[TOTM: The following is part of a symposium by TOTM guests and authors marking the release of Nicolas Petit’s “Big Tech and the Digital Economy: The Moligopoly Scenario.” The entire series of posts is available here.

This post is authored by Peter Klein (Professor of Entrepreneurship, Baylor University).
]

Nicolas Petit’s insightful and provocative book ends with a chapter on “Big Tech’s Novel Harms,” asking whether antitrust is the appropriate remedy for popular (and academic) concerns about privacy, fake news, and hate speech. In each case, he asks whether the alleged harms are caused by a lack of competition among platforms – which could support a case for breaking them up – or by the nature of the underlying technologies and business models. He concludes that these problems are not alleviated (and may even be exacerbated) by applying competition policy and suggests that regulation, not antitrust, is the more appropriate tool for protecting privacy and truth.

What kind of regulation? Treating digital platforms like public utilities won’t work, Petit argues, because the product is multidimensional and competition takes place on multiple margins (the larger theme of the book): “there is a plausible chance that increased competition in digital markets will lead to a race to the bottom, in which price competition (e.g., on ad markets) will be the winner, and non-price competition (e.g., on privacy) will be the loser.” Utilities regulation also provides incentives for rent-seeking by less efficient rivals. Retail regulation, aimed at protecting small firms, may end up helping incumbents instead by raising rivals’ costs.

Petit concludes that consumer protection regulation (such as Europe’s GDPR) is a better tool for guarding privacy and truth, though it poses challenges as well. More generally, he highlights the vast gulf between the economic analysis of privacy and speech and the increasingly loud calls for breaking up the big tech platforms, which would do little to alleviate these problems.

As in the rest of the book, Petit’s treatment of these complex issues is thoughtful, careful, and systematic. I have more fundamental problems with conventional antitrust remedies and think that consumer protection is problematic when applied to data services (even more so than in other cases). Inspired by this chapter, let me offer some additional thoughts on privacy and the nature of data which speak to regulation of digital platforms and services.

First, privacy, like information, is not an economic good. Just as we don’t buy and sell information per se but information goods (books, movies, communications infrastructure, consultants, training programs, etc.), we likewise don’t produce and consume privacy but what we might call privacy goods: sunglasses, disguises, locks, window shades, land, fences and, in the digital realm, encryption software, cookie blockers, data scramblers, and so on.

Privacy goods and services can be analyzed just like other economic goods. Entrepreneurs offer bundled services that come with varying degrees of privacy protection: encrypted or regular emails, chats, voice and video calls; browsers that block cookies or don’t; social media sites, search engines, etc. that store information or not; and so on. Most consumers seem unwilling to sacrifice other functionality for increased privacy, as suggested by the small market shares held by DuckDuckGo, Telegram, Tor, and the like suggest. Moreover, while privacy per se is appealing, there are huge efficiency gains from matching on buyer and seller characteristics on sharing platforms, digital marketplaces, and dating sites. There are also substantial cost savings from electronic storage and sharing of private information such as medical records and credit histories. And there is little evidence of sellers exploiting such information to engage in price discrimination. (Aquisti, Taylor, and Wagman, 2016 provide a detailed discussion of many of these issues.)

Regulating markets for privacy goods via bans on third-party access to customer data, mandatory data portability, and stiff penalties for data breaches is tricky. Such policies could make digital services more valuable, but it is not obvious why the market cannot figure this out. If consumers are willing to pay for additional privacy, entrepreneurs will be eager to supply it. Of course, bans on third-party access and other forms of sharing would require a fundamental change in the ad-based revenue model that makes free or low-cost access possible, so platforms would have to devise other means of monetizing their services. (Again, many platforms already offer ad-free subscriptions, so it’s unclear why those who prefer ad-based, free usage should be prevented from doing so.)

What about the idea that I own “my” data and that, therefore, I should have full control over how it is used? Some of the utilities-based regulatory models treat platforms as neutral storage places or conduits for information belonging to users. Proposals for data portability suggest that users of technology platforms should be able to move their data from platform to platform, downloading all their personal information from one platform then uploading it to another, then enjoying the same functionality on the new platform as longtime users.

Of course, there are substantial technical obstacles to such proposals. Data would have to be stored in a universal format – not just the text or media users upload to platforms, but also records of all interactions (likes, shares, comments), the search and usage patterns of users, and any other data generated as a result of the user’s actions and interactions with other users, advertisers, and the platform itself. It is unlikely that any universal format could capture this information in a form that could be transferred from one platform to another without a substantial loss of functionality, particularly for platforms that use algorithms to determine how information is presented to users based on past use. (The extreme case is a platform like TikTok which uses usage patterns as a substitute for follows, likes, and shares, portability to construct a “feed.”)

Moreover, as each platform sets its own rules for what information is allowed, the import functionality would have to screen the data for information allowed on the original platform but not the new (and the reverse would be impossible – a user switching from Twitter to Gab, for instance, would have no way to add the content that would have been permitted on Gab but was never created in the first place because it would have violated Twitter rules).

There is a deeper, philosophical issue at stake, however. Portability and neutrality proposals take for granted that users own “their” data. Users create data, either by themselves or with their friends and contacts, and the platform stores and displays the data, just as a safe deposit box holds documents or jewelry and a display case shows of an art collection. I should be able to remove my items from the safe deposit box and take them home or to another bank, and a “neutral” display case operator should not prevent me from showing off my preferred art (perhaps subject to some general rules about obscenity or harmful personal information).

These analogies do not hold for user-generated information on internet platforms, however. “My data” is a record of all my interactions with platforms, with other users on those platforms, with contractual partners of those platforms, and so on. It is co-created by these interactions. I don’t own these records any more than I “own” the fact that someone saw me in the grocery store yesterday buying apples. Of course, if I have a contract with the grocer that says he will keep my purchase records private, and he shares them with someone else, then I can sue him for breach of contract. But this isn’t theft. He hasn’t “stolen” anything; there is nothing for him to steal. If a grocer — or an owner of a tech platform — wants to attract my business by monetizing the records of our interactions and giving me a cut, he should go for it. I still might prefer another store. In any case, I don’t have the legal right to demand this revenue stream.

Likewise, “privacy” refers to what other people know about me – it is knowledge in their heads, not mine. Information isn’t property. If I know something about you, that knowledge is in my head; it’s not something I took from you. Of course, if I obtained or used that info in violation of a prior agreement, then I’m guilty of breach, and I use that information to threaten or harass you, I may be guilty of other crimes. But the popular idea that tech companies are stealing and profiting from something that’s “ours” isn’t right.

The concept of co-creation is important, because these digital records, like other co-created assets, can be more or less relationship specific. The late Oliver Williamson devoted his career to exploring the rich variety of contractual relationships devised by market participants to solve complex contracting problems, particularly in the face of asset specificity. Relationship-specific investments can be difficult for trading parties to manage, but they typically create more value. A legal regime in which only general-purpose, easily redeployable technologies were permitted would alleviate the holdup problem, but at the cost of a huge loss in efficiency. Likewise, a world in which all digital records must be fully portable reduces switching costs, but results in technologies for creating, storing, and sharing information that are less valuable. Why would platform operators invest in efficiency improvements if they cannot capture some of that value by means of proprietary formats, interfaces, sharing rules, and other arrangements?  

In short, we should not be quick to assume “market failure” in the market for privacy goods (or “true” news, whatever that is). Entrepreneurs operating in a competitive environment – not the static, partial-equilibrium notion of competition from intermediate micro texts but the rich, dynamic, complex, and multimarket kind of competition described in Petit’s book – can provide the levels of privacy and truthiness that consumers prefer.

What is a search engine?

Dirk Auer —  21 October 2020 — 1 Comment

What is a search engine? This might seem like an innocuous question, but it lies at the heart of the US Department of Justice and state Attorneys’ General antitrust complaint against Google, as well as the European Commission’s Google Search and Android decisions. It is also central to a report published by the UK’s Competition & Markets Authority (“CMA”). To varying degrees, all of these proceedings are premised on the assumption that Google enjoys a monopoly/dominant position over online search. But things are not quite this simple. 

Despite years of competition decisions and policy discussions, there are still many unanswered questions concerning the operation of search markets. For example, it is still unclear exactly which services compete against Google Search, and how this might evolve in the near future. Likewise, there has only been limited scholarly discussion as to how a search engine monopoly would exert its market power. In other words, what does a restriction of output look like on a search platform — particularly on the user side

Answering these questions will be essential if authorities wish to successfully bring an antitrust suit against Google for conduct involving search. Indeed, as things stand, these uncertainties greatly complicate efforts (i) to rigorously define the relevant market(s) in which Google Search operates, (ii) to identify potential anticompetitive effects, and (iii) to apply the quantitative tools that usually underpin antitrust proceedings.

In short, as explained below, antitrust authorities and other plaintiffs have their work cut out if they are to prevail in court.

Consumers demand information 

For a start, identifying the competitive constraints faced by Google presents authorities and plaintiffs with an important challenge.

Even proponents of antitrust intervention recognize that the market for search is complex. For instance, the DOJ and state AGs argue that Google dominates a narrow market for “general search services” — as opposed to specialized search services, content sites, social networks, and online marketplaces, etc. The EU Commission reached the same conclusion in its Google Search decision. Finally, commenting on the CMA’s online advertising report, Fiona Scott Morton and David Dinielli argue that: 

General search is a relevant market […]

In this way, an individual specialized search engine competes with a small fraction of what the Google search engine does, because a user could employ either for one specific type of search. The CMA concludes that, from the consumer standpoint, a specialized search engine exerts only a limited competitive constraint on Google.

(Note that the CMA stressed that it did not perform a market definition exercise: “We have not carried out a formal market definition assessment, but have instead looked at competitive constraints across the sector…”).

In other words, the above critics recognize that search engines are merely tools that can serve multiple functions, and that competitive constraints may be different for some of these. But this has wider ramifications that policymakers have so far overlooked. 

When quizzed about his involvement with Neuralink (a company working on implantable brain–machine interfaces), Elon Musk famously argued that human beings already share a near-symbiotic relationship with machines (a point already made by others):

The purpose of Neuralink [is] to create a high-bandwidth interface to the brain such that we can be symbiotic with AI. […] Because we have a bandwidth problem. You just can’t communicate through your fingers. It’s just too slow.

Commentators were quick to spot this implications of this technology for the search industry:

Imagine a world when humans would no longer require a device to search for answers on the internet, you just have to think of something and you get the answer straight in your head from the internet.

As things stand, this example still belongs to the realm of sci-fi. But it neatly illustrates a critical feature of the search industry. 

Search engines are just the latest iteration (but certainly not the last) of technology that enables human beings to access specific pieces of information more rapidly. Before the advent of online search, consumers used phone directories, paper maps, encyclopedias, and other tools to find the information they were looking for. They would read newspapers and watch television to know the weather forecast. They went to public libraries to undertake research projects (some still do), etc.

And, in some respects, the search engine is already obsolete for many of these uses. For instance, virtual assistants like Alexa, Siri, Cortana and Google’s own Google Assistant offering can perform many functions that were previously the preserve of search engines: checking the weather, finding addresses and asking for directions, looking up recipes, answering general knowledge questions, finding goods online, etc. Granted, these virtual assistants partly rely on existing search engines to complete tasks. However, Google is much less dominant in this space, and search engines are not the sole source on which virtual assistants rely to generate results. Amazon’s Alexa provides a fitting example (here and here).

