Curbing the New Corporate Power
May 4, 2015
With Responses From
May 4, 2015
18 Min read time
Consumer prices are not the only concern raised by dominant companies.
Designed by Rodrigo Corral.
In February, the Federal Communications Commission issued a landmark ruling about the Internet. After much debate, the FCC established a regime of “net neutrality,” reclassifying Internet service providers (ISPs) such as Comcast as common carriers. Under Title II of the Federal Communication Act, common carriers are private companies with public obligations, most importantly to ensure equal access for the general public. Though the net neutrality debate addressed only ISPs, it revived the old idea of the common carrier and suggests a far-reaching way of thinking about all kinds of online services and business models, from Amazon to Uber to Airbnb.
Such firms play an increasingly powerful role in today’s information economy, shaping access to widely used goods and services. But apart from vague appeals to the threat of monopoly, reformers have generally lacked a framework for addressing the multiplying concerns provoked by businesses founded on new communication technologies. The FCC’s move, rooted in Progressive Era ideas about public utilities and the regulation of private power, offers a useful point of departure.
More than a hundred years ago, the rise of railroads and trusts sparked widespread anxiety over the threats posed by new forms of private power. These concerns drove the first antitrust movement, led by figures such as President Theodore Roosevelt and Justice Louis Brandeis. It also gave rise to a broader reform movement at the state and local levels. Progressive reformers understood that foundational common services, such as electricity and transportation, and basic goods on which many depend—Progressive Era examples include ice and milk—raise significant policy concerns. Those concerns are not confined to prices, efficiency, or consumer welfare, the focus of modern antitrust regulation. Rather, reformers accounted for broader consequences of concentrated economic power, developing a robust set of ideas and arguments about how to regulate private actors providing needed goods and services.
Progressives’ specific interventions do not always make sense now, and critics of regulation are right to recognize the benefits that we derive from innovative producers and services. But recapturing some of the Progressive ethos—the model of a public utility and its alertness to how excessive private power can not only lead to monopolies but also harm workers, producers, and consumers by other means—will help us respond to the challenges of the information economy in ways that antitrust regulation alone cannot.
• • •
Recent commentary on threats posed by Internet companies has drawn on the language of antitrust and monopoly. In a provocative New Republic essay last year, Franklin Foer argued that Amazon represented a modern form of monopoly; like U.S. Steel and the monopolies of the late nineteenth century, Amazon had acquired the power to unfairly discriminate on the market. But unlike those monopolies, Foer argued, Amazon has kept consumer prices low, obscuring its market power. According to Paul Krugman, Amazon is a different kind of monopoly. It does not extract rents from consumers but rather operates as a monopsony, a company whose buying power allows it to discriminate against suppliers. Google too is the subject of monopoly concerns thanks to its dominance in information gathering and its growing political influence. Former Secretary of Labor Robert Reich used the same analogy to nineteenth-century monopolies in his critique of Comcast.
In contemporary antitrust regulation, however, the central question is whether concentrations of economic and market power enable extractive or unfair consumer prices. On that metric, it is hard to show how Amazon and other Internet companies use power in harmful ways. If these companies lower prices and increase access for consumers, how could they be considered dangerous? Defenders of these companies also point out that they face competitors in the marketplace: Amazon does not control the retail sector; on paper, at least, Google has rivals in search; at the national level, Comcast faces competition in Internet service provision.
If consumer prices are our only concern, it is hard to see how Amazon, Comcast, and companies such as Uber need regulation.
The kinds of power that Amazon, Comcast, and companies such as Airbnb and Uber possess can’t be seen or tackled via conventional antitrust regulations. These companies are not, strictly speaking, monopolies; Uber and Airbnb, in particular, do not engage in the kind of price-fixing or market dominance that is the usual target of antitrust regulation today. These companies are better understood as platforms or utilities: they provide a core, infrastructural service upon which other firms, individuals, and social groups depend. For instance, the publisher Hachette depends on Amazon to access the book-buying public. This dependency operates in the other direction as well. Consumers depend on the diligence of Airbnb and Uber to ensure that services contracted through them are safe and as advertised.
A platform thus presents a uniquely troubling form of private power that manifests in its ability to set not just prices but also the wages or returns for producers, and, most importantly, the terms of access to the marketplace itself. Unlike a traditional monopoly whose power stems from its control over the production and pricing of a single good, a platform draws its power from its position as a kind of middleman, a broker that controls the relationship with producers and consumers alike. Once a platform reaches a critical mass of consumers, producers, or both, these groups become vulnerable to the platform’s control over standards and policies.
