Carte Blanche: Antitrust Calls For Big Tech

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At Elizabeth Warren’s rally in Long Island City, she rolled out her plan to break up supposed monopolies of Amazon, Apple, Google, and Facebook. A New York Times article reported that “She compared Amazon to the dystopian novel “The Hunger Games,” in which those with power force their wishes on the less fortunate”. For those of us that have not read The Hunger Games, Warren is referring to the chapter where President Snow restores private property rights and deregulates the economy, allowing the districts to become entrepreneurs and start their own businesses. Citizens of District 12 are able to purchase Amazon Prime and receive any product with two-hour delivery while they watch the Hunger Games in HD on their tablets. Although the chapter was later cut from the book, it was great because it showed readers that there is something worse than mass starvation, unique to a capitalist economy: millionaires and billionaires. As Warren later said, “I’m sick of freeloading billionaires”.

The bizarre thing about this speech is that her entire basis for breaking up big tech is envy for the rich, rather than restoring competition. From the small excerpt provided, it is clear that Warren has no sense of legitimate use of force in a free society, the role of entrepreneurship, nor competition in a free market society, and most of her comments are not worth the time. It is also clear that she has neither read major economic works on monopoly theory nor The Hunger Games. Since Warren’s calls for antitrust, however, many other politicians have climbed aboard, accusing Amazon, Apple, Google, and Facebook of holding monopolies, including Senator Amy Klobuchar of Minnesota. To judge the legitimacy of antitrust for these companies, we will judge if they really lack competition and make consumers worse off. This judgment will be based on an accurate description of competition, monopoly, and entrepreneurship.

Competition

In modern economics textbooks, we are taught the concept of “perfect competition”. A way to describe this perfect competition is when no single consumer or producer of a product can influence price. The simple language sometimes used distinguishes “price makers” from “price takers”. This is how prices are described as competitive in a basic economics class, with a supply and demand model. If a producer of a good in perfect competition cannot influence the given market price, then they also must have free entry and exit from the market as well as a product identical to all the others in the same market. If these conditions did not apply, and the goods were not homogeneous, then the producer would no longer be a “price taker” and there would no longer be perfect competition.

The problem with this idea is that these absurd parameters do not exist in the real world. For perfect competition to exist, all economic actors would require perfect knowledge of all factors in the market, which is impossible. Secondly, all goods in a particular market are not homogeneous and never will be. This explanation of competition presents a static view of market “equilibrium”, not allowing for change and entrepreneurship. By the standards of perfect competition, no significant good or service can be perfectly competitive, except for maybe paperclips. In the real world, competition exists because of the very factors that prevent the existence of “perfect competition”: heterogeneous goods and services, imperfect knowledge, and forward-looking changes to the market. Competition in the market is the drive between different producers to satisfy a limited number of consumers. Producers compete by better satisfying consumers, through the process of offering more valued goods or lower prices, not by “taking”’ the current conditions of the market. There is also no such thing as static “equilibrium” outside of the economic model, but rather markets are in a constant state of change. Therefore, the undercutting of prices of a competitor is not anti-competitive, but the embodiment of competition.

Monopoly

The phenomenon of monopoly should be described as when a producer enjoys barriers to enter their industry, thereby holding off other competing producers. This one producer then has the ability to limit supply and raise prices. In this sense, “monopoly prices” are differentiated from “market prices”. In the case of “perfect competition”, entrepreneurs take risks on new goods or services and production processes, and if successful, they influence the market. Although they influence price and may be the sole producer of their invention, entrepreneurs are not monopolists, and their actions are not uncompetitive. As long as there is free entry and exit from the market, the producer faces competition from alternative products and faces limits on prices to remain profitable. The success of producers then is entirely reliant on the voluntary choices of consumers.

Even in the case of a single seller in a particular market, artificially limiting supply and raising prices is not possible if new producers can simply enter the market at any time to meet the unsatisfied demands of consumers. Therefore, if the market remains free, market share and size of a particular company has nothing to do with whether or not it has a monopoly, and competition exists regardless. It is important to remember that action happens over the passage of time, and market share is simply a snapshot of some point in the past. Some economists, like Ludwig VonMises, acknowledged the possibility of monopoly for certain natural resources that a single producer can own all of on the earth, but this can only apply to a limit number of industries, and certainly cannot apply to the companies in question.

The Entrepreneur

The models of perfect competition have no sense of the continuation of time, and therefore no role for the entrepreneur. Since entrepreneurs are forward-looking, disrupting the equilibrium by creating new individual methods to turn a profit, their definition is to disrupt “perfect competition”. They are necessarily always the sole seller of their product at some point, being the first individuals to bring them to the market. If the entrepreneur remains the sole seller and the idea is profitable, consumers have been made better, not worse off than they were previously. Entrepreneurs, although the sole producers of their idea, must compete with the status quo and cannot block entry to the market without involvement from a central authority, and therefore are not monopolists at any point in time.

