Tech Monopoly

Tech Monopoly

The MIT Press Essential Knowledge Series

A complete list of books in this series can be found online at https://mitpress.mit.edu/books/series/mit-press-essential-knowledge-series.

Tech Monopoly

Herbert Hovenkamp

The MIT Press | Cambridge, Massachusetts | London, England

© 2024 Massachusetts Institute of Technology

All rights reserved. No part of this book may be used to train artificial intelligence systems or reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher.

The MIT Press would like to thank the anonymous peer reviewers who provided comments on drafts of this book. The generous work of academic experts is essential for establishing the authority and quality of our publications. We acknowledge with gratitude the contributions of these otherwise uncredited readers.

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Library of Congress Cataloging-in-Publication Data

Names: Hovenkamp, Herbert, 1948– author.

Title: Tech monopoly / Herbert Hovenkamp.

Description: Cambridge, Massachusetts : The MIT Press, 2024. | Series: The MIT press essential knowledge series | Includes bibliographical references and index.

Identifiers: LCCN 2023042861 (print) | LCCN 2023042862 (ebook) | ISBN 9780262548748 (paperback) | ISBN 9780262379274 (epub) | ISBN 9780262379267 (pdf)

Subjects: LCSH: Antitrust law. | Big data. | Electronic commerce—Law and legislation. | Internet marketing—Law and legislation. | Data protection—Law and legislation.

Classification: LCC K3850 .H69 2024 (print) | LCC K3850 (ebook) | DDC 343.7307/21—dc23/eng/20231003

LC record available at https://lccn.loc.gov/2023042861

LC ebook record available at https://lccn.loc.gov/2023042862

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Contents

Series Foreword

Preface: Antitrust and Big Tech

1 Introduction: The Antitrust Laws

2 Antitrust and Power

3 Anticompetitive Conduct and Big Tech

4 Antitrust Solutions to Tech Monopoly Problems

Glossary

Notes

Further Reading

Index

Series Foreword

The MIT Press Essential Knowledge series offers accessible, concise, beautifully produced pocket-size books on topics of current interest. Written by leading thinkers, the books in this series deliver expert overviews of subjects that range from the cultural and the historical to the scientific and the technical.

In today’s era of instant information gratification, we have ready access to opinions, rationalizations, and superficial descriptions. Much harder to come by is the foundational knowledge that informs a principled understanding of the world. Essential Knowledge books fill that need. Synthesizing specialized subject matter for nonspecialists and engaging critical topics through fundamentals, each of these compact volumes offers readers a point of access to complex ideas.

Preface

Antitrust and Big Tech

The subject of this book affects everyone, often in ways that people do not realize. Our lives are shaped by big tech. Even the vanishingly small number of people who have never used a computer or cellular phone are affected by tech products and services, including television and other media, or by family members who use them. Most Americans deal every day with at least one of the five largest tech companies, Amazon, Alphabet (formerly Google), Apple, Meta (formerly Facebook), or Microsoft. All are among the ten largest firms in the world. But the term big tech applies to many others, including Uber, Tesla, eBay, Samsung, Adobe, Oracle, IBM, Texas Instruments, and Intuit. Others, including Intel, Qualcomm, AMD, Micron, and TSMC (Taiwan Semiconductor), deal mainly with other business firms. Not to be forgotten are large media or social networking companies whose products are heavily digital, including Netflix, Disney, Viacom, Comcast, MSNBC, Fox, Spotify, Twitter, and TikTok. Finally are financial services firms that operate on digital platforms, including Fidelity, Schwab, PayPal, Visa, American Express, and many others.

Virtually every firm today uses tech in some way, so identifying tech firms by use is not helpful. Rather, a tech firm is one that either develops digital technology or uses it as an important part of its production or distribution. Some firms, such as Spotify, sell digital content exclusively. Others, such as Amazon, Apple, or Texas Instruments, sell a mixture of digital and traditional tactile content. For example, Amazon streams music and movies but also sells toasters, bicycles, and wrenches. It will either stream you a movie or sell it to you on DVD. Others, such as Uber, sell nondigital services but operate on a digital network for coordinating rides.

The term monopoly almost always refers to products, not to firms. Only a few of the products sold by these firms are monopolies. Likely examples are Google Search, which controls more than 90 percent of consumer search on personal computers and mobile devices. Amazon controls nearly 70 percent of ebooks, although ebooks are only 20 percent of the overall book market. Microsoft Windows is the operating system for more than 70 percent of desktop and laptop computers, but Microsoft has a much smaller share for tablets, and its market share for smartphones is less than 1 percent. That market is dominated by Alphabet’s Android and Apple’s iPhone.¹ Meta (Facebook) may or may not be a dominant firm, depending on which firms are included as competitors. Netflix is very large, but it streams programming in competition with Amazon Prime, Disney+, Hulu, Apple TV, MAX (formerly HBO+), and others.

In most cases size is a poor measure of market dominance. Most firms sell multiple products. Amazon in particular sells 12 million of them. That explains why its overall size is very large, while its share of individual products is often quite small. Importantly, you as a customer are typically looking for a single product. The question for you is the number of realistically available alternatives for your search. For example, if you want to buy groceries, the fact that Amazon’s grocery share is 2.5 percent gives a much better reading of the extent of the competition than does the fact that it is the largest online retailer. There may be situations in which size is more important, but one needs to be careful. In most cases market share of a particular product tells you much more about competitive alternatives than does the absolute size of the seller.

