David Warsh: Digital regulation is coming, sooner or later
Visualization of Internet routing paths.
—Graphic by The Opte Project
SOMERVILLE, Mass.
There are two ways of thinking about political prospects for the years ahead. One is to dwell on the relatively narrow margins of the recent presidential election – 80 million vs. 74 million votes cast, 306-232 in the Electoral College – and fear gridlock. The other is to look at America’s history of dealing with its problems and expect a series of further adjustments to be made, patterned on what’s been done before.
Take the problem of industrial concentration.
The government’s last big antitrust action came at the very dawn of the digital age: an unlawful monopolization charge under the Sherman Antitrust Act in the aftermath of the browser wars for having “smothered” a rival start-up, Netscape. The government won the case; and federal Judge Thomas Penfield Jackson ordered that Microsoft be split in two, one company selling operating systems, the other applications. The D.C. Court of Appeals overturned Jackson’s rulings and accused him of unethical conduct. The George W. Bush administration’s Justice Department announced that it would no longer seek to break up the company.
What has changed since then? Plenty. The shares of five large companies – Apple, Google, Microsoft, Facebook and Amazon make up nearly a quarter of the S&P 500 index, as EconoFact noted last week, in the course of surveying the legal landscape. The Justice Department and 11 states have sued Google, charging the company with abuse of its power.
The belief is growing that, whatever the conveniences of the Internet giants, there’s something about the structure of digital markets that means that they cannot be expected to self-correct. The most thoughtful proposal for government intervention I’ve seen is one prepared for a Report on Digital Platforms, commissioned by the Stigler Center for the Study of the Economy and the State at the University of Chicago’s Graduate School of Business.
There’s justice in this, it should be said. George Stigler was a pillar of the third Chicago School (1945–2014), a Nobel laureate, known for his decades-long rear-guard action against 20th Century ideas about market power. “It is virtually impossible to eliminate competition in economic life,” he wrote in his autobiography. Stigler died in 1991, the same year that the Internet was commercialized.
Fiona Scott Morton, of Yale University, chaired the study’s antitrust subcommittee. She served as Deputy Assistant Secretary for Economics in the Antitrust Division of the Justice Department in the Obama Administration.
At a conference in Chicago last year, Scott Morton presented the subcommittee’s 90-page findings in short, to-the-point remarks. Digital markets are quite different from most goods markets, she said. They are two-sided markets, serving at least two distinct user groups (readers or listeners and advertisers, for example), providing network effects to each. Economies of scale, of scope, and increasing returns to the possession of user data mean that such markets often “tip” at a certain point. The less successful drop out or are acquired and the winner takes all. Competition thus is often only for the market, not in it, Scott Morton said.
Three panelists discussed the report. Activist Matt Stoller, proprietor of the antitrust Web site Big, described a “world on fire,” and complained the recommendations lacked urgency. Ariel Eztrachi, of Oxford University, a member of the subcommittee, agreed. “No action is no longer an option. If we play for too long, we might find ourselves in a very different reality.” But Randal Picker, of the University of Chicago Law School, offered a jolt of the old-time religion.
When I took price theory from Gary Becker many years ago, Gary made clear that I needed to know two things to do economics. People optimize subject to constraints, and markets clear. That was all I really needed to know, and if I confronted a problem and thought I needed something more than that, I probably wasn’t thinking hard enough.
The subcommittee proposed two policy measures. A specialist competition court should be established to hear all private and public antitrust cases. That would allow judges to develop expertise in an area in which both behavioral and organizational economics have changed a great deal in the last 30 years.
A regulatory agency, a digital authority, should be created as well. Antitrust works well when agencies are quick to act and courts enforce the law well, said Scott Morton. “But even in the best world that’s not a complete solution. You need a partner to create a competitive environment.”
New technologies have traditionally brought into existence new regulatory agencies to help structure the new markets they created. The Interstate Commerce Commission was established to deal with the railroads (and later trucking). The Federal Communications Commission followed the radio industry into existence, and later came to oversee all kinds of communication. The Securities and Exchange Commission arrived not long after chicanery in the 1920s marred the beginnings of the democratization of finance.
Why not, then, enact a Digital Competition Commission, to provide a foil to the still-robust Sherman Antitrust Act? A new era of trust-busting may be in the offing. Digital regulation is coming, sooner or later, the subcommittee was saying. Why not start now?
David Warsh, an economic historian and a veteran columnist, is proprietor of Somerville-based economicprincipals.com, where this column first appeared.