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A Decision-Theoretic Approach to Insider Trading Regulation

Posted by Thom Lambert on January 19, 2012

Regular readers will know that several of us TOTM bloggers are fans of the “decision-theoretic” approach to antitrust law.  Such an approach, which Josh and Geoff often call an “error cost” approach, recognizes that antitrust liability rules may misfire in two directions:  they may wrongly acquit harmful practices, and they may wrongly convict beneficial (or benign) behavior.  Accordingly, liability rules should be structured to minimize total error costs (welfare losses from condemning good stuff and acquitting bad stuff), while keeping in check the costs of administering the rules (e.g., the costs courts and business planners incur in applying the rules).  The goal, in other words, should be to minimize the sum of decision and error costs.  As I have elsewhere demonstrated, the Roberts Court’s antitrust jurisprudence seems to embrace this sort of approach.

One of my long-term projects (once I jettison some administrative responsibilities, like co-chairing my school’s dean search committee!) will be to apply the decision-theoretic approach to regulation generally.  I hope to build upon some classic regulatory scholarship, like Alfred Kahn’s Economics of Regulation (1970) and Justice Breyer’s Regulation and Its Reform (1984), to craft a systematic regulatory model that both avoids “regulatory mismatch” (applying the wrong regulatory fix to a particular type of market failure) and incorporates the decision-theoretic perspective. 

In the meantime, I’ve been thinking about insider trading regulation.  Our friend Professor Bainbridge recently invited me to contribute to a volume he’s editing on insider trading.  I’m planning to conduct a decision-theoretic analysis of actual and proposed insider trading regulation.

Such regulation is a terrific candidate for decision-theoretic analysis because stock trading on the basis of material, nonpublic information itself is a “mixed bag” practice:  Some instances of insider trading are, on net, socially beneficial; others create net welfare losses.  Contrast, for example, two famous insider trading cases:

  • In SEC v. Texas Gulf Sulphur, mining company insiders who knew of an unannounced ore discovery purchased stock in their company, knowing that the stock price would rise when the discovery was announced.  Their trading activity caused the stock price to rise over time.  Such price movement might have tipped off landowners in the vicinity of the deposit and caused them not to sell their property to the company (or to do so only at a high price), in which case the traders’ activity would have thwarted a valuable corporate opportunity.  If corporations cannot exploit their discoveries of hidden value (because of insider trading), they’ll be less likely to seek out hidden value in the first place, and social welfare will be reduced.  TGS thus represents “bad” insider trading.  
  • Dirks v. SEC, by contrast, illustrates “good” insider trading.  In that case, an insider tipped a securities analyst that a company was grossly overvalued because of rampant fraud.  The analyst recommended that his clients sell (or buy puts on) the stock of the fraud-ridden corporation.  That trading helped expose the fraud, creating social value in the form of more accurate stock prices.

These are just two examples of how insider trading may reduce or enhance social welfare.  In general, instances of insider trading may reduce social welfare by preventing firms from exploiting and thus creating valuable information (as in TGS), by creating incentives for deliberate mismanagement (because insiders can benefit from “bad news” and might therefore be encouraged to “create” it), and perhaps by limiting stock market liquidity or reducing market efficiency by increasing bid-ask spreads.  On the other hand, instances of insider trading may enhance social welfare by making stock markets more efficient (so that prices better reflect firms’ expected profitability and capital is more appropriately channeled), by reducing firms’ compensation costs (as the right to engage in insider trading replaces managers’ cash compensation—on this point, see the excellent work by our former blog colleague, Todd Henderson), and by reducing the corporate mismanagement and subsequent wealth destruction that comes from stock mispricing (mainly overvaluation of equity—see work by Michael Jensen and yours truly).

Because insider trading is sometimes good and sometimes bad, rules restricting it may err in two directions:  they may acquit/encourage bad instances, or they may condemn/prevent good instances.  In either case, social welfare suffers.  Accordingly, the optimal regulatory regime would seek to minimize the sum of losses from improper condemnations and improper acquittals (total error costs), while keeping administrative costs in check.

My contribution to Prof. Bainbridge’s insider trading book will employ decision theory to evaluate three actual or proposed approaches to regulating insider trading:  (1) the “level playing field” paradigm, apparently favored by many prosecutors and securities regulators, which would condemn any stock trading on the basis of material, nonpublic information; (2) the legal status quo, which deems “fraudulent” any insider trading where the trader owes either a fiduciary duty to his trading partner or a duty of trust or confidence to the source of his nonpublic information; and (3) a laissez-faire, “contractarian” approach, which would permit corporations and sources of nonpublic information to posit their own rules about when insiders and informed outsiders may trade on the basis of material, nonpublic information.  I’ll then propose a fourth disclosure-based alternative aimed at maximizing social welfare by enhancing the social benefits and reducing the social costs of insider trading, while keeping decision costs in check. 

Stay tuned…I’ll be trying out a few of the paper’s ideas on TOTM.  I look forward to hearing our informed readers’ thoughts.

Posted in 10b-5, error costs, insider trading, law and economics, markets, regulation, securities regulation | Leave a Comment »

Fed should stay out of Google/Twitter social search spat

Posted by Geoffrey Manne on January 12, 2012

By Berin Szoka, Geoffrey Manne & Ryan Radia

As has become customary with just about every new product announcement by Google these days, the company’s introduction on Tuesday of its new “Search, plus Your World” (SPYW) program, which aims to incorporate a user’s Google+ content into her organic search results, has met with cries of antitrust foul play. All the usual blustering and speculation in the latest Google antitrust debate has obscured what should, however, be the two key prior questions: (1) Did Google violate the antitrust laws by not including data from Facebook, Twitter and other social networks in its new SPYW program alongside Google+ content; and (2) How might antitrust restrain Google in conditioning participation in this program in the future?

The answer to the first is a clear no. The second is more complicated—but also purely speculative at this point, especially because it’s not even clear Facebook and Twitter really want to be included or what their price and conditions for doing so would be. So in short, it’s hard to see what there is to argue about yet.

Let’s consider both questions in turn.

Should Google Have Included Other Services Prior to SPYW’s Launch?

Google says it’s happy to add non-Google content to SPYW but, as Google fellow Amit Singhal told Danny Sullivan, a leading search engine journalist:

Facebook and Twitter and other services, basically, their terms of service don’t allow us to crawl them deeply and store things. Google+ is the only [network] that provides such a persistent service,… Of course, going forward, if others were willing to change, we’d look at designing things to see how it would work.

