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Responding to a new draft policy statement from the U.S. Patent & Trademark Office (USPTO), the National Institute of Standards and Technology (NIST), and the U.S. Department of Justice, Antitrust Division (DOJ) regarding remedies for infringement of standard-essential patents (SEPs), a group of 19 distinguished law, economics, and business scholars convened by the International Center for Law & Economics (ICLE) submitted comments arguing that the guidance would improperly tilt the balance of power between implementers and inventors, and could undermine incentives for innovation.

As explained in the scholars’ comments, the draft policy statement misunderstands many aspects of patent and antitrust policy. The draft notably underestimates the value of injunctions and the circumstances in which they are a necessary remedy. It also overlooks important features of the standardization process that make opportunistic behavior much less likely than policymakers typically recognize. These points are discussed in even more detail in previous work by ICLE scholars, including here and here.

These first-order considerations are only the tip of the iceberg, however. Patent policy has a huge range of second-order effects that the draft policy statement and policymakers more generally tend to overlook. Indeed, reducing patent protection has more detrimental effects on economic welfare than the conventional wisdom typically assumes. 

The comments highlight three important areas affected by SEP policy that would be undermined by the draft statement. 

  1. First, SEPs are established through an industry-wide, collaborative process that develops and protects innovations considered essential to an industry’s core functioning. This process enables firms to specialize in various functions throughout an industry, rather than vertically integrate to ensure compatibility. 
  2. Second, strong patent protection, especially of SEPs, boosts startup creation via a broader set of mechanisms than is typically recognized. 
  3. Finally, strong SEP protection is essential to safeguard U.S. technology leadership and sovereignty. 

As explained in the scholars’ comments, the draft policy statement would be detrimental on all three of these dimensions. 

To be clear, the comments do not argue that addressing these secondary effects should be a central focus of patent and antitrust policy. Instead, the point is that policymakers must deal with a far more complex set of issues than is commonly recognized; the effects of SEP policy aren’t limited to the allocation of rents among inventors and implementers (as they are sometimes framed in policy debates). Accordingly, policymakers should proceed with caution and resist the temptation to alter by fiat terms that have emerged through careful negotiation among inventors and implementers, and which have been governed for centuries by the common law of contract. 

Collaborative Standard-Setting and Specialization as Substitutes for Proprietary Standards and Vertical Integration

Intellectual property in general—and patents, more specifically—is often described as a means to increase the monetary returns from the creation and distribution of innovations. While this is undeniably the case, this framing overlooks the essential role that IP also plays in promoting specialization throughout the economy.

As Ronald Coase famously showed in his Nobel-winning work, firms must constantly decide whether to perform functions in-house (by vertically integrating), or contract them out to third parties (via the market mechanism). Coase concluded that these decisions hinge on whether the transaction costs associated with the market mechanism outweigh the cost of organizing production internally. Decades later, Oliver Williamson added a key finding to this insight. He found that among the most important transaction costs that firms encounter are those that stem from incomplete contracts and the scope for opportunistic behavior they entail.

This leads to a simple rule of thumb: as the scope for opportunistic behavior increases, firms are less likely to use the market mechanism and will instead perform tasks in-house, leading to increased vertical integration.

IP plays a key role in this process. Patents drastically reduce the transaction costs associated with the transfer of knowledge. This gives firms the opportunity to develop innovations collaboratively and without fear that trading partners might opportunistically appropriate their inventions. In turn, this leads to increased specialization. As Robert Merges observes

Patents facilitate arms-length trade of a technology-intensive input, leading to entry and specialization.

More specifically, it is worth noting that the development and commercialization of inventions can lead to two important sources of opportunistic behavior: patent holdup and patent holdout. As the assembled scholars explain in their comments, while patent holdup has drawn the lion’s share of policymaker attention, empirical and anecdotal evidence suggest that holdout is the more salient problem.

Policies that reduce these costs—especially patent holdout—in a cost-effective manner are worthwhile, with the immediate result that technologies are more widely distributed than would otherwise be the case. Inventors also see more intense and extensive incentives to produce those technologies in the first place.

The Importance of Intellectual Property Rights for Startup Activity

Strong patent rights are essential to monetize innovation, thus enabling new firms to gain a foothold in the marketplace. As the scholars’ comments explain, this is even more true for startup companies. There are three main reasons for this: 

  1. Patent rights protected by injunctions prevent established companies from simply copying innovative startups, with the expectation that they will be able to afford court-set royalties; 
  2. Patent rights can be the basis for securitization, facilitating access to startup funding; and
  3. Patent rights drive venture capital (VC) investment.

While point (1) is widely acknowledged, many fail to recognize it is particularly important for startup companies. There is abundant literature on firms’ appropriability mechanisms (these are essentially the strategies firms employ to prevent rivals from copying their inventions). The literature tells us that patent protection is far from the only strategy firms use to protect their inventions (see. e.g., here, here and here). 

The alternative appropriability mechanisms identified by these studies tend to be easier to implement for well-established firms. For instance, many firms earn returns on their inventions by incorporating them into physical products that cannot be reverse engineered. This is much easier for firms that already have a large industry presence and advanced manufacturing capabilities.  In contrast, startup companies—almost by definition—must outsource production.

Second, property rights could drive startup activity through the collateralization of IP. By offering security interests in patents, trademarks, and copyrights, startups with little or no tangible assets can obtain funding without surrendering significant equity. As Gaétan de Rassenfosse puts it

SMEs can leverage their IP to facilitate R&D financing…. [P]atents materialize the value of knowledge stock: they codify the knowledge and make it tradable, such that they can be used as collaterals. Recent theoretical evidence by Amable et al. (2010) suggests that a systematic use of patents as collateral would allow a high growth rate of innovations despite financial constraints.

Finally, there is reason to believe intellectual-property protection is an important driver of venture capital activity. Beyond simply enabling firms to earn returns on their investments, patents might signal to potential investors that a company is successful and/or valuable. Empirical research by Hsu and Ziedonis, for instance, supports this hypothesis

[W]e find a statistically significant and economically large effect of patent filings on investor estimates of start-up value…. A doubling in the patent application stock of a new venture [in] this sector is associated with a 28 percent increase in valuation, representing an upward funding-round adjustment of approximately $16.8 million for the average start-up in our sample.

In short, intellectual property can stimulate startup activity through various mechanisms. There is thus a sense that, at the margin, weakening patent protection will make it harder for entrepreneurs to embark on new business ventures.

The Role of Strong SEP Rights in Guarding Against China’s ‘Cyber Great Power’ Ambitions 

The United States, due in large measure to its strong intellectual-property protections, is a nation of innovators, and its production of IP is one of its most important comparative advantages. 

IP and its legal protections become even more important, however, when dealing with international jurisdictions, like China, that don’t offer similar levels of legal protection. By making it harder for patent holders to obtain injunctions, licensees and implementers gain the advantage in the short term, because they are able to use patented technology without having to engage in negotiations to pay the full market price. 

In the case of many SEPs—particularly those in the telecommunications sector—a great many patent holders are U.S.-based, while the lion’s share of implementers are Chinese. The anti-injunction policy espoused in the draft policy statement thus amounts to a subsidy to Chinese infringers of U.S. technology.

At the same time, China routinely undermines U.S. intellectual property protections through its industrial policy. The government’s stated goal is to promote “fair and reasonable” international rules, but it is clear that China stretches its power over intellectual property around the world by granting “anti-suit injunctions” on behalf of Chinese smartphone makers, designed to curtail enforcement of foreign companies’ patent rights.

This is part of the Chinese government’s larger approach to industrial policy, which seeks to expand Chinese power in international trade negotiations and in global standards bodies. As one Chinese Communist Party official put it

Standards are the commanding heights, the right to speak, and the right to control. Therefore, the one who obtains the standards gains the world.

Insufficient protections for intellectual property will hasten China’s objective of dominating collaborative standard development in the medium to long term. Simultaneously, this will engender a switch to greater reliance on proprietary, closed standards rather than collaborative, open standards. These harmful consequences are magnified in the context of the global technology landscape, and in light of China’s strategic effort to shape international technology standards. Chinese companies, directed by their government authorities, will gain significant control of the technologies that will underpin tomorrow’s digital goods and services.

The scholars convened by ICLE were not alone in voicing these fears. David Teece (also a signatory to the ICLE-convened comments), for example, surmises in his comments that: 

The US government, in reviewing competition policy issues that might impact standards, therefore needs to be aware that the issues at hand have tremendous geopolitical consequences and cannot be looked at in isolation…. Success in this regard will promote competition and is our best chance to maintain technological leadership—and, along with it, long-term economic growth and consumer welfare and national security.

Similarly, comments from the Center for Strategic and International Studies (signed by, among others, former USPTO Director Anrei Iancu, former NIST Director Walter Copan, and former Deputy Secretary of Defense John Hamre) argue that the draft policy statement would benefit Chinese firms at U.S. firms’ expense:

What is more, the largest short-term and long-term beneficiaries of the 2021 Draft Policy Statement are firms based in China. Currently, China is the world’s largest consumer of SEP-based technology, so weakening protection of American owned patents directly benefits Chinese manufacturers. The unintended effect of the 2021 Draft Policy Statement will be to support Chinese efforts to dominate critical technology standards and other advanced technologies, such as 5G. Put simply, devaluing U.S. patents is akin to a subsidized tech transfer to China.

With Chinese authorities joining standardization bodies and increasingly claiming jurisdiction over F/RAND disputes, there should be careful reevaluation of the ways the draft policy statement would further weaken the United States’ comparative advantage in IP-dependent technological innovation. 

Conclusion

In short, weakening patent protection could have detrimental ramifications that are routinely overlooked by policymakers. These include increasing inventors’ incentives to vertically integrate rather than develop innovations collaboratively; reducing startup activity (especially when combined with antitrust enforcers’ newfound proclivity to challenge startup acquisitions); and eroding America’s global technology leadership, particularly with respect to China.

For these reasons (and others), the text of the draft policy statement should be reconsidered and either revised substantially to better reflect these concerns or withdrawn entirely. 

