Competition Policy in Transition

Actor James Dean once said, “I can't change the direction of the wind, but I can adjust my sails to always reach my destination.” Change is constant – industries change, consumers change, competition changes, regulators change, and regulatory policy changes. Change is a particularly salient feature of technology industries, which frequently experience rapid product evolution and sudden, market-displacing disruptions. Change is also a uniquely prominent political reality at the moment. Businesses, the antitrust bar, consumer groups and other stakeholders are uncertain about how the new administration will approach antitrust policy, particularly the sometimes tough questions presented by the tech industry. I am confident that the new leadership at the agencies, their excellent and dedicated professionals who engage in the day to day enforcement work on the ground, and the judiciary with its critical role in interpreting our antitrust laws, will continue to navigate us towards our longstanding “destination” — protecting competition and consumers.

This election season, numerous commentators argued that our economy has become too highly concentrated, with too much power residing in the hands of a select few companies, particularly in the technology industry. Some said that the US federal antitrust agencies, the Federal Trade Commission and the Department of Justice, have not done enough to prosecute anticompetitive behavior and stop potentially harmful mergers. Other pundits have argued that “tech is different” and the general antitrust rules simply do not apply to fast-moving, innovation-focused technology markets. Neither of these positions rings true. In my experience as a Commissioner of the US Federal Trade Commission for six years, I can tell you that the story is much more complicated.

So as we embark on a potentially new antitrust regime at the federal level, allow me to offer to the new leadership, as well as all of you, seven lessons I learned while steering the ship of competition enforcement for the Federal Trade Commission.

First lesson: Antitrust enforcers play an indispensable role in protecting competition and innovation in technology markets.

The antitrust laws certainly apply equally across all industries, including high-tech. In fact, vigorous antitrust enforcement is necessary in technology markets.  Recognizing this, the FTC and DOJ brought numerous enforcement actions in the last several years to quell anticompetitive behavior by technology companies. And during my time as an FTC Commissioner, we were not afraid to challenge anticompetitive actions by technology companies. We engaged in a thorough investigation of Google’s business practices; it ultimately signed a consent order that put boundaries on its use of critical standard essential patents. We also brought a complaint against Intel alleging that it illegally used its dominant market position to stifle competition and strengthen its monopoly in microchips. Intel agreed to wide-ranging conduct restrictions that enabled renewed competition and prevented Intel from suppressing future competitors.

DOJ has also been active in policing anticompetitive conduct by technology companies, such as its successful litigation against Apple for anticompetitive behavior in the e-books market. And in 2015, DOJ brought its first criminal antitrust prosecution against a conspiracy specifically targeting e-commerce when it filed charges against an e-commerce company executive alleging that he and his co-conspirators used algorithms to fix the prices of certain posters sold online through Amazon Marketplace.

Similarly, the antitrust agencies have not been shy about blocking or undoing technology mergers that would substantially lessen competition. For example, when Nielsen and Arbitron proposed to merge in 2013, the FTC discovered that the merging parties were the only firms that were well positioned to develop a next generation cross-platform audience measurement product. Even though that product had not yet been developed, we required a divestiture of the assets necessary for another entity to develop a competing cross-platform audience measurement tool. In addition, recognizing the power of big data in Nielsen’s hands, the FTC required Nielsen to equip another company with a perpetual, royalty-free license to the data, including individual-level demographic data and technology related to Arbitron’s cross-platform audience measurement business for at least eight years. Similarly, DOJ recently went to court to challenge the combination of the only two significant online product review and ratings platforms in the US, Bazaarvoice and Power Reviews. The court acknowledged that the industry was “at an early stage of development” and was “rapidly evolving,” but nevertheless agreed with DOJ and found that the transaction violated the antitrust laws.

Second lesson: Technology markets often exhibit unique characteristics that the agencies must account for in their investigations.

Technology markets are typically dynamic, with market shares changing rapidly.  Consider how Facebook replaced Myspace as the leading social network, and Apple iOS and Android replaced Blackberry as the leading mobile operating systems. For antitrust enforcers, this means that current market shares may not be reliably indicative of a technology product’s future competitive significance. To keep up with the rapidly changing marketplace, enforcers must stay current on the markets they are investigating, taking into account all relevant information, even in real time. One good example of this was the FTC’s investigation of Google/AdMob. The initial investigation found that the merging parties were the two largest players in the mobile ad market on the iPhone platform, and we uncovered evidence showing each of the merging parties considered the other to be its primary competitor. However, during the investigation, Apple radically changed the market by acquiring another mobile ad network and announcing the development of its own iAd platform. We determined that Apple’s entry into the market meant that AdMob’s success to date on the iPhone platform was unlikely to be an accurate predictor of its competitive significance going forward, whether it was owned by Google or not. Therefore, we closed the investigation and allowed the transaction to proceed, which was the right decision.

Another salient feature of many high tech markets is that users often engage in “multi-homing,” which means they use multiple substitutes at the same time. For example, many of us are frequent users of Snapchat, Slack and Facebook, as well as Uber and Lyft. This makes switching easy and further undermines the significance of current market shares. Indeed, Snap and Slack – to name just a few – didn’t exist five years ago, which demonstrates how new entrants can grow quickly to scale. All of these factors should be taken into account in applying antitrust law to digital technology markets. Good antitrust enforcement in the tech industry requires constant monitoring, fact gathering, and watching for market shifts.

Third lesson: Technology markets also have some tendencies that counsel in favor of vigilant antitrust enforcement.

