Jamison Says Tech Competition Policy Needs Overhaul to Factor in Rapid Change

Jamison said the government's approach to assessing market power is to first define the "market" and then "power," but he suggested DOJ transaction guidelines are out of date. "What if markets are rapidly changing so that defining one is illusive?" he asked. "And what if what appears to be power is fleeting or is actually earned by a company simply doing a great job for customers? It’s time to look for a new approach.”

The traditional approach doesn't capture the "relationship between market structure and market performance, and generally omits consideration of multisided platforms," Jamison wrote, crediting a piece by another AEI visiting fellow, Bronwyn Howell. Jamison said the approach also can't keep up with fast-changing markets. "Remember that thing called 'long distance telephone service'?" Jamison wrote. "In the year 2000, the DOJ stopped the proposed merger of MCI and Sprint, claiming it ‘would result in higher prices for millions of consumers and businesses’ and would threaten ‘to undermine the competitive gains achieved’ by past DOJ actions. Within a few years, long distance as a distinct service was effectively no more. (Full disclosure: I was employed at Sprint from 1993 to 1996.)”

He also cited regulatory concerns about AOL Instant Messenger that led to FCC conditions on AOL's deal with Time Warner in 2001. "The regulators believed that AOL was dominant in messaging and that this dominance would continue through future generations of the service," Jamison wrote. "Not only did AOL completely lose instant messaging, the merged company proved so weak that it broke up ten years later.”

Jamison said the problems were in part a result of the need to define the market. "In today’s fast moving tech industry, data and analyses decay quickly, making yesterday’s market data largely irrelevant for making decisions about tomorrow," he wrote. "It is time for economics to return to its fundamentals. Market boundaries and market outcomes result from basic conditions and people’s decisions. In tech, by the time we observe the boundaries and outcomes, they are no longer relevant, and we should therefore rely instead on analyses of the basic conditions and decisions.”

The basic conditions producing market power are "an under-researched area of economics," Jamison wrote. "Fortunately, two of the founders of modern economics -- Adam Smith and John Stuart Mill -- addressed what creates monopolies," Jamison wrote. "They point to collusive agreements, control of essential resources, and government-imposed restrictions on competition as the chief culprits. So competition analysis could focus on those. More recently, William Baumol addressed what creates economies of scale. Professor Baumol explained that these economies result from the presence of a production input that is both costly to acquire (in relative terms) and necessary for the service and that, once acquired, is nearly costless to use for multiple services and quantities of sales. So for economies of scale to matter for market power in a dynamic industry, such an input must exist and must be essential for multiple generations of services.”

Large market shares are likely "earned and shouldn't be considered market failure," unless they result from one of the factors described above, Jamison wrote. "For example, Google’s Android operating system is on nearly 90 percent of smartphones worldwide because of the high value and low cost it offers device manufacturers and consumers. Should the presence of such value be considered a market failure? Also, providing the system makes sense for Google in part because it allows Google to provide more apps. Some might view this vertical relationship with concern, but would customers really be better off if tech companies viewed each product in isolation and, in doing so, took a pass on investing to create synergies across products? (Full disclosure: I consulted for Google in 2012.)”