Along similar lines, it has been widely reported that 60% of online shoppers start their search on Amazon, while only 26% opt for Google Search. In other words, Amazon’s ability to rapidly show users the product they are looking for somewhat alleviates the need for a general search engine. In turn, this certainly constrains Google’s behavior to some extent. And much of the same applies to other websites that provide a specific type of content (think of Twitter, LinkedIn, Tripadvisor, Booking.com, etc.)

Finally, it is also revealing that the most common searches on Google are, in all likelihood, made to reach other websites — a function for which competition is literally endless:

The upshot is that Google Search and other search engines perform a bundle of functions. Most of these can be done via alternative means, and this will increasingly be the case as technology continues to advance. 

This is all the more important given that the vast majority of search engine revenue derives from roughly 30 percent of search terms (notably those that are linked to product searches). The remaining search terms are effectively a loss leader. And these profitable searches also happen to be those where competition from alternative means is, in all likelihood, the strongest (this includes competition from online retail platforms, and online travel agents like Booking.com or Kayak, but also from referral sites, direct marketing, and offline sources). In turn, this undermines US plaintiffs’ claims that Google faces little competition from rivals like Amazon, because they don’t compete for the entirety of Google’s search results (in other words, Google might face strong competition for the most valuable ads):

108. […] This market share understates Google’s market power in search advertising because many search-advertising competitors offer only specialized search ads and thus compete with Google only in a limited portion of the market. 

Critics might mistakenly take the above for an argument that Google has no market power because competition is “just a click away”. But the point is more subtle, and has important implications as far as market definition is concerned.

Authorities should not define the search market by arguing that no other rival is quite like Google (or one if its rivals) — as the DOJ and state AGs did in their complaint:

90. Other search tools, platforms, and sources of information are not reasonable substitutes for general search services. Offline and online resources, such as books, publisher websites, social media platforms, and specialized search providers such as Amazon, Expedia, or Yelp, do not offer consumers the same breadth of information or convenience. These resources are not “one-stop shops” and cannot respond to all types of consumer queries, particularly navigational queries. Few consumers would find alternative sources a suitable substitute for general search services. Thus, there are no reasonable substitutes for general search services, and a general search service monopolist would be able to maintain quality below the level that would prevail in a competitive market. 

And as the EU Commission did in the Google Search decision:

(162) For the reasons set out below, there is, however, limited demand side substitutability between general search services and other online services. […]

(163) There is limited substitutability between general search services and content sites. […]

(166) There is also limited substitutability between general search services and specialised search services. […]

(178) There is also limited substitutability between general search services and social networking sites.

Ad absurdum, if consumers suddenly decided to access information via other means, Google could be the only firm to provide general search results and yet have absolutely no market power. 

Take the example of Yahoo: Despite arguably remaining the most successful “web directory”, it likely lost any market power that it had when Google launched a superior — and significantly more successful — type of search engine. Google Search may not have provided a complete, literal directory of the web (as did Yahoo), but it offered users faster access to the information they wanted. In short, the Yahoo example shows that being unique is not equivalent to having market power. Accordingly, any market definition exercise that merely focuses on the idiosyncrasies of firms is likely to overstate their actual market power. 

Given what precedes, the question that authorities should ask is thus whether Google Search (or another search engine) performs so many unique functions that it may be in a position to restrict output. So far, no one appears to have convincingly answered this question.

Similar uncertainties surround the question of how a search engine might restrict output, especially on the user side of the search market. Accordingly, authorities will struggle to produce evidence (i) the Google has market power, especially on the user side of the market, and (ii) that its behavior has anticompetitive effects.

Consider the following:

The SSNIP test (which is the standard method of defining markets in antitrust proceedings) is inapplicable to the consumer side of search platforms. Indeed, it is simply impossible to apply a hypothetical 10% price increase to goods that are given away for free.

This raises a deeper question: how would a search engine exercise its market power? 

For a start, it seems unlikely that it would start charging fees to its users. For instance, empirical research pertaining to the magazine industry (also an ad-based two-sided market) suggests that increased concentration does not lead to higher magazine prices. Minjae Song notably finds that:

Taking the advantage of having structural models for both sides, I calculate equilibrium outcomes for hypothetical ownership structures. Results show that when the market becomes more concentrated, copy prices do not necessarily increase as magazines try to attract more readers.

It is also far from certain that a dominant search engine would necessarily increase the amount of adverts it displays. To the contrary, market power on the advertising side of the platform might lead search engines to decrease the number of advertising slots that are available (i.e. reducing advertising output), thus showing less adverts to users. 

Finally, it is not obvious that market power would lead search engines to significantly degrade their product (as this could ultimately hurt ad revenue). For example, empirical research by Avi Goldfarb and Catherine Tucker suggests that there is some limit to the type of adverts that search engines could profitably impose upon consumers. They notably find that ads that are both obtrusive and targeted decrease subsequent purchases:

Ads that match both website content and are obtrusive do worse at increasing purchase intent than ads that do only one or the other. This failure appears to be related to privacy concerns: the negative effect of combining targeting with obtrusiveness is strongest for people who refuse to give their income and for categories where privacy matters most.

The preceding paragraphs find some support in the theoretical literature on two-sided markets literature, which suggests that competition on the user side of search engines is likely to be particularly intense and beneficial to consumers (because they are more likely to single-home than advertisers, and because each additional user creates a positive externality on the advertising side of the market). For instance, Jean Charles Rochet and Jean Tirole find that:

The single-homing side receives a large share of the joint surplus, while the multi-homing one receives a small share.

This is just a restatement of Mark Armstrong’s “competitive bottlenecks” theory:

Here, if it wishes to interact with an agent on the single-homing side, the multi-homing side has no choice but to deal with that agent’s chosen platform. Thus, platforms have monopoly power over providing access to their single-homing customers for the multi-homing side. This monopoly power naturally leads to high prices being charged to the multi-homing side, and there will be too few agents on this side being served from a social point of view (Proposition 4). By contrast, platforms do have to compete for the single-homing agents, and high profits generated from the multi-homing side are to a large extent passed on to the single-homing side in the form of low prices (or even zero prices).

All of this is not to suggest that Google Search has no market power, or that monopoly is necessarily less problematic in the search engine industry than in other markets. 

Instead, the argument is that analyzing competition on the user side of search platforms is unlikely to yield dispositive evidence of market power or anticompetitive effects. This is because market power is hard to measure on this side of the market, and because even a monopoly platform might not significantly restrict user output. 

That might explain why the DOJ and state AGs analysis of anticompetitive effects is so limited. Take the following paragraph (provided without further supporting evidence):

167. By restricting competition in general search services, Google’s conduct has harmed consumers by reducing the quality of general search services (including dimensions such as privacy, data protection, and use of consumer data), lessening choice in general search services, and impeding innovation. 

Given these inherent difficulties, antitrust investigators would do better to focus on the side of those platforms where mainstream IO tools are much easier to apply and where a dominant search engine would likely restrict output: the advertising market. Not only is it the market where search engines are most likely to exert their market power (thus creating a deadweight loss), but — because it involves monetary transactions — this side of the market lends itself to the application of traditional antitrust tools.  

Looking at the right side of the market

Finally, and unfortunately for Google’s critics, available evidence suggests that its position on the (online) advertising market might not meet the requirements necessary to bring a monopolization case (at least in the US).

For a start, online advertising appears to exhibit the prima facie signs of a competitive market. As Geoffrey Manne, Sam Bowman and Eric Fruits have argued:

Over the past decade, the price of advertising has fallen steadily while output has risen. Spending on digital advertising in the US grew from $26 billion in 2010 to nearly $130 billion in 2019, an average increase of 20% a year. Over the same period the Producer Price Index for Internet advertising sales declined by nearly 40%. The rising spending in the face of falling prices indicates the number of ads bought and sold increased by approximately 27% a year. Since 2000, advertising spending has been falling as a share of GDP, with online advertising growing as a share of that. The combination of increasing quantity, decreasing cost, and increasing total revenues are consistent with a growing and increasingly competitive market.

Second, empirical research suggests that the market might need to be widened to include offline advertising. For instance, Avi Goldfarb and Catherine Tucker show that there can be important substitution effects between online and offline advertising channels:

Using data on the advertising prices paid by lawyers for 139 Google search terms in 195 locations, we exploit a natural experiment in “ambulance-chaser” regulations across states. When lawyers cannot contact clients by mail, advertising prices per click for search engine advertisements are 5%–7% higher. Therefore, online advertising substitutes for offline advertising.

Of course, a careful examination of the advertising industry could also lead authorities to define a narrower relevant market. For example, the DOJ and state AG complaint argued that Google dominated the “search advertising” market:

97. Search advertising in the United States is a relevant antitrust market. The search advertising market consists of all types of ads generated in response to online search queries, including general search text ads (offered by general search engines such as Google and Bing) […] and other, specialized search ads (offered by general search engines and specialized search providers such as Amazon, Expedia, or Yelp). 

Likewise, the European Commission concluded that Google dominated the market for “online search advertising” in the AdSense case (though the full decision has not yet been made public). Finally, the CMA’s online platforms report found that display and search advertising belonged to separate markets. 

But these are empirical questions that could dispositively be answered by applying traditional antitrust tools, such as the SSNIP test. And yet, there is no indication that the authorities behind the US complaint undertook this type of empirical analysis (and until its AdSense decision is made public, it is not clear that the EU Commission did so either). Accordingly, there is no guarantee that US courts will go along with the DOJ and state AGs’ findings.

In short, it is far from certain that Google currently enjoys an advertising monopoly, especially if the market is defined more broadly than that for “search advertising” (or the even narrower market for “General Search Text Advertising”). 

Concluding remarks

The preceding paragraphs have argued that a successful antitrust case against Google is anything but a foregone conclusion. In order to successfully bring a suit, authorities would notably need to figure out just what market it is that Google is monopolizing. In turn, that would require a finer understanding of what competition, and monopoly, look like in the search and advertising industries.

[TOTM: The following is part of a symposium by TOTM guests and authors marking the release of Nicolas Petit’s “Big Tech and the Digital Economy: The Moligopoly Scenario.” The entire series of posts is available here.

This post is authored by Shane Greenstein (Professor of Business Administration, Harvard Business School).
]

In his book, Nicolas Petit approaches antitrust issues by analyzing their economic foundations, and he aspires to bridge gaps between those foundations and the common points of view. In light of the divisiveness of today’s debates, I appreciate Petit’s calm and deliberate view of antitrust, and I respect his clear and engaging prose.

I spent a lot of time with this topic when writing a book (How the Internet Became Commercial, 2015, Princeton Press). If I have something unique to add to a review of Petit’s book, it comes from the role Microsoft played in the events in my book.

Many commentators have speculated on what precise charges could be brought against Facebook, Google/Alphabet, Apple, and Amazon. For the sake of simplicity, let’s call these the “big four.” While I have no special insight to bring to such speculation, for this post I can do something different, and look forward by looking back. For the time being, Microsoft has been spared scrutiny by contemporary political actors. (It seems safe to presume Microsoft’s managers prefer to be left out.) While it is tempting to focus on why this has happened, let’s focus on a related issue: What shadow did Microsoft’s trials cast on the antitrust issues facing the big four?

