Antitrust 101 with Ryan Young
2019-08-21 · Guest: Ryan Young (Senior Fellow at the Competitive Enterprise Institute) · 52:20
History and economic impact of antitrust regulation
Bob Zadek and Ryan Young of the Competitive Enterprise Institute discuss the history and economic impact of antitrust regulation. They analyze the vagueness of the Sherman Act, the shift from protecting consumers to protecting competitors, and why modern “Big Tech” companies are being targeted for political rather than economic reasons.
Topics: Antitrust, Monopoly, Sherman Act, Big Tech, Consumer Welfare Standard, Competitive Enterprise Institute, Standard Oil, Microsoft, Amazon, Regulatory Capture
Speakers: Bob Zadek, Ryan Young, Caller (David)
Introduction to Antitrust [00:00]
Bob Zadek: Hello everyone, and welcome to the Bob Zadek Show, the longest-running live libertarian talk radio show on all of radio. Thank you so much for listening this beautiful summer Sunday morning.
This morning’s show ought to be subtitled, “What the heck took me so long?” As in, what the heck took me so long to invite this morning’s guest to share his wisdom with us for the next hour. I’m happy to welcome to the show Ryan Young. Ryan is a senior fellow at the Competitive Enterprise Institute, aka CEI. He researches regulatory reform, trade policy, and of particular relevance to this morning’s show, antitrust regulation. He used to host the CEI podcast and he writes a popular “This Week in Ridiculous Regulations” series for the CEI staff’s blog. He’s a trained economist; he has an MA in economics from George Mason University and a BA in history from Lawrence University. He’s worked—before joining CEI, he’s worked at Cato.
This morning we’re going to examine a topic that I cannot believe it took me so long to discuss on my show, which is the subject of antitrust regulation in general, because it has become the tool du jour of the left who seek to accomplish a pretty dramatic change in our entire economic system. And when you want to effect a profound economic change, you dust off all of the tools in your governmental toolbox, such as taxation and the like, and a tool that keeps on popping up—and it is very handy, it is a blunt-edged instrument and very effective if you want to destroy the market system—is antitrust regulation. We’re going to discuss this morning: is big bad? As in Amazon, Facebook, other big tech companies, and American business in general. Is big bad? Is big good? Is big neutral? Does it make a difference? And you must understand the economics and the politics of antitrust legislation in order to follow the economic debate which will take place during the upcoming presidential election. Ryan, welcome to the show this morning.
Ryan Young: Thanks so much for having me on, Bob.
The History of the Sherman Act [04:51]
Bob Zadek: Now Ryan, we’re going to discuss something that sounds like economic theory, perhaps legal theory: antitrust regulation. Now, of course, there’s nothing in our Constitution that invites government to use the powers of legislation simply to effect economic transactions between consenting adults in the marketplace. And for the first, let’s say, hundred years of our life as a country, there was no real discussion of “woe is us, woe is us, we have big companies selling us goods and services.” Then it all changed during a very particular political era, the end of the 19th century. Tell us about antitrust legislation. What does the Sherman Act and the Clayton Act and other federal legislation—what did it target? What did it attempt to do when it was enacted around the very end of the 19th century?
Ryan Young: Well, the timing there is very important, because for a long time leading up to that, monopolies were very rare. They were essentially government-supported trade organizations like the Dutch East India Company and all that. And economists didn’t even think them to be worth studying if they weren’t propped up by government; they would simply go away, so they weren’t seen as a threat to larger market processes.
This changed in the 19th century when you had the rise of Standard Oil, Carnegie Steel, big railroads, big banks. And that frightened a lot of people. And for other companies, they saw it as a possible, very lucrative regulatory weapon. So beginning in the late 1880s, some states went together and at the behest of certain special interests passed their own antitrust laws that could be used as barriers to entry for new firms or to advantage incumbent firms to protect their privileged position. By 1890, this sentiment had reached the federal level and we got the Sherman Antitrust Act, which is still in force today. And that’s becoming a big battle with the environment being pretty restrained right now, but people on both the left and on the right are pushing for an antitrust revival, and that’s going to be a very important issue over the next several years.
Bob Zadek: Now you said when companies got to be larger—that is, larger than they were historically—and we’re talking about companies that were not propped up by government, just companies that were propped up by their own skill and their own market savvy. You said it frightened people. Why should the size of a company frighten somebody per se? And I’m not talking about any company, large or small, which operates in a way that harms its customers, that harms consumers. We’re putting aside bad actions and bad actors. We’re talking about bigness per se. Why should that per se be scary to anybody?
