Technological Monopolies, Innovation, and the Personal Freedom to Form Businesses: Like Oil and Water?

• Jurisdiction: California,United States
• Author: By Christopher K.L. Young
• Citation: Vol. 33 No. 1
• Publication year: 2023

TECHNOLOGICAL MONOPOLIES, INNOVATION, AND THE PERSONAL FREEDOM TO FORM BUSINESSES: LIKE OIL AND WATER?

By Christopher K.L. Young¹

I. INTRODUCTION

In 2022, the California legislature passed Assembly Concurrent Resolution No. 95 authorizing the California Law Revision Commission to study potential revisions to California's state antitrust law.²Among the topics the CLRC is studying is whether California's antitrust law should be revised in the context of technology companies such 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 businesses and not solely whether such monopolies act to raise prices.³

The Cartwright Act is California's primary state antitrust law. It was passed in 1907 and appeared to be an express attempt to rein in the cartels that were rampant in the state at that time.⁴ The text of the Cartwright Act is reflective of the threats to competition that were prevalent at the time of its passing: given that cartels dominated industry, the Cartwright Act targeted multi-firm conduct and contained no explicit provision targeting single firm conduct analogous to Section 2 of the federal Sherman Act.⁵ Now, over one hundred years later, California is again facing serious competition-related issues. Rather than multi-firm cartels, the threat now comes from single-firm conduct by large sprawling technology companies.⁶ The largest technology firms are wielding their dominance to entrench their market power. Indeed, reports by federal legislative bodies such as the House Judiciary Committee have documented anticompetitive practices by technology companies such as acquiring nascent competitors and capitalizing on their role as gatekeepers to maintain their market power. The California antitrust laws should certainly be stiffened in response to the growing prevalence of these practices and, in particular, to account for single-firm conduct by large technology firms.

There are those, however, who say any such expansion of the Cartwright Act should account for the competitive benefits that these technology companies provide. They argue that these

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companies provide procompetitive values—such as fostering innovation and individuals' freedom to start their own businesses—which should be considered when measuring single firm conduct, in addition to whether monopolies raise prices. That would, however, dilute any amendment seeking to strengthen California's antitrust laws by targeting single-firm conduct and would seem contrary to the original purposes of the Cartwright Act, which is to promote competition for not only consumers, but also for nascent competitors.⁷

It is first necessary to address three reasons why explicit consideration of procompetitive benefits of single-firm conduct is inconsistent with the purpose and goals of the Cartwright Act. First, courts interpreting the Cartwright Act already consider competitive benefits like innovation in antitrust analysis. Second, inclusion of procompetitive benefits in the law presupposes that the existing California antitrust laws do not suppress innovation and the personal freedom of individuals to start their own businesses. Third, it presumes that the contemporary Cartwright Act framework solely focuses on whether an allegedly anticompetitive practice affects price. Part I will address each of these presumptions and demonstrate why an explicit requirement to consider procompetitive benefits is unnecessary.

Second, it is highly unlikely that a nascent innovative firm would have the market power to behave anticompetitively in the first place. So any revision to the law should be careful not to integrate any provisions that may inadvertently give larger companies a way to inoculate their anticompetitive conduct. Indeed, it is not those persons whom the antitrust laws are concerned about; rather, it is the sprawling mega-corporations whose reach is practically boundless in the contemporary digital world. As revealed by the House Subcommittee on the Judiciary Subcommittee on Antitrust, Commercial and Administrative Law's Investigation of Competition in Digital Markets, many of the largest tech companies have engaged in strategies that include acquisition of putative competitors in their infancy in order to protect their market power. Further, these same companies often use their status as gatekeepers of walled gardens to collect data from competitors to then advantage their own products. Experience has shown that the consolidation of technology companies has led to a stifling of innovation and decreased incentives for those who otherwise may have started their own businesses to do so. Part II will highlight some examples of this.

