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Research Bleg: Competition Settlements With Conditions (Arguably) Contrary to Consumer Welfare

Posted by Josh Wright on January 8, 2012

Judge Ginsburg and I are working on a project for an upcoming festschrift in honor of Bill Kovacic.  The project involves the role of settlements in the pursuit of the goals of antitrust.  In particular, we are looking for examples of antitrust settlements between competition agencies and private parties — in the U.S. or internationally — involving conditions either: (1) clearly antithetical to consumer welfare, or (2) that arguably disserve consumer welfare.  In the former category, examples might include conditions requiring firms to make employment commitments.  The second category might include conditions placing the agency in an ongoing regulatory role or restricting the firm’s ability to engage in consumer-welfare increasing price or non-price competition.

I turn to our learned TOTM readership for help.  Please feel free to leave examples in the comments here — or email me.  Cites and links appreciated.

Posted in antitrust, doj, federal trade commission, scholarship, settlements | 2 Comments »

Some Much-Needed Antitrust Skepticism on Senate Letter Urging FTC Google Investigation

Posted by Geoffrey Manne on December 20, 2011

By Geoffrey Manne and Berin Szoka

[Cross posted at TechFreedom.org]

Back in September, the Senate Judiciary Committee’s Antitrust Subcommittee held a hearing on “The Power of Google: Serving Consumers or Threatening Competition?” Given the harsh questioning from the Subcommittee’s Chairman Herb Kohl (D-WI) and Ranking Member Mike Lee (R-UT), no one should have been surprised by the letter they sent yesterday to the Federal Trade Commission asking for a “thorough investigation” of the company. At least this time the danger is somewhat limited: by calling for the FTC to investigate Google, the senators are thus urging the agency to do . . . exactly what it’s already doing.

So one must wonder about the real aim of the letter. Unfortunately, the goal does not appear to be to offer an objective appraisal of the complex issues intended to be addressed at the hearing. That’s disappointing (though hardly surprising) and underscores what we noted at the time of the hearing: There’s something backward about seeing a company hauled before a hostile congressional panel and asked to defend itself, rather than its self-appointed prosecutors being asked to defend their case.

Senators Kohl and Lee insist that they take no position on the legality of Google’s actions, but their lopsided characterization of the issues in the letter—and the fact that the FTC is already doing what they purport to desire as the sole outcome of the letter!—leaves little room for doubt about their aim: to put political pressure on the FTC not merely to investigate, but to reach a particular conclusion and bring a case in court (or simply to ratchet up public pressure from its bully pulpit).

The five page letter concludes with, literally, three sentences presenting Google’s case, one of which reads, in its entirety, “Google strongly denies the arguments of its critics.” The derision is palpable—as if only a craven monopolist would deign to actually deny the iron-clad arguments of Google’s competitors so painstakingly reproduced by Senators Kohl and Lee in the preceding four pages. This is neither rigorous analysis nor objective reporting on the contents of the Senate’s hearing.

While we worry about particularly successful companies being singled out for punishment, we hold no brief for Google in this debate. Instead, in all our writings, we’ve tried to present a consistently skeptical view about a worrisome trend in antitrust enforcement in high tech markets: error-prone and costly intervention in markets that are ill-understood and fast-moving, to the great detriment of consumers and progress generally. Although our institutions have received financial support from Google among a range of other companies, organizations and individuals, our work is focused on this broad mission; we have no obligation or intention to support any company simply because it finds value in supporting our mission.

We’ve defended (and one of us has even worked for) Microsoft in the past, and just yesterday, we lamented the fact that the Obama Justice Department and the FCC have effectively blocked Google’s arch-rival, AT&T, from buying T-Mobile. Rather than defend any particular company, our goal, to paraphrase Hayek, is to “demonstrate to [regulators] how little they really know about what they imagine they can design”—lest they undermine how competition actually works in the name of defending outdated models of how they think it should work. Unfortunately, the letter from Senators Kohl and Lee does nothing to assuage our concern and suggests instead that crass politics, rather than sensible economics, could determine the outcome of cases like this one—if not in a court of law, then in the court of public opinion and extra-legal intimidation.

To begin with, the letter asserts that “Google faces competition from only one general search engine, Bing,” suggesting that only Bing (and it, only ineffectively) could keep Google in check. In essence, the Senators are prejudging an essential question on which any case against Google would turn: market definition. But why would the market not include other tools for information retrieval? Is it not at least worth mentioning that more and more Internet users are finding information and spending time on social networks like Facebook and Twitter, while more and more advertisers are spending their money on these Google competitors? Isn’t it clear that search itself is evolving from “ten blue links” into something more social, multi-faceted and interactive?

In a remarkable leap, the senators then identify the specific alleged abuse that Google’s alleged market power leads to: search bias. That’s remarkable because, other than the breathless claims of disgruntled competitors (given plenty of air time at the September hearing), there is actually no evidence that search bias is, in fact, harmful to consumers—which is what antitrust is concerned with. (Read both sides of this debate in TechFreedom’s free ebook, The Next Digital Decade: Essays on the Future of the Internet.)

As our colleague, Josh Wright, has thoroughly demonstrated, this “own-content” bias is actually an infrequent phenomenon and is simply not consistent with an actionable claim of anticompetitive foreclosure. Moreover, among search engines, Google references its own content far less frequently than does Bing (which favors Microsoft content in the first search result when no other search engine does so more than twice as often as Google favors its own content).

