Antitrust in the Digital Age

By: Amarins Laanstra-Corn and Roshni Padhi (Stanford University)

 

Introduction


On July 29th, 2020, four of the most powerful men were virtually sworn in to the United States House of Representatives Judiciary Committee to testify regarding the current state of antitrust and competition regulation as it relates to the technological sector. Collectively, these four men – Amazon CEO Jeff Bezos, Google CEO Sundar Pichai, Facebook CEO Mark Zuckerberg, and Apple CEO Tim Cook – and their respective companies have amassed a net worth of roughly $5 trillion, and over the course of the past three decade, these four companies have, in total, bought and absorbed over 720 additional companies


Current Legislation and Standing on Competition in Technology Sector


One of the biggest questions surrounding big tech and competition is whether or not antitrust laws should be rewritten or merely reinterpreted. Given the fact that the most notorious statute on market competition currently holds as the Sherman Act, a piece of legislation written in 1890, there is room for argument that the parameters set in place by this specific act could have never even conceived the challenges but forth by the technology companies of the present. This being acknowledged, the Sherman Act’s Section Two broad language on monopolization, which states it is “unlawful to monopolize, attempt to monopolize, or conspire to monopolize” as well as “engage in exclusionary conduct to achieve, maintain, or enhance [monopolized] power,” could potentially be applied regardless of sector. However, in practice, the Supreme Court has maintained that Section Two can only be enforced when both clauses are proved true, companies must engage in active exclusionary activities, and the Supreme Court has never deemed a company to possess monopoly power when their market share has been demonstrated to be below 75%, (lower courts have set different precedents on thresholds).


The Supreme Court’s mandate that violations of antitrust legislation must establish significant and monopolistic market power has proved to be an incredible hurdle for federal regulators, as exclusionary practices in the digital market are significantly different from those in a traditional one. One of the most prominent tests in determining monopolistic practices is the “small but significant and non-transitory increase in price” (SSNIP) test. This seeks to determine if a monopolist could impose a profitable price increase to consumers of about 5%. However, when it comes to digital markets, this test becomes almost moot. Since the majority of the major software companies are zero price markets, as they don’t charge users for their services (search engines, social media platforms, etc.), this is no longer a suitable manner for determining market dominance. Additionally, regulators face barriers when attempting to demonstrate imposed entry barriers for the digital market. This is due to market phenomena limited to the technology primarily network scale, the larger the network offered by a service, the more likely it is to attract new users while driving business away from smaller competitor platforms, and the advantage of big data, companies with aggregate sources of data collection can offer more personalized tailored experiences, an advantage not offered by nascent competitor companies.


In addition to proving monopoly power, regulators also must deal with the hurdle of proving exclusionary practices. Exclusionary practices usually fall into the categories of predatory pricing or price gouging, refusals to deal, and exclusive dealing and product design. All of which have been demonstrated as more difficult to prove for tech based companies when compared to traditional ones. This again is due to zero price markets and digital packages designed to be provided by only one service.


Furthermore, the Clayton Act, under Article Seven of the Sherman Act, details the processes of unlawful Mergers and Acquisitions (M&A) of which result in “lessened competition.” This section reviews both horizontal (intrasector) and vertical (across-sector) M&As. It qualifies “lessened-competition” through the use of exclusionary and monopolistic practices as listed above, with the same challenges. The Hart-Scott-Rodino Antitrust Act (HSR) regulatory agencies, specifically the Department of Justice and the Federal Trade Commission (FTC), then have the power sue the involved merging companies to block the presented merger or acquisition. These bodies also have the powers beyond ex-ante regulation, as they can also act to effectively undo previously closed mergers and acquisitions.


Previous History of Tech Acquisitions


From the beginning, big tech companies have acted in bold and brazen manners in order to stifle competition through acquisitions. This trend can be seen consistently, from Facebook’s purchase of Instagram ($1.1bn) in 2011 and later WhatsApp ($22bn) in 2014, Microsoft's acquisition of LinkedIn ($26.2bn) in 2016 and then its subsequent all cash purchase of GitHub ($34bn) in 2018, which currently stands as the most expensive software M&A of all time.


Case Study: Google

Ever since its creation, Google has acquired over 270 companies, with the majority (170) being both established and nascent competitors. Google (and its parent company Alphabet Inc.) found its peak in rate of acquisitions in the year 2011 and 2014, acquiring 34 companies in each year, approximately one for every ten days. Although behaving in both monopolization and market dominance practices, Google’s M&A behavior has gone largely unregulated. In the past two decades, Google has managed to buy some of its most prominent direct competitors such as the advertising firms Doubleclick (bought for $3.1bn in 2007) and Admob (bought for $750m in 2009), Youtube (bought for $1.65bn in 2006), which at the time was classified as a direct threat to GoogleVideo, and Waze, a rival to the GoogleMaps Services (bought for $1.3bn in 2013). Throughout this time, Google has only been challenged once, on their 2011 purchase of travel software firm ITA, which was eventually approved by the Justice Department for 700 million with embedded anti-competition conditions. Currently, Google is said to retain a 70% market share within search engines and online ad services. Ultimately, Google’s market behavior is not the exception to the rule, but rather serves as the archetype for other corporations of similar scale.