Archives For antitrust

During the recent debate over whether to grant the Obama Administration “trade promotion authority” (TPA or fast track) to enter into major international trade agreements (such as the Trans-Pacific Partnership, or TPP), little attention has been directed to the problem of remaining anticompetitive governmental regulatory obstacles to liberalized trade and free markets.  Those remaining obstacles, which merit far more public attention, are highlighted in an article coauthored by Shanker Singham and me on competition policy and international trade distortions.

As our article explains, international trade agreements simply do not reach a variety of anticompetitive welfare-reducing government measures that create de facto trade barriers by favoring domestic interests over foreign competitors.  Moreover, many of these restraints are not in place to discriminate against foreign entities, but rather exist to promote certain favored firms. We dub these restrictions “anticompetitive market distortions” or “ACMDs,” in that they involve government actions that empower certain private interests to obtain or retain artificial competitive advantages over their rivals, be they foreign or domestic.  ACMDs are often a manifestation of cronyism, by which politically-connected enterprises successfully pressure government to shield them from effective competition, to the detriment of overall economic growth and welfare.  As we emphasize in our article, existing international trade rules have been able to reach ACMDs, which include: (1) governmental restraints that distort markets and lessen competition; and (2) anticompetitive private arrangements that are backed by government actions, have substantial effects on trade outside the jurisdiction that imposes the restrictions, and are not readily susceptible to domestic competition law challenge.  Among the most pernicious ACMDs are those that artificially alter the cost-base as between competing firms. Such cost changes will have large and immediate effects on market shares, and therefore on international trade flows.

Likewise, with the growing internationalization of commerce, ACMDs not only diminish domestic consumer welfare – they increasingly may have a harmful effect on foreign enterprises that seek to do business in the country imposing the restraint.  The home nations of the affected foreign enterprises, moreover, may as a practical matter find it not feasible to apply their competition laws extraterritorially to curb the restraint, given issues of jurisdictional reach and comity (particularly if the restraint flies under the colors of domestic law).  Because ACMDs also have not been constrained by international trade liberalization initiatives, they pose a serious challenge to global welfare enhancement by curtailing potential trade and investment opportunities.

Interest group politics and associated rent-seeking by well-organized private actors are endemic to modern economic life, guaranteeing that ACMDs will not easily be dismantled.  What is to be done, then, to curb ACMDs?

As a first step, Shanker Singham and I have proposed the development of a metric to estimate the net welfare costs of ACMDs.  Such a metric could help strengthen the hand of international organizations (including the International Competition Network, the World Bank, and the OECD) – and of reform-minded public officials – in building the case for dismantling these restraints, or (as a last resort) replacing them with less costly means for benefiting favored constituencies.  (Singham, two other coauthors, and I have developed a draft paper that delineates a specific metric, which we hope will be suitable for public release in the near future.)

Furthermore, free market-oriented think tanks can also be helpful by highlighting the harm special interest governmental restraints impose on the economy and on economic freedom.  In that regard, the Heritage Foundation’s excellent work in opposing cronyism deserves special mention.

Working to eliminate ACMDs and thereby promoting economic liberty is an arduous long-term task – one that will only succeed in increments, one battle at a time (the current principled effort to eliminate the Ex-Im Bank, strongly supported by the Heritage Foundation, is one such example).  Nevertheless, it is very much worth the candle.

The CPI Antitrust Chronicle published Geoffrey Manne’s and my recent paperThe Problems and Perils of Bootstrapping Privacy and Data into an Antitrust Framework as part of a symposium on Big Data in the May 2015 issue. All of the papers are worth reading and pondering, but of course ours is the best ;).

In it, we analyze two of the most prominent theories of antitrust harm arising from data collection: privacy as a factor of non-price competition, and price discrimination facilitated by data collection. We also analyze whether data is serving as a barrier to entry and effectively preventing competition. We argue that, in the current marketplace, there are no plausible harms to competition arising from either non-price effects or price discrimination due to data collection online and that there is no data barrier to entry preventing effective competition.

The issues of how to regulate privacy issues and what role competition authorities should in that, are only likely to increase in importance as the Internet marketplace continues to grow and evolve. The European Commission and the FTC have been called on by scholars and advocates to take greater consideration of privacy concerns during merger review and encouraged to even bring monopolization claims based upon data dominance. These calls should be rejected unless these theories can satisfy the rigorous economic review of antitrust law. In our humble opinion, they cannot do so at this time.

Excerpts:

PRIVACY AS AN ELEMENT OF NON-PRICE COMPETITION

The Horizontal Merger Guidelines have long recognized that anticompetitive effects may “be manifested in non-price terms and conditions that adversely affect customers.” But this notion, while largely unobjectionable in the abstract, still presents significant problems in actual application.

First, product quality effects can be extremely difficult to distinguish from price effects. Quality-adjusted price is usually the touchstone by which antitrust regulators assess prices for competitive effects analysis. Disentangling (allegedly) anticompetitive quality effects from simultaneous (neutral or pro-competitive) price effects is an imprecise exercise, at best. For this reason, proving a product-quality case alone is very difficult and requires connecting the degradation of a particular element of product quality to a net gain in advantage for the monopolist.

Second, invariably product quality can be measured on more than one dimension. For instance, product quality could include both function and aesthetics: A watch’s quality lies in both its ability to tell time as well as how nice it looks on your wrist. A non-price effects analysis involving product quality across multiple dimensions becomes exceedingly difficult if there is a tradeoff in consumer welfare between the dimensions. Thus, for example, a smaller watch battery may improve its aesthetics, but also reduce its reliability. Any such analysis would necessarily involve a complex and imprecise comparison of the relative magnitudes of harm/benefit to consumers who prefer one type of quality to another.

PRICE DISCRIMINATION AS A PRIVACY HARM

If non-price effects cannot be relied upon to establish competitive injury (as explained above), then what can be the basis for incorporating privacy concerns into antitrust? One argument is that major data collectors (e.g., Google and Facebook) facilitate price discrimination.

The argument can be summed up as follows: Price discrimination could be a harm to consumers that antitrust law takes into consideration. Because companies like Google and Facebook are able to collect a great deal of data about their users for analysis, businesses could segment groups based on certain characteristics and offer them different deals. The resulting price discrimination could lead to many consumers paying more than they would in the absence of the data collection. Therefore, the data collection by these major online companies facilitates price discrimination that harms consumer welfare.

