Antitrust does nothing except stifle innovation.

There is much to criticize about government meddling in the tech market. Tech has spurred productivity growth and created a bounty of new products in recent decades. Many of these products are free and digitization has by and large reduced costs compared to non-internet alternatives or predecessors. Arguments that the U.S. tech sector is not competitive disregard changes in prices across different economic sectors, while government regulatory barriers and labor intensiveness explain high prices in areas like education and housing.

Nonetheless, calls to expand antitrust are growing. One thrust is to promote digital startup competition. In recent years, competitive process scholars like Columbia’s Tim Wu and Lina Kahn (now appointees of the Biden administration), Yale’s Fiona Scott Morton, and former Federal Trade Commission economist Jonathan Baker have written books and articles suggesting that judicial emphasis on price and output in exclusionary conduct cases is particularly ill suited to the digital economy. They propose that courts alter how they weigh procompetitive and anticompetitive effects when evaluating vertical integration and vertical contractual restraints. They also suggest removing the below-cost and recoupment requirements for predatory pricing exclusion claims.

The competitive process school’s proposed reforms should be rejected because current law adequately prohibits unjustified dominant firm exclusionary conduct without unduly protecting inefficient competitors. The proposed changes would not improve the ability of courts to sanction unjustified exclusionary conduct that harms startups. Instead, the reforms might prevent dominant firms from achieving efficient scale and discourage new firms from aggressively pursuing price and quality competitiveness.

Balacing Analysis in Vertical Mergers, Vertical Restraints, and Vertical Ties

Balancing procompetitive and anticompetitive effects is the primary analytical tool used by courts in evaluating potentially exclusionary vertical mergers, vertical restraints, and product ties conducted or implemented by dominant firms. These balancing analyses usually do not take the form of an attempt to calculate the net economic effect of challenged conduct. Courts often consider whether a procompetitive benefit could be achieved by a less restrictive alternative. Additionally, defendants win close cases because of burden-of-proof issues. Therefore, balancing analyses consist of rough analyses of competitive and anticompetitive effects rather than precise attempts to quantify the conduct.

Competitive process scholars argue that balancing analyses focus too much on evidence of price harm and downplay the possibility of inefficient nascent competitors becoming efficiency leaders in the future. To fix this, they advocate adding legislatively mandated presumptions to the balancing analysis that would block more exclusionary conduct. Specific proposals given by Wu, Kahn, and Baker, and by a recent House Antitrust Subcommittee report, include altering doctrine by making a platform’s integration with an application (e.g., Amazon selling its own branded goods on its platform) prima facie evidence of anticompetitive behavior; increasing scrutiny of exclusive dealing, “most favored nation,” and data provision vertical contracts; and creating a presumption against approving vertical mergers if the target supplies at least 30% of the goods or services in its market.

The proposed reforms are a solution in search of a problem and ought to be rejected. A dominant firm’s conduct should not be prohibited unless its exclusionary consequences reflect the firm’s dominance as opposed to its efficiency, and could exclude a competitor of equal or superior efficiency. Applying this principle to a wide set of firms, industries, cost structures, and so on requires very careful attention to the specific facts of a case. One virtue of today’s law is that it understands that these and a host of other factors go into determining whether a certain practice with exclusionary consequences mainly reflects efficiency or dominance. Current law allows courts to address the specifics of each case without being burdened by the type of blunt presumptions the competitive process adherents propose.

Competitive process scholars argue that vertical exclusion warrants particular scrutiny when undertaken by a dominant digital platform because of the naturally monopolistic features of digital markets. For instance, Wu recently argued in the New York Times that Google’s acquisition of the mapping software company Waze should have been challenged and possibly blocked. According to him, a putative Google competitor with a better search platform might struggle to compete for market share unless it has good mapping software that it can integrate into search, as Google has done. Google’s mapping advantage might entirely deter the competitor from making the investments and raising the capital necessary to enter the search market.

Platform markets / These barriers could be reinforced by search’s platform market structure. Platform markets (also referred to as two-sided markets) are markets where businesses provide value, at least in part, by matching providers with consumers; think of Airbnb’s matching property owners and renters. Platform markets are often digitally based because a primary value of the internet is instantaneous processing of large sources of information. Thus, Amazon’s marketplace matches buyers and third-party sellers, Uber matches riders and drivers, and Google matches searchers with content. Platform businesses feature consumer network effects because either one or both sets of market participants benefit when more consumers use the platform. When customers have reason to use just one platform and switching costs are high, the market structure might encourage enduring monopoly even in the face of a superior competitor. By contrast, when switching costs are low and when it makes sense for consumers to use more than one platform, the market will support multiple firms, making it easier for new firms with competitive advantages to enter.

Tying / Competitive process scholars acknowledge that some digital markets have a greater tendency toward sustained, inefficient monopolization. Nonetheless, they advocate new anti-dominant firm presumptions that would apply equally across the digital economy.

These reform proposals might undermine careful, fact-sensitive adjudication of exclusion cases. Consider Google’s acquisition of Waze and its proposed acquisition of Fitbit. If enforcement agencies challenge those acquisitions under current doctrine, a reviewing court would pay close attention to the efficiency benefits of the deals, namely the benefits to consumers of direct integration of real-time mapping or fitness tracking software with Google’s widely used email and search functions. Moreover, the court would note limits to the exclusionary effect. Waze’s and Fitbit’s technological advantages are their easy-to-use interfaces and automated methods of processing user data. In theory, those processes could be improved upon by a competitor solely with human capital inputs. A competitor with Google’s search might therefore need to invest some more capital to develop its own map and fitness platforms, but by no means does that make competing significantly harder. The search engine competitor could also forgo mapping and fitness integration and still survive. Integrating search with mapping and fitness functions certainly provides some consumer benefits, but they are not extreme relative to the alternative of using separate search, mapping, and fitness programs. Under the competitive process school’s proposed changes, however, a court would have to start its analysis of these proposed mergers by noting that the case involves a platform buying an app with a large share of its market. By placing large weight on that characteristic of the deal, the new doctrine might therefore minimize other facts that show barriers to entry were low and benefits to consumers important.