In a follow-up story, Sullivan quotes his interview with Google executive chairman Eric Schmidt about how this would work:

“To start with, we would have a conversation with them,” Schmidt said, about settling any differences.

I replied that with the Google+ suggestions now hitting Google, there was no need to have any discussions or formal deals. Google’s regular crawling, allowed by both Twitter and Facebook, was a form of “automated conversation” giving Google material it could use.

“Anything we do with companies like that, it’s always better to have a conversion,” Schmidt said.

MG Siegler calls this “doublespeak” and seems to think Google violated the antitrust laws by not making SPYW more inclusive right out of the gate. He insists Google didn’t need permission to include public data in SPYW:

Both Twitter and Facebook have data that is available to the public. It’s data that Google crawls. It’s data that Google even has some social context for thanks to older Google Profile features, as Sullivan points out.

It’s not all the data inside the walls of Twitter and Facebook — hence the need for firehose deals. But the data Google can get is more than enough for many of the high level features of Search+ — like the “People and Places” box, for example.

It’s certainly true that if you search Google for “site:twitter.com” or “site:facebook.com,” you’ll get billions of search results from publicly-available Facebook and Twitter pages, and that Google already has some friend connection data via social accounts you might have linked to your Google profile (check out this dashboard), as Sullivan notes. But the public data isn’t available in real-time, and the private, social connection data is limited and available only for users who link their accounts. For Google to access real-time results and full social connection data would require… you guessed it… permission from Twitter (or Facebook)! As it happens, Twitter and Google had a deal for a “data firehose” so that Google could display tweets in real-time under the “personalized search” program for public social information that SPYW builds on top of. But Twitter ended the deal last May for reasons neither company has explained.

At best, therefore, Google might have included public, relatively stale social information from Twitter and Facebook in SPYW—content that is, in any case, already included in basic search results and remains available there. The real question, however, isn’t could Google have included this data in SPYW, but rather need they have? If Google’s engineers and executives decided that the incorporation of this limited data would present an inconsistent user experience or otherwise diminish its uniquely new social search experience, it’s hard to fault the company for deciding to exclude it. Moreover, as an antitrust matter, both the economics and the law of anticompetitive product design are uncertain. In general, as with issues surrounding the vertical integration claims against Google, product design that hurts rivals can (it should be self-evident) be quite beneficial for consumers. Here, it’s difficult to see how the exclusion of non-Google+ social media from SPYW could raise the costs of Google’s rivals, result in anticompetitive foreclosure, retard rivals’ incentives for innovation, or otherwise result in anticompetitive effects (as required to establish an antitrust claim).

Further, it’s easy to see why Google’s lawyers would prefer express permission from competitors before using their content in this way. After all, Google was denounced last year for “scraping” a different type of social content, user reviews, most notably by Yelp’s CEO at the contentious Senate antitrust hearing in September. Perhaps one could distinguish that situation from this one, but it’s not obvious where to draw the line between content Google has a duty to include without “making excuses” about needing permission and content Google has a duty not to include without express permission. Indeed, this seems like a case of “damned if you do, damned if you don’t.” It seems only natural for Google to be gun-shy about “scraping” other services’ public content for use in its latest search innovation without at least first conducting, as Eric Schmidt puts it, a “conversation.”

And as we noted, integrating non-public content would require not just permission but active coordination about implementation. SPYW displays Google+ content only to users who are logged into their Google+ account. Similarly, to display content shared with a user’s friends (but not the world) on Facebook, or protected tweets, Google would need a feed of that private data and a way of logging the user into his or her account on those sites.

Now, if Twitter truly wants Google to feature tweets in Google’s personalized search results, why did Twitter end its agreement with Google last year? Google responded to Twitter’s criticism of its SPYW launch last night with a short Google+ statement:

We are a bit surprised by Twitter’s comments about Search plus Your World, because they chose not to renew their agreement with us last summer, and since then we have observed their rel=nofollow instructions [by removing Twitter content results from "personalized search" results].

Perhaps Twitter simply got a better deal: Microsoft may have paid Twitter $30 million last year for a similar deal allowing Bing users to receive Twitter results. If Twitter really is playing hardball, Google is not guilty of discriminating against Facebook and Twitter in favor of its own social platform. Rather, it’s simply unwilling to pony up the cash that Facebook and Twitter are demanding—and there’s nothing illegal about that.

Indeed, the issue may go beyond a simple pricing dispute. If you were CEO of Twitter or Facebook, would you really think it was a net-win if your users could use Google search as an interface for your site? After all, these social networking sites are in an intense war for eyeballs: the more time users spend on Google, the more ads Google can sell, to the detriment of Facebook or Twitter. Facebook probably sees itself increasingly in direct competition with Google as a tool for finding information. Its social network has vastly more users than Google+ (800 million v 62 million, but even larger lead in active users), and, in most respects, more social functionality. The one area where Facebook lags is search functionality. Would Facebook really want to let Google become the tool for searching social networks—one social search engine “to rule them all“? Or would Facebook prefer to continue developing “social search” in partnership with Bing? On Bing, it can control how its content appears—and Facebook sees Microsoft as a partner, not a rival (at least until it can build its own search functionality inside the web’s hottest property).

Adding to this dynamic, and perhaps ultimately fueling some of the fire against SPYW, is the fact that many Google+ users seem to be multi-homing, using both Facebook and Google+ (and other social networks) at the same time, and even using various aggregators and syncing tools (Start Google+, for example) to unify social media streams and share content among them. Before SPYW, this might have seemed like a boon to Facebook, staunching any potential defectors from its network onto Google+ by keeping them engaged with both, with a kind of “Facebook primacy” ensuring continued eyeball time on its site. But Facebook might see SPYW as a threat to this primacy—in effect, reversing users’ primary “home” as they effectively import their Facebook data into SPYW via their Google+ accounts (such as through Start Google+). If SPYW can effectively facilitate indirect Google searching of private Facebook content, the fears we suggest above may be realized, and more users may forego vistiing Facebook.com (and seeing its advertisers), accessing much of their Facebook content elsewhere—where Facebook cannot monetize their attention.

Amidst all the antitrust hand-wringing over SPYW and Google’s decision to “go it alone” for now, it’s worth noting that Facebook has remained silent. Even Twitter has said little more than a tweet’s worth about the issue. It’s simply not clear that Google’s rivals would even want to participate in SPYW. This could still be bad for consumers, but in that case, the source of the harm, if any, wouldn’t be Google. If this all sounds speculative, it is—and that’s precisely the point. No one really knows. So, again, what’s to argue about on Day 3 of the new social search paradigm?

