August 16, 2018

Lifting Barriers to Entrepreneurship

A "Permissionless Innovation" Approach to Competition and Consumer Protection Policies
Key materials
hearing details

Hearings on Competition and Consumer Protection in the 21st Century
Agency: Federal Trade Commission
Comment Period Opens: June 20, 2018
Comment Period Closes: August 20, 2018
Submitted: August 16, 2018
Document No. 2018-16608

The attached submission is written in response to the request by the Federal Trade Commission (FTC) for comments regarding the upcoming public hearings on competition and consumer protection in the 21st century.

These hearings come as the United States and European Union (EU) have significantly diverged on the questions of antitrust enforcement and consumer protection regulations concerning the digital economy. While proposals for reforming US competition and consumer protection policies to more closely match those of the EU have gained support in recent years, we and other Mercatus Center scholars have written extensively on the damaging effects adopting an EU-style regulatory framework would have on innovation, competition, and consumer welfare.

The burdens that the EU’s regulatory actions have imposed on innovation in the technology sector raise concerns the FTC should heed. The EU’s sweeping General Data Protection Regulation (GDPR) could actually increase the market power of large tech companies like Facebook and Google in digital advertising, and GDPR is likely to raise compliance costs to businesses and individuals across the globe so much that many firms will drop out of the industry, leaving consumers with even fewer options in digital goods and services. Meanwhile, the EU’s antitrust actions against tech firms, such as its recent Android ruling, have done little to promote competition or increase consumer welfare.

The EU’s heavy-handed regulatory approach to competition and consumer protection directly opposes two decades of light-touch regulation in the United States and threatens the openness under which internet services have flourished. Under the American light-touch regulatory regime—anchored in the principles of “permissionless innovation”—information technology companies experiment with different business models and deliver innovative and novel products and services to consumers without prior regulatory approval and with limited red tape. The result of getting innovation policy right is seen in the large gap between the United States and Europe in attracting capital to tech ventures. Of the 274 privately held tech companies to reach a one-billion-dollar valuation since 2003, over half (148) of these so-called unicorns are based in the United States, while only 33 were started in Europe.

Observing the success that permissionless innovation has given American technology companies, we offer the following principles to guide competition and consumer protection policy:

  1. Antitrust policy should focus on the effects of a firm’s practices on consumer welfare, not the firm’s market power per se, the size of its network of users, or supposed advantages of “big data.”
  2. Review of vertical mergers and acquisitions ought not to be treated differently for firms in the “information economy.”
  3. Definitions of harm should be narrowly tailored to reflect only truly cognizable harms to the consumer or competition, not speculative harms like, for instance, the effects of a proposed merger or acquisition on “potential competition.”
  4. Regulations regarding privacy and market power must be examined in the context of tradeoffs.
  5. A key role for regulatory agencies is to educate and empower consumers.

We commend the FTC for its intention to hold hearings on the topic of competition and consumer protection. The growth in market concentration and declines in business startups and labor market mobility observed in the United States since the 1970s are troubling trends. Thus, public policies and regulatory approaches that will encourage entrepreneurialism and competition in the marketplace ought to be examined and debated.

The digital economy has been the most productive and dynamic sector in the 21st century and created digital goods and services that have been a boon for consumers in the United States and across the globe. This dynamism could not have been possible without the United States’ light-touch regulatory regime. We therefore find proposals for US regulators to tighten the rules for the sake of taking action against today’s leading technology firms to be misguided. Indeed, the EU’s ongoing regulatory interventions in the digital economy show that this approach comes to the detriment of both competition and consumer protection. To advance the ends of competition and consumer protection, the FTC would do better to continue the work of the Economic Liberty Task Force, a project that seeks to identify and reverse onerous rules and regulations that suppress entrepreneurial activity and consumer choice across many industries.