Expanding antitrust and decreasing patent eligibility spurs efficient tech production.

As I explain in The Market Power of Technology, the central challenge for antitrust is that firms with advanced technology build legal market power to extract monopoly profits. While market entry is free (for example, anyone can sell smartphones), an entrant cannot use existing proprietary technology (such as the Apple iPhone). To compete in that market (top-quality smartphones), it must invent new technology and produce a superior product. But that is very difficult, and any attempt will elicit an aggressive response from the incumbent (Apple, Inc.). Consequently, competitive challenges are rare, and market power becomes entrenched.

Antitrust laws and Supreme Court decisions have declared profits from an innovation “innocent” because they result spontaneously, not as a result of intentional action to restrain trade. Not only is the accumulating market power of technology legal and unregulated; it is also supported by patent law, which is thus in conflict with the original aim of antitrust law. The implication is that the FTC can bring suits only against how firms conduct their business, not against their actual monopoly power.

Consider Microsoft’s Xbox gaming console, which had only a 13% market share in 2022 and an even smaller market share of games. Microsoft offered to acquire Activision Blizzard for $68 billion, and to demonstrate its absence of intent to prevent other platforms from using Activision’s games, Microsoft announced that the games would be available on all consoles for ten years. Since the market for new games remains free for anyone to enter, one could expect this merger to be allowed, given the current view of the courts.

Using Kahn’s strategy, the FTC opposed Microsoft’s acquisition, reasoning that a $2.7 trillion technology empire should be prevented from leveraging its existing power to gain even more. But, as expected, the court allowed the merger to proceed. Kahn’s true goal cannot be achieved with existing laws. The market power of technology is legal and thus unchallengeable. As dangerous as it is now, it will become even more so in the age of artificial intelligence.

Lacking the tools to curb the market power of dominant tech firms, the most the FTC is likely to achieve in its outstanding suits are slight changes in current business practices. Meanwhile, the tech giants’ current market power will continue to have a significant negative impact on economic efficiency, growth, income inequality, and social polarization. Addressing the problem adequately requires a return to the original goal of antitrust policy, which is to restrain the power of businesses.

Current laws need to be expanded so that restraining firms’ market power becomes an explicit objective. Since technological dominance is the main source of market power, preventing technological concentration must be an explicit goal of antitrust law. The permitted level of market power must be consistent with that granted by patent law, and that requires prohibiting many of the strategies firms use to consolidate and expand their market power. For example, the law should promote innovation but restrict acquisitions of competitors or their technologies; as much as possible, it should address the interoperability of digital ecosystems linked via a single operating system; and it should prevent firms from suppressing competitive superior technologies.

Patent law itself must also be reformed. Patents are too often granted for trivial inventions, so the standards for approval should be raised. Policymakers must prevent pyramids of interrelated patents that extend market power’s duration far beyond patent law’s intent. This will require a distinction between a primary patent of something genuinely new and a secondary patent whose description depends upon a primary patent. Secondary patents should be granted for only half the duration of a primary patent.