Introduction and Executive Summary

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Antitrust institutions in the United States and around the world are at a crossroads. Until now, antitrust has been based upon the consumer welfare standard, which has served as the lodestar of modern antitrust for the past 40 years. The hallmark of modern antitrust enforcement has been a case-by-case approach, driven by economic analysis and an evaluation of conduct on the merits. Courts and competition agencies have generally rejected invitations to jettison this successful approach in favor of presumptions of illegality and other shortcuts. The reason is simple: Relying upon presumptions instead of evidence risks rendering unlawful business behavior that in fact benefits consumers.

But there is increasingly talk of a revolution that would overthrow the antitrust regime in the United States and, indeed, around the world. The drumbeat for this revolution appears to be strong and growing, with a broad range of enthusiastic participants and followers, including legal academics and economists, public intellectuals, think tankers, prominent members of Congress, and some foreign competition authorities. The would-be revolution has already had some success—at least as measured by the increasing discussion in academia, the popular press, and social media, and having embedded some of its central ideas in the platforms of both major U.S. political parties. Signs of the gathering revolution can also be seen in the various reports on antitrust and the digital economy emanating from around the world, such as those of the Stigler Center at the University of Chicago, the Australian Competition and Consumer Commission, The United Kingdom’s Competition and Markets Authority, the European Commission’s Directorate-General for Competition, the House Judiciary Committee’s Subcommittee on Antitrust, Commercial, and Administrative Law, and other think tanks and governmental bodies.

The more radical revolutionaries want an antitrust regime to address a myriad of perceived socio-political problems, including, but not limited to, income inequality, relative wage depression, and the concentration of political power. Some call for incorporating other forms of regulation—particularly regulation of data and privacy—into the antitrust laws and putting them in the hands of the antitrust regulators. Their revolutionary zeal is aimed generally at the digital economy and in particular at large tech firms. Their proposed “fixes” targeting the largest tech firms run the gamut from the reinvigoration of competition rulemaking at the Federal Trade Commission, to shifting the burden of proof from plaintiffs to defendants in antitrust litigation, to extending the reach of antitrust to content moderation decisions, to size-based presumptions akin to the antitrust approach of the 1960s, to creating a new agency with unlimited regulatory power. These proposals have been refined to the point that they are now ripe, in our view, for rigorous examination from an evidence-based perspective.

The GAI is well suited to participate in that examination. Our fundamental mission is to promote the application of sound economic analysis to competition enforcement around the world through economic education programs, competition advocacy, and research. It is our sincere hope that the GAI Report on the Digital Economy furthers the healthy debate now under way in the marketplace of ideas. With that hope in mind, we have brought together in the Report a stellar group of contributors, including former government officials, academic lawyers and economists, and practitioners. These authors, with a diversity of views, advance a plethora of ideas to improve the performance of antitrust institutions, as well as criticisms of many more radical proposals. And while the authors represent a consensus around a few key points—for example, support for the existing consumer welfare orientation of antitrust institutions—readers should not impute to contributors agreement or endorsement of the Report as a whole. Our primary goals are to offer (1) a collection of views that share an evidence-based approach to the economics of antitrust enforcement in digital markets and beyond, (2) an assessment of the state of competition in those markets, and (3) an evaluation of the more significant policy proposals that have been offered in this area. The Report is structured with those goals in mind.

In Section I the authors explain the foundational economic concepts and legal principles that apply to the digital economy. This serves two functions: It is a primer for the reader less familiar with the key topics in competition policy as applied to the digital economy, and it prepares the reader for the application of those principles and concepts in the discussions to come in Sections II and III. Chapter 1 begins with John Yun discussing the basics of network effects and platform markets. In Chapter 2, Geoffrey Manne explains the error cost framework and emphasizes its importance in assessing conduct in innovative markets. In Chapter 3, Elyse Dorsey puts the consumer welfare standard in historical perspective and reasserts its continuing importance as the lodestar of competition law. Christopher Yoo then returns to the topic of network effects, digging more deeply into their theoretical underpinnings and their competitive significance in Chapter 4. In Chapter 5 Luke Froeb, Greg Werden, Bernhard Ganglmair, and Steven Tschantz explore the economics of innovation, focusing on the economic underpinnings of intellectual property law. In Chapter 6, John Yun details the antitrust implications of a firm having “big data,” and in Chapter 7 he discusses vertical integration and the generally procompetitive outcomes of vertical mergers. Relatedly, in Chapter 8 Dan O’Brien covers the welfare implications of various forms of vertical arrangements. Michael Salinger uses Chapter 9 to build on the two preceding chapters to explicate the effects of self-preferencing. Chapter 10 provides Richard Epstein’s analysis of the increasingly important intersection of the patent and antitrust laws.

