Antitrust Policy Is Contradicted By Patent Laws

The FTC opened a broad antitrust campaign against leading high tech companies, aiming to curb their power and thwart their expansion. Although the market power of these firms is derived from their monopoly over powerful technologies, the FTC cannot attack this power directly because it is legal and strongly supported by policies to promote economic growth. In particular, high tech firms own patents and other intellectual property rights that protect their monopoly power. This creates a contradiction between laws to promote growth and antitrust, which explains the numerous failures of the justice department at least since 1911 to suppress technology based market power by using antitrust law. Would the FTC succeed where it failed in the past?

Current antitrust policy is based on the Sherman Antitrust Act that aims to prevent the restraint of trade by people who conspire to monopolize a market. In practice, the policy is designed to ensure free entry of potential competitors into any market. I explain below that firms with technological market power extract excess profits while allowing free entry of competitors, as required by law. This demonstrates that current law is insufficient and, to be effective, antitrust laws must be reformed! 

Innovations have been spectacularly successful in raising living standards. However, they also create legal monopoly power of innovators over their privately owned technologies. Using this advantage, firms consolidate and expand their market power by using diverse strategies such as technology updates, multilayered patents, acquisitions of competitors, etc. In my book it is defined as the market power of technology. Current law assumes, and most economists believe, that competition restrains market power. I show that competition does not eliminate the market power of technology because technological competition results mostly in one winner (although sometimes two or three firms survive) that invents the best technology. Over time, technology leaders strengthen financially and innovating competitors prefer certain wealth from being acquired by a strong adversary, rather than go to war with it. This makes the market power of technology durable.

Firms with technological market power operate mostly in markets that enable free entry of competitors. Consider the example of Apple Inc. who does not monopolize the market for smartphone. The number of iPhone units sold in 2021 accounted for only 14% of world unit smartphone sold, but Apple’s iPhone sale value amounts to almost 60% of total value of smartphone world sales. Apple’s iPhone popularity enables the firm to price it well over cost, generating large but legal monopoly profits. They are legal because the market for smartphones is free: anyone can enter the market by inventing a new smartphone but without using Apple’s technology. Antitrust laws and decisions of the US Supreme Court permit monopoly profits of an innovation because the law does not view them as the result of a conspiracy to restrain trade.

As a result of the conflict between antitrust and innovation policies, the FTC can bring suit only against the way firms conduct their business, not against their actual monopoly power. Microsoft’s Xbox is a gaming console with only 13% of the market for consoles in 2022. It has even a smaller market share of games, and it wants to increase its library of games. Activission Blizzard owns a library of games used by gamers on all platforms, including platforms of firms like Sony and Nintendo. The FTC opposes Microsoft acquisition of Activission for $68 billion on the grounds that Microsoft will prevent gamers from using Activission’s games on competing platforms. This, in spite of Microsoft’s announcement that for ten years the desired Activission games would be available for all platforms. Note that the market for new games is free for anyone to develop substitutes for the Activission games. 

As to Google, the FTC has filed five suits against the way the firm conducts business. For example, the 2020 suit opposes Google’s payments to firms like Apple and Samsung for selecting Google’s search engine as the default app. The January 2023 suit charges Google with monopolistic practice in on-line advertising markets not because of Google’s superior search engine but because of its control of high-tech tools used by advertisers and brokers to facilitate on-line advertising. 

Without predicting the outcome of these litigations, in my view the FTC does not have the tools to achieve a real breakthrough in curbing big tech market power of technology. The best the FTC is likely to achieve are some agreed upon changes in business practices of the firms. 

A policy to curb market power is socially desirable but requires the expansion of current laws to explicitly limit such power. The law should prohibit many of the strategies used by firms to expand their market power. For example, it should place strict limits on the acquisitions of competitors’ technologies. Pyramids of interrelated patents should be restrained; they extend the duration of market power far beyond the intent of patent law. The law should also prevent firms from suppressing competitive and superior technologies. A fourth example is the significant upgrading of the standards for patent approval and reducing the number of patents issued. In addition, patent laws should be reformed so that a secondary patent, which depends on a primary patent, be approved for only half the duration of a primary patent. For details please see Chapter 9 of my book.

Innovators need to be compensated but competition and free choice need to be preserved as well. This dual objective imply that a good policy must be a balancing act. This means that for the FTC to be effective, a revised antitrust law must be expanded to be consistent with a reformed patent law.

Written by Mordecai Kurz, author of The Market Power of Technology, Understanding the Second Gilded Age, published by Columbia University Press, 2023.

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