Archives For mergers

The press release is here. Notably, the settlement obligates Google to continue product development and to license ITA software on commercially-reasonable terms, seemingly for 5 years.  Frankly, I can’t imagine Google wouldn’t have done this anyway, so the settlement is not likely much of a binding constraint.

Also notable is what the settlement doesn’t seem to do: Impose any remedies intended to “correct” (or even acknowledge) so-called search neutrality issues.  This has to be considered a huge victory for Google and for common sense.  I’m sure Josh and I will have more to say once the pleadings and settlement are available.  Later today or tomorrow we will post a paper we have just completed on the issue of search neutrality.

Unfortunately, this settlement doesn’t put the matter to rest, and we still have to see what the FTC has in store now.  But for now, this is, as I said, a huge victory for Google . . . and for all of us who travel!

Steven Pearlstein at the Washington Post asks if it’s “Time to loosen Google’s grip.”  The article is an analytical mess.  Pearlstein is often a decent business reporter–I’m not sure what went wrong here, but this is a pretty shoddy piece of antitrust journalism.

For the most part, the article is a series of tired claims about Google leveraging its monopoly . . . blah, blah, blah.  See my posts here, here, and here for some detailed responses to those claims.

Pearlstein is at least a decent writer, so the prose is nice and flowery.  I don’t think he even uses the word “leverage.”  Instead we get this:

The question now is how much bigger and more dominant we want this innovative and ambitious company to become. Google has already achieved a near-monopoly in Web search and search advertising, and has cleverly used that monopoly and the profits it generates to achieve dominant positions in adjacent or complementary markets. Success in those other markets, in turn, further strengthens Google’s Web search dominance and reduces the chance that any other competitor will be able to successfully challenge it.

It’s the same old line:  “Google is dominant (in a market we wave our hands and say is antitrust-relevant).*  It uses its profits to ‘leverage’ its power to control other ‘adjacent’ markets.  Said leveraging reinforces Google’s monopoly, making it nearly impossible for anyone to compete.  Wash. Rinse. Repeat.”

Pearlstein claims not to be bothered by Google’s legitimate monopoly–it’s the crass buying of other companies that worries him ($6 billion for Groupon?!?! Talk about stimulus!  Why isn’t the fed subsidizing this?–Oh, wait.  I guess they are . . . ).  And here’s where Pearlstein really flubs it.

Check out this paragraph:

In theory, antitrust laws were meant to restrict such acquisitions by a monopolist. In practice, however, it hasn’t worked out that way. Decades of cramped judicial opinions have so limited application of antitrust laws that each transaction can be considered only in terms of how it affects the narrowly defined niche market that an acquiring company hopes to enter.

By “such acquisitions,” Pearlstein means the ones he knows to be anticompetitive.  OK, that’s not fair.  They are the ones where a monopolist “buys its way into new markets and new technologies.”  I must be reading different antitrust laws.  I can’t recall the part where the Sherman Act makes it illegal for a monopolist to improve its product or its business processes, even if it does so by buying another company in a different (though “adjacent”) market in order to run it better.  And could it really be ok for a monopolist to develop its own new technology to accomplish the same ends, but not ok for the company to just take the more efficient route and buy the technology from another company?  I mean, it has to come from somewhere.  Google is either paying its own employees to develop technology or it’s paying another company’s employees to do it.  What’s the difference? Continue Reading…

Today comes news that Senator Kohl has sent a letter to the DOJ urging “careful review” of the proposed Google/ITA merger.  Underlying his concerns (or rather the “concerns raised by a number of industry participants and consumer advocates that I believe warrant careful review”) is this:

Many of ITA’s customers believe that access to ITA’s technology is critical to competition in online air travel search because it cannot be matched by other players in the travel search industry.  They claim that ITA’s superior access to information and superior technology enables it to provide faster and better results to consumers.  As a result, some of these industry participants and independent experts fear that the current high level of competition among online travel agents and metasearch providers could be undermined if Google were to acquire ITA and start its own OTA or metasearch service.  If this were to happen, they argue, consumers would lose the benefits of a robustly competitive online air travel market.

For several reasons, these complaints are without merit and a challenge to the Google/ITA merger would be premature at best—and a costly mistake at worst.

The high-tech market is innovative and dynamic. Goods and services that were once inconceivable are now indispensable, and competition has improved the quality of technology while driving down its costs. But as the market continues to change, antitrust interventions are stuck using a static regulatory framework. As the government develops a strategy for regulating competition in the digital marketplace, it must tread carefully—excessive intervention will stifle innovation, harm consumers, and prevent growth.  And given the link between innovation and economic growth, the stakes of “getting it right” are high. The individual nature of every decision, however, makes errors in antitrust enforcement inevitable. Some conduct that is bad for competition will be allowed to go on while some conduct that is good for competition will be blocked by intervention.