The Debate to Come: Conditioning Access to SPYW

While Twitter and Facebook may well prefer that Google not index their content on SPYW—at least, not unless Google is willing to pay up—suppose the social networking firms took Google up on its offer to have a “conversation” about greater cooperation. Google hasn’t made clear on what terms it would include content from other social media platforms. So it’s at least conceivable that, when pressed to make good on its lofty-but-vague offer to include other platforms, Google might insist on unacceptable terms. In principle, there are essentially three possibilities here:

  1. Antitrust law requires nothing because there are pro-consumer benefits for Google to make SPYW exclusive and no clear harm to competition (as distinct from harm to competitors) for doing so, as our colleague Josh Wright argues.
  2. Antitrust law requires Google to grant competitors access to SPYW on commercially reasonable terms.
  3. Antitrust law requires Google to grant such access on terms dictated by its competitors, even if unreasonable to Google.

Door #3 is a legal non-starter. In Aspen Skiing v. Aspen Highlands (1985), the Supreme Court came the closest it has ever come to endorsing the “essential facilities” doctrine by which a competitor has a duty to offer its facilities to competitors. But in Verizon Communications v. Trinko (2004), the Court made clear that even Aspen Skiing is “at or near the outer boundary of § 2 liability.” Part of the basis for the decision in Aspen Skiing was the existence of a prior, profitable relationship between the “essential facility” in question and the competitor seeking access. Although the assumption is neither warranted nor sufficient (circumstances change, of course, and merely “profitable” is not the same thing as “best available use of a resource”), the Court in Aspen Skiing seems to have been swayed by the view that the access in question was otherwise profitable for the company that was denying it. Trinko limited the reach of the doctrine to the extraordinary circumstances of Aspen Skiing, and thus, as the Court affirmed in Pacific Bell v. LinkLine (2008), it seems there is no antitrust duty for a firm to offer access to a competitor on commercially unreasonable terms (as Geoff Manne discusses at greater length in his chapter on search bias in TechFreedom’s free ebook, The Next Digital Decade).

So Google either has no duty to deal at all, or a duty to deal only on reasonable terms. But what would a competitor have to show to establish such a duty? And how would “reasonableness” be defined?

First, this issue parallels claims made more generally about Google’s supposed “search bias.” As Josh Wright has said about those claims, “[p]roperly articulated vertical foreclosure theories proffer both that bias is (1) sufficient in magnitude to exclude Google’s rivals from achieving efficient scale, and (2) actually directed at Google’s rivals.” Supposing (for the moment) that the second point could be established, it’s hard to see how Facebook or Twitter could really show that being excluded from SPYW—while still having their available content show up as it always has in Google’s “organic” search results—would actually “render their efforts to compete for distribution uneconomical,” which, as Josh explains, antitrust law would require them to show. Google+ is a tiny service compared to Google or Facebook. And even Google itself, for all the awe and loathing it inspires, lags in the critical metric of user engagement, keeping the average user on site for only a quarter as much time as Facebook.

Moreover, by these same measures, it’s clear that Facebook and Twitter don’t need access to Google search results at all, much less its relatively trivial SPYW results, in order find, and be found by, users; it’s difficult to know from what even vaguely relevant market they could possibly be foreclosed by their absence from SPYW results. Does SPYW potentially help Google+, to Facebook’s detriment? Yes. Just as Facebook’s deal with Microsoft hurts Google. But this is called competition. The world would be a desolate place if antitrust laws effectively prohibited firms from making decisions that helped themselves at their competitors’ expense.

After all, no one seems to be suggesting that Microsoft should be forced to include Google+ results in Bing—and rightly so. Microsoft’s exclusive partnership with Facebook is an important example of how a market leader in one area (Facebook in social) can help a market laggard in another (Microsoft in search) compete more effectively with a common rival (Google). In other words, banning exclusive deals can actually make it more difficult to unseat an incumbent (like Google), especially where the technologies involved are constantly evolving, as here.

Antitrust meddling in such arrangements, particularly in high-risk, dynamic markets where large up-front investments are frequently required (and lost), risks deterring innovation and reducing the very dynamism from which consumers reap such incredible rewards. “Reasonable” is a dangerously slippery concept in such markets, and a recipe for costly errors by the courts asked to define the concept. We suspect that disputes arising out of these sorts of deals will largely boil down to skirmishes over pricing, financing and marketing—the essential dilemma of new media services whose business models are as much the object of innovation as their technologies. Turning these, by little more than innuendo, into nefarious anticompetitive schemes is extremely—and unnecessarily—risky. Read the rest of this entry »

Posted in advertising, error costs, essential facilities, exclusionary conduct, google, Internet search, law and economics, monopolization, technology | Tagged: , , , , , , | 1 Comment »

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 »

The NYT on why law school is expensive

Posted by Larry Ribstein on December 18, 2011

It’s Sunday so the NYT has another David Segal screed on legal education.  This time he presents the insight that law school is expensive because of accreditation standards that prevent law schools from containing costs even if they wanted to.  Segal says, “[t]he lack of affordable law school options, scholars say, helps explain why so many Americans don’t hire lawyers.” He quotes several law professors — my former colleague Andy Morriss, now at Alabama; USC’s Gillian; Emory’s George Shepherd.

The article seeks to rebut the claim of the chairman of the ABA’s legal education section that high accreditation standards are necessary to give students “what they have a right to receive in terms of education” and “protect the public and make certain that graduates who offer themselves as qualified lawyers know what they’re doing.”  It examines the experiences of a start up law school in Tennessee, the Duncan School of Law, which is seeking ABA accreditation. The school must have a big library and professors with tenure and time to write law review articles.  This setup is great for law professors. So, as a couple of former law deans tell Segal, the professors exert their power through the accreditation process to maintain the status quo. 

In the end, the Duncan folks had to fly to a beachfront Ritz-Carlton in Puerto Rico to meet with the ABA to meet and make a 15-minute argument for provisional accreditation. The ABA’s questions indicated they were interested in the lawyer market in east Tennessee, suggesting that lowering clients’ costs mattered less to them than threatening lawyers’ income.

As usual (see my posts on past Segal screeds here and here) Segal presents common complaints in an overwrought stew with little cogent analysis.  Law is high-priced because the ABA is powerful and wants to keep it that way. Clifford Winston, co-author of First Thing We Do, Let’s Deregulate All the Lawyers, says this ABA-enforced “near-total absence of competition” is the big problem.  Raise your hand if this shocks or surprises you.