Section II provides an overview of the state of competition law in digital markets, current antitrust enforcement efforts, competition, concentration, and the role of government in the competitive process. Chapter 11 begins this section with Jonathan Klick addressing one of the most frequently asked questions: Is the digital economy too concentrated? In Chapter 12, Jan Rybnicek looks at various metrics related to innovation, and uses them to compare innovation levels in the United States and Europe. Avinash Collis then reviews the macroeconomic effects that big tech has had on the global economy and in Chapter 13 proposes a new measure of the benefits of technology . In Chapter 14, Thom Lambert uses public choice theory to explore rent-seeking strategies used by firms in the digital economy. Kristian Stout and Aurelien Portuese, in Chapters 15 and 16, provide a review of antitrust enforcement efforts to date in the digital economy in the U.S. and the EU. In Chapter 17 John Yun then turns to the analysis of “killer acquisitions,” asking whether current laws are capable of addressing mergers involving nascent or potential competitors. In Chapter 18, Catherine Tucker examines the state of competition in digital advertising markets. Chapter 19 closes out this section with Bruce H. Kobayashi considering the effects of non-compete and no-poach agreements in digital markets, and their treatment under both state and federal antitrust law.

Finally, Section III analyzes contemporary proposals to overhaul the antitrust laws and offers evidence-based proposals for how to improve antitrust institutions in order to promote competition in the digital economy. In Chapter 20, Neil Chilson opens this section with the question: Do we need a new regulatory scheme just for big tech? Then in Chapter 21 Tad Lipsky reviews the essential facilities doctrine through its surprisingly elusive history in the Supreme Court to its controversial implications for the digital economy. In Chapter 22, Joanna Tsai discusses the role of standards and standards development organizations and their contributions to innovation in the digital economy. Chapter 23, by Babette Boliek, highlights the relationship between competition policy and the future of 5G innovation. Chapter 24 discusses the trade-offs between ex ante sector-specific regulation and ex post antitrust enforcement; along the way authors Bruce H. Kobayashi and Joshua D. Wright debunk the claim that modern antitrust is based solely upon ex post antitrust litigation and analyze the tradeoffs among available ways to approach the regulation of digital markets. Chapter 25 builds upon the previous chapter, with Giuseppe Colangelo reviewing and weighing some of the recent proposals to regulate tech firms. In Chapter 26, Ai Deng delves into the next frontier of Sherman Act Section 1 issues—algorithmic collusion—and offers insights into how the use of algorithms will affect the future of competition. Justin “Gus” Hurwitz, in Chapter 27, walks through the history of duties to deal as both remedies and regulatory mandates, and explains why a duty to deal should not be favored as an antitrust remedy. In Chapter 28, Berin Szóka and Ashkhen Kazaryan provide background on the hotly debated merits of Section 230 of the Communications Decency Act, and discuss some recent proposals for reform. In Chapter 29, Bruce H. Kobayashi and Joshua D. Wright broadly cover antitrust exemptions and immunities, and explain why both should be treated with skepticism. In Chapter 30, Maureen Ohlhausen highlights the anticompetitive effects of occupational licensing and discusses recent enforcement efforts in this area. James Cooper, in Chapter 31, explores the ever-increasing overlap between privacy concerns and the antitrust laws. In Chapter 32, Daniel Crane engages in the ongoing debate regarding the design of public enforcement in the U.S., focusing on the tensions between the FTC, the DOJ, and the states’ attorneys general. In Chapter 33, Michael Baye and Jeffrey Prince provide regulators with an economic toolkit to use when considering certain conduct in digital markets. And finally, Chapter 34 closes with Tim Muris and Joseph Coniglio’s evaluation of the continued importance of both the price-cost test and the likelihood of recoupment when considering predation in digital markets.

We hope readers learn from, engage with, and enjoy reading the Report on the Digital Economy as much as we have enjoyed producing it and engaging in the ongoing debate about the role of antitrust in the digital economy.