But prosecuting pro-competitive conduct is almost certainly more costly than mistakenly allowing anticompetitive conduct because mechanisms are in place to mitigate the latter but not the former. The cost of erroneous intervention is the loss to consumers directly and a deterrent effect on innovation—for fear of intervention, companies may not take large risks. Meanwhile, allowing conduct to persist amidst uncertainty allows the potential benefits of conduct to materialize while maintaining checks against practices that are bad for consumers: both the competitive marketplace and future enforcers have the power to mitigate specific anticompetitive outcomes that may arise. Unfortunately, current antitrust enforcement—abetted by influential congressmen like Senator Kohl—is more, rather than less, aggressive against innovative companies in high-tech industries. This aggression threatens to stifle growth and deter future innovation in a market with incredible potential.

Google has become a primary target of this scrutiny, and the company’s proposed acquisition of ITA, a software company that compiles and processes travel data, is a good example of aggressive scrutiny threatening to stifle growth.

Google’s acquisition of ITA is a straightforward merger where one company has decided to purchase another outright (instead of merely purchasing its services through contract). There are good reasons for integration. Most notably, Google gets to exercise direct control over ITA’s talented engineers if it owns ITA—influence that it would not have if the company simply signed a contract with ITA. If Google is correct that it can manage ITA’s resources better than ITA’s current management, then integration makes sense and is valuable for consumers.

The primary concern raised over Google’s proposed acquisition of ITA is that acquisition would “leverage” Google’s alleged dominance into another market—the online travel search market—and permit Google to prevent its competitors from accessing ITA’s high-quality analysis of flights and fares.

There are a few problems with this.

  • First, ITA does not provide or own the underlying data (this comes from the airlines themselves); rather it works only to analyze and process it—processing that other companies can and do undertake.  It may have developed superior technology to engage in this processing, but that is precisely why it (and consumers) should not be penalized by its competitors’ efforts to hamstring it.  Remember—although most of the hand-wringing surrounding this deal concerns Google, it is first and foremost the innovative entrepreneurs at ITA who would be prevented from capitalizing on their success if the deal is stopped.
  • Second, it is hard to see why, under the facts as alleged by the deal’s naysayers, consumers would be worse off if Google owns ITA than if ITA stands on its own.  The claims seem to turn on ITA’s indispensability to the online travel industry.  But if ITA is so indispensable—if it possesses such market power, in other words—it’s hard to see how its incentives to capitalize on that market power would change simply by virtue of a change in its management.  Either ITA possesses market power and is already taking advantage of it (or else its managers are leaving money on the table and it most certainly should be taken over by another set of managers) or else it does not actually possess this market power and its combination with Google, even if Google were to keep all of ITA’s technology for itself, will do little to harm the rest of the industry as its competitors step up and step in to take its place.
  • Third and related to these is the simple repugnance of hamstringing successful entrepreneurs because of the exhortations of their competitors, and the implication that a successful company’s work product (like ITA’s “superior technology”) must be rendered widely-available, by government force if necessary.
  • Meanwhile, Google does not seem to have any interest in selling airline tickets or making airline reservations (just as it doesn’t sell the retail goods one can search for using its site). Instead, its interest is in providing its users easy access to airline flight and pricing data and giving online travel agencies the ability to bid on the sale of tickets to Google users looking to buy. The availability of this information via Google search will lower search costs for consumers and the expected bidding should increase competition and drive down travel costs for consumers.  It is easy to see why companies like Kayak and Bing Travel and Expedia and Travelocity might be unhappy about this, but far more difficult to see how their woes should be a problem for the antitrust enforcers (or Congress, for that matter).

The point is not that we know that Google—or any other high-tech company’s—conduct is pro-competitive, but rather that the very uncertainty surrounding it counsels caution, not aggression. As the technology, usage and market structure change, so do the strategies of the various businesses that build up around them. These new strategies present unknown and unprecedented challenges to regulators, and these new challenges call for a deferential approach. New conduct is not necessarily anticompetitive conduct, and if our antitrust regulation does not accept this, we all lose.

Josh’s ongoing series on “Nudging Antitrust” and FTC Commissioner Rosch’s recent thoughts on behavioral economics has been excellent and I look forward to the next installment.  Rosch’s speech, not surprisingly, also elicited a strong response from me.  What follows are my thoughts on Rosch’s speech, focusing on some of the same issues Josh addressed in his first post.

Rosch puts forward four reasons, purportedly identified by behavioral economics, that explain why “human beings sometimes act irrationally in making commercial decisions.”  Each of his four reasons and/or his understanding of its implication is problematic.  Finally, Rosch proposes a policy response to his assessment of the behavioral literature—one that, unfortunately, bears almost no relationship to the behavioral findings form which he purports to draw it.

In the interest of space (and assuming readers have seen Josh’s posts on the speech) I will jump right in with my assessment of Rosch’s claims without trying to restate them.  The speech is readily-available here for those interested in checking my characterizations of Rosch’s comments.

