Archives For

[TOTM: The following is part of a digital symposium by TOTM guests and authors on the law, economics, and policy of the antitrust lawsuits against Google. The entire series of posts is available here.]

Google is facing a series of lawsuits in 2020 and 2021 that challenge some of the most fundamental parts of its business, and of the internet itself — Search, Android, Chrome, Google’s digital-advertising business, and potentially other services as well. 

The U.S. Justice Department (DOJ) has brought a case alleging that Google’s deals with Android smartphone manufacturers, Apple, and third-party browsers to make Google Search their default general search engine are anticompetitive (ICLE’s tl;dr on the case is here), and the State of Texas has brought a suit against Google’s display advertising business. These follow a market study by the United K’s Competition and Markets Authority that recommended an ex ante regulator and code of conduct for Google and Facebook. At least one more suit is expected to follow.

These lawsuits will test ideas that are at the heart of modern antitrust debates: the roles of defaults and exclusivity deals in competition; the costs of self-preferencing and its benefits to competition; the role of data in improving software and advertising, and its role as a potential barrier to entry; and potential remedies in these markets and their limitations.

This Truth on the Market symposium asks contributors with wide-ranging viewpoints to comment on some of these issues as they arise in the lawsuits being brought—starting with the U.S. Justice Department’s case against Google for alleged anticompetitive practices in search distribution and search-advertising markets—and continuing throughout the duration of the lawsuits.

Congressman Buck’s “Third Way” report offers a compromise between the House Judiciary Committee’s majority report, which proposes sweeping new regulation of tech companies, and the status quo, which Buck argues is unfair and insufficient. But though Buck rejects many of the majority’s reports proposals, what he proposes instead would lead to virtually the same outcome via a slightly longer process. 

The most significant majority proposals that Buck rejects are the structural separation to prevent a company that runs a platform from operating on that platform “in competition with the firms dependent on its infrastructure”, and line-of-business restrictions that would confine tech companies to a small number of markets, to prevent them from preferencing their other products to the detriment of competitors.

Buck rules these out, saying that they are “regulatory in nature [and] invite unforeseen consequences and divert attention away from public interest antitrust enforcement by our antitrust agencies.” He goes on to say that “this proposal is a thinly veiled call to break up Big Tech firms.”

Instead, Buck endorses, either fully or provisionally, measures including revitalising the essential facilities doctrine, imposing data interoperability mandates on platforms, and changing antitrust law to prevent “monopoly leveraging and predatory pricing”. 

Put together, though, these would amount to the same thing that the Democratic majority report proposes: a world where platforms are basically just conduits, regulated to be neutral and open, and where the companies that run them require a regulator’s go-ahead for important decisions — a process that would be just as influenced lobbying and political considerations, and insulated from market price signals, as any other regulator’s decisions are.

Revitalizing the essential facilities doctrine

Buck describes proposals to “revitalize the essential facilities doctrine” as “common ground” that warrant further consideration. This would mean that platforms deemed to be “essential facilities” would be required to offer access to their platform to third parties at a “reasonable” price, except in exceptional circumstances. The presumption would be that these platforms were anticompetitively foreclosing third party developers and merchants by either denying them access to their platforms or by charging them “too high” prices. 

This would require the kind of regulatory oversight that Buck says he wants to avoid. He says that “conservatives should be wary of handing additional regulatory authority to agencies in an attempt to micromanage platforms’ access rules.” But there’s no way to avoid this when the “facility” — and hence its pricing and access rules — changes as frequently as any digital platform does. In practice, digital platforms would have to justify their pricing rules and decisions about exclusion of third parties to courts or a regulator as often as they make those decisions.

If Apple’s App Store were deemed an essential facility such that it is presumed to be foreclosing third party developers any time it rejected their submissions, it would have to submit to regulatory scrutiny of the “reasonableness” of its commercial decisions on, literally, a daily basis.

That would likely require price controls to prevent platforms from using pricing to de facto exclude third parties they did not want to deal with. Adjudication of “fair” pricing by courts is unlikely to be a sustainable solution. Justice Breyer, in Town of Concord v. Boston Edison Co., considered this to be outside the courts’ purview:

[H]ow is a judge or jury to determine a ‘fair price?’ Is it the price charged by other suppliers of the primary product? None exist. Is it the price that competition ‘would have set’ were the primary level not monopolized? How can the court determine this price without examining costs and demands, indeed without acting like a rate-setting regulatory agency, the rate-setting proceedings of which often last for several years? Further, how is the court to decide the proper size of the price ‘gap?’ Must it be large enough for all independent competing firms to make a ‘living profit,’ no matter how inefficient they may be? . . . And how should the court respond when costs or demands change over time, as they inevitably will?

In practice, infrastructure treated as an essential facility is usually subject to pricing control by a regulator. This has its own difficulties. The UK’s energy and water infrastructure is an example. In determining optimal access pricing, regulators must determine the price that weighs competing needs to maximise short-term output, incentivise investment by the infrastructure owner, incentivise innovation and entry by competitors (e.g., local energy grids) and, of course, avoid “excessive” pricing. 

