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Testimony by Michael Kades before the Subcommittee on Antitrust, Commercial, and Administrative Law on digital markets

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Michael KadesDirector, Markets and Competition PolicyWashington Center for Equitable Growth“Proposals to Strengthen the Antitrust Laws and Restore Competition Online”Subcommittee on Antitrust, Commercial, and Administrative LawOctober 1, 2020 Thank you Chairman Cicilline and Ranking Member Sensenbrenner and full committee Chairman Nadler and full committee Ranking Member Jordan for the honor of testifying before this Subcommittee on competition and digital markets. I am the Director of Markets and Competition Policy at the Washington Center for Equitable Growth. We seek to advance evidence-backed ideas and policies that promote strong, stable, and broad-based economic growth. The exploitation of monopoly power across the U.S. economy threatens innovation, stifles growth, and

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Michael Kades
Director, Markets and Competition Policy
Washington Center for Equitable Growth
“Proposals to Strengthen the Antitrust Laws and Restore Competition Online”
Subcommittee on Antitrust, Commercial, and Administrative Law

October 1, 2020

Thank you Chairman Cicilline and Ranking Member Sensenbrenner and full committee Chairman Nadler and full committee Ranking Member Jordan for the honor of testifying before this Subcommittee on competition and digital markets.

I am the Director of Markets and Competition Policy at the Washington Center for Equitable Growth. We seek to advance evidence-backed ideas and policies that promote strong, stable, and broad-based economic growth. The exploitation of monopoly power across the U.S. economy threatens innovation, stifles growth, and exacerbates inequality.

Digital marketplaces play an increasingly important role in the economic life of every American. The novel coronavirus pandemic has only increased their significance. The Judiciary Committee should be commended for conducting a bipartisan investigation into the state of competition in online markets and issuing its report.

 I encourage the Committee not to stop with the report. The challenges we face are not limited to one or two companies. The filing of one or two cases will not solve our problems. The committee has an important role to play in promoting competition in digital markets.  There are three issues, I urge you to consider as you move forward.

Legislative Reforms

First, we need legislation, not just enforcement actions. This may sound obvious, but legal requirements should efficiently distinguish procompetitive conduct from anticompetitive conduct. Over the past 40 years, however, the federal courts, showing an almost neurotic fear of overenforcement, have increased burdens on plaintiffs in antitrust cases and narrowed the scope of antitrust law.

One example underscores this point. Arguably, the most significant monopolization case in U.S. history was the government’s successful break-up of the American Telegraph and Telephone Company in the 1980s. Under current case law, it is questionable that the government could pursue its claim under today’s standards. This development should shock every member of Congress. But it is of particular concern because the central issue in AT&T was its refusal to connect its long-distance competitor MCI to local phone exchanges—in other words, freezing out competitors—one of the major concerns raised in the course of the Committee’s investigation. My written testimony includes a letter I signed with 11 other economists and lawyers. (see Appendix A). All of them have served in the government. Many of them have defended companies in antitrust investigations. And all of them agree that

the antitrust laws, as interpreted and enforced today, are inadequate to confront and deter growing market power in the U.S. economy and unnecessarily limit the ability of antitrust enforcers to address anticompetitive conduct in the digital markets that the Committee is investigating.

That letter I signed provides a number of suggested reforms to restore the vitality of the antitrust laws, which

  • Nullify existing precedent that limits antitrust actions,
  • Clarify that the antitrust laws protect potential competition,
  • Establish legal rules that, in appropriate cases, require defendants to prove their conduct does not harm competition, and
  • Increase penalties and enforcement resources

The courts have made it abundantly clear that they believe the antitrust laws have little role to play in promoting competition because the market can fix itself. And, therefore, do no harm is the prevailing approach. Unless Congress takes a different view by passing legislation, dominant firms will have little concern about the antitrust laws limiting their conduct.

Remedies that address entry barriers: Interoperability

None of this is to suggest that the government should shy away from prosecuting antitrust violations against digital platforms. To the contrary, the antitrust enforcement agencies have a duty to attack monopoly power where they find it and to advocate for courts to update and modify their doctrines to conform to modern economic theory.

This leads me to my second point. Remedying antitrust violations in digital markets will be challenging. As this committee has heard consistently, whether it be a social network such as Facebook, an online marketplace such as Amazon, an App Store, or Google’s search product and online advertising eco-system, network effects are a fact of life. The more people using a digital platform, the more valuable it is. In turn, the markets tend to tip toward a single firm.

These dynamics make anticompetitive conduct more likely to be successful and it will often target small, nascent, or potential competitors. This makes it harder to challenge conduct and to develop remedies that will restore competition. Moreover, once an antitrust violation has occurred—once a company has obtained or maintained a dominant position through exclusionary conduct—restoring competition and preventing future violations requires a remedy that diminishes those entry barriers. As result, simply banning conduct, financially penalizing a company, or even breaking up a company may not be sufficient.   

Interoperability, which broadly defined means requiring connections between platforms can be an effective tool to diminish entry barriers. (See Appendix B). For a social network, interoperability is likely a necessary, but not necessarily a sufficient, condition for an effective remedy to an antitrust violation. Users will not switch to a new social network until their friends and families have switched.

Interoperability causes network effects to occur at the market level – where they are available to nascent and potential competitors – instead of the firm level where they only advantage the incumbent. Interoperability allows someone who is not a member of the dominant social network to continue to communicate with friends or families on that platform. Just like a person with Verizon can text a person with T-Mobile, interoperability would allow a person on one social network to share posts and pictures) with a friend on another social network.

Without interoperability, it would be difficult to undo the damage done by excluding competition, and the dominant firm has the same incentives to find new way to prevent competition.

Regulations that Promote Competition

Third, the Committee should focus broadly on the goals of promoting competition and not narrowly on specific tools. Strong antitrust enforcement is an important tool, but it is not the only tool. Laws and regulations can also promote competition. Reports from the U. K.’s Competition and Markets Authority, the Stigler Center, the European Union, and the Shorenstein Center all conclude that the solutions are not a choice between antitrust enforcement and regulation but rather both. Regulations, broadly understood, can establish marketplace rules that promote competition and ensure that competition occurs on dimensions that consumers value, such as quality, rather than deceiving or steering consumers into making poor choices. Regulations can also limit the harms that fall outside of traditional competition concerns such as labor, the environment, and speech issues.

I do not mean old-fashioned, utility-style regulation but regulations that level the playing field, promote entry, and increase competition. The Carterfone rule created competition in the sale of phones, fax machines, and modems. The Hatch-Waxman Act created vibrant price competition in pharmaceutical markets that saves consumers tens of billions of dollars every year.

Focused regulation can often reach important issues, such as privacy and protecting consumers’ data, more efficiently and quickly than litigation-based antitrust enforcement. As the committee considers how to promote and protect competition in digital markets, it is good to remember that the greatest successes in competition policy have typically come when antitrust enforcement and regulation complement each other as they did in eliminating AT&T’s phone service monopoly. That approach is likely to apply with equal force to today’s challenges in digital markets.

Protecting competition in digital markets requires laws that efficiently distinguish pro and anticompetitive conduct, remedies that address the underlying network dynamics, and a combination of antitrust enforcement and regulation so that markets the deliver the results that benefit us all.

Thank You, and I look forward to answering your questions.


Appendix A

Joint response to the house judiciary committee on the state of antitrust law and implications for protecting competition in digital markets

Appendix B

Interoperability as a competition remedy for digital networks

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