Of course, none of this is even hinted at in the Senators’ letter, which seems intended to condemn Google for “preferencing” its own content (under the pretense of withholding judgment). It’s a little like condemning Target for deigning to use its trucks to supply inventory only to its own stores instead of Wal-Mart’s, or, say, condemning a congressman for targeting earmarks for his own state or district. Earmark bias! Read the rest of this entry »

Posted in antitrust, error costs, exclusionary conduct, federal trade commission, google, Internet search, law and economics, markets, monopolization, regulation, technology | Tagged: , , , , , , , , , | 3 Comments »

Never Mistake Activity for Achievement, Antitrust Edition

Posted by Josh Wright on December 1, 2011

FTC Chairman Leibowitz recently gave a speech in which he took on a number of issues, but one in particular caught my eye.  In a portion of the speech describing how antitrust has updated its procedures in order to become more efficient and avoid the problem of having decade-long cases focused upon technologies that are obsolete by the time the case is resolved, Leibowitz offers the following example of Commission success:

The best, recent example of the need to move quickly in the high-tech area is our recent Intel case.11 Our investigation of Intel started out very slowly and went on for quite some time, but once the Commission issued process and then a complaint, the litigation proceeded with alacrity and ended with a consent less than a year later.

We think the remedies in the consent do much to protect consumers while still allowing Intel to innovate, develop, and sell new products. And I am proud of the relationship that we have been able to maintain with Intel since then. Still, we might have gained more for consumers: much was lost in the years between the start of the investigation and the litigation’s conclusion, and competition for CPUs and other components in personal computers might have been different had we moved faster initially. And moving quickly might have been fairer to Intel too.

As a result of what we have learned from Intel and other cases, the Commission is no longer bogged down in outmoded procedures. Much of what we’ve done at the Commission in recent years has been to make us better at getting to the bottom of investigations and resolving them faster to ensure that businesses get certainty and consumers get protection quickly. That was at the heart of the changes to our Part 3 rules, you get an antitrust trial, and it is implicit in every effort we make to learn more about industries and develop our internal expertise. We have also pushed to make “go/no go” decisions on investigations earlier so that they don’t linger on. All this reduces expenses and, I believe, allows us to act with a lighter hand.

There is a lot about this strikes me as misguided.

First, lets start broadly.  Striking quickly and striking accurately are two different things.  As John Wooden famously says “never mistake activity for achievement.”  Bill Kovacic has emphasized that case counts alone (nor win rates alone) are not very informative regarding agency performance.   Claims of agency success based upon activity levels in extracting settlements and such should be viewed skeptically without evidence that the activity prevented anticompetitive activity and improved consumer welfare.  Doing things faster doesn’t mean doing them any better.

Second, so what about accuracy?  If Intel is the “best example” the Chairman can come up with of antitrust enforcement in high-tech industries, this is not a good sign for the Commission.  I’ve written quite a bit about the Intel complaint and settlement — and so won’t belabor the point here — but suffice it to say that the evidence does not support the claim that the settlement improved consumer outcomes.  In fact, consumers are probably worse off in my view.  Reasonable minds may differ on these points but it is difficult to evaluate the evidence and come away confident that the settlement is as successful as claimed.  And that’s not even counting the peculiar endorsement it gives Lepage’s, which has been overwhelming condemned a standard which threatens pro-consumer conduct.

Third, the Chairman writes: “And I am proud of the relationship that we have been able to maintain with Intel since then.”  Ugh.  Developing longstanding relationships with Intel and other companies is not something for the Commission to be proud of.  Its just not.  In this case, the relationship derives from the product design elements of the Intel settlement.  Remember this language?

Respondent shall not make any engineering or design change to a Relevant Product if that change (1) degrades the performance of a Relevant Product sold by a competitor of Respondent and (2) does not provide an actual benefit to the Relevant Product sold by Respondent, including without limitation any improvement in performance, operation, cost, manufacturability, reliability, compatibility, or ability to operate or enhance the operation of another product; provided, however, that any degradation of the performance of a competing product shall not itself be deemed to be a benefit to the Relevant Product sold by Respondent. Respondent shall have the burden of demonstrating that any engineering or design change at issue complies with Section V. of this Order.

I’m sure Intel’s lawyers and engineers have a fine relationship with the FTC.  But lets not mistake that with agency success or something that consumers should celebrate.

Never mistake activity with achievement.

Posted in antitrust, federal trade commission, technology | Comments Off

In re Pool Corporation: Yet Another Peculiar and Peverse Section 5 Consent from the FTC

Posted by Josh Wright on November 27, 2011

TOTM readers know that I’ve long been skeptical of claims that expansive use of Section 5 of the FTC Act will prove productive for consumers.  I’ve been critical of recent applications of Section 5 such as Intel and N-Data.  Now comes yet another FTC consent decree in PoolCorp.  I’m still skeptical.  Indeed, PoolCorp appears to provide ammunition for those (like me) who have criticized the Commission’s stance on expansive use of Section 5 precisely upon the grounds that it can and will be applied to conduct that is either competitively neutral or even procompetitive.