This is a near-impossible task, and the process is often drawn out and subject to challenges even in markets where the infrastructure is relatively simple. It is even less likely that these considerations would be objectively tractable in digital markets.

Treating a service as an essential facility is based on the premise that, absent mandated access, it is impossible to compete with it. But mandating access does not, on its own, prevent it from extracting monopoly rents from consumers; it just means that other companies selling inputs can have their share of the rents. 

So you may end up with two different sets of price controls: on the consumer side, to determine how much monopoly rent can be extracted from consumers, and on the access side, to determine how the monopoly rents are divided.

The UK’s energy market has both, for example. In the case of something like an electricity network, where it may simply not be physically or economically feasible to construct a second, competing network, this might be the least-bad course of action. In such circumstances, consumer-side price regulation might make sense. 

But if a service could, in fact, be competed with by others, treating it as an essential facility may be affirmatively harmful to competition and consumers if it diverts investment and time away from that potential competitor by allowing other companies to acquire some of the incumbent’s rents themselves.

The HJC report assumes that Apple is a monopolist, because, among people who own iPhones, the App Store is the only way to install third-party software. Treating the App Store as an essential facility may mean a ban on Apple charging “excessive prices” to companies like Spotify or Epic that would like to use it, or on Apple blocking them for offering users alternative in-app ways of buying their services.

If it were impossible for users to switch from iPhones, or for app developers to earn revenue through other mechanisms, this logic might be sound. But it would still not change the fact that the App Store platform was able to charge users monopoly prices; it would just mean that Epic and Spotify could capture some of those monopoly rents for themselves. Nice for them, but not for consumers. And since both companies have already grown to be pretty big and profitable with the constraints they object to in place, it seems difficult to argue that they cannot compete with these in place and sounds more like they’d just like a bigger share of the pie.

And, in fact, it is possible to switch away from the iPhone to Android. I have personally switched back and forth several times over the past few years, for example. And so have many others — despite what some claim, it’s really not that hard, especially now that most important data is stored on cloud-based services, and both companies offer an app to switch from the other. Apple also does not act like a monopolist — its Bionic chips are vastly better than any competitor’s and it continues to invest in and develop them.

So in practice, users switching from iPhone to Android if Epic’s games and Spotify’s music are not available constrains Apple, to some extent. If Apple did drive those services permanently off their platform, it would make Android relatively more attractive, and some users would move away — Apple would bear some of the costs of its ecosystem becoming worse. 

Assuming away this kind of competition, as Buck and the majority report do, is implausible. Not only that, but Buck and the majority believe that competition in this market is impossible — no policy or antitrust action could change things, and all that’s left is to regulate the market like it’s an electricity grid. 

And it means that platforms could often face situations where they could not expect to make themselves profitable after building their markets, since they could not control the supply side in order to earn revenues. That would make it harder to build platforms, and weaken competition, especially competition faced by incumbents.

Mandating interoperability

Interoperability mandates, which Buck supports, require platforms to make their products open and interoperable with third party software. If Twitter were required to be interoperable, for example, it would have to provide a mechanism (probably a set of open APIs) by which third party software could tweet and read its feeds, upload photos, send and receive DMs, and so on. 

Obviously, what interoperability actually involves differs from service to service, and involves decisions about design that are specific to each service. These variations are relevant because they mean interoperability requires discretionary regulation, including about product design, and can’t just be covered by a simple piece of legislation or a court order. 

To give an example: interoperability means a heightened security risk, perhaps from people unwittingly authorising a bad actor to access their private messages. How much is it appropriate to warn users about this, and how tight should your security controls be? It is probably excessive to require that users provide a sworn affidavit with witnesses, and even some written warnings about the risks may be so over the top as to scare off virtually any interested user. But some level of warning and user authentication is appropriate. So how much? 

Similarly, a company that has been required to offer its customers’ data through an API, but doesn’t really want to, can make life miserable for third party services that want to use it. Changing the API without warning, or letting its service drop or slow down, can break other services, and few users will be likely to want to use a third-party service that is unreliable. But some outages are inevitable, and some changes to the API and service are desirable. How do you decide how much?

These are not abstract examples. Open Banking in the UK, which requires interoperability of personal and small business current accounts, is the most developed example of interoperability in the world. It has been cited by former Chair of the Council of Economic Advisors, Jason Furman, among others, as a model for interoperability in tech. It has faced all of these questions: one bank, for instance, required that customers pass through twelve warning screens to approve a third party app to access their banking details.

To address problems like this, Open Banking has needed an “implementation entity” to design many of its most important elements. This is a de facto regulator, and it has taken years of difficult design decisions to arrive at Open Banking’s current form. 