If you want more thoughtful analysis on the modern issues confronting law teaching you need to look beyond the NYT to a blog — namely this one, and especially our “Unlocking the Law” symposium, which had essays by, among many others, Gillian Hadfield and Winston’s co-author, Robert Crandall. My law review article, Practicing Theory, discusses many of the issues presented in Segal’s paper.

The NYT article typically fails to articulate the causes and cures of our over-priced legal system beyond the commonplace that the ABA somehow manages to restrict competition.  Segal blames the law professors, finding comfort in the scam-bloggers’ simple-minded denunciation of high-priced legal scholarship. But since Segal doesn’t explain how a bunch of eggheads sitting around writing useless articles came to control the ABA, he sounds like he’s blaming the mosquitoes for banning DDT.  This narrow focus isn’t surprising given Segal’s mission, which not to analyze or educate, but to entertain with simplistic narratives and pithy quotes.

So what’s really happening?  The cause of the current situation, as I make clear in my Practicing Theory, is obviously the practicing bar, a powerful lawyer interest group with an incentive to keep the price of legal services high.  Lawyers operate not only through the ABA but also local bar associations. Legal educators (law professors, law school and university administrators) come into the picture because they manage the key instrument for doing so — the academic institutions that keep the price of entry high. If the lawyers really wanted to make law school cheaper and more “practical” they could do it in an instant.

Gillian Hadfield’s suggestion to Segal of alternative accrediting bodies is one possible future world, but there are others.  The route to all of these worlds isn’t simply changing the law school accreditation system (accreditation is pervasive throughout the education world), but changing the system of lawyer licensing which maintains the current one-size-fits-all approach.  But how to do that when the powerful lawyers’ guild has maintained its grip on the process for almost a century?   

As I have discussed (Practicing Theory, Law’s Information Revolution, Delawyering the Corporation, Death of Big Law) the answer lies in the current rise of technology and global competition, which are combining with the soaring costs of legal services to crack the foundations of the current regulatory system.  Systemic changes such as changing the choice of law rules regulation of the structure of law practice and changing the intellectual property rules governing legal information products (Law’s Information Revolution, Law as a Byproduct) could hasten this process. 

Reform of law school accreditation ultimately will come along with significant changes to lawyer licensing whether lawyers and law professors like it or not.  Regulation of legal services will be unbundled, with only core legal services (however that comes to be defined) subject to anything like the current level of regulation, and other areas regulated at different levels or deregulated altogether. 

While lawyers and law professors can’t stop change they can shape the future.  In particular, they should start to provide a rationale for why the world needs at least some high-priced legal experts.  What, exactly, is it that lawyers do that’s so valuable?  The answer is clearly not “nothing,” although in a world of increasing competition and sophisticated technology may not be enough to maintain the current level of lawyer employment.

With respect to legal educators, as I discuss in Practicing Theory, law schools should continue to do what they do best — teach theory.  Although the theory should be relevant to what lawyers do, this doesn’t mean that law school should devolve to three-year apprenticeships overseen by practitioners.  The new world of law practice will leave the more menial and routine stuff to machines and non-lawyers.  Lawyers will handle the high-level legal planning and architecture.  They will have to learn how to build that legal architecture using disciplines such as philosophy, economics, political science, psychology, and computer science.

This leads me to the most interesting, if unspoken, aspect of Segal’s article.  All of the non-ex-dean law professors quoted in the article trained as economists. This isn’t surprising. An economist would not ask how we make sure lawyers remain important, but rather what it is that lawyers contribute on the margin.  (Perhaps it’s that tendency to ask such pesky questions and their skepticism about the government regulation that secures the demand for lawyers that some law professors don’t like about economists.) This is the kind of multidisciplinary perspective (as noted above, not just economics) that will provide the intellectual foundation of the future of legal services.  It’s going to come from law professors writing the high-priced articles that Segal and the scam-bloggers decry.  Of course, there will be fewer of them, at fewer schools, but that’s a story for another day.

Posted in law and economics, law school, lawyers, legal profession | 11 Comments »

Is Google Search Bias Consistent with Anticompetitive Foreclosure?

Posted by Josh Wright on December 9, 2011

In my series of three posts (here, here and here) drawn from my empirical study on search bias I have examined whether search bias exists, and, if so, how frequently it occurs.  This, the final post in the series, assesses the results of the study (as well as the Edelman & Lockwood (E&L) study to which it responds) to determine whether the own-content bias I’ve identified is in fact consistent with anticompetitive foreclosure or is otherwise sufficient to warrant antitrust intervention.

As I’ve repeatedly emphasized, while I refer to differences among search engines’ rankings of their own or affiliated content as “bias,” without more these differences do not imply anticompetitive conduct.  It is wholly unsurprising and indeed consistent with vigorous competition among engines that differentiation emerges with respect to algorithms.  However, it is especially important to note that the theories of anticompetitive foreclosure raised by Google’s rivals involve very specific claims about these differences.  Properly articulated vertical foreclosure theories proffer both that bias is (1) sufficient in magnitude to exclude Google’s rivals from achieving efficient scale, and (2) actually directed at Google’s rivals.  Unfortunately for search engine critics, their theories fail on both counts.  The observed own-content bias appears neither to be extensive enough to prevent rivals from gaining access to distribution nor does it appear to target Google’s rivals; rather, it seems to be a natural result of intense competition between search engines and of significant benefit to consumers.

Vertical foreclosure arguments are premised upon the notion that rivals are excluded with sufficient frequency and intensity as to render their efforts to compete for distribution uneconomical.  Yet the empirical results simply do not indicate that market conditions are in fact conducive to the types of harmful exclusion contemplated by application of the antitrust laws.  Rather, the evidence indicates that (1) the absolute level of search engine “bias” is extremely low, and (2) “bias” is not a function of market power, but an effective strategy that has arisen as a result of serious competition and innovation between and by search engines.  The first finding undermines competitive foreclosure arguments on their own terms, that is, even if there were no pro-consumer justifications for the integration of Google content with Google search results.  The second finding, even more importantly, reveals that the evolution of consumer preferences for more sophisticated and useful search results has driven rival search engines to satisfy that demand.  Both Bing and Google have shifted toward these results, rendering the complained-of conduct equivalent to satisfying the standard of care in the industry–not restraining competition.

A significant lack of search bias emerges in the representative sample of queries.  This result is entirely unsurprising, given that bias is relatively infrequent even in E&L’s sample of queries specifically designed to identify maximum bias.  In the representative sample, the total percentage of queries for which Google references its own content when rivals do not is even lower—only about 8%—meaning that Google favors its own content far less often than critics have suggested.  This fact is crucial and highly problematic for search engine critics, as their burden in articulating a cognizable antitrust harm includes not only demonstrating that bias exists, but further that it is actually competitively harmful.  As I’ve discussed, bias alone is simply not sufficient to demonstrate any prima facie anticompetitive harm as it is far more often procompetitive or competitively neutral than actively harmful.  Moreover, given that bias occurs in less than 10% of queries run on Google, anticompetitive exclusion arguments appear unsustainable.

