5 Major Woes for Small Businesses Due to Antitrust Activism

By at 17 October, 2023, 2:01 pm

by Raymond J. Keating – 

The activist stance by the Biden administration (along with assorted Members of Congress, as well as the previous Trump administration) on antitrust – through the Department of Justice (DOJ) and in particular the Federal Trade Commission (FTC) under the leadership of Lina Khan (as well as via various proposed legislation) – amounts to a troubling, wrongheaded policy direction based on unsound economics, and detachment from market and business realities. The implications for consumers, for small businesses, and for the overall economy are significant and negative.

That’s right, while recent antitrust actions often get dressed up as means for aiding small businesses, in reality, these actions undermine small businesses and the entrepreneurship ecosystem.

Foundational Points and Some Background

As a matter of quick background, for more than 130 years, antitrust laws, and their interpretation and application, have not exactly been models of clarity, consistency, predictability, sound economics, and being in touch with business and market realities. However, for the past half-century, the courts developed and applied a consumer-welfare standard – i.e., pointed to limiting consumer harm – that at least brought some focus and a degree of reasonableness to antitrust. Rather than being rooted in “big business must be bad” ignorance, the more reasoned application of antitrust law looked at whether or not consumers were being, or would be, harmed. While problems remain even with this application, given that antitrust legislation largely is built on faulty economics, the consumer-welfare standard makes sense in that consumption is the end point of the economic process, if you will. That is, entrepreneurs, businesses, workers and investors are incentivized to compete, cooperate, innovate and invest in order to achieve success by serving consumers better.

Moving the focus off of consumers (fully or by adding other “concerns”), as supported by some of today’s leading antitrust activists, means opening the door to politicians, their appointees, and special interests (including businesses that have failed in the market and seek government action on their behalf) imposing their preferences and biases via regulation on the market, that is, on entrepreneurs, businesses ranging from the largest to the smallest, employees, investors and consumers.  Consider the revelatory, but disturbing, point made in a recent MoneyWatch article at about FTC Chair Lina Khan having her sights set on breaking up Amazon: “For FTC Chair Lina Khan — who first came to prominence while still in law school by writing a paper arguing that Amazon is a monopoly — an effort to fracture the company would amount to a career-defining throw of the dice.”

And since antitrust law and regulation is supposed to deal with monopolies, it’s important to understand what a monopoly actually is. A monopoly means that a market is served by only one seller, and there also must be no close substitutes for the product, and high barriers to enter the market must exist. For good measure, the realities of the marketplace also make clear that firms not only are competing with current businesses, but also with emerging and future competitors.

That’s a high bar, to say the least. Indeed, it’s actually very difficult to think of a true monopoly that has emerged out of the competitive process in U.S. history. The only true monopolies that come to mind were either created or protected by government action, such as the regulatory morass that effectively created AT&T’s “Ma Bell” monopoly, and of course, public elementary and secondary schools. And remember that the reason why no one likes a true monopoly is because a monopoly will have few incentives to innovate and to maintain or improve quality, and it will raise prices. How many businesses in the private marketplace, without government subsidies or protection, actually function this way? And if they did, the market, via competition and consumer sovereignty, punishes such complacency.

Also, gaining significant market share by better serving consumers does not mean that a company is a monopoly warranting government action against it. For example, when engaging in a discussion about monopolies, John D. Rockefeller’s Standard Oil is almost always noted, especially by those who level monopoly accusations. However, in reality, Standard Oil gained market share by reducing the price of fuel for consumers, and well before being broken up by the courts, Standard Oil’s share of U.S. crude oil production fell from 32 percent to 14 percent of the market, and in oil refining, from a high of 86 percent to 70 percent.

The economic realities about monopolies – or the lack thereof – lead those who favor government interference and dictates to turn to expanding the pretexts for government antitrust interference, such as broadening the excuses for regulation from a consumer-welfare standard to protecting competitors; expanding the definition of “monopoly” to cover vague terms like “monopoly power” or “market power”; and to dramatically narrow the market definition so as to exclude competitors and substitutes, and to give the appearance that barriers to market entry are high.