Having helped write the UK’s industry review into Open Banking, I am cautiously optimistic about what it might be able to do for banking in Britain, not least because that market is already heavily regulated and lacking in competition. But it has been a huge undertaking, and has related to a relatively narrow set of data (its core is just two different things — the ability to read an account’s balance and transaction history, and the ability to initiate payments) in a sector that is not known for rapidly changing technology. Here, the costs of regulation may be outweighed by the benefits.

I am deeply sceptical that the same would be the case in most digital markets, where products do change rapidly, where new entrants frequently attempt to enter the market (and often succeed), where the security trade-offs are even more difficult to adjudicate, and where the economics are less straightforward, given that many services are provided at least in part because of the access to customer data they provide. 

Even if I am wrong, it is unavoidable that interoperability in digital markets would require an equivalent body to make and implement decisions when trade-offs are involved. This, again, would require a regulator like the UK’s implementation entity, and one that was enormous, given the number and diversity of services that it would have to oversee. And it would likely have to make important and difficult design decisions to which there is no clear answer. 

Banning self-preferencing

Buck’s Third Way would also ban digital platforms from self-preferencing. This typically involves an incumbent that can provide a good more cheaply than its third-party competitors — whether it’s through use of data that those third parties do not have access to, reputational advantages that mean customers will be more likely to use their products, or through scale efficiencies that allow it to provide goods to a larger customer base for a cheaper price. 

Although many people criticise self-preferencing as being unfair on competitors, “self-preferencing” is an inherent part of almost every business. When a company employs its own in-house accountants, cleaners or lawyers, instead of contracting out for them, it is engaged in internal self-preferencing. Any firm that is vertically integrated to any extent, instead of contracting externally for every single ancillary service other than the one it sells in the market, is self-preferencing. Coase’s theory of the firm is all about why this kind of behaviour happens, instead of every worker contracting on the open market for everything they do. His answer is that transaction costs make it cheaper to bring certain business relationships in-house than to contract externally for them. Virtually everyone agrees that this is desirable to some extent.

Nor does it somehow become a problem when the self-preferencing takes place on the consumer product side. Any firm that offers any bundle of products — like a smartphone that can run only the manufacturer’s operating system — is engaged in self-preferencing, because users cannot construct their own bundle with that company’s hardware and another’s operating system. But the efficiency benefits often outweigh the lack of choice.

Self-preferencing in digital platforms occurs, for example, when Google includes relevant Shopping or Maps results at the top of its general Search results, or when Amazon gives its own store-brand products (like the AmazonBasics range) a prominent place in the results listing.

There are good reasons to think that both of these are good for competition and consumer welfare. Google making Shopping results easily visible makes it a stronger competitor to Amazon, and including Maps results when you search for a restaurant just makes it more convenient to get the information you’re looking for.

Amazon sells its own private label products partially because doing so is profitable (even when undercutting rivals), partially to fill holes in product lines (like clothing, where 11% of listings were Amazon private label as of November 2018), and partially because it increases users’ likelihood to use Amazon if they expect to find a reliable product from a brand they trust. According to Amazon, they account for less than 1% of its annual retail sales, in contrast to the 19% of revenues ($54 billion) Amazon makes from third party seller services, which includes Marketplace commissions. Any analysis that ignores that Amazon has to balance those sources of revenue, and so has to tread carefully, is deficient. 

With “commodity” products (like, say, batteries and USB cables), where multiple sellers are offering very similar or identical versions of the same thing, private label competition works well for both Amazon and consumers. By Amazon’s own rules it can enter this market using aggregated data, but this doesn’t give it a significant advantage, because that data is easily obtainable from multiple sources, including Amazon itself, which makes detailed aggregated sales data freely available to third-party retailers

Amazon does profit from sales of these products, of course. And other merchants suffer by having to cut their prices to compete. That’s precisely what competition involves — competition is incompatible with a quiet life for businesses. But consumers benefit, and the biggest benefit to Amazon is that it assures its potential customers that when they visit they will be able to find a product that is cheap and reliable, so they keep coming back.

It is even hard to argue that in aggregate this practice is damaging to third-party sellers: many, like Anker, have built successful businesses on Amazon despite private-label competition precisely because the value of the platform increases for all parties as user trust and confidence in it does.

In these cases and in others, platforms act to solve market failures on the markets they host, as Andrei Hagiu has argued. To maximize profits, digital platforms need to strike a balance between being an attractive place for third-party merchants to sell their goods and being attractive to consumers by offering low prices. The latter will frequently clash with the former — and that’s the difficulty of managing a platform. 

To mistake this pro-competitive behaviour with an absence of competition is misguided. But that is a key conclusion of Buck’s Third Way: that the damage to competitors makes this behaviour harmful overall, and that it should be curtailed with “non-discrimination” rules. 

Treating below-cost selling as “predatory pricing”

Buck’s report equates below-cost selling with predatory pricing (“predatory pricing, also known as below-cost selling”). This is mistaken. Predatory pricing refers to a particular scenario where your price cut is temporary and designed to drive a competitor out of business, so that you can raise prices later and recoup your losses. 

