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Critics of Google have argued that users overvalue Google’s services in relation to the data they give away.  One breath-taking headline asked Who Would Pay $5,000 to Use Google?, suggesting that Google and its advertisers can make as much as $5,000 off of individuals whose data they track. Scholars, such as Nathan Newman, have used this to argue that Google exploits its users through data extraction. But, the question remains: how good of a deal is Google? My contention is that Google’s value to most consumers far surpasses the value supposedly extracted from them in data.

First off, it is unlikely that Google and its advertisers make anywhere close to $5,000 off the average user. Only very high volume online purchasers who consistently click through online ads are likely anywhere close to that valuable. Nonetheless, it is true that Google and its advertisers must be making money, or else Google would be charging users for its services.

PrivacyFix, a popular extension for Google Chrome, calculates your worth to Google based upon the amount of searches you have done. Far from $5,000, my total only comes in at $58.66 (and only $10.74 for Facebook). Now, I might not be the highest volume searcher out there. My colleague, Geoffrey Manne states that he is worth $125.18 on Google (and $10.74 for Facebook). But, I use Google search everyday for work in tech policy, along with Google Docs, Google Calendar, and Gmail (both my private email and work emails)… for FREE!*

The value of all of these services to me, or even just Google search alone, easily surpasses the value of my data attributed to Google. This is likely true for the vast majority of other users, as well. While not a perfect analogue, there are paid specialized search options out there (familiar to lawyers) that do little tracking and are not ad-supported: Westlaw, Lexis, and Bloomberg. But, the price for using these services are considerably higher than zero:


Can you imagine having to pay anywhere near $14 per search on Google? Or a subscription that costs $450 per user per month like some firms pay for Bloomberg? It may be the case that the costs are significantly lower per search for Google than for specialized legal searches (though Google is increasingly used by young lawyers as more cases become available). But, the “price” of viewing a targeted ad is a much lower psychic burden for most people than paying even just a few cents per month for an ad-free experience. For instance, consumers almost always choose free apps over the 99 cent alternative without ads.

Maybe the real question about Google is: Great Deal or Greatest Deal?

* Otherwise known as unpriced for those that know there’s no such thing as a free lunch.

Last week the New York Times ran an article, “Building the Next Facebook a Tough Task in Europe“, by Eric Pfanner, discussing the lack of major high tech innovation in Europe.  Eric Pfanner discusses the importance of such investment, and then speculates on the reason for the lack of such innovation.  The ultimate conclusion is that there is a lack of venture capital in Europe for various cultural and historical reasons.  This explanation of course makes no sense.  Capital is geographically mobile and if European tech start ups were a profitable investment that Europeans were afraid to bankroll, American investors would be on the next plane.

Here is a better explanation.  In the name of “privacy,” the EU greatly restricts the use of consumer online  information.  Josh Lerner has a recent paper, “The Impact of Privacy Policy Changes on Venture Capital Investment in Online Advertising Companies” (based in part on the work of Avi Goldfarb and Catherine E. Tucker, “Privacy Regulation and Online Advertising“) finding that this restriction on the use of information is a large part of the explanation for the lack of tech investment in Europe.  Tom Lenard and I have written extensively about the costs of privacy regulation (for example, here) and this is just another example of these costs, although the costs are much greater in Europe than they are here (so far.)

A new rule kicks in today requiring airlines to include all taxes and mandatory fees in their advertised fares.  The rule, part of a broader “passengers’ bill of rights”-type regulation promulgated by the Department of Transportation, is being sold as a proconsumer mandate:  It purportedly protects consumers from the sticker shock that results when they learn that the true consumer price for a flight, due to taxes and mandatory fees, is much higher than the advertised price.

But how consumer-friendly is this rule?  Won’t it be easier to raise taxes and fees when they aren’t presented as a line item, when consumers aren’t “startled” to see the exorbitant amount they’re paying for government services?  Value-added taxes (VATs), which tax the incremental value added at each stage of production and are generally included in the posted price for an item, have proven easier to raise than sales taxes, which are added at the register.  That’s because the latter are more visible so that increases are more likely to generate political opposition.  While VATs are common throughout Europe, they’re virtually non-existent in the United States, in part because we Americans have recognized the important role “tax sticker shock” plays in creating political accountability.

