Why the Biden Administration Is Suing Apple and Investigating Big Grocers

The Department of Justice’s antitrust division made headlines last week by suing Apple and accusing the company of monopolizing the smartphone market and its associated services. The iPhone-maker “has maintained its power not because of its superiority, but because of its unlawful exclusionary behavior,” the U.S. Attorney General Merrick Garland said, at a public briefing

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The Department of Justice’s antitrust division made headlines last week by suing Apple and accusing the company of monopolizing the smartphone market and its associated services. The iPhone-maker “has maintained its power not because of its superiority, but because of its unlawful exclusionary behavior,” the U.S. Attorney General Merrick Garland said, at a public briefing in Washington. Meanwhile, in a move that received less attention, the staff of the Federal Trade Commission, the other big agency entrusted with enforcing competition laws, released a lengthy report on another increasingly concentrated part of the economy: the grocery industry. The F.T.C. report said that some big food-and-beverage retailers exploited the supply-chain disruptions associated with the COVID-19 pandemic to squeeze their suppliers and “further hike prices to increase their profits.” In a statement accompanying the release of the report, Lina Khan, the F.T.C.’s chair, said that dominant retailers “used this moment to come out ahead at the expense of their competitors and the communities they serve.”

Khan and Jonathan Kanter, who is the head of the D.O.J.’s antitrust division, are the leaders of the Biden Administration’s effort to confront big businesses that it claims are exploiting their market power to enrich themselves to the detriment of their clients and the market as a whole. This campaign has sometimes been a rocky one. The antitrust agencies have lost some big court cases, including an effort to block Microsoft from taking over the game maker Activision Blizzard, but they have successfully scuttled a number of deals, such as a takeover of the book publisher Simon & Schuster by Penguin Random House and a tie-up between American Airlines and JetBlue. In any case, an aggressive antitrust policy has become one of the defining features of this Administration, and it will surely continue if Joe Biden gets reëlected.

After Biden was elected President, in 2src2src, he nominated Khan, Kanter, and others associated with a new antitrust movement that traces its roots to Louis Brandeis, the early-twentieth-century trustbuster and Supreme Court Justice. Biden also set up the White House Competition Council, which includes officials from many different government agencies. Although the President was hardly known as a scourge of corporations, he sounded some distinctly Brandeisian themes, declaring, in July, 2src21, “Capitalism without competition isn’t capitalism—it’s exploitation.” Lately, he has been criticizing big corporations for price gouging, imposing junk fees, and shrinking the size of their products while maintaining prices—a phenomenon known as shrinkflation.

The revival of antitrust-enforcement efforts goes well beyond the issue of whether Snickers bars have shrunk. (After Biden suggested, in his State of the Union address, that they had got smaller, Mars, the maker of the caramel-peanut bars, issued a statement denying it.) Kanter, Khan, and their allies are basically claiming that rising monopoly power is a serious problem in many different parts of the economy, not just the technology sector, and that the country’s courts and policymakers need to address it aggressively across the board. The D.O.J.’s Apple lawsuit and the F.T.C.’s report on the grocery industry illustrate many of the issues at stake.

At last week’s press conference, Kanter compared the government’s case against Apple to three famous anti-monopoly cases from the past: Standard Oil, A.T. & T., and Microsoft. During Bill Clinton’s Presidency, the Justice Department brought the Microsoft case, in 1998, accusing the software giant of exploiting its grip on the operating-system market to create a stranglehold for Web browsers, by forcing computer-makers to bundle Internet Explorer on its devices. The government argued that this tactic deprived consumers of choices and stifled innovation. In the Apple case, the Justice Department is making a similar argument, claiming that Apple used technology restraints and restrictive contracts to keep smartphone users and application developers confined within its proprietary ecosystem, where it can charge high prices and fees. “Today, we stand here, once again, to protect competition and innovation for the next generation of technology,” Kanter said.