Indeed, theories of vertical foreclosure find virtually zero empirical support in the data.  Moreover, it appears that, rather than being a function of monopolistic abuse of power, search bias has emerged as an efficient competitive strategy, allowing search engines to differentiate their products in ways that benefit consumers.  I find that when search engines do reference their own content on their search results pages, it is generally unlikely that another engine will reference this same content.  However, the fact that both this percentage and the absolute level of own content inclusion is similar across engines indicates that this practice is not a function of market power (or its abuse), but is rather an industry standard.  In fact, despite conducting a much smaller percentage of total consumer searches, Bing is consistently more biased than Google, illustrating that the benefits search engines enjoy from integrating their own content into results is not necessarily a function of search engine size or volume of queries.  These results are consistent with a business practice that is efficient and at significant tension with arguments that such integration is designed to facilitate competitive foreclosure. Read the rest of this entry »

Posted in advertising, antitrust, business, economics, exclusionary conduct, google, Internet search, law and economics, monopolization, technology | Tagged: , , , , , , , | 4 Comments »

A Quick Assessment of the FCC’s Appalling Staff Report on the AT&T Merger

Posted by Geoffrey Manne on December 2, 2011

As everyone knows by now, AT&T’s proposed merger with T-Mobile has hit a bureaucratic snag at the FCC.  The remarkable decision to refer the merger to the Commission’s Administrative Law Judge (in an effort to derail the deal) and the public release of the FCC staff’s internal, draft report are problematic and poorly considered.  But far worse is the content of the report on which the decision to attempt to kill the deal was based.

With this report the FCC staff joins the exalted company of AT&T’s complaining competitors (surely the least reliable judges of the desirability of the proposed merger if ever there were any) and the antitrust policy scolds and consumer “advocates” who, quite literally, have never met a merger of which they approved.

In this post I’m going to hit a few of the most glaring problems in the staff’s report, and I hope to return again soon with further analysis.

As it happens, AT&T’s own response to the report is actually very good and it effectively highlights many of the key problems with the staff’s report.  While it might make sense to take AT&T’s own reply with a grain of salt, in this case the reply is, if anything, too tame.  No doubt the company wants to keep in the Commission’s good graces (it is the very definition of a repeat player at the agency, after all).  But I am not so constrained.  Using the company’s reply as a jumping off point, let me discuss a few of the problems with the staff report.

First, as the blog post (written by Jim Cicconi, Senior Vice President of External & Legislative Affairs) notes,

We expected that the AT&T-T-Mobile transaction would receive careful, considered, and fair analysis.   Unfortunately, the preliminary FCC Staff Analysis offers none of that.  The document is so obviously one-sided that any fair-minded person reading it is left with the clear impression that it is an advocacy piece, and not a considered analysis.

In our view, the report raises questions as to whether its authors were predisposed.  The report cherry-picks facts to support its views, and ignores facts that don’t.  Where facts were lacking, the report speculates, with no basis, and then treats its own speculations as if they were fact.  This is clearly not the fair and objective analysis to which any party is entitled, and which we have every right to expect.

OK, maybe they aren’t pulling punches.  The fact that this reply was written with such scathing language despite AT&T’s expectation to have to go right back to the FCC to get approval for this deal in some form or another itself speaks volumes about the undeniable shoddiness of the report.

Cicconi goes on to detail five areas where AT&T thinks the report went seriously awry:  “Expanding LTE to 97% of the U.S. Population,” “Job Gains Versus Losses,” “Deutsche Telekom, T-Mobile’s Parent, Has Serious Investment Constraints,” “Spectrum” and “Competition.”  I have dealt with a few of these issues at some length elsewhere, including most notably here (noting how the FCC’s own wireless competition report “supports what everyone already knows: falling prices, improved quality, dynamic competition and unflagging innovation have led to a golden age of mobile services”), and here (“It is troubling that critics–particularly those with little if any business experience–are so certain that even with no obvious source of additional spectrum suitable for LTE coming from the government any time soon, and even with exponential growth in broadband (including mobile) data use, AT&T’s current spectrum holdings are sufficient to satisfy its business plans”).

What is really galling about the staff report—and, frankly, the basic posture of the agency—is that its criticisms really boil down to one thing:  “We believe there is another way to accomplish (something like) what AT&T wants to do here, and we’d just prefer they do it that way.”  This is central planning at its most repugnant.  What is both assumed and what is lacking in this basic posture is beyond the pale for an allegedly independent government agency—and as Larry Downes notes in the linked article, the agency’s hubris and its politics may have real, costly consequences for all of us.

Competition

But procedure must be followed, and the staff thus musters a technical defense to support its basic position, starting with the claim that the merger will result in too much concentration.  Blinded by its new-found love for HHIs, the staff commits a few blunders.  First, it claims that concentration levels like those in this case “trigger a presumption of harm” to competition, citing the DOJ/FTC Merger Guidelines.  Alas, as even the report’s own footnotes reveal, the Merger Guidelines actually say that highly concentrated markets with HHI increases of 200 or more trigger a presumption that the merger will “enhance market power.”  This is not, in fact, the same thing as harm to competition.  Elsewhere the staff calls this—a merger that increases concentration and gives one firm an “undue” share of the market—“presumptively illegal.”  Perhaps the staff could use an antitrust refresher course.  I’d be happy to come teach it.

Not only is there no actual evidence of consumer harm resulting from the sort of increases in concentration that might result from the merger, but the staff seems to derive its negative conclusions despite the damning fact that the data shows that wireless markets have seen considerable increases in concentration along with considerable decreases in prices, rather than harm to competition, over the last decade.  While high and increasing HHIs might indicate a need for further investigation, when actual evidence refutes the connection between concentration and price, they simply lose their relevance.  Someone should tell the FCC staff.

This is a different Wireless Bureau than the one that wrote so much sensible material in the 15th Annual Wireless Competition Report.  That Bureau described a complex, dynamic, robust mobile “ecosystem” driven not by carrier market power and industrial structure, but by rapid evolution and technological disruptors.  The analysis here wishes away every important factor that every consumer knows to be the real drivers of price and innovation in the mobile marketplace, including, among other things:

  1. Local markets, where there are five, six, or more carriers to choose from;
  2. Non-contract/pre-paid providers, whose strength is rapidly growing;
  3. Technology that is making more bands of available spectrum useful for competitive offerings;
  4. The reality that LTE will make inter-modal competition a reality; and
  5. The reality that churn is rampant and consumer decision-making is driven today by devices, operating systems, applications and content – not networks.