Antitrust Activism

Recent antitrust actions by government fall under these misguided assumptions, assertions and/or actions to varying but significant degrees. For example, SBE Council explained the absurdly narrow market definition by the FTC in its case against, noting:

“Activist antitrust regulators have resorted to creating distortive, extremely narrow, unrelated-to-economic-reality market definitions to claim that a business is a monopoly. That is, exclude as much of the actual market as possible to artificially jack up the targeted company’s market share, and then move to hyper-regulate that company as a so-called monopoly. This deceptive, politically-driven activity has perhaps been taken to a new level with the case brought against by the Federal Trade Commission (FTC) and 17 state attorneys general. It is stated in the case: ‘A single company, Amazon, has seized control over much of the online retail economy. Amazon is a monopolist.’ Really? Have any of these regulators and state attorneys general gone shopping lately?”

And then there are the recently released proposed merger guidelines, which came from the FTC and DOJ and would create more uncertainty for businesses and investors on the antitrust front.  SBE Council reported: “These proposed merger guidelines, according to the FTC and DOJ, offer ‘thirteen principles that the agencies may use when determining whether a merger is unlawfully anticompetitive under the antitrust laws.’ SBE Council President & CEO Karen Kerrigan was correct in observing: ‘When reviewing the list of 13 guidelines, one walks away with the sense that FTC and DOJ ideologues want to stop merger and acquisition activity in its tracks. That will certainly be the case if these unworkable and irrational guidelines are implemented.’ Indeed, it’s hard to read these vague guidelines, and not conclude that, if imposed, these would do nothing more than empower regulators to act according to their political whims and preferences, create greater uncertainty in the M&A marketplace, and thereby disincentivize and undermine investment in startups and growing small businesses.”

In the end, the most basic understanding of the economy makes clear that the actions and decisions made by entrepreneurs, businesses of all size and across industries, workers, investors, and consumers are deeply intertwined, and therefore, government actions taken against large businesses will have consequences across the economy, that is, for consumers, and for the small businesses that are customers of those large businesses as well as suppliers to and partners with such businesses.

Small Business Woes Due to Antitrust Activism

1) Hurting small businesses as suppliers or partners. Various policymakers, many in the media, and more than a few economists miss the essential point that in free enterprise, cooperation is just as important as competition. In fact, cooperation essentially is part of the competitive process. For example, within a particular business, fellow employees cooperate, as do the owners and their employees. And yes, businesses in the marketplace cooperate. Think about supply chains, for example, and trade between businesses across towns, state lines and international borders. And small businesses often serve large businesses and their employees, and vice versa.

As noted in a recent SBE Council analysis, refers to its “selling partners,” or those who sell or would like to sell in Amazon’s store: “‘Selling partner’ is not just a public relations phrase, but instead captures the notable reality that more than 60 percent of the products sold in Amazon’s store are sold by independent sellers, that is, mostly small businesses. By the way, this 60 percent of sales from small businesses is up from 40 percent on Amazon a decade ago.”

Therefore, when antitrust regulators take action against large tech firms, like Amazon, Meta, or Alphabet (Google), the consequences, including higher costs and reduced choices, certainly fall hard on the small businesses that partner with these large firms in all kinds of ways, from being suppliers to these large companies and their employees, to partnering with them in myriad ways.

2) Under-cutting investment in small businesses. Access to capital and credit always has been and remains a challenge for small businesses at various stages of growth. And when politicians or their appointees take actions that limit or undermine potential returns for investors and businesses on investments, the negatives for smaller businesses and for entrepreneurship in general are real and significant.

Naturally, regulators don’t like talking about the full consequences of their actions, including that last point about undermining entrepreneurial activity. But when one understands that investors, such as venture capitalists, consider M&A as a means for getting a return on their investments, then pushing M&A antitrust policymaking further away from sound economic and market considerations, to be more deeply immersed in political ideologies and special interest influences, means very real ills for small, entrepreneurial firms that desperately need investment.

Indeed, a key problem with antitrust interference in the economy in the hands of hyper-active regulators, again such as the FTC’s Lina Khan, is that their very activism creates uncertainty in the market; eliminates or discourages mergers that could benefit consumers and the economy; and hurts entrepreneurial firms as investment is disincentivized due to very real concerns about mergers and acquisitions being disallowed due to the political assumptions of regulators. For example, rather than clarifying the implementation of antitrust laws, the FTC and DOJ draft merger guidelines would further muddy the waters by making policy even more susceptible to the political whims and preferences of regulators, and again, thereby trumping sound economics and what’s actually going on in the marketplace.