Rosch’s four claims about behavioral economics:

1.  Information asymmetry.  It is deeply problematic that Rosch seems to think that this isn’t something that classical economics has discussed for generations.  More importantly, the idea that it presents a special problem is valid (at least as Rosch seems to see it) only if you act like information is or should be free and that there are no (or small) adverse effects to forcing disclosure of information.  In reality, the creation, assessment and disclosure of information are costly, and it makes no sense to act like there should be no return to these activities or to view as illegitimate the protection by commercial actors of the value they create.

2.  Instant gratification may be more important than long-run maximization.  As Josh points out, we have to assume this refers to hyperbolic discounting.  But even so, the implications of this, if true, are unclear, especially if we take into account (as Rosch seems not to) that regulators are also subject to the effect.  Implicit in much of the behavioral literature (derived, as it is, from constrained and manufactured experimental settings) is that institutions little affect the found effects.  It may even be the case that regulators operating within bureaucratic constraints indeed could be less affected by hyperbolic discounting.  But certainly actors in markets are less constrained than the naked assumption implies, and, either way, the policy implications would seem to be significantly affected by the institutional setting, consideration of which is essential to any legitimate assessment of the value of behavioral economics to the antitrust enterprise.  Unfortunately this consideration seems to be completely lacking here.

3.  Status quo bias.  Again, a large conventional literature on this sort of effect (arising from different sources, perhaps) exists, and the extent to which Rosch is talking about something new is unclear to me.  Even to the extent that it is a new idea, its assessment here falls prey to the same problems I mention above.  Moreover Rosch’s comments fail to reflect the difficulty in differentiating a “normal” or “rational” preference for the status quo arising from, for example, risk aversion, avoidance of transaction costs and the obtaining of costly information from their “irrational,” status-quo biased counterparts.

4.  Sellers may not always behave rationally.  As Josh suggests, this is, at least as Rosch seems to think relevant, an absurd claim on his part.  First off, claiming the theory of the firm for the behavioralists, or ignoring the essential ways in which “conventional” economics accounts for the very things Rosch thinks it fails to account for, seriously calls into question the quality and clarity of Rosch’s thinking on this topic.  Second, everyone knows that perfection is an assumption and not a description of reality.  The constant refrain, sometimes implicit and sometimes explicit, that classical economics “presumes that people will always behave rationally to achieve the best outcome” is, I think, willfully misleading.  Especially along the lines Rosch suggests here (agency costs?  Really? This is something behavioralists invented?), economics has never assumed this kind of perfection, and entire fields revolve around its rejection.

Moreover, there is also a sly and perhaps willful disconnect in emphasis.  The critique ends up sounding like a disparagement of classical economics’ (presumed) description of actual, individual psychology and behavior rather than a critique of a methodological assumption used to achieve better analysis (Josh’s reference to Friedman here is apt, of course).  Saying the behavioralists have a good handle on certain aspects of human psychology is not at all the same thing as saying they have a good approach to making those bits of knowledge systematic and useful.

Rosch’s policy recommendation:

Finally, Rosch pulls all of this together to make a recommendation: Merger review should rely more heavily on documentary evidence of merging parties’ “actual intent.”  In Rosch’s words, neoclassical economics has a problem dealing with behavioral economics because it

suggests [that neoclassical] models are imperfect and that better evidence (i.e., the parties’ documents and testimony) may be just as accurate at predicting competitive effects.

Um, no.  Actually there is nothing in behavioral economics, and certainly nothing in Rosch’s speech, that supports the claim that the parties’ documents may be just as accurate as neoclassical models (nor do I think that most neoclassical economists, other than a few misguided post-Chicagoans, think they should base their analysis of cases solely on abstract theories) at predicting competitive effects.

Of course regular readers know that this is a hot button for me.  My paper with Marc Williamson on the serious problems with relying on documents to infer intent, and on relying on expressions of intent as meaningful to relevant antitrust analysis, must have made little impression on Rosch (in case you haven’t looked at it in a while, the paper, Hot Docs vs. Cold Economics, is here).

Not only does Rosch’s assertion overstate the claims that even behavioralists would make for their ability to understand, interpret and systematize human and group psychology and sociology, it completely glosses over the incredibly thorny problem of the disconnect between that which is intended and that which actually is.  Nothing in the behavioral literature says anything at all about this problem, and it is a serious lapse for a Commissioner of the FTC to suggest that better knowledge (assuming it is better knowledge) about intent permits stronger conclusions about competitive effects.  This is just a non sequitur.

Overall I find the Commissioner’s speech to be seriously lacking.  I understand and applaud the effort to find knowledge useful to the antitrust enterprise wherever it may lie.  But one can’t help feeling that Rosch is a bit too enthusiastic, combative, naïve and, thus, careless in his support for the usefulness of this particular bit of knowledge.