The resulting analysis is stilted and stale, and describes a wireless industry that exists only in the agency’s collective imagination.

There is considerably more to say about the report’s tortured unilateral effects analysis, but it will have to wait for my next post.  Here I want to quickly touch on a two of the other issues called out by Cicconi’s blog post. Read the rest of this entry »

Posted in antitrust, business, law and economics, merger guidelines, regulation, technology, telecommunications | Tagged: , , , | 3 Comments »

Kahneman’s Time Interview Fails to Allay Concerns About Behavioral Law and Economics

Posted by Thom Lambert on November 28, 2011

TOTM alumnus Todd Henderson recently pointed me to a short, ten-question interview Time Magazine conducted with Nobel prize-winning economist Daniel Kahneman.  Prof. Kahneman is a founding father of behavioral economics, which rejects the rational choice model of human behavior (i.e., humans are rational self-interest maximizers) in favor of a more complicated model that incorporates a number of systematic irrationalities (e.g., the so-called endowment effect, under which people value items they own more than they’d be willing to pay to acquire those same items if they didn’t own them). 

 I’ve been interested in behavioral economics since I took Cass Sunstein’s “Elements of the Law” course as a first-year law student.  Prof. Sunstein is a leading figure in the “behavioral law and economics” movement, which advocates structuring laws and regulations to account for the various irrationalities purportedly revealed by behavioral economics.  Most famously, behavioral L&E calls for the imposition of default rules that “nudge” humans toward outcomes they’d likely choose but for the irrationalities and myopia with which they are beset.

 I’ve long been somewhat suspicious of the behavioral L&E project.  As I once explained in a short response essay entitled Two Mistakes Behavioralists Make,  I suspect that behavioral L&E types are too quick to reject rational explanations for observed human behavior and that they too hastily advocate a governmental fix for irrational behavior.  Time’s interview with Prof. Kahneman did little to allay those two concerns.

Asked to identify his “favorite experiment that demonstrates our blindness to our own blindness,” Prof. Kahneman responded:

It’s one someone else did.  During [the ’90s] when there was terrorist activity in Thailand, people were asked how much they’d pay for a travel-insurance policy that pays $100,000 in case of death for any reason.  Others were asked how much they’d pay for a policy that pays $100,000 for death in a terrorist act.  And people will pay more for the second, even though it’s less likely.

 This answer pattern is admittedly strange.  Since death from a terrorist attack is, a fortiori, less likely than death from any cause, it makes no sense to pay the same amount for the two insurance policies; the “regardless of cause” life insurance policy should command a far higher price.  So maybe people are wildly irrational in comparing risks and the value of risk mitigation measures.

 Or maybe, as boundedly rational (but not systematically irrational) beings, they just don’t want to waste effort answering silly, hypothetical questions about the maximum amount they’d pay for stuff.  I remember exercises in Prof. Sunstein’s class in which we were split into groups and asked to state either how much we’d pay to obtain a certain object or, assuming we owned the object, how much we’d demand as a sales price.  I distinctly recall thinking how artificial the question was.  Given the low stakes of the exercise, I quickly wrote down some number and returned to thinking about what I would have for lunch, what was going to be on Sunstein’s exam, and whether I had adequately prepared for my next class.  I suspect my classmates did as well.  Was it not fully rational for us to conserve our limited mental resources by giving quick, thoughtless answers to wholly hypothetical, zero-stakes questions?

If so, then there are two possible reasons for subjects’ strange answers to the terrorism insurance questions Kahneman cites:  Subjects could be wildly irrational with respect to risk assessment and the value of protective measures, or they might rationally choose to give hasty answers to silly questions that don’t matter.  What we need is some way to choose between these irrational and rational accounts of the answer pattern.

Perhaps the best thing to do would be to examine people’s revealed preferences by looking at what they actually do when they’re spending money to protect against risk.  If Kahneman’s explanation for subjects’ strange answers were sound, we’d see people paying hefty premiums for terrorism insurance.  Profit-seeking insurance companies, in turn, would scramble to create and market such risk protection, realizing that they could charge irrational consumers far more than their expected liabilities.  But we don’t see this sort of thing.

That suggests that the alternative, “rational” (or at least not systematically irrational) account is the more compelling story:  Subjects pestered with questions about how much hypothetical money they’d spend on hypothetical insurance products decide not to invest too much in the decision and just spit out an answer.  As we all learn as kids, you a ask a silly question, you get a silly answer.

So again we see the behavioralist tendency to discount the rational account too quickly.  But what about the second common behavioralist mistake (i.e., hastily jumping from an observation about human irrationality to the conclusion that a governmental fix is warranted)?  On that issue, consider this portion of the interview:

Time:  You endorse a kind of libertarian paternalism that gives people freedom of choice but frames the choice so they are nudged toward the option that’s better for them.  Are you worried that experts will misuse that?

Kahneman:  What psychology and behavioral economics have shown is that people don’t think very carefully.  They’re influenced by all sorts of superficial things in their decisionmaking, and they procrastinate and don’t read the small print.  You’ve got to create situations so they’ll make better decisions for themselves.

Could Prof. Kahneman have been more evasive?  The question was about an obvious downside of governmental intervention to correct for systematic irrationalities, but Prof. Kahneman, channeling Herman “9-9-9” Cain, just ignored it and repeated his affirmative case.  This is a serious problem for the behavioral L&E crowd:  They think they’re done once they convince you that humans exhibit some irrationalities.  But they’re not.  Just as one may believe in anthropogenic global warming and still oppose efforts to combat it on cost-benefit grounds, one may be skeptical of a nudge strategy even if one believes that humans may, in fact, exhibit some systematic irrationalities.  Individual free choice may have its limits, but governmental decisionmaking (executed by self-serving humans whose own rationality is limited) may amount to a cure that’s worse than the disease.

Readers interested in the promise and limitations of behavioral law and economics should check out TOTM’s all-star Free to Choose Symposium.

 

Posted in economics, law and economics, regulation, behavioral economics, behavioral economics, free to choose symposium, nobel prize | 7 Comments »

How Much Search Bias Is There?