Commissioner Rosch’s dissent makes many of the key points.  Indeed his opening line gets straight to the point: “This case presents the novel situation of a company willing to enter into a consent decree notwithstanding a lack of evidence indicating that a violation has occurred.”

Before getting to specifics, the sharp disagreement between the majority and Commissioner Rosch on both the most basic of facts and economic principles is hard to miss, and gives the entire exchange a rather peculiar feel.  Here’s an example.  The majority describes the case as a standard application of a “Raising Rivals’ Costs” theory, citing Krattenmaker & Salop.  The allegation is that:

Specifically, the Complaint alleges that PoolCorp, which possesses monopoly power in many local distribution markets, threatened its suppliers (i.e., pool product manufacturers) that it would no longer distribute a manufacturer’s products on a nationwide basis if that manufacturer sold its products to a new distributor that was attempting to enter a local market.

The conditions that must be satisfied for an exclusionary theory are well known.  Substantial foreclosure of a critical input is one such necessary, but not sufficient, condition for the possibility of competitive harm.  The majority argues that PoolCorp “foreclosed new entrants from obtaining pool products from manufacturers representing more than 70 percent of sales.”  But standard antitrust analysis tells us that such foreclosure is not enough to support an inference of harm to competition.  First, we must ask whether the threatened refusals to deal actually had any impact on the allegedly impaired rivals or whether they were able to easily realign supply contracts?  Second, and most fundamentally, we must ask whether the conduct at issue had any impact on competition itself, or upon consumers in the form of higher prices, reduced output, lower quality, etc.?

Here is where things get, well, weird.

Did PoolCorp’s actions actually disadvantage any rivals?  The majority concedes that “Some of PoolCorp’s targets were able to survive by purchasing pool products from other distributors rather than directly from the
manufacturers.” Well, that doesn’t sound too bad for the Commission.  If a few firms survived but others were excluded (surely the implication of the sentence), we should continue our analysis.  But was there actually any foreclosure?

Here’s Commissioner Rosch in dissent:

“The investigation revealed that PoolCorp’s demands were not honored by manufacturers.”

What about those potential entrants that were excluded — the ones that were not so lucky as the surviving targets the majority mentions?

“Another problem with this case is that no entrants were actually excluded.”

Yikes.  One gets the impression that the Commissioners are not talking about the same case.  The majority is full of broad generalizations and assertions but no real discussion of facts.  Commissioner Rosch’s dissent offers a bit more on the exclusion claim:

“The only claim to the contrary is in Paragraph 28 of the complaint, which alleges that in Baton Rouge, “the new entrant’s business ultimately failed in 2005” because of the lack of “direct access to the manufacturers’ pool products.” The complaint neglects to mention that this entrant was able to secure supplies from other sources and later sold itself to an established out-of-state distributor. Since then, that distributor, which has had full access to supplies, has been a highly effective rival to PoolCorp. Thus, to the extent PoolCorp’s threats had an effect in Baton Rouge, they may have led to more, not less, competition.”

Not good for the Commission majority.  But injury to rivals isn’t our primary concern.  What about injury to competition?  Here, things get even murkier.  The majority plainly asserts “the harm to consumers that occurred as a result was substantial” and “consumers had fewer choices and were forced to pay higher prices for pool products.”  Sounds relatively straightforward.  Once again, Commissioner Rosch’s dissent exposes disagreement over the most basic of antitrust-relevant facts (emphasis added):

“A third problem with this case is that there was no consumer injury. The investigation did not uncover price increases, service degradation, or other anticompetitive effects in any local markets.”

Rosch goes on:

The basis for the majority statement’s claim that there was “substantial” consumer harm resulting from the alleged conduct of Respondent is a mystery. The complaint contains no factual allegations of any harm to consumers, much less “substantial” harm. Likewise, there are no factual allegations in the complaint corroborating the majority’s claim that consumers “had fewer choices and were forced to pay higher prices for pool products.”

This is a real mess.  Proponents of an expanded application of Section 5 (including Commissioner Rosch) frequently argue that it is capable of being applied with certain limiting principles, including demonstration of consumer injury.  To his credit, Commissioner Rosch is sticking to his guns on consumer injury as a limiting principle here.  But the evidence that the Section 5 is too enticing a tool for the Commission in cases lacking consumer injury is mounting.  The public disagreement over basic facts — is there harm to consumers or not?  was there foreclosure or not?  if so, how much? — also does not inspire confidence that the Commission’s discretion in applying Section 5 in cases where the conduct lies outside the scope of the Sherman Act for technical reasons will be applied in a manner consistent with the consumer welfare goals of antitrust.

Those are general problems with Section 5.  As applied here, the majority opinion is also analytically incoherent.   The Commission majority must deal with the fact that there appears to be no real foreclosure as a result of PoolCorp’s conduct — recall that what the majority described as a few successful surviving firms turns out to be no actual exclusion whatsoever.  Despite the fact that absence of foreclosure or injury to rivals in a case like this is typically the end of the line for the plaintiff, the Commission doesn’t appear to be bothered at all by the lack of evidence of harm to rivals or consumers.  Responding to the fact of no foreclosure, the Commission writes:

“However, we assess consumer harm relative to market conditions that would have existed but for the respondent’s allegedly unlawful conduct. Here, PoolCorp’s strategy significantly increased a new entrant’s costs of obtaining pool products. Conduct by a monopolist that raises rivals’ costs can harm competition by creating an artificial price floor or deterring investments in quality, service and innovation.”

