketplace. But Amazon both runs the marketplace and has its own business that competes on the marketplace, Amazon Basics. That means that if John Q. Public’s bracelets do well, Amazon will notice because it collects data about its marketplace, and Amazon Basics can produce identical bracelets in China at a lower cost. Amazon can then feature Amazon Basic’s bracelets on page one of its search results while relegating John Q. Public’s bracelets to page three, four, or worse. The result is that John Q. Public will go out of business—not because his product was worse but because Amazon used its platform’s data, its power over the marketplace, and its Basics business to put him out of business. Some companies have alleged that Amazon has done exactly this to them.15

  The same kind of thing can happen with Google Search. Consider the conflict between Google and Yelp, which aggregates customer reviews of restaurants and other businesses. Because Google has a separate line of business reviewing and recommending businesses, Google can prioritize its content over Yelp’s when a user searches for a business review—and even when they search for “Yelp” and a business review. This, too, isn’t theoretical. In the summer of 2017, the EU antitrust authorities fined Google $2.7 billion because it did not place its shopping comparison tool on a level playing field with those of competitors. One start-up has also alleged that Google deprioritized its competing search tool. If the start-up gained traction, it might eventually threaten Google’s dominance in online search, so they alleged Google prevented them from even being findable on the internet.16

  The problem in these cases emerges from what scholars call vertical integration and market power. In these cases, vertical integration means that the company owns both the platform (the marketplace or search engine) and simultaneously competes on the platform. This gives a platform a motive to discriminate against its users and favor its own business over others. The market power problem is that platforms are so dominant that companies and individuals have to use them, and as a result, are at their mercy. Many people think tech platforms got so powerful because of network effects—that is, the more people using the platform, the better the service gets. But platforms can also become dominant if they discriminate against, exclude, and threaten possible competitors. For example, if a search engine doesn’t allow a potential competitor to be searchable, the competitors might never have a chance to succeed.

  The problems of vertical integration and market power are not new, and there are long-standing models for addressing them through regulation. Since the dawn of the industrial era, policy makers confronted a variety of industries engaged in similar practices to those of contemporary tech platforms. They recognized that these practices were destructive, and to address them, they developed a set of legal principles that have regularly been applied to sectors like transportation, communications, and electricity: nondiscriminatory access, separation or quarantine of the business, and (depending on the context) regulation of rates.

  A few illustrations will help. Let’s start with an industrial era example from the late nineteenth century. Imagine that railroad service is competitive, with many train companies (each of which owns its own track) operating on the East and West Coasts. But the railroad terminal in St. Louis is owned by one train company, and any other train company that wants to send its trains from the eastern United States to the West must pass through it. If the company that owns the terminal refuses to let any other company use it, there would be no competition on the routes through St. Louis. Because of the extremely high cost of building a new terminal and rerouting tracks to it, competition might be impossible. The terminal and train company could price gouge both consumers and other train companies while providing poor service.

  Historically, under the essential facilities doctrine, it would be illegal for the company to discriminate against other companies for access to the terminal. The idea was that it was impractical to build another terminal, and the terminal was basically a public utility or piece of infrastructure, essential for commerce to work. This doesn’t mean that the company can’t recoup its costs by charging a fee (it can, though that rate has to be reasonable), nor does it mean that the company can’t limit access to the terminal to prevent congestion. But it can’t charge different prices to different users or bar access altogether. The law recognized that monopolists have the extraordinary power to choke off commerce (and, in this case, transportation) and that no entity should be so powerful as to be able to exploit and pressure consumers, citizens, or the government.17

  Another example comes from the law of public accommodations, also known as the law of innkeepers and common carriers. Innkeepers and common carriers were required to accept all comers, meaning that they could not discriminate against customers. The justification for the rule was similar to the one undergirding the essential facilities doctrine. Think back to the early republic, when travel between cities took weeks and there were few roads and few places to stay along those roads. If an innkeeper could discriminate against travelers, then it would be impossible to travel. The nondiscriminatory access rule recognized that innkeepers served an important public function on highways and held extraordinary power over the free flow of commerce in the country.18

  A third example is public utilities regulation, which can apply when a particular service is a natural monopoly or networked industry. In the telephone industry, for example, it was extremely costly to provide phone lines to every household, and the network was more valuable the more people were on it (because they could communicate with each other). As a result, it made sense to have a single provider of telephone service. But if telephone service was a monopoly, what was to stop the monopolist from raising rates? What was to stop the monopolist from using its power over phone lines to weasel its way into other adjacent sectors? Electricity and water were similar. It was costly to build pipes and power lines—and we didn’t really want multiple sets of competing pipes and power lines everywhere—but that meant that a monopol
ist over these essential services could exploit users.

  The answer in these sectors was public utilities regulation. The basic idea was that monopolies might be necessary, but instead of government providing the service directly, the government would regulate the private monopolist. First, it would separate or quarantine the business line that had monopoly power from the rest of the company, restricting a company to owning only the monopoly element and thereby preventing them from exploiting other adjacent sectors. Second, there would be regulation of rates and terms to prevent the monopolist from jacking up prices on captive consumers. Third, there was usually a protected franchise and a mandate to provide service to everyone. The utility was given exclusive domain over its sector so that competitors could not undercut the utility’s business by skimming off the most valuable customers.19

  The common themes in these approaches provide principles for how to regulate tech platforms. Platforms like Amazon Marketplace and Google Search should be required to offer nondiscriminatory access to their services, and vertically integrated business lines should be divested—broken off—from the platform. This separation, or quarantine, prevents exploiting power, including the power that comes from surveillance and data collection, and giving preferential treatment to their own business lines. The nondiscriminatory access provision is a complementary obligation to treat all users with fair and neutral terms. In some industries, rate regulation might also be a necessary companion to nondiscrimination and quarantine. If a platform charges users and becomes so dominant as to serve as an effective monopoly, then the platform might raise rates on captive users. Competitors won’t be able to challenge the platform because they might not be able to build an alternative platform.20

  The new Anti-Monopoly Agency should be directed to break up tech platforms along these lines. But even in the absence of Congress creating a new agency, the Federal Trade Commission can currently act in accordance with these principles on a case-by-case basis or by issuing regulations. Because the FTC has the power to regulate unfair methods of competition and unfair or deceptive practices, it could, for example, determine that discriminatory platforms are engaged in an unfair method of competition or unfair practice.21