Ryan Young: Because concentrated power is a terrible thing. The whole American Revolution and the whole general liberal project of the last two, three, four hundred years has all been about reacting against absolute centralized authority. And while our current political situation has largely encompassed that in the political realm, this was new in the private realm in the late 19th century. And people saw this same pattern that they’d seen among kings and monarchs possibly re-emerging in the form this time of robber barons. And fortunately, these fears turned out to be overblown, but that was what the popular mind was thinking at the time.
Defining a Monopoly [09:20]
Bob Zadek: Now, of course, Standard Oil is the poster child, and the railroads, for robber baron-ness, if I can invent a phrase. The railroads, of course, became monopolies because the government made them monopolies. They not only operated with the government’s blessing, but they were protected in many ways. So railroads became monopolies because the government gave them that monopoly power. Standard Oil, of course, was different. They became a monopoly, if they were a monopoly, by dint of the cleverness of their business model and Rockefeller and others who simply grew because they were good at what they did.
Now, two comments. When we’re talking about monopoly, the word “monopoly,” which is in the statute—it’s in the Sherman Act of 1890—the word “monopoly” is kind of a squirrelly word. It’s in the statute and the enforcers are told to use the statute to beat down monopolies without a lot of guidance as to what that means. And I know you have studied this quite a bit. So what exactly is the monopoly that is evil? What are we talking about?
Ryan Young: That is an excellent question. The Sherman Act, unlike a lot of modern legislation, is two pages long, which—I appreciate the brevity, it’s wonderful. But at the same time, in two pages, they don’t define what they actually mean by monopoly. And this is still a source of confusion 130 years later.
Generally, an economist will say a monopoly is where you have a company that’s powerful enough where it can lower its supply and raise its prices. So they make their product harder to get and more expensive, which harms consumers. That’s usually what people mean when they say monopoly. The thing is, though, economists are not in charge of antitrust policy. It’s usually judges who are making cases, and they decide it based on whatever they want. This is called the “Rule of Reason” standard where they essentially use any definition of the term monopoly they find reasonable. And this changes from case to case. There is no bright-line standard for what constitutes a monopoly for legal purposes. And this creates a great deal of uncertainty. A company often has no idea of knowing whether it’s in trouble or not, and it can’t plan for the future or create long-term investments if it has any fear of a possible antitrust action.
Bob Zadek: Now the question is, you had defined monopoly for us as best you can given the fact that the statute has no guidance. But it says—as you said, I believe—it’s a company has grown in economic power so that it can reduce the supply and increase the price. Is it a monopoly if it can or a monopoly if it does? What if a company is large enough to do those anti-competitive steps but never does it? Is that company a monopoly? So it’s the power to do it without actually exercising it? In other words, if somebody has the power to do bad acts but never does the bad act, is that a monopoly and therefore the target of government action?
Ryan Young: That question has never been definitively answered. It’s been answered differently in different cases. Usually, it’s based on past actions. The Justice Department generally doesn’t have a “Department of Pre-Crime” like you’d see in science fiction movies like Minority Report. But at the same time, there is an actual antitrust legal term called “incipiency,” where a judge or a regulator sees the conditions in the market being such that they might in the future be possible conditions for monopoly. Then they can act. And that’s called incipiency. That’s been invoked rarely, but it has happened, especially back in the 1950s and 1960s.
Bob Zadek: And can you imagine—I ask our listeners—just imagine that in federal criminal law there was a statute that said if an individual has a higher than average likelihood of committing a crime, he can be arrested or his freedom can be denied because he has a greater likelihood of committing a crime. “The world will be safer,” so goes my hypothetical statute, “the world will be a better place if we get rid of the 10% of the people who are more likely than others to commit crimes.” Could we tolerate that even for a minute? Well, of course we cannot. And yet we have federal law, been around for 130 years, that says the mere power to do a bad act, even though you’ve never done a bad act, the mere power is a reason to break you up. Breaking up an enterprise is taking it apart as a matter of judge-made law because you have the power to interfere with the market. Am I exaggerating, or is that the current state and therefore the historical state of antitrust law in America?