This doesn’t make any sense.  If there is no foreclosure, there is no risk of consumer harm.  Period.  Indeed, while the majority asserts it, there appears to be no actual evidence of consumer harm.  At a minimum, its up for serious debate.  If it were true that PoolCorp’s strategy “increased a few entrant’s cost of obtaining pool products” in practice, and that there were sufficient exclusion to create additional market power, two things would be true: (1) one would observe harm to the rival, and (2) there would be harm to competition in the form of higher prices or reduced output.  Apparently, the Commission could must neither — even when challenged by Commissioner Rosch’s dissent to do so.

One last observation.  Commissioner Rosch’s dissent hints that economic analysis in the case demonstrated that “even if” PoolCorp fully foreclosed its rivals the harm to consumers would be minimal and a waste of Commission resources.   Query: what role are agency economists playing in the Commission’s Section5 agenda?  Unfortunately, it does not appear to be a significant one.

Posted in antitrust, economics, exclusionary conduct, federal trade commission, monopolization | 1 Comment »

My New Empirical Study on Defining and Measuring Search Bias

Posted by Josh Wright on November 3, 2011

Tomorrow is the deadline for Eric Schmidt to send his replies to the Senate Judiciary Committee’s follow up questions from his appearance at a hearing on Google antitrust issues last month.  At the hearing, not surprisingly, search neutrality was a hot topic, with representatives from the likes of Yelp and Nextag, as well as Expedia’s lawyer, Tom Barnett (that’s Tom Barnett (2011), not Tom Barnett (2006-08)), weighing in on Google’s purported bias.  One serious problem with the search neutrality/search bias discussions to date has been the dearth of empirical evidence concerning so-called search bias and its likely impact upon consumers.  Hoping to remedy this, I posted a study this morning at the ICLE website both critiquing one of the few, existing pieces of empirical work on the topic (by Ben Edelman, Harvard economist) as well as offering up my own, more expansive empirical analysis.  Chris Sherman at Search Engine Land has a great post covering the study.  The title of his article pretty much says it all:  “Bing More Biased Than Google; Google Not Behaving Anti-competitively.” Read the rest of this entry »

Posted in antitrust, business, doj, federal trade commission, truth on the market | Tagged: , , , | 4 Comments »

Google, Vertical Integration, and Beer

Posted by Josh Wright on October 20, 2011

First, Google had the audacity to include a map in search queries suggesting a user wanted a map.  Consumers liked it.  Then came video.  Then, they came for the beer:

Google’s first attempt at brewing has resulted in a beer that taps ingredients from all across the globe. They teamed up with Delaware craft brewery Dogfish Head to make “URKontinent,” a Belgian Dubbel style beer with flavors from five different continents.

No word yet from the Google’s antitrust-wielding critics whether integration into beer will exclude rivals who vertical search engines who, without access to the beer, have no chance to compete.  Yes, there are specialized beer search sites if you must know (or local beer search).  Or small breweries who, because of Google’s market share in search, cannot compete against Dogfish Head’s newest product.  But before we start the new antitrust investigation, Google has offered some new facts to clarify matters:

Similarly, the project with Dogfish Head brewery was a Googler-driven project organized by a group of craftbrewery aficionados across the company. While our Googlers had fun advising on the creation of a beer recipe, we aren’t receiving any proceeds from the sale of the beer and we have no plans to enter the beer business.

Whew.  What a relief.  But, I’m sure the critics will be watching just in case to see if Dogfish Head jumps in the search rankings.  Donating time and energy to the creation of beer is really just a gateway to more serious exclusionary conduct, right?  And Section 5 of the FTC Act applies to incipient conduct in the beer market, clearly.  Or did the DOJ get beer-related Google activities in the clearance arrangement between the agencies?

Posted in alcohol, antitrust, beer, clearance, doj, federal trade commission, google, musings | 2 Comments »

72% of Antitrust Lawyers Not Impressed By Case Against Google

Posted by Josh Wright on October 10, 2011

It is not exactly the application of the consumer welfare standard, nor a scientific survey, but nonetheless an interesting poll at the American Bar Association Antitrust & Intellectual Property Conference before and after presentations from lawyers representing each side.  The results?

While this is an admittedly small sample size and may not be representative of antitrust lawyers on a more widespread basis, a poll taken at an American Bar Association event at Stanford University reveals that nearly 3/4 of the antitrust lawyers present didn’t feel that Google was hurting competition.  The event was a debate and polling before the debate had attendees of the debate set at 61% not feeling that Google has hurt competition.  Those on the other side of the debate? Before it got underway 19% felt that Google was hurting competition and that number lowered slightly to 17% following the exchange.

Interesting results for a group of antitrust lawyers hearing out some version of the arguments likely to be made in from of the antitrust lawyers at the Federal Trade Commission.

UPDATE: Here is Manne & Wright (2011) on the case against the case against Google in the Harvard Journal of Law & Public Policy.