This argument misses a large part of the story, however. The flip side is that price discrimination could have benefits to those who receive lower prices from the scheme than they would have in the absence of the data collection, a possibility explored by the recent White House Report on Big Data and Differential Pricing.

While privacy advocates have focused on the possible negative effects of price discrimination to one subset of consumers, they generally ignore the positive effects of businesses being able to expand output by serving previously underserved consumers. It is inconsistent with basic economic logic to suggest that a business relying on metrics would want to serve only those who can pay more by charging them a lower price, while charging those who cannot afford it a larger one. If anything, price discrimination would likely promote more egalitarian outcomes by allowing companies to offer lower prices to poorer segments of the population—segments that can be identified by data collection and analysis.

If this group favored by “personalized pricing” is as big as—or bigger than—the group that pays higher prices, then it is difficult to state that the practice leads to a reduction in consumer welfare, even if this can be divorced from total welfare. Again, the question becomes one of magnitudes that has yet to be considered in detail by privacy advocates.

DATA BARRIER TO ENTRY

Either of these theories of harm is predicated on the inability or difficulty of competitors to develop alternative products in the marketplace—the so-called “data barrier to entry.” The argument is that upstarts do not have sufficient data to compete with established players like Google and Facebook, which in turn employ their data to both attract online advertisers as well as foreclose their competitors from this crucial source of revenue. There are at least four reasons to be dubious of such arguments:

  1. Data is useful to all industries, not just online companies;
  2. It’s not the amount of data, but how you use it;
  3. Competition online is one click or swipe away; and
  4. Access to data is not exclusive

CONCLUSION

Privacy advocates have thus far failed to make their case. Even in their most plausible forms, the arguments for incorporating privacy and data concerns into antitrust analysis do not survive legal and economic scrutiny. In the absence of strong arguments suggesting likely anticompetitive effects, and in the face of enormous analytical problems (and thus a high risk of error cost), privacy should remain a matter of consumer protection, not of antitrust.

In a recent post, I presented an overview of the ICN’s recent Annual Conference in Sydney, Australia.  Today I briefly summarize and critique a key product approved by the Conference, a new chapter 6 of the ICN’s Workbook on Unilateral Conduct, devoted to tying and bundling.  (My analysis is based on a hard copy final version of the chapter, which shortly will be posted online at internationalcompetitionnetwork.org.)

Chapter 6 is the latest installment in the ICN’s continuing effort to present an overview of how different types of single firm conduct might be assessed by competition authorities, taking into account potential efficiencies as well as potential theories of competitive harm.  In particular, chapter 6 defines tying and bundling; focuses primarily on theories of exclusionary anticompetitive effects; lays out potential evaluative criteria (for example, when tying is efficient, it is likely to be employed by a dominant firm’s significant competitors); and discusses the characteristics of tying/bundling.  It then turns to theories of anticompetitive leveraging and foreclosure and price discrimination (avoiding taking a position as to whether price discrimination is a basis for condemning tying), and discusses how possible and actual anticompetitive effects might be observed.  It then turns to justifications and defenses for tying and bundling, including reduced manufacturing and distribution costs; reduced customer transaction and search costs; improved product performance or convenience; and quality and safety assurance.  The chapter then proclaims that “[t]he burden of demonstrating the likelihood and magnitude of actual or potential efficiencies generally is placed on an accused infringer”; states that “agencies must examine whether those claimed efficiencies actually arise from the tying arrangement, and whether there are ways to achieve the claimed efficiencies through less restrictive means”; and implicitly lends support to rule of reason balancing, noting that, “[i]n many jurisdictions if the party imposing the tie can establish that its claimed efficiencies would outweigh the anticompetitive effects then the conduct would not be deemed an infringement.”  The chapter ends with a normative suggestion:  “When the harm is likely materially greater than the efficiencies, the practice should be condemned. When the harm and the efficiencies both seem likely to be at the same rough magnitude, the general principle of non-interference in the market place may suggest that the practice not be condemned.”

Overall, chapter 6 presents a generally helpful discussion of tying and bundling, avoiding the misguided condemnations of these frequently efficient practices that characterized antitrust enforcement prior to the incorporation of modern economic analysis.  This good chapter, however, could be enhanced by drawing upon sources that explore the actual effects of tying, such as a literature review that explains there is very little empirical support for the proposition that tying or bundling are actually anticompetitive.  Chapter 6 could also benefit by setting forth a broader set of efficiency explanations for these practices, and by addressing the fact that using tying or bundling to gain market share at rivals’ expense need not imply consumer harm (the literature review noted above also addresses these points).  If chapter 6 is revised, it should discuss these issues, and also include footnote and bibliographic evidence to the extensive law and economics literature on bundling and tying.

More generally, chapter 6, and the entire Workbook, could benefit by evincing greater recognition of the limits of antitrust enforcement, in particular, the inevitability of error costs in enforcement (especially since welfare-enhancing unilateral practices may well be misunderstood by enforcers), and the general desirability of avoiding false positives that discourage aggressive but efficiency-enhancing unilateral conduct.  In this regard, chapter 6 could be improved by taking a page from the discussion of error costs in the U.S. Justice Department’s 2008 Report on Single Firm Conduct (withdrawn in 2009 by the Obama Administration).  The 2008 Report also stated, with regard to tying, “that when actual or probable harm to competition is shown, tying should be illegal only when (1) it has no procompetitive benefits, or (2) if there are procompetitive benefits, the tie produces harms substantially disproportionate to those benefits.”  As the 2008 Report further explained, the disproportionality test would make a good “default” standard for those forms of unilateral conduct that lack specific tests of illegality.  Moving toward a default disproportionality standard, however, is a long-term project, which requires rethinking of unilateral conduct enforcement policy in the United States and most other jurisdictions.

The ICN’s 14 Annual Conference, held in Sydney, Australia, from April 28th through May 1st, as usual, provided a forum for highlighting the work of ICN working groups on cartels, mergers, unilateral conduct, agency effectiveness, and advocacy.  The Conference approved multiple working group products, including a guidance document on investigative process that reflects key investigative tools and procedural fairness principles; a new chapter for the ICN Anti-Cartel Enforcement Manual on the relationship between competition agencies and public procurement bodies; a practical guide to international cooperation in mergers; a workbook chapter on tying and bundling (more on this in a future Truth on the Market commentary); and a report on developing an effective competition culture.  Efforts to promote greater openness and procedural due process in competition agency investigations (a U.S. Government priority) – and to reduce transaction costs and unnecessary burdens in merger reviews – continue to make slow but steady progress.  The host Australian agency’s “special project,” a report based on a survey of how agencies treat vertical restraints in online commerce, fortunately was descriptive, not normative, and hopefully will not prompt follow-up initiatives.  (There is no sound reason to believe that vertical restraints of any kind should be given high enforcement priority.)