Ryan Young: That impulse exists. It comes and it goes; it ebbs and flows. It becomes weaker and stronger over time, which actually leads to a much bigger problem, which is uncertainty. I mentioned that there are few, if any, standardized bright-line definitions of terms like monopoly that anyone can point to that applies to what you’re talking about with “well, these companies might cause trouble in the future, so let’s make sure that they don’t now.” There’s no existing standard for when that might or might not be legally permissible. Basically, antitrust policy shifts with the political winds. It was very active in the ’50s and ’60s. It tamped back in the ’70s and ’80s through to today after the Microsoft case. Right now, it appears to be on another upswing. And this has nothing to do with the merits of the matter or the companies at hand; it has to do with politics rather than actual market or legal conditions. And this uncertainty is a major problem for long-term investment and future innovation.
Antitrust and Big Tech [15:00]
Bob Zadek: Ryan, you said this has nothing to do with the merits of the matter. I would point out nothing in antitrust law has very much to do with “the merits of the matter,” but rather, since we have a two-page statute with very vague terms with no guidance, such as “monopoly,” once we have those phrases, then the courts are given a blank slate to, as you pointed out, by applying the accepted standard of “Rule of Reason.” If it seems to be monopolistic, if it seems to be in violation of a two-page statute, then a judge is on sound legal footing by applying antitrust law. And in a decision that is a little less likely to be overturned on appeal, a judge at the trial level can apply his or her own Rule of Reason to cause economic havoc in the marketplace.
So we have a concept that is purely economic conceptually, but yet its operation is 100% political. Thus, it brings us to the present where in a political battle—the battle for the Democratic nomination and maybe in the general election as well—we have the subject of breaking up big tech as an antitrust issue in the political realm, even though the issue is purely economic with the most vaguest terms possible in the statute to guide anybody. So we have, Ryan, to show how you will shortly after this show and for the rest of the political campaign until a president is elected, you and your colleagues who study antitrust legislation will be the most sought-after after-dinner speakers. You will become the rockstar of political commentary because there’ll be so much discussed about antitrust legislation.
So you have no doubt observed, and perhaps your eyes have been rolling, in the concept of applying antitrust legislation to big tech. We have big tech, which essentially gives away its product for free. There’s unlimited supply for free. So if we harken back to earlier in the show when you said the danger of monopoly is to reduce supply and increase the price, we have that concept being applied to big tech, which gives away a product for free and there is unlimited supply of it. How in the world does antitrust legislation and the concept of breaking up big tech—how do they coexist?
Ryan Young: There are lots of areas where very creative minds are attacking the issue. It’s frankly hard to undercut zero price. So for example, if a company is based on a revenue model based on selling ads instead of charging money for services rendered, there’s an argument that Google and Amazon are taking away advertising revenue from other sources, such as newspapers, for example. They’re dominating the ad-serving market now, so that’s their monopoly as opposed to social networking or online retail. That’s one area of attack. I don’t think it necessarily is relevant to consumer welfare, but that is a common line of attack these days.
Bob Zadek: And of course, the test in antitrust legislation is—I think this is correct, but Ryan help me out—the ultimate test of whether a company is guilty of violating federal antitrust legislation, the ultimate test is the effect on consumers. Isn’t antitrust legislation essentially the mother of all consumer protection statutes? And therefore the test is only: does the behavior harm or hurt consumers? If that is the test, how could the behavior of big tech harm or hurt consumers?
Ryan Young: That’s a good question, especially about the antitrust as consumer welfare policy. Does it help consumers or not? We talked earlier about the Rule of Reason standard. Antitrust policy is whatever the judge decides is best and what is reasonable in a given case. Over time, and never formally—so this has never been codified, there’s no bright-line predictable standard people can follow—antitrust jurisprudence has now for a long time been following the consumer welfare standard, under which big isn’t necessarily bad, but if big is doing consumer harm, that’s when antitrust regulators can and should step in. That has been the dominant school of thought for most court cases since about the 1980s or so, but it’s never been formalized and it could turn back on a dime as soon as the next big antitrust case. So that hopefully these days is the intent behind most antitrust action, but there’s no guarantee of that, so it could be a very slippery slope if one judge in one decision decides next week to change that.