Consumer advocates, nevertheless, are lauding the new Department of Transportation rule.  They don’t seem to realize that higher taxes are bad for consumers and that taxes are more likely to rise when the government can hide them.  They also seem to care little about consumer sovereignty.  Don’t consumers have a right to know how much they’re paying to have scads of Homeland Security officers bark orders at them and gawk at their privates?


By Berin Szoka, Geoffrey Manne & Ryan Radia

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

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

Let’s consider both questions in turn.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Debate to Come: Conditioning Access to SPYW

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

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

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

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

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

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

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

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

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

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

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

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

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

By now everyone is probably aware of the “tracking” of certain cellphones (Sprint, iPhone, T-Mobile, AT&T perhaps others) by a company called Carrier IQ.  There are lots of discussions available; a good summary is on one of my favorite websites, Lifehacker;  also here from CNET. Apparently the program gathers lots of anonymous data mainly for the purpose of helping carriers improve their service. Nonetheless, there are lawsuits and calls for the FTC to investigate.

Aside from the fact that the data is used only to improve service, it is also useful to ask just what people are afraid of.  Clearly the phone companies already have access to SMS messages if they want it since these go through the phone system anyway.  Moreover, of course, no person would see the data even if it were somehow collected.  The fear is perhaps that “… marketers can use that data to sell you more stuff or send targeted ads…” (from the Lifehacker site) but even if so, so what?  If apps are using data to try to sell you stuff that they think that you want, what is the harm? If you do want it, then the app has done you a service.  If you don’t want it, then you don’t buy it.  Ads tailored to your behavior are likely to be more useful than ads randomly assigned.

The Lifehacker story does use phrases like “freak people out” and “scary” and “creepy.”  But except for the possibility of being sold stuff, the story never explains what is harmful about the behavior.  As I have said before, I think the basic problem is that people cannot understand the notion that something is known but no person knows it.  If some server somewhere knows where your phone has been, so what?

The end result of this episode will probably be somewhat worse phone service.

Privacy Again

Paul H. Rubin —  15 November 2011

Today’s Wall Street Journal has a long article-debate on privacy.  The strongest pro-privacy is Christopher Soghoian of the Open Society Institute.  He confuses commercial privacy with government privacy:

“The dirty secret of the Web is that the “free” content and services that consumers enjoy come with a hidden price: their own private data. Many of the major online advertising companies are not interested in the data that we knowingly and willingly share. Instead, these parasitic firms covertly track our web-browsing activities, search behavior and geolocation information. Once collected, this mountain of data is analyzed to build digital dossiers on millions of consumers, in some cases identifying us by name, gender, age as well as the medical conditions and political issues we have researched online.”

When asked “Why is that a problem” he replies

“Many of the dangers posed by digital dossiers do not occur regularly, but are incredibly destructive to people’s lives when they do. An unlucky few will be stalked, fired, surveilled, arrested, deported or even tortured, all as a result of the data kept about them by companies and governments. Much more common are the harms of identity theft or public embarrassment. Even when companies follow best practices—and few do—it is impossible to be completely secure.”

Note that “parasitic firms” are collecting the data which is then used for arrest, deportation, and torture.  A bit of a disconnect. Identity theft is a problem, but the risk is decreasing and the costs are almost always low.  Moreover, identity thieves are crooks, not firms.

What is particularly interesting about the article is the survey data reported.  It demonstrates peoples’ confusion about the issues.  92% of the adults surveyed  “Think that there should be a law that requires websites and advertising companies to delete all stored information about an individual” but between 32% and 47% would like websites to provide information of some sort (ads: 32%, discounts: 47%, or news: 40%) “tailored to their interests.”  But of course these numbers are totally inconsistent.  If websites cannot keep any information about an individual, then they cannot provide tailored information since there will be nothing on which to base the tailoring.  The relevant questions are tradeoff questions, but the reported survey does not address these.