The concept of the platform explains many forms of private economic power. Despite its low prices, Wal-Mart, for example, has power as a platform: like Amazon, it can leverage its huge consumer base to pressure producers who want their goods on the shelves. The railroads of the late nineteenth century were threatening for similar reasons, not just as monopolies but also as platforms using their middleman position in transporting goods to exploit producers and consumers.
While platforms are not limited to the online world, many Internet-based companies are primed to acquire this kind of economic power. Replacing traditional middlemen—wholesalers or local cab companies, for example—by connecting providers and users, buyers and sellers, is increasingly at the heart of the Silicon Valley playbook. This can be great for society. Amazon designed new ways to store a wide variety of goods and distribute them cheaply and directly to customers. But the enormous success of its technology investments has allowed it to dominate the matching of buyers and sellers in certain markets. Amazon reportedly owns more than two-thirds of e-book market share and sells 41 percent of new books in all formats.
The use of an online, rather than physical, platform enables particularly rapid scaling, so companies can quickly establish dominance. Wal-Mart took decades to become the force that it is today, whereas Uber took just a few years. And the online nature of companies such as Uber and Airbnb enables them to sidestep some of the licensing, safety, and labor regulations that traditional taxi services and hotels face, undercutting the impact of regulatory limits on their capacity to exploit producers or harm consumers.
In the case of Amazon, critics’ fears are well founded. Amazon is a critical hub through which almost any bookseller or buyer must pass. As a result, Amazon can use its position to unfairly discriminate between publishers, wielding its access to its vast user base as a weapon. It did so with Hachette, refusing to accept pre-orders for the publisher’s books because Hachette had demanded the ability to set prices for its e-books. Amazon’s power in this case is not just visible in its impact on prices for producers and consumers but also in its capacity to encourage and discourage sales and therefore control access to the marketplace itself.
Uber and Airbnb are on the surface vastly different companies from Amazon. Rather than selling retail products, they match riders to drivers and short-term renters to individual subletters. But both Uber and Airbnb operate in a manner similar to Amazon: they provide an online platform that links buyers and sellers. In so doing, they have accumulated a greater degree of economic power, not just over prices, but also over labor standards, wages, consumer risk, and access. Uber, for example, has sparked controversy over the cut it takes from its drivers’ fees; far from its rhetoric of enabling drivers to have more control and expand their earning power, Uber’s indispensable role as a link between drivers and riders allows it to grasp that control. These drivers, as a result, have less bargaining power. They have to accept Uber’s fee structure and operate without the kinds of worker protections that the taxi business must uphold. At the same time, riders risk harm from drivers and cars that have not been vetted for safety. Airbnb has analogous problems in the rental market. New York Attorney General Eric Schneiderman alleges that Airbnb allows large-scale, for-profit landlords to avoid hotel regulations and taxes by masquerading as individuals renting out rooms.
The platform concept also helps diagnose the range of dangers posed by ISPs such as Comcast. In many respects, Comcast looks like a classic monopoly. ISPs tend to have regional monopolies, often granted through franchise agreements with municipal governments. Without competition, firms can charge unfairly high prices. But we can also think of ISPs as middlemen or platform services akin to Amazon and Uber. ISPs link content producers—businesses providing online content—with consumers trying to access Websites. They are not simply transmission mechanisms; they leverage their position as connector to extract profits. This ability to shape access to content, on top of price implications, is what makes the net neutrality debate so critical.
The FCC ruling not only bans ISPs from exerting just this control on who can see which content but also paves the way for municipal broadband and reduces barriers to entry by allowing competitors to use existing infrastructure. The Commission’s main concern, clearly, is not extractive pricing but enabling access to the needed good—high-speed Internet service—despite the private control over access exercised by ISPs. The FCC ruling is not perfect. Its standard of requiring just and reasonable practices by ISPs is vague, and it has taken an avowedly “light touch,” which shields ISPs from some of the more aggressive forms of telecommunications regulation, such as rate regulation or requiring unbundling to enable more third-party competition. Yet in drawing on the public utility framework, the FCC recalls an earlier tradition of regulating private power, one that can help us address the platforms arising today.
• • •
The problem with the current debate over Amazon, Uber, Airbnb, and other information economy platforms is that available off-the-shelf regulatory mechanisms have narrowed over the last century. The antitrust regulation that prevents monopoly pricing doesn’t capture what is really at stake with platform firms, which often seem to offer consumers a good deal. The early history of antitrust and public utility regulation points a way forward.