The signatories to the comments are:

Alden F. AbbottSenior Research Fellow, Mercatus Center
George Mason University
Former General Counsel, U.S. Federal Trade Commission
Jonathan BarnettTorrey H. Webb Professor of Law
University of Southern California
Ronald A. CassDean Emeritus, School of Law
Boston University
Former Commissioner and Vice-Chairman, U.S. International Trade Commission
Giuseppe ColangeloJean Monnet Chair in European Innovation Policy and Associate Professor of Competition Law & Economics
University of Basilicata and LUISS (Italy)
Richard A. EpsteinLaurence A. Tisch Professor of Law
New York University
Bowman HeidenExecutive Director, Tusher Initiative at the Haas School of Business
University of California, Berkeley
Justin (Gus) HurwitzProfessor of Law
University of Nebraska
Thomas A. LambertWall Chair in Corporate Law and Governance
University of Missouri
Stan J. LiebowitzAshbel Smith Professor of Economics
University of Texas at Dallas
John E. LopatkaA. Robert Noll Distinguished Professor of Law
Penn State University
Keith MallinsonFounder and Managing Partner
WiseHarbor
Geoffrey A. MannePresident and Founder
International Center for Law & Economics
Adam MossoffProfessor of Law
George Mason University
Kristen Osenga Austin E. Owen Research Scholar and Professor of Law
University of Richmond
Vernon L. SmithGeorge L. Argyros Endowed Chair in Finance and Economics
Chapman University
Nobel Laureate in Economics (2002)
Daniel F. SpulberElinor Hobbs Distinguished Professor of International Business
Northwestern University
David J. TeeceThomas W. Tusher Professor in Global Business
University of California, Berkeley
Joshua D. WrightUniversity Professor of Law
George Mason University
Former Commissioner, U.S. Federal Trade Commission
John M. YunAssociate Professor of Law
George Mason University
Former Acting Deputy Assistant Director, Bureau of Economics, U.S. Federal Trade Commission 

European Union (EU) legislators are now considering an Artificial Intelligence Act (AIA)—the original draft of which was published by the European Commission in April 2021—that aims to ensure AI systems are safe in a number of uses designated as “high risk.” One of the big problems with the AIA is that, as originally drafted, it is not at all limited to AI, but would be sweeping legislation covering virtually all software. The EU governments seem to have realized this and are trying to fix the proposal. However, some pressure groups are pushing in the opposite direction. 

While there can be reasonable debate about what constitutes AI, almost no one would intuitively consider most of the software covered by the original AIA draft to be artificial intelligence. Ben Mueller and I covered this in more detail in our report “More Than Meets The AI: The Hidden Costs of a European Software Law.” Among other issues, the proposal would seriously undermine the legitimacy of the legislative process: the public is told that a law is meant to cover one sphere of life, but it mostly covers something different. 

It also does not appear that the Commission drafters seriously considered the costs that would arise from imposing the AIA’s regulatory regime on virtually all software across a sphere of “high-risk” uses that include education, employment, and personal finance.

The following example illustrates how the AIA would work in practice: A school develops a simple logic-based expert system to assist in making decisions related to admissions. It could be as basic as a Microsoft Excel macro that checks if a candidate is in the school’s catchment area based on the candidate’s postal code, by comparing the content of one column of a spreadsheet with another column. 

Under the AIA’s current definitions, this would not only be an “AI system,” but also a “high-risk AI system” (because it is “intended to be used for the purpose of determining access or assigning natural persons to educational and vocational training institutions” – Annex III of the AIA). Hence, to use this simple Excel macro, the school would be legally required to, among other things:

  1. put in place a quality management system;
  2. prepare detailed “technical documentation”;
  3. create a system for logging and audit trails;
  4. conduct a conformity assessment (likely requiring costly legal advice);
  5. issue an “EU declaration of conformity”; and
  6. register the “AI system” in the EU database of high-risk AI systems.

This does not sound like proportionate regulation. 

Some governments of EU member states have been pushing for a narrower definition of an AI system, drawing rebuke from pressure groups Access Now and Algorithm Watch, who issued a statement effectively defending the “all-software” approach. For its part, the European Council, which represents member states, unveiled compromise text in November 2021 that changed general provisions around the AIA’s scope (Article 3), but not the list of in-scope techniques (Annex I).

While the new definition appears slightly narrower, it remains overly broad and will create significant uncertainty. It is likely that many software developers and users will require costly legal advice to determine whether a particular piece of software in a particular use case is in scope or not. 

The “core” of the new definition is found in Article(3)(1)(ii), according to which an AI system is one that: “infers how to achieve a given set of human-defined objectives using learning, reasoning or modeling implemented with the techniques and approaches listed in Annex I.” This redefinition does precious little to solve the AIA’s original flaws. A legal inquiry focused on an AI system’s capacity for “reasoning” and “modeling” will tend either toward overinclusion or toward imagining a software reality that doesn’t exist at all. 

The revised text can still be interpreted so broadly as to cover virtually all software. Given that the list of in-scope techniques (Annex I) was not changed, any “reasoning” implemented with “Logic- and knowledge-based approaches, including knowledge representation, inductive (logic) programming, knowledge bases, inference and deductive engines, (symbolic) reasoning and expert systems” (i.e., all software) remains in scope. In practice, the combined effect of those two provisions will be hard to distinguish from the original Commission draft. In other words, we still have an all-software law, not an AI-specific law. 

The AIA deliberations highlight two basic difficulties in regulating AI. First, it is likely that many activists and legislators have in mind science-fiction scenarios of strong AI (or “artificial general intelligence”) when pushing for regulations that will apply in a world where only weak AI exists. Strong AI is AI that is at least equal to human intelligence and is therefore capable of some form of agency. Weak AI is akin to  software techniques that augment human processing of information. For as long as computer scientists have been thinking about AI, there have been serious doubts that software systems can ever achieve generalized intelligence or become strong AI. 

Thus, what’s really at stake in regulating AI is regulating software-enabled extensions of human agency. But leaving aside the activists who explicitly do want controls on all software, lawmakers who promote the AIA have something in mind conceptually distinct from “software.” This raises the question of whether the “AI” that lawmakers imagine they are regulating is actually a null set. These laws can only regulate the equivalent of Excel spreadsheets at scale, and lawmakers need to think seriously about how they intervene. For such interventions to be deemed necessary, there should at least be quantifiable consumer harms that require redress. Focusing regulation on such broad topics as “AI” or “software” is almost certain to generate unacceptable unseen costs.

Even if we limit our concern to the real, weak AI, settling on an accepted “scientific” definition will be a challenge. Lawmakers inevitably will include either too much or too little. Overly inclusive regulation may seem like a good way to “future proof” the rules, but such future-proofing comes at the cost of significant legal uncertainty. It will also come at the cost of making some uses of software too costly to be worthwhile.

This post is the second in a planned series. The first installment can be found here.

In just over a century since its dawn, liberalism had reshaped much of the world along the lines of individualism, free markets, private property, contract, trade, and competition. A modest laissez-faire political philosophy that had begun to germinate in the minds of French Physiocrats in the early 18th century had, scarcely 150 years later, inspired the constitution of the world’s nascent leading power, the United States. But it wasn’t all plain sailing, as liberalism’s expansion eventually galvanized strong social, political, cultural, economic and even spiritual opposition, which coalesced around two main ideologies: socialism and fascism.

In this post, I explore the collectivist backlash against liberalism, its deeper meaning from the perspective of political philosophy, and the main features of its two main antagonists—especially as they relate to competition and competition regulation. Ultimately, the purpose is to show that, in trying to respond to the collectivist threat, successive iterations of neoliberalism integrated some of collectivism’s key postulates in an attempt to create a synthesis between opposing philosophical currents. Yet this “mostly” liberal synthesis, which serves as the philosophical basis of many competition systems today, is afflicted with the same collectivist flaws that the synthesis purported to overthrow (as I will elaborate in subsequent posts).

The Collectivist Backlash

By the early 20th century, two deeply illiberal movements bent on exposing and demolishing the fallacies and contradictions of liberalism had succeeded in capturing the imagination and support of the masses. These collectivist ideologies were Marxian socialism/communism on the left and fascism/Nazism on the right. Although ultimately distinct, they both rejected the basic postulates of classical liberalism. 

Socially, both agreed that liberalism uprooted traditional ways of life and dissolved the bonds of solidarity that had hitherto governed social relationships. This is the view expressed, e.g., in Karl Polanyi’s influential book The Great Transformation, in which the Christian socialist Polanyi contends that “disembedded” liberal markets would inevitably come to be governed again by the principles of solidarity and reciprocity (under socialism/communism). Similarly, although not technically a work on political economy or philosophy, Knut Hamsun’s 1917 novel Growth of the Soil perfectly captures the right’s rejection of liberal progress, materialism, industrialization, and the idealization of traditional bucolic life. The Norwegian Hamsun, winner of the 1920 Nobel Prize in Literature, later became an enthusiastic supporter of the Third Reich. 

Politically and culturally, Marxist historical materialism posited that liberal democracy (individual freedoms, periodic elections, etc.) and liberal culture (literature, art, cinema) served the interests of the economically dominant class: the bourgeoisie, i.e., the owners of the means of production. Fascists and Nazis likewise deplored liberal democracy as a sign of decadence and weakness and viewed liberal culture as an oxymoron: a hotbed of degeneracy built on the dilution of national and racial identities. 

Economically, the more theoretically robust leftist critiques rallied around Marx’ scientific socialism, which held that capitalism—the economic system that served as the embodiment of a liberal social order built on private property, contract, and competition—was exploitative and doomed to consume itself. From the right, it was argued that liberalism enabled individual interest to override what was good for the collective—an unpardonable sin in the eyes of an ideology built around robust nodes of collectivist identity, such as nation, race, and history.

A Recurrent Civilizational Struggle

The rise of socialism and fascism marked the beginning of a civilizational shift that many have referred to as the lowest ebb of liberalism. By the 1930s, totalitarian regimes utterly incompatible with a liberal worldview were in place in several European countries, such as Italy, Russia, Germany, Portugal, Spain, and Romania. As Austrian economist Ludwig Von Mises lamented, liberals and liberal ideas—at least, in the classical sense—had been driven to the fringes of society and academia, subject of scorn and ridicule. Even the liberally oriented, like economist John Maynard Keynes, were declaring the “end of laissez-faire.” 

At its most basic level, I believe that the conflict can be understood, from a philosophical perspective, as an iteration of the recurrent struggle between individualism and collectivism.

For instance, the German sociologist Ferdinand Tonnies has described the perennial tension between two elementary ways of conceiving the social order: Gesellschaft and Gemeinschaft. Gesellschaft refers to societies made up of individuals held together by formal bonds, such as contracts, whereas Gemeinschaft refers to communities held together by organic bonds, such as kinship, which function together as parts of an integrated whole. American law professor David Gerber explains that, from the Gemeinschaft perspective, competition was seen as an enemy:

Gemeinschaft required co-operation and the accommodation of individual interests to the commonwealth, but competition, in contrast, demanded that individuals be concerned first and foremost with their own self-interest. From this communitarian perspective, competition looked suspiciously like exploitation. The combined effect of competition and of political and economic inequality was that the strong would get stronger, the weak would get weaker, and the strong would use their strength to take from the weak.