Tech markets have some features that distinguish them from old economy markets. For competition policy, these features pull in different directions. First, much of their output is digital. This means that the cost of selling one additional unit—such as one additional copy of an ebook or a streamed video—is very low. Second, digital output is nonrivalrous, which means that the sale of one unit does not reduce the amount that is left over. You can stream Taylor Swift on Spotify as much as you want without reducing the amount available to others. For successful products, nonrivalrous digital output can make firms larger because there are few limits on the firms’ capacity to produce more.

Third, tech firms are often organized as networks, in which firms interconnect in order to share information or intellectual property, or to engage in operations that involve many participants. One example is blanket licensing of copyrighted music. ASCAP, the American Society of Composers, Authors and Publishers, for example, has some 875,000 owner members who collectively control over 16 million digital musical works. Copyright owners grant ASCAP nonexclusive licenses, which it relicenses as a bundle to radio stations or distributors such as Spotify, which then relicense them to subscribers. Spotify alone had 489 million listeners in 2023. With blanket licensing you can subscribe to a music streaming service and have immediate access to this entire library. This market could not exist if each artist had to license her songs individually to listeners. Other networks of competitors involve the cross-licensing of patents for shared technology such as is used in cell phones or driverless cars. Still others are the old economy networks of teams that make up professional and amateur athletics. Ours is a world of networks, many of which are privately owned and operated. While we benefit greatly from them, they can also do anticompetitive things. For example, in 2021 the Supreme Court applied section 1 of the Sherman Antitrust Act against an agreement among NCAA colleges to limit the compensation of student athletes.²

Network effects can make networks more valuable as the number of participants is larger. For example, a dating site such as Match.com or a ride-hailing site such as Uber becomes more attractive as it grows. As a rider, you want access to as many drivers as possible, and as a driver you are drawn to sites with more potential riders. Indirect network effects refer to the increased value on one side (e.g., riders) as the number on the other side (drivers) increases. The gold standard in networks is the phone system, where everyone on the system can talk to everyone else. A dominated network is one that is controlled by a single firm, such as Uber or the Apple operating system. But networks can also be competitive, such as the telephone system, email system, or sports leagues in the nondigital world. These do not have a dominant firm but rather many members of various sizes. They typically act both as collaborators in the operation of the network and as competitors with one another for your business. For example, when you set up an email account you have a competitive choice among Gmail, Outlook, Yahoo, and many others. Nevertheless, these firms also collaborate to ensure interoperability.

Tech firms are often organized as networks, in which firms interconnect in order to share information or intellectual property, or to engage in operations that involve many participants.

Another feature of networks is that they are often two-sided markets. That means that they often obtain users and revenue from two (or more) sides. For example, a magazine, whether digital or traditional, gets revenue from both subscribers and advertisers. Too high a subscription price and it will lose readers, and then it will also lose advertisers. But too low a subscription price and it may need to sell excessive amounts of advertising to survive. As a result, it engages in participation balancing to find the right distribution.³ A ride-sharing app like Uber may have to adjust its fares by the minute, with higher rush hour prices to bring in enough drivers to satisfy the number of riders and lower prices during off hours. Some two-sided markets are completely free on one side. That is true of Facebook and Google search technologies, but also of older technologies such as over-the-air radio and television.

Collectively, big tech firms have produced economic growth about three times greater than the growth rate of the economy as a whole. They have educated workforces, and produce outsize growth rates in the job market. Firms in these markets also innovate much more than the economy as a whole. Indeed, in recent years the ten firms that obtained the most patents were all tech companies. New entry into tech markets is relatively common, and even the largest tech firms appear to be competing aggressively with each other. On the buying side, consumers often have a wider variety of choices. If you are unhappy with Walmart’s toaster selection you can exit the store and drive somewhere else. If you have the same experience on Amazon, you can switch with a mouse click. Information is usually more readily available on the internet, and comparison shopping is often easier. These facts lead one to wonder whether an antitrust policy of targeting big tech, as reflected in some journalistic writing and proposed legislation, is a good idea.

Offsetting this competition, which helps consumers, big tech firms also engage in practices that have legitimately aroused antitrust concern. They are involved in many mergers. The networks that occur so frequently in tech markets often require agreements among competitors—something that can arouse the suspicion of antitrust law enforcers.

Tech firms have also displaced many firms that were dedicated to older technologies or methods of doing business. For example, the rise of Amazon has been a brutal experience for Main Street retailers. Netflix and other video streamers have been devastating for the DVD business and traditional movie theaters. Uber and Lyft have caused serious damage to the traditional taxicab industry. The digital camera killed the film camera, and today the smartphone camera is killing the dedicated digital camera. Firms that lose out in market battles, perhaps because their business method or technology is obsolete, may continue to have influence in political institutions. To that extent the political process may lead to misguided antitrust enforcement.

Chapter 1 of this book gives an introduction to the history, capabilities, and limits of antitrust regulations. Chapter 2 discusses the problem that is sometimes characterized by the press as bigness. Should antitrust law focus on large firms, or should it instead be concerned with high prices in consumer markets, low innovation, or harm to labor markets? Chapter 3 focuses more narrowly on the activities of technology companies themselves: What are the unique promises and threats to competition that they present? A closely related question is how much should the problems be addressed by antitrust law, or when should we turn to other areas of law, which are frequently more specific? Finally, chapter 4 examines the difficult problem of remedies. Once we have decided that Meta (Facebook) or Amazon have been behaving anticompetitively, what should we do