Monopoly Get Out of Jail Free Card

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For the anti-monopoly movement, the past three months have been exciting but sobering. In late July, the House Antitrust Subcommittee held a landmark hearing at which members of Congress forced the CEOs of Amazon, Apple, Facebook, and Google to admit to business practices they would rather have stayed private. Amazon got publicly outed for refusing to stop sales of counterfeit products claiming to be from PopSocket unless the accessory maker purchased ads on the giant retailer’s platform. Facebook CEO Mark Zuckerberg was forced to admit his company used its dominant position to limit the growth of rival Pinterest. Then, this past week, the subcommittee released a report on its sixteen-month investigation into the Big Tech companies, revealing more damaging facts, including the contractual and technical restrictions Apple used to build and maintain its monopoly over the sale of apps for the iPhone.

But here’s something that received a lot less attention: In August, a court of appeals in California overturned the Federal Trade Commission’s spring 2019 trial victory over Qualcomm, a manufacturer of chips for wireless devices that used coercive patent-licensing terms and denied essential patents to rivals to maintain its monopoly. (Disclosure: The Open Markets Institute filed an amicus brief in support of the FTC last November.) The court characterized Qualcomm’s exclusionary practices as “hypercompetitive” not “anticompetitive,” and therefore legal. Minus action from Congress or an FTC victory on a potential rehearing, this court’s decision will dampen the chances of successful anti-monopoly litigation going forward.

The discussion on tech and the Qualcomm case reveals a problem that has long plagued antitrust debates and continues to do so: the failure to define “competition.” What is a “hypercompetitive” business practice? What is “anticompetitive” conduct? The court in Qualcomm offered little guidance. As antitrust reform efforts gain steam, members of Congress, policymakers in the next administration, advocates, and scholars should recognize that all markets have rules of fair conduct and discuss what constitutes fair competition.

Here’s why this is so important: the House report showed that in 2009 Amazon launched a price war against — something over which it was willing to lose $200 million on diaper sales in a single month — with the ultimately successful goal of forcing a competitor to sell out to Amazon. Was this “anticompetitive,” or “hypercompetitive”? What competitive practices are, or should be, illegal? In concrete terms, should businesses in general, and dominant firms in particular, be permitted to gain a leg-up and succeed in the market through employment of sabotage and deception, exercise of market might, and use of financial firepower?

Notwithstanding the common rhetoric of “free markets” and “free enterprise,” every market is a product of state-enforced rules and has limits on competition. The law does not permit firms to gain an advantage over competitors and acquire market share by any means necessary, and accordingly prohibits certain business practices.  

Consider the rivalry between Apple and Samsung and what the two competitors can — and cannot — do in their market contest. Apple can compete by reducing the retail price of the iPhone, swapping lower per-unit margins for potentially larger sales volumes. Samsung can respond by selling devices with a larger screen or an additional camera. The law encourages success through these methods of competition. The loser is not permitted to cry foul and obtain redress in court.

Other competitive tactics, however, are prohibited. For instance, Apple cannot capture market share from Samsung by falsely claiming that the newest Samsung device is prone to explode. Samsung cannot bribe employees of Best Buy to damage iPads on display as a means of dissuading customers from purchasing Apple’s tablet. Beyond these “intuitive” limits on competition, the law bars the use of other methods of rivalry. One manufacturer, for example, cannot copy the other’s device features that are protected by patents. In summary, laws against false advertising, commercial bribery, and patent infringement ban certain forms of competition and embody implicit norms of fair conduct.

Since the law unavoidably structures and circumscribes market competition, antitrust debates need to feature open discussion on what the acceptable—and unacceptable—forms of business rivalry are. What tactics should be prohibited? This calls for grappling with norms of fairness. It cannot be resolved through appeals to workhorse platitudes of the field like “antitrust law protects competition, not competitors.” We need to address hard questions. What is permissible competition? Are competitors not entitled to any protection under the antitrust laws, even against industrial sabotage or false advertising by rivals? If indeed antitrust law offers no protection to competitors, why can competitors file antitrust suits and recover lost profits (and more) from monopolists that squeezed them out of the market?

