Executives and shareholders don’t like competition.  For good reason.  It squeezes their margins, by making them compete more aggressively on price and innovation.  (Warren Buffett refers to the phenomenon of companies being shielded from competition as a “moat”, and it is one of the key criteria he looks for in his investments.)

However, for obvious reasons, society encourages competition.  Economic growth and innovation from the Roman empire through the Renaissance was impeded by rulers handing out monopolies like candy (and then taking a share of the excess profits, as selling favors was more palatable than trying to collect taxes), thus preventing competition and innovative new methods of providing the same service.

In fact, that very notion of entrenched, powerful interests harming competition, consumers and society was what motivated the United States (and then subsequent jurisdictions) to pass the first strands of modern antitrust law.  (To be fair to our northern neighbors, Canada passed its law in 1889, one year before the U.S. enacted the now famous Sherman Act.)

However, antitrust law can be subverted to prevent legitimate competition.  In that way, if used imprudently, antitrust can inflict the same harm that it was created to solve.

In discussing private antitrust lawsuits (the same is true of firms that use their legal and political resources to encourage governments to bring antitrust suits on their behalf), three notable economists pointed out:

Private firms will generally pursue antitrust actions when it is in the private firm’s interest, an interest that could easily diverge from the social interest. Firms may have incentive to use the antitrust laws strategically, which may hinder rather than promote competition.

Therefore, the job of an antitrust regulator is to sort out which antitrust complaints are legitimate (companies are victims of another’s abuse of market power to impede competition or innovation) versus illegitimate (companies are trying to get the government to slow down an aggressive competitor).

A recent series of Financial Times articles illustrates the latter case.  The first article [paywall] discusses TripAdvisor’s involvement in the campaign to get the European Union to bring a competition case against Google.  It also features the founder and CEO of TripAdvisor, Steve Kaufer, complaining about Google using its size and resources to compete with his company.  (He also curiously complains about Google “scraping” TripAdvisor’s content, which not only is perfectly legal if only snippets are displayed — in fact, this is practice makes the entire search industry possible — but also is a practice that Google has ceased for its review sites, and pledged not to do going forward in its settlement with the FTC.  This is doubly ironic seeing as TripAdvisor makes its money from aggregating and organizing other people’s content — reviews, booking info, pricing, etc. — which is the very same thing Google does, just on a smaller scale.)

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A consistent theme here at DisCo is government getting in the way of new business models or disruptive market entrants.  Because disruptive competitors do things differently — and usually more efficiently — than incumbents, government regulators often have a difficult time understanding how new types of businesses fit in old silos of regulation.  Even worse, the old entrenched businesses frequently lean on their political connections and get the government to come up with some justification for shutting down the new competitors or, at the very least, harming their competitive advantages.  Whether it is local governments passing ordinances designed to undercut the business model of food trucks at the behest of local restaurant associations, state governments saddling Internet startups with huge licensing fees just for facilitating transactions, or the FDA taking 8 months to approve a toothbrush that plays music, the story is the same across all levels of government.

Uber — the dynamic startup that has used a mobile application to revolutionize local transportation service — has become a poster child of an innovative company being targeted by anti-disruption incumbent lobbying.  Local taxi associations have filed ridiculous lawsuits and ginned up local officials to hit the company with regulatory actions harming its ability to do business in well over a dozen municipalities.  Not surprisingly, the Colorado Public Utilities Commission (CPUC) recently followed suit and proposed a series of regulations designed to prevent Uber from being an effective competitor.  Furthermore, like actions in other cities, these regulations were offered under the guise of protecting consumers (because saying you are protecting powerful political interests at the expense of the public is politically unattractive).  These proposed “consumer protection” regulations included mandating that limousines offer only a specific up-front fixed price (making Uber’s variable demand-based pricing illegal), requiring all services that advertise or offer transportation service to be regulated as an actual transportation company (Uber has no cars, it simply connects limo/taxi drivers with customers via a mobile app), and preventing limousines and non-cab car services from stationing within 200 feet of a hotel, motel, restaurant, bar, taxi stand or airport passenger pickup location.  Things did not look good for the company in Colorado.

However, in a little-reported action last Thursday, another government agency stepped in — on behalf of the disruptive entrant (and, more importantly, consumers).  The U.S. Federal Trade Commission (FTC), which wears a dual hat as both a competition regulator and a consumer protection agency, filed a great comment in support of Uber.  Not only was the brief targeted at the proposed Colorado regulations, but it offered a universal maxim that all regulators seeking to impose restrictions on a new company or business model should take to heart:

In evaluating claims that the practices to be prohibited impose a genuine threat to consumer welfare, we recommend that the CPUC be guided by the principle that any restriction to competition designed to address such potential harm should be narrowly crafted to minimize its anticompetitive impact.

The FTC further articulated the principle later in the letter:

In general competition should only be restricted when necessary to achieve some countervailing procompetitive virtue or other public benefit such as protecting the public from significant harm.

Amen.

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