In June 2017, the European Union fined Google a record-breaking €2.42 billion for abusing the dominance of its popular search engine while building its online shopping service. Brussels found that Google illegally and artificially endorsed its own price-comparison service in searches. (In plain English, Google’s search results were biased in favor of its own services.) Consequently, consumers were denied genuine choices, and rival firms the ability to compete on a level playing field. Google is appealing this ruling.
When Americans hear about this sort of antitrust action overseas, they wonder why there is no corresponding U.S. crackdown. Why aren’t American trust busters going after giant corporations with market dominance such as Google, Amazon, and Facebook? The answer is complicated, and reflects a shift in American antitrust priorities.
The principal weapon available to federal antitrust authorities is the Sherman Act (1890). Section One prohibits all contracts, combinations, or conspiracies in the restraint of trade. Section Two prohibits monopolies and attempts to monopolize. Because of the broad language, the courts have limited the first section to agreements that “unreasonably” restrain trade, and the second to “unreasonable” exclusionary behavior.
The Sherman Act was introduced by Republicans as a response to Democratic claims that high tariffs and large trusts or holding companies were two sides of the same coin. Thus, in an effort to secure the protective tariffs they desired, the Republicans had to give the appearance that they were doing something to address the people’s fears about giant combinations. According to legal historian Lawrence M. Friedman, the Sherman Act “did nothing and solved nothing except to still the cry for action—any action—against the trusts.” The vague language was Congress’s way of passing responsibility for protecting competitive markets to prosecutors and the courts.
In framing the antitrust debate in the early 1900’s, progressive lawyer and future Supreme Court Justice Louis Brandeis focused on the social and economic power that naturally comes with bigness. Brandeis argued that “competition is in no sense consistent with large-scale production and distribution”; “efficiency in business does not grow indefinitely with the size of business”; and trust “profits are not due in the main to efficiency, but are due to the control of the market, to the exercise by a small body of men.”
In 1911, when the Supreme Court broke up Standard Oil, it, too, tied the Sherman Act to concerns about
the vast accumulation of wealth in the hands of corporations and individuals . . . and the widespread belief that their power had been and would be exerted to oppress individuals and injure the public generally.
Until the 1970’s and 80’s, concerns about the concentration of power in the hands of a few and potential abuses of power were the rudders guiding American antitrust law. This changed with the ascendency of the Chicago school of antitrust analysis. Robert Bork (former solicitor general and Supreme Court nominee), Richard Posner (retired in 2017 from the Seventh Circuit Court of Appeals), and Frank Easterbrook (currently serving on the Seventh Circuit) have been the chief proponents of the Chicago school.
The cornerstone of the Chicago school is the idea that all antitrust problems should be viewed through the lens of price theory. Healthy competition is synonymous with consumer welfare, that is, paying low prices for goods and services. Indeed, the modern Supreme Court, quoting Bork, has described the Sherman Act as “a consumer welfare prescription” (Reiter v. Sonotone Corp., 1979). Chicago-school theorists such as Judge Easterbrook also point out how difficult it is for generalist judges and lay juries to know the correct balance between competition and cooperation in each market. If a court errs in condemning a beneficial practice, the practice or technique is off limits until another litigant at some distant date persuades the court to reconsider its ruling. Thus, a practice should not be deemed per se in violation of the Sherman Act absent clear and convincing evidence.
The Chicago school is also skeptical of the dangers of monopoly. Judge Easterbrook sees monopoly as “self-destructive” and argues that “monopoly prices eventually attract entry.” It might take some time, but the market will correct and topple the monopoly from its position of power.
The Roberts Court shows an affinity for the Chicago school and has, according to the University of Missouri Law School’s Thomas Lambert, worked hard to “minimize antitrust’s error and decision cost.” Practices that years ago were seen as per se uncompetitive have more recently received Supreme Court blessings.