Most significant from a consumer welfare standard, however, were the signs that competition advocacy is being given a higher profile within the ICN.  Competition advocacy seeks to dismantle, or prevent the creation of new, government regulations that harm the competitive process, such as rules that create barriers to entry or other inefficiencies that have a disparate impact on differently-situated firms.  The harm stemming from such distortions (described as “anticompetitive market distortions” or “ACMDs” in the recent literature) swamps the effects of purely private restraints, and merits the highest priority from public officials who seek to promote consumer welfare.  In the plenary event on the Conference’s closing day (moderated by former UK Office of Fair Trading head John Fingleton), the leaders of the competition agencies of France, Mexico, and Singapore, joined by an Italian Competition Commissioner, addressed the theme of “credible advocacy,” specifically, means by which competition agencies can highlight the harm from government impediments to competition.  Representatives of the World Bank and OECD participated in the Sydney Conference discussions of competition advocacy, reflecting a growing interest in this topic by international economic institutions.  The newly approved ICN report on developing a competition culture pointed the way toward promoting greater public acceptance of procompetitive policies – a prerequisite for the broad-scale dismantling of existing (and blocking of newly proposed) ACMDs.

Notably, in a follow-up breakout session on advocacy toward policymakers, former Mexican competition chief (and head of the ICN Executive Steering Committee) Eduardo Perez Motta cited the example of his agency’s convincing the Mexican Commerce Ministry not to adopt new non-tariff barriers that would have effectively blocked steel imports – a result that would have imposed major harm on both Mexican businesses that utilize steel inputs and many ultimate consumers.  (The proposed steel restraint, a prime example of an ACMD, represented a manifestation of crony capitalism – a growing problem in industrialized economies, including the United States.)  This example vividly demonstrates that competition agencies may occasionally prove successful in the fight to curb ACMDs (and crony capitalism in general), if they have sufficient political influence and are given the correct tools to spot and highlight for the public the costs of such harmful government restraints.

A powerful way to build public support against ACMDs is to highlight their costs.  Scholars from Babson College (Shanker Singham and Srinivasa Rangan), Northeastern University (Robert Bradley), and I have developed a metric that seeks to estimate the negative effects of ACMDs on national productivity.  Our paper, which presents quantitative estimates on how various institutional factors affect productivity, draws upon existing indices of economic liberty, including the World Economic Forum Global Competitiveness Index, the Fraser Index, and the Heritage Foundation Index of Economic Freedom.  We will present this paper at a World Bank-OECD Conference on Competition Policy, Shared Prosperity and Inclusive Growth, to be held next month at World Bank Headquarters in Washington, D.C.  (Hopefully this will lead to annual joint World Bank-OECD conferences exploring this topic.)  Stay tuned for additional information on ongoing efforts by the ICN and other international economic institutions to bolster competition advocacy – and for more details on my co-authored paper.

Last year, Microsoft’s new CEO, Satya Nadella, seemed to break with the company’s longstanding “complain instead of compete” strategy to acknowledge that:

We’re going to innovate with a challenger mindset…. We’re not coming at this as some incumbent.

Among the first items on his agenda? Treating competing platforms like opportunities for innovation and expansion rather than obstacles to be torn down by any means possible:

We are absolutely committed to making our applications run what most people describe as cross platform…. There is no holding back of anything.

Earlier this week, at its Build Developer Conference, Microsoft announced its most significant initiative yet to bring about this reality: code built into its Windows 10 OS that will enable Android and iOS developers to port apps into the Windows ecosystem more easily.

To make this possible… Windows phones “will include an Android subsystem” meant to play nice with the Java and C++ code developers have already crafted to run on a rival’s operating system…. iOS developers can compile their Objective C code right from Microsoft’s Visual Studio, and turn it into a full-fledged Windows 10 app.

Microsoft also announced that its new browser, rebranded as “Edge,” will run Chrome and Firefox extensions, and that its Office suite would enable a range of third-party services to integrate with Office on Windows, iOS, Android and Mac.

Consumers, developers and Microsoft itself should all benefit from the increased competition that these moves are certain to facilitate.

Most obviously, more consumers may be willing to switch to phones and tablets with the Windows 10 operating system if they can continue to enjoy the apps and extensions they’ve come to rely on when using Google and Apple products. As one commenter said of the move:

I left Windows phone due to the lack of apps. I love the OS though, so if this means all my favorite apps will be on the platform I’ll jump back onto the WP bandwagon in a heartbeat.

And developers should invest more in development when they can expect additional revenue from yet another platform running their apps and extensions, with minimal additional development required.

It’s win-win-win. Except perhaps for Microsoft’s lingering regulatory strategy to hobble Google.

That strategy is built primarily on antitrust claims, most recently rooted in arguments that consumers, developers and competitors alike are harmed by Google’s conduct around Android which, it is alleged, makes it difficult for OS makers (like Cyanogen) and app developers (like Microsoft Bing) to compete.

But Microsoft’s interoperability announcements (along with a host of other rapidly evolving market characteristics) actually serve to undermine the antitrust arguments that Microsoft, through groups like FairSearch and ICOMP, has largely been responsible for pushing in the EU against Google/Android.

The reality is that, with innovations like the one Microsoft announced this week, Microsoft, Google and Apple (and Samsung, Nokia, Tizen, Cyanogen…) are competing more vigorously on several fronts. Such competition is evidence of a vibrant marketplace that is simply not in need of antitrust intervention.

The supreme irony in this is that such a move represents a (further) nail in the coffin of the supposed “applications barrier to entry” that was central to the US DOJ’s antitrust suit against Microsoft and that factors into the contemporary Android antitrust arguments against Google.

Frankly, the argument was never very convincing. Absent unjustified and anticompetitive efforts to prop up such a barrier, the “applications barrier to entry” is just a synonym for “big.” Admittedly, the DC Court of Appeals in Microsoft was careful — far more careful than the district court — to locate specific, narrow conduct beyond the mere existence of the alleged barrier that it believed amounted to anticompetitive monopoly maintenance. But central to the imposition of liability was the finding that some of Microsoft’s conduct deterred application developers from effectively accessing other platforms, without procompetitive justification.

