The “Big Tech” Hearings Continue: Antitrust Subcommittee’s Detachment from Economic Realities

By at 17 March, 2021, 8:31 pm


by Raymond J. Keating-

Just in case you thought that all congressional hearings were established to learn and perhaps gain insights from experts, there is the title of a hearing on March 18, 2021, in the House Subcommittee on Antitrust, Commercial, and Administrative Law: “Reviving Competition, Part 3: Strengthening the Laws to Address Monopoly Power.”

The assumptions are clear. First, competition is suffering, that is, in need of “reviving.” Second, “monopoly power” is a serious issue and must be remedied by strengthened laws.

However, none of this has much to do with economic reality, especially, given that this presumptuousness is directed at the dynamic, innovation-driven, high-tech marketplace of the 21st century.

In particular, this is about so-called “Big Tech,” namely, Members of Congress going after four global-leading U.S. technology companies – Amazon, Apple, Facebook and Google (or Alphabet, which is Google’s parent company). The Democratic majority in this House subcommittee produced a massive report against these four businesses, with the Republican minority offering a shorter report. SBE Council has addressed an assortment of problems with these reports, such as in a brief The Treacherous Turn on Antitrust Regulation of U.S. Tech Companies.”

Understanding Growth: Assumptions vs. Reality

On both sides of the political aisle, although to varying degrees, the emphasis has been on ramping up antitrust regulation of U.S. technology firms that have become global leaders, which also points to increased regulation of other significant swaths of the U.S. economy. This activity springs from political biases, in particular, a resurgence of progressive and populist fears, distrust, anger, and misunderstandings.

For example, under-performing economic growth over the past decade-and-a-half – with real annual GDP growth averaging 1.3 percent from 2007 to 2020 versus a post-WWII average (for example, from 1950 to 2006) of 3.6 percent – has led to all kinds of worries and created real woes. But rather than examining the actual reasons for this under-performance (such as increased regulation and related uncertainties; higher taxes; protectionist sentiments and policies on international trade; uncertainty fed by unmoored monetary policy; and diminished entrepreneurship related to the aforementioned policy issues as well as shifting cultural and societal views, demographic changes, education policies, and anti-entrepreneur immigration policies), the political arena has fed on and fueled mistaken assumptions.

The progressive Left has hammered away with its longtime anti-free-enterprise advocacy, including its emphasis on redistribution and its lack of concern for or understanding of how economic growth occurs. Progressives tend to simply assume that economic growth just happens, and therefore, the real concern is on how the wealth that is created is to be distributed by government. The link between entrepreneurship, investment and economic growth; between productivity and earnings; between public policies and their impact on incentives and decisions made by entrepreneurs, businesses, workers, consumers and investors are assumed away.

Meanwhile, a resurgent populism has energized anti-trade and anti-immigration sentiments.

While these political movements have much in common, they particularly share an anti-big-business – in this case anti-Big-Tech – bias, which in turn serves as the basis for calls for increased antitrust regulation. And both progressives and populists remain unconcerned about any ill effects of increased antitrust regulation on, for example, investment, innovation and economic growth. After all, they have talked themselves into the idea that big businesses – “Big Tech” – is the reason for many of our economic ills.

Understanding Competition: Assumptions vs. Reality

The first antitrust law, the Sherman Antitrust Act, imposed in 1890, was a political measure detached from common economic understanding. The late George Stigler, who won the 1982 Nobel Prize in economics, explained in his essay on monopoly in The Concise Encyclopedia of Economics:

“As late as 1890, when the Sherman antitrust law was passed, most economists believed that the only antimonopoly policy needed was to restrain government’s impulse to grant exclusive privileges, such as that given to the British East India Company to trade with India. They thought that other sources of market dominance, such as superior efficiency, should be allowed to operate freely, to the benefit of consumers, since consumers would ultimately be protected from excessive prices by potential or actual rivals.”

The Sherman Act, and subsequent measures like the Clayton Act (1914) and the Federal Trade Commission Act (1914), were driven by both populist and progressive forces at the time. A point similar to Stigler’s was made the late Fred S. McChesney, who was a law professor at Northwestern University School of Law and a professor in the Kellogg School of Management at Northwestern, in his essay on antitrust also in The Concise Encyclopedia of Economics:

“Economists did not lobby for, or even support, the antitrust statutes. Rather, the passage of such laws is generally ascribed to the influence of populist ‘muckrakers’ such as Ida Tarbell, who frequently decried the supposed ability of emerging corporate giants (‘the trusts’) to increase prices and exploit customers by reducing production. One reason most economists were indifferent to the law was their belief that any higher prices achieved by the supposed anticompetitive acts were more than outweighed by the price reducing effects of greater operating efficiency and lower costs. Interestingly, Tarbell herself conceded, as did ‘trustbuster’ Teddy Roosevelt, that the trusts might be more efficient producers.”