Posted by Josh Wright on November 22, 2011

My last two posts on search bias (here and here) have analyzed and critiqued Edelman & Lockwood’s small study on search bias.  This post extends this same methodology and analysis to a random sample of 1,000 Google queries (released by AOL in 2006), to develop a more comprehensive understanding of own-content bias.  As I’ve stressed, these analyses provide useful—but importantly limited—glimpses into the nature of the search engine environment.  While these studies are descriptively helpful, actual harm to consumer welfare must always be demonstrated before cognizable antitrust injuries arise.  And naked identifications of own-content bias simply do not inherently translate to negative effects on consumers (see, e.g., here and here for more comprehensive discussion).

Now that’s settled, let’s jump into the results of the 1,000 random search query study.

How Do Search Engines Rank Their Own Content?

Consistent with our earlier analysis, a starting off point for thinking about measuring differentiation among search engines with respect to placing their own content is to compare how a search engine ranks its own content relative to how other engines place that same content (e.g. to compare how Google ranks “Google Maps” relative to how Bing or Blekko rank it).   Restricting attention exclusively to the first or “top” position, I find that Google simply does not refer to its own content in over 90% of queries.  Similarly, Bing does not reference Microsoft content in 85.4% of queries.  Google refers to its own content in the first position when other search engines do not in only 6.7% of queries; while Bing does so over twice as often, referencing Microsoft content that no other engine references in the first position in 14.3% of queries.  The following two charts illustrate the percentage of Google or Bing first position results, respectively, dedicated to own content across search engines.

The most striking aspect of these results is the small fraction of queries for which placement of own-content is relevant.  The results are similar when I expand consideration to the entire first page of results; interestingly, however, while the levels of own-content bias are similar considering the entire first page of results, Bing is far more likely than Google to reference its own content in its very first results position.

Examining Search Engine “Bias” on Google

Two distinct differences between the results of this larger study and my replication of Edelman & Lockwood emerge: (1) Google and Bing refer to their own content in a significantly smaller percentage of cases here than in the non-random sample; and (2) in general, when Google or Bing does rank its own content highly, rival engines are unlikely to similarly rank that same content.

The following table reports the percentages of queries for which Google’s ranking of its own content and its rivals’ rankings of that same content differ significantly. When Google refers to its own content within its Top 5 results, at least one other engine similarly ranks this content for only about 5% of queries.

The following table presents the likelihood that Google content will appear in a Google search, relative to searches conducted on rival engines (reported in odds ratios).

The first and third columns report results indicating that Google affiliated content is more likely to appear in a search executed on Google rather than rival engines.  Google is approximately 16 times more likely to refer to its own content on its first page as is any other engine.  Bing and Blekko are both significantly less likely to refer to Google content in their first result or on their first page than Google is to refer to Google content within these same parameters.  In each iteration, Bing is more likely to refer to Google content than is Blekko, and in the case of the first result, Bing is much more likely to do so.  Again, to be clear, the fact that Bing is more likely to rank its own content is not suggestive that the practice is problematic.  Quite the contrary, the demonstration that firms both with and without market power in search (to the extent that is a relevant antitrust market) engage in similar conduct the correct inference is that there must be efficiency explanations for the practice.  The standard response, of course, is that the competitive implications of a practice are different when a firm with market power does it.  That’s not exactly right.  It is true that firms with market power can engage in conduct that gives rise to potential antitrust problems when the same conduct from a firm without market power would not; however, when firms without market power engage in the same business practice it demands that antitrust analysts seriously consider the efficiency implications of the practice.  In other words, there is nothing in the mantra that things are “different” when larger firms do them that undercut potential efficiency explanations.

Examining Search Engine “Bias” on Bing

For queries within the larger sample, Bing refers to Microsoft content within its Top 1 and 3 results when no other engine similarly references this content for a slightly smaller percentage of queries than in my Edelman & Lockwood replication.  Yet Bing continues to exhibit a strong tendency to rank Microsoft content more prominently than rival engines.  For example, when Bing refers to Microsoft content within its Top 5 results, other engines agree with this ranking for less than 2% of queries; and Bing refers to Microsoft content that no other engine does within its Top 3 results for 99.2% of queries:

Regression analysis further illustrates Bing’s propensity to reference Microsoft content that rivals do not.  The following table reports the likelihood that Microsoft content is referred to in a Bing search as compared to searches on rival engines (again reported in odds ratios).

Bing refers to Microsoft content in its first results position about 56 times more often than rival engines refer to Microsoft content in this same position.  Across the entire first page, Microsoft content appears on a Bing search about 25 times more often than it does on any other engine.  Both Google and Blekko are accordingly significantly less likely to reference Microsoft content.  Notice further that, contrary to the findings in the smaller study, Google is slightly less likely to return Microsoft content than is Blekko, both in its first results position and across its entire first page.

A Closer Look at Google v. Bing

 Consistent with the smaller sample, I find again that Bing is more biased than Google using these metrics.  In other words, Bing ranks its own content significantly more highly than its rivals do more frequently then Google does, although the discrepancy between the two engines is smaller here than in the study of Edelman & Lockwood’s queries.  As noted above, Bing is over twice as likely to refer to own content in first results position than is Google.

Figures 7 and 8 present the same data reported above, but with Blekko removed, to allow for a direct visual comparison of own-content bias between Google and Bing.

Consistent with my earlier results, Bing appears to consistently rank Microsoft content higher than Google ranks the same (Microsoft) content more frequently than Google ranks Google content more prominently than Bing ranks the same (Google) content.

This result is particularly interesting given the strength of the accusations condemning Google for behaving in precisely this way.  That Bing references Microsoft content just as often as—and frequently even more often than!—Google references its own content strongly suggests that this behavior is a function of procompetitive product differentiation, and not abuse of market power.  But I’ll save an in-depth analysis of this issue for my next post, where I’ll also discuss whether any of the results reported in this series of posts support anticompetitive foreclosure theories or otherwise suggest antitrust intervention is warranted.

Posted in antitrust, economics, google, Internet search, law and economics, technology | Tagged: , , , , , | 1 Comment »

Mason LEC Programs for Economics & Law Professors

Posted by Josh Wright on November 17, 2011

The George Mason LEC has reinstituted the Economics Institute for Law Professors and the Law Institute for Economics Professors.  I will be attending as faculty  for the Economic Institute for Law Professors, where I will teach various aspects of microeconomic theory along with Michael Baye.  The agenda for that program is available here.

If you’ve got questions about either program, please feel free to contact me.

Details and links for both programs are below:

Economics Institute for Law Professors and Law Institute for Economics Professors

July 2012, Estes Park, Colorado

The Henry G. Manne Program in Law & Economics Studies at the George Mason Law & Economics Center is pleased to announce the following programs:

  • Twenty-Eighth Economics Institute for Law Professors
  • Sixteenth Law Institute for Economics Professors.