Political Motivations [20:57]
Bob Zadek: And I think that the animus against big tech is not because consumers are harmed. It is on these peripheral and somewhat political issues that they have their thumb on the scales in terms of providing information to the public. They bar certain types of information. The conservatives have been complaining that the algorithms used by big tech to allow information to get out is tilted towards the left. There’s no real proof of that; it’s all anecdotal and I don’t have any idea who’s right and who’s wrong. But the issue of privacy and exposure to ideas is kind of what creates a lot of anger towards big tech. But that has nothing to do with monopoly. After all, how could any entity have a monopoly on information available to anybody on the planet when we have more access to information now than ever before in the history of humankind in the world? So the issue of adjusting the algorithms to affect information, that has nothing to do with pure antitrust policy. Antitrust policy is purely economic and not access to information.
Ryan Young: Well, I think especially on the right, the current antitrust push isn’t economic or consumer-oriented; it’s personal. President Trump has a personal beef with Amazon founder Jeff Bezos, in part because he owns the Washington Post, which is often critical of President Trump. He’s said that other companies such as Time Warner, which is the parent of CNN, also have possible antitrust concerns going forward because of their political coverage of the president as opposed to how any of their business affects consumer welfare. So here you’re seeing antitrust policy being wielded as a potential weapon for competition-unrelated reasons. And this kind of mission creep is something that the left and the right both should stop doing and keep a more careful eye out for.
Historical Antitrust Cases [23:29]
Bob Zadek: This is Bob Zadek, I’m speaking with Ryan Young this morning. We are talking about antitrust legislation as an economic and, more importantly, a political tool to accomplish broader changes in our economic system than merely protecting the consumers. It’s a major topic; it will be a topic front and center of the political debate in the 2020 election and thereafter. We have, in all of the discussion of economic issues such as socialism and national conservatism, we are being exposed to economic worldviews by political candidates running for federal office. So all of a sudden, Americans must have a core understanding of economic policy in order to vote intelligently. We are being asked to vote for an economic system in 2020; we have never been asked to have that kind of a vote before. Antitrust legislation is crucial to understand when you vote about selecting an economic system. Therefore, this topic is essential to exercise your right to vote. We’ll be back with Ryan Young in 30 short seconds to discuss the abuse of antitrust legislation to accomplish dark political and economic goals. It’s a pretty scary story. We’ll be back in 30 seconds.
[Break]
Bob Zadek: Welcome back to the Bob Zadek Show, longest-running live libertarian talk radio show in all of radio. Thanks so much for listening to my conversation this morning with Ryan Young. Ryan works at Competitive Enterprise Institute; he is a senior fellow there. He researches regulatory policy, trade policy, antitrust regulation. He writes his staff blog, “This Week in Ridiculous Regulations.” Of course, “ridiculous” should always precede “regulation,” so that is Ryan’s staff blog at CEI. And Ryan has authored with Wayne Crews a wonderful piece, “The Terrible Ten of Antitrust Policies.” It is the case against antitrust regulation.
Antitrust regulation is particularly important because it is a federal statute which purports to be economic in nature, protecting the free market from any kind of thumb on the scales and protect the ultimate freedom of the marketplace from monopolistic practices without defining that. And what’s happening now is antitrust legislation has again become in the political forefront. And we must understand antitrust legislation because it will be a tool that will be used by those who seek to attack the free market capitalist system.
Now Ryan, you have studied antitrust legislation going back to the first major statute, which was the 1890 statute—I believe it’s 1890, the Sherman Act. Tracing the history of antitrust legislation, has there ever been, or give us examples of when that statute, when applied, accomplished an improvement in the marketplace as opposed to where it simply destroyed bigness per se and helped competitors but didn’t help the consumers? So make the case for, if you can, and against effective antitrust legislation.
Ryan Young: It’s very difficult to make; in fact, I’d argue that it is impossible to make. The Standard Oil case back in the day centered on a company that was continually cutting its prices and increasing its supply, which was making its product more available to consumers, more widely available, as well as cheaper. And at the same time, while the antitrust case was going on, there was a major shift in the oil market. The electric light was displacing the gas lamp. Standard Oil made its name providing fuel for kerosene lamps. That market was killed by Thomas Edison, and Standard Oil was starting to see its market share decline along with this. But then something else emerged: the automobile. All of a sudden, there was rising demand for gasoline. So Standard Oil had to innovate and change its policy to supply what consumers wanted. Standard Oil had to adapt to consumers, not the other way around. So that antitrust case was, frankly, a waste of time.