However, eventually, economists developed tools that became useful in disguising political antitrust actions with at least the rhetoric of economics.

Specifically, the concept of perfect competition – also known as pure competition or price-taker markets – is where the market is characterized by many small businesses that produce the same product, must take the market price to sell their product, and there is complete freedom of entry and exit in the market. For good measure, when it comes specifically to perfect competition, zero transaction costs and everyone having perfect information are assumed. These concepts largely were developed as teaching tools, and not to reflect the real-world workings in the marketplace. Indeed, notions like perfect and pure competition have very little to do with how actual markets and market participants function (which raises serious questions as to their worth as teaching tools, but that is a discussion for another day).

The problem for our purposes is that these dubious teaching tools, detached from economic reality, have come to be relied upon as justifications for those advancing ideas of diminished competition, advancing monopolies or monopoly power, and a need for increased antitrust regulation. Indeed, it was not just politicians, partisans and regulators who were guilty of such misuses, but, as McChesney pointed out, some economists, who for a time, “concluded that unfamiliar commercial arrangements that were not explicable in a model of perfect competition must be anticompetitive.”

In reality, actual competition is far, far away from the static picture offered by perfect competition. In reality, competition is a dynamic process involving, for example, often striking market differences; price changes; technological change; innovation; differentiation in quality, design and convenience; marketing and advertising; relationships between and actions by immediate competitors and seemingly distant markets and sectors; operational improvements; inventory controls; and much more. Indeed, businesses compete in myriad ways. The late Friedrich Hayek, anther Nobel laureate in economics, said, as noted in his book Individualism and Economic Order, “Competition is by its nature a dynamic process whose essential characteristics are assumed away by the assumptions underlying static analysis.”

The late economist Joseph Schumpeter also saw little merit in the concept of “perfect competition” as compared to how competition actually worked. In the biography of Schumpeter presented in The Concise Encyclopedia of Economics, it was explained:

“Innovation by the entrepreneur, argued Schumpeter, leads to gales of ‘creative destruction’ as innovations cause old inventories, ideas, technologies, skills, and equipment to become obsolete. The question is not ‘how capitalism administers existing structures, … [but] how it creates and destroys them.’ This creative destruction, he believed, causes continuous progress and improves the standards of living for everyone.

“Schumpeter argued with the prevailing view that ‘perfect’ competition was the way to maximize economic well-being. Under perfect competition all firms in an industry produce the same good, sell it for the same price, and have access to the same technology. Schumpeter saw this kind of competition as relatively unimportant. He wrote: ‘[What counts is] competition from the new commodity, the new technology, the new source of supply, the new type of organization … competition which … strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.’

“Schumpeter argued on this basis that some degree of monopoly is preferable to perfect competition. Competition from innovations, he argued, is an ‘ever-present threat’ that ‘disciplines before it attacks.’”

What entrepreneurs and businesses are doing within a competitive environment is investing and innovating to create what effectively are “temporary monopolies” that allow profits to be maximized. And the longer a firm excels at providing something that consumers cannot get elsewhere, the longer the business can maintain that “temporary monopoly.” At the same time, these entrepreneurs and businesses compete with existing, emerging and future competitors.

Competition in the marketplace, including in the tech areas where firms like Apple, Amazon, Facebook and Google are leaders, is intense and robust, and it is not the static “perfect competition” espoused by many economists and regulators, nor should so-called “perfect competition” be the objective of policymaking.

Understanding Monopoly: Assumptions vs. Reality

However, the competition that drives firms to establish “temporary monopolies,” of course, does not refer to the monopolies at which antitrust laws and actions are directed. However, there are real problems with these traditional monopolies as well. These were explored in SBE Council’s The Treacherous Turn on Antitrust Regulation of U.S. Tech Companies, but warrant a brief recap here.

Properly understood, a traditional monopoly means that a market is served by only one seller, and there are no close substitutes for the product and high barriers to enter the market exist. Unfortunately, it’s hard to determine the last time this definition was given serious consideration in actual antitrust enforcement. Why? Well, economics and economic history make clear that monopolies in private, competitive markets rarely, if ever, occur, and firms that do gain significant market share can only do so by better serving consumers. Meanwhile, true, traditional monopolies occur when government acts to create, grant or protect a monopoly.

The only way that antitrust enforcers can create “monopolies” – especially in dynamic technology markets – is by so narrowly defining the relevant market as to come up with one seller, and effectively wishing away the additional requirements for a monopoly, that is, there being no close substitutes for the product and high barriers to entry existing. Regulators also must ignore the reality that even those businesses earning large market shares must be aware of emerging and future competitors. Hence, we do not see the expected outcome of a monopoly operating in the marketplace, that is, reduced supply, significant price increases, and a diminishment in innovation and quality. The economic reality of markets is that companies that have gained significant market share are competing against current, emerging and future competitors. Again, markets are dynamic, not static.