Federal antitrust law originated with the Sherman Antitrust Act of 1890, designed to rein in the first corporate titans of the industrial age: the railroads, U.S. Steel, Standard Oil, financier J. P. Morgan. Reformers saw that the “curse of bigness” enabled not only extractive pricing but also broader economic and political domination. These corporations, by virtue of their concentrated power, seemed to pose a threat to liberty itself by narrowing the opportunities for small businesses and rival producers, extracting rents from consumers, and exploiting workers. Reformers also feared the ways in which concentrated economic power might bleed into concentrated political power—that mega-corporations might corrupt the political process itself. They therefore sought to break up these powerful conglomerations.
The original notion of antitrust takes an expansive view of the potential harms of private power.
The original notion of antitrust is one step better than the modern approach because it recognizes the potential harms of private power not just in terms of prices. Even so, antitrust alone provides a limited framework for understanding modern forms of private power. After all, what would it mean to break up firms, such as Amazon or Uber, whose major innovation is a centralized platform linking buyers and sellers? This is where the Progressive public utility model comes in.
Today we think of public utilities in economic terms: natural monopolies such as electricity or water provision, where economic efficiency requires a monopoly structure in order to incentivize expensive investments in shared infrastructure. These monopolies are tightly regulated or controlled by the public sector. But for Progressive reformers, the idea of the public utility was much more expansive. In English common law, some industries were designated common carriers or “public callings” and were subject to special restrictions, such as the duty to provide a service once undertaken, to serve all comers, to demand reasonable prices, and to offer acceptable compensation. Over the course of the nineteenth century, this tradition was gradually absorbed into the emerging law of highways, rivers, ports, and innkeepers, among other industries.
As part of their broader effort to rein in private power, Progressive reformers applied the common carrier idea to govern industries that seemed socially vital, providing foundational goods and services on which the rest of society depended. These were chartered as public-purpose entities—utilities. By the turn of the twentieth century, state- or municipal-chartered public utilities could be found everywhere, applied not only to electricity and water but also to goods and services such as gas, transportation, communications, milk, and banking.
Industries triggered public utility regulation when their scale limited ordinary accountability through market competition and the goods and services they provided were socially necessary, not to be left to the whims of the market or the control of a handful of private actors. This combination of economic dominance and social necessity created the threat not just of exploitative prices but also of discrimination and unequal access. Importantly, the public utility model was flexible; it could accommodate industries that evolved over time—through changes in production, distribution, and consumption—such that one or another good became essential to more people. Broadband today offers a good example: for a time, it was considered a luxury, but increasingly it is seen as a necessity for economic inclusion and opportunity.
The widespread use of public utility regulation, however, faded relatively quickly. First, the effort to impose additional oversight and constraints on corporations dominating industries vital to the public good gave way to more liberal incorporation laws. As states competed with one another to offer more favorable terms for incorporation to attract businesses, companies were allowed to form with relatively few strings attached.
Second, it was not always clear which industries required the more stringent forms of public utility regulation. As a result courts began to strike down regulations more often. The Supreme Court’s debate surrounding New State Ice Co. v. Liebmann (1932) is instructive on this score. At issue was an Oklahoma statute requiring that ice producers be licensed by the state as public utilities. While the majority acknowledged the power of states to protect consumers through public utilities, it held that ice production was not “affected with a public interest” and therefore did not warrant such extensive regulation. Ice may be have been a necessity, but it was increasingly made with ease by ordinary people as access to electricity became more widespread. In dissent, Brandeis defended the relevance of the public utility model and argued that the growing availability of refrigeration did not undercut the need for some degree of public control. Just because some individuals were wealthy enough to secure their own access to ice did not remove the moral imperative to help others access this social necessity. The “business of supplying to others, for compensation, any article or service whatsoever may become a matter of public concern,” Brandeis wrote, depending upon the “conditions existing in the community affected.” If such public concern were sufficiently high, greater regulation would be justified. The Court was unmoved by the argument.
Third, commissions and courts found it difficult to regulate prices and rates in a fair and transparent manner. Railroads were the biggest monopoly fear of the era—a vast new transportation network on which the entire economy depended, dominated by private corporations with the power to extract rents from farmers and other businesses. Yet while the railroad problem spurred state and federal regulatory efforts, it raised precisely these difficulties of transparency and fairness.
Finally, with the gradual rise of general regulatory oversight through federal agencies, particularly after the New Deal, the need for public utilities seemed to fade away.