Consider analyses that further drive home these points about increased uncertainty and costs. As pointed out in a recent SBE Council brief:

“…venture capital ranks as an essential form of investment for a variety of businesses at assorted stages of growth. The latest PitchBook-NVCA Venture Monitor unfortunately indicated recent stagnation, at best, on the venture capital front… There are a variety of causes coming into play, but the role of governmental intrusion and overreach on the regulatory front cannot be ignored. In the Venture Monitor report, among other factors, it was pointed out that ‘the threat of dogmatic regulation could stifle development of promising innovation hubs.’ Keep in mind that venture capital investors essentially have two exit strategies – that is, two ways to earn returns on their investments – the firm invested in either is acquired or goes public. It’s either M&A (mergers and acquisitions) or IPOs (initial public offerings). Unfortunately, elected officials and their appointees seem set on limiting, or even eliminating, M&A options, and restricting potential returns on investments in certain industries. And by doing so, they effectively limit the incentives for investing in entrepreneurial ventures thick with risk and uncertainty.”

In addition (and again as noted by SBE Council previously), a study titled “Venture Capital Investments and Merger and Acquisition Activity Around the World,” by Gordon M. Phillips, from Dartmouth College’s Tuck School of Business and NBER, and Alexei Zhdanov, of Penn State University’s Smeal College of Business, looked at venture capital investment and M&A activity in 48 nations, as well as at “country-level pro-takeover legislation” and “U.S. state-level antitakeover business combination laws.” Among the findings were the following:

•  “We show that there is a strong positive association between venture capital and lagged M&A activity around the world. We argue that growth in M&A deals in a country is likely to attract more investments by VC firms as venture capitalists anticipate more viable future exit opportunities via a takeover.”

•  “…we argue that an enactment of a country pro-takeover law represents a positive shock to M&A activity. On the other hand, the passage of a state antitakeover law in the U.S. can be interpreted a negative shock that is likely to reduce M&A activity in that state. We show that subsequent VC activity responds to both types of shocks. First, the passage of a pro-takeover law in a country is associated with more subsequent VC deals in that country, while the enactment of a business combination antitakeover law in the U.S. has a negative effect on subsequent VC investment in that state.”

•  “Overall, our results highlight the importance of M&A markets for the incentives to engage in VC. As many start-ups rely on VC funding and venture capitalists rely on acquisitions for subsequent exits, our results suggest that an active M&A market is important for encouraging venture capital investments, entrepreneurship and growth.”

Finally, consider a key point from an analysis of the Meta-Within case by the Information Technology and Innovation Foundation: “In 2020, nearly 90 percent of all venture-backed startups exited their venture-funding through an acquisition. The looming threat that this exit strategy may no longer be available, or will face costly litigation, will limit the ability of small studios to access venture capital and thereby reduce VR app innovation.”

Yes, M&A opportunities are vital for investment in startups and smaller enterprises, and government increasing costs and uncertainties to M&A is negative for entrepreneurship, investment and growth.

3) Short-circuiting small businesses as emerging and future competitors. Among the over-arching effects of this antitrust hyper-activism is an actual reduction in competitive activity. Make no mistake, while increased regulation raises costs for all businesses, the straightforward fact is that large existing firms are better able to deal with such costs compared to startup entrepreneurs and smaller enterprises. So, since small businesses in the technology arena, for example, cannot handle high regulatory costs, entrepreneurship and competition – current and future – are reduced, with resources channeled elsewhere.

And as pointed out in another SBE Council examination of the ills wrought by antitrust overreach, while such regulatory action is “said to be about promoting competition, [it] actually winds up protecting established firms, while limiting opportunities for entrepreneurs. After all, the enormous risk and uncertainty that comes with this kind of regulatory activism will limit investment in smaller entrepreneurial firms that already face significant market risks and uncertainties, as the opportunities for returns would be controlled, at least in part, by the whims of regulators. That’s a recipe for further entrepreneurial stagnation in a nation where entrepreneurship already has been undermined in recent years due to counter-productive tax, regulatory, trade and government spending policies.”

4) Undermining small businesses as sources of innovation and growth. Dampening entrepreneurial activity, of course, means dampening innovation and growth. Several analyses and studies over the years confirm the central role that entrepreneurs and small businesses play in innovation. For example:

•  In a study titled “An Analysis of Small Business Patents by Industry and Firm Size,” authors Anthony Breitzman and Diana Hicks found: “Small firms are a significant source of innovation and patent activity. Small businesses develop more patents per employee than larger businesses, with the smallest firms, those with fewer than 25 employees, producing the greatest number of patents per employee. Furthermore, small firm patents tend to be more significant than large firm patents, outperforming them in a number of categories including growth, citation impact, and originality. Finally, small firms tend to specialize in high tech, high growth industries, such as bio-technology, pharmaceuticals, information technology, and semiconductors.”