Posted in antitrust, federal trade commission, google | 1 Comment »

ACS Blog Debate on Google: Putting Consumer Welfare First in Antitrust Analysis of Google

Posted by Josh Wright on October 6, 2011

[I am participating in an online “debate” at the American Constitution Society with Professor Ben Edelman.  The debate consists of an opening statement and concluding responses to be posted later in the week.  Professor Edelman’s opening statement is here.  I am cross-posting my opening statement here at TOTM.  This is my closing statement]

Professor Edelman’s opening post does little to support his case.  Instead, it reflects the same retrograde antitrust I criticized in my first post.

Edelman’s understanding of antitrust law and economics appears firmly rooted in the 1960s approach to antitrust in which enforcement agencies, courts, and economists vigorously attacked novel business arrangements without regard to their impact on consumers.  Judge Learned Hand’s infamous passage in the Alcoa decision comes to mind as an exemplar of antitrust’s bad old days when the antitrust laws demanded that successful firms forego opportunities to satisfy consumer demand.  Hand wrote:

we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connections and the elite of personnel.

Antitrust has come a long way since then.  By way of contrast, today’s antitrust analysis of alleged exclusionary conduct begins with (ironically enough) the U.S. v. Microsoft decision.  Microsoft emphasizes the difficulty of distinguishing effective competition from exclusionary conduct; but it also firmly places “consumer welfare” as the lodestar of the modern approach to antitrust:

Whether any particular act of a monopolist is exclusionary, rather than merely a form of vigorous competition, can be difficult to discern: the means of illicit exclusion, like the means of legitimate competition, are myriad.  The challenge for an antitrust court lies in stating a general rule for distinguishing between exclusionary acts, which reduce social welfare, and competitive acts, which increase it.  From a century of case law on monopolization under § 2, however, several principles do emerge.  First, to be condemned as exclusionary, a monopolist’s act must have an “anticompetitive effect.”  That is, it must harm the competitive process and thereby harm consumers.  In contrast, harm to one or more competitors will not suffice.

Nearly all antitrust commentators agree that the shift to consumer-welfare focused analysis has been a boon for consumers.  Unfortunately, Edelman’s analysis consists largely of complaints that would have satisfied courts and agencies in the 1960s but would not do so now that the focus has turned to consumer welfare rather than indirect complaints about market structure or the fortunes of individual rivals.

From the start, in laying out his basic case against Google, Edelman invokes antitrust concepts that are simply inapt for the facts and then goes on to apply them in a manner inconsistent with the modern consumer-welfare-oriented framework described above:

In antitrust parlance, this is tying: A user who wants only Google Search, but not Google’s other services, will be disappointed.  Instead, any user who wants Google Search is forced to receive Google’s other services too.  Google’s approach also forecloses competition: Other sites cannot compete on their merits for a substantial portion of the market – consumers who use Google to find information – because Google has kept those consumers for itself.

There are two significant errors here.  First, Edelman claims to be interested in protecting users who want only Google Search but not its other services will be disappointed.  I have no doubt such consumers exist.  Some proof that they exist is that a service has already been developed to serve them.  Professor Edelman, meet Googleminusgoogle.com.  Across the top the page reads: “Search with Google without getting results from Google sites such as Knol, Blogger and YouTube.”  In antitrust parlance, this is not tying after all.  The critical point, however, is that user preferences are being satisfied as one would expect to arise from competition.

The second error, as I noted in my first post, is to condemn vertical integration as inherently anticompetitive.  It is here that the retrograde character of Professor Edelman’s analysis (and other critics of Google, to be fair) shines brightest.  It reflects a true disconnect between the 1960s approach to antitrust which focused exclusively upon market structure and impact upon rival websites; impact upon consumers was nowhere to be found.  That Google not only produces search results but also owns some of the results that are searched is not a problem cognizable by modern antitrust.  Edelman himself—appropriately—describes Google and its competitors as “information services.”  Google is not merely a URL finder.  Consumers demand more than that and competition forces search engines to deliver.  It offers value to users (and thus it can offer users to advertisers) by helping them find information in increasingly useful ways.  Most users “want Google Search” to the exclusion of Google’s “other services” (and, if they do, all they need do is navigate over to http://googleminusgoogle.com/ (even in a Chrome browser) and they can have exactly that).  But the critical point is that Google’s “other services” are methods of presenting information to consumers, just like search.  As the web and its users have evolved, and as Google has innovated to keep up with the evolving demands of consumers, it has devised or employed other means than simply providing links to a set of URLs to provide the most relevant information to its users.  The 1960s approach to antitrust condemns this as anticompetitive foreclosure; the modern version recognizes it as innovation, a form of competition that benefits consumers.

Edelman (and other critics, including a number of Senators at last month’s hearing) hearken back to the good old days and suggest that any deviation from Google’s technology or business model of the past is an indication of anticompetitive conduct:

The Google of 2004 promised to help users “leave its website as quickly as possible” while showing, initially, zero ads.  But times have changed.  Google has modified its site design to encourage users to linger on other Google properties, even when competing services have more or better information.  And Google now shows as many fourteen ads on a page.

It is hard to take seriously an argument that turns on criticizing a company simply for looking different than it did seven years ago.  Does anybody remember what search results looked like 7 years ago?  A theory of antitrust liability that would condemn a firm for investing billions of dollars in research and product development, constantly evolving its product to meet consumer demand, taking advantage of new technology, and developing its business model to increase profitability should not be taken seriously.  This is particularly true where, as here, every firm in the industry has followed a similar course, adopting the same or similar innovations.  I encourage readers to try a few queries on http://www.bing-vs-google.com/– where you can get side by side comparisons – in order to test whether the evolution of search results and innovation to meet consumer preferences is really a Google-specific thing or an industry wide phenomenon consistent with competition.  Conventional antitrust analysis holds that when conduct is engaged in not only by allegedly dominant firms, but also by every other firm in an industry, that conduct is presumptively efficient, not anticompetitive.

