Uncreative Destruction: The Misguided War on Vertical Integration in the Information Economy

Abstract

Are information sectors sufficiently different from other sectors of the economy such that more stringent antitrust standards should be applied to them preemptively? Columbia Law School professor Tim Wu responds in the affirmative in his book The Master Switch: The Rise and Fall of Information Empires. Wu proposes preventing vertical mergers in the information economy and the mandatory divestiture of vertically integrated companies. To implement this, Wu proposes a Separations Principle for the information economy, which would segregate information providers into three buckets, which we have labeled information creators, information distributors, and hardware makers.

This article outlines Wu’s separations proposal, explains why his fears regarding vertical relationships should be rejected by regulatory and antitrust policymakers, and illustrates the legal and practical problems his Separations Principle poses. Wu justifies his Separations Principle by citing monopolies and market power in the information economy. He also advocates using U.S. antitrust authorities to enforce his Principle.

We argue that the antitrust harms he fears are not present, and we highlight scholarship on the accepted benefits of vertically integrated firms. We show that Wu’s remedies are policy preferences wrapped in the language of competition law. In fact, the information economy is largely competitive and does not warrant interventionist regulatory enforcement. Since much of American economic vitality flows from the information economy and technology, policymakers should reject a radical antitrust remedy like Wu’s preemptive Separations Principle.

Keywords: Tim, Wu, Skorup, Thierer, Mercatus, regulation, antitrust, information, economy, economics, vertical, integration, separations, principle, efficiency, AOL, Time Warner, Google, Apple, Microsoft, Yahoo, smartphone, Blackberry, Nokia, Schumpeterian, Schumpeter, enforcement, openness, neutrality

JEL Classification: K21, K23, L1, L2, L4, L5, L96, M2