Breaking up monopolies draws populist cheer from some antitrust advocates, but that approach could cause more harm than good in the case of digital enterprises, according to Herbert Hovenkamp, Wharton professor of legal studies and business ethics, and professor of law at the University of Pennsylvania’s Carey Law School. A more flexible option to curb anticompetitive practices is to use injunctions, which “opens the path for more competitive choices,” he said.

Regulating Big Tech from an antitrust standpoint can be complicated and the nature of the business does not easily allow clarity on the underlying issues, Hovenkamp said recently on the Wharton Business Daily radio show that airs on SiriusXM. (Listen to the podcast.) It is best for regulators to take a cautious approach and avoid taking strong actions on markets they don’t understand well, he advised in a recent paper titled “Structural Antitrust Relief Against Digital Platforms.”

“[Big tech companies] have certainly done things that could be challenged as antitrust violations,” Hovenkamp said. “However, I don’t think there’s much warrant for this prolonged, repeated attack on Big Tech, which is using up a very large percentage of agency enforcement revenue.” Furthermore, there is “no real evidence of naked antitrust violations” among those companies such as fixing prices, he continued. They tend to focus more on “vertical agreements” such as mergers, he added.

Hovenkamp’s comments are set against the backdrop of recent government actions targeted at Amazon, Google, Facebook, and Microsoft that accuse them of violating antitrust laws. Hovenkamp is the pre-eminent authority on the subject. The New York Times in 2011 noted that many consider him to be “the dean of American antitrust law.” He also co-authored the landmark 21-volume Antitrust Law, which has been cited more than 50 times by the Supreme Court and more than 1,000 times by federal courts, according to his Wharton online profile.

Dismantling Modern-day Monopolies

The paper noted that structural remedies — or breakups — for monopolization cases are uncommon under the Sherman Act. (The 1890 Sherman Antitrust Act is the first of the three acts in the U.S. that target unlawful mergers and business practices; the other two are the Federal Trade Commission Act and the Clayton Antitrust Act, both of 1914.) When they do occur, the courts almost always break firms along the boundary lines that had been formed by an earlier combination or merger, the paper added. “Undoing anticompetitive mergers is and should be lawful,” Hovenkamp said.

In finding a remedy for a proven antitrust violation, structural remedies, or breakups, should be considered only as a last resort, according to the paper. “Courts should always look first to injunctions, which can be more effectively targeted at the harm and are likely to do less collateral damage,” Hovenkamp wrote.

For example, a court order “divesting” Amazon of e-books would likely take the form of an injunction prohibiting it from licensing and relicensing e-books, or perhaps placing other contractual limits on its license agreements, the paper noted. If an injunction proves inadequate, the next option is to consider relief such as interoperability decrees, it added. Interoperability can take the form of firms in a market sharing data and operations, intellectual property, or other productive assets.

“I don’t think there’s much warrant for this prolonged, repeated attack on Big Tech, which is using up a very large percentage of agency enforcement revenue.”— Herbert Hovenkamp

Hovenkamp agrees with the Federal Trade Commission’s (FTC) request that Facebook parent Meta divest Instagram, which it acquired in 2012. Spinning off assets acquired by unlawful mergers is categorically different from breaking up firms that were developed through internal expansion, he noted. In the Facebook case, the FTC alleged that the company used illegal means “to crush competition.” It accused Facebook of buying up-and-coming rivals Instagram and WhatsApp to protect its dominance and of luring other would-be competitors with access to its platform and data and then cutting them off when they became threats. Facebook faces similar charges in another suit filed by 48 state attorneys general.

In the case involving Google Search, the FTC took issue with Google paying $26.3 billion in 2021 to companies including Apple and Samsung to make its search engine the default on their devices, The Wall Street Journal reported. In its case against Amazon, the FTC has characterized the company’s online superstores as monopolistic. The Google case will come up for a verdict in May 2024, and for Amazon, a federal judge has set a trial date of October 2026.

Hovenkamp pointed out that Big Tech companies are “highly productive,” have growth rates that are three to four times as large as the growth rates of the overall economy, do “enormous amounts of research,” and are among the largest patent-receiving entities. The paper also cited the innovation spends of firms like Apple, Microsoft, and Amazon.

“We should avoid the effort to try to break up Big Tech, because we have a very poor track record with respect to breakups,” Hovenkamp said. For instance, a breakup is an unwise antitrust remedy if it ends up transferring a monopoly to another company. “Should the remedy in the Google search case be to force Google to transfer [its] search [capabilities] to another buyer?” he asked. “Unless we can predict some other kind of pro-competitive consequence down the road, it really doesn’t make any sense to simply transfer a dominant product like a search engine and break it up.”