The main thrust of my critique is that Edelman and other Google critics rely on an outdated antitrust framework in which consumers play little or no role.  Rather than a consumer-welfare based economic critique consistent with the modern approach, these critics (as Edelman does in his opening statement) turn to a collection of anecdotes and “gotcha” statements from company executives.  It is worth correcting a few of those items here, although when we’ve reached the point where identifying a firm’s alleged abuse is a function of defining what a “confirmed” fax is, we’ve probably reached the point of decreasing marginal returns.  Rest assured that a series of (largely inaccurate) anecdotes about Google’s treatment of particular websites or insignificant contract terms is wholly insufficient to meet the standard of proof required to make a case against the company under the Sherman Act or even the looser Federal Trade Commission Act.

  • It appears to be completely inaccurate to say that “[a]n unsatisfied advertiser must complain to Google by ‘first class mail or air mail or overnight courier’ with a copy by ‘confirmed facsimile.’”  A quick search, even on Bing, leads one to this page, indicating that complaints may be submitted via web form.
  • It is likewise inaccurate to claim that “advertisers are compelled to accept whatever terms Google chooses to impose.  For example, an advertiser seeking placement through Google’s premium Search Network partners (like AOL and The New York Times) must also accept placement through the entire Google Search Network which includes all manner . . . undesirable placements.”  In actuality, Google offers a “Site and Category Exclusion Tool” that seems to permit advertisers to tailor their placements to exclude exactly these “undesirable placements.”
  • “Meanwhile, a user searching for restaurants, hotels, or other local merchants sees Google Places results with similar prominence, pushing other information services to locations users are unlikely to notice.”  I have strived in vain to enter a search for a restaurant, hotel, or the like into Google that yielded results that effectively hid “other information services” from my notice, but for some of my searches, Google Places did come up first or second (and for others it showed up further down the page).
  • Edelman has noted elsewhere that, sometimes, for some of the searches he has tested, the most popular result on Google (as well, I should add, on other, non-“dominant” sites) is not the first, Google-owned result, but instead the second.  He cites this as evidence that Google is cooking the books, favoring its own properties when users actually prefer another option.  It actually doesn’t demonstrate that, but let’s accept the claim for the sake of argument.  Notice what his example also demonstrates: that users who prefer the second result to the first are perfectly capable of finding it and clicking on it.  If this is foreclosure, Google is exceptionally bad at it.

The crux of Edelman’s complaint seems to be that Google is competing in ways that respond to consumer preferences.  This is precisely what antitrust seeks to encourage, and we would not want a set of standards that chilled competition because of a competitor’s success.  Having been remarkably successful in serving consumers’ search demands in a quickly evolving market, it would be perverse for the antitrust laws to then turn upon Google without serious evidence that it had, in fact, actually harmed consumers.

Untethered from consumer welfare analysis, antitrust threatens to re-orient itself to the days when it was used primarily as a weapon against rivals and thus imposed a costly tax on consumers.  It is perhaps telling that Microsoft, Expedia, and a few other Google competitors are the primary movers behind the effort to convict the company.  But modern antitrust, shunning its inglorious past, requires actual evidence of anticompetitive effect before condemning conduct, particularly in fast-moving, innovative industries.  Neither Edelman nor any of Google’s other critics, offer any.

During the heady days of the Microsoft antitrust case, the big question was whether modern antitrust would be able to keep up with quickly evolving markets.  The treatment of the proferred case against Google is an important test of the proposition (endorsed by the Antitrust Modernization Commission and others) that today’s antitrust is capable of consistent and coherent application in innovative, high-tech markets.  An enormous amount is at stake.  Faced with the high stakes and ever-evolving novelty of high-tech markets, antitrust will only meet this expectation if it remains grounded and focused on the core principle of competitive effects and consumer harm.  Without it, antitrust will devolve back into the laughable and anti-consumer state of affairs of the 1960s—and we will all pay for it.

Posted in antitrust, consumer protection, economics, error costs, exclusionary conduct, federal trade commission, google, monopolization, technology, tying | 6 Comments »

ACS Blog Debate on Google: Retrograde Antitrust Analysis is No Fit for Google

Posted by Josh Wright on October 3, 2011

I am participating in an online “debate” at the American Constitution Society with Professor Ben Edelman.  The debate consists of an opening statement and concluding responses to be posted later in the week.  Professor Edelman’s opening statement is here.  I am cross-posting my opening statement here at TOTM, and will cross-post my closing statement later this week.

The theoretical antitrust case against Google reflects a troubling disconnect between the state of our technology and the state of our antitrust economics.  Google’s is a 2011 high tech market being condemned by 1960s economics.  Of primary concern (although there are a lot of things to be concerned about, and my paper with Geoffrey Manne, “If Search Neutrality Is the Answer, What’s the Question?,” canvasses the problems in much more detail) is the treatment of so-called search bias (whereby Google’s ownership and alleged preference for its own content relative to rivals’ is claimed to be anticompetitive) and the outsized importance given to complaints by competitors and individual web pages rather than consumer welfare in condemning this bias.

