Controlling Platform Monopoly without Excessive Harm

Herbert Hovenkamp - University of Pennsylvania Carey School of Law and The Wharton School

-- This post summarizes the main argument of my forthcoming article, “Antitrust and Platform Monopoly,” 130 Yale Law Journal (2020). Today people from many political perspectives believe that something must be done about the large internet platform companies. They are too big and have become too powerful. Writers from both the right and the left describe them as “winner take all,” or natural monopoly, markets. A natural monopoly market has room for only one firm at a time. For those on the right this means that antitrust can do little and breakups will not work. Breaking up natural monopoly markets inevitably leads to collusion or bankruptcy, and eventually a new monopolist will emerge anyway. Those on the left accept the same premise but argue that the platforms should be regulated as public utilities.

The closer one looks at digital platforms, however, the less they resemble natural monopolies. If they are not, then they can sustain their dominant positions only by engaging in anticompetitive practices and antitrust has a role. The history of dominant firms is that they come into being and fade, sometimes over a period of several decades but sometimes much more quickly. Kodak held a dominant position in amateur photography for eighty years, but then declined and went bankrupt. It had become overly committed to film and was not nimble enough to make the transition to digital. IBM and Xerox survived, but they also lost their monopoly positions as a result of technological change. The life of platforms has been even briefer. Not long ago the dominant search engine was AltaVista and the dominant social networking site was MySpace. A prominent commentator wondered in 2007 whether MySpace would ever lose its monopoly. Today the clear market leader is Facebook, and MySpace is no longer among the top fifteen social networking sites.

An important reason why large digital platforms are not natural monopolies is product differentiation, which means that different firms appeal to different customers. Kodak and IBM lost their dominant positions because of new technologies. Google was able to emerge in the shadow of Microsoft, not because it merely did the same thing, but because its technologies were less focused on the desktop and more on the internet and, eventually, the cloud. When the product is identical, all customers flock to the single source offering the lowest price. Under product differentiation, however, there can always be groups of customers who prefer one firm’s offerings over those of another. As a result, competing but differentiated platforms can co-exist indefinitely.

Assuming a dominant firm and an antitrust violation are found, what should the remedy be? Even if a platform is not a natural monopoly but does experience significant economies of scale, a breakup will be socially costly. In the past, structural relief of this type has led to lower output and higher prices or business firm failure, benefitting no one.

A better way to deal with platform monopoly is to break up ownership and management rather than assets. This requires giving management control to firms who have outside business interests, such as the merchants who sell through Amazon or the advertisers who do business with Facebook or Google. Leaving the platforms intact as production entities but making ownership more competitive can actually increase output. The history of antitrust law is full of firms, including the Chicago Board of Trade, the NCAA, the NFL, and numerous real estate boards that are organized as single entities but that also function as combinations of multiple firms. When a firm is run by managers who are also outside competitors then antitrust law treats them as joint ventures or cartels. This makes close antitrust scrutiny of these platforms possible by encouraging greater competition within the platform, rather than between the platform and other firms.

Such a remedy will not appeal to people who think that pursuing bigness per se should be the goal of antitrust law. It will, however, produce greater output and greater benefits for consumers, labor, and the many smaller firms who do business with the platforms.

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