The Case of Big Tech

So then we can apply the economics of competition and monopoly to big tech companies and the talk of antitrust lawsuits for the companies. For progressives, this is one of those things where “it’s time to do X”, injecting their mild historical determinism. Social media and technology is the next big industry, and progressive God said “it’s time” to smash them. For the right, they always must concede to the left, and they are on board with the trendy antitrust sentiment as well. The problem with this notion is that it is assumed that “bigness” is the indicator of monopoly rather than barriers to entry. Amazon and Facebook are big, therefore they must be monopolies. If they actually enjoy monopoly status it will have to be proven that they actually have forcible barriers to entry and can raise prices to monopoly levels. To examine this issue the companies must be separated between those that have clear prices and those that are free to consumers for the most part.

Amazon and Apple

Amazon and Apple sell tangible products at clear market prices. Like many pro-interventionists for big tech, Greg Ip, in a Wall Street Journal article cited the market shares of these companies, with Apple providing 99% of phone operating system and Amazon providing 75% of book sales. He also compares these companies to those of past antitrust lawsuits, writing, “A growing number of critics think these tech giants need to be broken up or regulated as Standard Oil and AT&T once were”. We know that market share is not a factor that makes a firm uncompetitive, and to examine Apple and Amazon we can look at their rapidly falling prices and new innovations constantly released on the market.

Antitrust supporters often cite successful cases of the past like Standard Oil or US Steel. However, both of these cases face the same logical error as Amazon and Apple: their outputs were rapidly increasing and their prices were rapidly falling. In the decades leading up to US v. Standard Oil of New Jersey (1911), kerosene prices fell from 30 cents per gallon to 6 cents, and market share had declined with about 137 competitors in the industry. This enables the increase in purchasing power for consumers and living standards. Amazon releases new products and services every year, retailing consumer goods and delivering them at low prices, facing competition from any store. In 2017, Amazon spent nearly $23 billion on research and development, more than any other company. If we were to ask the average citizen what the problem with monopoly is, the answer would likely be the ability to charge higher prices, gouging consumers. But if the so-called monopoly lacks the very problem that makes it a monopoly in the first place, what problem are we fixing by breaking these companies up? The fact of lower prices and innovations for these tech giants creates higher living standards for consumers, and large market shares for these companies are purely the result of consumer choice.

But now as the statists see their mistake with Amazon and Apple, just as they should with the reality of Standard Oil, they switch gears from monopolistic “price gouging” to lower “predatory pricing” as the main problem. Companies like Amazon and Walmart have often been accused of retailing goods lower than other sellers to drive them out of business, and it is supposedly anti-competitive to sell for lower prices than competitors. The main point of “predatory pricing” is that the proponents will then raise prices to monopoly levels once the competitors are gone, thereby gouging consumers. But when retailers like Amazon continue the low prices after the competitor is gone how is it predatory? If a firm has the ability to provide a good or service at a lower price than previously, they are enhancing the purchasing power and living standards of individuals. If preventing predatory pricing means artificially propping up less productive producers, living standards are artificially held back. This is a theory that holds no ground in reality, because reality bears the passage of time. Even if a company like Amazon can lower prices to unprofitable levels to eliminate competition, it is impossible to take a loss forever, and if they try to raise them, forward-looking entrepreneurs will just come back to take the business.

This idea bears so much confusion that the process of undercutting competing producers are described as uncompetitive when in reality, this the physical embodiment of competition. Politicians really do view non-competition as competition and real competition as anti-competitive. Although, with the common error of discounting the passage of time and believing in this stagnant equilibrium as a real economic model, we can see the real reason individuals make this mistake. If we can understand the competition as a process through time and not a snapshot in the past, we can view the creative destruction of less productive business as competitive, and understand why a free market results in a general fall in prices. If a retailer like Amazon puts another out of business, it would be uncompetitive to use the force of the state to prevent the action.

As we see statists and politicians attack large companies for both raising and lowering prices we see the true nature of the argument, that they are attacking nothing more than “bigness” of companies, as to join the trendy monoculture that hurts consumers as a result. This is exactly why Elizabeth Warren cites “billionaires” as justification for antitrust. In the poem, Tom Smith and his Incredible Bread Machine, an antitrust lawyer sums up the stance of the politicians very well.

“The rule of law, in complex times,

Has proved itself deficient.

We much prefer the rule of men!

It's vastly more efficient.”

 

“Now, let me state the present rules.

The lawyer then went on,

These very simple guidelines

You can rely upon:

You're gouging on your prices if

You charge more than the rest.

But it's unfair competition

If you think you can charge less.”

 

“A second point that we would make

To help avoid confusion:

Don't try to charge the same amount:

That would be collusion!

You must compete. But not too much,

For if you do, you see,

Then the market would be yours

And that's monopoly!”

