Using Antitrust to Tax Consumers is a Bad Idea Even If You Really, Really Want "True" Interoperability

Josh Wright —  9 February 2007

There is some antitrust buzz in the air after Steve Job’s “Thoughts on Music,” which discussed the possibility of eliminating DRM entirely. The real antitrust story, I suspect, is whether the rather transparent attempt to shift the gaze of regulators fixated on the iPod/iTunes combo to the big four’s “refusal” to go DRM-free will have any success. Antitrust Review has covered these issues at length, and Randy Picker chimes in as well. So does Frank Pasquale , who applauds the Norwegian antitrust attack on Apple and suggests that Apple adopt a “true interoperability” approach which “would likely lead to a boom in the sale of both digital music players and music.”

Everybody seems to have some advice for how Apple’s business model, which is fine, and there are certainly a ton of interesting economic issues about interoperability, standards, and competition to discuss here. But I’m not sure what about the Norwegian / European approach is worth celebrating here from an antitrust perspective. As I’ve written here before, the discussion of antitrust issues surrounding the Apple have been heavy on buzzwords and light on deference to the competitive process that has generated obvious and tangible consumer benefits thus far:

What I find puzzling is that the regulatory-speak has focused so much on these buzzwords and speculative theoretical effects and so little on consumer welfare. Let’s keep in mind that Apple’s success, and the benefits that have accrued to consumers because of it, derives precisely from their business model of integrating iPod and iTunes.

Is there concrete evidence that Apple’s conduct has harmed competition? Not that I am aware of. Most of the anticompetitive claims involve some speculative harm down the line from a future decrease in innovation or some such. Notice that I am not claiming that these effects will certainly not occur, just that an honest assessment of the competitive effects must account for both the pro-competitive bird in the hand and the speculative harms in the future discounted by the probability of their occurrence. By the way, the antitrust laws also are not equivocal about the presumption that the “bird in the hand” wins in close cases. Are there also substantial costs to using the antitrust laws to condemn what basically everyone agrees is conduct that produces at least some consumer benefits? You bet. DOJ AG Tom Barnett discussed exactly this threat in his speech on interoperability, DRM and antitrust at the GMU Antitrust Symposium last year:

“There are real costs to using the antitrust law to protect competitors rather than competition. There is the problem of deterring innovation by the target of the ‘dominance’ attack: if a firm knows it will have to share its IP or to be managed by a committee of government regulators, it may not innovate in the first instance. Or, just as likely, it will reduce its further innovation once the product has arrived on the market — either because its returns are diminishing, or because its personnel are forced to spend their time playing defense against the regulators, rather than playing innovation offense in the marketplace.”

I think that is right. So, again, what exactly are those behind this action in favor of? Whatever it is, I don’t think it is conventional (or appropriate) antitrust analysis focused on consumer welfare. This does not stop Professor Pasquale from getting off a passing shot against U.S. antitrust regulators:

Even if antitrust in the U.S. slowly fades into a subfield of legal history, international pressure can lead to fairer business practices. Consider Norway’s recent pressure on Apple to open up its iTunes/iPod music platform to rival players: “Norway’s consumer regulator declared the lack of interoperability illegal, and gave Apple until Oct. 1 to change it or face legal action and possible fines.

One is invited to accept the inference that the U.S. antitrust regulators are standing idly by knowing that their inaction is harming consumers. Don’t take the bait. If there is some real evidence that Apple’s conduct here is reducing consumer welfare that Pasquale has in mind, I would like to see it. Of course, Professor Pasquale leaves himself some “outs” by using the term “fairer business practices” rather than “consumer welfare,” the latter of which is the currency of the U.S. antitrust laws. But this is an attempt to skirt the issue and substitute one’s policy preferences (dressed up in vague notions of “fairness”) for evidence of consumer harm. How do we rank business practices by “fairness”? Do we mean fairness between producers and consumers? Between groups of consumers? Fairness over time? Are lower prices more fair than higher prices? Or perhaps we just know an unfair practice when we see it in action?

Professor Pasquale’s position, it should be clear, has very little to do with antitrust principles and that is a good thing for consumers. One would hope that antitrusters would resist this temptation to condemn conduct without evidence of anticompetitive effects in order to avoid the possibility of interfering with a competitive process that has produced real and tangible benefits for consumers. The antitrust laws are not designed to serve as a “fairness” tax imposed on consumers and there is no cause to celebrate when they are used to protect competitors rather than competition. Didn’t we learn this with the Robinson-Patman Act, Von’s Grocery, Brown Shoe, Utah Pie

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