Tonnies himself thought that dominant liberal notions of Gesellschaft would inevitably give way to greater integration of a socialist Gemeinschaft. This was somewhat reminiscent of Polanyi’s distinction between embedded and disembedded markets; Karl Popper’s “open” and “closed” societies; and possibly, albeit somewhat more remotely, David Hume’s distinction between “concord” and “union.” While we should be wary of reductivism, a common theme underlying these works (at least two of which are not liberal) is the conflict between opposing views of society: one that posits the subordination of the individual to some larger community or group versus another that anoints the individual’s well-being as the ultimate measure of the value of social arrangements. That basic tension, in turn, reverberates across social and economic questions, including as they relate to markets, competition, and the functions of the state.

 Competition Under Marxism

Karl Marx argued that the course of history was determined by material relations among the social classes under any given system of production (historical materialism and dialectical materialism, respectively). Under that view, communism was not a desirable “state of affairs,” but the inevitable consequence of social forces as they then existed. As Marx and Friedrich Engels wrote in The Communist Manifesto:

Communism is for us not a state of affairs which is to be established, an ideal to which reality [will] have to adjust itself. We call communism the real movement which abolishes the present state of things. The conditions of this movement result from the premises now in existence.

Thus, following the ineluctable laws of history, which Marx claimed to have discovered, capitalism would inevitably come to be replaced by socialism and, subsequently, communism. Under socialism, the means of production would be controlled not by individuals interacting in a free market, but by the political process under the aegis of the state, with the corollary that planning would come to substitute for competition as the economy’s steering mechanism. This would then give way to communism: a stateless utopia in which everything would be owned by the community and where there would be no class divisions. This would come about as a result of the interplay of several factors inherent to capitalism, such as the exploitation of the working class and the impossibility of sustained competition.

Per Marx, under capitalism, owners of the means of production (i.e., the capitalists or the bourgeoisie) appropriate the surplus value (i.e., the difference between the sale price of a product and the cost to produce it) generated by workers. Thus, the lower the wages and the longer the working hours of the worker, the greater the profit accrued to the capitalist. This was not an unfortunate byproduct that could be reformed, Marx posited, but a central feature of the system that was solvable only through revolution. Moreover, the laws, culture, media, politics, faith, and other institutions that might ordinarily open alternative avenues to nonviolent resolution of class tensions (the “super-structure”) were themselves byproducts of the underlying material relations of production (“structure” or “base”), and thus served to justify and uphold them.

The Marxian position further held that competition—the lodestar and governing principle of the capitalist economy—was, like the system itself, unsustainable. It would inevitably end up cannibalizing itself. But the claim is a bit more subtle than critics of communism often assume. As Leon Trotsky wrote in the 1939 pamphlet Marxism in our time:

Relations between capitalists, who exploit the workers, are defined by competition, which for long endures as the mainspring of capitalist progress.

Two notions expressed seamlessly in Trotsky’s statement need to be understood about the Marxian perception of competition. The first is that, since capitalism is exploitative of workers and competition among capitalists is the engine of capitalism, competition is itself effectively a mechanism of exploitation. Capitalists compete through the cheapening of commodities and the subsequent reinvestment of the surplus appropriated from labor into the expansion of productivity. The most exploitative capitalist, therefore, generally has the advantage (this hinges, of course, largely on the validity of the labor theory of value).

At the same time, however, Marxists (including Marx himself) recognized the economic and technological progress brought about through capitalism and competition. This is what Trotsky means when he refers to competition as the “mainspring of capitalist progress” and, by extension, the “historical justification of the capitalist.” The implication is that, if competition were to cease, the entire capitalist edifice and the political philosophy undergirding it (liberalism) would crumble, as well.

Whereas liberalism and competition were intertwined, liberalism and monopoly could not coexist. Instead, monopolists demanded—and, due to their political clout, were able to obtain—an increasingly powerful central state capable of imposing protective tariffs and other measures for their benefit and protection. Trotsky again:

The elimination of competition by monopoly marks the beginning of the disintegration of capitalist society. Competition was the creative mainspring of capitalism and the historical justification of the capitalist. By the same token the elimination of competition marks the transformation of stockholders into social parasites. Competition had to have certain liberties, a liberal atmosphere, a regime of democracy, of commercial cosmopolitanism. Monopoly needs as authoritative government as possible, tariff walls, “its own” sources of raw materials and arenas of marketing (colonies). The last word in the disintegration of monopolistic capital is fascism.

Marxian theory posited that this outcome was destined to happen for two reasons. First, because:

The battle of competition is fought by cheapening of commodities. The cheapness of commodities depends, ceteris paribus, on the productiveness of labor, and this again on the scale of production. Therefore, the larger capital beats the smaller.

In other words, competition stimulated the progressive development of productivity, which depended on the scale of production, which depended, in turn, on firm size. Ultimately, therefore, competition ended up producing a handful of large companies that would subjugate competitors and cannibalize competition. Thus, the more wealth that capitalism generated—and Marx had no doubts that capitalism was a wealth-generating machine—the more it sowed the seeds of its own destruction. Hence:

While stimulating the progressive development of technique, competition gradually consumes, not only the intermediary layers but itself as well. Over the corpses and the semi-corpses of small and middling capitalists, emerges an ever-decreasing number of ever more powerful capitalist overlords. Thus, out of “honest”, “democratic”, “progressive” competition grows irrevocably “harmful”, “parasitic”, “reactionary” monopoly.

The second reason Marxists believed the downfall of capitalism was inevitable is that the capitalists squeezed out of the market by the competitive process would become proletarians, which would create a glut of labor (“a growing reserve army of the unemployed”), which would in turn depress wages. This process of proletarianization, combined with the “revolutionary combination by association” of workers in factories would raise class consciousness and ultimately lead to the toppling of capitalism and the ushering in of socialism.

Thus, there is a clear nexus in Marxian theory between the end of competition and the end of capitalism (and therefore liberalism), whereby monopoly is deduced from the inherent tendencies of capitalism, and the end of capitalism, in turn, is deduced from the ineluctable advent of monopoly. What follows (i.e., socialism and communism) are collectivist systems that purport to be run according to the principles of solidarity and cooperation (“from each according to his abilities, to each according to his needs”), where there is therefore no place (and no need) for competition. Instead, the Marxian Gemeinschaft would organize the economy around rationalistic lines, substituting cut-throat competition for centralized command by the state (later, the community) that would rein in hitherto uncontrollable economic forces in a heroic victory over the chaos and unpredictability of capitalism. This would, of course, also bring about the end of liberalism, with individualism, private property, and other liberal freedoms jettisoned as mouthpieces of bourgeoisie class interests. Chairman Mao Zedong put it succinctly:

We must affirm anew the discipline of the Party, namely:

1. The individual is subordinate to the organization;

2. The minority is subordinate to the majority.

Competition Under Fascism/Nazism

Formidable as it was, the Marxian attack on liberalism was just one side of the coin. Decades after the articulation of Marxian theory in the mid-19th century, fascism—founded by former socialist Benito Mussolini in 1915—emerged as a militant alternative to both liberalism and socialism/communism.

In essence, fascism was, like communism, unapologetically collectivist. But whereas socialists considered class to be the relevant building block of society, fascists viewed the individual as part of a greater national, racial, and historical entity embodied in the state and its leadership. As Mussolini wrote in his 1932 pamphlet The Doctrine of Fascism:

Anti-individualistic, the Fascist conception of life stresses the importance of the State and accepts the individual only in so far as his interests coincide with those of the State, which stands for the conscience of the universal, will of man as a historic entity. It is opposed to classical liberalism […] liberalism denied the State in the name of the individual; Fascism reasserts.

Accordingly, fascism leads to an amalgamation of state and individual that is not just a politico-economic arrangement where the latter formally submits to the former, but a conception of life. This worldview is, of course, diametrically opposed to core liberal principles, such as personal freedom, individualism, and the minimal state. And surely enough, fascists saw these liberal values as signs of civilizational decadence (as expressed most notably by Oswald Spengler in The Decline of the West—a book that greatly inspired Nazi ideology). Instead, they posited that the only freedom worthy of the name existed within the state; that peace and cosmopolitanism were illusory; and that man was man only by virtue of his membership and contribution to nation and race.

But fascism was also opposed to Marxian socialism. At its most basic, the schism between the two worldviews can be understood in terms of the fascist rejection of materialism, which was a centerpiece of Marxian thought. Fascists denied the equivalence of material well-being and happiness, instead viewing man as fulfilled by hardship, war, and by playing his part in the grand tapestry of history, whose real protagonists were nation-states. While admitting the importance of economic life—e.g., of efficiency and technological innovation—fascists denied that material relations unequivocally determined the course of history, insisting instead on the preponderance of spiritual and heroic acts (i.e., acts with no economic motive) as drivers of social change. “Sanctity and heroism,” Mussolini wrote, are at the root of the fascist belief system, not material self-interest.  

This belief system also extended to economic matters, including competition. The Third Reich respected private property rights to some degree—among other reasons, because Adolf Hitler believed it would encourage creative competition and innovation. The Nazis’ overarching principle, however, was that all economic activity and all private property ultimately be subordinated to the “common good,” as interpreted by the state. In the words of Hitler:

I want everyone to keep what he has earned subject to the principle that the good of the community takes priority over that of the individual. But the State should retain control; every owner should feel himself to be an agent of the State. […] The Third Reich will always retain the right to control property owners.

The solution was a totalitarian system of government control that maintained private enterprise and profit incentives as spurs to efficient management, but narrowly circumscribed the traditional freedom of entrepreneurs. Economic historians Christoph Buchheim and Jonas Scherner have characterized the Nazis’ economic system as a “state-directed private ownership economy,” a partnership in which the state was the principal and the business was the agent. Economic activity would be judged according to the criteria of “strategic necessity and social utility,” encompassing an array of social, political, practical, and ideological goals. Some have referred to this as the “primacy of politics over economics” approach.

For instance, in supervising cross-border acquisitions (today’s mergers), the state “sought to suppress purely economic motives and to substitute some rough notion of ‘racial political’ priority when supervising industrial acquisitions or controlling existing German subsidiaries.” The Reich selectively applied the 1933 Act for the Formation of Compulsory Cartels in regulating cartels that had been formed under the Weimar Republic with the Cartel Act of 1923. But the legislation also appears to have been applied to protect small and medium-sized enterprises, an important source of the party’s political support, from ruinous competition. This is reminiscent of German industrialist and Nazi supporter Gustav Krupp’s “Third Form”: 

Between “free” economy and state capitalism there is a third form: the economy that is free from obligations, but has a sense of inner duty to the state. 