Google was under investigation by the Federal Trade Commission (FTC) for skewing search results, but the case was closed in 2013. Those familiar with the investigation indicate that charges were not pursued because consumers were not harmed by having to pay higher prices. The FTC concluded that competitors suffered injury, but—because price theory is the baseline principle—the agency declined to move forward.
Although the Chicago school remains dominant, the tide might be turning. The agent of this change is an unlikely candidate: a young associate research scholar at Yale Law School named Lina M. Khan. Last year her law-journal article “Amazon’s Antitrust Paradox” stirred debate and challenged much of the Chicago school’s doctrine. Khan argues that
the current framework in antitrust—specifically pegging competition to “consumer welfare,” defined as short-term price effects—is unequipped to capture the architecture of market power in the modern economy.
Low prices, Khan contends, are not bellwethers of the market.
To make her point, Khan focuses on Amazon, a company that has undoubtedly lowered book prices overall and has expanded into everything from apparel to home entertainment. Statistics show that 55 percent of Americans start their online shopping ventures at Amazon.com. Forty-four cents out of every ecommerce dollar spent in the U.S. goes through Amazon. But so long as prices are low, Chicago-school theorists have no issue with trends indicating Amazon’s dominance of American ecommerce. Khan urges examination of the “structure of a business and the structural role it plays in markets.” Amazon’s dominance of online shopping platforms, Khan fears, allows and encourages it to pursue growth over profits, engage in predatory pricing, and control infrastructure on which rival companies depend. She also notes that companies having little choice but to do business in the Amazon marketplace are put at risk because Amazon can exploit information collected on companies using its services to undermine them as competitors. To deal with the bigness of Amazon, Khan calls for a restoration of “traditional antitrust principles to create a presumption of predation and to ban vertical integration by dominant platforms.”
Khan is not without her critics. For example, Alan Reynolds, a senior fellow at the Cato Institute, raises concerns that the structural approach “would not only have antitrust czars prosecuting cases based on their technological predictions,” but would empower prosecutors to bring cases based on a mere perception that there is an apparent concentration of power. He sees the structural approach as removing “all annoying requirements for evidence that competition is impeded in any way.”
Critics also see Khan’s clarion call as an invitation to competitors to use regulators and federal prosecutors as tools to crush or injure a business rival. When government reshapes markets to suit competitors, private decisions about production and organization are replaced by government decrees. Many view antitrust actions of the 1990’s against Microsoft, Intel, and various mergers as rooted in political gamesmanship rather than real concerns about consumers or competition. Libertarian scholars such as Dominick T. Armentano assert that
government regulation, entry control, subsidization, and antitrust, are all manifestations of a governmental interventionist power that has been employed by private firms to private advantage to the detriment of society.
In The Constitution of Liberty, Friedrich A. Hayek observes that
[i]t has been the experience of all countries that discretionary powers in the treatment of monopoly are soon used to distinguish between “good” and “bad” monopolies and that authority soon becomes more concerned with protecting the supposedly good than with preventing the bad.
This warning is even more poignant in an age such as ours when government applauds what once was universally seen as evil and condemns individuals for adhering to millennia-old teachings.
Not surprisingly, Armentano and fellow travelers such as Thomas DiLorenzo make a compelling case that government is the real source of monopoly, and that the Sherman Act should be repealed in favor of a free-market approach. “Social arrangements,” writes Armentano,
are efficient if they provide the widest opportunity for private plan fulfillment and private plan coordination. A free society is both the necessary and the sufficient condition for efficient action and efficient resource allocation.