The recent political theater in the Senate’s hearings on Google displayed these problems prominently, with the first half of the hearing dedicated to Senators questioning Google’s Eric Schmidt about search bias and the second half dedicated to testimony from and about competitors and individual websites allegedly harmed by Google.  Very little, if any, attention was paid to the underlying economics of search technology, consumer preferences, and the ultimate impact of differentiation in search rankings upon consumers.

So what is the alleged problem?  Well, in the first place, the claim is that there is bias.  Proving that bias exists — that Google favors its own maps over MapQuest’s, for example — would be a necessary precondition for proving that the conduct causes anticompetitive harm, but let us be clear that the existence of bias alone is not sufficient to show competitive harm, nor is it even particularly interesting, at least viewed through the lens of modern antitrust economics.

In fact, economists have known for a very long time that favoring one’s own content — a form of “vertical” arrangement whereby the firm produces (and favors) both a product and one of its inputs — is generally procompetitive.  Vertically integrated firms may “bias” their own content in ways that increase output, just as other firms may do so by arrangement with others.  Economists since Nobel Laureate Ronald Coase have known — and have been reminded by Klein, Crawford & Alchian, as well as Nobel Laureate Oliver Williamson and many others — that firms may achieve by contract anything they could do within the boundaries of the firm.  The point is that, in the economics literature, it is well known that self-promotion in a vertical relationship can be either efficient or anticompetitive depending on the circumstances of the situation.  It is never presumptively problematic.  In fact, the empirical literature suggests that such relationships are almost always procompetitive and that restrictions imposed upon the abilities of firms to enter them generally reduce consumer welfare.  Procompetitive vertical integration is the rule; the rare exception (and the exception relevant to antitrust analysis) is the use of vertical arrangements to harm not just individual competitors, but competition, thus reducing consumer welfare.

One has to go back to the antitrust economics of the 1960s to find a literature — and a jurisprudence — espousing the notion that “bias” alone is inherently an antitrust problem.  This is why it is so disconcerting to find academics, politicians, and policy wags promoting such theories today on the basis that this favoritism harms competitors.  The relevant antitrust question is not whether there is bias but whether that bias is efficient.  Evidence that other search engines with much smaller market shares, and certainly without any market power, exhibit similar bias suggests that the practice certainly has some efficiency justifications.  Ignoring that possibility ignores nearly a half century of economic theory and empirical evidence.

It adds insult to injury to point to harm borne by competitors as justification for antitrust enforcement already built upon outdated, discredited economic notions.  The standard in antitrust jurisprudence (and antitrust economics) is harm to consumers.  When a monopolist restricts output and prices go up, harming consumers, it is a harm potentially cognizable by antitrust; but when Safeway brands, sells, and promotes its own products and the only identifiable harm is that Kraft sells less macaroni and cheese, it is not.

Understanding the competitive economics of vertical integration and vertical contractual arrangements is difficult because there are generally both anticompetitive and procompetitive theories of the conduct.  One must be very careful with the facts in these cases to avoid conflating harm to rivals arising from competition on the merits with harm to competition arising out of exclusionary conduct.  Misapplication of even this nuanced approach can generate significant consumer harm by prohibiting efficient, pro-consumer conduct that is wrongly determined to be the opposite and by reducing incentives for other firms to take risks and innovate for fear that they, too, will be wrongly condemned.

Professor Edelman has been prominent among Google’s critics calling for antitrust intervention.  Yet, unfortunately, he too has demonstrated a surprising inattention to this complexity and its very real anti-consumer consequences.  In an interview in Politico (login required), he suggests that we should simply prevent Google from vertically integrating:

I don’t think it’s out of the question given the complexity of what Google has built and its persistence in entering adjacent, ancillary markets.  A much simpler approach, if you like things that are simple, would be to disallow Google from entering these adjacent markets.  OK, you want to be dominant in search?  Stay out of the vertical business, stay out of content.

This sort of thinking implies that the harm suffered by competing content providers justifies preventing Google from adopting an entire class of common business relationships on the implicit assumption that competitor harm is relevant to antitrust economics and the ban on vertical integration is essentially costless.  Neither is true.  U.S. antitrust law requires a demonstration that consumers — not just rivals — will be harmed by a challenged practice.  But consumers’ interests are absent from this assessment on both sides — on the one hand by adopting harm to competitors rather than harm to consumers as a relevant antitrust standard and on the other by ignoring the hidden harm to consumers from blithely constraining potentially efficient business conduct.

Actual, measurable competitive effects are what matters for modern antitrust analysis, not presumptions about competitive consequences derived from the structure of a firm or harm to its competitors.  Unfortunately for its critics, in Google’s world, prices to consumers are zero, there is a remarkable amount of investment and innovation (not only from Google but also from competitors like Bing, Blekko, Expedia, and others), consumers are happy, and, significantly, Google is far less dominant than critics and senators suggest.  Facebook is now the most visited page on the Internet.  Many online marketers no longer view Google as the standard, but are instead increasingly looking to social media (like Facebook) as the key to advertisers’ success in attracting eyeballs on the Internet.  And at the end of the day, competition really is “just a click away” (OK, a few letters away) as Google has no control over users’ ability to employ other search engines, use other sources of information, or simply directly access content, all by typing a different URL into a browser.