In short, competition and individual achievement had to be balanced with cooperation, mediated by the self-appointed guardians of the “general interest.” In contrast with Marxian socialism/communism, the long-term goal of the Nazi regime was not to abolish competition, but to harness it to serve the aims of the regime. As Franz Böhm—cofounder, with Walter Eucken, of the Freiburg School and its theory of “ordoliberalism”—wrote in his advice to the Nazi government:

The state regulatory framework gives the Reich economic leadership the power to make administrative commands applying either the indirect or the direct steering competence according to need, functionality, and political intent. The leadership may go as far as it wishes in this regard, for example, by suspending competition-based economic steering and returning to it when appropriate. 

Conclusion

After a century of expansion, opposition to classical liberalism started to coalesce around two nodes: Marxism on the left, and fascism/Nazism on the right. What ensued was a civilizational crisis of material, social, and spiritual proportions that, at its most basic level, can be understood as an iteration of the perennial struggle between individualism and collectivism. On the one hand, liberals like J.S. Mill had argued forcefully that “the only freedom which deserves the name, is that of pursuing our own good in our own way.” In stark contrast, Mussolini wrote that “fascism stands for liberty, and for the only liberty worth having, the liberty of the state and of the individual within the state.” The former position is rooted in a humanist view that enshrines the individual at the center of the social order; the latter in a communitarian ideal that sees him as subordinate to forces that supersede him.

As I have explained in the previous post, the philosophical undercurrents of both positions are ancient. A more immediate precursor of the collectivist standpoint, however, can be found in German idealism and particularly in Georg Wilhelm Friedrich Hegel. In The Philosophy of Right, he wrote:

A single person, I need hardly say, is something subordinate, and as such he must dedicate himself to the ethical whole. Hence, if the state claims life, the individual must surrender it. All the worth which the human being possesses […] he possesses only through the state.

This broader clash is reflected, directly and indirectly, in notions of competition and competition regulation. Classical liberals sought to liberate competition from regulatory fetters. Marxism “predicted” its downfall and envisioned a social order without it. Fascism/Nazism sought to wrest it from the hands of greedy self-interest and mold it to serve the many and the fluctuating objectives of the state and its vision of the common good

In the next post, I will discuss how this has influenced the neoliberal philosophy that is still at the heart of many competition systems today. I will argue that two strands of neoliberalism emerged, which each attempted to resolve the challenge of collectivism in distinct ways. 

One strand, associated with a continental understanding of liberalism and epitomized by the Freiburg School, sought to strike a “mostly liberal” compromise between liberalism and collectivism—a “Third Way” between opposites. In doing so, however, it may have indulged in some of the same collectivist vices that it initially sought to avoid— such as vast government discretion and the imposition of myriad “higher” goals on society. 

The other strand, represented by Anglo-American liberalism of the sort espoused by Friedrich Hayek and Milton Friedman, was less conciliatory. It attempted to reform, rather than reinvent, liberalism. Their prescriptions involved creating a strong legal framework conducive to economic efficiency against a background of limited government discretion, freedom, and the rule of law.

There has been a wave of legislative proposals on both sides of the Atlantic that purport to improve consumer choice and the competitiveness of digital markets. In a new working paper published by the Stanford-Vienna Transatlantic Technology Law Forum, I analyzed five such bills: the EU Digital Services Act, the EU Digital Markets Act, and U.S. bills sponsored by Rep. David Cicilline (D-R.I.), Rep. Mary Gay Scanlon (D-Pa.), Sen. Amy Klobuchar (D-Minn.) and Sen. Richard Blumenthal (D-Conn.). I concluded that all those bills would have negative and unaddressed consequences in terms of information privacy and security.

In this post, I present the main points from the working paper regarding two regulatory solutions: (1) mandating interoperability and (2) mandating device neutrality (which leads to a possibility of sideloading applications, a special case of interoperability.) The full working paper  also covers the risks of compulsory data access (by vetted researchers or by authorities).

Interoperability

Interoperability is increasingly presented as a potential solution to some of the alleged problems associated with digital services and with large online platforms, in particular (see, e.g., here and here). For example, interoperability might allow third-party developers to offer different “flavors” of social-media newsfeeds, with varying approaches to content ranking and moderation. This way, it might matter less than it does now what content moderation decisions Facebook or other platforms make. Facebook users could choose alternative content moderators, delivering the kind of news feed that those users expect.

The concept of interoperability is popular not only among thought leaders, but also among legislators. The DMA, as well as the U.S. bills by Rep. Scanlon, Rep. Cicilline, and Sen. Klobuchar, all include interoperability mandates.

At the most basic level, interoperability means a capacity to exchange information between computer systems. Email is an example of an interoperable standard that most of us use today. It is telling that supporters of interoperability mandates use services like email as their model examples. Email (more precisely, the SMTP protocol) originally was designed in a notoriously insecure way. It is a perfect example of the opposite of privacy by design. A good analogy for the levels of privacy and security provided by email, as originally conceived, is that of a postcard message sent without an envelope that passes through many hands before reaching the addressee. Even today, email continues to be a source of security concerns, due to its prioritization of interoperability (see, e.g., here).

Using currently available technology to provide alternative interfaces or moderation services for social-media platforms, third-party developers would have to be able to access much of the platform content that is potentially available to a user. This would include not just content produced by users who explicitly agree to share their data with third parties, but also content—e.g., posts, comments, likes—created by others who may have strong objections to such sharing. It does not require much imagination to see how, without adequate safeguards, mandating this kind of information exchange would inevitably result in something akin to the 2018 Cambridge Analytica data scandal.

There are several constraints for interoperability frameworks that must be in place to safeguard privacy and security effectively.

First, solutions should be targeted toward real users of digital services, without assuming away some common but inconvenient characteristics. In particular, solutions should not assume unrealistic levels of user interest and technical acumen.

Second, solutions must address the issue of effective enforcement. Even the best information privacy and security laws do not, in and of themselves, solve any problems. Such rules must be followed, which requires addressing the problems of procedure and enforcement. In both the EU and the United States, the current framework and practice of privacy law enforcement offers little confidence that misuses of broadly construed interoperability would be detected and prosecuted, much less that they would be prevented. This is especially true for smaller and “judgment-proof” rulebreakers, including those from foreign jurisdictions.

If the service providers are placed under a broad interoperability mandate with non-discrimination provisions (preventing effective vetting of third parties, unilateral denials of access, and so on), then the burden placed on law enforcement will be mammoth. Just one bad actor, perhaps working from Russia or North Korea, could cause immense damage by taking advantage of interoperability mandates to exfiltrate user data or to execute a hacking (e.g., phishing) campaign. Of course, such foreign bad actors would be in violation of the EU GDPR, but that is unlikely to have any practical significance.

It would not be sufficient to allow (or require) service providers to enforce merely technical filters, such as a requirement to check whether the interoperating third parties’ IP address comes from a jurisdiction with sufficient privacy protections. Working around such technical limitations does not pose a significant difficulty to motivated bad actors.

Art 6(1) of the original DMA proposal included some general interoperability provisions applicable to “gatekeepers”—i.e., the largest online platforms. Those interoperability mandates were somewhat limited – applying only to “ancillary services” (e.g., payment or identification services) or requiring only one-way data portability. However, even here, there may be some risks. For example, users may choose poorly secured identification services and thus become victims of attacks. Therefore, it is important that gatekeepers not be prevented from protecting their users adequately.

The drafts of the DMA adopted by the European Council and by the European Parliament attempt to address that, but they only allow gatekeepers to do what is “strictly necessary” (Council) or “indispensable” (Parliament). This standard may be too high and could push gatekeepers to offer lower security to avoid liability for adopting measures that would be judged by EU institutions and the courts as going beyond what is strictly necessary or indispensable.

The more recent DMA proposal from the European Parliament goes significantly beyond the original proposal, mandating full interoperability of a number of “independent interpersonal communication services” and of social-networking services. The Parliament’s proposals are good examples of overly broad and irresponsible interoperability mandates. They would cover “any providers” wanting to interconnect with gatekeepers, without adequate vetting. The safeguard proviso mentioning “high level of security and personal data protection” does not come close to addressing the seriousness of the risks created by the mandate. Instead of facing up to the risks and ensuring that the mandate itself be limited in ways that minimize them, the proposal seems just to expect that the gatekeepers can solve the problems if they only “nerd harder.”

All U.S. bills considered here introduce some interoperability mandates and none of them do so in a way that would effectively safeguard information privacy and security. For example, Rep. Cicilline’s American Choice and Innovation Online Act (ACIOA) would make it unlawful (in Section 2(b)(1)) to:

All U.S. bills considered here introduce some interoperability mandates and none of them do so in a way that would effectively safeguard information privacy and security. For example, Rep. Cicilline’s American Choice and Innovation Online Act (ACIOA) would make it unlawful (in Section 2(b)(1)) to:

restrict or impede the capacity of a business user to access or interoperate with the same platform, operating system, hardware and software features that are available to the covered platform operator’s own products, services, or lines of business.

The language of the prohibition in Sen. Klobuchar’s American Innovation and Choice Online Act (AICOA) is similar (also in Section 2(b)(1)). Both ACIOA and AICOA allow for affirmative defenses that a service provider could use if sued under the statute. While those defenses mention privacy and security, they are narrow (“narrowly tailored, could not be achieved through a less discriminatory means, was nonpretextual, and was necessary”) and would not prevent service providers from incurring significant litigation costs. Hence, just like the provisions of the DMA, they would heavily incentivize covered service providers not to adopt the most effective protections of privacy and security.

Device Neutrality (Sideloading)

Article 6(1)(c) of the DMA contains specific provisions about “sideloading”—i.e., allowing installation of third-party software through alternative app stores other than the one provided by the manufacturer (e.g., Apple’s App Store for iOS devices). A similar express provision for sideloading is included in Sen. Blumenthal’s Open App Markets Act (Section 3(d)(2)). Moreover, the broad interoperability provisions in the other U.S. bills discussed above may also be interpreted to require permitting sideloading.

A sideloading mandate aims to give users more choice. It can only achieve this, however, by taking away the option of choosing a device with a “walled garden” approach to privacy and security (such as is taken by Apple with iOS). By taking away the choice of a walled garden environment, a sideloading mandate will effectively force users to use whatever alternative app stores are preferred by particular app developers. App developers would have strong incentive to set up their own app stores or to move their apps to app stores with the least friction (for developers, not users), which would also mean the least privacy and security scrutiny.

This is not to say that Apple’s app scrutiny is perfect, but it is reasonable for an ordinary user to prefer Apple’s approach because it provides greater security (see, e.g., here and here). Thus, a legislative choice to override the revealed preference of millions of users for a “walled garden” approach should not be made lightly. 

Privacy and security safeguards in the DMA’s sideloading provisions, as amended by the European Council and by the European Parliament, as well as in Sen. Blumenthal’s Open App Markets Act, share the same problem of narrowness as the safeguards discussed above.