With the implementation of initiatives like the one Microsoft has now undertaken in Windows 10, however, it appears that such concerns regarding Google and mobile app developers are unsupportable.

Of greatest significance to the current Android-related accusations against Google, the appeals court in Microsoft also reversed the district court’s finding of liability based on tying, noting in particular that:

If OS vendors without market power also sell their software bundled with a browser, the natural inference is that sale of the items as a bundle serves consumer demand and that unbundled sale would not.

Of course this is exactly what Microsoft Windows Phone (which decidedly does not have market power) does, suggesting that the bundling of mobile OS’s with proprietary apps is procompetitive.

Similarly, in reviewing the eventual consent decree in Microsoft, the appeals court upheld the conditions that allowed the integration of OS and browser code, and rejected the plaintiff’s assertion that a prohibition on such technological commingling was required by law.

The appeals court praised the district court’s recognition that an appropriate remedy “must place paramount significance upon addressing the exclusionary effect of the commingling, rather than the mere conduct which gives rise to the effect,” as well as the district court’s acknowledgement that “it is not a proper task for the Court to undertake to redesign products.”  Said the appeals court, “addressing the applications barrier to entry in a manner likely to harm consumers is not self-evidently an appropriate way to remedy an antitrust violation.”

Today, claims that the integration of Google Mobile Services (GMS) into Google’s version of the Android OS is anticompetitive are misplaced for the same reason:

But making Android competitive with its tightly controlled competitors [e.g., Apple iOS and Windows Phone] requires special efforts from Google to maintain a uniform and consistent experience for users. Google has tried to achieve this uniformity by increasingly disentangling its apps from the operating system (the opposite of tying) and giving OEMs the option (but not the requirement) of licensing GMS — a “suite” of technically integrated Google applications (integrated with each other, not the OS).  Devices with these proprietary apps thus ensure that both consumers and developers know what they’re getting.

In fact, some commenters have even suggested that, by effectively making the OS more “open,” Microsoft’s new Windows 10 initiative might undermine the Windows experience in exactly this fashion:

As a Windows Phone developer, I think this could easily turn into a horrible idea…. [I]t might break the whole Windows user experience Microsoft has been building in the past few years. Modern UI design is a different approach from both Android and iOS. We risk having a very unhomogenic [sic] store with lots of apps using different design patterns, and Modern UI is in my opinion, one of the strongest points of Windows Phone.

But just because Microsoft may be willing to take this risk doesn’t mean that any sensible conception of competition law and economics should require Google (or anyone else) to do so, as well.

Most significantly, Microsoft’s recent announcement is further evidence that both technological and contractual innovations can (potentially — the initiative is too new to know its effect) transform competition, undermine static market definitions and weaken theories of anticompetitive harm.

When apps and their functionality are routinely built into some OS’s or set as defaults; when mobile apps are also available for the desktop and are seamlessly integrated to permit identical functions to be performed on multiple platforms; and when new form factors like Apple MacBook Air and Microsoft Surface blur the lines between mobile and desktop, traditional, static anticompetitive theories are out the window (no pun intended).

Of course, it’s always been possible for new entrants to overcome network effects and scale impediments by a range of means. Microsoft itself has in the past offered to pay app developers to write for its mobile platform. Similarly, it offers inducements to attract users to its Bing search engine and it has devised several creative mechanisms to overcome its claimed scale inferiority in search.

A further irony (and market complication) is that now some of these apps — the ones with network effects of their own — threaten in turn to challenge the reigning mobile operating systems, exactly as Netscape was purported to threaten Microsoft’s OS (and lead to its anticompetitive conduct) back in the day. Facebook, for example, now offers not only its core social media function, but also search, messaging, video calls, mobile payments, photo editing and sharing, and other functionality that compete with many of the core functions built into mobile OS’s.

But the desire by apps like Facebook to expand their networks by being on multiple platforms, and the desire by these platforms to offer popular apps in order to attract users, ensure that Facebook is ubiquitous, even without any antitrust intervention. As Timothy Bresnahan, Joe Orsini and Pai-Ling Yin demonstrate:

(1) The distribution of app attractiveness to consumers is skewed, with a small minority of apps drawing the vast majority of consumer demand. (2) Apps which are highly demanded on one platform tend also to be highly demanded on the other platform. (3) These highly demanded apps have a strong tendency to multihome, writing for both platforms. As a result, the presence or absence of apps offers little reason for consumers to choose a platform. A consumer can choose either platform and have access to the most attractive apps.

Of course, even before Microsoft’s announcement, cross-platform app development was common, and third-party platforms like Xamarin facilitated cross-platform development. As Daniel O’Connor noted last year:

Even if one ecosystem has a majority of the market share, software developers will release versions for different operating systems if it is cheap/easy enough to do so…. As [Torsten] Körber documents [here], building mobile applications is much easier and cheaper than building PC software. Therefore, it is more common for programmers to write programs for multiple OSes…. 73 percent of apps developers design apps for at least two different mobiles OSes, while 62 percent support 3 or more.

Whether Microsoft’s interoperability efforts prove to be “perfect” or not (and some commenters are skeptical), they seem destined to at least further decrease the cost of cross-platform development, thus reducing any “application barrier to entry” that might impede Microsoft’s ability to compete with its much larger rivals.

Moreover, one of the most interesting things about the announcement is that it will enable Android and iOS apps to run not only on Windows phones, but also on Windows computers. Some 1.3 billion PCs run Windows. Forget Windows’ tiny share of mobile phone OS’s; that massive potential PC market (of which Microsoft still has 91 percent) presents an enormous ready-made market for mobile app developers that won’t be ignored.

It also points up the increasing absurdity of compartmentalizing these markets for antitrust purposes. As the relevant distinctions between mobile and desktop markets break down, the idea of Google (or any other company) “leveraging its dominance” in one market to monopolize a “neighboring” or “related” market is increasingly unsustainable. As I wrote earlier this week:

Mobile and social media have transformed search, too…. This revolution has migrated to the computer, which has itself become “app-ified.” Now there are desktop apps and browser extensions that take users directly to Google competitors such as Kayak, eBay and Amazon, or that pull and present information from these sites.