Two types of lessons emerged from Microsoft’s trials, and both tend to be less appreciated by economists. One set of lessons emerged from the media flood of the flotsam and jetsam of sensationalistic factoids and sound bites, drawn from Congressional and courtroom testimony. That yielded lessons about managing sound and fury – i.e., mostly about reducing the cringe-worthy quotes from CEOs and trial witnesses.

Another set of lessons pertained to the role and limits of economic reasoning. Many decision makers reasoned by analogy and metaphor. That is especially so for lawyers and executives. These metaphors do not make economic reasoning wrong, but they do tend to shape how an antitrust question takes center stage with a judge, as well as in the court of public opinion. These metaphors also influence the stories a CEO tells to employees.

If you asked me to forecast how things will go for the big four, based on what I learned from studying Microsoft’s trials, I forecast that the outcome depends on which metaphor and analogy gets the upper hand.

In that sense, I want to argue that Microsoft’s experience depended on “the fox and shepherd problem.” When is a platform leader better thought of as a shepherd, helping partners achieve a healthy outcome, or as a fox in charge of a henhouse, ready to sacrifice a partner for self-serving purposes? I forecast the same metaphors will shape experience of the big four.

Gaps and analysis

The fox-shepherd problem never shows up when a platform leader is young and its platform is small. As the platform reaches bigger scale, however, the problem becomes more salient. Conflicts of interests emerge and focus attention on platform leadership.

Petit frames these issues within a Schumpeterian vision. In this view, firms compete for dominant positions over time, potentially with one dominant firm replacing another. Potential competition has a salutary effect if established firms perceive a threat from the future shadow of such competitors, motivating innovation. In this view, antitrust’s role might be characterized as “keeping markets open so there is pressure on the dominant firm from potential competition.”

In the Microsoft trial economists framed the Schumpeterian tradeoff in the vocabulary of economics. Firms who supply complements at one point could become suppliers of substitutes at a later point if they are allowed to. In other words, platform leaders today support complements that enhance the value of the platform, while also having the motive and ability to discourage those same business partners from developing services that substitute for the platform’s services, which could reduce the platform’s value. Seen through this lens, platform leaders inherently face a conflict of interest, and antitrust law should intervene if platform leaders could place excessive limitations on existing business partners.

This economic framing is not wrong. Rather, it is necessary, but not sufficient. If I take a sober view of events in the Microsoft trial, I am not convinced the economics alone persuaded the judge in Microsoft’s case, or, for that matter, the public.

As judges sort through the endless detail of contracting provisions, they need a broad perspective, one that sharpens their focus on a key question. One central question in particular inhabits a lot of a judge’s mindshare: how did the platform leader use its discretion, and for what purposes? In case it is not obvious, shepherds deserve a lot of discretion, while only a fool gives a fox much license.

Before the trial, when it initially faced this question from reporters and Congress, Microsoft tried to dismiss the discussion altogether. Their representatives argued that high technology differs from every other market in its speed and productivity, and, therefore, ought to be thought of as incomparable to other antitrust examples. This reflected the high tech elite’s view of their own exceptionalism.

Reporters dutifully restated this argument, and, long story short, it did not get far with the public once the sensationalism started making headlines, and it especially did not get far with the trial judge. To be fair, if you watched recent congressional testimony, it appears as if the lawyers for the big four instructed their CEOs not to try it this approach this time around.

Origins

Well before lawyers and advocates exaggerate claims, the perspective of both sides usually have some merit, and usually the twain do not meet. Most executives tend to remember every detail behind growth, and know the risks confronted and overcome, and usually are reluctant to give up something that works for their interests, and sometimes these interests can be narrowly defined. In contrast, many partners will know examples of a rule that hindered them, and point to complaints that executives ignored, and aspire to have rules changed, and, again, their interests tend to be narrow.

Consider the quality-control process today for iPhone apps as an example. The merits and absurdity of some of Apples conduct get a lot of attention in online forums, especially the 30% take for Apple. Apple can reasonably claim the present set of rules work well overall, and only emerged after considerable experimentation, and today they seek to protect all who benefit from the entire system, like a shepherd. It is no surprise however, that some partners accuse Apple of tweaking rules to their own benefit, and using the process to further Apple’s ambitions at the expense of the partner’s, like a fox in a henhouse. So it goes.

More generally, based on publically available information, all of the big four already face this debate. Self-serving behavior shows up in different guise in different parts of the big four’s business, but it is always there. As noted, Apple’s apps compete with the apps of others, so it has incentives to shape distribution of other apps. Amazon’s products compete with some products coming from its third—party sellers, and it too faces mixed incentives. Google’s services compete with online services who also advertise on their search engine, and they too face issues over their charges for listing on the Play store. Facebook faces an additional issues, because it has bought firms that were trying to grow their own platforms to compete with Facebook.

Look, those four each contain rather different businesses in their details, which merits some caution in making a sweeping characterization. My only point: the question about self-serving behavior arises in each instance. That frames a fox-shepherd problem for prosecutors in each case.

Lessons from prior experience

Circling back to lessons of the past for antitrust today, the Shepherd-Fox problem was one of the deeper sources of miscommunication leading up to the Microsoft trial. In the late 1990s Microsoft could reasonably claim to be a shepherd for all its platform’s partners, and it could reasonably claim to have improved the platform in ways that benefited partners. Moreover, for years some of the industry gossip about their behavior stressed misinformed nonsense. Accordingly, Microsoft’s executives had learned to trust their own judgment and to mistrust the complaints of outsiders. Right in line with that mistrust, many employees and executives took umbrage to being characterized as a fox in a henhouse, dismissing the accusations out of hand.

Those habits-of-mind poorly positioned the firm for a court case. As any observer of the trial knowns, When prosecutors came looking, they found lots of examples that looked like fox-like behavior. Onerous contract restrictions and cumbersome processes for business partners produced plenty of bad optics in court, and fueled the prosecution’s case that the platform had become too self-serving at the expense of competitive processes. Prosecutors had plenty to work with when it came time to prove motive, intent, and ability to misuse discretion. 

What is the lesson for the big four? Ask an executive in technology today, and sometimes you will hear the following: As long as a platform’s actions can be construed as friendly to customers, the platform leader will be off the hook. That is not wrong lessons, but it is an incomplete one. Looking with hindsight and foresight, that perspective seems too sanguine about the prospects for the big four. Microsoft had done plenty for its customers, but so what? There was plenty of evidence of acting like a fox in a hen-house. The bigger lesson is this: all it took were a few bad examples to paint a picture of a pattern, and every firm has such examples.

Do not get me wrong. I am not saying a fox and hen-house analogy is fair or unfair to platform leaders. Rather, I am saying that economists like to think the economic trade-off between the interests of platform leaders, platform partners, and platform customers emerge from some grand policy compromise. That is not how prosecutors think, nor how judges decide. In the Microsoft case there was no such grand consideration. The economic framing of the case only went so far. As it was, the decision was vulnerable to metaphor, shrewdly applied and convincingly argued. Done persuasively, with enough examples of selfish behavior, excuses about “helping customers” came across as empty.

Policy

Some advocates argue, somewhat philosophically, that platforms deserve discretion, and governments are bound to err once they intervene. I have sympathy with that point of view, but only up to a point. Below are two examples from outside antitrust where government routinely do not give the big four a blank check.

First, when it started selling ads, Google banned ads for cigarettes, porn and alcohol, and it downgraded in its quality score for websites that used deceptive means to attract users. That helped the service foster trust with new users, enabling it to grow. After it became bigger should Google have continued to have unqualified discretion to shepherd the entire ad system? Nobody thinks so. A while ago the Federal Trade Commission decided to investigate deceptive online advertising, just as it investigates deceptive advertising in other media. It is not a big philosophical step to next ask whether Google should have unfettered discretion to structure the ad business, search process, and related e-commerce to its own benefit.

Here is another example, this one about Facebook. Over the years Facebook cycled through a number of rules for sharing information with business partners, generally taking a “relaxed” attitude enforcing those policies. Few observers cared when Facebook was small, but many governments started to care after Facebook grew to billions of users. Facebook’s lax monitoring did not line up with the preferences of many governments. It should not come as a surprise now that many governments want to regulate Facebook’s handling of data. Like it or not, this question lies squarely within the domain of government privacy policy. Again, the next step is small. Why should other parts of its business remain solely in Facebook’s discretion, like its ability to buy other businesses?

This gets us to the other legacy of the Microsoft case: As we think about future policy dilemmas, are there a general set of criteria for the antitrust issues facing all four firms? Veterans of court cases will point out that every court case is its own circus. Just because Microsoft failed to be persuasive in its day does not imply any of the big four will be unpersuasive.

Looking back on the Microsoft trial, it did not articulate a general set of principles about acceptable or excusable self-serving behavior from a platform leader. It did not settle what criteria best determine when a court should consider a platform leader’s behavior closer to that of a shepherd or a fox. The appropriate general criteria remains unclear.

[TOTM: The following is part of a symposium by TOTM guests and authors marking the release of Nicolas Petit’s “Big Tech and the Digital Economy: The Moligopoly Scenario.” The entire series of posts is available here.

This post is authored by Richard N. Langlois
(Professor of Economics, University of Connecticut).]

Market share has long been the talisman of antitrust economics.  Once we properly define what “the product” is, all we have to do is look at shares in the relevant market.  In such an exercise, today’s high-tech firms come off badly.  Each of them has a large share of the market for some “product.” What I appreciate about Nicolas Petit’s notion of “moligopoly” is that it recognizes that genuine competition is a far more complex and interesting phenomenon, one that goes beyond the category of “the product.”

In his chapter 4, Petit lays out how this works with six of today’s large high-tech companies, adding Netflix to the usual Big Five of Amazon, Apple, Facebook, Google, and Microsoft.  If I understand properly, what he means by “moligopoly” is that these large firms have their hands in many different relevant markets.  Because they seem to be selling different “products,” they don’t seem to be competing with one another.  Yet, in a fundamental sense, they are very much competing with one another, and perhaps with firms that do not yet exist.  

In this view, diversification is at the heart of competition.  Indeed, Petit wonders at one point whether we are in a new era of “conglomeralism.”  I would argue that the diversified high-tech firms we see today are actually very unlike the conglomerates of the late twentieth century.  In my view, the earlier conglomerates were not equilibrium phenomena but rather short-lived vehicles for the radical restructuring of the American economy in the post- Bretton Woods era of globalization.  A defining characteristic of those firms was that their diversification was unrelated, not just in terms of the SIC codes of their products but also in terms of their underlying capabilities.  If we look only at the products on the demand side, today’s high-tech firms might also seem to reflect unrelated diversification.  In fact, however, unlike in the twentieth-century conglomerates, the activities of present-day high-tech firms are connected on the supply side by a common set of capabilities involving the deployment of digital technology. 

Thus the boundaries of markets can shift and morph unexpectedly.  Enterprises that may seem entirely different actually harbor the potential to invade one other’s territory (or invade new territory – “competing against non-consumption”).  What Amazon can do, Google can do; and so can Microsoft.  The arena is competitive not because firms have a small share of relevant markets but because all of them sit beneath four or five damocletian swords, suspended by the thinnest of horsehairs.  No wonder the executives of high-tech firms sound paranoid.