There was the IBM case in the 1960s that lasted for about 13 years, by which time the government decided to drop the case altogether because the technological issue at hand had long since become obsolete, which is a common theme in the tech industry. Then there was the big Microsoft case, which is the most recent major case back in the late 1990s. That case was mainly over the fact that Microsoft included a free browser in its Windows operating system. That browser, Internet Explorer, has since been supplanted by other browsers, from Google’s Chrome to Netscape to Firefox, that can be downloaded for free using Microsoft’s own browser. So that case turned out to sizzle and it ended up in a settlement, neither a victory nor a defeat for either side. So really looking at the long history of major cases, there’s not been a single one that—
Bob Zadek: And what about AT&T and Bell Labs?
Ryan Young: That is a good question. And frankly, Bell Labs and AT&T were a government-supported monopoly. This is the only kind of monopoly that can endure. So the government was right to break it up, but it was wrong to have protected that monopoly and preserved it in the first place. So in that sense, it was righting a wrong rather than affirmatively protecting consumer welfare.
The Natural Check on Monopolies [31:35]
Bob Zadek: And Ryan makes an important point made earlier by Milton Friedman in a widely viewed, still viewed series, Free to Choose. And Milton Friedman, a free-market economist as we all know, pointed out that the only monopoly that has any kind of legs to it, that can survive the passage of time and survive competition, is a monopoly created by or supported by government. Ryan mentioned in his introductory comments the East India Trading Company, a British monopoly. Their tea, you may recall, was thrown into Boston Harbor, the so-called Boston Tea Party. That was a governmental monopoly. So governmental monopolies have governmental support and protection, and they survive. But monopolies that are created by the skill of the management of the company never survive for all that long.
And I would just remind my listeners, long-time listeners, one of my very first shows discussed the story of the largest retailer in the world in 1960, which was—the younger listeners will never have heard of this—the A&P, Atlantic and Pacific Tea Company. They were the Walmart of their day in 1960, during my life, and they do not exist today. So the market is in many ways a cruel place if you want longevity, and certainly it’s almost impossible to live in a monopoly environment for very long, because if you are making disproportionate profits, that will draw competitors like bees to honey. So Ryan, the marketplace itself shows us that monopolies lawfully created don’t really have legs. It just draws too much competition. Isn’t that the case?
Ryan Young: That’s right. And further to your point, there are competitive abuses all over the broader economy, and that’s why antitrust policy exists. People see these problems and they want to fix them. The trouble is that the tool is ill-suited to the job, because a lot of the times, whether the policy is an occupational license that restricts entry by new competitors or other barriers to entry—fees, taxes, building permit issues—a lot of these are the real barriers to entry that prevent entrepreneurs from entering a market and either putting up a viable front against a competitor or maybe evolving a new way to do business or even a new product entirely that never existed before. Those are the real threats to competition. So competition policy is important, just maybe not so much in the Sherman Act/Clayton Act sense. It’s more of a—you don’t so much have to teach the grass to grow, but you do have to take the rocks off the lawn.
Caller Segment: Monopolies and the Founding [34:59]
Bob Zadek: We have several callers, as I expected we would. First, David, you’ve been holding for a while. Good morning, what’s on your mind?
Caller (David): Good morning. I was listening with interest. Of course, monopoly means putting all your eggs in one basket, and probably the simplest person knows that you shouldn’t do that. But I was interested, the other day Trump was caught with a little quote, “I was the chosen one.” And when he said it, you could tell he was tongue-in-cheek about it, but the interesting thing about it was that he apparently was in some planning session and that the world’s, let’s say, the people that dominate the world had chosen him to do the most wild and erratic thing, which is to help develop monopolies. And I’m just wondering if you think back to 1776, we were fighting monopolies. There were 13 colonies that were chartered by the king, and each of those 13 colonies were basically a monopoly. You couldn’t trade from New York to New Jersey without paying tribute to London. You couldn’t haul a load of corn across a state line, so to speak, or a colony line without having to pay tribute. And the idea that we’re being trapped into accepting more and more monopolies means that somebody is choosing our presidents so that we’re going to trap America into being a land of monopolies. So I’m just wondering if you’ve looked at this idea in its broader picture, whether the Democrats and Republicans are really both sides of a coin that are developing these monopolies.
