In a court filing on October 9, 2024, the US Department of Justice (DOJ) let it be known that it was considering a break-up of Alphabet, with the addendum that it would also be pushing for the company to share the data it collects across its multiple platforms with competitors. There is many a slip between the cup and the lip, and it is entirely possible that these are threats designed to extract more concessions from the company, but the break-up talk is a continuation of a debate about the power accumulated by big tech companies, in general, and with Microsoft, Amazon, Apple, Alphabet and Meta, in particular, and what should be done about that power. With politicians, economists and lawyers all in the mix, offering widely divergent solutions, I look at the evolution of anti-trust law in the United States, and whether that law can or should be used to counter big tech. In doing so, I will start with the disclosure that I am not a lawyer, and have no desire to be one, but the problem, in this case, may be that there are too many lawyers involved, and too little business sense.
The Law in Spirit and Letter
In the latter part of the nineteenth century, as the United States was transitioning from an emerging market to a global economic power, its growth was powered by three industries – steel, railroads and oil – all requiring large investments in infrastructure. In each one of these businesses, powerful men earned their “robber baron” standing by squashing competition and building dominant companies that aspired for pricing power. In oil, it was John D. Rockefeller, who started Standard Oil and built a sprawling empire across the nation, acquiring other players in the still nascent oil business. With Carnegie Steel as his vehicle, Andrew Carnegie took control of the growing steel market, before selling his business to J.P. Morgan, who took it public as US Steel. In railroads, a network of tycoons controlled swathes of the country, with Cornelius Vanderbilt, Jay Gold and Leland Stanford all playing starring roles, as heroes and villains. Along the way, they created the trust structure, organizations of companies which controlled production and prices, effectively monopolizing the businesses .
As these companies laid waste to competition, exploited labor and overcharged customers, a political and economic backlash ensued, manifesting in the Sherman Anti-trust Act of 1890 and the election of a Teddy Roosevelt, campaigning as a trust buster. The Sherman Act used the constitutional power of Congress to regulate interstate commerce to authorize the federal government to break up the trusts and “restore competition”, with the latter words vaguely defined. While the law outlawed “every contract, combination, or conspiracy in restraint of trade,” and any “monopolization, attempted monopolization, or conspiracy or combination to monopolize”, the Supreme Court added the constraint that the law only forbade competitive restraints that were “unreasonable”. That vagueness initially worked against the government, in its enforcement of the act, with the Supreme Court ruling against it in its attempt to break down the American Sugar Refining Company, in 1896, but the kinks were worked out in the next decade. In 1911, President Taft used the act to break up Standard Oil into multiple oil businesses, and the entrails of that breakup can be found in many of the largest oil companies of today.
In 1914, Congress passed the Clayton Act to clarify and augment the Sherman Act, and expanded its reach to cover a whole host of activities that it classified as anti-competitive, including some mergers, predatory pricing and sales ties. It also barred individuals from sitting on boards of competing companies and created the Federal Trade Commission (FTC) as an institution to provide the specifics on what constitutes unfair competition and to work with the Department of Justice, to enforce these rules. In subsequent years, Congress returned to add provisions and modify the act, including the Robinson-Patman Act in 1936, which reinforced the laws against price discrimination, the Celler-Kefauver Act of 1950, which filled in gaps on the merger provisions, and the Hart-Scott-Rodino Act of 1976, which introduced the need for any company planning an acquisition that exceeded a transaction value threshold (reset at regular intervals) to file a pre-merger notification with the Justice Department and to wait at least thirty days before consummating the acquisition.
Enforcement Ebbs and Flows
The effectiveness of laws at dealing with the problems that they purport to solve depends in large part on how they are enforced. In fact, one reason that the Clayton Act created the Federal Trade Commission in 1914 was to enforce the anti-trust laws, and the FTC states its mission as protecting “the public from deceptive or unfair business practices and from unfair methods of competition through law enforcement, advocacy, research and education.” In carrying out this mission, the FTC often relies on the Department of Justice (DOJ), where an antitrust division was created specifically for this purpose, in 1919.