Petit speculates that today’s high-tech companies have diversified (among other reasons) because of complementarities.  That may be part of the story.  But as Carliss Baldwin argues (and as Petit mentions in passing), we can think about the investments high-tech firms seem to be making as options – experiments that may or may not pay off.  The more uncertain the environment, the more valuable it is to have many diverse options.  A decade or so after the breakup of AT&T, the “baby Bells” were buying into landline, cellular, cable, satellite, and many other things, not because, as many thought at the time, that these were complementary, but because no one had any idea what would be important in the future (including whether there would be any complementarities).  As uncertainty resolved, these lines of business became more specialized, and the babies unbundled.  (As I write, AT&T, the baby Bell that snagged the original company name, is probably about to sell off DirectTV at a loss.)  From this perspective, the high degree of diversification we observe today implies not control of markets but the opposite – existential uncertainty about the future.

I wonder whether this kind of competition is unique to the age of the Internet.  There is an entire genre of business-school case built around an epiphany of the form: “we thought we were in the X business, but we were really in the Y business all along!”  I have recently read (listened to, technically) Marc Levinson’s wonderful history of containerized shipping.  Here the real competition occurred across modes of transport, not within existing well-defined markets.  The innovators came to realize that they were in the logistics business, not in the trucking business or the railroad business or the ocean-shipping business.  (Some of the most interesting parts of the story were about how entrepreneurship happens in a heavily regulated environment.  At one point early in the story, Malcolm McLean, the most important of these entrepreneurs, had to buy up other trucking firms just to obtain the ICC permits necessary to redesign routes efficiently.)  Of course, containerized shipping is also a modular system that some economists have accused of being a general-purpose technology like the Internet.

[TOTM: The following is part of a symposium by TOTM guests and authors marking the release of Nicolas Petit’s “Big Tech and the Digital Economy: The Moligopoly Scenario.” The entire series of posts is available here.

This post is authored by Doug Melamed (Professor of the Practice of Law, Stanford law School).
]

The big digital platforms make people uneasy.  Part of the unease is no doubt attributable to widespread populist concerns about large and powerful business entities.  Platforms like Facebook and Google in particular cause unease because they affect sensitive issues of communications, community, and politics.  But the platforms also make people uneasy because they seem boundless – enduring monopolies protected by ever-increasing scale and network economies, and growing monopolies aided by scope economies that enable them to conquer complementary markets.  They provoke a discussion about whether antitrust law is sufficient for the challenge.

Nicolas Petit’s Big Tech and the Digital Economy: The Moligopoly Scenario provides an insightful and valuable antidote to this unease.  While neither Panglossian nor comprehensive, Petit’s analysis persuasively argues that some of the concerns about the platforms are misguided or at least overstated.  As Petit sees it, the platforms are not so much monopolies in discrete markets – search, social networking, online commerce, and so on – as “multibusiness firms with business units in partly overlapping markets” that are engaged in a “dynamic oligopoly game” that might be “the socially optimal industry structure.”  Petit suggests that we should “abandon or at least radically alter traditional antitrust principles,” which are aimed at preserving “rivalry,” and “adapt to the specific non-rival economics of digital markets.”  In other words, the law should not try to diminish the platforms’ unique dominance in their individual sectors, which have already tipped to a winner-take-all (or most) state and in which protecting rivalry is not “socially beneficial.”  Instead, the law should encourage reductions of output in tipped markets in which the dominant firm “extracts a monopoly rent” in order to encourage rivalry in untipped markets. 

Petit’s analysis rests on the distinction between “tipped markets,” in which “tech firms with observed monopoly positions can take full advantage of their market power,” and “untipped markets,” which are “characterized by entry, instability and uncertainty.”  Notably, however, he does not expect “dispositive findings” as to whether a market is tipped or untipped.  The idea is to define markets, not just by “structural” factors like rival goods and services, market shares and entry barriers, but also by considering “uncertainty” and “pressure for change.”

Not surprisingly, given Petit’s training and work as a European scholar, his discussion of “antitrust in moligopoly markets” includes prescriptions that seem to one schooled in U.S. antitrust law to be a form of regulation that goes beyond proscribing unlawful conduct.  Petit’s principal concern is with reducing monopoly rents available to digital platforms.  He rejects direct reduction of rents by price regulation as antithetical to antitrust’s DNA and proposes instead indirect reduction of rents by permitting users on the inelastic side of a platform (the side from which the platform gains most of its revenues) to collaborate in order to gain countervailing market power and by restricting the platforms’ use of vertical restraints to limit user bypass. 

He would create a presumption against all horizontal mergers by dominant platforms in order to “prevent marginal increases of the output share on which the firms take a monopoly rent” and would avoid the risk of defining markets narrowly and thus failing to recognize that platforms are conglomerates that provide actual or potential competition in multiple partially overlapping commercial segments. By contrast, Petit would restrict the platforms’ entry into untipped markets only in “exceptional circumstances.”  For this, Petit suggests four inquiries: whether leveraging of network effects is involved; whether platform entry deters or forecloses entry by others; whether entry by others pressures the monopoly rents; and whether entry into the untipped market is intended to deter entry by others or is a long-term commitment.

One might question the proposition, which is central to much of Petit’s argument, that reducing monopoly rents in tipped markets will increase the platforms’ incentives to enter untipped markets.  Entry into untipped markets is likely to depend more on expected returns in the untipped market, the cost of capital, and constraints on managerial bandwidth than on expected returns in the tipped market.  But the more important issue, at least from the perspective of competition law, is whether – even assuming the correctness of all aspects of Petit’s economic analysis — the kind of categorical regulatory intervention proposed by Petit is superior to a law enforcement regime that proscribes only anticompetitive conduct that increases or threatens to increase market power.  Under U.S. law, anticompetitive conduct is conduct that tends to diminish the competitive efficacy of rivals and does not sufficiently enhance economic welfare by reducing costs, increasing product quality, or reducing above-cost prices.

If there were no concerns about the ability of legal institutions to know and understand the facts, a law enforcement regime would seem clearly superior.  Consider, for example, Petit’s recommendation that entry by a platform monopoly into untipped markets should be restricted only when network effects are involved and after taking into account whether the entry tends to protect the tipped market monopoly and whether it reflects a long-term commitment.  Petit’s proposed inquiries might make good sense as a way of understanding as a general matter whether market extension by a dominant platform is likely to be problematic.  But it is hard to see how economic welfare is promoted by permitting a platform to enter an adjacent market (e.g., Amazon entering a complementary product market) by predatory pricing or by otherwise unprofitable self-preferencing, even if the entry is intended to be permanent and does not protect the platform monopoly. 

Similarly, consider the proposed presumption against horizontal mergers.  That might not be a good idea if there is a small (10%) chance that the acquired firm would otherwise endure and modestly reduce the platform’s monopoly rents and an equal or even smaller chance that the acquisition will enable the platform, by taking advantage of economies of scope and asset complementarities, to build from the acquired firm an improved business that is much more valuable to consumers.  In that case, the expected value of the merger in welfare terms might be very positive.  Similarly, Petit would permit acquisitions by a platform of firms outside the tipped market as long as the platform has the ability and incentive to grow the target.  But the growth path of the target is not set in stone.  The platform might use it as a constrained complement, while an unaffiliated owner might build it into something both more valuable to consumers and threatening to the platform.  Maybe one of these stories describes Facebook’s acquisition of Instagram.

The prototypical anticompetitive horizontal merger story is one in which actual or potential competitors agree to share the monopoly rents that would be dissipated by competition between them. That story is confounded by communications that seem like threats, which imply a story of exclusion rather than collusion.  Petit refers to one such story.  But the threat story can be misleading.  Suppose, for example, that Platform sees Startup introduce a new business concept and studies whether it could profitably emulate Startup.  Suppose further that Platform concludes that, because of scale and scope economies available to it, it could develop such a business and come to dominate the market for a cost of $100 million acting alone or $25 million if it can acquire Startup and take advantage of its existing expertise, intellectual property, and personnel.  In that case, Platform might explain to Startup the reality that Platform is going to take the new market either way and propose to buy Startup for $50 million (thus offering Startup two-thirds of the gains from trade).  Startup might refuse, perhaps out of vanity or greed, in which case Platform as promised might enter aggressively and, without engaging in predatory or other anticompetitive conduct, drive Startup from the market.  To an omniscient law enforcement regime, there should be no antitrust violation from either an acquisition or the aggressive competition.  Either way, the more efficient provider prevails so the optimum outcome is realized in the new market.  The merger would have been more efficient because it would have avoided wasteful duplication of startup costs, and the merger proposal (later characterized as a threat) was thus a benign, even procompetitive, invitation to collude.  It would be a different story of course if Platform could overcome Startup’s first mover advantage only by engaging in anticompetitive conduct.

The problem is that antitrust decision makers often cannot understand all the facts.  Take the threat story, for example.  If Startup acquiesces and accepts the $50 million offer, the decision maker will have to determine whether Platform could have driven Startup from the market without engaging in predatory or anticompetitive conduct and, if not, whether absent the merger the parties would have competed against one another.  In other situations, decision makers are asked to determine whether the conduct at issue would be more likely than the but-for world to promote innovation or other, similarly elusive matters.

U.S. antitrust law accommodates its unavoidable uncertainty by various default rules and practices.  Some, like per se rules and the controversial Philadelphia National Bank presumption, might on occasion prohibit conduct that would actually have been benign or even procompetitive.  Most, however, insulate from antitrust liability conduct that might actually be anticompetitive.  These include rules applicable to predatory pricing, refusals to deal, two-sided markets, and various matters involving patents.  Perhaps more important are proof requirements in general.  U.S. antitrust law is based on the largely unexamined notion that false positives are worse than false negatives and thus, for the most part, puts the burden of uncertainty on the plaintiff.

Petit is proposing, in effect, an alternative approach for the digital platforms.  This approach would not just proscribe anticompetitive conduct.  It would, instead, apply to specific firms special rules that are intended to promote a desired outcome, the reduction in monopoly rents in tipped digital markets.  So, one question suggested by Petit’s provocative study is whether the inevitable uncertainty surrounding issues of platform competition are best addressed by the kinds of categorical rules Petit proposes or by case-by-case application of abstract legal principles.  Put differently, assuming that economic welfare is the objective, what is the best way to minimize error costs?

Broadly speaking, there are two kinds of error costs: specification errors and application errors.  Specification errors reflect legal rules that do not map perfectly to the normative objectives of the law (e.g., a rule that would prohibit all horizontal mergers by dominant platforms when some such mergers are procompetitive or welfare-enhancing).  Application errors reflect mistaken application of the legal rule to the facts of the case (e.g., an erroneous determination whether the conduct excludes rivals or provides efficiency benefits).   

Application errors are the most likely source of error costs in U.S. antitrust law.  The law relies largely on abstract principles that track the normative objectives of the law (e.g., conduct by a monopoly that excludes rivals and has no efficiency benefit is illegal). Several recent U.S. antitrust decisions (American Express, Qualcomm, and Farelogix among them) suggest that error costs in a law enforcement regime like that in the U.S. might be substantial and even that case-by-case application of principles that require applying economic understanding to diverse factual circumstances might be beyond the competence of generalist judges.  Default rules applicable in special circumstances reduce application errors but at the expense of specification errors.