The legacy of the public utility era was therefore mixed. On the one hand, the model helped to undermine the presumption of free, unregulated markets while emboldening those who took seriously the need for state oversight of some kinds of private actors. As historian William Novak argues, this shift was essential in enabling the rise of the modern regulatory state. On the other hand, the idea of a special category of publicly critical and therefore more stringently regulated corporations came to seem unworkable.
• • •
This Progressive notion—firms that dominate provision of some publicly vital infrastructure or socially important good need to be more robustly regulated—adds two important insights to contemporary debates over Amazon, Comcast, and the corporate giants of the information age. First, our primary concern need not be consumer prices. Rather, we must see the purposes of regulation more broadly as preventing domination, checking the power of firms to impose unfair conditions on consumers and producers and to control access to the marketplace itself. Second, a version of the public utility regulatory model may yet serve to rein in that power.
The public utility approach can manifest in one of three ways. First, governments can reduce the dominance of platforms by taking a modified antitrust approach, facilitating rivals’ entry into the market to increase competition, reduce domination, and thus challenge unfair standards or prices. Second, governments can impose public obligations such as consumer protection, labor rights, and nondiscrimination through industry-specific legislation, for example by addressing short-term rentals or ride-sharing. Third, governments can accept the de facto dominance of an operator but convert it into a public or quasi-public utility, granting a franchise while requiring compliance on a host of labor, consumer, and nondiscrimination regulations. The choice of strategy requires judgment calls and depends on context.
The net neutrality debate touched on all of these possible measures. The FCC ruling reduces barriers to entry by allowing competitors to use existing cable and fiber infrastructure, limiting ISP power by enabling greater competition. It also requires ISPs to treat all forms of Web traffic equally and attempts to limit “unjust and unreasonable practices,” creating a yet-to-be-defined Open Internet conduct standard. Finally, the ruling represents a tentative first step toward the creation of an outright public utility. While reclassifying ISPs as common carriers avoids full-blown imposition of rate regulations, the ruling also paves the way for municipally owned and operated broadband, which may enhance the negotiating positions of municipal governments trying to craft new franchise agreements with ISPs. In exchange for a legally created monopoly, the argument goes, ISPs should be required to provide more extensive broadband access to a wider range of consumers both by adding wiring and by charging more reasonable prices.
Sharing-economy firms offer more complex cases. Take Uber. Regulating Uber as a platform suggests taking seriously concerns about consumer protection: Uber bears some degree of responsibility for ensuring that its service is safe and reliable. This might mean performing the kinds of car safety and driver background checks required of registered taxi and livery services.
Uber also carries responsibilities toward its “suppliers”—the drivers. But instead of encouraging small-scale entrepreneurs, Uber, like other sharing firms, is cashing in on the broader structural increase in inequality and economic vulnerability, relying on under-employed job-seekers desperately looking for income and avoiding at all costs treating these workers as full-time employees with benefits.
Most important is the central concern of common carriers: assuring equal access for anyone seeking to use the service. Uber does not meet this test. The Obama administration recently joined a suit arguing that blind passengers are unfairly treated by Uber because they are unable to access the service without accommodation, which the company doesn’t provide. Uber has argued that it is not bound by disability laws that apply to public accommodations. But if we understand Uber as a platform, a kind of utility, it should be subjected to exactly this kind of legal obligation ensuring equal access.
Transparency will be a key factor here. Many of the early clashes between regulators and Web platforms have involved efforts to acquire from firms better data about their users and transactions as well as information that will affect safety, labor, access, and price regulations.
Critics of regulation worry that oversight will dismantle the sharing sector, but experience suggests it won’t. Unlike Uber, which attacks every suggestion of regulation as an assault on innovation, the car-sharing company Car2Go has been successful while being more collaborative with regulators, highlighting the potential for capturing the innovative value of these companies amid an appropriate legal framework.
• • •
While Progressive policies are not direct blueprints for the modern era, their ideas—focusing on the broader problem of economic power, not just prices or welfare or efficiency, and on tailored regulatory responses to firms that provide common infrastructural services—suggest important directions for regulating the new forms of private power in the Internet era.
The FCC’s ruling was a step in that direction. It was won by activists asserting political pressure. Regulatory agencies can be targets for mobilization as much as Congress or elections.
But the problems of private power—and the threats arising from platforms—are not limited to Internet companies. They arise in a range of contexts, from too-big-to-fail banks to the health care industry. Like Progressive reformers a century ago, we must meet the pace of economic innovation with an equally creative and broad moral and political imagination capable of making sense of the economic landscape as it changes around us.
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May 04, 2015
18 Min read time