Congress and antitrust enforcers need to broaden and strengthen the existing restrictions on certain competitive methods through legislation, regulation, and strategic litigation. First, firms should not be allowed to capture and maintain dominance by using practices prohibited by other laws. This prohibition on illegal practices is likely the least controversial one. On top of the bilateral injustice, what is the social benefit from a powerful company, or any company, destroying a rival’s factories or products? More than a century ago, National Cash Register maintained its monopoly in the cash-register market by directing its salespeople to put sand in the machines of competitors. In recent times, U.S. Tobacco perpetuated its dominance in smokeless tobacco by damaging and stealing a rival’s product displays at convenience stores and other retailers.

Second, firms should be prohibited from preserving their monopolies by use of their market power. This can occur by exclusionary contracting, in which, for example, monopolistic manufacturers forbid or restrain distributors from buying and selling the products of rivals. This coerces distributors, who have no alternative but to deal with the monopolist on its terms, and blocks rivals from accessing distribution channels to sell their goods. (In July, the Open Markets Institute, as part of a public interest coalition, petitioned the FTC to ban exclusionary contracting.)

Dominant firms have also tied and bundled their products to extend their power into new markets. In a tying arrangement, a business conditions the purchase of product 1 on the purchase of product 2; and, if it has power in the market for product 1, it can extend its power into the market for product 2. As Amazon CEO Jeff Bezos admitted to Rep. Mary Gay Scanlon at July’s House hearing, sellers who use Amazon’s shipping and delivery services are much more likely to become the “Featured Offer” for the coveted “Buy Box,” which makes that seller’s offer the first choice shown to buyers using the “Add to Cart” button on a product detail page. Not making sales on Amazon can be the death of an online merchant. Amazon uses sellers’ dependence on its marketplace (product 1) to capture more volume in its shipping and delivery services (product 2). Similarly, Slack has accused Microsoft of bundling Teams into its dominant Office package to marginalize Slack and other rivals in the market for office-collaboration software.

Finally, firms should be barred from using financial advantages alone to drive out rivals. The principal example is predatory pricing, where a firm runs short-term losses to bleed rivals and force their exit from the market. With apparently unlimited support from venture capital firms, Uber has upended the taxicab business around the world. Uber has lost billions of dollars in an attempt to build a global ride-hailing monopoly and destroyed the livelihoods of countless cab drivers. The plight of drivers and traditional cab operators cannot be attributed to their being less efficient than Uber at owning and driving vehicles and transporting passengers. On these grounds, they are likely more efficient than the ride-hailing giant. Instead, they have struggled because Uber has the freedom to lose huge sums of money year after year. The company has also lowered its operating costs by misclassifying drivers as “independent contractors” and has flouted municipal cab regulations as a matter of corporate policy.

Antitrust enforcers and scholars and federal judges have long neglected to examine the content of “competition,” and relied on empty words such as “anticompetitive” and “hypercompetitive” to make policy and decide cases. They have failed to acknowledge that market rules, one way or another, establish norms of fair conduct and fair competition — certain practices are prohibited as a means of obtaining an advantage over rivals. A coherent, effective antitrust law demands a change of course.

As they transition from fact-finding to legislation, regulation, and litigation to strengthen antitrust rules, members of Congress, antitrust enforcers, advocates, and scholars should debate what constitutes a fair marketplace and seek to answer one question: Do we want an economy in which firms win through deception, raw muscle, and privileged funding, or one in which firms succeed through fair treatment of customers, workers, and suppliers and investment in new products and processes? If the latter, companies would compete and profit by offering attractive prices to customers and high wages to workers and making better products, not through the use of generally prohibited practices, assertions of power, and reliance on privileged access to funding. That’s the world we live in now, and our society is the poorer for it.

Sandeep Vaheesan is legal director at the Open Markets Institute and previously served as a regulations counsel at the Consumer Financial Protection Bureau. He has published articles and essays on a variety of topics in anti-monopoly law and policy.