Reform antitrust and patent laws now

When the United States enacted the Sherman Antitrust Act in 1890, Senator John Sherman offered a famous justification: “If we will not endure a king as a political power, we should not endure a king over the production, transportation and sale of any of the necessities of life. If we would not submit to an emperor, we should not submit to an autocrat of trade, with power to prevent competition and to fix the price of any commodity”.

The real aim of antitrust law, then, is to curb excessive economic and political power of business. Yet the original legislation made only the restraint of trade illegal. Finding this too vague, the courts compelled Congress – in 1914, 1936 and 1950 – to spell out unlawful market practices, but always without reference to the exercise of power. Thus, in practice, antitrust policy has been used to ensure the free entry of competitors into all markets.

While Milton Friedman opposed antitrust because it creates bureaucracy, most of the opposition to it has rested on the claim that it penalises the best for being the best. University of Chicago economists and legal scholars, such as Robert Bork, convinced the courts that the real intent of the Sherman Antitrust Act was to enhance consumer welfare. The only relevant problem is the short-term market price – not market power. Monopoly power and business practices do not matter if a firm is the best and offers products at prices and qualities that benefit consumers.

Thus, Chicago economists argued (without evidence) that predatory pricing could not be distinguished from “vigorous competition” that benefits consumers. After the Supreme Court itself started citing Chicago School academic papers as evidence in its rulings on antitrust litigation, predatory pricing suits were rarely filed.

However, the claim that antitrust penalises the best for being the best is flawed. Being the ‘best’ is an empty comparison if the firm with the most advanced technology is a monopolist that acquires its competitors. After all, firms that could pose a competitive challenge never get off the ground. Similarly, focusing on current prices is a flawed policy because it exempts the dynamic strategies that firms use to build market power, which itself is detrimental to consumer welfare over time.

In a 2017 paper, Lina Kahn, now the Chair of the Federal Trade Commission, argued that Amazon’s business practices violate antitrust law because they include predatory pricing and unlawful vertical integration. But such violations have long been challenging to prove in court. Aiming to restore the efficacy of antitrust policy, she has used her time at the FTC to file suits designed to convince the courts that they have adopted a flawed interpretation of the Sherman Antitrust Act. But this strategy is likely to fall short. What we really need is a new, more robust antitrust policy based on a broader law.

As I explained in The Market Power of Technology, the central challenge for antitrust is that firms with advanced technology build legal market power to extract monopoly profits. While market entry is free (for example, anyone can sell smartphones), an entrant cannot use existing proprietary technology (such as the Apple iPhone). To compete in that market (top-quality smartphones), it must invent new technology and produce a superior product. But that is very difficult, and any attempt will elicit an aggressive response from the incumbent (Apple, Inc.). Consequently, competitive challenges are rare, and market power becomes entrenched.

Antitrust laws and Supreme Court decisions have declared profits from an innovation ‘innocent’ because they result spontaneously, not as a result of intentional action to restrain trade. Not only is the accumulating market power of technology legal and unregulated; it is also supported by patent law, which is thus in conflict with the original aim of antitrust law. The implication is that the FTC can bring suits only against how firms conduct their business, not against their actual monopoly power.

Consider Microsoft’s Xbox gaming console, which had only a 13 percent market share in 2022 and an even smaller market share of games. Microsoft offered to acquire Activision Blizzard for US$68billion; and to demonstrate its absence of intent to prevent other platforms from using Activision’s games, Microsoft announced that the games would be available on all consoles for ten years. Since the market for new games remains free for anyone to enter, one could expect this merger to be allowed, given the current view of the courts.

Using Kahn’s strategy, the FTC opposed Microsoft’s acquisition, reasoning that a US$2.7trillion technology empire should be prevented from leveraging its existing power to gain even more. But, as expected, the court allowed the merger to proceed. Kahn’s true goal cannot be achieved with existing laws. The market power of technology is legal and thus unchallengeable. As dangerous as it is now, it will become even more so in the age of artificial intelligence.

Lacking the tools to curb the market power of dominant tech firms, the most the FTC is likely to achieve in its outstanding suits are slight changes in current business practices. Meanwhile, the tech giants’ current market power will continue to have a significant negative impact on economic efficiency, growth, income inequality, and social polarisation. Addressing the problem adequately requires a return to the original goal of antitrust policy, which is to restrain the power of businesses.

Current laws need to be expanded so that restraining firms’ market power becomes an explicit objective. Since technological dominance is the main source of market power, preventing technological concentration must be an explicit goal of antitrust law. The permitted level of market power must be consistent with that granted by patent law, and that requires prohibiting many of the strategies firms use to consolidate and expand their market power. For example, the law should promote innovation but restrict acquisitions of competitors or their technologies; as much as possible, it should address the interoperability of digital ecosystems linked via a single operating system; and it should prevent firms from suppressing competitive superior technologies.

Patent law itself must also be reformed. Patents are too often granted for trivial inventions, so the standards for approval should be raised. Policy-makers must prevent pyramids of interrelated patents that extend market power’s duration far beyond patent law’s intent. This will require a distinction between a primary patent of something genuinely new and a secondary patent whose description depends upon a primary patent. Secondary patents should be granted for only half the duration of a primary patent.

Innovators must be compensated, but competition and free choice must also be preserved with a sound, balanced policy. The US economy and American democracy would be healthier with a larger number of strong competitive firms. I believe Congress is ready to consider legislation to restrain rising market power in America. The FTC should work with lawmakers to attain this goal.

Mordecai Kurz is Emeritus Professor of Economics at Stanford University and the author, most recently, of The Market Power of Technology: Understanding the Second Gilded Age (Columbia University Press, 2023).

Copyright: Project Syndicate, 2024.
www.project-syndicate.org 

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