Search Bias and Antitrust

Josh Wright —  24 March 2011

There is an antitrust debate brewing concerning Google and “search bias,” a term used to describe search engine results that preference the content of the search provider.  For example, Google might list Google Maps prominently if one searches “maps” or Microsoft’s Bing might prominently place Microsoft affiliated content or products.

Apparently both antitrust investigations and Congressional hearings are in the works; regulators and commentators appear poised to attempt to impose “search neutrality” through antitrust or other regulatory means to limit or prohibit the ability of search engines (or perhaps just Google) to favor their own content.  At least one proposal goes so far as to advocate a new government agency to regulate search.  Of course, when I read proposals like this, I wonder where Google’s share of the “search market” will be by the time the new agency is built.

As with the net neutrality debate, I understand some of the push for search neutrality involves an intense push to discard traditional economically-grounded antitrust framework.  The logic for this push is simple.  The economic literature on vertical restraints and vertical integration provides no support for ex ante regulation arising out of the concern that a vertically integrating firm will harm competition through favoring its own content and discriminating against rivals.  Economic theory suggests that such arrangements may be anticompetitive in some instances, but also provides a plethora of pro-competitive explanations.  Lafontaine & Slade explain the state of the evidence in their recent survey paper in the Journal of Economic Literature:

We are therefore somewhat surprised at what the weight of the evidence is telling us. It says that, under most circumstances, profit-maximizing vertical-integration decisions are efficient, not just from the firms’ but also from the consumers’ points of view. Although there are isolated studies that contradict this claim, the vast majority support it. Moreover, even in industries that are highly concentrated so that horizontal considerations assume substantial importance, the net effect of vertical integration appears to be positive in many instances. We therefore conclude that, faced with a vertical arrangement, the burden of evidence should be placed on competition authorities to demonstrate that that arrangement is harmful before the practice is attacked. Furthermore, we have found clear evidence that restrictions on vertical integration that are imposed, often by local authorities, on owners of retail networks are usually detrimental to consumers. Given the weight of the evidence, it behooves government agencies to reconsider the validity of such restrictions.

Of course, this does not bless all instances of vertical contracts or integration as pro-competitive.  The antitrust approach appropriately eschews ex ante regulation in favor of a fact-specific rule of reason analysis that requires plaintiffs to demonstrate competitive harm in a particular instance. Again, given the strength of the empirical evidence, it is no surprise that advocates of search neutrality, as net neutrality before it, either do not rely on consumer welfare arguments or are willing to sacrifice consumer welfare for other objectives.

I wish to focus on the antitrust arguments for a moment.  In an interview with the San Francisco Gate, Harvard’s Ben Edelman sketches out an antitrust claim against Google based upon search bias; and to his credit, Edelman provides some evidence in support of his claim.

I’m not convinced.  Edelman’s interpretation of evidence of search bias is detached from antitrust economics.  The evidence is all about identifying whether or not there is bias.  That, however, is not the relevant antitrust inquiry; instead, the question is whether such vertical arrangements, including preferential treatment of one’s own downstream products, are generally procompetitive or anticompetitive.  Examples from other contexts illustrate this point.

Continue Reading…

Privacy and Tracking

Paul H. Rubin —  12 March 2011

First I would like to thank Geoff Manne for inviting me to join this blog.  I know most of my fellow bloggers and it is a group I am proud to be associated with.

For my first few posts I am going to write about privacy.  This is a hot topic.  Senators McCain and Kerry are floating a privacy bill, and the FTC is also looking at privacy. I have written a lot about privacy (mostly with Tom Lenard of the Technology Policy Institute, where I am a senior fellow).

The issue of the day is “tracking.”  There are several proposals for “do not track” legislation and polls show that consumers do not want to be tracked.

The entire fear of being tracked is based on an illusion.  It is a deep illusion, and difficult or impossible to eliminate, but still an illusion.   People are uncomfortable with the idea that someone knows what they are doing.  (It is “creepy.”)  But in fact no person knows what you are doing, even if you are being tracked. Only a machine knows.

As humans, we have difficulty understanding that something can be “known” but nonetheless not known by anyone.   We do not understand that we can be “tracked” but that no one is tracking us.  That is, data on our searches may exist on a server somewhere so that the server “knows” it, but no human knows it.  We don’t intuitively grasp this concept because it it entirely alien to our evolved intelligence.