Some technology markets exhibit significant “network effects,” which means that the product’s worth to an individual user increases as more people adopt the product. The classic example is a telephone — it was a neat invention, but it wasn’t worth anything unless other people had one too. That is, it only had value to the extent that the people you wanted to communicate with also had a telephone. Today, in some markets customers can become “locked in” to an online network of users in a way that makes switching very costly or difficult. These factors make it imperative that the antitrust agencies remain watchful in policing technology industries.

Fourth lesson: Aim to Strike the Right Balance

There has been a great deal of writing within the antitrust community about the potential negative impact of over-enforcement, also known as “Type 1 errors” or “false positives.” These errors can harm consumers by preventing procompetitive conduct and creating a chilling effect on future procompetitive conduct. However, failing to bring antitrust enforcement actions can also lead to significant consumer harm. A recent in-depth study of merger retrospectives conducted by John Kwoka found that harm from under-enforcement, also known as “Type 2 errors” or “false negatives,” can come in the form of significant price increases when anticompetitive mergers are not blocked. This implies that the antitrust agencies should take into account dynamic competition and innovation in technology markets without being overly sensitive to “false positives” or foregoing the traditional approach of assessing the likely competitive effect of the deal.  It is true that some of the details of Kwoka’s study have faced criticism, including from the current acting FTC Chairwoman. However, the important takeaway is that too little enforcement can be just as harmful as too much.  The agencies should also watch out for conduct that impedes the disruptive innovation that naturally occurs in many technology industries, such as conduct that raises rivals’ costs without any procompetitive justification. And, in fact, as their recent record shows, this balancing is exactly what the agencies have been doing. Of course, despite our best efforts, no agency — including the FTC and DOJ — is perfect. During my time as Commissioner, I disagreed with my colleagues’ decisions to close investigations on several occasions, as I believed that the facts of the particular case warranted more aggressive enforcement action. However, I also believe that the agencies generally struck an appropriate balance between these risks, and I am confident that they can continue to do so in the future.

Fifth Lesson: Follow the Money

The best way to ensure the agencies will be able to strike the right balance is to provide them with adequate funding to achieve the mission we have given them. The spate of large mergers in our economy over the last 18 months has pushed the DOJ and FTC staff to the edge. The recently announced AT&T/Time Warner deal is only the most recent example. It follows such behemoth deals as Anthem/Cigna, Aetna/Humana, ABI/SABMiller, Halliburton/Baker Hughes, Staples/Office Depot, Pfizer/Allergan, and Teva/Actavis. In my time as Commissioner, I watched the competition staff at the FTC struggle to cover the range of large merger reviews that we had to conduct simultaneously. Congress granted some additional resources to both agencies this year – the FTC and DOJ each received an approximate 10 percent increase in the FY2017 budget, mostly for new hiring. But this is just a down payment on the kind of resources that the nation should commit to ensure that the antitrust agencies have the best attorneys, economists and experts at their disposal to adequately address the competition issues our country faces.

The new Administration will not release its full budget for FY2018 until May, so we do not yet know exactly what resources will be allocated to the FTC or DOJ Antitrust Division. The budget blueprint that the administration released on March 16 proposes to decrease funding for “non-major” agencies, which includes the FTC, by 9.8 percent. The Administration also proposes to decrease funding for the DOJ by 3.8 percent. The proposal notes that there will be targeted increases for “key issues” at the DOJ, but it does not mention the Antitrust Division. With less funding, coupled with a hiring freeze, the agencies may be strained to perform their duties. Those who value effective antitrust enforcement should watch this critical issue closely and advocate for sufficient funding and personnel for the agencies.

Sixth Lesson: Elections Matter to Competition Policy (and every thing else)

In addition to shaping the budget for the two antitrust enforcement agencies, the new Administration will have broad authority to shape competition policy over the next few years. I, for one, have always believed that words matter, including on a campaign trail, and we should pay close attention to them to piece together the likely changes in competition policy. And just this week we learned who will be the Administration’s top antitrust cop at DOJ – Makan Delrahim – who has a sound record at the DOJ antitrust division and representing clients in competition matters in private practice. Mr. Delrahim and the permanent chair of the FTC – whoever that will turn out to be – will have an important opportunity to make their mark on competition enforcement policy at the federal level.

Seventh Lesson: The FTC’s Structure Should Provide Policy Continuity

The FTC and DOJ both have a long history of independence and non-interference by the White House. However, unlike the DOJ, which is part of the executive branch, the FTC is an independent regulatory agency. With leadership that is mandated to be bipartisan, the FTC is structured to steer towards bipartisan consensus on enforcement efforts. And the FTC’s dedicated and experienced staff attorneys and economists, who do the critical groundwork to develop cases, work hard to ensure that enforcement actions achieve bipartisan support among the Commissioners. Thus, as the political climate changes, the FTC’s concurrent jurisdiction over federal antitrust enforcement with DOJ should provide some stability to competition policy.

In practice, changes in the partisan affiliation of leadership at the FTC do not tend to cause major upheavals in competition policy. While Democrats and Republicans disagree on certain enforcement decisions at the margins, Commissioners on both sides of the political aisle for the past several decades have believed that a well-functioning market-based economy requires effective, economics-based antitrust enforcement that preserves competition to enhance consumer welfare and efficiency.

* * * *

Let me close by quoting one of my heroes: Grace Hopper, who was a Rear Admiral in the Navy and an early computer programmer, at a time when both activities were unheard of for women. Grace was fond of saying “A ship in port is safe, but that is not what ships are built for. Sail out to sea and do things.”

The new antitrust leadership at the FTC and DOJ should take their ships out to sea, and do things – things to protect competition and consumers. It is critical to the economy that the new Administration engages in smart enforcement based on evidence, looks fulsomely at the markets, and makes enforcement decisions that are sufficiently measured and sober to stand the test of time.

Download PDF Back To Listing