It is easy to see that this does not describe the vast majority of below-cost selling. Buck’s formulation would describe all of the following as “predatory pricing”:

  • A restaurants that gives away ketchup for free;
  • An online retailer that offers free shipping and returns;
  • A grocery store that sells tins of beans for 3p a can. (This really happened when I was a child.)

The rationale for offering below-cost prices differs in each of these cases. Sometimes it’s a marketing ploy — Tesco sells those beans to get some free media, and to entice people into their stores, hoping they’ll decide to do the rest of their weekly shop there at the same time. Sometimes it’s about reducing frictions — the marginal cost of ketchup is so low that it’s simpler to just give it away. Sometimes it’s about reducing the fixed costs of transactions so more take place — allowing customers who buy your products to return them easily may mean more are willing to buy them overall, because there’s less risk for them if they don’t like what they buy. 

Obviously, none of these is “predatory”: none is done in the expectation that the below-cost selling will drive those businesses’ competitors out of business, allowing them to make monopoly profits later.

True predatory pricing is theoretically possible, but very difficult. As David Henderson describes, to successfully engage in predatory pricing means taking enormous and rising losses that grow for the “predatory” firm as customers switch to it from its competitor. And once the rival firm has exited the market, if the predatory firm raises prices above average cost (i.e., to recoup its losses), there is no guarantee that a new competitor will not enter the market selling at the previously competitive price. And the competing firm can either shut down temporarily or, in some cases, just buy up the “predatory” firm’s discounted goods to resell later. It is debatable whether the canonical predatory pricing case, Standard Oil, is itself even an example of that behaviour.

Offering a product below cost in a multi-sided market (like a digital platform) can be a way of building a customer base in order to incentivise entry on the other side of the market. When network effects exist, so additional users make the service more valuable to existing users, it can be worthwhile to subsidise the initial users until the service reaches a certain size. 

Uber subsidising drivers and riders in a new city is an example of this — riders want enough drivers on the road that they know they’ll be picked up fairly quickly if they order one, and drivers want enough riders that they know they’ll be able to earn a decent night’s fares if they use the app. This requires a certain volume of users on both sides — to get there, it can be in everyone’s interest for the platform to subsidise one or both sides of the market to reach that critical mass.

The slightly longer road to regulation

That is another reason for below-cost pricing: someone other than the user may be part-paying for a product, to build a market they hope to profit from later. Platforms must adjust pricing and their offerings to each side of their market to manage supply and demand. Epic, for example, is trying to build a desktop computer game store to rival the largest incumbent, Steam. To win over customers, it has been giving away games for free to users, who can own them on that store forever. 

That is clearly pro-competitive — Epic is hoping to get users over the habit of using Steam for all their games, in the hope that they will recoup the costs of doing so later in increased sales. And it is good for consumers to get free stuff. This kind of behaviour is very common. As well as Uber and Epic, smaller platforms do it too. 

Buck’s proposals would make this kind of behaviour much more difficult, and permitted only if a regulator or court allows it, instead of if the market can bear it. On both sides of the coin, Buck’s proposals would prevent platforms from the behaviour that allows them to grow in the first place — enticing suppliers and consumers and subsidising either side until critical mass has been reached that allows the platform to exist by itself, and the platform owner to recoup its investments. Fundamentally, both Buck and the majority take the existence of platforms as a given, ignoring the incentives to create new ones and compete with incumbents. 

In doing so, they give up on competition altogether. As described, Buck’s provisions would necessitate ongoing rule-making, including price controls, to work. It is unlikely that a court could do this, since the relevant costs would change too often for one-shot rule-making of the kind a court could do. To be effective at all, Buck’s proposals would require an extensive, active regulator, just as the majority report’s would. 

Buck nominally argues against this sort of outcome — “Conservatives should be wary of handing additional regulatory authority to agencies in an attempt to micromanage platforms’ access rules” — but it is probably unavoidable, given the changes he proposes. And because the rule changes he proposes would apply to the whole economy, not just tech, his proposals may, perversely, end up being even more extensive and interventionist than the majority’s.

Other than this, the differences in practice between Buck’s proposals and the Democrats’ proposals would be trivial. At best, Buck’s Third Way is just a longer route to the same destination.

[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.

Earlier this year the UK government announced it was adopting the main recommendations of the Furman Report into competition in digital markets and setting up a “Digital Markets Taskforce” to oversee those recommendations being put into practice. The Competition and Markets Authority’s digital advertising market study largely came to similar conclusions (indeed, in places it reads as if the CMA worked backwards from those conclusions).

The Furman Report recommended that the UK should overhaul its competition regime with some quite significant changes to regulate the conduct of large digital platforms and make it harder for them to acquire other companies. But, while the Report’s panel is accomplished and its tone is sober and even-handed, the evidence on which it is based does not justify the recommendations it makes.

Most of the citations in the Report are of news reports or simple reporting of data with no analysis, and there is very little discussion of the relevant academic literature in each area, even to give a summary of it. In some cases, evidence and logic are misused to justify intuitions that are just not supported by the facts.