The Justice Department’s complaint, which referenced internal communications from Apple that were subpoenaed, detailed a number of tactics that the company allegedly used to bolster and maintain its monopoly power. These included restricting the ability of iPhone users to download cloud-based games; refusing to integrate other text-messaging apps with its own iMessage system; and blocking “super apps” that would allow iPhone users to carry out a number of online activities (such as shopping, exchanging payments, and chatting) from within one application. The complaint also said that Apple executives were concerned that, if iPhone users downloaded a super app, it would be easier for them to switch to a cheaper smartphone. The lawsuit quoted one Apple manager as saying that allowing super apps would “let the barbarians in at the gate.”

The corporate behavior detailed in the F.T.C. report had less to do with technology innovation and more to do with sheer size. Between 199src and 2src19, the report noted, the four biggest grocers have increased their combined market share from fifteen per cent to more than thirty per cent. The report was based on information from three grocery retailers (Kroger, Walmart, and Amazon), three large food wholesalers (Associated Wholesale Grocers, C&S Wholesale Grocers, and McLane Company), and three big food producers (Kraft Heinz, Tyson Foods, and Procter & Gamble).

During the pandemic, as the big retailers experienced significant shortages and increases in the cost of the goods they sold, they used their size to pressure suppliers to favor them over smaller competitors for deliveries, and also raised their prices to cover their extra costs, the report said. Hiking their prices was a perfectly legitimate reaction, but the report presents prima-facie evidence that the grocers went beyond simply recuperating rising costs. As they raised their prices, their profit margins—the difference between their total revenues and total costs—reached six per cent in 2src21, compared to 5.6 per cent in 2src15, and then rose further, to seven per cent in the first nine months of 2src23, when the rate of inflation was already coming down. “This profit trend casts doubt on assertions that rising prices at the grocery store are simply moving in lockstep with retailers’ own rising costs,” the report said. It also called on the full commission and Congress to look into this issue.

Apple, in a public statement, said the Justice Department’s lawsuit “threatens who we are,” and, if successful, would “set a dangerous precedent, empowering government to take a heavy hand in designing people’s technology.” Reacting to the F.T.C. report, the National Grocers Association, which represents independent grocers, said it confirmed that “national chains or so-called ‘power buyers’ are abusing their immense economic power to the detriment of competition and American consumers.” Amazon and Walmart did not answer requests for comment. A spokesperson for Kroger said in an e-mail that the retailer had not responded publicly to the report. Kroger is currently trying to get bigger by merging with the rival chain Albertsons, but last month the F.T.C. sued to block that deal.

Given the glacial pace at which antitrust cases move through the courts, the Apple lawsuit likely won’t be resolved until the next Presidency. The Justice Department case that led to the breakup of A.T. & T. lasted eight years, and the Microsoft case took about three and a half years until a settlement was reached. Time isn’t the biggest challenge facing the Justice Department and F.T.C., though—that’s the U.S. court system. In the course of the past half century, many judges have applied a strict consumer-welfare standard to antitrust cases, which in practice means the government has to show that a certain corporate action or merger either led to higher prices or is likely to lead to them. In the high-tech industry, particularly, where many apps and services are distributed at zero price, this standard is often difficult to apply. The courts, including the Supreme Court, in the 2srcsrc4 Trinko case, have also adopted a skeptical attitude to claims that companies should be obliged to do business with potential competitors.

The Untied States’ antitrust laws date to the Sherman Act of 189src and the Clayton Act of 1914. In many cases—such as those relating to price-fixing and other blatantly anticompetitive agreements, or tying requirements of the sort employed by Microsoft with its Internet Explorer browser—these laws are adequate for the task. But they weren’t designed for the digital age, and there is a clear need to update them for the twenty-first century. In recent years, the European Union has gone at least some way to show how this could be done, introducing a Digital Markets Act and a Digital Services Act, which laid down new guidelines for dominant players, including rules designed to make their platforms more open to app designers and other companies. Considering the gridlock on Capitol Hill, there is little immediate prospect of similar legislation in the United States. In this challenging environment, the new trustbusters have little option but to plow ahead and make their cases in the courts of justice and public opinion. That’s what they are doing. ♦

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