Bob Zadek: Thank you so much, David. And Ryan, you have pointed out in our conversations that antitrust legislation is bipartisan. Is there much difference—there is a surprising agreement, it seems to be, at the federal level in how to apply antitrust policy with Democrats and with Republicans. I wonder if you can comment on whether or not historically or at present the ballot box gives us a clear choice when it comes to antitrust policy. Since you and I agree that antitrust policy is never a sensible policy and the marketplace is the best way to protect against the growth of economic power, can one in the ballot box make a distinction?
Ryan Young: I think the caller made excellent points about the Constitution essentially setting up America as what was at the time the world’s largest free trade zone. That was an important way to eliminate monopoly abuses, not so much by the private sector, but by the states. That was one of the main purposes of the Constitution: to get rid of those monopolies.
As far as how the ballot box can address it, that is a much trickier issue, because if public opinion favors an active antitrust regulation approach, then in the long run that’s what we’ll get, even though that tends to be economically harmful, especially for consumers. In the long run, what the people want, they get, good and hard. That’s how democracy works. The point is how we can steer both policymakers and the public to embrace innovative dynamism, to realize that the true source of a lot of restrictions on competition and a lot of the monopoly abuses don’t come from companies like Amazon or Facebook; they come from Washington.
The Baptist and Bootlegger Dynamic [39:24]
Bob Zadek: You know, you make so many good points, Ryan, in that one comment you just made. First of all, what strikes me is that the biggest monopoly, or the fastest-growing monopoly, is the monopoly in political power that is being ceded from 50 competitors for political power—the states—and it’s being ceded upstream to Washington as power devolves from the states to the federal government. So what’s interesting is people who are afraid of bigness per se and therefore have this somewhat automatic knee-jerk fear of big anything, they look to bigger government to save them from bigness. So using bigness to save us from bigness is kind of fuzzy thinking.
Also, you made a wonderful point which I had never thought about before, which is the formation of the federal government in 1788 was, as you have pointed out, done because the states were charging tariffs to move goods from one state to another, and the founders felt that we could not grow as an economic powerhouse as a country unless we allowed free trade between the states. And so we preceded the EU by a couple hundred years, and the EU is trying to accomplish with their free trade zone what we accomplished in 1788. One can only ask what took so long.
And as to bigness, so I think you have made the point more than once during our show, perhaps you can reinforce it, is that antitrust legislation seems to have its roots, to the extent that it has political history, in the fear of bigness per se. And in 1890, as you have pointed out, perhaps you can expand upon it, that the antitrust movement, the trust-busting of Teddy Roosevelt, was not done in response to any consumer abuse. The consumers and the marketplace weren’t being harmed at the time, as you pointed out. And isn’t it true that none of the antitrust legislation was done to fix an identifiable harm to the marketplace or to consumers? And Ryan, you have pointed out in your writing that antitrust legislation is done to protect competition and not the competitors. So if you can expand upon that, whether antitrust legislation was ever used to protect a clear harm to consumers.
Ryan Young: In a lot of ways, antitrust began and still is to this day a confluence of two separate things. It began as special interest legislation to protect competitors rather than competition. 95% of all antitrust lawsuits are brought not by the Justice Department or the Federal Trade Commission; they’re brought by competitors trying to take down their other competitors. They’re trying to advantage themselves rather than preserve the larger market process. So one dynamic is antitrust legislation as special interest legislation.
The other dynamic is basically public sentiment. People do fear the unknown; they see big, they view big as bad. And a lot of times they have very good reasons for doing so. Sometimes they’re misguided, but their heart is in the right place, often as not. So what you have is what’s called a “Baptist and Bootlegger” dynamic, where you might have both a moralizing Baptist preacher and a shady bootlegger both favoring a liquor prohibition on Sundays. The preacher does not want people drinking on the Lord’s Day, and the bootlegger enjoys a nice, very lucrative monopoly on Sundays. You have that same Baptist and bootlegger dynamic in play in a lot of antitrust regulation, where you have companies that want to pad their bottom line even if they have to do so unfairly, along with people who genuinely feel like reining in the big guy and saving David over Goliath would do good for consumers.
The Relevant Market Fallacy [44:16]
Bob Zadek: So it is the biblical David versus Goliath that drives antitrust legislation, not the fear that Goliath was a cruel person. He was just bigger than David. He didn’t do anything wrong; he was just bigger. So it was the bigness in and of itself and the fact that someone else wanted to be the Goliath but was crowded out. That’s what prompted antitrust legislation.