•  Another study, titled “Product Innovations by Young and Small Firms,” the author, Jose M. Plehn-Dujowich, reported that “small firms are surprisingly capable at inventing and managing products relative to large firms” and “small firms are more innovative per dollar of R&D than large firms, and the extent to which this occurs is decreasing in firm age; and young firms are more innovative per dollar of R&D than old firms, and the extent to which this occurs is decreasing in firm size.”

•  Researchers Nadine Kammerlander and Marc van Essen reported some complex results in the Harvard Business Review from their study when it came to innovation at family-owned businesses (which, of course, are overwhelmingly small businesses): “On average, family firms have a smaller R&D budget than other organizations of similar size, but that does not mean they are less innovative. On the contrary, our study found that family firms are more efficient in their innovation processes. For every dollar invested in R&D, they get more innovative output, measured by number of patents, number of new products, or revenues generated with new products. The level of innovation is higher in family firms.”

And make no mistake, innovation – that is, bringing new and improved goods, services and methods to the marketplace – drives economic growth. So, as antitrust overreach limits and/or misdirects entrepreneurial and investment activity, the consequences include reduced innovation and, therefore, reduced economic growth.

5) Harming small businesses as consumers. Finally, small businesses aren’t just partners with and competitors to large businesses falling under antitrust assaults by government, but small businesses obviously are customers of these big firms. This is an obvious point, as small businesses, for example, purchase goods from; use Facebook to reach, communicate and service customers; advertise via Google; use cloud services offered by the likes of Google and Microsoft; purchase hardware made by Apple; and subscribe to a wide-range of tech tools offered by Amazon, Microsoft, Apple, and so many others; and so on. When government undermines large firms that have gained market share by serving customers – including small businesses – well, then those small business customers suffer from the resulting increased costs and/or reduced choices.

Concluding Thoughts

The FTC has regularly overstepped the normal boundaries of antitrust actions, such as challenging Meta’s acquisition of VR (virtual reality) startup Within Unlimited, Inc., and trying to block Microsoft’s acquisition of the video game Activision Blizzard. At the time, SBE Council explained that the Meta-Within case by the FTC was “economically unhinged” and in the Microsoft/Activision Blizzard, the FTC used “a ridiculously narrow market definition” and chose “to ignore the dynamism at work in gaming.” And thankfully, the FTC suffered defeats in each of these cases. However, win or lose, these and other efforts in antitrust hyper-activism create a climate of uncertainty, including looming threats and costs, that serve to dampen activity in the M&A market.

Finally, labeling big as bad, and attempting to regulate or restrict activity through the application of random, government-developed size classifications and definitions in the tech arena (as well as all other industries) are escapades fraught with unintended consequences – especially for the startups and small businesses operating in tech industries, and those that use technology platforms and tools to run their businesses.

And as I have written before, unintended consequences plague legislation and regulatory actions rooted in blind ideology and/or pandering politics that ignore sound economics, logic and history. Government attacks on large businesses – like so-called “Big Tech,” “Big Pharma” and “Big Oil” – wind up ignoring fundamental economic realities, such as how large businesses were once small businesses that earned market share by serving consumers well; that small businesses overwhelmingly populate the industries of the targeted, large firms and wind up getting hit hard by the regulatory costs imposed; that small businesses serving or being served by these large firms likewise suffer when governmental costs are inflicted; and that large businesses face competition from current (both domestic and international), emerging and future competitors, and need to continue innovating or, if not, lose market share accordingly.

Free enterprise is disciplined by competition, prices, profits, losses and, in the end, consumers, with entrepreneurs, businesses and investors competing and cooperating to serve those consumers. Indeed, the U.S. free enterprise system has led to incredible innovations, advancements in technology, gains in productivity, and economic, income and employment growth. And along the way, market leaders emerge, including firms like Apple,, Facebook and Google. Those businesses should be celebrated, not arbitrarily punished by politicians or their appointees who so often are either acting out of ignorance or doing the bidding of assorted special interests. In contrast, it pays to keep in mind what one might call “productive punishment,” that is, punishment comes via the marketplace when businesses – no matter their size – fail the consumer, and such punishment will be doled out by entrepreneurs and other businesses.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist and The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist.



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