There is a more general privacy and security issue here, however, that those safeguards cannot address. The proposed sideloading mandate would prohibit outright a privacy and security-protection model that many users rationally choose today. Even with broader exemptions, this loss will be genuine. It is unclear whether taking away this choice from users is justified.

Conclusion

All the U.S. and EU legislative proposals considered here betray a policy preference of privileging uncertain and speculative competition gains at the expense of introducing a new and clear danger to information privacy and security. The proponents of these (or even stronger) legislative interventions seem much more concerned, for example, that privacy safeguards are “not abused by Apple and Google to protect their respective app store monopoly in the guise of user security” (source).

Given the problems with ensuring effective enforcement of privacy protections (especially with respect to actors coming from outside the EU, the United States, and other broadly privacy-respecting jurisdictions), the lip service paid by the legislative proposals to privacy and security is not much more than that. Policymakers should be expected to offer a much more detailed vision of concrete safeguards and mechanisms of enforcement when proposing rules that come with significant and entirely predictable privacy and security risks. Such vision is lacking on both sides of the Atlantic.

I do not want to suggest that interoperability is undesirable. The argument of this paper was focused on legally mandated interoperability. Firms experiment with interoperability all the time—the prevalence of open APIs on the Internet is testament to this. My aim, however, is to highlight that interoperability is complex and exposes firms and their users to potentially large-scale cyber vulnerabilities.

Generalized obligations on firms to open their data, or to create service interoperability, can short-circuit the private ordering processes that seek out those forms of interoperability and sharing that pass a cost-benefit test. The result will likely be both overinclusive and underinclusive. It would be overinclusive to require all firms in the regulated class to broadly open their services and data to all interested parties, even where it wouldn’t make sense for privacy, security, or other efficiency reasons. It is underinclusive in that the broad mandate will necessarily sap regulated firms’ resources and deter them from looking for new innovative uses that might make sense, but that are outside of the broad mandate. Thus, the likely result is less security and privacy, more expense, and less innovation.

In a new paper, Giuseppe Colangelo and Oscar Borgogno investigate whether antitrust policy is sufficiently flexible to keep up with the dynamics of digital app stores, and whether regulatory interventions are required in order to address their unique features. The authors summarize their findings in this blog post.

App stores are at the forefront of policy debates surrounding digital markets. The gatekeeping position of Apple and Google in the App Store and Google Play Store, respectively, and related concerns about the companies’ rule-setting and dual role, have been the subject of market studies launched by the Australian Competition and Consumer Commission (ACCC), the Netherlands Authority for Consumers & Markets (ACM), the U.K. Competition and Markets Authority (CMA), the Japan Federal Trade Commission (JFTC), and the U.S. House of Representatives.

Likewise, the terms and conditions for accessing app stores—such as in-app purchasing rules, restrictions on freedom of choice for smartphone payment apps, and near field communication (NFC) limitations—face scrutiny from courts and antitrust authorities around the world.

Finally, legislative initiatives envisage obligations explicitly addressed to app stores. Notably, the European Digital Markets Act (DMA) and some U.S. bills (e.g., the American Innovation and Choice Online Act and the Open App Markets Act, both of which are scheduled to be marked up Jan. 20 by the Senate Judiciary Committee) prohibit designated platforms from, for example: discriminating among users by engaging in self-preferencing and applying unfair access conditions; preventing users from sideloading and uninstalling pre-installed apps; impeding data portability and interoperability; or imposing anti-steering provisions. Likewise, South Korea has recently prohibited app-store operators in dominant market positions from forcing payment systems upon content providers and inappropriately delaying the review of, or deleting, mobile content from app markets.

Despite their differences, these international legislative initiatives do share the same aims and concerns. By and large, they question the role of competition law in the digital economy. In the case of app stores, these regulatory interventions attempt to introduce a neutrality regime, with the aim of increasing contestability, facilitating the possibility of switching by users, tackling conflicts of interests, and addressing imbalances in the commercial relationship. Ultimately, these proposals would treat online platforms as akin to common carriers or public utilities.

All of these initiatives assume antitrust is currently falling, because competition rules apply ex post and require an extensive investigation on a case-by-case basis. But is that really the case?

Platform and Device Neutrality Regime

Focusing on the content of the European, German, and U.S. legislative initiatives, the neutrality regime envisaged for app stores would introduce obligations in terms of both device and platform neutrality. The former includes provisions on app uninstalling, sideloading, app switching, access to technical functionality, and the possibility of changing default settings.  The latter entail data portability and interoperability obligations, and the ban on self-preferencing, Sherlocking, and unfair access conditions.

App Store Obligations: Comparison of EU, German, and U.S. Initiatives

Antitrust v. Regulation

Despite the growing consensus regarding the need to rely on ex ante regulation to govern digital markets and tackle the practices of large online platforms, recent and ongoing antitrust investigations demonstrate that standard competition law still provides a flexible framework to scrutinize several practices sometimes described as new and peculiar to app stores.

This is particularly true in Europe, where the antitrust framework grants significant leeway to antitrust enforcers relative to the U.S. scenario, as illustrated by the recent Google Shopping decision.

Indeed, considering legislative proposals to modernize antitrust law and to strengthen its enforcement, the U.S. House Judiciary Antitrust Subcommittee, along with some authoritative scholars, have suggested emulating the European model—imposing particular responsibility on dominant firms through the notion of abuse of dominant position and overriding several Supreme Court decisions in order to clarify the prohibitions on monopoly leveraging, predatory pricing, denial of essential facilities, refusals to deal, and tying.

By contrast, regulation appears better suited to support interventions intended to implement industrial-policy objectives. This applies, in particular, to provisions prohibiting app stores from impeding or restricting sideloading, app uninstalling, the possibility of choosing third-party apps and app stores as defaults, as well as provisions that would mandate data portability and interoperability.

However, such regulatory proposals may ultimately harm consumers. Indeed, by questioning the core of digital platform business models and affecting their governance design, these interventions entrust public authorities with mammoth tasks that could ultimately jeopardize the profitability of app-store ecosystems. They also overlook the differences that may exist between the business models of different platforms, such as Google and Apple’s app stores.

To make matters worse, the  difficulties encountered by regulators that have imposed product-design remedies on firms suggest that regulators may struggle to craft feasible and effective solutions. For instance, when the European General Court found that Google favored its own services in the Google Shopping case, it noted that this finding rested on the differential positioning and display of Shopping Units when compared to generic results. As a consequence, it could be argued that Google’s proposed auction remedy (whereby Google would compete with rivals for Shopping box placement) is compliant with the Court’s ruling because there is no dicrimination, regardless of the fact that Google might ultimately outbid its rivals (see here).

Finally, the neutrality principle cannot be transposed perfectly to all online platforms. Indeed, the workings of the app-discovery and distribution markets differ from broadband networks, as rankings and mobile services by definition involve some form of continuous selection and differentiated treatment to optimize the mobile-customer experience.

For all these reasons, our analysis suggests that antitrust law provides a less intrusive and more individualized approach, which would eventually benefit consumers by safeguarding quality and innovation.

Early last month, the Italian competition authority issued a record 1.128 billion euro fine against Amazon for abuse of dominance under Article 102 of the Treaty on the Functioning of the European Union (TFEU). In its order, the Agenzia Garante della Concorrenza e del Mercato (AGCM) essentially argues that Amazon has combined its Amazon.it marketplace and Fulfillment by Amazon (FBA) services to exclude logistics rivals such as FedEx, DHL, UPS, and Poste Italiane. 

The sanctions came exactly one month after the European General Court seconded the European Commission’s “discovery” in the Google Shopping case of a new antitrust infringement known as “self-preferencing,” which also cited Article 102 TFEU. Perhaps not entirely coincidentally, legislation was introduced in the United States earlier this year to prohibit the practice. Meanwhile, the EU’s legislative bodies have been busy taking steps to approve the Digital Markets Act (DMA), which would regulate so-called digital “gatekeepers.”

Italy thus joins a wave of policymakers that have either imposed heavy-handed decisions to “rein in” online platforms, or are seeking to implement ex ante regulations toward that end. Ultimately, the decision is reminiscent of the self-preferencing prohibition contained in Article 6a of the current draft of the DMA and reflects much of what is wrong with the current approach to regulating tech. It presages some of the potential problems with punishing efficient behavior for the sake of protecting competitors through “common carrier antitrust.” However, if this decision is anything to go by, these efforts will end up hurting the very consumers authorities purport to protect and lending color to more general fears over the DMA. 

In this post, we discuss how the AGCM’s reasoning departs from sound legal and economic thinking to reach a conclusion at odds with the traditional goal of competition law—i.e., the protection of consumer welfare. Neo-Brandeisians and other competition scholars who dispute the centrality of the consumer welfare standard and would use antitrust to curb “bigness” may find this result acceptable, in principle. But even they must admit that the AGCM decision ultimately serves to benefit large (if less successful) competitors, and not the “small dealers and worthy men” of progressive lore.

Relevant Market Definition

Market definition constitutes a preliminary step in any finding of abuse under Article 102 TFEU. An excessively narrow market definition can result in false positives by treating neutral or efficient conduct as anticompetitive, while an overly broad market definition might allow anticompetitive conduct to slip through the cracks, leading to false negatives. 

Amazon Italy may be an example of the former. Here, the AGCM identified two relevant markets: the leveraging market, which it identified as the Italian market for online marketplace intermediation, and the leveraged market, which it identified as the market for e-commerce logistics. The AGCM charges that Amazon is dominant in the former and that it gained an illegal advantage in the latter. It found, in this sense, that online marketplaces constitute a uniquely relevant market that is not substitutable for other offline or online sales channels, such as brick-and-mortar shops, price-comparison websites (e.g., Google Shopping), or dedicated sales websites (e.g., Nike.com/it). Similarly, it concluded that e-commerce logistics are sufficiently different from other forms of logistics as to comprise a separate market.

The AGCM’s findings combine qualitative and quantitative evidence, including retailer surveys and “small but significant and non-transitory increase in price” (SSNIP) tests. They also include a large dose of speculative reasoning.

For instance, the AGCM asserts that online marketplaces are fundamentally different from price-comparison sites because, in the latter case, purchase transactions do not take place on the platform. It asserts that e-commerce logistics are different from traditional logistics because the former require a higher degree of automation for transportation and storage. And in what can only be seen as a normative claim, rather than an objective assessment of substitutability, the Italian watchdog found that marketplaces are simply better than dedicated websites because, e.g., they offer greater visibility and allow retailers to save on marketing costs. While it is unclear what weights the AGCM assigned to each of these considerations when defining the relevant markets, it is reasonable to assume they played some part in defining the nature and scope of Amazon’s market presence in Italy.

