The Federalist Society is pleased to announce its Student Blog Initiative, a project of the Practice Groups and the Student Division. An inaugural group of eight students will contribute to the Federalist Society's blog throughout this academic year. Student contributors accepted into the program are held to the same rigorous standards as the regular and guest contributors to the blog, which exists as a forum for experts to provide thoughtful, balanced commentary in an engaging, accessible manner.
Each student in this select group drafts posts on legal, constitutional, and policy issues, receives feedback and revisions from volunteer experts, and has the opportunity to share his or her work on the Federalist Society's widely viewed platforms.
The Federalist Society takes no positions on particular legal and public policy matters. Any expressions of opinion are those of the authors.
In 2005, a well-known company dominated its competitors. It had just earned $5.9 billion in the prior year. And it was launching a hostile bid to acquire its nearest competitor. If this bid succeeded, the company would occupy over fifty percent of the market share in its vertical.
Fearing a budding monopoly, the Federal Trade Commission (FTC) heavily scrutinized this bid. It feared that if the acquisition went through, the company would raise prices due to a lack of competition. Eventually, the FTC prevailed. The company ended its hostile bid because of the FTC’s antitrust concerns.
In retrospect, the calls for Blockbuster to face antitrust scrutiny seem excessive. Yet Blockbuster’s story is not unique. Seemingly invincible corporate giants often become vincible after facing the market’s competitive pressures.
Federal antitrust enforcers sued MySpace for anticompetitive behavior in 2008. Today, MySpace is an irrelevant player in the social media market. In 1998, Fortune declared Yahoo the king of online search, going as far to say it could be “the next America Online.” Six months later, Larry Page and Sergey Brin founded Google. And market watchers called for antitrust action against Walmart, wondering if anyone could compete with the retail giant. Amazon is today’s undisputed retail leader.
In his book Capitalism, Socialism, and Democracy, Joseph Schumpeter predicted this recurring phenomenon. He argued that capitalism has an evolutionary character because actors within it continuously create new products and processes to compete with and replace outdated competitors. Schumpeter described this system of innovation as “creative destruction,” and he believed this idea had important implications for monopolies.
Creative Destruction and Corporate Giants. No corporation is immune from creative destruction. Although corporate giants may see prosperity for a time, eventually their size becomes a liability. They become bureaucratic and lethargic, making way for more innovative and nimble competitors (e.g. Netflix and Google). These competitors eventually replace the corporate giant, making it another victim of creative destruction. The process of creative destruction prevents lasting monopolies from taking hold.
Short-Circuiting Creative Destruction. Hence, the best—and arguably only—way to create lasting monopolies is to short-circuit the system of creative destruction. This occurs when government policies erect barriers to entry for nimble competitors in markets. In such situations, corporate giants need not worry about becoming victims of creative destruction. Their products and processes—no matter how outdated or lethargic they become—are insulated from obsolescence by the state.
Schumpeter’s insights leave lessons for antitrust regulators.
First, antitrust regulators are better served by taking a more humble, longer term view. The examples above serve as a warning against wasteful antitrust suits that cost both taxpayers and corporations time and money. Schumpeter explains that seemingly invulnerable corporate giants will eventually give way to nimble competitors as the process of creative destruction takes place. This cautionary tale is especially relevant today, as a bipartisan consensus calls for antitrust actions against tech giants like Google, Amazon, and Facebook.
Second, antitrust regulators need to look out for state-mandated policies erecting barriers to entry. Corporations enjoying the benefits of state-mandated barriers to entry deserve closer antitrust scrutiny because they do not face the possibility of creative destruction. But rather than bring antitrust lawsuits to address anticompetitive behavior, the federal government should work to reduce barriers to entry for potential competitors. Many of these barriers to entry may be the result of unintended consequences of well-intentioned policies, but they are no less effective at preventing creative destruction.
Complex regulatory schemes often have this effect. If the federal government regulates an industry, the biggest corporate players can absorb the accompanying compliance costs; meanwhile, smaller actors, including up-and-coming competitors, cannot bear the regulatory burden. Consolidation in the banking industry since 2010 illustrates this point. In the wake of regulations stemming from the Dodd–Frank Wall Street Reform and Consumer Protection Act, smaller banks have struggled and failed under the burden of regulatory compliance. This has been to the benefit of corporate giants in the banking industry, which now face less of a threat of creative destruction from up-and-coming competitors. Antitrust regulators need to be cognizant of state-imposed barriers to entry. They prevent creative destruction from taking place and allow for lasting monopolies. Curtailing them will prevent anticompetitive behavior.
It is impossible to say which companies will dominate the market in the future. But one thing is certain: The corporate giants of tomorrow will look different than the corporate giants of today. Creative destruction will see to that. As calls for antitrust scrutiny increase on a bipartisan basis, antitrust regulators should recognize this long-term reality before engaging in enforcement suits.