In the end, intentionally or not, Microsoft is (again) undermining its own case. And it is doing so by innovating and competing — those Schumpeterian concepts that were always destined to undermine antitrust cases in the high-tech sector.

If we’re lucky, Microsoft’s new initiatives are the leading edge of a sea change for Microsoft — a different and welcome mindset built on competing in the marketplace rather than at regulators’ doors.

The precise details underlying the European Commission’s (EC) April 15 Statement of Objections (SO), the EC’s equivalent of an antitrust complaint, against Google, centered on the company’s promotion of its comparison shopping service (CSS), “Google Shopping,” have not yet been made public.  Nevertheless, the EC’s fact sheet describing the theory of the case is most discouraging to anyone who believes in economically sound, consumer welfare-oriented antitrust enforcement.   Put simply, the SO alleges that Google is “abusing its dominant position” in online search services throughout Europe by systematically positioning and prominently displaying its CSS in its general search result pages, “irrespective of its merits,” causing the Google CSS to achieve higher rates of growth than CSSs promoted by rivals.  According to the EC, this behavior “has a negative impact on consumers and innovation”.  Why so?  Because this “means that users do not necessarily see the most relevant shopping results in response to their queries, and that incentives to innovate from rivals are lowered as they know that however good their product, they will not benefit from the same prominence as Google’s product.”  (Emphasis added.)  The EC’s proposed solution?  “Google should treat its own comparison shopping services and those of rivals in the same way.”

The EC’s latest action may represent only “the tip of a Google EC antitrust iceberg,” since the EC has stated that it is continuing to investigate other aspects of Google’s behavior, including Google agreements with respect to the Android operating system, plus “the favourable treatment by Google in its general search results of other specialised search services, and concerns with regard to copying of rivals’ web content (known as ‘scraping’), advertising exclusivity and undue restrictions on advertisers.”  For today, I focus on the tip, leaving consideration of the bulk of the iceberg to future commentaries, as warranted.  (Truth on the Market has addressed Google-related antitrust issues previously — see, for example, here, here, and here.)

The EC’s April 15 Google SO is troublesome in multiple ways.

First, the claim that Google does not “necessarily” array the most relevant search results in a manner desired by consumers appears to be in tension with the findings of an exhaustive U.S. antitrust investigation of the company.  As U.S. Federal Trade Commissioner Josh Wright pointed out in a recent speech, the FTC’s 2013 “closing statement [in its Google investigation] indicates that Google’s so-called search bias did not, in fact, harm consumers; to the contrary, the evidence suggested that ‘Google likely benefited consumers by prominently displaying its vertical content on its search results page.’  The Commission reached this conclusion based upon, among other things, analyses of actual consumer behavior – so-called ‘click through’ data – which showed how consumers reacted to Google’s promotion of its vertical properties.”

Second, even assuming that Google’s search engine practices have weakened competing CSSs, that would not justify EC enforcement action against Google.  As Commissioner Wright also explained, the FTC “accepted arguments made by competing websites that Google’s practices injured them and strengthened Google’s market position, but correctly found that these were not relevant considerations in a proper antitrust analysis focused upon consumer welfare rather than harm to competitors.”  The EC should keep this in mind, given that, as former EC Competition Commissioner Joaquin Almunia emphasized, “[c]onsumer welfare is not just a catchy phrase.  It is the cornerstone, the guiding principle of EU competition policy.”

Third, and perhaps most fundamentally, although EC disclaims an interest in “interfere[ing] with” Google’s search engine algorithm, dictating an “equal treatment of competitors” result implicitly would require intrusive micromanagement of Google’s search engine – a search engine which is at the heart of the company’s success and has bestowed enormous welfare benefits on consumers and producers alike.  There is no reason to believe that EC policing of EC CSS listings to promote an “equal protection of competitors” mandate would result in a search experience that better serves consumers than the current Google policy.  Consistent with this point, in its 2013 Google closing statement, the FTC observed that it lacked the ability to “second-guess” product improvements that plausibly benefit consumers, and it stressed that “condemning legitimate product improvements risks harming consumers.”

Fourth, competing CSSs have every incentive to inform consumers if they believe that Google search results are somehow “inferior” to their offerings.  They are free to advertise and publicize the merits of their services, and third party intermediaries that rate browsers may be expected to report if Google Shopping consistently offers suboptimal consumer services.  In short, “the word will get out.”  Even in the absence of perfect information, consumers can readily at low cost browse alternative CSSs to determine whether they prefer their services to Google’s – “help is only a click away.”

Fifth, the most likely outcome of an EC “victory” in this case would be a reduced incentive for Google to invest in improving its search engine, knowing that its ability to monetize search engine improvements could be compromised by future EC decisions to prevent an improved search engine from harming rivals.  What’s worse, other developers of service platforms and other innovative business improvements would similarly “get the message” that it would not be worth their while to innovate to the point of dominance, because their returns to such innovation would be constrained.  In sum, companies in a wide variety of sectors would have less of an incentive to innovate, and this in turn would lead to reduced welfare gains and benefits to consumers.  This would yield (as the EC’s fact sheet put it) “a negative impact on consumers and innovation”, because companies across industries operating in Europe would know that if their product were too good, they would attract the EC’s attention and be put in their place.  In other words, a successful EC intervention here could spawn the very welfare losses (magnified across sectors) that the Commission cited as justification for reining in Google in the first place!

Finally, it should come as no surprise that a coalition of purveyors of competing search engines and online shopping sites lobbied hard for EC antitrust action against Google.  When government intervenes heavily and often in markets to “correct” perceived “abuses,” private actors have a strong incentive to expend resources on achieving government actions that disadvantage their rivals – resources that could otherwise have been used to compete more vigorously and effectively.  In short, the very existence of expansive regulatory schemes disincentivizes competition on the merits, and in that regard tends to undermine welfare.  Government officials should keep that firmly in mind when private actors urge them to act decisively to “cure” marketplace imperfections by limiting a rival’s freedom of action.

Let us hope that the EC takes these concerns to heart before taking further action against Google.

By a 3-2 vote, the Federal Communications Commission (FCC) decided on February 26 to preempt state laws in North Carolina and Tennessee that bar municipally-owned broadband providers from providing services beyond their geographic boundaries.  This decision raises substantial legal issues and threatens economic harm to state taxpayers and consumers.

