The Adaptable Antitrust Laws

• Publication year: 2023
• Author: By Lin W. Kahn, David C. Kiernan, Alyxandra Vernon, Maya Baumer

THE ADAPTABLE ANTITRUST LAWS

By Lin W. Kahn, David C. Kiernan, Alyxandra Vernon, Maya Baumer¹

Today, a loud chorus is calling for antitrust reform for digital markets and technology companies. The refrains are familiar: "big is bad"; "break them up"; "walled garden"; "killer acquisitions"; "platform self-preferencing." Critics decry what they view as the current antitrust framework's inordinate focus on price or output impacts as determining whether competition has been harmed. They argue that this standard fails to capture the nonprice effects of exclusionary conduct and mergers in digital markets, including harm to innovation, barriers to entry, and invasion of privacy. Prompted by such criticism, the California Legislature authorized the California Law Revision Commission² to study "[w]hether the law should be revised in the context of technology companies so that analysis of antitrust injury in that setting reflects competitive benefits such as innovation and permitting the personal freedom of individuals to start their own business and not solely whether such monopolies act to raise prices."³

This article focuses on one part of the debate: the role that innovation plays in today's antitrust jurisprudence. There is little dispute that protecting innovation is a central goal of the current antitrust laws. Despite this consensus, some argue that the law gives only "lip service" to this goal.⁴ Below, we briefly describe the call for reform, then examine the role of innovation in the case law and enforcement actions, and finally analyze whether the antitrust statutes should be revised to provide ex ante rules for digital markets to account for harm to innovation.

As we show, courts and government regulators do more than give perfunctory attention to harm to innovation. Promoting innovation is often a key consideration in the analysis, especially in government enforcement actions. When antitrust challenges involving innovation harm fail, it is not because courts and regulators ignore impacts on innovation but because the factfinder found that the challenger failed to prove an anticompetitive impact or that countervailing procompetitive benefits outweighed such impact. The analysis in these cases shows that the existing Rule of Reason framework that has long been a hallmark of antitrust law protects innovation benefits. The process is also ongoing, as recent enforcement activity in digital markets has focused on alleged harms to innovation. These cases are working their way through the courts and their resolution will contribute to the further development of the standards in this area. The case-by-case, non-sector specific framework the courts will apply in these cases allows the law to adapt to changing circumstances, evolving economic theory, and accumulated experience. Dismantling this approach and imposing new ex ante rules at this juncture for technology companies is unnecessary and would risk harming the vigorous competition the antitrust laws were enacted to protect.

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I. CALLS FOR REFORM

The primary target for advocates of reform is the consumer welfare standard that has been the bedrock of antitrust law for decades. Critics of the current system argue that a significant consequence of the consumer welfare standard has been to focus on consumer prices as the dominant metric of assessing competition.⁵ As a result, the argument goes, the current framework "yield[s] almost no consideration of the 'dynamic' costs of monopoly, like stagnation or stalled innovation."⁶ Critics argue that the consumer welfare standard has failed to stop "Big Tech" from locking in customers and using exclusionary conduct to block nascent competitive threats. They say this has led to a slew of harmful effects, including the concentration of power, higher prices, and declining innovation and quality. Proponents of reform argue that the consumer welfare standard is especially ill equipped for the digital economy with business models centered around zero-price markets, where anticompetitive conduct may not lead to immediate higher prices. And some posit that the best solution for dealing with entrenched technology companies is to revise the rules through adoption of per se or ex ante standards without requiring proof of anticompetitive effects in certain circumstances.