In all of these instances, however, while the AGCM carefully delineated superficial distinctions between these markets, it did not actually establish that those differences are relevant to competition. Fetishizing granular but ultimately irrelevant differences between products and services—such as between marketplaces and shopping comparison sites—is a sure way to incur false positives, a misstep tantamount to punishing innocuous or efficient business conduct.

Dominance

The AGCM found that Amazon was “hyper-dominant” in the online marketplace intermediation market. Dominance was established by looking at revenue from marketplace sales, where Amazon’s share had risen from about 65% in 2016 to 75% in 2019. Taken in isolation, this figure might suggest that Amazon’s competitors cannot thrive in the market. A broader look at the data, however, paints a picture of more generalized growth, with some segments greatly benefiting newcomers and small, innovative marketplaces. 

For instance, virtually all companies active in the online marketplace intermediation market have experienced significant growth in terms of monthly visitors. It is true that Amazon’s visitors grew significantly, up 150%, but established competitors like Aliexpress and eBay also saw growth rates of 90% and 25%, respectively. Meanwhile, Wish grew a massive 10,000% from 2016 to 2019; while ManoMano and Zalando grew 450% and 100%, respectively.

In terms of active users (i.e., visits that result in a purchase), relative numbers seem to have stayed roughly the same, although the AGCM claims that eBay saw a 20-30% drop. The number of third-party products Amazon offered through Marketplace grew from between 100 and 500 million to between 500 million and 1 billion, while other marketplaces appear to have remained fairly constant, with some expanding and others contracting.

In sum, while Amazon has undeniably improved its position in practically all of the parameters considered by the AGCM, indicators show that the market as a whole has experienced and is experiencing growth. The improvement in Amazon’s position relative to some competitors—notably eBay, which AGCM asserts is Amazon’s biggest competitor—should therefore not obscure the fact that there is entry and expansion both at the fringes (ManoMano, Wish), and in the center of the market for online marketplace intermediation (Aliexpress).

Amazon’s Allegedly Abusive Conduct

According to the AGCM, Amazon has taken advantage of vertical integration to engage in self-preferencing. Specifically, the charge is that the company offers exclusive and purportedly crucial advantages on the Amazon.it marketplace to sellers who use Amazon’s own e-commerce logistics service, FBA. The purported advantages of this arrangement include, to name a few, the coveted Prime badge, the elimination of negative user feedback on sale or delivery, preferential algorithmic treatment, and exclusive participation in Amazon’s sales promotions (e.g., Black Friday, Cyber Monday). As a result, according to the AGCM, products sold through FBA enjoy more visibility and a better chance to win the “Buy Box.”

The AGCM claims this puts competing logistics operators like FedEx, Poste Italiane, and DHL at a disadvantage, because non-FBA products have less chance to be sold than FBA products, regardless of any efficiency or quality criteria. In the AGCM’s words, “Amazon has stolen demand for other e-commerce logistics operators.” 

Indirectly, Amazon’s “self-preferencing” purportedly also harms competing marketplaces like eBay by creating incentives for sellers to single-home—i.e., to sell only through Amazon Marketplace. The argument here is that retailers will not multi-home to avoid duplicative costs associated with FBA, e.g., storing goods in several warehouses. 

Although it is not necessary to demonstrate anticompetitive effects under Article 102 TFEU, the AGCM claims that Amazon’s behavior has caused drastic worsening in other marketplaces’ competitive position by constraining their ability to reach the minimum scale needed to enjoy direct and indirect network effects. The Italian authorities summarily assert that this results in consumer harm, although the gargantuan 250-page decision spends scarcely one paragraph on this point. 

Intuitively, however, Amazon’s behavior should, in principle, benefit consumers by offering something that most find tremendously valuable: a guarantee of quick delivery for a wide range of goods. Indeed, this is precisely why it is so misguided to condemn self-preferencing by online platforms.

As some have already argued, we cannot assume that something is bad for competition just because it is bad for certain competitors. For instance, a lot of unambiguously procompetitive behavior, like cutting prices, puts competitors at a disadvantage. The same might be true for a digital platform that preferences its own service because it is generally better than the alternatives provided by third-party sellers. In the case at hand, for example, Amazon’s granting marketplace privileges to FBA products may help users to select the products that Amazon can guarantee will best satisfy their needs. This is perfectly plausible, as customers have repeatedly shown that they often prefer less open, less neutral options.

The key question, therefore, should be whether the behavior in question excludes equally efficient rivals in such a way as to harm consumer welfare. Otherwise, we would essentially be asking companies to refrain from offering services that benefit their users in order to make competing products comparatively more attractive. This is antithetical to the nature of competition, which is based on the principle that what is good for consumers is frequently bad for competitors.

AGCM’s Theory of Harm Rests on Four Weak Pillars

Building on the logic that Amazon enjoys “hyper-dominance” in marketplace intermediation; that most online sales are marketplace sales; and that most marketplace sales are, in turn, Amazon.it sales, the AGCM decision finds that succeeding on Amazon.it is indispensable for any online retailer in Italy. This argument hinges largely on whether online and offline retailers are thought of as distinct relevant markets—i.e., whether, from the perspective of the retailer, online and offline sales channels are substitutable (see also the relevant market definition section above). 

Ultimately, the AGCM finds that they are not, as online sales enjoy such advantages as lower fixed costs, increased sale flexibility, and better geographical reach. To an outsider, the distinction between the two markets may seem artificial—and it largely is—but such theoretical market segmentation is the bread-and-butter of antitrust analysis. Still, even by EU competition law standards, the relevant market definitions on which the AGCM relies to conclude that selling on Amazon is indispensable appear excessively narrow. 

This market distinction also serves to set up the AGCM’s second, more controversial argument: that the benefits extended to products sold through the FBA channel are also indispensable for retailers’ success on the Amazon.it marketplace. Here, the AGCM seeks a middle ground between competitive advantage and indispensability, finally settling on the notion that a sufficiently large competitive advantage itself translates into indispensability.

But how big is too big? The facts that 40-45% of Amazon’s third-party retailers do not use FBA (p. 57 of the decision) and that roughly 40 of the top 100 products sold on Amazon.it are not fulfilled through Amazon’s logistics service (p. 58) would appear to suggest that FBA is more of a convenience than an obligation. At the least, it does not appear that the advantage conferred is so big as to amount to indispensability. This may be because sellers that choose not to use Amazon’s logistics service (including offline, of course) can and do cut prices to compete with FBA-sold products. If anything, this should be counted as a good thing from the perspective of consumer welfare.

Instead, and signaling the decision’s overarching preoccupation with protecting some businesses at the expense of others (and, ultimately, at the expense of consumers), the AGCM has expanded the already bloated notion of a self-preferencing offense to conclude that expecting sellers to compete on pricing parameters would unfairly slash profit margins for non-FBA sellers.

The third pillar of the AGCM’s theory of harm is the claim that the benefits conferred on products sold through FBA are not awarded based on any objective quality criteria, but purely on whether the seller has chosen FBA or third-party logistics. Thus, even if a logistics operator were, in principle, capable of offering a service as efficient as FBA’s, it would not qualify for the same benefits. 

But this is a disingenuous line of reasoning. One legitimate reason why Amazon could choose to confer exclusive advantages on products fulfilled by its own logistics operation is because no other service is, in fact, routinely as reliable. This does not necessarily mean that FBA is always superior to the alternatives, but rather that it makes sense for Amazon to adopt this presumption a general rule based on past experience, without spending the resources to constantly evaluate it. In other words, granting exclusive benefits is based on quality criteria, just on a prior measurement of quality rather than an ongoing assessment. This is presumably what a customer-obsessed business that does not want to take chances with consumer satisfaction would do. 

Fourth, the AGCM posits that Prime and FBA constitute two separate products that have been artificially tied by Amazon, thereby unfairly excluding third-party logistics operators. Co-opting Amazon’s own terminology, the AGCM claims that the company has created a flywheel of artificial interdependence, wherein Prime benefits increase the number of Prime users, which drives demand for Prime products, which creates demand for Prime-eligible FBA products, and so on. 

To support its case, the AGCM repeatedly adduces a 2015 letter in which Jeff Bezos told shareholders that Amazon Marketplace and Prime are “happily and deeply intertwined,” and that FBA is the “glue” that links them together. Instead of taking this for what it likely is—i.e., a case of legitimate, efficiency-enhancing vertical integration—the AGCM has preferred to read into it a case of illicit tying, an established offense under Article 102 TFEU whereby a dominant firm makes the purchase of one product conditional on the purchase of another, unrelated one. 

The problem with this narrative is that it is perfectly plausible that Prime and FBA are, in fact, meant to be one product that is more than the sum of its parts. For one, the inventory of sellers who use FBA is stowed in fulfillment centers, meaning that Amazon takes care of all logistics, customer service, and product returns. As Bezos put it in the same 2015 letter, this is a huge efficiency gain. It thus makes sense to nudge consumers towards products that use FBA.

In sum, the AGCM’s case rests on a series of questionable assumptions that build on each other: a narrow relevant market definition; a finding of “hyper-dominance” that downplays competitors’ growth and expansion, as well as competition from outside the narrowly defined market; a contrived notion of indispensability at two levels (Marketplace and FBA); and a refusal to contemplate the possibility that Amazon integrates its marketplace and logistics services in orders to enhance efficiency, rather than to exclude competitors.

Remedies

The AGCM sees “only one way to restore a level-playing field in e-commerce logistics”: Amazon must redesign its existing Self-Fulfilled Prime (SFP) program in such a way as to grant all logistics operators—FBA or non-FBA—equal treatment on Amazon.it, based on a set of objective, transparent, standard, uniform, and non-discriminatory criteria. Any logistics operator that demonstrates the ability to fulfill such criteria must be awarded SFP status and the accompanying Prime badge, along with all the perks associated with it. Further, SFP- and FBA-sold products must be subject to the same monitoring mechanism with regard to the observance of Prime standards, as well as to the same evaluation standards. 

In sum, Amazon Italy now has a duty to treat Marketplace sales fulfilled by third-party operators the same as those fulfilled by its own logistics service. This is a significant step toward “common carrier antitrust.” in which vertically integrated firms are expected to comply with perfect neutrality obligations with respect to customers, suppliers, and competitors

Beyond the philosophical question of whether successful private companies should be obliged by law to treat competitors analogously to its affiliates (they shouldn’t), the pitfalls of this approach are plain to see. Nearly all consumer-facing services use choice architectures as a means to highlight products that rank favorably in terms of price and quality, and ensuring consumers enjoy a seamless user experience: Supermarkets offer house brands that signal a product has certain desirable features; operating system developers pre-install certain applications to streamline users’ “out of the box “experience; app stores curate the apps that users will view; search engines use specialized boxes that anticipate the motives underlying users’ search queries, etc. Suppressing these practices through heavy-handed neutrality mandates is liable to harm consumers. 

