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Net Neutrality Part 2: Antitrust Law

June 11, 2018

In Part 1 of our Net Neutrality series, I noted that “the net neutrality debate [stands] in for many other, less accessible debates in American politics.” In Part 2, we’ll take a deeper dive into one of those “less accessible” debates: the proper function of antitrust law in society.

Antitrust political cartoon of the 19th century

Antitrust political cartoon of the 19th century

Antitrust laws in the US go back over a century, to the Sherman Antitrust Act of 1890. During that time, the criteria used to guide enforcement of these laws has “evolved significantly,” writes David Wessel in the March 2018 issue of Harvard Business Review: “In the 1950s and 1960s, many mergers — even ones that would have led to relatively modest increases in concentration — were routinely challenged, but in the 1970s the antitrust framework began to shift toward challenging many fewer mergers.”

This shift was driven in part by influential books written by two men trained in both law and economics, Robert Bork and Richard Posner. Posner’s “Antitrust Law: An Economic Perspective,” and Bork’s “The Antitrust Paradox” applied the ruthless calculus of the Chicago School of economics to antitrust law. (The Chicago School also developed the equally-ruthless shareholder theory of value.) They argued that the main, or perhaps sole, criterion for whether a business transaction merited antitrust scrutiny was whether it would lead to higher prices for consumers. A merger or acquisition that would lead to lower prices should be permitted, even if it led to one firm gaining a monopoly in a given market. Posner argued that the societal costs of monopoly may well be counterbalanced by “the economies of centralizing production in one or very few firms.”

This quantitative approach was appealing to the Justice Department and Federal Trade Commission under the Reagan and Bush administrations of the 1980s. As Wessel writes, the new approach to antitrust law “relied on three ideas: that harm from increased concentration had to be weighed against the efficiencies to be achieved, that horizontal mergers between competitors were harmful only if they led to less output, and that vertical mergers between supplier and buyer generally were not a problem.” Subsequent administrations of either party continued the practice. The result is that antitrust action has declined precipitously over the last four decades.

It is possible to see in this historical development the roots of the net neutrality controversy. Most consumers live in an internet market dominated by 1-2 gargantuan service providers created by the aggregation of multiple smaller providers (horizontal mergers) as well as the acquisition of content providers (vertical mergers). These providers have become experts at making the case to regulators that any action they take will naturally result in lower costs for consumers and greater efficiency, and regulators mostly defer to them.

The fact that so many are calling for controls on the freedom of these corporations, while their de facto monopolistic power is essentially taken for granted, is but one of many indications that the current approach to antitrust law is overly simplistic. If nothing else, it fails to take into account the way that the internet enables network effects that inexorably drive modern technology companies to consolidate. If a future Congress or administration decides to strengthen antitrust oversight to counteract the trend toward concentration (a trend that is happening in industries across the entire US economy), the argument for net neutrality regulations could be substantially weakened.

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