The narrow FCC majority rested its decision on its authority to remove broadband investment barriers, citing Section 706 of the Telecommunications Act of 1996.  Section 706 requires the FCC to encourage the deployment of broadband to all Americans by using “measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.”  As dissenting Commissioner Ajit Pai pointed out, however, Section 706 contains no specific language empowering it to preempt state laws, and the FCC’s action trenches upon the sovereign power of the states to control their subordinate governmental entities.  Moreover, it is far from clear that authorizing government-owned broadband companies to expand into new territories promotes competition or eliminates broadband investment barriers.  Indeed, the opposite is more likely to be the case.

Simply put, government-owned networks artificially displace market forces and are an affront to a reliance on free competition to provide the goods and services consumers demand – including broadband communications.  Government-owned networks use local taxpayer monies and federal grants (also taxpayer funded, of course) to compete unfairly with existing private sector providers.  Those taxpayer subsidies put privately funded networks at a competitive disadvantage, creating barriers to new private sector entry or expansion, as private businesses decide they cannot fairly compete against government-backed enterprises.  In turn, reduced private sector investment tends to diminish quality and effective consumer choice.

These conclusions are based on hard facts, not mere theory.  There is no evidence that municipal broadband is needed because “market failure” has deterred private sector provision of broadband – indeed, firms such as Verizon, AT&T, and Comcast spend many billions of dollars annually to maintain, upgrade, and expand their broadband networks.  Indeed, far more serious is the risk of “government failure.”  Municipal corporations, free from market discipline and accountability due to their public funding, may be expected to be bureaucratic, inefficient, and slow to react to changing market conditions.  Consistent with this observation, an economic study of government-operated municipal broadband networks reveals failures to achieve universal service in areas that they serve; lack of cost-benefit analysis that has caused costs to outweigh benefits; the inefficient use of scarce resources; the inability to cover costs; anticompetitive behavior fueled by unfair competitive advantages; the inefficient allocation of limited tax revenues that are denied to more essential public services; and the stifling of private firm innovation.  In a time of tight budget constraints, the waste of taxpayer funds and competitive harm stemming from municipal broadband activities is particularly unfortunate.  In short, real world evidence demonstrates that “[i]n a dynamic market such as broadband services, government ownership has proven to be an abject failure.”  What is required is not more government involvement, but, rather, fewer governmental constraints on private sector broadband activities.

Finally, what’s worse, the FCC’s decision has harmful constitutional overtones.  The Chattanooga, Tennessee and Wilson, North Carolina municipal broadband networks that requested FCC preemption impose troublesome speech limitations as conditions of service.  The utility that operates the Chattanooga network may “reject or remove any material residing on or transmitted to or through” the network that violates its “Accepted Use Policy.”  That Policy, among other things, prohibits using the network to send materials that are “threatening, abusive or hateful” or that offend “the privacy, publicity, or other personal rights of others.”  It also bars the posting of messages that are “intended to annoy or harass others.”  In a similar vein, the Wilson network bars transmission of materials that are “harassing, abusive, libelous or obscene” and “activities or actions intended to withhold or cloak any user’s identity or contact information.”  Content-based prohibitions of this type broadly restrict carriage of constitutionally protected speech and, thus, raise serious First Amendment questions.  Other municipal broadband systems may, of course, elect to adopt similarly questionable censorship-based policies.

In short, the FCC’s broadband preemption decision is likely to harm economic welfare and is highly problematic on legal grounds to boot.  The FCC should rescind that decision.  If it fails to do so, and if the courts do not strike the decision down, Congress should consider legislation to bar the FCC from meddling in state oversight of municipal broadband.

Recent years have seen an increasing interest in incorporating privacy into antitrust analysis. The FTC and regulators in Europe have rejected these calls so far, but certain scholars and activists continue their attempts to breathe life into this novel concept. Elsewhere we have written at length on the scholarship addressing the issue and found the case for incorporation wanting. Among the errors proponents make is a persistent (and woefully unsubstantiated) assertion that online data can amount to a barrier to entry, insulating incumbent services from competition and ensuring that only the largest providers thrive. This data barrier to entry, it is alleged, can then allow firms with monopoly power to harm consumers, either directly through “bad acts” like price discrimination, or indirectly by raising the costs of advertising, which then get passed on to consumers.

A case in point was on display at last week’s George Mason Law & Economics Center Briefing on Big Data, Privacy, and Antitrust. Building on their growing body of advocacy work, Nathan Newman and Allen Grunes argued that this hypothesized data barrier to entry actually exists, and that it prevents effective competition from search engines and social networks that are interested in offering services with heightened privacy protections.

According to Newman and Grunes, network effects and economies of scale ensure that dominant companies in search and social networking (they specifically named Google and Facebook — implying that they are in separate markets) operate without effective competition. This results in antitrust harm, they assert, because it precludes competition on the non-price factor of privacy protection.

In other words, according to Newman and Grunes, even though Google and Facebook offer their services for a price of $0 and constantly innovate and upgrade their products, consumers are nevertheless harmed because the business models of less-privacy-invasive alternatives are foreclosed by insufficient access to data (an almost self-contradicting and silly narrative for many reasons, including the big question of whether consumers prefer greater privacy protection to free stuff). Without access to, and use of, copious amounts of data, Newman and Grunes argue, the algorithms underlying search and targeted advertising are necessarily less effective and thus the search product without such access is less useful to consumers. And even more importantly to Newman, the value to advertisers of the resulting consumer profiles is diminished.

Newman has put forth a number of other possible antitrust harms that purportedly result from this alleged data barrier to entry, as well. Among these is the increased cost of advertising to those who wish to reach consumers. Presumably this would harm end users who have to pay more for goods and services because the costs of advertising are passed on to them. On top of that, Newman argues that ad networks inherently facilitate price discrimination, an outcome that he asserts amounts to antitrust harm.

FTC Commissioner Maureen Ohlhausen (who also spoke at the George Mason event) recently made the case that antitrust law is not well-suited to handling privacy problems. She argues — convincingly — that competition policy and consumer protection should be kept separate to preserve doctrinal stability. Antitrust law deals with harms to competition through the lens of economic analysis. Consumer protection law is tailored to deal with broader societal harms and aims at protecting the “sanctity” of consumer transactions. Antitrust law can, in theory, deal with privacy as a non-price factor of competition, but this is an uneasy fit because of the difficulties of balancing quality over two dimensions: Privacy may be something some consumers want, but others would prefer a better algorithm for search and social networks, and targeted ads with free content, for instance.