Second, monitoring third-party logistics operators’ compliance with the requisite standards is going to come at a cost for Amazon (and, presumably, its customers)—a cost likely much higher than that of monitoring its own operations—while awarding the Prime badge liberally may deteriorate the consumer experience on Amazon Marketplace.

Thus, one way for Amazon to comply with AGCM’s remedies while also minimizing monitoring costs is simply to dilute or even remove the criteria for Prime, thereby allowing sellers using any logistics provider to be eligible for Prime. While this would presumably insulate Amazon from any future claims against exclusionary self-preferencing, it would almost certainly also harm consumer welfare. 

A final point worth noting is that vertical integration may well be subsidizing Amazon’s own first-party products. In other words, even if FBA is not fully better than other logistics operators, the revenue that it derives from FBA enables Amazon to offer low prices, as well as a range of other benefits from Prime, such as, e.g., free video. Take that source of revenue away, and those subsidized prices go up and the benefits disappear. This is another reason why it may be legitimate to consider FBA and Prime as a single product.

Of course, this argument is moot if all one cares about is how Amazon’s vertical integration affects competitors, not consumers. But consumers care about the whole package. The rationale at play in the AGCM decision ultimately ends up imposing a narrow, boring business model on all sellers, precluding them from offering interesting consumer benefits to bolster their overall product.

Conclusion

Some have openly applauded AGCM’s use of EU competition law to protect traditional logistics operators like FedEx, Poste Italiane, DHL, and UPS. Others lament the competition authority’s apparent abandonment of the consumer welfare standard in favor of a renewed interest in punishing efficiency to favor laggard competitors under the guise of safekeeping “competition.” Both sides ultimately agree on one thing, however: Amazon Italy is about favoring Amazon’s competitors. If competition authorities insist on continuing down this populist rabbit hole,  the best they can hope for is a series of Pyrrhic victories against the businesses that are most bent on customer satisfaction, i.e., the successful ones.

Some may intuitively think that this is fair; that Amazon is just too big and that it strangles small competitors. But Amazon’s “small” competitors are hardly the “worthy men” of Brandeisian mythology. They are FedEx, DHL, UPS, and the state-backed goliath Poste Italiane; they are undeniably successful companies like eBay, Alibaba – or Walmart in the United States. It is, conversely, the smallest retailers and consumers who benefit the most from Amazon’s integrated logistics and marketplace services, as the company’s meteoric rise in popularity in Italy since 2016 attests. But it seems that, in the brave new world of antitrust, such stakeholders are now too small to matter.

The Autorità Garante della Concorenza e del Mercato (AGCM), Italy’s competition and consumer-protection watchdog, on Nov. 25 handed down fines against Google and Apple of €10 million each—the maximum penalty contemplated by the law—for alleged unfair commercial practices. Ultimately, the two decisions stand as textbook examples of why regulators should, wherever possible, strongly defer to consumer preferences, rather than substitute their own.

The Alleged Infringements

The AGCM has made two practically identical cases built around two interrelated claims. The first claim is that the companies have not properly informed users that the data they consent to share will be used for commercial purposes. The second is that, by making users opt out if they don’t want to consent to data sharing, the companies unduly restrict users’ freedom of choice and constrain them to accept terms they would not have otherwise accepted.

According to the AGCM, Apple and Google’s behavior infringes Articles 20, 21, 22, 24 and 25 of the Italian Consumer Code. The first three provisions prohibit misleading business practices, and are typically applied to conduct such as lying, fraud, the sale of unsafe products, or the omission or otherwise deliberate misrepresentation of facts in ways that would deceive the average user. The conduct caught by the first claim would allegedly fall into this category.

The last two provisions, by contrast, refer to aggressive business practices such as coercion, blackmail, verbal threats, and even physical harassment capable of “limiting the freedom of choice of users.” The conduct described in the second claim would fall here.

The First Claim

The AGCM’s first claim does not dispute that the companies informed users about the commercial use of their data. Instead, the authority argues that the companies are not sufficiently transparent in how they inform users.

Let’s start with Google. Upon creating a Google ID, users can click to view the “Privacy and Terms” disclosure, which details the types of data that Google processes and the reasons that it does so. As Figure 1 below demonstrates, the company explains that it processes data: “to publish personalized ads, based on your account settings, on Google services as well as on other partner sites and apps” (translation of the Italian text highlighted in the first red rectangle). Below, under the “data combination” heading, the user is further informed that: “in accordance with the settings of your account, we show you personalized ads based on the information gathered from your combined activity on Google and YouTube” (the section in the second red rectangle).

Figure 1: ACGM Google decision, p. 7

After creating a Google ID, a pop-up once again reminds the user that “this Google account is configured to include the personalization function, which provides tips and personalized ads based on the information saved on your account. [And that] you can select ‘other options’ to change the personalization settings as well as the information saved in your account.”

The AGCM sees two problems with this. First, the user must click on “Privacy and Terms” to be told what Google does with their data and why. Viewing this information is not simply an unavoidable step in the registration process. Second, the AGCM finds it unacceptable that the commercial use of data is listed together with other, non-commercial uses, such as improved quality, security, etc. (the other items listed in Figure 1). The allegation is that this leads to confusion and makes it less likely that users will notice the commercial aspects of data usage.

A similar argument is made in the Apple decision, where the AGCM similarly contends that users are not properly informed that their data may be used for commercial purposes. As shown in Figure 2, upon creating an Apple ID, users are asked to consent to receive “communications” (notifications, tips, and updates on Apple products, services, and software) and “Apps, music, TV, and other” (latest releases, exclusive content, special offers, tips on apps, music, films, TV programs, books, podcasts, Apple Pay and others).

Figure 2: AGCM Apple decision, p. 8

If users click on “see how your data is managed”—located just above the “Continue” button, as shown in Figure 2—they are taken to another page, where they are given more detailed information about what data Apple collects and how it is used. Apple discloses that it may employ user data to send communications and marketing e-mails about new products and services. Categories are clearly delineated and users are reminded that, if they wish to change their marketing email preferences, they can do so by going to appleid.apple.com. The word “data” is used 40 times and the taxonomy of the kind of data gathered by Apple is truly comprehensive. See for yourself.

The App Store, Apple Book Store, and iTunes Store have similar clickable options (“see how your data is managed”) that lead to pages with detailed information about how Apple uses data. This includes unambiguous references to so-called “commercial use” (e.g., “Apple uses information on your purchases, downloads, and other activities to send you tailored ads and notifications relative to Apple marketing campaigns.”)

But these disclosures failed to convince the AGCM that users are sufficiently aware that their data may be used for commercial purposes. The two reasons cited in the opinion mirror those in the Google decision. First, the authority claims that the design of the “see how your data is managed” option does not “induce the user to click on it” (see the marked area in Figure 2). Further, it notes that accessing the “Apple ID Privacy” page requires a “voluntary and eventual [i.e., hypothetical]” action by the user. According to the AGCM, this leads to a situation in which “the average user” is not “directly and intuitively” aware of the magnitude of data used for commercial purposes, and is instead led to believe that data is shared to improve the functionality of the Apple product and the Apple ecosystem.

The Second Claim

The AGCM’s second claim contends that the opt-out mechanism used by both Apple and Google “limits and conditions” users’ freedom of choice by nudging them toward the companies’ preferred option—i.e., granting the widest possible consent to process data for commercial use.

In Google’s case, the AGCM first notes that, when creating a Google ID, a user must take an additional discretionary step before they can opt out of data sharing. This refers to mechanism in which a user must click the words “OTHER OPTIONS,” in bright blue capitalized font, as shown in Figure 3 below (first blue rectangle, upper right corner).

Figure 3: AGCM Google decision, p. 22

The AGCM’s complaint here is that it is insufficient to grant users merely the possibility of opting out, as Google does. Rather, the authority contends, users must be explicitly asked whether they wish to share their data. As in the first claim, the AGCM holds that questions relating to the commercial use of data must be woven in as unavoidable steps in the registration process.

The AGCM also posits that the opt-out mechanism itself (in the lower left corner of Figure 3) “restricts and conditions” users’ freedom of choice by preventing them from “expressly and preventively” manifesting their real preferences. The contention is that, if presented with an opt-in checkbox, users would choose differently—and thus, from the authority’s point of view, choose correctly. Indeed, the AGCM concludes from the fact that the vast majority of users have not opted out from data sharing (80-100%, according to the authority), that the only reasonable conclusion is that “a significant number of subscribers have been induced to make a commercial decision without being aware of it.”

A similar argument is made in the Apple decision. Here, the issue is the supposed difficulty of the opt-out mechanism, which the AGCM describes as “intricate and non-immediate.” If a user wishes to opt out of data sharing, he or she would not only have to “uncheck” the checkboxes displayed in Figure 2, but also do the same in the Apple Store with respect to their preferences for other individual Apple products. This “intricate” process generally involves two to three steps. For instance, to opt out of “personalized tips,” a user must first go to Settings, then select their name, then multimedia files, and then “deactivate personalized tips.”

According to the AGCM, the registration process is set up in such a way that the users’ consent is not informed, free, and specific. It concludes:

The consumer, entangled in this system, of which he is not aware, is conditioned in his choices, undergoing the transfer of his data, which the professional can dispose of for his own promotional purposes.

The AGCM’s decisions fail on three fronts. They are speculative, paternalistic, and subject to the Nirvana Fallacy. They are also underpinned by an extremely uncharitable conception of what the “average user” knows and understands.

Epistemic Modesty Under Uncertainty

The AGCM makes far-reaching and speculative assumptions about user behavior based on incomplete knowledge. For instance, both Google and Apple’s registration processes make clear that they gather users’ data for advertising purposes—which, especially in the relevant context, cannot be interpreted by a user as anything but “commercial” (even under the AGCM’s pessimistic assumptions about the “average user.”) It’s true that the disclosure requires the user to click “see how your data is managed” (Apple) or “Privacy and Terms” (Google). But it’s not at all clear that this is less transparent than, say, the obligatory scroll-text that most users will ignore before blindly clicking to accept.

For example, in registering for a Blizzard account (a gaming service), users are forced to read the company’s lengthy terms and conditions, with information on the “commercial use” of data buried somewhere in a seven-page document of legalese. Does it really follow from this that Blizzard users are better informed about the commercial use of their data? I don’t think so.

