The FTC is setting its sights on generative AI

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The FTC is setting its sights on generative AI

Watershed technological transitions can usher in opportunities for new entrants to challenge market leaders. These rare paradigm shifts redefine how companies compete for customers and resources. The emergence of generative artificial intelligence (AI) is a quintessential example of how innovation can either disrupt or entrench dominant incumbents depending on how markets and regulators respond.

Generative AI uses massive models trained on rich and diverse datasets to create new content. This revolutionary tool is reshaping how businesses interact with their customers, competitors, and partners, creating immense opportunity and great risk.

The Federal Trade Commission (FTC) is making a case for aggressive antitrust enforcement. A recent Technology Blog submission from the Bureau of Competition and Office of Technology staff outlines several practices that could trigger government intervention. To understand antitrust risk when competing in markets affecting generative AI, businesses should familiarize themselves with the parameters and limits of several common antitrust theories of harm.

Exclusive dealing

Companies often seek to shore up suppliers or customers through exclusive deals. Exclusive dealing is not necessarily problematic and often stimulates competition. But agreements that enable one firm to control a critical input, distribution channel, or customer segment can raise concerns. In McWane v. FTC, for example, a federal court condemned an exclusive-dealing arrangement that foreclosed rivals from “distribution sufficient to achieve efficient scale, thereby raising costs and slowing or preventing effective entry.”

Generative AI startups should familiarize themselves with the parameters and limits of several common antitrust theories of harm.

In the context of generative AI, the FTC foresees antitrust exposure where “incumbents that offer both compute services and generative AI products” wield such arrangements to discriminate against new entrants. The FTC appears poised to scrutinize exclusive deals involving compute resources, such as graphical processing units, that are key to competing for generative AI markets.

Although each agreement requires an individualized assessment, several general principles are worth knowing. First, exclusive-dealing arrangements should not be implemented as part of a scheme to exclude or deny rivals the ability to compete. Exclusive-dealing contracts that block competitors from scaling are inherently risky.

Second, companies should contemporaneously document any pro-competitive benefits, such as lower costs, higher quality, and better access to products, and should be prepared to explain specifically how the exclusivity results in improved products or services. Finally, be aware that exclusive arrangements with companies whose market share exceeds 30% are riskier.

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