The programs will run concurrently from Sunday, July 15 to Friday, July 27, 2012, and will be held at the historic Stanley Hotel in Estes Park, Colorado.

There is no tuition, and room, group meals, and reading materials are provided by the Law & Economics Center.

The application deadline for both programs is December 1, 2011.

Please apply on the Law & Economics Center’s website now:

Twenty-Eighth Economics Institute for Law Professors

Sixteenth Law Institute for Economics Professors 

Posted in economics, law and economics | Comments Off

Extending & Rebutting Edelman & Lockwood on Search Bias

Posted by Josh Wright on November 9, 2011

In my last post, I discussed Edelman & Lockwood’s (E&L’s) attempt to catch search engines in the act of biasing their results—as well as their failure to actually do so.  In this post, I present my own results from replicating their study.  Unlike E&L, I find that Bing is consistently more biased than Google, for reasons discussed further below, although neither engine references its own content as frequently as E&L suggest.

I ran searches for E&L’s original 32 non-random queries using three different search engines—Google, Bing, and Blekko—between June 23 and July 5 of this year.  This replication is useful, as search technology has changed dramatically since E&L recorded their results in August 2010.  Bing now powers Yahoo, and Blekko has had more time to mature and enhance its results.  Blekko serves as a helpful “control” engine in my study, as it is totally independent of Google and Microsoft, and so has no incentive to refer to Google or Microsoft content unless it is actually relevant to users.  In addition, because Blekko’s model is significantly different than Google and Microsoft’s, if results on all three engines agree that specific content is highly relevant to the user query, it lends significant credibility to the notion that the content places well on the merits rather than being attributable to bias or other factors.

How Do Search Engines Rank Their Own Content?

Focusing solely upon the first position, Google refers to its own products or services when no other search engine does in 21.9% of queries; in another 21.9% of queries, both Google and at least one other search engine rival (i.e. Bing or Blekko) refer to the same Google content with their first links.

But restricting focus upon the first position is too narrow.  Assuming that all instances in which Google or Bing rank their own content first and rivals do not amounts to bias would be a mistake; such a restrictive definition would include cases in which all three search engines rank the same content prominently—agreeing that it is highly relevant—although not all in the first position. 

The entire first page of results provides a more informative comparison.  I find that Google and at least one other engine return Google content on the first page of results in 7% of the queries.  Google refers to its own content on the first page of results without agreement from either rival search engine in only 7.9% of the queries.  Meanwhile, Bing and at least one other engine refer to Microsoft content in 3.2% of the queries.  Bing references Microsoft content without agreement from either Google or Blekko in 13.2% of the queries:

This evidence indicates that Google’s ranking of its own content differs significantly from its rivals in only 7.9% of queries, and that when Google ranks its own content prominently it is generally perceived as relevant.  Further, these results suggest that Bing’s organic search results are significantly more biased in favor of Microsoft content than Google’s search results are in favor of Google’s content.

Examining Search Engine “Bias” on Google

The following table presents the percentages of queries for which Google’s ranking of its own content differs significantly from its rivals’ ranking of that same content.

Note that percentages below 50 in this table indicate that rival search engines generally see the referenced Google content as relevant and independently believe that it should be ranked similarly.

So when Google ranks its own content highly, at least one rival engine typically agrees with this ranking; for example, when Google places its own content in its Top 3 results, at least one rival agrees with this ranking in over 70% of queries.  Bing especially agrees with Google’s rankings of Google content within its Top 3 and 5 results, failing to include Google content that Google ranks similarly in only a little more than a third of queries.

Examining Search Engine “Bias” on Bing

Bing refers to Microsoft content in its search results far more frequently than its rivals reference the same Microsoft content.  For example, Bing’s top result references Microsoft content for 5 queries, while neither Google nor Blekko ever rank Microsoft content in the first position:

This table illustrates the significant discrepancies between Bing’s treatment of its own Microsoft content relative to Google and Blekko.  Neither rival engine refers to Microsoft content Bing ranks within its Top 3 results; Google and Blekko do not include any Microsoft content Bing refers to on the first page of results in nearly 80% of queries.

Moreover, Bing frequently ranks Microsoft content highly even when rival engines do not refer to the same content at all in the first page of results.  For example, of the 5 queries for which Bing ranks Microsoft content in its top result, Google refers to only one of these 5 within its first page of results, while Blekko refers to none.  Even when comparing results across each engine’s full page of results, Google and Blekko only agree with Bing’s referral of Microsoft content in 20.4% of queries.

Although there are not enough Bing data to test results in the first position in E&L’s sample, Microsoft content appears as results on the first page of a Bing search about 7 times more often than Microsoft content appears on the first page of rival engines.  Also, Google is much more likely to refer to Microsoft content than Blekko, though both refer to significantly less Microsoft content than Bing.

A Closer Look at Google v. Bing

On E&L’s own terms, Bing results are more biased than Google results; rivals are more likely to agree with Google’s algorithmic assessment (than with Bing’s) that its own content is relevant to user queries.  Bing refers to Microsoft content other engines do not rank at all more often than Google refers its own content without any agreement from rivals.  Figures 1 and 2 display the same data presented above in order to facilitate direct comparisons between Google and Bing.

As Figures 1 and 2 illustrate, Bing search results for these 32 queries are more frequently “biased” in favor of its own content than are Google’s.  The bias is greatest for the Top 1 and Top 3 search results.

My study finds that Bing exhibits far more “bias” than E&L identify in their earlier analysis.  For example, in E&L’s study, Bing does not refer to Microsoft content at all in its Top 1 or Top 3 results; moreover, Bing refers to Microsoft content within its entire first page 11 times, while Google and Yahoo refer to Microsoft content 8 and 9 times, respectively.  Most likely, the significant increase in Bing’s “bias” differential is largely a function of Bing’s introduction of localized and personalized search results and represents serious competitive efforts on Bing’s behalf.

Again, it’s important to stress E&L’s limited and non-random sample, and to emphasize the danger of making strong inferences about the general nature or magnitude of search bias based upon these data alone.  However, the data indicate that Google’s own-content bias is relatively small even in a sample collected precisely to focus upon the queries most likely to generate it.  In fact—as I’ll discuss in my next post—own-content bias occurs even less often in a more representative sample of queries, strongly suggesting that such bias does not raise the competitive concerns attributed to it.

Posted in antitrust, business, economics, google, Internet search, law and economics, monopolization, technology | Tagged: , , , , , , , , | 1 Comment »

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