Through the history of anti-trust laws in the United States, the enforcement has ebbed and flowed, partly as a result of changing administrations bringing in very different idealogical perspectives on its need, partly in response to Court judgments in its favor or against it, but mostly because of questions about whether the central objective of the laws is to enhance competition or to protect consumers. The divide between enhanced competition and consumers played out in competing viewpoints, with one school, led by Robert Bork, arguing that the original intent of the law is consumer protection, and the other pushing back that the end game of the law is to stop cartels and monopolies, i.e., enhancing competition. That tension continues to underlie much of the debate of the law today, in both political and economic circles, and will come into play if the DOJ pushes ahead trying for a big tech breakup.
It is undeniable that for most of the last few decades, the consumer protection argument has resonated more strongly with courts, and has played out as a restraint on what actions the FTC can take, and how far it can go in its enforcement of antitrust law. It is this context that Joe Biden’s choice of Lina Khan as the youngest person to head the FTC was viewed a signal of change in focus, since Ms. Khan’s most well-read treatise, Amazon’s Antitrust Paradox, written while she was still a student at Yale, argued that the company’s increasing power was hurting both competitors and consumers. In that paper, she posited that platform-based companies prioritized growth over profits, using their platform size to decimate competition, and that antitrust laws would have to be retooled to rein in these companies. The central part of her argument is that while Amazon’s consumers benefit in the short term, because of lower prices and better service, they would lose out in the long term because less competition leads to less innovation and fewer choices. While her appointment led many to expect a sea change in antitrust enforcement, the effects have been modest, at least in terms of activity:
That graph, though, does obscure the fact that the government has been more aggressive about challenging high profile mergers, and publicly proclaiming its intent to do so, in others. The results have been mixed, with wins in a few cases coming with losses in several others, with the failure to stop Microsoft’s acquisition of Activision representing one of it s highest profile losses. In short, while Ms. Khan’s argument for use of antitrust laws to restrain platforms may have found a receptive audience among some legal thinkers and politicians, it has not won over the courts (at least as of now).
The Remedies: Sticks and Stones!
No matter where you fall on the consumer versus competitor protection debate, the remedies available to the government fall into three groups, ranging from its power to stop (require) activity that it believes will stymie (advance) competition to breaking up companies, with the possibility, albeit rarely used, of allowing a company to establish monopoly power, but with pricing power restraints.
1. Operating restraints and changes
The anti-trust laws give the government the power to affect how a company operates by stopping it from acting (by acquiring another company, introducing a new product or entering a new market) or changing its behavior (in terms of pricing it products and operating its business), in the interests of increased competitiveness. In doing so, though, the courts require the government to make the case that the actions that it is stopping or the behavior it is altering are unreasonable and that it meets the “rule-of-reason” threshold, i.e., that there are anticompetitive effects that exceed any pro-competitive effects.
a. Merger Challenges
Corporate mergers in the United States, where the transaction value exceeded $111.3 million in 2023, required the acquiring company to file a pre-merger notification with the Justice department, with consummation of the merger happening only after approval. In its most recent update to requirements on pre-merger notifications, the DOJ expanded its information disclosure requirements to include transaction-related documents from deal teams and more complete information about both the products and services offered by the companies, as well as about corporate governance. As we noted in the last section, the degree to which the government uses it power to challenge mergers has waxed and waned over time, and even if challenged, the last word rests with the courts. In a report that it is required to file under the Hart-Scott-Rodino Act for the 2023 fiscal year, the DOJ listed out the number of merger challenges for the year (16), breaking them down into wins (1), consent agreements (4), ongoing litigation (1) and abandonments/restructured complaints (10). The report also lists out the industries that were targeted the most, in terms of merger challenges:
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| Hart-Scott-Rodino Annual Report for 2023 (DOJ) |
Again, note that notwithstanding Ms. Khan’s high profile thesis on the need for antitrust enforcement against technology companies, the bulk of the challenges have been directed at more traditional businesses.