Killer acquisitions

One particularly bad example is the report’s discussion of mergers in digital markets. The Report provides a single citation to support its proposals on the question of so-called “killer acquisitions” — acquisitions where incumbent firms acquire innovative startups to kill their rival product and avoid competing on the merits. The concern is that these mergers slip under the radar of current merger control either because the transaction is too small, or because the purchased firm is not yet in competition with the incumbent. But the paper the Report cites, by Colleen Cunningham, Florian Ederer and Song Ma, looks only at the pharmaceutical industry. 

The Furman Report says that “in the absence of any detailed analysis of the digital sector, these results can be roughly informative”. But there are several important differences between the drug markets the paper considers and the digital markets the Furman Report is focused on. 

The scenario described in the Cunningham, et al. paper is of a patent holder buying a direct competitor that has come up with a drug that emulates the patent holder’s drug without infringing on the patent. As the Cunningham, et al. paper demonstrates, decreases in development rates are a feature of acquisitions where the acquiring company holds a patent for a similar product that is far from expiry. The closer a patent is to expiry, the less likely an associated “killer” acquisition is. 

But tech typically doesn’t have the clear and predictable IP protections that would make such strategies reliable. The long and uncertain development and approval process involved in bringing a drug to market may also be a factor.

There are many more differences between tech acquisitions and the “killer acquisitions” in pharma that the Cunningham, et al. paper describes. SO-called “acqui-hires,” where a company is acquired in order to hire its workforce en masse, are common in tech and explicitly ruled out of being “killers” by this paper, for example: it is not harmful to overall innovation or output overall if a team is moved to a more productive project after an acquisition. And network effects, although sometimes troubling from a competition perspective, can also make mergers of platforms beneficial for users by growing the size of that platform (because, of course, one of the points of a network is its size).

The Cunningham, et al. paper estimates that 5.3% of pharma acquisitions are “killers”. While that may seem low, some might say it’s still 5.3% too much. However, it’s not obvious that a merger review authority could bring that number closer to zero without also rejecting more mergers that are good for consumers, making people worse off overall. Given the number of factors that are specific to pharma and that do not apply to tech, it is dubious whether the findings of this paper are useful to the Furman Report’s subject at all. Given how few acquisitions are found to be “killers” in pharma with all of these conditions present, it seems reasonable to assume that, even if this phenomenon does apply in some tech mergers, it is significantly rarer than the ~5.3% of mergers Cunningham, et al. find in pharma. As a result, the likelihood of erroneous condemnation of procompetitive mergers is significantly higher. 

In any case, there’s a fundamental disconnect between the “killer acquisitions” in the Cunningham, et al. paper and the tech acquisitions described as “killers” in the popular media. Neither Facebook’s acquisition of Instagram nor Google’s acquisition of Youtube, which FTC Commissioner Rohit Chopra recently highlighted, would count, because in neither case was the acquired company “killed.” Nor were any of the other commonly derided tech acquisitions — e.g., Facebook/Whatsapp, Google/Waze, Microsoft.LinkedIn, or Amazon/Whole Foods — “killers,” either. 

In all these high-profile cases the acquiring companies expanded the service and invested more in them. One may object that these services would have competed with their acquirers had they remained independent, but this is a totally different argument to the scenarios described in the Cunningham, et al. paper, where development of a new drug is shut down by the acquirer ostensibly to protect their existing product. It is thus extremely difficult to see how the Cunningham, et al. paper is even relevant to the digital platform context, let alone how it could justify a wholesale revision of the merger regime as applied to digital platforms.

A recent paper (published after the Furman Report) does attempt to survey acquisitions by Google, Amazon, Facebook, Microsoft, and Apple. Out of 175 acquisitions in the 2015-17 period the paper surveys, only one satisfies the Cunningham, et al. paper’s criteria for being a potentially “killer” acquisition — Facebook’s acquisition of a photo sharing app called Masquerade, which had raised just $1 million in funding before being acquired.

In lieu of any actual analysis of mergers in digital markets, the Report falls back on a puzzling logic:

To date, there have been no false positives in mergers involving the major digital platforms, for the simple reason that all of them have been permitted. Meanwhile, it is likely that some false negatives will have occurred during this time. This suggests that there has been underenforcement of digital mergers, both in the UK and globally. Remedying this underenforcement is not just a matter of greater focus by the enforcer, as it will also need to be assisted by legislative change.

This is very poor reasoning. It does not logically follow that the (presumed) existence of false negatives implies that there has been underenforcement, because overenforcement carries costs as well. Moreover, there are strong reasons to think that false positives in these markets are more costly than false negatives. A well-run court system might still fail to convict a few criminals because the cost of accidentally convicting an innocent person was so high.

The UK’s competition authority did commission an ex post review of six historical mergers in digital markets, including Facebook/Instagram and Google/Waze, two of the most controversial in the UK. Although it did suggest that the review process could have been done differently, it also highlighted efficiencies that arose from each, and did not conclude that any has led to consumer detriment.

