Undermining Innovation? Digital economy startups can compete without competitive process antitrust.

• Author: Blask, Byari
• Position: ANTITRUST

Members of the Biden administration and prominent Democrats in Congress such as Elizabeth Warren and Amy Klobuchar are advocating that expanding antitrust be a domestic policy priority. They argue that large tech companies like Amazon, Google, and Airbnb engage in business practices that exclude potential competitors from the marketplace and that current legal doctrines governing exclusionary conduct are insufficient to protect against these harms. These leaders draw on scholarship that calls for courts to consider how a firm's practices affect "competitive process" rather than just focusing on consumer welfare as measured by prices and output.

There is much to criticize about government meddling in the tech market. Tech has spurred productivity growth and created a bounty of new products in recent decades. Many of these products are free and digitization has by and large reduced costs compared to non-internet alternatives or predecessors. Arguments that the U.S. tech sector is not competitive disregard changes in prices across different economic sectors, while government regulatory barriers and labor intensiveness explain high prices in areas like education and housing.

Nonetheless, calls to expand antitrust are growing. One thrust is to promote digital startup competition. In recent years, competitive process scholars like Columbia's Tim Wu and Lina Kahn (now appointees of the Biden administration), Yale's Fiona Scott Morton, and former Federal Trade Commission economist Jonathan Baker have written books and articles suggesting that judicial emphasis on price and output in exclusionary conduct cases is particularly ill suited to the digital economy. They propose that courts alter how they weigh procompetitive and anticompetitive effects when evaluating vertical integration and vertical contractual restraints. They also suggest removing the below-cost and recoupment requirements for predatory pricing exclusion claims.

The competitive process school's proposed reforms should be rejected because current law adequately prohibits unjustified dominant firm exclusionary conduct without unduly protecting inefficient competitors. The proposed changes would not improve the ability of courts to sanction unjustified exclusionary conduct that harms startups. Instead, the reforms might prevent dominant firms from achieving efficient scale and discourage new firms from aggressively pursuing price and quality competitiveness.

BALANCING ANALYSIS IN VERTICAL MERGERS, VERTICAL RESTRAINTS, AND VERTICAL TIES

Balancing procompetitive and anticompetitive effects is the primary analytical tool used by courts in evaluating potentially exclusionary vertical mergers, vertical restraints, and product ties conducted or implemented by dominant firms. These balancing analyses usually do not take the form of an attempt to calculate the net economic effect of challenged conduct. Courts often consider whether a procompetitive benefit could be achieved by a less restrictive alternative. Additionally, defendants win close cases because of burden-of-proof issues. Therefore, balancing analyses consist of rough analyses of competitive and anticompetitive effects rather than precise attempts to quantify the conduct.

Competitive process scholars argue that balancing analyses focus too much on evidence of price harm and downplay the possibility of inefficient nascent competitors becoming efficiency leaders in the future. To fix this, they advocate adding legislatively mandated presumptions to the balancing analysis that would block more exclusionary conduct. Specific proposals given by Wu, Kahn, and Baker, and by a recent House Antitrust Subcommittee report, include altering doctrine by making a platform's integration with an application (e.g., Amazon selling its own branded goods on its platform) prima facie evidence of anticompetitive behavior; increasing scrutiny of exclusive dealing, "most favored nation," and data provision vertical contracts; and creating a presumption against approving vertical mergers if the target supplies at least 30% of the goods or services in its market.

The proposed reforms are a solution in search of a problem and ought to be rejected. A dominant firm's conduct should not be prohibited unless its exclusionary consequences reflect the firm's dominance as opposed to its efficiency, and could exclude a competitor of equal or superior efficiency. Applying this principle to a wide set of firms, industries, cost structures, and so on requires very careful attention to the specific facts of a case. One virtue of today's law is that it understands that these and a host of other factors go into determining whether a certain practice with exclusionary consequences mainly reflects efficiency or dominance. Current law allows courts to address the specifics of each case without being burdened by the type of blunt presumptions the competitive process adherents propose.

Competitive process scholars argue that vertical exclusion warrants particular scrutiny when undertaken by a dominant digital platform because of the naturally monopolistic features of...