Specification errors are more likely with categorical rules, like those suggested by Petit.  The total costs of those specification errors are likely to exceed the costs of mistaken decisions in individual cases because categorical rules guide firm conduct in general, not just in decided cases, and rules that embody specification errors are thus likely to encourage undesirable conduct and to discourage desirable conduct in matters that are not the subject of enforcement proceedings.  Application errors, unless systematic and predictable, are less likely to impose substantial costs beyond the costs of mistaken decisions in the decided cases themselves.  Whether any particular categorical rules are likely to have error costs greater than the error costs of the existing U.S. antitrust law will depend in large part on the specification errors of the rules and on whether their application is likely to be accompanied by substantial application costs.

As discussed above, the particular rules suggested by Petit appear to embody important specification errors.  They are likely also to lead to substantial application errors because they would require determination of difficult factual issues.  These include, for example, whether the market at issue has tipped, whether the merger is horizontal, and whether the platform’s entry into an untipped market is intended to be permanent.  It thus seems unlikely, at least from this casual review, that adoption of the rules suggested by Petit will reduce error costs.

 Petit’s impressive study might therefore be most valuable, not as a roadmap for action, but as a source of insight and understanding of the facts – what Petit calls a “mental model to help decision makers understand the idiosyncrasies of digital markets.”  If viewed, not as a prescription for action, but as a description of the digital world, the Moligopoly Scenario can help address the urgent matter of reducing the costs of application errors in U.S. antitrust law.

[TOTM: The following is part of a symposium by TOTM guests and authors marking the release of Nicolas Petit’s “Big Tech and the Digital Economy: The Moligopoly Scenario.” The entire series of posts is available here.]

To mark the release of Nicolas Petit’s “Big Tech and the Digital Economy: The Moligopoly Scenario”, Truth on the Market and  International Center for Law & Economics (ICLE) are hosting some of the world’s leading scholars and practitioners of competition law and economics to discuss some of the book’s themes.

In his book, Petit offers a “moligopoly” framework for understanding competition between large tech companies that may have significant market shares in their ‘home’ markets but nevertheless compete intensely in adjacent ones. Petit argues that tech giants coexist as both monopolies and oligopolies in markets defined by uncertainty and dynamism, and offers policy tools for dealing with the concerns people have about these markets that avoid crude “big is bad” assumptions and do not try to solve non-economic harms with the tools of antitrust.

This symposium asks contributors to give their thoughts either on the book as a whole or on a selected chapter that relates to their own work. In it we hope to explore some of Petit’s arguments with different perspectives from our contributors.

Confirmed Participants

As in the past (see examples of previous TOTM blog symposia here), we’ve lined up an outstanding and diverse group of scholars to discuss these issues, including:

  • Kelly Fayne, Antitrust Associate, Latham & Watkins
  • Shane Greenstein, Professor of Business Administration; Co-chair of the HBS Digital Initiative, Harvard Business School
  • Peter Klein, Professor of Entrepreneurship and Chair, Department of Entrepreneurship and Corporate Innovation, Baylor University
  • William Kovacic, Global Competition Professor of Law and Policy; Director, Competition Law Center, George Washington University Law
  • Kai-Uwe Kuhn, Academic Advisor, University of East Anglia
  • Richard Langlois, Professor of Economics, University of Connecticut
  • Doug Melamed, Professor of the Practice of Law, Stanford law School
  • David Teece, Professor in Global Business, University of California’s Haas School of Business (Berkeley); Director, Center for Global Strategy; Governance and Faculty Director, Institute for Business Innovation

Thank you again to all of the excellent authors for agreeing to participate in this interesting and timely symposium.

Look for the first posts starting later today, October 12, 2020.

The writing is on the wall for Big Tech: regulation is coming. At least, that is what the House Judiciary Committee’s report into competition in digital markets would like us to believe. 

The Subcommittee’s Majority members, led by Rhode Island’s Rep. David Cicilline, are calling for a complete overhaul of America’s antitrust and regulatory apparatus. This would notably entail a break up of America’s largest tech firms, by prohibiting them from operating digital platforms and competing on them at the same time. Unfortunately, the report ignores the tremendous costs that such proposals would impose upon consumers and companies alike. 

For several years now, there has been growing pushback against the perceived “unfairness” of America’s tech industry: of large tech platforms favoring their own products at the expense of entrepreneurs who use their platforms; of incumbents acquiring startups to quash competition; of platforms overcharging  companies like Epic Games, Spotify, and the media, just because they can; and of tech companies that spy on their users and use that data to sell them things they don’t need. 

But this portrayal of America’s tech industry obscures an inconvenient possibility: supposing that these perceived ills even occur, there is every chance that the House’s reforms would merely exacerbate the status quo. The House report gives short shrift to this eventuality, but it should not.

Over the last decade, the tech sector has been the crown jewel of America’s economy. And while firms like Amazon, Google, Facebook, and Apple, may have grown at a blistering pace, countless others have flourished in their wake.

Google and Apple’s app stores have given rise to a booming mobile software industry. Platforms like Youtube and Instagram have created new venues for advertisers and ushered in a new generation of entrepreneurs including influencers, podcasters, and marketing experts. Social media platforms like Facebook and Twitter have disintermediated the production of news media, allowing ever more people to share their ideas with the rest of the world (mostly for better, and sometimes for worse). Amazon has opened up new markets for thousands of retailers, some of which are now going public. The recent $3.4 billion Snowflake IPO may have been the biggest public offering of a tech firm no one has heard of.

The trillion dollar question is whether it is possible to regulate this thriving industry without stifling its unparalleled dynamism. If Rep. Cicilline’s House report is anything to go by, the answer is a resounding no.

Acquisition by a Big Tech firm is one way for startups to rapidly scale and reach a wider audience, while allowing early investors to make a quick exit. Self-preferencing can enable platforms to tailor their services to the needs and desires of users (Apple and Google’s pre-installed app suites are arguably what drive users to opt for their devices). Excluding bad apples from a platform is essential to gain users’ trust and build a strong reputation. Finally, in the online retail space, copying rival products via house brands provides consumers with competitively priced goods and helps new distributors enter the market. 

All of these practices would either be heavily scrutinized or outright banned under the Subcommittee ’s proposed reforms. Beyond its direct impact on the quality of online goods and services, this huge shift would threaten the climate of permissionless innovation that has arguably been key to Silicon Valley’s success. 

More fundamentally, these reforms would mostly protect certain privileged rivals at the expense of the wider industry. Take Apple’s App Store: Epic Games and others have complained about the 30% Commission charged by Apple for in-app purchases (as is standard throughout the industry). Yet, as things stand, roughly 80% of apps pay no commission at all. Tackling this 30% commission — for instance by allowing developers to bypass Apple’s in-app payment processing — would almost certainly result in larger fees for small developers. In short, regulation could significantly impede smaller firms.

Fortunately, there is another way. For decades, antitrust law — guided by the judge-made consumer welfare standard — has been the cornerstone of economic policy in the US. During that time, America built a tech industry that is the envy of the world. This should give pause to would-be reformers. There is a real chance overbearing regulation will permanently hamper America’s tech industry. With competition from China more intense than ever, it is a risk that the US cannot afford to take.

Over at the Federalist Society’s blog, there has been an ongoing debate about what to do about Section 230. While there has long-been variety in what we call conservatism in the United States, the most prominent strains have agreed on at least the following: Constitutionally limited government, free markets, and prudence in policy-making. You would think all of these values would be important in the Section 230 debate. It seems, however, that some are willing to throw these principles away in pursuit of a temporary political victory over perceived “Big Tech censorship.” 

Constitutionally Limited Government: Congress Shall Make No Law

The First Amendment of the United States Constitution states: “Congress shall make no law… abridging the freedom of speech.” Originalists on the Supreme Court have noted that this makes clear that the Constitution protects against state action, not private action. In other words, the Constitution protects a negative conception of free speech, not a positive conception.

Despite this, some conservatives believe that Section 230 should be about promoting First Amendment values by mandating private entities are held to the same standards as the government. 

For instance, in his Big Tech and the Whole First Amendment, Craig Parshall of the American Center for Law and Justice (ACLJ) stated:

What better example of objective free speech standards could we have than those First Amendment principles decided by justices appointed by an elected president and confirmed by elected members of the Senate, applying the ideals laid down by our Founders? I will take those over the preferences of brilliant computer engineers any day.

In other words, he thinks Section 230 should be amended to only give Big Tech the “subsidy” of immunity if it commits to a First Amendment-like editorial regime. To defend the constitutionality of such “restrictions on Big Tech”, he points to the Turner intermediate scrutiny standard, in which the Supreme Court upheld must-carry provisions against cable networks. In particular, Parshall latches on to the “bottleneck monopoly” language from the case to argue that Big Tech is similarly situated to cable providers at the time of the case.

Turner, however, turned more on the “special characteristics of the cable medium” that gave it the bottleneck power than the market power itself. As stated by the Supreme Court:

When an individual subscribes to cable, the physical connection between the television set and the cable network gives the cable operator bottleneck, or gatekeeper, control over most (if not all) of the television programming that is channeled into the subscriber’s home. Hence, simply by virtue of its ownership of the essential pathway for cable speech, a cable operator can prevent its subscribers from obtaining access to programming it chooses to exclude. A cable operator, unlike speakers in other media, can thus silence the voice of competing speakers with a mere flick of the switch.

Turner v. FCC, 512 U.S. 622, 656 (1994).

None of the Big Tech companies has the comparable ability to silence competing speakers with a flick of the switch. In fact, the relationship goes the other way on the Internet. Users can (and do) use multiple Big Tech companies’ services, as well as those of competitors which are not quite as big. Users are the ones who can switch with a click or a swipe. There is no basis for treating Big Tech companies any differently than other First Amendment speakers.

Like newspapers, Big Tech companies must use their editorial discretion to determine what is displayed and where. Just like those newspapers, Big Tech has the First Amendment right to editorial discretion. This, not Section 230, is the bedrock law that gives Big Tech companies the right to remove content.

Thus, when Rachel Bovard of the Internet Accountability Project argues that the FCC should remove the ability of tech platforms to engage in viewpoint discrimination, she makes a serious error in arguing it is Section 230 that gives them the right to remove content.

Immediately upon noting that the NTIA petition seeks clarification on the relationship between (c)(1) and (c)(2), Bovard moves right to concern over the removal of content. “Unfortunately, embedded in that section [(c)(2)] is a catch-all phrase, ‘otherwise objectionable,’ that gives tech platforms discretion to censor anything that they deem ‘otherwise objectionable.’ Such broad language lends itself in practice to arbitrariness.” 

In order for CDA 230 to “give[] tech platforms discretion to censor,” they would have to not have that discretion absent CDA 230. Bovard totally misses the point of the First Amendment argument, stating:

Yet DC’s tech establishment frequently rejects this argument, choosing instead to focus on the First Amendment right of corporations to suppress whatever content they so choose, never acknowledging that these choices, when made at scale, have enormous ramifications. . . . 

But this argument intentionally sidesteps the fact that Sec. 230 is not required by the First Amendment, and that its application to tech platforms privileges their First Amendment behavior in a unique way among other kinds of media corporations. Newspapers also have a First Amendment right to publish what they choose—but they are subject to defamation and libel laws for content they write, or merely publish. Media companies also make First Amendment decisions subject to a thicket of laws and regulations that do not similarly encumber tech platforms.

