It’s always fun to see what names politicians come up with for their legislative proposals. Take, for example, the American Innovation and Choice Online Act, which is co-sponsored by Sens. Amy Klobuchar (D-Minnesota) and Chuck Grassley (R-Iowa) and just cleared the Senate Judiciary Committee. Should it pass, it would promote neither innovation nor choice, but would in fact give the Federal Trade Commission and the Department of Justice a mandate to squash innovation.
The measure directly goes after a few politically unpopular Big Tech firms such as Google, Amazon, Apple, Microsoft, and Facebook by preventing these companies from “self-preferencing” their services. When Google places its Google Maps at the top of a search result, that’s self-preferencing. When an iPhone comes with Apple’s flashlight app installed, that’s self-preferencing.
The bill would overturn decades of antitrust rulings in that Google, for example, wouldn’t be able to defend itself by showing that the action was good for competition, the goal of antitrust. Instead, the company would have to explain why putting its map atop its search engine results was necessary to “enhance the core functionality” of the product. If the company couldn’t, it would face fines of up to 15 percent of its total U.S. revenue. This huge risk would simply make it not worth implementing a new system.
Companies will improve their products only if they think it will make them more money. Google can profit through its search engine from improving its maps. Because it could profit from a high-quality product, Google Maps blew past competitors in popularity.
While the most obvious casualty will be innovation by Big Tech companies, the legislation will have spillover effects by indirectly suppressing innovation by smaller companies too. One common way to profit from an innovative idea is to be acquired by a bigger company. Startups create new products that integrate well with existing internet infrastructure, making them appealing and valuable to bigger companies. Acquiring startups is a major component of what Big Tech companies do. Microsoft, for example, acquired six companies in the third quarter of 2021 alone.
However, if Microsoft fears it will lose 15 percent of U.S. revenue from integrating a new application into its lineup, it won’t acquire a small company in the first place. In response, by limiting the prospects of being acquired (which the FTC also wants to crack down on in other ways), the so-called innovation bill limits the number of new ideas that are pursued. A “guilty until proven innocent” approach to market behavior will suffocate innovation, even if it is only about self-preferencing.
For innovation to flourish, we must push to make it permissionless, as innovation scholar Adam Thierer stresses more generally. Companies and individuals need the ability to tinker with systems and processes. All innovation is incremental, as Anton Howes has stressed in his research.
For example, take something that people recognize as being a major technological improvement: steam engines. Contrary to the popular story that James Watt invented steam engines, they took centuries to develop. Starting in the early 1600s, there were decades of experimentation and prototypes across Europe. It was not until the 1710s that practical atmospheric steam engines appeared. These became profitable only after several more decades: first, thanks to marginal improvements by Henry Beighton, John Theophilus Desaguliers, and John Smeaton; then, finally in the 1760s, James Watt. Little by little, permissionless innovation drives an economy forward.
On a shorter timescale, the products we love today on the internet involved lots of tinkering; they evolved incrementally over time. As we know, Google started as a search engine, then it integrated a map into its search engine. Eventually, it decided to self-preference its own map, instead of using everyone’s favorite: MapQuest’s. It then also added its own system of reviews, instead of Yelp’s.
Is either of these a necessary aspect of running a search engine, as the new burden would require? Probably not. Do users seem to like a well-integrated map and review system when searching for nearby restaurants? Absolutely.
At which point should the FTC have stepped in and signed off on the integration of Google’s product? No individual or government agency can know what form of tinkering is necessary for the business. To mandate that they try is to give them an impossible task. If you force a bureaucrat to sign off on every new product, you can expect fewer new products. Just because the products are digital and offered by Big Tech companies that are politically unpopular does not change the basic economics.
Brian Albrecht is an assistant professor of economics at Kennesaw State University, a faculty affiliate at the International Center for Law and Economics, and a Young Voices contributor. He writes a weekly economics newsletter on basic economics (pricetheory.substack.com).