Understanding Monopoly Power: Assumptions vs. Reality

But what about “monopoly power” (also known as market power)? We hear a great deal about this from those arguing for an increase in antitrust regulation and intervention in markets. After all, part of the title of the March 18 House committee hearing is “Strengthening the Laws to Address Monopoly Power.”

“Monopoly power” is a much more vague and more easily manipulated term than is “monopoly.” Monopoly power usually means that due to some limitation in competition, a firm has monopoly power, which allows it to earn consistently “large” profits. But since we’ve already explained how actual competition works, versus the unrealistic assumptions of perfect competition, it is hard to come up with something concrete regarding the use, or misuse, of monopoly power. Nonetheless, “monopoly power” and its presumed abuses rank as fertile ground for serving up all kinds of accusations by those who seek to make antitrust law, regulation and enforcement a mighty weapon for controlling and dictating business models and terms.

A March 2021 report from the Information Technology and Innovation Foundation, authored by Robert D. Atkinson, explains what is at work in terms of this push to expand the power and reach of antitrust:

“To be clear, the neo-Brandeisian project [named for former Supreme Court Justice Louis Brandeis who opposed big business just for being big] is not to improve the economy with antitrust. It is to limit the size and economic influence of large corporations, regardless of whether it hurts or helps the economy, competitiveness, workers, and consumers. The neo-Brandeisian project is not about efficiency, innovation, consumer benefits, or American competitiveness; it is about ‘values.’ The core value is deconcentration for the sake of it—almost always without tangible benefits, and with a certainty of considerable costs and stifled innovation.”

That is, it is the resurgence of progressive and populist anti-big-business crusaders.

Atkinson refutes assorted accusations served up against “Big Tech” based on “monopoly power” assumptions, including:

•  “The core argument neo-Brandeisians have relied on … is that lax antitrust enforcement has led to market concentration rising to dangerous levels, and in turn leading to a decline in competition. Yet, when looked at more closely, the problem is far less serious than the broad pronouncements would suggest. Despite the measured rise in concentration in some industries (at least from 2002 to 2012, the last year of government-provided data), in the vast majority of markets, it remains well below the levels that would normally trigger antitrust concern. Moreover, while concentration has grown in many industries, that growth is usually from very low to low levels.” In addition, most studies that the neo-Brandeisians rely on “omit the role of imports that reduce concentration.”

•  As for “large” profits due to monopoly power: “It turns out profits are difficult to accurately measure, especially for determining market power. Some studies do show a rise in profits over the last few decades, but they rely on simplifying assumptions that limit their policy relevance. Moreover, profits as a percentage of gross domestic product (GDP) are in fact lower than they were in the 1960s, a period of strict antitrust enforcement—and they have been decreasing for the last five years. Finally, much of the modest increase in profits in the last two decades has come from foreign profits of U.S. firms (something that is not a U.S. antitrust issue) and profits of the financial services industry. The growth over the last two decades in domestic nonfinancial profits as a share of the economy has in fact been quite modest, suggesting there is actually very little smoke from that gun.”

•  And as for market share, there is the simple fact of serving the market well: “This market power explanation of superstar firms appears to be flawed. Although some firms have gained even more market share, this has generally not been because the firms used market power to succeed, nor does it suggest reduced economic welfare. Rather, in this environment, a few firms appear to have figured out how to be much more innovative and competitive, and have acted effectively on those insights, enabling them to outperform laggard firms.”

•  Regarding internet platforms supposedly being welfare-reducing monopolies, Atkinson notes: “Platforms create significant economic value. Far from being lazy monopolists that try to increase profits by artificially reducing supply, these companies seek to grow rapidly. They are constantly innovating to both attract new users and retain the ones they have. To do this, they invest enormous amounts of money in R&D. The welfare-enhancing benefits of platforms often go unnoticed because many services are provided for free… These platforms face continued competition in many of the markets they participate in, competing for ‘eyeballs’ with both each other and other forms of media. Their industries are continually evolving. Although some compete with other companies on their platforms, the incentive to attract more third- party suppliers usually outweighs their interest in displacing any one supplier.”

•  Regarding “Big Tech” supposedly using acquisition of entrepreneurial firms to limit innovation and creating “kill zones” where innovation goes to die, acquisitions actually motivate entrepreneurs and investors. Indeed, it is noted that “if they are creating kill zones, why did the number of angel and seed deals rise almost sixfold between 2006 and 2019, peaking in 2015? The number of early deals rose by 2.4 times. It is hard to see any sign of investor activity slowing down.”