There is the merest kernel of truth in the lines quoted above. Newspapers are indeed subject to defamation and libel laws for what they publish. But, as should be obvious, liability for publication entails actually publishing something. And what some conservatives are concerned about is platforms’ ability to not publish something: to take down conservative content.

It might be simpler if the First Amendment treated published speech and unpublished speech the same way. But it doesn’t. One can be liable for what one speaks, writes, or publishes on behalf of others. Indeed, even with the full protection of the First Amendment, there is no question that newspapers can be held responsible for delicts caused by content they publish. But no newspaper has ever been held responsible for anything they didn’t publish.

Free Markets: Competition as the Bulwark Against Abuses, not Regulation

Conservatives have long believed in the importance of property rights, exchange, and the power of the free market to promote economic growth. Competition is seen as the protector of the consumer, not big government regulators. In the latter half of the twentieth century into the twenty-first century, conservatives have fought for capitalism over socialism, free markets over regulation, and competition over cronyism. But in the name of combating anti-conservative bias online, they are willing to throw these principles away.

The bedrock belief in the right of property owners to decide the terms of how they want to engage with others is fundamental to American conservatism. As stated by none other than Bovard (along with co-author Jim Demint in their book Conservative: Knowing What to Keep):

Capitalism is nothing more or less than the extension of individual freedom from the political and cultural realms to the economy. Just as government isn’t supposed to tell you how to pray, or what to think, or what sports teams to follow or books to read, it’s not supposed to tell you what to do with your own money and property.

Conservatives normally believe that it is the free choices of consumers and producers in the marketplace that maximize consumer welfare, rather than the choices of politicians and bureaucrats. Competition, in other words, is what protects us from abuses in the marketplace. Again as Bovard and Demint rightly put it:

Under the free enterprise system, money is not redistributed by a central government bureau. It goes wherever people see value. Those who create value are rewarded which then signals to the rest of the economy to up their game. It’s continuous democracy.

To get around this, both Parshall and Bovard make much of the “market dominance” of tech platforms. The essays take the position that tech platforms have nearly unassailable monopoly power which makes them unaccountable. Bovard claims that “mega-corporations have as much power as the government itself—and in some ways, more power, because theirs is unchecked and unaccountable.” Parshall even connects this to antitrust law, stating:  

This brings us to another kind of innovation, one that’s hidden from the public view. It has to do with how Big Tech companies use both algorithms plus human review during content moderation. This review process has resulted in the targeting, suppression, or down-ranking of primarily conservative content. As such, this process, should it continue, should be considered a kind of suppressive “innovation” in a quasi-antitrust analysis.

How the process harms “consumer welfare” is obvious. A more competitive market could produce social media platforms designing more innovational content moderation systems that honor traditional free speech and First Amendment norms while still offering features and connectivity akin to the huge players.

Antitrust law, in theory, would be a good way to handle issues of market power and consumer harm that results from non-price effects. But it is difficult to see how antitrust could handle the issue of political bias well:

Just as with privacy and other product qualities, the analysis becomes increasingly complex first when tradeoffs between price and quality are introduced, and then even more so when tradeoffs between what different consumer groups perceive as quality is added. In fact, it is more complex than privacy. All but the most exhibitionistic would prefer more to less privacy, all other things being equal. But with political media consumption, most would prefer to have more of what they want to read available, even if it comes at the expense of what others may want. There is no easy way to understand what consumer welfare means in a situation where one group’s preferences need to come at the expense of another’s in moderation decisions.

Neither antitrust nor quasi-antitrust regimes are well-suited to dealing with the perceived harm of anti-conservative bias. However unfulfilling this is to some conservatives, competition and choice are better answers to perceived political bias than the heavy hand of government. 

Prudence: Awareness of Unintended Consequences

Another bedrock principle of conservatism is to be aware of unintended consequences when making changes to long-standing laws and policies. In regulatory matters, cost-benefit analysis is employed to evaluate whether policies are improving societal outcomes. Using economic thinking to understand the likely responses to changes in regulation is fundamental to American conservatism. Or as Bovard and Demint’s book title suggests, conservatism is about knowing what to keep. 

Bovard has argued that since conservatism is a set of principles, not a dogmatic ideology, it can be in favor of fighting against the collectivism of Big Tech companies imposing their political vision upon the world. Conservatism, in this Kirkian sense, doesn’t require particular policy solutions. But this analysis misses what has worked about Section 230 and how the very tech platforms she decries have greatly benefited society. Prudence means understanding what has worked and only changing what has worked in a way that will improve upon it.

The benefits of Section 230 immunity in promoting platforms for third-party speech are clear. It is not an overstatement to say that Section 230 contains “The Twenty-Six Words that Created the Internet.” It is important to note that Section 230 is not only available to Big Tech companies. It is available to all online platforms who host third-party speech. Any reform efforts at Section 230 must know what to keep.In a sense, Section (c)(1) of Section 230 does, indeed, provide greater protection for published content online than the First Amendment on its own would offer: it extends the First Amendment’s permissible scope of published content for which an online service cannot be held liable to include otherwise actionable third-party content.

But let’s be clear about the extent of this protection. It doesn’t protect anything a platform itself publishes, or even anything in which it has a significant hand in producing. Why don’t offline newspapers enjoy this “handout” (though the online versions clearly do for comments)? Because they don’t need it, and because — yes, it’s true — it comes at a cost. How much third-party content would newspapers publish without significant input from the paper itself if only they were freed from the risk of liability for such content? None? Not much? The New York Times didn’t build and sustain its reputation on the slapdash publication of unedited ramblings by random commentators. But what about classifieds? Sure. There would be more classified ads, presumably. More to the point, newspapers would exert far less oversight over the classified ads, saving themselves the expense of moderating this one, small corner of their output.

There is a cost to traditional newspapers from being denied the extended protections of Section 230. But the effect is less third-party content in parts of the paper that they didn’t wish to have the same level of editorial control. If Section 230 is a “subsidy” as critics put it, then what it is subsidizing is the hosting of third-party speech. 

The Internet would look vastly different if it was just the online reproduction of the offline world. If tech platforms were responsible for all third-party speech to the degree that newspapers are for op-eds, then they would likely moderate it to the same degree, making sure there is nothing which could expose them to liability before publishing. This means there would be far less third-party speech on the Internet.

In fact, it could be argued that it is smaller platforms who would be most affected by the repeal of Section 230 immunity. Without it, it is likely that only the biggest tech platforms would have the necessary resources to dedicate to content moderation in order to avoid liability.

Proposed Section 230 reforms will likely have unintended consequences in reducing third-party speech altogether, including conservative speech. For instance, a few bills have proposed only allowing moderation for reasons defined by statute if the platform has an “objectively reasonable belief” that the speech fits under such categories. This would likely open up tech platforms to lawsuits over the meaning of “objectively reasonable belief” that could deter them from wanting to host third-party speech altogether. Similarly, lawsuits for “selective enforcement” of a tech platform’s terms of service could lead them to either host less speech or change their terms of service.

This could actually exacerbate the issue of political bias. Allegedly anti-conservative tech platforms could respond to a “good faith” requirement in enforcing its terms of service by becoming explicitly biased. If the terms of service of a tech platform state grounds which would exclude conservative speech, a requirement of “good faith” enforcement of those terms of service will do nothing to prevent the bias. 

Conclusion

Conservatives would do well to return to their first principles in the Section 230 debate. The Constitution’s First Amendment, respect for free markets and property rights, and appreciation for unintended consequences in changing tech platform incentives all caution against the current proposals to condition Section 230 immunity on platforms giving up editorial discretion. Whether or not tech platforms engage in anti-conservative bias, there’s nothing conservative about abdicating these principles for the sake of political expediency.

With the passing of Justice Ruth Bader Ginsburg, many have already noted her impact on the law as an advocate for gender equality and women’s rights, her importance as a role model for women, and her civility. Indeed, a key piece of her legacy is that she was a jurist in the classic sense of the word: she believed in using coherent legal reasoning to reach a result. And that meant Justice Ginsburg’s decisions sometimes cut against partisan political expectations. 

This is clearly demonstrated in our little corner of the law: RBG frequently voted in the majority on antitrust cases in a manner that—to populist leftwing observers—would be surprising. Moreover, she authored an important case on price discrimination that likewise cuts against the expectation of populist antitrust critics and demonstrates her nuanced jurisprudence.

RBG’s record on the Court shows a respect for the evolving nature of antitrust law

In the absence of written opinions of her own, it is difficult to discern what was actually in Justice Ginsburg’s mind as she encountered antitrust issues. But, her voting record represents at least a willingness to approach antitrust in an apolitical manner. 

Over the last several decades, Justice Ginsburg joined the Supreme Court majority in many cases dealing with a wide variety of antitrust issues, including the duty to deal doctrine, vertical restraints, joint ventures, and mergers. In many of these cases, RBG aligned herself with judgments of the type that the antitrust populists criticize.

The following are major consumer welfare standard cases that helped shape the current state of antitrust law in which she joined the majority or issued a concurrence: 

  • Verizon Commc’ns Inc. v. Law Offices of Curtis Trinko, LLP, 540 U.S. 398 (2004) (unanimous opinion heightening the standard for finding a duty to deal)
  • Pacific Bell Tel. Co v. linkLine Commc’ns, Inc.,  555 U.S. 438 (2009) (Justice Ginsburg joined the concurrence finding there was no “price squeeze” but suggesting the predatory pricing claim should be remanded)
  • Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc., 549 U.S. 312 (2007) (unanimous opinion finding predatory buying claims are still subject to the dangerous probability of recoupment test from Brooke Group)
  • Apple, Inc. v. Robert Pepper, 139 S.Ct. 1514 (2019) (part of majority written by Justice Kavanaugh finding that iPhone owners were direct purchasers under Illinois Brick that may sue Apple for alleged monopolization)
  • State Oil Co. v. Khan, 522 U.S. 3 (1997) (unanimous opinion overturning per se treatment of vertical maximum price fixing under Albrecht and applying rule of reason standard)
  • Texaco Inc. v. Dagher, 547 U.S. 1 (2006) (unanimous opinion finding it is not per se illegal under §1 of the Sherman Act for a lawful, economically integrated joint venture to set the prices at which it sells its products)
  • Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006) (unanimous opinion finding a patent does not necessarily confer market power upon the patentee, in all cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product)
  • U.S. v. Baker Hughes, Inc., 908 F. 2d 981 (D.C. Cir. 1990) (unanimous opinion written by then-Judge Clarence Thomas while both were on the D.C. Circuit of Appeals finding against the government’s argument that the defendant in a Section 7 merger challenge can rebut a prima facie case only by a clear showing that entry into the market by competitors would be quick and effective)

Even where she joined the dissent in antitrust cases, she did so within the ambit of the consumer welfare standard. Thus, while she was part of the dissent in cases like Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), Bell Atlantic Corp v. Twombly, 550 U.S. 544 (2007), and Ohio v. American Express Co., 138 S.Ct. 2274 (2018), she still left a legacy of supporting modern antitrust jurisprudence. In those cases, RBG simply  had a different vision for how best to optimize consumer welfare. 

Justice Ginsburg’s Volvo Opinion

The 2006 decision Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc. was one of the few antitrust decisions authored by RBG and shows her appreciation for the consumer welfare standard. In particular, Justice Ginsburg affirmed the notion that antitrust law is designed to protect competition not competitors—a lesson that, as of late, needs to be refreshed. 