Recommendations

The Report is vague about which mergers it considers to have been uncompetitive, and apart from the aforementioned text it does not really attempt to justify its recommendations around merger control. 

Despite this, the Report recommends a shift to a ‘balance of harms’ approach. Under the current regime, merger review focuses on the likelihood that a merger would reduce competition which, at least, gives clarity about the factors to be considered. A ‘balance of harms’ approach would require the potential scale (size) of the merged company to be considered as well. 

This could give basis for blocking any merger at all on ‘scale’ grounds. After all, if a photo editing app with a sharing timeline can grow into the world’s second largest social network, how could a competition authority say with any confidence that some other acquisition might not prevent the emergence of a new platform on a similar scale, however unlikely? This could provide a basis for blocking almost any acquisition by an incumbent firm, and make merger review an even more opaque and uncertain process than it currently is, potentially deterring efficiency-raising mergers or leading startups that would like to be acquired to set up and operate overseas instead (or not to be started up in the first place).

The treatment of mergers is just one example of the shallowness of the Report. In many other cases — the discussions of concentration and barriers to entry in digital markets, for example — big changes are recommended on the basis of a handful of papers or less. Intuition repeatedly trumps evidence and academic research.

The Report’s subject is incredibly broad, of course, and one might argue that such a limited, casual approach is inevitable. In this sense the Report may function perfectly well as an opening brief introducing the potential range of problems in the digital economy that a rational competition authority might consider addressing. But the complexity and uncertainty of the issues is no reason to eschew rigorous, detailed analysis before determining that a compelling case has been made. Adopting the Report’s assumptions — and in many cases that is the very most one can say of them — of harm and remedial recommendations on the limited bases it offers is sure to lead to erroneous enforcement of competition law in a way that would reduce, rather than enhance, consumer welfare.

The goal of US antitrust law is to ensure that competition continues to produce positive results for consumers and the economy in general. We published a letter co-signed by twenty three of the U.S.’s leading economists, legal scholars and practitioners, including one winner of the Nobel Prize in economics (full list of signatories here), to exactly that effect urging the House Judiciary Committee on the State of Antitrust Law to reject calls for radical upheaval of antitrust law that would, among other things, undermine the independence and neutrality of US antitrust law. 

A critical part of maintaining independence and neutrality in the administration of antitrust is ensuring that it is insulated from politics. Unfortunately, this view is under attack from all sides. The President sees widespread misconduct among US tech firms that he believes are controlled by the “radical left” and is, apparently, happy to use whatever tools are at hand to chasten them. 

Meanwhile, Senator Klobuchar has claimed, without any real evidence, that the mooted Uber/Grubhub merger is simply about monopolisation of the market, and not, for example, related to the huge changes that businesses like this are facing because of the Covid shutdown.

Both of these statements challenge the principle that the rule of law depends on being politically neutral, including in antitrust. 

Our letter, contrary to the claims made by President Trump, Sen. Klobuchar and some of the claims made to the Committee, asserts that the evidence and economic theory is clear: existing antitrust law is doing a good job of promoting competition and consumer welfare in digital markets and the economy more broadly, and concludes that the Committee should focus on reforms that improve antitrust at the margin, not changes that throw out decades of practice and precedent.

The letter argues that:

  1. The American economy—including the digital sector—is competitive, innovative, and serves consumers well, contrary to how it is sometimes portrayed in the public debate. 
  2. Structural changes in the economy have resulted from increased competition, and increases in national concentration have generally happened because competition at the local level has intensified and local concentration has fallen.
  3. Lax antitrust enforcement has not allowed systematic increases in market power, and the evidence simply does not support out the idea that antitrust enforcement has weakened in recent decades.
  4. Existing antitrust law is adequate for protecting competition in the modern economy, and built up through years of careful case-by-case scrutiny. Calls to throw out decades of precedent to achieve an antitrust “Year Zero” would throw away a huge body of learning and deliberation.
  5. History teaches that discarding the modern approach to antitrust would harm consumers, and return to a situation where per se rules prohibited the use of economic analysis and fact-based defences of business practices.
  6. Common sense reforms should be pursued to improve antitrust enforcement, and the reforms proposed in the letter could help to improve competition and consumer outcomes in the United States without overturning the whole system.

The reforms suggested include measures to increase transparency of the DoJ and FTC, greater scope for antitrust challenges against state-sponsored monopolies, stronger penalties for criminal cartel conduct, and more agency resources being made available to protect workers from anti-competitive wage-fixing agreements between businesses. These are suggestions for the House Committee to consider and are not supported by all the letter’s signatories.

Some of the arguments in the letter are set out in greater detail in the ICLE’s own submission to the Committee, which goes into detail about the nature of competition in modern digital markets and in traditional markets that have been changed because of the adoption of digital technologies. 

The full letter is here.

The Wall Street Journal reports that Amazon employees have been using data from individual sellers to identify products to compete with with its own ‘private label’ (or own-brand) products, such as AmazonBasics, Presto!, and Pinzon.