In the end, the same market realities warrant repeating. That is, companies that have gained significant market share by serving consumers are competing against current, emerging and future competitors. Again, markets are dynamic, not static.

Understanding Market Failure: Assumptions vs. Reality

The assumption undergirding any form of government regulation, including antitrust regulation in the name of battling ills of monopoly or monopoly power, is that some kind of “market failure” exists, therefore requiring government action. Even if we make this monumentally unrealistic assumption that some kind of market failure is at work, that leads to another major assumption. Regulatory action simply assumes that government action will improve the situation. The notion that “government failure” might actually exist and make matters worse is not even considered.

However, within the economics profession, prominent economists over the years have come to recognize that the cure of antitrust regulations often turns out to be worse than the concerns they had about monopolies or monopoly power.

Again, Nobel laureate George Stigler wrote:

“More recently, and at the risk of being called fickle, many economists (I among them) have lost both our enthusiasm for antitrust policy and much of our fear of oligopolies. The declining support for antitrust policy has been due to the often objectionable uses to which that policy has been put…

“Antitrust policy is expensive to enforce… Moreover, antitrust is slow moving. It takes years before a monopoly practice is identified, and more years to reach a decision; the antitrust case that led to the breakup of the American Telephone and Telegraph Company began in 1974 and was still under judicial administration in 1991. Public regulation has been the preferred choice in America, beginning with the creation of the Interstate Commerce Commission in 1887 and extending down to municipal regulation of taxicabs and ice companies. Yet most public regulation has the effect of reducing or eliminating competition rather than eliminating monopoly…

“A famous theorem in economics states that a competitive enterprise economy will produce the largest possible income from a given stock of resources. No real economy meets the exact conditions of the theorem, and all real economies will fall short of the ideal economy—a difference called ‘market failure.’ In my view, however, the degree of “market failure” for the American economy is much smaller than the ‘political failure’ arising from the imperfections of economic policies found in real political systems. The merits of laissez-faire rest less upon its famous theoretical foundations than upon its advantages over the actual performance of rival forms of economic organization.”

Another Nobel laureate, Milton Friedman wrote in 1999:

“Now we come to Silicon Valley and Microsoft. I am not going to argue about the technical aspects of whether Microsoft is guilty or not under the antitrust laws. My own views about the antitrust laws have changed greatly over time. When I started in this business, as a believer in competition, I was a great supporter of antitrust laws; I thought enforcing them was one of the few desirable things that the government could do to promote more competition. But as I watched what actually happened, I saw that, instead of promoting competition, antitrust laws tended to do exactly the opposite, because they tended, like so many government activities, to be taken over by the people they were supposed to regulate and control. And so over time I have gradually come to the conclusion that antitrust laws do far more harm than good and that we would be better off if we didn’t have them at all, if we could get rid of them. But we do have them. Under the circumstances, given that we do have antitrust laws, is it really in the self-interest of Silicon Valley to set the government on Microsoft? Your industry, the computer industry, moves so much more rapidly than the legal process, that by the time this suit is over, who knows what the shape of the industry will be. Never mind the fact that the human energy and the money that will be spent in hiring my fellow economists, as well as in other ways, would be much more productively employed in improving your products. It’s a waste! But beyond that, you will rue the day when you called in the government. From now on the computer industry, which has been very fortunate in that it has been relatively free of government intrusion, will experience a continuous increase in government regulation. Antitrust very quickly becomes regulation.”

McChesney also noted a variety of ways in which antitrust has failed, including:

•  “With the hindsight of better economic understanding, economists now realize that one undeniable effect of antitrust has been to penalize numerous economically benign practices. Horizontal and especially vertical agreements that are clearly useful, particularly in reducing transaction costs, have been (or for many years were) effectively banned.”

•  “One of the most worrisome statistics in antitrust is that for every case brought by government, private plaintiffs bring ten. The majority of cases are filed to hinder, not help, competition…”

None of this should be surprising given the incentives at work in politics and government, including special interests seeking government aid, including using government to undermine competitors.


In the end, the notion that a true monopoly, or even some kind of troubling monopoly power, such as companies being able to raise prices, reduce quality, and cease working to innovate without fear from current or future competitors, could emerge from the competitive marketplace is more economic fiction than fact. That’s especially the case in today’s dynamic, high-tech, global economy.

Indeed, it is critical that our elected officials understand how economic growth, the market, business, competition, and government actually work before deciding to inflict political decisions upon any private businesses, including extreme measures, such as considering limiting the business models of , or even breaking up, U.S. technology companies that have excelled in serving consumers to the point that they have become global leaders.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.


News and Media Releases