In fact, there is general agreement with Commissioner Ohlhausen on her basic points, even among critics like Newman and Grunes. But, as mentioned above, views diverge over whether there are some privacy harms that should nevertheless factor into competition analysis, and on whether there is in fact  a data barrier to entry that makes these harms possible.

As we explain below, however, the notion of data as an antitrust-relevant barrier to entry is simply a myth. And, because all of the theories of “privacy as an antitrust harm” are essentially predicated on this, they are meritless.

First, data is useful to all industries — this is not some new phenomenon particular to online companies

It bears repeating (because critics seem to forget it in their rush to embrace “online exceptionalism”) that offline retailers also receive substantial benefit from, and greatly benefit consumers by, knowing more about what consumers want and when they want it. Through devices like coupons and loyalty cards (to say nothing of targeted mailing lists and the age-old practice of data mining check-out receipts), brick-and-mortar retailers can track purchase data and better serve consumers. Not only do consumers receive better deals for using them, but retailers know what products to stock and advertise and when and on what products to run sales. For instance:

  • Macy’s analyzes tens of millions of terabytes of data every day to gain insights from social media and store transactions. Over the past three years, the use of big data analytics alone has helped Macy’s boost its revenue growth by 4 percent annually.
  • Following its acquisition of Kosmix in 2011, Walmart established @WalmartLabs, which created its own product search engine for online shoppers. In the first year of its use alone, the number of customers buying a product on Walmart.com after researching a purchase increased by 20 percent. According to Ron Bensen, the vice president of engineering at @WalmartLabs, the combination of in-store and online data could give brick-and-mortar retailers like Walmart an advantage over strictly online stores.
  • Panera and a whole host of restaurants, grocery stores, drug stores and retailers use loyalty cards to advertise and learn about consumer preferences.

And of course there is a host of others uses for data, as well, including security, fraud prevention, product optimization, risk reduction to the insured, knowing what content is most interesting to readers, etc. The importance of data stretches far beyond the online world, and far beyond mere retail uses more generally. To describe even online giants like Amazon, Apple, Microsoft, Facebook and Google as having a monopoly on data is silly.

Second, it’s not the amount of data that leads to success but building a better mousetrap

The value of knowing someone’s birthday, for example, is not in that tidbit itself, but in the fact that you know this is a good day to give that person a present. Most of the data that supports the advertising networks underlying the Internet ecosphere is of this sort: Information is important to companies because of the value that can be drawn from it, not for the inherent value of the data itself. Companies don’t collect information about you to stalk you, but to better provide goods and services to you.

Moreover, data itself is not only less important than what can be drawn from it, but data is also less important than the underlying product it informs. For instance, Snapchat created a challenger to  Facebook so successfully (and in such short time) that Facebook attempted to buy it for $3 billion (Google offered $4 billion). But Facebook’s interest in Snapchat wasn’t about its data. Instead, Snapchat was valuable — and a competitive challenge to Facebook — because it cleverly incorporated the (apparently novel) insight that many people wanted to share information in a more private way.

Relatedly, Twitter, Instagram, LinkedIn, Yelp, Pinterest (and Facebook itself) all started with little (or no) data and they have had a lot of success. Meanwhile, despite its supposed data advantages, Google’s attempts at social networking — Google+ — have never caught up to Facebook in terms of popularity to users (and thus not to advertisers either). And scrappy social network Ello is starting to build a significant base without data collection for advertising at all.

At the same time it’s simply not the case that the alleged data giants — the ones supposedly insulating themselves behind data barriers to entry — actually have the type of data most relevant to startups anyway. As Andres Lerner has argued, if you wanted to start a travel business, the data from Kayak or Priceline would be far more relevant. Or if you wanted to start a ride-sharing business, data from cab companies would be more useful than the broad, market-cross-cutting profiles Google and Facebook have. Consider companies like Uber, Lyft and Sidecar that had no customer data when they began to challenge established cab companies that did possess such data. If data were really so significant, they could never have competed successfully. But Uber, Lyft and Sidecar have been able to effectively compete because they built products that users wanted to use — they came up with an idea for a better mousetrap.The data they have accrued came after they innovated, entered the market and mounted their successful challenges — not before.

In reality, those who complain about data facilitating unassailable competitive advantages have it exactly backwards. Companies need to innovate to attract consumer data, otherwise consumers will switch to competitors (including both new entrants and established incumbents). As a result, the desire to make use of more and better data drives competitive innovation, with manifestly impressive results: The continued explosion of new products, services and other apps is evidence that data is not a bottleneck to competition but a spur to drive it.

Third, competition online is one click or thumb swipe away; that is, barriers to entry and switching costs are low

Somehow, in the face of alleged data barriers to entry, competition online continues to soar, with newcomers constantly emerging and triumphing. This suggests that the barriers to entry are not so high as to prevent robust competition.

Again, despite the supposed data-based monopolies of Facebook, Google, Amazon, Apple and others, there exist powerful competitors in the marketplaces they compete in:

  • If consumers want to make a purchase, they are more likely to do their research on Amazon than Google.
  • Google flight search has failed to seriously challenge — let alone displace —  its competitors, as critics feared. Kayak, Expedia and the like remain the most prominent travel search sites — despite Google having literally purchased ITA’s trove of flight data and data-processing acumen.
  • People looking for local reviews go to Yelp and TripAdvisor (and, increasingly, Facebook) as often as Google.
  • Pinterest, one of the most highly valued startups today, is now a serious challenger to traditional search engines when people want to discover new products.
  • With its recent acquisition of the shopping search engine, TheFind, and test-run of a “buy” button, Facebook is also gearing up to become a major competitor in the realm of e-commerce, challenging Amazon.
  • Likewise, Amazon recently launched its own ad network, “Amazon Sponsored Links,” to challenge other advertising players.

Even assuming for the sake of argument that data creates a barrier to entry, there is little evidence that consumers cannot easily switch to a competitor. While there are sometimes network effects online, like with social networking, history still shows that people will switch. MySpace was considered a dominant network until it made a series of bad business decisions and everyone ended up on Facebook instead. Similarly, Internet users can and do use Bing, DuckDuckGo, Yahoo, and a plethora of more specialized search engines on top of and instead of Google. And don’t forget that Google itself was once an upstart new entrant that replaced once-household names like Yahoo and AltaVista.

