Warren Shares Plans to Restrict Leading Internet Companies

Senator Elizabeth Warren

Elizabeth Warren wants to try to break three big internet companies, ones she feels have grown too big. They are bigger than she likes, and she wants to try to stop them.

What do Amazon, Google, and Facebook have in common? They are all among the world’s biggest companies of course, and they are all use the internet as the platform to dominate their competition.

They have also all raised the ire of Sen. Elizabeth Warren, who also happens to be a presidential hopeful in 2020 on the Democratic side of the ticket. Sen. Warren is well known for her left-wing leanings, and has participated in or even lead some of the rather odd ideas that this camp has put forth lately, in what we could perhaps call the Punish the Wealthy movement that has managed to earn quite a bit of attention lately.

Warren doesn’t just raise her fists in defiance to those who are fabulously wealthy though, as she has now turned her attention to fabulously successful companies, like Amazon, Google, and Facebook. She wants to try to knock them down a few sizes the same way she wishes she could knock down some very wealthy people.

Warren is already pretty famous for her disdain for big business, so this shouldn’t be a great surprise, and she is also no stranger to rabble-rousing, where those who really don’t understand the issues are encouraged to pick up their pitchforks and join her.

When we examine her rationale for wanting to disrupt these huge internet businesses, we end up coming away with the sense that it boils down to merely wanting to take away some of the means of production that they enjoy and redistribute it to those she deems more worthy, with very little regard to how this power is to be used properly under American law or even within a democratic society.

How Competition Law Is Applied

This is actually a world apart from the proper use of competition law under any reasonable conception of it. There are some gray areas here of course, as there often is with the law, and the Microsoft antitrust case is a good example of where legal scholars may disagree. Judges are certainly not immune from emotion as well, and can also get caught up in the rage against the machine that Warren possesses, but even then, the law does speak to them as well, and cannot just be ignored.

In order to understand how her intentions here take us from the gray area to the far-out, we need at least a basic understanding of competition law, also called anti-trust law even though it extends well beyond abuses caused by trusts.

In a nutshell, competition law seeks to prevent entities from using their power in the marketplace or elsewhere to restrain trade. It is not even enough to have a monopoly, or in some cases even to have formed pacts with others, as there must be a certain threshold of intentional manipulation that occurs for this to be contrary to law.

Judges apply what is termed the rule of reason to these cases, where we ask whether the actions taken by those accused of violating the law did act to restrict competition, or whether the law stepping in would end up restricting it, and we are to choose the option that interferes with market efficiency the least.

Former Supreme Court Justice Louis Brandeis described the rule of reason very well, over 100 years ago: “The true test of legality is whether the restraint imposed is such as merely regulates and thereby promotes competition or whether it is such as may suppress or even destroy competition.”

We can drill down deeper and describe these abuses as intentional acts that serve to artificially inflate the price of something, from acts to restrain a free marketplace. This results in price inefficiencies and this is why we describe these acts with terms like price fixing or price gouging.

An example of a huge company not restraining trade would be with Walmart, who comes to town and a lot of other competitors shut down as a result due to their not being able to compete with Walmart’s superior price efficiency. Here we have a more efficient market, and attempts to subdue Walmart would serve to reward their less efficient competitors without cause and reduce or eliminate the efficiency advantages that their opening the store provided.

There are less competitors here, but we cannot say that there is less competition, as this has increased not decreased. Elizabeth Warren would be no doubt upset, as her goal is clearly not to promote competition but to instead give it to the big guys to help out the smaller, less competitive guys.

Sen. Warren Wants Companies to Play by the Rules, Her Rules That Is

This is all made very clear in her recently published remarks supporting the idea. These companies have all made acquisitions, and serves to reduce the number of players in the game, which does not sit well with her.

She claims that these big companies “have tilted the playing field against everyone else. And, in the process, they have hurt small businesses and stifled innovation.” She goes on to say that “I want a government that makes sure that everybody, even the biggest and most powerful companies in America, play by the rules.”

She wants to unwind several acquisitions that these companies have made recently, as well as preventing them from making any further ones. These acquisitions have been well within “the rules” though, as has the conduct of these companies overall, so it is not clear what she means by playing by the rules, other than the new rules she wants to put forth.

Even if, somehow, she became President though, which looks very unlikely at this point given how she’s doing in the polls, relegated to a fringe candidate really, we do have the separation between the executive and judicial branches, so attempts like this would be subject to judicial review.

The law is not on her side at all though, even with the friendliest interpretations of it. Let’s look at an example that is close to the minimum threshold of being upheld by the law. While the government did seek to break up Microsoft at one time, and even got a court ruling to do so, it ended up being overturned and the two parties, tired of battle, ended up with an out-of-court settlement where Microsoft had to share some of their proprietary knowledge.

There was at least a prima facie case against Microsoft here, as they did have a monopoly of sorts and they did use this to restrain trade at least somewhat, but there isn’t any of this with things like Amazon promoting and pricing their house brands in a way that Warren expresses offense with.

There isn’t any restraint of trade with Amazon doing things like buying Whole Foods, something that Warren specifically wants to reverse, or with any of the other internet company acquisitions she so strongly objects to. These are horizontal moves in fact, not vertical ones such as the things that Standard Oil was accused of, looking to take over oil from well to tank and using unsavory business tactics such as denying competitors access to markets, or simply using their wealth to temporarily drop prices to the extent that competitors were driven out of business, and then raise them even higher.

Hardly anyone would argue that these actions were not abuses that warranted action. This is beyond the threshold, and the threshold here is clear and deliberate abuse of free trade. Whether or not Microsoft’s monopoly was above it is far from clear. Economist Elliott Friedman did not think so, and feared that this case even being pursued would serve as a dangerous precedent to governments going beyond their proper role as protecting the efficiency of markets and create the very thing that they are bound to prevent by causing inefficiency on the other side.

Amusingly, the prospect of starting a tech company and eventually being bought out by one of these big guys is often the dream of these people, where they sell their companies and become fabulously wealthy. Even if this was not the case though, we need a better reason to prevent this than Sen. Warren offended by the size of these big companies and wanting the law to step in to cut them down according to her wishes.

The fact that we can buy so many things easily and cheaply and get them delivered to our door, or can connect with all our friends on a site they all hang out at, or to use what many feel is the best search engine out there, is not even something we should want to be discouraging, and especially not seeing the government try to wrestle these companies to the ground because of these things.

If these companies are found to be breaking the law at some point, then we’d all like to see them punished. Simply being too popular and successful isn’t against the law at all though.

Eric Baker

Editor, MarketReview.com

Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.

Contact Eric: [email protected]

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