Changing competition law threatens California’s innovation ecosystem, USC Professor warns
Next month, the California Law Revision Commission will begin holding a series of meetings to explore potential changes to antitrust laws. Ahead of these meetings, University of Southern California law professor and antitrust expert Jonathan Barnett submitted a report on the concerning European approach to competition and the devastating effect a similar approach would have on California—the economy that gave us computers, smartphones, and artificial intelligence.
1. “Ex-ante” frameworks prohibit conduct without any showing of harm—leading to results that inhibit competition rather than promote it
2. “Big is bad” assumptions target businesses based on size rather than their market power or conduct—distorting competition by picking winners and losers
3. Overregulation will bog down business operations with extensive compliance rules, reporting requirements, and audits
“Ex-ante” frameworks prohibit conduct without any showing of harm—leading to results that inhibit competition rather than promote it
The U.S.’s current “ex-post” framework acknowledges that most antitrust cases require careful, fact-specific analysis and increases the probability of appropriate action.
— Whether a business practice fosters or hampers competition overall can depend on many factors. In the absence of agreements among competitors to raise prices, there is always the risk of making a decision on erroneous findings.
— “The U.S. tradition of [ex-post] antitrust adjudication relies on fact-intensive analysis tailored to market conditions rather than blanket condemnation of certain practices,” Barnett writes in his report.
— The ex-post approach makes a decision on legality only after the facts of each case are available and a judge can weigh the positive and negative effects of the practice—a process known as the “rule of reason.”
— This approach is structured to ensure that unclear evidence or incorrect assumptions do not lead to inappropriate antitrust actions that harm competition and consumers.
In contrast to existing U.S. law, ex-ante prohibitions are riskier and rely on speculation about harms.
— While existing federal and California law commits to reviewing business practices once facts are available, ex-ante frameworks sweepingly outlaw business practices solely on the basis that regulators believe they will be anti-competitive.
— The ex-ante approach is more liable to banning practices too broadly, to the ultimate detriment of competition. It “could end up prohibiting procompetitive conduct when applied in the wrong context,” Evalusion’s Kay Jebelli warns. This could be disastrous for an economy that relies on competition to drive innovations and product creation.
“Big is bad” assumptions target businesses based on size rather than their market power or conduct—distorting competition by picking winners and losers
The “big is bad” approach focuses on size at the particular expense of consumers, because it does not allow for the time and research necessary to understand how a practice affects consumers.
— The “big is bad” assumption “targets certain practices undertaken by the largest firms without a thorough assessment of the complete range of anticompetitive and procompetitive effects reasonably attributable to any contested business practice,” Barnett explains.
— A thorough assessment is especially important to understand how business practices affect prices, product variety, quality, and product availability—all of the most important consumer-welfare metrics.
— This is why the U.S.’s established rule of reason framework is better structured to support consumers’ interests. It “avoids a rush to judgment that may erroneously condemn practices that confer gains on consumers in the form of lower prices, higher quality, or new functionalities,” according to Barnett.
By focusing on size, the “big is bad” approach also risks engineering downright anticompetitive results.
— “Big” is not just another way of saying anticompetitive, and antitrust laws that assume otherwise are making a grave error. Economic research has found “no consistent relationship between large firm size, high concentration levels, and market competitiveness,” Barnett writes.
— “Big is bad” regulation could target size in a competitive industry and lead to outcomes that harm markets and consumers. “The regulation of competitive industries has anticompetitive effects: with less entry comes less innovation and higher prices,” Mario Zuniga of the International Center for Law and Economics writes.
Overregulation will bog down business operations with extensive compliance rules, reporting requirements, and audits
Extensive prohibitions like those outlined in Europe would remove courts as the enforcer of antitrust laws and require a costly permanent agency.
— Companies would have to focus on compliance first, and production and innovation second—a system that would impede success and completely go against the Californian and American tech ecosystem.
— “This type of ‘top-down’ governance structure, which requires firms to continuously seek guidance, clearance, and waivers from a regulatory agency, is difficult to reconcile with the ‘bottom-up’ entrepreneurial environment that characterizes innovation in technology markets and, especially, the fast-moving dynamics that have characterized California’s innovation economy in particular,” Barnett concludes.