Lastly, in light of the rapid growth of the largest technology companies, the Cartwright Act should be updated to be more stringent with respect to large technology companies without being hampered by consideration of purported procompetitive benefits. Technology has advanced many times over since the Cartwright Act was enacted in 1907. Emerging technologies such as AI, machine learning and large language models can mitigate collective action or coordination problems which limit the ability of human beings to maintain monopoly or supracompetitive prices. Anticompetitive single-firm conduct is possible at unprecedented speed and scale by taking advantage of these emergent technologies. Indeed, advances in algorithmic prices have already led to new and faster methods of anticompetitive multi-firm conduct. Advances in Als and large language models and the concentration already occurring in that space also represent a potential new inflection point for competition. Part III will address why, as opposed to making the Cartwright Act more lax, it should rather be strengthened and sharpened to address the changing digital markets without necessitating any balancing of procompetitive benefits.

II. THE RIGHT QUESTIONS

The idea that any revision of the Cartwright Act must include consideration for procompetitive benefits rather than just anticompetitive harm may lead to conclusions unwarranted by the facts. First, antitrust analysis already takes procompetitive factors into account, so any revision of the Cartwright Act should strictly be more stringent rather than build in room to wiggle.⁸ The Cartwright Act, like the Sherman Act, "has been interpreted

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to permit by implication those restraints found to be reasonable."⁹ Indeed, the Cartwright Act itself embeds a caveat that it is not meant to restrain procompetitive restraints: "It is not unlawful to enter into agreements or form associations or combinations, the purpose and effect of which is to promote, encourage or increase competition in any trade or industry, or which are in furtherance of trade."¹⁰Even presuming that single-firm conduct or market consolidation can lead to increased competition in innovation, that purported justification will be taken into account as the current analytical framework is constructed without any need to embed it formally into statute.¹¹

The idea that market concentration can lead to innovation seems a bit counterintuitive. "[T]echnology markets are—in the end—just product markets,"¹² and it has long been recognized that markets with few rivals permit coordination either overtly or tacitly to achieve supracompetitive prices (and other anticompetitive effects including suppressed innovation).¹³ In what instances therefore would otherwise anticompetitive behavior lead to increased innovation?

We start with the economic rationale as to why competition begets innovation with the necessary caveat that evaluation of procompetitive justifications is necessarily fact specific.¹⁴Anticompetitive conduct restricting supply can, for example, hypothetically lead to higher quality of service. This rationale in the technology context is fairly intuitive, however: competitors are incentivized to innovate and produce better products and services in order to attract more consumers. Small innovative firms can grow into larger ones, offering more competition at scale. Conversely, when markets are concentrated, larger firms may be able to leverage more funding to research and development which can lead to further innovation. But when large companies acquire the small innovative firm, that possibility could be eliminated. Indeed, there is evidence that this is precisely what is happening. Meta, Alphabet, Microsoft, and Apple have made more than 500 acquisitions since their founding.¹⁵ And as described more fully below, evidence suggests that these mergers do not lead to the development of the acquired product, but rather stifle innovation. The evidence thus does not bear out baking in an additional consideration for procompetitive benefits with respect to technology companies.

Second, a proposal to include statutory consideration of procompetitive justifications in the context of technology companies suggests that the California antitrust laws as written does not adequately promote innovation or the personal freedom of individuals to start businesses in that same context. But this seems to be belied by the empirical number of startups with roots in California.¹⁶ California, even with its relatively broad and rigorous antitrust regime, is still appealing to innovators and entrepreneurs. Indeed, California is routinely near the top of lists of total startup funding or per-capita startup funding.¹⁷ As explained by the California Supreme Court, while certainly true that the "[a]ntitrust laws are designed primarily to aid the consumer," "[a]nother beneficiary of antitrust law is the competitor himself."¹⁸ Thus, the antitrust laws at least as understood by the California Supreme Court exist not only to protect the consumer, but also the nascent competitor. Failing to regulate the monopolist can nip competitors in the bud, resulting in a less competitive environment. Ensuring...