Although the libertarians write with conviction, one cannot blame Americans for concerns about bigness. The recent economic crisis and the phenomena of companies “too big to fail” demanding (and often receiving) taxpayer bailouts should give us pause. Moreover, the functioning of the modern state raises concerns about the danger of bigness and consolidation. The Framers of the Constitution crafted a political system that depended on competition. Vertically, the national and state governments were supposed to compete with and check each other. Horizontally, the three branches of government were supposed to compete with and check one another within the national and state governments. Today, there is no vertical competition inasmuch as the national government is ascendant if not completely dominant. Within the national government the Supreme Court is the actual sovereign and has the final say on the constitutionality of national and state legislation. It enjoys monopoly power and does not even blush when declaring that traditional marriage violates the constitutional compact. Structurally, our system has failed, and Americans are left as subjects of the center rather than citizens of a republic with diffused power.
We could agree that bigness often poses a danger, a threat to our liberty. But it does not necessarily follow that massive state intervention is the solution. Is a government that is undisciplined enough to ring up a $20 trillion debt fit to judge the roles of market participants?
One need only look at what government has done to agriculture to question its role in protecting Americans from monopoly. Wendell Berry has chronicled how Washington, since World War II, has told American family farmers to “get big or get out.” The feds have promoted industrial agriculture, concentration of farmland, and regulatory standards that only agribusiness can meet. The people forced off the land in the mid-20th century relocated to urban environments and are now an underclass of meth heads and gang bangers with no constructive purpose in life. The bigness promoted by Washington has resulted in inhumane factory-farming conditions for animals, genetic engineering of crops, and a dead zone in the Gulf of Mexico the size of New Jersey created because of the chemical fertilizer that drives industrial agriculture.
Joel Salatin and his Polyface Farm in Virginia is a remnant of what agriculture once was and should be again. (For more on Salatin’s farming techniques, read his book Folks, This Ain’t Normal, Center Street, 2011.) Applying his Christian belief in stewardship of Creation, Salatin does not use chemical fertilizers, does not load animals up with antibiotics, and focuses on sustainable agriculture that builds and heals the land. He makes money not by trying to compete with industrial farming and selling to supermarket chains, but by selling to his neighbors and local farm-to-table restaurants. The people in the surrounding towns and countryside choose to purchase from Polyface because the product is superior to that of industrial agriculture and the animals are treated with due respect—not caged and cramped as they are in concentrated animal feeding operations.
Salatin and others like him are succeeding because of choices individuals make. While it is easier to stop at the big-box grocery on the way home and support industrial agriculture, many people instead plan on going out of the way to the farmers’ markets and small grocers that carry locally grown products. According to Business Insider, “local food sales in the U.S. grew from $5 billion to $12 billion between 2008 and 2014.” Local food sales are projected to “jump to $20 billion in 2019, outpacing the growth of the country’s total food and beverage sales.” Individuals are rejecting the bigness and concentration of modern agriculture and turning to local farmers. They are doing this not because of a federal policy encouraging such behavior, but in spite of federal preference for the Monsantos over the Polyfaces.
Brandeis was right to express concern about the concentration of power. It is a danger in the market just as it is in government. But the Chicago school and libertarians are right to question the efficacy of federal intervention in the market. Lay judges and juries do not have the expertise to plan economic markets, and their errors are difficult to correct.
In attempting to strike a balance, we should agree that some reasonable intervention is needed. Price theory is not a panacea. Even a classical liberal such as Hayek thought it a “good thing if the monopolist is treated as a sort of a whipping boy of economic policy.” Rather than Sherman Act supermen hunting down monopolists, he favored “the enforcement of general rules (such as that of non-discrimination)” to “curb monopolistic powers.” If a monopoly rested upon “man-made obstacles to entry into a market,” Hayek supported government intervention to remove those obstacles. Yet, he still worried that “giving government discretionary powers” would likely have the result of increasing rather than reducing obstacles.
In the end, perhaps the best we can do is encourage individual Americans to become aware of the dangers of bigness and take steps away from it, as they have in the locally sourced food movement. Rather than starting a search with Amazon, we can choose another platform—or better yet, visit what remains of our downtown shopping areas to make a purchase. The people are starting to curb the power of agribusiness without government incentives; they can do the same in other sectors of the economy.