Volvo, a 7-2 decision, dealt with the Robinson-Patman Act’s prohibition on price discimination. Reeder-Simco, a retail car dealer that sold Volvos, alleged that Volvo Inc. was violating the Robinson-Patman Act by selling cars to them at different prices than to other Volvo dealers.

The Robinson-Patman Act is frequently cited by antitrust populists as a way to return antitrust law to its former glory. A main argument of Lina Khan’s Amazon’s Antitrust Paradox was that the Chicago School had distorted the law on vertical restraints generally, and price discrimination in particular. One source of this distortion in Khan’s opinion has been the Supreme Court’s mishandling of the Robinson-Patman Act.

Yet, in Volvo we see Justice Ginsburg wrestling with the Robinson-Patman Act in a way to give effect to the law as written, which may run counter to some of the contemporary populist impulse to revise the Court’s interpretation of antitrust laws. Justice Ginsburg, citing Brown & Williamson, first noted that: 

Mindful of the purposes of the Act and of the antitrust laws generally, we have explained that Robinson-Patman does not “ban all price differences charged to different purchasers of commodities of like grade and quality.”

Instead, the Robinson-Patman Act was aimed at a particular class of harms that Congress believed existed when large chain-stores were able to exert something like monopsony buying power. Moreover, Justice Ginsburg noted, the Act “proscribes ‘price discrimination only to the extent that it threatens to injure competition’[.]”

Under the Act, plaintiffs needed to demonstrate evidence of Volvo Inc. systematically treating plaintiffs as “disfavored” purchasers as against another set of “favored” purchasers. Instead, all plaintiffs could produce was anecdotal and inconsistent evidence of Volvo Inc. disfavoring them. Thus, the plaintiffs— and theoretically other similarly situated Volvo dealers— were in fact harmed in a sense by Volvo Inc. Yet, Justice Ginsburg was unwilling to rewrite the Act on Congress’s behalf to incorporate new harms later discovered (a fact which would not earn her accolades in populist circles these days). 

Instead, Justice Ginsburg wrote that:

Interbrand competition, our opinions affirm, is the “primary concern of antitrust law.”… The Robinson-Patman Act signals no large departure from that main concern. Even if the Act’s text could be construed in the manner urged by [plaintiffs], we would resist interpretation geared more to the protection of existing competitors than to the stimulation of competition. In the case before us, there is no evidence that any favored purchaser possesses market power, the allegedly favored purchasers are dealers with little resemblance to large independent department stores or chain operations, and the supplier’s selective price discounting fosters competition among suppliers of different brands… By declining to extend Robinson-Patman’s governance to such cases, we continue to construe the Act “consistently with broader policies of the antitrust laws.” Brooke Group, 509 U.S., at 220… (cautioning against Robinson-Patman constructions that “extend beyond the prohibitions of the Act and, in doing so, help give rise to a price uniformity and rigidity in open conflict with the purposes of other antitrust legislation”).

Thus, interested in the soundness of her jurisprudence in the face of a well-developed body of antitrust law, Justice Ginsburg chose to continue to develop that body of law rather than engage in judicial policymaking in favor of a sympathetic plaintiff. 

It must surely be tempting for a justice on the Court to adopt less principled approaches to the law in any given case, and it is equally as impressive that Justice Ginsburg consistently stuck to her principles. We can only hope her successor takes note of Justice Ginsburg’s example.

Apple’s legal team will be relieved that “you reap what you sow” is just a proverb. After a long-running antitrust battle against Qualcomm unsurprisingly ended in failure, Apple now faces antitrust accusations of its own (most notably from Epic Games). Somewhat paradoxically, this turn of events might cause Apple to see its previous defeat in a new light. Indeed, the well-established antitrust principles that scuppered Apple’s challenge against Qualcomm will now be the rock upon which it builds its legal defense.

But while Apple’s reversal of fortunes might seem anecdotal, it neatly illustrates a fundamental – and often overlooked – principle of antitrust policy: Antitrust law is about maximizing consumer welfare. Accordingly, the allocation of surplus between two companies is only incidentally relevant to antitrust proceedings, and it certainly is not a goal in and of itself. In other words, antitrust law is not about protecting David from Goliath.

Jockeying over the distribution of surplus

Or at least that is the theory. In practice, however, most antitrust cases are but small parts of much wider battles where corporations use courts and regulators in order to jockey for market position and/or tilt the distribution of surplus in their favor. The Microsoft competition suits brought by the DOJ and the European commission (in the EU and US) partly originated from complaints, and lobbying, by Sun Microsystems, Novell, and Netscape. Likewise, the European Commission’s case against Google was prompted by accusations from Microsoft and Oracle, among others. The European Intel case was initiated following a complaint by AMD. The list goes on.

The last couple of years have witnessed a proliferation of antitrust suits that are emblematic of this type of power tussle. For instance, Apple has been notoriously industrious in using the court system to lower the royalties that it pays to Qualcomm for LTE chips. One of the focal points of Apple’s discontent was Qualcomm’s policy of basing royalties on the end-price of devices (Qualcomm charged iPhone manufacturers a 5% royalty rate on their handset sales – and Apple received further rebates):

“The whole idea of a percentage of the cost of the phone didn’t make sense to us,” [Apple COO Jeff Williams] said. “It struck at our very core of fairness. At the time we were making something really really different.”

This pricing dispute not only gave rise to high-profile court cases, it also led Apple to lobby Standard Developing Organizations (“SDOs”) in a partly successful attempt to make them amend their patent policies, so as to prevent this type of pricing. 

However, in a highly ironic turn of events, Apple now finds itself on the receiving end of strikingly similar allegations. At issue is the 30% commission that Apple charges for in app purchases on the iPhone and iPad. These “high” commissions led several companies to lodge complaints with competition authorities (Spotify and Facebook, in the EU) and file antitrust suits against Apple (Epic Games, in the US).

Of course, these complaints are couched in more sophisticated, and antitrust-relevant, reasoning. But that doesn’t alter the fact that these disputes are ultimately driven by firms trying to tilt the allocation of surplus in their favor (for a more detailed explanation, see Apple and Qualcomm).

Pushback from courts: The Qualcomm case

Against this backdrop, a string of recent cases sends a clear message to would-be plaintiffs: antitrust courts will not be drawn into rent allocation disputes that have no bearing on consumer welfare. 

The best example of this judicial trend is Qualcomm’s victory before the United States Court of Appeal for the 9th Circuit. The case centered on the royalties that Qualcomm charged to OEMs for its Standard Essential Patents (SEPs). Both the district court and the FTC found that Qualcomm had deployed a series of tactics (rebates, refusals to deal, etc) that enabled it to circumvent its FRAND pledges. 

However, the Court of Appeal was not convinced. It failed to find any consumer harm, or recognizable antitrust infringement. Instead, it held that the dispute at hand was essentially a matter of contract law:

To the extent Qualcomm has breached any of its FRAND commitments, a conclusion we need not and do not reach, the remedy for such a breach lies in contract and patent law. 

This is not surprising. From the outset, numerous critics pointed that the case lied well beyond the narrow confines of antitrust law. The scathing dissenting statement written by Commissioner Maureen Olhaussen is revealing:

[I]n the Commission’s 2-1 decision to sue Qualcomm, I face an extraordinary situation: an enforcement action based on a flawed legal theory (including a standalone Section 5 count) that lacks economic and evidentiary support, that was brought on the eve of a new presidential administration, and that, by its mere issuance, will undermine U.S. intellectual property rights in Asia and worldwide. These extreme circumstances compel me to voice my objections. 

In reaching its conclusion, the Court notably rejected the notion that SEP royalties should be systematically based upon the “Smallest Saleable Patent Practicing Unit” (or SSPPU):

Even if we accept that the modem chip in a cellphone is the cellphone’s SSPPU, the district court’s analysis is still fundamentally flawed. No court has held that the SSPPU concept is a per se rule for “reasonable royalty” calculations; instead, the concept is used as a tool in jury cases to minimize potential jury confusion when the jury is weighing complex expert testimony about patent damages.

Similarly, it saw no objection to Qualcomm licensing its technology at the OEM level (rather than the component level):

Qualcomm’s rationale for “switching” to OEM-level licensing was not “to sacrifice short-term benefits in order to obtain higher profits in the long run from the exclusion of competition,” the second element of the Aspen Skiing exception. Aerotec Int’l, 836 F.3d at 1184 (internal quotation marks and citation omitted). Instead, Qualcomm responded to the change in patent-exhaustion law by choosing the path that was “far more lucrative,” both in the short term and the long term, regardless of any impacts on competition. 

Finally, the Court concluded that a firm breaching its FRAND pledges did not automatically amount to anticompetitive conduct: 

We decline to adopt a theory of antitrust liability that would presume anticompetitive conduct any time a company could not prove that the “fair value” of its SEP portfolios corresponds to the prices the market appears willing to pay for those SEPs in the form of licensing royalty rates.

Taken together, these findings paint a very clear picture. The Qualcomm Court repeatedly rejected the radical idea that US antitrust law should concern itself with the prices charged by monopolists — as opposed to practices that allow firms to illegally acquire or maintain a monopoly position. The words of Learned Hand and those of Antonin Scalia (respectively, below) loom large:

The successful competitor, having been urged to compete, must not be turned upon when he wins. 

And,

To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.

Other courts (both in the US and abroad) have reached similar conclusions

For instance, a district court in Texas dismissed a suit brought by Continental Automotive Systems (which supplies electronic systems to the automotive industry) against a group of SEP holders. 

Continental challenged the patent holders’ decision to license their technology at the vehicle rather than component level (the allegation is very similar to the FTC’s complaint that Qualcomm licensed its SEPs at the OEM, rather than chipset level). However, following a forceful intervention by the DOJ, the Court ultimately held that the facts alleged by Continental were not indicative of antitrust injury. It thus dismissed the case.

Likewise, within weeks of the Qualcomm and Continental decisions, the UK Supreme court also ruled in favor of SEP holders. In its Unwired Planet ruling, the Court concluded that discriminatory licenses did not automatically infringe competition law (even though they might breach a firm’s contractual obligations):

[I]t cannot be said that there is any general presumption that differential pricing for licensees is problematic in terms of the public or private interests at stake.

In reaching this conclusion, the UK Supreme Court emphasized that the determination of whether licenses were FRAND, or not, was first and foremost a matter of contract law. In the case at hand, the most important guide to making this determination were the internal rules of the relevant SDO (as opposed to competition case law):

Since price discrimination is the norm as a matter of licensing practice and may promote objectives which the ETSI regime is intended to promote (such as innovation and consumer welfare), it would have required far clearer language in the ETSI FRAND undertaking to indicate an intention to impose the more strict, “hard-edged” non-discrimination obligation for which Huawei contends. Further, in view of the prevalence of competition laws in the major economies around the world, it is to be expected that any anti-competitive effects from differential pricing would be most appropriately addressed by those laws

All of this ultimately led the Court to rule in favor of Unwired Planet, thus dismissing Huawei’s claims that it had infringed competition law by breaching its FRAND pledges. 

In short, courts and antitrust authorities on both sides of the Atlantic have repeatedly, and unambiguously, concluded that pricing disputes (albeit in the specific context of technological standards) are generally a matter of contract law. Antitrust/competition law intercedes only when unfair/excessive/discriminatory prices are both caused by anticompetitive behavior and result in anticompetitive injury.