b. Operating Changes
In some settlements, the government extracts concessions from a targeted company that it believes will improve the competitive standing of the business. These can range the spectrum, and I will use some of the 2023 settlements to illustrate:
- Forced divestitures: As part of a settlement allowing a proposed merger of Vistra Corporation to acquire nuclear plants owned by Energy Harbor Corporation, where the FTC raised concerns about less competition and higher energy prices for consumers, Vistra agreed to divest its power plant in Ohio. In its challenge of Intercontinental Exchange’s acquisition of Black Knight, it required Blue Knight to divest some of its businesses, as a condition for the merger to go through.
- Product bundling/Pricing: As a condition for allowing Amgen to move forward on its acquisition of Horizon Therapeutics, where the FTC feared that Amgen would use its large drug portfolio to pressure pharmacies to push Horizon’s two monopoly products, the FTC secured a consent order where Amgen agreed not to condition any of its product pricing or rebates on whether Horizon drugs were prescribed.
- Corporate governance: In EQT’s acquisition of Quantum, the FTC’s concern was that as these companies were direct competitors, giving EQT a seat on the board and a large shareholding in Quantum would reduce competition. Consequently, EQT was forced to divest its EQT shares and was prohibited from having a board seat.
In most of these cases, the government used the threat of more extreme punishment to extract concessions from the targeted companies.
c. Pricing Oversight
If it is price fixing by a company that has drawn the attention of the antitrust enforcers, it is possible that the remedies sought will reflect changes in the way a company prices its products and services. In 1996, Archer Daniels Midland (ADM) pleaded guilty to fixing prices for Lysine, an animal feed, in collaboration with Japanese and Korean companies. The company, in addition to paying a large fine and having top executives face jail time, was also required to change its pricing processes. In 2024, the FTC published a warning that the use of algorithms by multiple competitors in the same business, to set prices, can violate antitrust laws, and sued RealPage, a property management software, for allegedly allowing landlords to use its algorithms to drive up rental prices. As AI makes algorithmic pricing more of a norm in other businesses, the FTC will undoubtedly be challenging more businesses on pricing practices.
2. Break ups
The most extreme action that the DOJ can take against a company in response to what it views as anti-competitive behavior is to break up the company. Since their effects on the company in question are so wrenching, they are rarely pursued and even more rarely court-approved, but when they do occur, they are memorable. Here are three that stand out:
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The Standard Oil break up, in 1911, was not just the first big break up in history, but given that it targeted what was then one of the largest companies in the United States, it had major consequences. At the time of the breakup, Standard Oil effectively controlled the entire oil business and it was forced to break itself up into thirty four companies:
The eight major companies that emerged from that breakup have morphed over time, and remain dominant players in the oil business, albeit in modified form.
- The other big breakup of the twentieth century happened closer to the end, when AT&T, then the monopoly phone company in the United States, was broken up into a long distance company (AT&T) and seven baby Bells, based upon geography:
A few decades later, the business has not only changed dramatically, but it has reconsolidated itself into four ventures, with AT&T and Verizon remaining the biggest players.
- The third breakup, albeit one that did not go through, targeted Microsoft in 2000, where the DOJ sought to break up the company, separating its operating system (Windows) from its application software and browsing businesses (Office and Internet Explorer). The courts initially found in the government’s favor, but that ruling was subsequently set aside. Eventually, the company settled, agreeing to share some of its application programming interface with third-party company, but avoided major restructuring.
While each of these breakup (including the potential Microsoft one), got significant attention at the time that they happened, the net effects on competition, consumers and the companies themselves are still being debated, and we will return to examine the trade offs in the next section.
3. Regulated Monopolies
The phone business was still in its nascency, when the Willis Graham Act was passed in 1921, arguing that “