October 16, 2012

Uncreative Destruction: The Misguided War on Vertical Integration in the Information Economy

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This working paper was published in the Federal Communications Law Journal, Vol. 65, Issue 2 (April 2013).

Are information sectors sufficiently different from other sectors of the economy such that more stringent antitrust standards should be applied to them preemptively? Columbia Law School professor Tim Wu responds in the affirmative in his book The Master Switch: The Rise and Fall of Information Empires. Having successfully pushed net-neutrality regulation into the policy spotlight, Wu has turned his attention to what he regards as excessive market concentration and threats to free speech throughout the entire information economy.

To support his call for increased antitrust intervention, Wu explains his view of competition in the information economy—a view that deviates substantially from current mainstream antitrust theory. First, Wu contends that “information monopolies” are pervasive in the information economy. Wu’s “monopolists” include Facebook, Apple, Google, and even Twitter. In The Master Switch and essays like “In the Grip of the New Monopolists,” Wu argues that these so-called monopolies are increasing their market power and require more aggressive oversight and regulation.

Second, Wu argues that traditional antitrust analysis is not sufficient for information systems because they carry speech. He claims, “Information industries . . . can never be properly understood as ‘normal’ industries,” and traditional forms of regulation, including antitrust enforcement, “are clearly inadequate for the regulation of information industries.” Wu believes that because information industries “traffic in forms of individual expression” and are “fundamental to democracy,” they should be subject to greater regulatory treatment.

Third, in contrast to current competition law’s focus on horizontal relationships, Wu desires a reinvigorated regulatory enforcement that addresses “the corrupting effects of vertically integrated power” in the information sectors. He is particularly concerned about private threats to free speech arising from such vertical integration.

The solution, he says, is preventing vertical mergers in the information economy and the mandatory divestiture of vertically integrated companies. To implement this, Wu proposes a Separations Principle for the information economy, which would segregate information providers into three buckets, which we have labeled information creators, information distributors, and hardware makers.

This article outlines Wu’s separations proposal, explains why his fears regarding vertical relationships should be rejected by regulatory and antitrust policymakers, and illustrates the legal and practical problems his Separations Principle poses. Wu justifies his Separations Principle by citing monopolies and market power in the information economy. He also advocates using U.S. antitrust authorities to enforce his Principle. We argue that the antitrust harms he fears are not present, and we highlight scholarship on the accepted benefits of vertically integrated firms. We show that Wu’s remedies are policy preferences wrapped in the language of competition law. In fact, the information economy is largely competitive and does not warrant interventionist regulatory enforcement. Since much of American economic vitality flows from the information economy and technology, policymakers should reject a radical antitrust remedy like Wu’s preemptive Separations Principle.

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