And there’s an interesting parallel—maybe not that interesting, but a bit interesting. I have done many shows on occupational licensing, and we have always discussed, we being myself and my guests, the fact that occupational licensing, requiring a license to be a cosmetologist for example, is not done to protect the public. There is nobody who has died because of a bad hair coloring. It’s not done to protect the public, but done to protect existing cosmetologists from competition. So much of this legislation is what economists call “rent-seeking,” using the government to give a competitor a market advantage. And that is the ugly underbelly of antitrust legislation.
In the history, I think you have commented on this earlier, Ryan, but has there ever been even one case of note where it can be said that successful antitrust legislation actually made economic life better, or is it always the case that antitrust legislation produces a result that’s worse?
Ryan Young: I can only think of one example, and that had to do with tariffs rather than specialized Sherman Act/Clayton Act antitrust legislation. And even then, it turns out to have been a false hope. What happened was in the 1890s, there was—oh, what was it, aluminum tins or something like that—where there was a protective tariff for this infant industry that was still growing, trying to find its sea legs against some very tough international competition. So Washington put up a tariff, and that helped the industry to grow, and then the tariff was later removed. So an economist named Doug Irwin, who will probably win the Nobel Prize sometime in the next decade, looked at the matter and he found that yes, this did help that industry reach maturity probably about a decade faster than it would have under market conditions. So in this case, competition policy stacking the deck in favor of one competitor over others helped one of the competitors. But the cost of doing so actually exceeded the benefit, so it was a net negative for the economy and a net negative for consumers. So people who cite that case as a positive example are simply seeing the seen but not seeing the unseen. They see the visible phenomenon of one company being helped, but at the same time they miss out on the larger costs to the rest of the economy who had to fund that company’s growth at their own expense.
Amazon and the Relevant Market [47:49]
Bob Zadek: Now Ryan, we’re running out of time, but there’s one important concept I want our audience to at least end the hour thinking about, which is: we started this show and I observed, and you concurred, that even defining what monopoly means, the statute gives us no guidance. And the test or the example we can use is Amazon. Is Amazon a monopoly? And how do you define, or what are the various ways you could define the marketplace in which Amazon operates to show how you could either conclude Amazon does have market dominance or they do not have market dominance, depending upon the use of the term monopoly? So use Amazon as a test to show how squirrelly the concept is of dominance of a particular market.
Ryan Young: That is a textbook example of what I call the “relevant market fallacy.” What is Amazon’s relevant market? Is it online retail, which they might capture as much as a third or a half of? Is it retail in general, which Amazon comprises about 5% of? They also do web services, cloud server hosting. Do they have a monopoly over that? What’s their market share? How many competing firms are there? How large are each of them? Is Amazon the only large player against a lot of smaller players, or are there several larger players in the market? All of these facts and more have to tie into what Amazon’s relevant market is. And there are so many different ways to define whatever Amazon’s relevant market is that when there’s an antitrust case, often this relevant market is one of the biggest things that the attorneys argue about. They don’t argue about whether a company’s been hurting or harming consumers; they argue about what the relevant market is, which is frankly completely arbitrary. Facebook, for example, competes—they might dominate social networking, but as a way to spend leisure time, they compete against restaurants, spending time with friends and family, sports games, television, movies, you name it. That’s their true relevant market. You can make similar arguments about Amazon. So when you say that a company is dominant in its market, always ask: what’s the real relevant market here?
Bob Zadek: And what’s important is imagine you are among Jeff Bezos’ inner circle and you are now doing economic planning, allocating capital, and you know there is antitrust legislation on the books. How in the world could you make decisions about allocation of enormous sums of capital feeling vulnerable that some court—and Ryan, I think a court could find by using applicable law that Amazon is a, whatever it means, monopoly, and a case could be made for breaking up Amazon, whatever that means. And since the risk exists, it adds uncertainty as a part of the planning team of Amazon, which interferes with growth decisions. And who in America wishes Amazon to be broken up so we can go back to higher prices?
Ryan, thank you so much for giving us an hour of your time this morning. Here comes John Philip Sousa reminding us that our time is up. Ryan, how could our friends follow your writings out there?
Ryan Young: The Competitive Enterprise Institute is online at cei.org. Thanks so much for having me on, Bob.
Bob Zadek: Ryan, thanks so much for joining us this Sunday morning, and thanks for your good work and scholarship. This is Bob Zadek saying so long for now. I’ll be back again next Sunday, God willing. Have a nice Sunday.