Competition law, or antitrust policy as it’s known in the US, exists for the purpose of preventing companies from abusing their power at the expense of consumers. It generally is supposed to act in the interest of the public, and so often has the primary aim of protecting the consumer.
For a simple example, consider the hypothetical case where Tesco, Sainsbury’s, Asda and Morrisons all agreed to raise the price they charge for milk. Since the U.K. consumer would have limited other options for buying milk, they’d be forced to pay the higher price. This would be considered a cartel and is always banned by competition law. To compete for your custom, the supermarkets then end up reducing the price they charge for milk, settling close to the lowest possible price they can charge without making the sale of milk unprofitable. We shouldn’t mind them making a profit, because otherwise we’d have nowhere to get our milk.
A second example is where two or more of the above supermarkets try to merge as one company. The effect is like a cartel, i.e. if the big four supermarkets were in fact one company, then they could choose to raise their price of milk. Competition regulators scrutinise any application for a merger, especially if the industry is already highly concentrated. Regulators blocked the purchase of Asda by Sainsbury’s in 2019 on the basis that it might raise prices and reduce consumer choice.
Competition law aims to reduce or prevent monopoly (where one firm controls and industry) or oligopoly (where only a few firms control the industry) power. There’s broad support for such regulation, because monopolies of the past have typically been inflationary. That is, a monopoly would typically raise prices to maximise profit once it controls the industry. Preventing (inflationary) monopoly power is therefore consistent with protecting consumers and acting in the public interest.
Where the subject gets a bit more interesting, however, is where monopolies are in fact deflationary. What if a monopoly used its power to lower prices and increase choice for the consumer? Would breaking up the monopoly still be in the best interest of the consumer? Take, for example, Amazon. The company has become one of the most valuable in the world, having dominated online commerce, decimated local high street businesses, and even threatened the traditional behemoths of retailing such as Walmart. But, with all its faults, Amazon has consistently been able to offer its customers lower prices than they’d get elsewhere, with more choice, and the convenience of doing it from home. Amazon is a deflationary monopoly, and while it has damaged other businesses, it has typically helped the consumer.
Competition law is not explicitly mandated to protect businesses. Economic progress depends on creative destruction and society has been consistently better off over the centuries because of it. Creative destruction is the by-product of innovation, which is unequivocally good for society. Where competition law must step in, however, is if a monopoly – inflationary or deflationary – is stifling innovation. If a company is the only one in its industry, then why should it bother innovating? Competition law usually tries to step in before the monopoly has taken hold of the industry, to prevent innovation from being stifled in the first place.
Which brings us to even more special kind of deflationary monopoly, and one which is in the news now. Technology monopolies are innovative monopolies. They are deflationary because technology is deflationary (your new giant 3D smart TV was cheaper than the little grey analog box you bought 20 years ago) and they are innovative because that’s what technology does. So, competition law doesn’t have a leg to stand on, right? Well, perhaps by current legal precedent, which is what makes today’s antitrust cases against Facebook, Amazon, Apple, Google, and others so interesting. These companies – and others – have at least partial monopoly power over not just the commercial industries they operate in or the products they sell to consumers, but over trillions of bits of data, that they can use to monetise any number of other commercial initiatives. Data is extremely valuable to them and it is what makes them powerful. While traditional causes for competition regulation intervention may be absent, these companies’ control over the world’s data is clearly a concern, which is why we’re seeing the authorities step in to – as they are mandated to – protect the consumer and act in the interest of the public.
This is a topic we’re likely to post about as the year goes on, so stay tuned.
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