Finally, even if there is a concern, there is the problem of what to do about it.  Even if Google’s critics were to demonstrate that bias is anticompetitive, it is relevant to any analysis that bias is hard to identify, that there is considerable disagreement among users over whether it is problematic in any given instance, that a remedy would be difficult to design and harder to enforce, and that the costs of being wrong are significant.

Tom Barnett — who was formerly in charge of the Antitrust Division at the DOJ and who now represents Expedia and vociferously criticizes Google (including at the Senate hearings in September) — has himself made this point, observing that:

No institution that enforces the antitrust laws is omniscient or perfect.  Among other things, antitrust enforcement agencies and courts lack perfect information about pertinent facts, including the impact of particular conduct on consumer welfare . . . . We face the risk of condemning conduct that is not harmful to competition . . . and the risk of failing to condemn conduct that does harm competition . . .

Condemning Google for developing Google Maps as a better form of search result than its original “ten blue links” reflects retrograde economics and a strange and costly preference for the status quo over innovation.  Doing so because it harms a competitor turns conventional antitrust analysis on its head with consumers bearing the cost in terms of reduced innovation and satisfaction.

Posted in antitrust, economics, federal trade commission, google, technology | 4 Comments »

Epstein, Kieff & Spulber Eviscerate the FTC’s Proposal on Regulating SSOs

Posted by Geoffrey Manne on August 24, 2011

In a thorough and convincing paper, “The FTC’s Proposal for Regulating IP through SSOs Would Replace Private Coordination with Government Hold-Up,” Richard Epstein, Scott Kieff and Dan Spulber assess and then decimate the FTC’s proposal on patent notice and remedies, “The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition.”  Note Epstein, Kieff and Spulber:

In its recent report entitled “The Evolving IP Marketplace,” the Federal Trade Commission (FTC) advances a far‐reaching regulatory approach (Proposal) whose likely effect would be to distort the operation of the intellectual property (IP) marketplace in ways that will hamper the innovation and commercialization of new technologies. The gist of the FTC Proposal is to rely on highly non-­standard and misguided definitions of economic terms of art such as “ex ante” and “hold-­up,” while urging new inefficient rules for calculating damages for patent infringement. Stripped of the technicalities, the FTC Proposal would so reduce the costs of infringement by downstream users that the rate of infringement would unduly increase, as potential infringers find it in their interest to abandon the voluntary market in favor of a more attractive system of judicial pricing. As the number of nonmarket transactions increases, the courts will play an ever larger role in deciding the terms on which the patents of one party may be used by another party. The adverse effects of this new trend will do more than reduce the incentives for innovation; it will upset the current set of well-­‐functioning private coordination activities in the IP marketplace that are needed to accomplish the commercialization of new technologies. Such a trend would seriously undermine capital formation, job growth, competition, and the consumer welfare the FTC seeks to promote.

Focusing in particular on SSOs, the trio homes in on the potential incentive problem created by the FTC’s proposal:

The central problem with the FTC’s approach is that it would interfere seriously with the helpful incentives all parties in the IP marketplace presently have to contract with each other. The FTC’s approach ignores the powerful incentives that it creates in putative licenses to spurn the voluntary market in order to obtain a strategic advantage over the licensor. In any voluntary market, the low rates that go to initial licensees reflect the uncertainty of the value of the patented technology at the time the license is issued. Once that technology has proven its worth, there is no sound reason to allow any potential licensee who instead held out from the originally offered deal to get bargain rates down the road. Allowing such an option would make the holdout better off than the contracting party. Such holdouts would not need to take licenses for technologies with low value, while resting assured they would still get technologies with high value at below market rates. The FTC seems to overlook that a well-­‐functioning patent damage system should do more than merely calibrate damages after the fact. An efficient approach to damages is one that also reduces the number of infringements overall by making sure that the infringer cannot improve his economic position by his own wrong.

The FTC Proposal rests on the misguided conviction that the law should not allow a licensor to “demand and obtain royalty payments based on the infringer’s switching costs” once the manufacturer has “sunk costs into using the technology;” and it labels any such payments as the result of “hold-­up.”

As Epstein, et al. discuss, current private ordering (reciprocal dealing, repeat play, RAND terms, etc.) works perfectly well to address real hold-up problems, and the FTC seems to be both defining the problem oddly and, thus, creating a problem that doesn’t really exist.

Although not discussed directly, the paper owes a great deal to the great Ben Klein and especially his paper, Why Hold-Ups Occur: The Self-Enforcing Range of Contractual Relationships (to say nothing of Klein, Crawford & Alchian, of course).  Likewise, although not discussed in the paper, Josh and Bruce Kobayashi’s excellent paper, Federalism, Substantive Preemption and Limits on Antitrust: An Application to Patent Holdup is an essential precursor to this paper, addressing the comparative merits of antitrust  and contract-based evaluation of claimed patent holdups in SSOs.

Highly-recommended and an important addition to the ever-interesting antitrust/IP discussion.

Posted in antitrust, armen alchian, economics, federal trade commission, law and economics, legal scholarship, patent, scholarship | Tagged: , , | 3 Comments »

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