Fourth, access to data is not exclusive

Critics like Newman have compared Google to Standard Oil and argued that government authorities need to step in to limit Google’s control over data. But to say data is like oil is a complete misnomer. If Exxon drills and extracts oil from the ground, that oil is no longer available to BP. Data is not finite in the same way. To use an earlier example, Google knowing my birthday doesn’t limit the ability of Facebook to know my birthday, as well. While databases may be proprietary, the underlying data is not. And what matters more than the data itself is how well it is analyzed.

This is especially important when discussing data online, where multi-homing is ubiquitous, meaning many competitors end up voluntarily sharing access to data. For instance, I can use the friend-finder feature on WordPress to find Facebook friends, Google connections, and people I’m following on Twitter who also use the site for blogging. Using this feature allows WordPress to access your contact list on these major online players.

Friend-Finder

Further, it is not apparent that Google’s competitors have less data available to them. Microsoft, for instance, has admitted that it may actually have more data. And, importantly for this discussion, Microsoft may have actually garnered some of its data for Bing from Google.

If Google has a high cost per click, then perhaps it’s because it is worth it to advertisers: There are more eyes on Google because of its superior search product. Contra Newman and Grunes, Google may just be more popular for consumers and advertisers alike because the algorithm makes it more useful, not because it has more data than everyone else.

Fifth, the data barrier to entry argument does not have workable antitrust remedies

The misguided logic of data barrier to entry arguments leaves a lot of questions unanswered. Perhaps most important among these is the question of remedies. What remedy would apply to a company found guilty of leveraging its market power with data?

It’s actually quite difficult to conceive of a practical means for a competition authority to craft remedies that would address the stated concerns without imposing enormous social costs. In the unilateral conduct context, the most obvious remedy would involve the forced sharing of data.

On the one hand, as we’ve noted, it’s not clear this would actually accomplish much. If competitors can’t actually make good use of data, simply having more of it isn’t going to change things. At the same time, such a result would reduce the incentive to build data networks to begin with. In their startup stage, companies like Uber and Facebook required several months and hundreds of thousands, if not millions, of dollars to design and develop just the first iteration of the products consumers love. Would any of them have done it if they had to share their insights? In fact, it may well be that access to these free insights is what competitors actually want; it’s not the data they’re lacking, but the vision or engineering acumen to use it.

Other remedies limiting collection and use of data are not only outside of the normal scope of antitrust remedies, they would also involve extremely costly court supervision and may entail problematic “collisions between new technologies and privacy rights,” as the last year’s White House Report on Big Data and Privacy put it.

It is equally unclear what an antitrust enforcer could do in the merger context. As Commissioner Ohlhausen has argued, blocking specific transactions does not necessarily stop data transfer or promote privacy interests. Parties could simply house data in a standalone entity and enter into licensing arrangements. And conditioning transactions with forced data sharing requirements would lead to the same problems described above.

If antitrust doesn’t provide a remedy, then it is not clear why it should apply at all. The absence of workable remedies is in fact a strong indication that data and privacy issues are not suitable for antitrust. Instead, such concerns would be better dealt with under consumer protection law or by targeted legislation.

On Wednesday, March 18, our fellow law-and-economics-focused brethren at George Mason’s Law and Economics Center will host a very interesting morning briefing on the intersection of privacy, big data, consumer protection, and antitrust. FTC Commissioner Maureen Ohlhausen will keynote and she will be followed by what looks like will be a lively panel discussion. If you are in DC you can join in person, but you can also watch online. More details below.
Please join the LEC in person or online for a morning of lively discussion on this topic. FTC Commissioner Maureen K. Ohlhausen will set the stage by discussing her Antitrust Law Journal article, “Competition, Consumer Protection and The Right [Approach] To Privacy“. A panel discussion on big data and antitrust, which includes some of the leading thinkers on the subject, will follow.
Other featured speakers include:

Allen P. Grunes
Founder, The Konkurrenz Group and Data Competition Institute

Andres Lerner
Executive Vice President, Compass Lexecon

Darren S. Tucker
Partner, Morgan Lewis

Nathan Newman
Director, Economic and Technology Strategies LLC

Moderator: James C. Cooper
Director, Research and Policy, Law & Economics Center

A full agenda is available click here.

It’s easy to look at the net neutrality debate and assume that everyone is acting in their self-interest and against consumer welfare. Thus, many on the left denounce all opposition to Title II as essentially “Comcast-funded,” aimed at undermining the Open Internet to further nefarious, hidden agendas. No matter how often opponents make the economic argument that Title II would reduce incentives to invest in the network, many will not listen because they have convinced themselves that it is simply special-interest pleading.

But whatever you think of ISPs’ incentives to oppose Title II, the incentive for the tech companies (like Cisco, Qualcomm, Nokia and IBM) that design and build key elements of network infrastructure and the devices that connect to it (i.e., essential input providers) is to build out networks and increase adoption (i.e., to expand output). These companies’ fundamental incentive with respect to regulation of the Internet is the adoption of rules that favor investment. They operate in highly competitive markets, they don’t offer competing content and they don’t stand as alleged “gatekeepers” seeking monopoly returns from, or control over, what crosses over the Interwebs.

Thus, it is no small thing that 60 tech companies — including some of the world’s largest, based both in the US and abroad — that are heavily invested in the buildout of networks and devices, as well as more than 100 manufacturing firms that are increasingly building the products and devices that make up the “Internet of Things,” have written letters strongly opposing the reclassification of broadband under Title II.

There is probably no more objective evidence that Title II reclassification will harm broadband deployment than the opposition of these informed market participants.

These companies have the most to lose from reduced buildout, and no reasonable nefarious plots can be constructed to impugn their opposition to reclassification as consumer-harming self-interest in disguise. Their self-interest is on their sleeves: More broadband deployment and adoption — which is exactly what the Open Internet proceedings are supposed to accomplish.

If the FCC chooses the reclassification route, it will most assuredly end up in litigation. And when it does, the opposition of these companies to Title II should be Exhibit A in the effort to debunk the FCC’s purported basis for its rules: the “virtuous circle” theory that says that strong net neutrality rules are necessary to drive broadband investment and deployment.

Access to all the wonderful content the Internet has brought us is not possible without the billions of dollars that have been invested in building the networks and devices themselves. Let’s not kill the goose that lays the golden eggs.