It’s implausible that this is an antitrust problem, as some have suggested. It’s extremely common for retailers to sell their own private label products and use data on how other products in their stores have sold to help development and marketing. They account for about 14–17% of overall US retail sales, and for an estimated 19% of Walmart’s and Kroger’s sales and 29% of Costco’s sales of consumer packaged goods. 

And Amazon accounts for 39% of US e-commerce spending, and about 6% of all US retail spending. Any antitrust-based argument against Amazon doing this should also apply to Walmart, Kroger and Costco as well. In other words, the case against Amazon proves too much. Alec Stapp has a good discussion of these and related facts here.

However, it is interesting to think about the underlying incentives facing Amazon here, and in particular why Amazon’s company policy is not to use individual seller data to develop products (rogue employees violating this policy, notwithstanding). One possibility is that it is a way for Amazon to balance its competition with some third parties with protections for others that it sees as valuable to its platform overall.

Amazon does use aggregated seller data to develop and market its products. If two or more merchants are selling a product, Amazon’s employees can see how popular it is. This might seem like a trivial distinction, but it might exist for good reason. It could be because sellers of unique products actually do have the bargaining power to demand that Amazon does not use their data to compete with them, or for public relations reasons, although it’s not clear how successful that has been. 

But another possibility is that it may be a self-imposed restraint. Amazon sells its own private label products partially because doing so is profitable (even when undercutting rivals), partially to fill holes in product lines (like clothing, where 11% of listings were Amazon private label as of November 2018), and partially because it increases users’ likelihood to use Amazon if they expect to find a reliable product from a brand they trust. According to the Journal, they account for less than 1% of Amazon’s product sales, in contrast to the 19% of revenues ($54 billion) Amazon makes from third party seller services, which includes Marketplace commissions. Any analysis that ignores that Amazon has to balance those sources of revenue, and so has to tread carefully, is deficient. 

With “commodity” products (like, say, batteries and USB cables), where multiple sellers are offering very similar or identical versions of the same thing, private label competition works well for both Amazon and consumers. By Amazon’s own rules it can enter this market using aggregated data, but this doesn’t give it a significant advantage, since that data is easily obtainable from multiple sources, including Amazon itself, which makes detailed aggregated sales data freely available to third-party retailers

But to the extent that Amazon competes against innovative third-party sellers (typically manufacturers doing direct sales, as opposed to pure retailers simply re-selling others’ products), there is a possibility that the prospect of having to compete with Amazon may diminish their incentive to develop new products and sell them on Amazon’s platform. 

This is the strongest argument that is made against private label offerings in general. When they involve some level of copying an innovative product, where the innovator has been collecting above-normal profits and those profits are what spur the innovation in the first place, a private label product that comes along and copies the product effectively free rides on the innovation and captures some of its return. That may get us less innovation than society—or a platform trying to host as many innovative products as possible—would like.

While the Journal conflates these two kinds of products, Amazon’s own policies may be tailored specifically to take account of the distinction, and maximise the total value of its marketplace to consumers.

This is nominally the focus of the Journal story: a car trunk organiser company with an (apparently) innovative product says that Amazon moving in to compete with its own AmazonBasics version competed away many of its sales. In this sort of situation, the free-rider problem described above might apply where future innovation is discouraged. Why bother to invent things like this if you’re just going to have your invention ripped off?

Of course, many such innovations are protected by patents. But there may be valuable innovations that are not, and even patented innovations are not perfectly protected given the costs of enforcement. But a platform like Amazon can adopt rules that fine-tune the protections offered by the legal system in an effort to increase the value of the platform for both innovators and consumers alike.

And that may be why Amazon has its rule against using individual seller data to compete: to allow creators of new products to collect more rents from their inventions, with a promise that, unless and until their product is commodified by other means (as indicated by the product being available from multiple other sellers), Amazon won’t compete against such sellers using any special insights it might have from that seller using Amazon’s Marketplace. 

This doesn’t mean Amazon refuses to compete (or refuses to allow others to compete); it has other rules that sometimes determine that boundary, as when it enters into agreements with certain brands to permit sales of the brand on the platform only by sellers authorized by the brand owner. Rather, this rule is a more limited—but perhaps no less important—one that should entice innovators to use Amazon’s platform to sell their products without concern that doing so will create a special risk that Amazon can compete away their returns using information uniquely available to it. In effect, it’s a promise that innovators won’t lose more by choosing to sell on Amazon rather than through other retail channels.. 

Like other platforms, to maximise its profits Amazon needs to strike a balance between being an attractive place for third party merchants to sell their goods, and being attractive to consumers by offering as many inexpensive, innovative, and reliable products as possible. Striking that balance is challenging, but a rule that restrains the platform from using its unique position to expropriate value from innovative sellers helps to protect the income of genuinely innovative third parties, and induces them to sell products consumers want on Amazon, while still allowing Amazon (and third-party sellers) to compete with commodity products. 