In my most recent paper (with Michael Hammock, coming out in Competition Policy International) we cite two books by Clifford Nass ( C. Nass & C. Yen, The Man Who Lied to His Laptop: What Machines Teach Us About Human Relationships (2010), and B. Reeves & C. Nass, The Media Equation: How People Treat Computers, Television, and New Media Like Real People and Places (1996, 2002).)  Nass and his coauthors show that people automatically treat intelligent machines like other people.  For example, if asked to fill out a questionnaire about the quality of a computer, they rate the machine higher if they are filling out the form on the computer being rated than if it on another computer — they don’t want to hurt the computer’s feelings.  Privacy is like that — people can’t adapt to the notion that a machine knows something. They assume (probably unconsciously) that if somethingis known then a person knows it, and this is why they do not like being tracked.

One final point about tracking.  Even if you are tracked, the purpose is to find out what you want and sell it to you.  Selling people things they want is the essence of the market economy, and if tracking does a better job of this, then it is helping the market function better, and also helping consumers get products that are a better fit.  Why should this make anyone mad?

In my academic research, I’ve studied contractual arrangements between manufacturers and retailers for premium shelf space, including slotting arrangements and category management contracts.  Typically, a shelf space arrangement in the retail sector will involve the supplier compensating the retailer for some specified promotional shelving arrangement, e.g. end-caps or eye level space, or a share of the total shelf space dedicated to a particular product category.  These arrangements have much in common with what is commonly referred to as product placement (see also the economics of celebrity endorsements).

As a form of advertising, it is not difficult to imagine why product placement would increase sales.  But the costs of such forms of advertising are not often discussed.  In today’s WSJ, however, there appears a bit of a backlash against Maserati for its product placement campaign in a review of the new 2011 Maserati GranTurismo Convertible.  Here’s a taste:

Maserati, founded in 1914 in Bologna, Italy, by the Maserati brothers, and relocated to Modena during World War II, is a grand old European sports-car name, the marque of Fangio and Moss, Birdcages and Boras. The company cratered in spectacular fashion in the 1970s under the ownership of Citroën and De Tomaso, and it’s certainly no stranger to indignity—you may recall the Chrysler TC by Maserati of the late 1980s, an opera-windowed calamity of a car, as traduced and contemptible as could be. But the company was revived early in the aughts by Fiat as a luxury adjunct of Ferrari, with a new factory and a significantly desirable new sedan, the Quattroporte.

Since then, brand-wise, Maserati has been drifting into the shoals of mere decadence, a bratty car that appears at all the worst parties and in all the worst hands. Last month, for instance, Maserati’s publicity hits include Mel Gibson auguring his Quattroporte into a Malibu Canyon ditch and Lindsay Lohan—Hollywood’s most indefatigable wench—tooting around Bel-Bev late nights in a Maserati GranTurismo S. Throw in the cars’ product-placement appearances on “Entourage,” “The Sopranos” and “The Real Housewives of New Jersey” and you paint a picture of a brand that is becoming synonymous with a kind of pitiable narcissism, a gum-smacking, Garden State idiocy.

The new GranTurismo Convertible—a chop-top version of the GranTurismo S—is a very nice car, but if I put myself in the place of a potential customer, I have to ask myself whether I want to be associated with these numbskulls. And the answer is, not really. … My advice to Maserati: Reassign the agency person in charge of product placement—perhaps to a shallow grave somewhere. Recalibrate the brand positioning. Move relentlessly upscale. Use a lot of words that end in vowels in your advertising. Make Maserati the Prada pumps of European luxury performance cars. Avoid becoming the clear stripper heels from out by the airport.

Its an interesting illustration of the complex set of tradeoffs involved in the firm’s advertising decision.   Product placement investments may draw some marginal consumers, and might also signal the presence of a Klein-Leffler quality assuring premium, i.e. an stream of rents the firm loses if it shirks on quality.  On the other hand, these types of contracts, at least in some markets (compare payola or grocery shelf space), might at least potentially reduce demand by changing the bundle of goods being sold to the consumer (car + image).