By Tirzah Duren, American Consumer Institute
The current tradition of enforcement practice is based on a reliance on economic analysis through the lens of the consumer welfare standard (CWS). What this combination achieved was to emphasize evidence-based enforcement which was limited to practices that resulted in consumer harm. Recent actions by the Federal Trade Commission (FTC) and legislators represent a movement away from this tradition and towards an emphasis on a firm’s size to determine legality. Ultimately, consumers are at risk under this new perspective as the size of a firm is often what enables and creates value.
From legislation to agency actions that are increasingly skeptical of mergers, it is clear that size is being used as a basis for antitrust efforts at the federal level. Moving towards an emphasis on size and a “big is bad” mentality necessitates a movement away from the CWS, because size is often, but not always, the mechanism that brings about consumer benefits.
Last year, the American Consumer Institute released a report demonstrating how large firms are able to use economies of scale to maximize consumer benefits, not least of which occurs through lower prices. Scale can be achieved through mergers and acquisitions, such as when Google acquired Android and developed an operating system to become a significant competitor of Apple. Scale can also be achieved by owning more than one step in a supply chain.
In a process referred to as the elimination of double marginalization, companies save by owning multiple steps in a supply chain and avoiding markups from other firms that would occur when the supply chain isn’t in-house. The savings from each step lower costs, which can be passed on to consumers. These effects have all been well studied in economic literature and demonstrate that a firm’s size is not necessarily an indicator of consumer benefit or competitiveness.
While economies of scale result in tangible savings for consumers, network effects contribute to the addition of intangible value. This concept is especially visible in social networks where the value is influenced by the number of users and content creators. In instances like Facebook, the number of individuals a user can connect with increases the platform’s value. TikTok also derives value from users, especially content creators who increase the number of videos available to users.
This concept is especially relevant to the digital economy. From features like iMessage that rely on the use of an Apple operating system, to video conferencing platforms, many digital services rely on a substantial number of users for the full value to be realized. This was true even early in the technological revolution. According to a study that analyzed early versions of video cassette recorders, while Sony had a beta version of VHS and a first-mover advantage, they ultimately lost out due to a lack of network effects and the dominant adoption of the VHS.
The VHS benefited from wide adoption and as a result the addition of more titles within the specific format. Consumers benefited due to the lower prices of VHS which were about $60 less than Sony. In cases where network effects matter for long-term success profit maximization may give way to prioritizing wide adoption through lower prices, especially early on.
For many products and industries, the size of the company is where the value lies. Whether this materializes in the form of price reductions due to increased efficiency or network effects that make the product more valuable, consumers often win as size increases. An antitrust enforcement regime that is unjustifiably focused on size ignores many of these consumer benefits.
Tirzah Duren is the director of technology policy at the American Consumer Institute, a nonprofit educational and research organization. You can follow her on Twitter @ConsumerPal.