That aside, “there’s no good way to come up with an engineering mechanism for breaking up Google search or Facebook,” Hovenkamp continued. “The only thing any one of those remedies does is make Facebook less valuable. It will hurt users. It will hurt investors, stockholders, and employees. But it won’t do any good in terms of making that particular set of markets more competitive.”

How Antitrust Action Impacts Innovation

The social value of antitrust enforcement shows up on a chart as an inverted “U,” the paper stated. At one extreme, monopolized markets produce less innovation because monopolists lack competitive pressure to do more and tend to become path-dependent on their own existing technology, it explained. At the other extreme, very tiny firms in atomistic markets do not do much innovation either, because they lack the surplus resources. “Most innovation is done in the middle — that is, in moderately concentrated markets with a fairly small number of firms,” the paper noted.

Antitrust enforcement has a roughly similar profile, the paper continued. “If antitrust’s goal is competitive rates of output and prices, then the optimum level of enforcement is somewhere in the middle,” it stated. “Too little antitrust leaves too much monopoly unchallenged, and gives us unreasonably high prices, low quality or low innovation, and harm to consumers and labor. Too much antitrust yields surprisingly similar results, although perhaps with smaller firms.”

“Unless we can predict some other kind of pro-competitive consequence down the road, it really doesn’t make any sense to simply transfer a dominant product like a search engine and break it up.”— Herbert Hovenkamp

Call for a Balanced Approach

Hovenkamp is not in denial, however, that Big Tech firms may be guilty of anticompetitive activities, in addition to abuses that impinge on privacy, decency, or national security. “But their antitrust violations are nothing in proportion to the vilification that has been aimed at them,” he wrote in the paper.

For sure, antitrust regulators “should keep some pressure on” technology firms, including digital platforms, to ensure that their markets are competitive, Hovenkamp said. “But they need to be more selective about targeting practices that are harder to defend and that have more obviously anti-competitive consequences.”

The paper discussed the complexities in imposing structural antitrust remedies on digital platforms, including challenges in defining terms such as “structure” and “divestiture”; the likely effects on output, prices, innovation, or growth; and the relationship between mergers and innovation. Specifically, it pointed out that digital platforms like Amazon outsource much of their “production” from third parties or operate with licensing agreements.

Also, digital assets are likely to be “nonrivalrous,” and therefore more readily subject to sharing; they also are “characterized by high fixed costs and low variable costs, making both scale economies and network effects significant,” the paper stated. In thinking about remedies, networks should be treated as assets, not as firms, Hovenkamp advised.

The paper also weighed the difficulties in understanding the concept of market power in dealing with a firm like Amazon that has both physical stores (Whole Foods) and e-commerce sales, but does not enjoy monopolies in a large number of the products it vends. “You need to go product by product and consider the range of competitive alternatives and pressures that exist for each product,” Hovenkamp said. “You get very different answers depending on which product you’re looking at.”

The paper cited Google to illustrate why breaking up its alleged monopoly could be counterproductive. “Any attempt to ‘break up’ Google Search would be a scale or operational disaster, even if it were technically feasible. Further, selling a monopoly asset to someone else simply transfers the monopoly, but does nothing to break it up,” the paper stated. “On the other hand, an injunction may not fix the problem if Google has already attained scale that places it out of competitive reach,” it added. The option here for regulators is to find “more creative remedies,” such as compelled sharing of the search database.

How Regulators Must Proceed

“The best course of action is to go slowly, and certainly not to try to break up firms when you don’t really understand what’s going on,” Hovenkamp advised. “Injunctions that stop certain anti-competitive practices have a much better track record in antitrust enforcement than mandatory breakups do, with one exception in the divestiture of recent mergers.”

In a nascent field such as digital platforms, regulators have limited experience in crafting remedies to ensure competitiveness, and “the risks of collateral damage are large,” the paper pointed out. “No one should mount an antitrust challenge without knowing what the harms are and at least some idea about the remedies that will fix them.”

As it happens, the FTC is investing in learning about how new technologies impact competition. On January 25, it launched an inquiry into investments by Microsoft, Amazon, and Google in AI firms OpenAI and Anthropic, The New York Times reported. “Our study will shed light on whether investments and partnerships pursued by dominant companies risk distorting innovation and undermining fair competition,” Lina Khan, the F.T.C. chair, said in a statement.