Apple’s Loss is… Apple’s gain.

Readers might wonder how the above cases relate to Apple’s app store. But, on closer inspection the parallels are numerous. As explained above, courts have repeatedly stressed that antitrust enforcement should not concern itself with the allocation of surplus between commercial partners. Yet that is precisely what Epic Game’s suit against Apple is all about.

Indeed, Epic’s central claim is not that it is somehow foreclosed from Apple’s App Store (for example, because Apple might have agreed to exclusively distribute the games of one of Epic’s rivals). Instead, all of its objections are down to the fact that it would like to access Apple’s store under more favorable terms:

Apple’s conduct denies developers the choice of how best to distribute their apps. Developers are barred from reaching over one billion iOS users unless they go through Apple’s App Store, and on Apple’s terms. […]

Thus, developers are dependent on Apple’s noblesse oblige, as Apple may deny access to the App Store, change the terms of access, or alter the tax it imposes on developers, all in its sole discretion and on the commercially devastating threat of the developer losing access to the entire iOS userbase. […]

By imposing its 30% tax, Apple necessarily forces developers to suffer lower profits, reduce the quantity or quality of their apps, raise prices to consumers, or some combination of the three.

And the parallels with the Qualcomm litigation do not stop there. Epic is effectively asking courts to make Apple monetize its platform at a different level than the one that it chose to maximize its profits (no more monetization at the app store level). Similarly, Epic Games omits any suggestion of profit sacrifice on the part of Apple — even though it is a critical element of most unilateral conduct theories of harm. Finally, Epic is challenging conduct that is both the industry norm and emerged in a highly competitive setting.

In short, all of Epic’s allegations are about monopoly prices, not monopoly maintenance or monopolization. Accordingly, just as the SEP cases discussed above were plainly beyond the outer bounds of antitrust enforcement (something that the DOJ repeatedly stressed with regard to the Qualcomm case), so too is the current wave of antitrust litigation against Apple. When all is said and done, Apple might thus be relieved that Qualcomm was victorious in their antitrust confrontation. Indeed, the legal principles that caused its demise against Qualcomm are precisely the ones that will, likely, enable it to prevail against Epic Games.

Germán Gutiérrez and Thomas Philippon have released a major rewrite of their paper comparing the U.S. and EU competitive environments. 

Although the NBER website provides an enticing title — “How European Markets Became Free: A Study of Institutional Drift” — the paper itself has a much more yawn-inducing title: “How EU Markets Became More Competitive Than US Markets: A Study of Institutional Drift.”

Having already critiqued the original paper at length (here and here), I wouldn’t normally take much interest in the do-over. However, in a recent episode of Tyler Cowen’s podcast, Jason Furman gave a shout out to Philippon’s work on increasing concentration. So, I thought it might be worth a review.

As with the original, the paper begins with a conclusion: The EU appears to be more competitive than the U.S. The authors then concoct a theory to explain their conclusion. The theory’s a bit janky, but it goes something like this:

  • Because of lobbying pressure and regulatory capture, an individual country will enforce competition policy at a suboptimal level.
  • Because of competing interests among different countries, a “supra-national” body will be more independent and better able to foster pro-competitive policies and to engage in more vigorous enforcement of competition policy.
  • The EU’s supra-national body and its Directorate-General for Competition is more independent than the U.S. Department of Justice and Federal Trade Commission.
  • Therefore, their model explains why the EU is more competitive than the U.S. Q.E.D.

If you’re looking for what this has to do with “institutional drift,” don’t bother. The term only shows up in the title.

The original paper provided evidence from 12 separate “markets,” that they say demonstrated their conclusion about EU vs. U.S. competitiveness. These weren’t really “markets” in the competition policy sense, they were just broad industry categories, such as health, information, trade, and professional services (actually “other business sector services”). 

As pointed out in one of my earlier critiques, In all but one of these industries, the 8-firm concentration ratios for the U.S. and the EU are below 40 percent and the HHI measures reported in the original paper are at levels that most observers would presume to be competitive. 

Sending their original markets to drift in the appendices, Gutiérrez and Philippon’s revised paper focuses its attention on two markets — telecommunications and airlines — to highlight their claims that EU markets are more competitive than the U.S. First, telecoms:

To be more concrete, consider the Telecom industry and the entry of the French Telecom company Free Mobile. Until 2011, the French mobile industry was an oligopoly with three large historical incumbents and weak competition. … Free obtained its 4G license in 2011 and entered the market with a plan of unlimited talk, messaging and data for €20. Within six months, the incumbents Orange, SFR and Bouygues had reacted by launching their own discount brands and by offering €20 contracts as well. … The relative price decline was 40%: France went from being 15% more expensive than the US [in 2011] to being 25% cheaper in about two years [in 2013].

While this is an interesting story about how entry can increase competition, the story of a single firm entering a market in a single country is hardly evidence that the EU as a whole is more competitive than the U.S.

What Gutiérrez and Philippon don’t report is that from 2013 to 2019, prices declined by 12% in the U.S. and only 8% in France. In the EU as a whole, prices decreased by only 5% over the years 2013-2019.

Gutiérrez and Philippon’s passenger airline story is even weaker. Because airline prices don’t fit their narrative, they argue that increasing airline profits are evidence that the U.S. is less competitive than the EU. 

The picture above is from Figure 5 of their paper (“Air Transportation Profits and Concentration, EU vs US”). They claim that the “rise in US concentration and profits aligns closely with a controversial merger wave,” with the vertical line in the figure marking the Delta-Northwest merger.

Sure, profitability among U.S. firms increased. But, before the “merger wave,” profits were negative. Perhaps predatory pricing is pro-competitive after all.

Where Gutiérrez and Philippon really fumble is with airline pricing. Since the merger wave that pulled the U.S. airline industry out of insolvency, ticket prices (as measured by the Consumer Price Index), have decreased by 6%. In France, prices increased by 4% and in the EU, prices increased by 30%. 

The paper relies more heavily on eyeballing graphs than statistical analysis, but something about Table 2 caught my attention — the R-squared statistics. First, they’re all over the place. But, look at column (1): A perfect 1.00 R-squared. Could it be that Gutiérrez and Philippon’s statistical model has (almost) as many parameters as variables?

Notice that all the regressions with an R-squared of 0.9 or higher include country fixed effects. The two regressions with R-squareds of 0.95 and 0.96 also include country-industry fixed effects. It’s very possible that the regressions results are driven entirely by idiosyncratic differences among countries and industries. 

Gutiérrez and Philippon provide no interpretation for their results in Table 2, but it seems to work like this, using column (1): A 10% increase in the 4-firm concentration ratio (which is different from a 10 percentage point increase), would be associated with a 1.8% increase in prices four years later. So, an increase in CR4 from 20% to 22% (or an increase from 60% to 66%) would be associated with a 1.8% increase in prices over four years, or about 0.4% a year. On the one hand, I just don’t buy it. On the other hand, the effect is so small that it seems economically insignificant. 

I’m sure Gutiérrez and Philippon have put a lot of time into this paper and its revision. But there’s an old saying that the best thing about banging your head against the wall is that it feels so good when it stops. Perhaps, it’s time to stop with this paper and let it “drift” into obscurity.

In the latest congressional hearing, purportedly analyzing Google’s “stacking the deck” in the online advertising marketplace, much of the opening statement and questioning by Senator Mike Lee and later questioning by Senator Josh Hawley focused on an episode of alleged anti-conservative bias by Google in threatening to demonetize The Federalist, a conservative publisher, unless they exercised a greater degree of control over its comments section. The senators connected this to Google’s “dominance,” arguing that it is only because Google’s ad services are essential that Google can dictate terms to a conservative website. A similar impulse motivates Section 230 reform efforts as well: allegedly anti-conservative online platforms wield their dominance to censor conservative speech, either through deplatforming or demonetization.

Before even getting into the analysis of how to incorporate political bias into antitrust analysis, though, it should be noted that there likely is no viable antitrust remedy. Even aside from the Section 230 debate, online platforms like Google are First Amendment speakers who have editorial discretion over their sites and apps, much like newspapers. An antitrust remedy compelling these companies to carry speech they disagree with would almost certainly violate the First Amendment.

But even aside from the First Amendment aspect of this debate, there is no easy way to incorporate concerns about political bias into antitrust. Perhaps the best way to understand this argument in the antitrust sense is as a non-price effects analysis. 

Political bias could be seen by end consumers as an important aspect of product quality. Conservatives have made the case that not only Google, but also Facebook and Twitter, have discriminated against conservative voices. The argument would then follow that consumer welfare is harmed when these dominant platforms leverage their control of the social media marketplace into the marketplace of ideas by censoring voices with whom they disagree. 

While this has theoretical plausibility, there are real practical difficulties. As Geoffrey Manne and I have written previously, in the context of incorporating privacy into antitrust analysis:

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.

Just as with privacy and other product qualities, the analysis becomes increasingly complex first when tradeoffs between price and quality are introduced, and then even more so when tradeoffs between what different consumer groups perceive as quality is added. In fact, it is more complex than privacy. All but the most exhibitionistic would prefer more to less privacy, all other things being equal. But with political media consumption, most would prefer to have more of what they want to read available, even if it comes at the expense of what others may want. There is no easy way to understand what consumer welfare means in a situation where one group’s preferences need to come at the expense of another’s in moderation decisions.

Consider the case of The Federalist again. The allegation is that Google is imposing their anticonservative bias by “forcing” the website to clean up its comments section. The argument is that since The Federalist needs Google’s advertising money, it must play by Google’s rules. And since it did so, there is now one less avenue for conservative speech.

What this argument misses is the balance Google and other online services must strike as multi-sided platforms. The goal is to connect advertisers on one side of the platform, to the users on the other. If a site wants to take advantage of the ad network, it seems inevitable that intermediaries like Google will need to create rules about what can and can’t be shown or they run the risk of losing advertisers who don’t want to be associated with certain speech or conduct. For instance, most companies don’t want to be associated with racist commentary. Thus, they will take great pains to make sure they don’t sponsor or place ads in venues associated with racism. Online platforms connecting advertisers to potential consumers must take that into consideration.

Users, like those who frequent The Federalist, have unpriced access to content across those sites and apps which are part of ad networks like Google’s. Other models, like paid subscriptions (which The Federalist also has available), are also possible. But it isn’t clear that conservative voices or conservative consumers have been harmed overall by the option of unpriced access on one side of the platform, with advertisers paying on the other side. If anything, it seems the opposite is the case since conservatives long complained about legacy media having a bias and lauded the Internet as an opportunity to gain a foothold in the marketplace of ideas.

Online platforms like Google must balance the interests of users from across the political spectrum. If their moderation practices are too politically biased in one direction or another, users could switch to another online platform with one click or swipe. Assuming online platforms wish to maximize revenue, they will have a strong incentive to limit political bias from its moderation practices. The ease of switching to another platform which markets itself as more free speech-friendly, like Parler, shows entrepreneurs can take advantage of market opportunities if Google and other online platforms go too far with political bias. 

While one could perhaps argue that the major online platforms are colluding to keep out conservative voices, this is difficult to square with the different moderation practices each employs, as well as the data that suggests conservative voices are consistently among the most shared on Facebook

Antitrust is not a cure-all law. Conservatives who normally understand this need to reconsider whether antitrust is really well-suited for litigating concerns about anti-conservative bias online.