Facebook and Google

The calls against so-called monopolies are even more interesting in the cases of Facebook and Google because these services have no market prices for consumers, as they profit from advertisements and data. This makes the fact that market share is driven by consumer choice more clear than ever. Mark Zuckerburg cannot gouge the price of his commodity to consumers and is the sole producer of Facebook because he invented it. Facebook is a specific and unique commodity, so obviously, the entrepreneur will remain the producer since he created the product with his mind. These companies face competition not only from alternative social media, communication, and search engines that are free for everyone but also from future startup companies that can pop up at any time or from consumers that can simply choose not to use these services at all. The traditional theoretical example of monopoly, where one producer owns all of a specific resource, is impossible for all services. Services, as intangible things of value, can be provided by anyone provided there are no barriers to entry. There is not a limited number of “Facebook mines” on the earth that are all owned by Mark Zuckerburg, so he can limit the production of Facebook and hurt consumers. The reason Facebook has the market share it does is the result of individual choice and the value of the innovations the company creates. Nobody is forced to join. It still spent $7.8 billion on research and development in 2017 with Google’s Alphabet spending $16.6 billion. These companies are competing extremely hard to hold on to their dominance and could lose it in the future, just as Myspace did. In just 2007 The Guardian was questioning if Myspace would ever lose its “monopoly”.

To prove the threat of competition to Facebook, we can look at the regulations Zuckerburg has proposed to reign in big tech. What will likely happen is that the state will “solve” the problem by writing regulations with the help of the companies themselves. Rather than increasing competition, they will seal them in power forever, making it significantly more difficult for startups to compete. Zuckerburg has requested that Facebook help write the regulations itself, which will only be designed to raise production costs for entrepreneurs. It never seems to be a factor for interventionists that the companies they are trying to control with their regulations have the support of the major companies themselves!

A proposed regulation from Elizabeth Warren would ban big tech companies from “moving into different lines of business where they abuse their power as middlemen”. This is exactly the kind of regulation dominant businesses love! What better way to consolidate power and construct barriers to entry than to legally bind current producers from moving into other lines of work? Some of the most successful companies in history have started out producing something completely different from what they are now known for, with Amazon standing out as a perfect example. This would be an option for reigning in the power of big tech that big tech itself will likely love, as means to destroy future competition and hurt consumers. Also, the words from Warren, “abusing their power as middlemen” is so adolescent and anti-intellectual it is not worth commenting on.

Objections

Now, it is clear that the profitable aspect of tech companies that do not charge consumers is data. This consumer data is collected to direct advertisements towards users more likely to be interested in the product. With directed advertising, the marking is more productive and therefore the consumer data has market value. Advertising is simply the service of connecting producers with potential buyers, spreading market information, and plays a legitimate role in a market economy. The collection of this consumer data does bear much controversy however, regarding the privacy rights of consumers. The knowledge of Cambridge Analytica buying consumer data from Facebook sparked a completely different debate regarding big tech. There is a serious case to be made that the selling of data without knowledge to the consumer is aggressive and infringes on individual liberty. However, this debate is outside the point of whether or not Facebook should face an antitrust lawsuit and be broken up. If it is found that Facebook indeed violated the privacy rights of consumers, then they should pay reparations to these consumers and move forward legally. None of this changes the economic reality of antitrust and monopoly, and the issue of data feels like an excuse for politicians to act out on anti-capitalist tendencies.

Another objection, particularly sensitive to conservatives, is the bias and shadow banning towards right-leaning individuals and accounts of big tech companies. Shadow banning is the act of disabling other accounts from viewing one without the knowledge of the user. Google has been said to regulate search results to a left-wing bias, and YouTube outright bans right-wing channels or classifies videos “adult content” when they clearly simply display unpopular opinions. Facebook has banned accounts, not for displaying hatred, but for spreading unfavorable opinions. A few examples involve some libertarian Facebook pages: “V is for Voluntary”, “Police the Police”, and “Free Thought Project”. The companies themselves want us to believe that they are only censoring “extremists” like Alex Jones, but the issue is obviously bigger than this. For this reason, conservatives have worked their way into supporting interventionism into big tech, or possibly antitrust. Like the previous issue of data, this issue does not automatically turn these tech companies into monopolies worthy of economic intervention. If they are doing so mething wrong, the best way forward is to allow a free market with unhampered entry and exit, to leave the opportunity for new entrepreneurs to pick up the slack where current companies fall short. Conservatives have sometimes called for regulations to force these companies like Facebook to treat them equally, but if these huge companies are inherently against conservatives and libertarians, why would we want to give them special regulations, thereby legitimizing their existence and cementing them in place forever as internet giants?

Conclusion

The central problem with the political attacks on big tech is the static view of competition, which leads to the description of competition as the exact opposite of real competition. They view unchanging prices as competitive when competition is the change in prices. They judge competitiveness by market shares of the past when it is the possibility for future change in market shares that determine competitiveness. When we account for free entry to the market and all of the factors of future competition, we can get to the final conclusion of big tech: it is impossible for Amazon, Facebook, Apple, or Google to have monopolies without government intervention creating barriers to entry. With the correct view of monopoly in mind, there are many reasons a single seller can exist in a particular market and still face competition in many forms. An antitrust case or regulatory body to this industry would hurt consumers and possibly destroy the innovation forever.