Amazon and Facebook: How Antitrust Enterprises Have Failed In The Digital Markets
At its most fundamental level, competition law (or antitrust in the US) regulates the behaviour of firms in a market. The goals of competition law, however, are far more contentious than this basic function it performs. The Chicago-School counterrevolution of the 1970s and 80s established the value of minimising legal intervention in favour of increasing the efficiency of markets and welfare. As a result, only a defined range of business strategies are caught by the web of competition law. We do not punish above-cost pricing, for example, because there is no rational economic separation between cases of pro-competitive above-cost pricing, and predatory pricing. We thus only class cases of below-cost pricing with indicators of a subjective intent to exclude competition as worthy of sanction by competition authorities. Critically, however, we are most concerned by the actions of dominant firms – those which can exercise market power or alter competition conditions.
This rather de minimis glance at the ‘antitrust enterprise’ provides one concrete assertion about the nature of competition law: it operates with rigid standards which are reviewed from time to time to ensure that the law is improving the operation of the free market. After all, it is turning economic theory into applied policy. Digital markets, however, have fundamentally changed the economics of competition. The network effect in modern digital markets sees products increase in value as the number of users increases, and firms gain a dominant position as their products subsume demand to become the standard – this is known as the ‘tipping effect.’ Facebook and Amazon in the social networking and retail sector respectively are the most obvious examples of this domination.
The antitrust enterprise is a failure in this regard because digital markets are exemplifying extremely abnormal structures and competitive tendencies. The 2020 report published by the U.S. House of Representatives Antitrust Subcommittee highlighted that network effects were so strong that the ‘tipping effect’ caused a monopoly in the social networking market such that Facebook’s most threatening competition comes from its own family of products (i.e. WhatsApp, Instagram). Indeed, for the market to be competitive, we need the incumbents to be threatened by potential entrants and innovative ideas – if Facebook’s concern is the competition posed by Instagram, it is not competing per se. In fact, it poses the problem of collusion within an internal company. Despite the ambitious efforts of Federal Trade Commissioner Lina Khan and a series of court claims in the past two years, Facebook is not suffering the consequences of anti competitive behaviour. Indeed, the big tech tactic seems to be to form clearly problematic mergers or acquisitions and offer agreements and fixes later in the form of selling assets. Examples include Facebook’s acquisitions of Instagram and WhatsApp, which, as suggested above, have had notable negative effects on competition.
Consequently, we see the damaging effects of Chicago School assumptions materialise in digital markets. Concerns that mergers and anti competitive behaviour had a negative effect on the structures of the market by increasing concentration dominated American jurisprudence in the 1940s and 50s. The ‘potential competition doctrine’ focused on this problem by prohibiting mergers which substantially reduced competition and deterred potential entrants. Antitrust challenges today would require plaintiffs to jump a significant number of legal hurdles and high thresholds. Even conclusive evidence that the acquisition of a start-up may have the effect of wiping out a potential entrant may not convince a court or agency. This was as true in the 1967 decision of Procter & Gamble as it is today – Facebook’s acquisition of Instagram for 1 billion dollars in 2012 did not warrant investigation by the FTC. Because the consumer-facing market is zero-priced (consumers of Facebook pay nothing to use it), defining the market and pinpointing where the abuse is occurring is much harder. The law is failing to adapt to the rate of development in digital markets – as the dominance of the incumbent grows, the incentive for tech start-ups to compete is sapped. As end consumers, we suffer from the hegemony and power of the Facebook monopoly – the structure of the market is not conducive to offering a range of social networking platforms and products.
In the case of Amazon, the concern is arguably even more obvious, with the antitrust subcommittee finding evidence following investigations that Amazon had exploited sellers through its overwhelming market dominance. With control over 40% of all US online retail sales, the particular concern identified by both the US HoR and the EU Commission is the use of sensitive data from independent retailers who use Amazon’s marketplace to sell products. Through the alleged exploitation, Amazon can discriminate what products are shown to consumers, inform the creation of its own products, and manipulate its ‘Buy’ box function (which is now the subject of a £900 million lawsuit). Despite this market power clearly stemming from its dominance, Amazon’s responses were not incredibly convincing:
“…large companies are not dominant by definition, and the presumption that success can only be the result of anti-competitive behaviour is simply wrong.”
The response is made even less convincing when Amazon’s internal investigation shockingly revealed no such problematic behaviours. The antitrust subcommittee recommended breaking up Amazon into small businesses – a tactic known as ‘no fault’ deconcentration, which aims to enhance competition in the market. The problem with adopting this recommendation is that it will be difficult to reliably assess the efficiency benefits from such a tactic. There is no guarantee that the welfare of consumers and producers would be enhanced without serious disruption, and such a movement for deconcentration had already been proven economically unpopular in the 1960s. A more strategic intervention is needed, which is why the EU Digital Markets Act (2022) provides an appropriate starting point for the future, by placing special responsibilities on dominant firms such as Amazon to be ‘Gatekeepers’ of e-commerce and not distort the market for consumers. Introducing a form of ethical responsibility in the competitive process is arguably an overreaching intervention; free market economics lacks an ethical component and all firms in the market are working towards their selfish desires of profit maximisation and growth. But, as already mentioned above, technology has fundamentally changed the economics of competition.
If the antitrust enterprise was truly successful, there would be no incentive for regulators to switch gears and intervene in digital markets. Yet the shift indicates a failure of effective policy, and a flaw in the fundamental economic assumptions of the Chicago School. Competition policy, as reiterated strongly in the case law of the European Court of Justice, should aim to enhance consumer welfare. If this is to be achieved in the short term, the role of legislation is critical. The EU Digital Markets Act is possibly the first step in recognising the need for intervention to reduce barriers to entry in such complex markets and increase the potential for innovation.