II. INNOVATION IN ANTITRUST ANALYSIS

There is little dispute that promoting and protecting innovation is a core purpose of the current antitrust laws. Areeda & Hovenkamp emphasize, "a dominant firm's restraints on the innovations of others go to the heart of antitrust policy."⁷ Courts have recognized this time and again, noting that antitrust laws "safeguard the incentive to innovate"⁸ and encourage "innovation, industry, and competition."⁹In fact, many have argued that innovation competition has likely produced considerably greater economic gains than the movement of markets toward greater price competition.¹⁰ Thus, it is no surprise that harm to innovation has been an important element of monopolization and anticompetitive conduct challenges under Sections 1 and 2 of the Sherman Act,¹¹ as well as merger challenges under Section 7 of the Clayton Act.¹²

In particular, the concern over impediments to innovation has long been a central focus of antitrust analysis in technology markets, where innovation is a prime mode of competition. As the FTC recognizes, "[i]nnovation is a central aspect of rivalries among technology firms, and the markets are dynamic: new ideas topple formerly dominant technologies and consumers line up to buy products that are smaller, faster, and better."¹³ For this reason, numerous technology cases over the years have addressed this concern under the existing antitrust framework.

A. INNOVATION IN MONOPOLIZATION CASES

Harm to innovation was front and center in United States v. Microsoft Corp.¹⁴ The district court held that Microsoft illegally preserved a monopoly in the market for personal computing operating systems by preventing competitors from distributing their products.¹⁵ Microsoft's Windows operating system held a significant share of the operating system market, but "middleware" products like Netscape Navigator browser threatened Microsoft's position. To combat this nascent threat, Microsoft pre-installed its own Internet browser on Windows and took steps to give its own browser an advantage over Navigator and other rival browsers.¹⁶ The district court found that Microsoft's actions harmed consumers by "unjustifiably distorting competition" and that Microsoft's actions "hobbled a form of innovation that had shown the potential to depress the applications barrier to entry sufficiently to enable other firms to compete effectively against Microsoft."¹⁷ The court added, "[m]ost harmful of all is the message that Microsoft's actions have conveyed to every enterprise with the potential to innovate in the computer industry," with the "ultimate result" being that "some innovations that would truly benefit consumers never occur for the sole reason that they do not coincide with Microsoft's self-interest."¹⁸ The D.C. Circuit upheld most of the district court's conclusions and condemned Microsoft's practices—which were unrelated to short-term pricing—because they

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threatened to raise entry barriers and thus reduced or delayed innovation.¹⁹

Similarly, the DOJ's suit against Mastercard and Visa in the 1990s was meant, in part, to protect innovation. The DOJ alleged the companies' policies preventing credit card issuers from issuing competing credit cards—like American Express or Discover cards—unreasonably restrained trade.²⁰ The DOJ alleged that the policies harmed consumers by "reducing competitive investments in the innovation, development, and marketing of improved network products and services, and by restraining the competitiveness of smaller networks."²¹ The Second Circuit agreed and affirmed the district court's finding that "by enforcing . . . the exclusionary rule, [which] bar[s] their member banks from issuing Amex or Discover cards," MasterCard and Visa violated the Sherman Act.²²Importantly, the DOJ showed "substantial adverse effects on competition" through nonprice harms like suppression of innovation.²³ The Second Circuit relied on trial testimony that "strongly indicated that price competition and innovation in services would be enhanced if four competitors, rather than only two, were able to compete . . . for issuing banks."²⁴The court also endorsed the district court's finding that both defendants would "respond to . . . greater network competition by offering new and better products and services."²⁵ Ultimately, because both "product innovation and output" were "stunted by the challenged policies," the Second Circuit ruled that competition had been harmed.²⁶

Innovation was also a key consideration in the FTC's suit against Intel, where the agency alleged that Intel used its market power to maintain a monopoly over the microprocessor market.²⁷ The FTC alleged that Intel denied certain customers access to technical information as a means of coercing those customers to grant Intel licenses to innovations developed and owned by those customers.²⁸ According to the complaint, "[a] natural and probable effect of Intel's conduct is to diminish the incentives of those [] customers—as well as other firms that are Intel customers or otherwise commercially dependent upon Intel—to develop new innovations relating to microprocessor technology."²⁹ Ultimately, the parties settled the dispute, with Intel agreeing to stop the challenged conduct.³⁰ The FTC's announcement of the settlement emphasized that the agency was focused on striking the right balance "between protecting the incentives of smaller rivals to innovate and unduly constricting a dominant firm's conduct of its business."³¹

Private plaintiffs have also sued on a theory of harm to innovation, particularly in cases involving alleged exclusionary conduct in connection with standard...