The fact that Amazon has strong competition online and offline certainly acts as an important constraint here, too: if Amazon behaved too badly, third parties might not sell on it at all, and Amazon would have none of the seller data that is allegedly so valuable to it.

But even in a world where Amazon had a huge, sticky customer base that meant it was not an option to sell elsewhere—which the Journal article somewhat improbably implies—Amazon would still need third parties to innovate and sell things on its platform. 

What the Journal story really seems to demonstrate is the sort of genuine principal-agent problem that all large businesses face: the company as a whole needs to restrain its private label section in various respects but its agents in the private label section want to break those rules to maximise their personal performance (in this case, by launching a successful new AmazonBasics product). It’s like a rogue trader at a bank who breaks the rules to make herself look good by, she hopes, getting good results.This is just one of many rules that a platform like Amazon has to preserve the value of its platform. It’s probably not the most important one. But understanding why it exists may help us to understand why simple stories of platform predation don’t add up, and help to demonstrate the mechanisms that companies like Amazon use to maximise the total value of their platform, not just one part of it.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Sam Bowman, (Director of Competition Policy, ICLE).]

No support package for workers and businesses during the coronavirus shutdown can be comprehensive. In the UK, for example, the government is offering to pay 80% of the wages of furloughed workers, but this will not apply to self-employed people or many gig economy workers, and so far it’s been hard to think of a way of giving them equivalent support. It’s likely that the bill going through Congress will have similar issues.

Whether or not solutions are found for these problems, it may be worth putting in place what you might call a ‘backstop’ policy that allows people to access money in case they cannot access it through the other policies that are being put into place. This doesn’t need to provide equivalent support to other packages, just to ensure that everyone has access to the money they need during the shutdown to pay their bills and rent, and cover other essential costs. The aim here is just to keep everyone afloat.

One mechanism for doing this might be to offer income-contingent loans to anyone currently resident in the country during the shutdown period. These are loans whose repayment is determined by the borrower’s income later on, and are how students in the UK and Australia pay for university. 

In the UK, for example, under the current student loan repayment terms, once a student has graduated, their earnings above a certain income threshold (currently £25,716/year) are taxed at 9% to repay the loan. So, if I earn £30,000/year and have a loan to repay, I pay an additional £385.56/year to repay the loan (9% of the £4,284 I’m earning above the income threshold); if I earn £40,000/year, I pay an additional £1,285.56/year. The loan incurs an annual interest rate equal to an annual measure of inflation plus 3%. Once you have paid off the loan, no more repayments are taken, and any amount still unpaid thirty years after the loan was first taken out is written off.

In practice, these terms mean that there is a significant subsidy to university students, most of whom never pay off the full amount. Under a less generous repayment scheme that was in place until recently, with a lower income threshold for repayment, out of every £1 borrowed by students the long-run cost to the government was 43.3p. This is regarded by many as a feature of the system rather than a bug, because of the belief that university education has positive externalities, and because this approach pools some of the risk associated with pursuing a graduate-level career (the risk of ending up with a low-paid job despite having spent a lot on your education, for example).

For loans available to the wider public, a different set of repayment criteria could apply. We could allow anyone who has filed a W-2 or 1099 tax statement in the past eighteen months (or filed a self-assessment tax return in the UK) to borrow up to something around 20% of median national annual income, to be paid back via an extra few percentage points on their federal income tax or, in the UK, National Insurance contributions over the following ten years, with the rate returning to normal after they have paid off the loan. Some other provision may have to be made for people approaching retirement.

With a low, inflation-indexed interest rate, this would allow people who need funds to access them, but make it mostly pointless for anyone who did not need to borrow. 

If, like student tuition fees, loans were written off after a certain period, low earners would probably never pay back the entirety of the ‘loan’ – as a one-off transfer (ie, one that does not distort work or savings incentives for recipients) to low paid people, this is probably not a bad thing. Most people, though, would pay back as and when they were able to. For self-employed people in particular, it could be a valuable source of liquidity during an unexpected period where they cannot work. Overall, it would function as a cash transfer to lower earners, and a liquidity injection for everyone else who takes advantage of the scheme.

This would have advantages over money being given to every US or UK citizen, as some have proposed, because most of the money being given out would be repaid, so the net burden on taxpayers would be lower and so the deadweight losses created by the additional tax needed to pay for it would be smaller. But you would also eliminate the need for means-testing, relying on self-selection instead.

The biggest obstacle to rolling something like this out may be administrative. However, if the government committed to setting up something like this, banks and credit card companies may be willing to step in in the short-run to issue short-term loans in the knowledge that people could be able to repay them once the government scheme was set up. To facilitate this, the government could guarantee the loans made by banks and credit card companies now, then allow people to opt into the income-contingent loans later, so there was no need for legislation immediately.

Speed is extremely important in helping people plug the gaps in their finances. As a complement to the government’s other plans, income-contingent loans to groups like self-employed people may be a useful way of catching people who would otherwise fall through the cracks.