Rather than the obligatory scroll-text, the AGCM may have in mind some sort of pop-up screen. But would this mean that companies should also include separate, obligatory pop-ups for every other relevant aspect of their terms and conditions? This would presumably take us back to square one, as the AGCM’s complaint was that Google amalgamated commercial and non-commercial uses of data under the same title. Perhaps the pop-up for the commercial use of data would have to be made more conspicuous. This would presumably require a normative hierarchy of the companies’ terms and conditions, listed in order of relevance for users. That would raise other thorny questions. For instance, should information about the commercial use of data be more prominently displayed than information about safety and security?

A reasonable alternative—especially under conditions of uncertainty—would be to leave Google and Apple alone to determine the best way to inform consumers, because nobody reads the terms and conditions anyway, no matter how they are presented. Moreover, the AGCM offers no evidence to support its contention that companies’ opt-out mechanisms lead more users to share their data than would freely choose to do so.

Whose Preferences?

The AGCM also replaces revealed user preferences with its own view of what those preferences should be. For instance, the AGCM doesn’t explain why opting to share data for commercial purposes would be, in principle, a bad thing. There are a number of plausible and legitimate explanations for why a user would opt for more generous data-sharing arrangements: they may believe that data sharing will improve their experience; may wish to receive tailored ads rather than generic ones; or may simply value a company’s product and see data sharing as a fair exchange. None of these explanations—or, indeed, any others—are ever contemplated in the AGCM decision.

Assuming that opt-outs, facultative terms and conditions screens, and two-to-three-step procedures to change one’s preferences truncate users’ “freedom of choice” is paternalistic and divorced from the reality of the average person, and the average Italian.

Ideal or Illegal?

At the heart of the AGCM decisions is the notion that it is proper to punish market actors wherever the real doesn’t match a regulator’s vision of the ideal—commonly known as “the Nirvana fallacy.” When the AGCM claims that Apple and Google do not properly disclose the commercial use of user data, or that the offered opt-out mechanism is opaque or manipulative, the question is: compared to what? There will always be theoretically “better” ways of granting users the choice to opt out of sharing their data. The test should not be whether a company falls short of some ideal imagined practice, but whether the existing mechanism actually deceives users.

There is nothing in the AGCM’s decisions to suggest that it does. Depending on how precipitously one lowers the bar for what the “average user” would understand, just about any intervention might be justified, in principle. But to justify the AGCM’s intervention in this case requires stretching the plausible ignorance of the average user to its absolute theoretical limits.

Conclusion

Even if a court were to buy the AGCM’s impossibly low view of the “average user” and grant the first claim—which would be unfortunate, but plausible — not even the most liberal reading of Articles 24 and 25 can support the view that “overly complex, non-immediate” opt-outs, as interpreted by the AGCM, limit users’ freedom of choice in any way comparable to the type of conduct described in those provisions (coercion, blackmail, verbal threats, etc.)

The AGCM decisions are shot through with unsubstantiated assumptions about users’ habits and preferences, and risk imposing undue burdens not only on the companies, but on users themselves. With some luck, they will be stricken down by a sensible judge. In the meantime, however, the trend of regulatory paternalism and over-enforcement continues. Much like in the United States, where the Federal Trade Commission (FTC) has occasionally engaged in product-design decisions that substitute the commission’s own preferences for those of consumers, regulators around the world continue to think they know better than consumers about what’s in their best interests.

Recent antitrust forays on both sides of the Atlantic have unfortunate echoes of the oldie-but-baddie “efficiencies offense” that once plagued American and European merger analysis (and, more broadly, reflected a “big is bad” theory of antitrust). After a very short overview of the history of merger efficiencies analysis under American and European competition law, we briefly examine two current enforcement matters “on both sides of the pond” that impliedly give rise to such a concern. Those cases may regrettably foreshadow a move by enforcers to downplay the importance of efficiencies, if not openly reject them.

Background: The Grudging Acceptance of Merger Efficiencies

Not long ago, economically literate antitrust teachers in the United States enjoyed poking fun at such benighted 1960s Supreme Court decisions as Procter & Gamble (following in the wake of Brown Shoe andPhiladelphia National Bank). Those holdings—which not only rejected efficiencies justifications for mergers, but indeed “treated efficiencies more as an offense”—seemed a thing of the past, put to rest by the rise of an economic approach to antitrust. Several early European Commission merger-control decisions also arguably embraced an “efficiencies offense.”  

Starting in the 1980s, the promulgation of increasingly economically sophisticated merger guidelines in the United States led to the acceptance of efficiencies (albeit less then perfectly) as an important aspect of integrated merger analysis. Several practitioners have claimed, nevertheless, that “efficiencies are seldom credited and almost never influence the outcome of mergers that are otherwise deemed anticompetitive.” Commissioner Christine Wilson has argued that the Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) still have work to do in “establish[ing] clear and reasonable expectations for what types of efficiency analysis will and will not pass muster.”

In its first few years of merger review, which was authorized in 1989, the European Commission was hostile to merger-efficiency arguments.  In 2004, however, the EC promulgated horizontal merger guidelines that allow for the consideration of efficiencies, but only if three cumulative conditions (consumer benefit, merger specificity, and verifiability) are satisfied. A leading European competition practitioner has characterized several key European Commission merger decisions in the last decade as giving rather short shrift to efficiencies. In light of that observation, the practitioner has advocated that “the efficiency offence theory should, once again, be repudiated by the Commission, in order to avoid deterring notifying parties from bringing forward perfectly valid efficiency claims.”

In short, although the actual weight enforcers accord to efficiency claims is a matter of debate, efficiency justifications are cognizable, subject to constraints, as a matter of U.S. and European Union merger-enforcement policy. Whether that will remain the case is, unfortunately, uncertain, given DOJ and FTC plans to revise merger guidelines, as well as EU talk of convergence with U.S. competition law.

Two Enforcement Matters with ‘Efficiencies Offense’ Overtones

Two Facebook-related matters currently before competition enforcers—one in the United States and one in the United Kingdom—have implications for the possible revival of an antitrust “efficiencies offense” as a “respectable” element of antitrust policy. (I use the term Facebook to reference both the platform company and its corporate parent, Meta.)

FTC v. Facebook

The FTC’s 2020 federal district court monopolization complaint against Facebook, still in the motion to dismiss the amended complaint phase (see here for an overview of the initial complaint and the judge’s dismissal of it), rests substantially on claims that Facebook’s acquisitions of Instagram and WhatsApp harmed competition. As Facebook points out in its recent reply brief supporting its motion to dismiss the FTC’s amended complaint, Facebook appears to be touting merger-related efficiencies in critiquing those acquisitions. Specifically:

[The amended complaint] depends on the allegation that Facebook’s expansion of both Instagram and WhatsApp created a “protective ‘moat’” that made it harder for rivals to compete because Facebook operated these services at “scale” and made them attractive to consumers post-acquisition. . . . The FTC does not allege facts that, left on their own, Instagram and WhatsApp would be less expensive (both are free; Facebook made WhatsApp free); or that output would have been greater (their dramatic expansion at “scale” is the linchpin of the FTC’s “moat” theory); or that the products would be better in any specific way.

The FTC’s concerns about a scale-based merger-related output expansion that benefited consumers and thereby allegedly enhanced Facebook’s market position eerily echoes the commission’s concerns in Procter & Gamble that merger-related cost-reducing joint efficiencies in advertising had an anticompetitive “entrenchment” effect. Both positions, in essence, characterize output-increasing efficiencies as harmful to competition: in other words, as “efficiencies offenses.”

UK Competition and Markets Authority (CMA) v. Facebook

The CMA announced Dec. 1 that it had decided to block retrospectively Facebook’s 2020 acquisition of Giphy, which is “a company that provides social media and messaging platforms with animated GIF images that users can embed in posts and messages. . . .  These platforms license the use of Giphy for its users.”

The CMA theorized that Facebook could harm competition by (1) restricting access to Giphy’s digital libraries to Facebook’s competitors; and (2) prevent Giphy from developing into a potential competitor to Facebook’s display advertising business.

As a CapX analysis explains, the CMA’s theory of harm to competition, based on theoretical speculation, is problematic. First, a behavioral remedy short of divestiture, such as requiring Facebook to maintain open access to its gif libraries, would deal with the threat of restricted access. Indeed, Facebook promised at the time of the acquisition that Giphy would maintain its library and make it widely available. Second, “loss of a single, relatively small, potential competitor out of many cannot be counted as a significant loss for competition, since so many other potential and actual competitors remain.” Third, given the purely theoretical and questionable danger to future competition, the CMA “has blocked this deal on relatively speculative potential competition grounds.”

Apart from the weakness of the CMA’s case for harm to competition, the CMA appears to ignore a substantial potential dynamic integrative efficiency flowing from Facebook’s acquisition of Giphy. As David Teece explains:

Facebook’s acquisition of Giphy maintained Giphy’s assets and furthered its innovation in Facebook’s ecosystem, strengthening that ecosystem in competition with others; and via Giphy’s APIs, strengthening the ecosystems of other service providers as well.

There is no evidence that CMA seriously took account of this integrative efficiency, which benefits consumers by offering them a richer experience from Facebook and its subsidiary Instagram, and which spurs competing ecosystems to enhance their offerings to consumers as well. This is a failure to properly account for an efficiency. Moreover, to the extent that the CMA viewed these integrative benefits as somehow anticompetitive (to the extent that it enhanced Facebook’s competitive position) the improvement of Facebook’s ecosystem could have been deemed a type of “efficiencies offense.”

Are the Facebook Cases Merely Random Straws in the Wind?

It might appear at first blush to be reading too much into the apparent slighting of efficiencies in the two current Facebook cases. Nevertheless, recent policy rhetoric suggests that economic efficiencies arguments (whose status was tenuous at enforcement agencies to begin with) may actually be viewed as “offensive” by the new breed of enforcers.

In her Sept. 22 policy statement on “Vision and Priorities for the FTC,” Chair Lina Khan advocated focusing on the possible competitive harm flowing from actions of “gatekeepers and dominant middlemen,” and from “one-sided [vertical] contract provisions” that are “imposed by dominant firms.” No suggestion can be found in the statement that such vertical relationships often confer substantial benefits on consumers. This hints at a new campaign by the FTC against vertical restraints (as opposed to an emphasis on clearly welfare-inimical conduct) that could discourage a wide range of efficiency-producing contracts.

Chair Khan also sponsored the FTC’s July 2021 rescission of its Section 5 Policy Statement on Unfair Methods of Competition, which had emphasized the primacy of consumer welfare as the guiding principle underlying FTC antitrust enforcement. A willingness to set aside (or place a lower priority on) consumer welfare considerations suggests a readiness to ignore efficiency justifications that benefit consumers.

Even more troubling, a direct attack on the consideration of efficiencies is found in the statement accompanying the FTC’s September 2021 withdrawal of the 2020 Vertical Merger Guidelines:

The statement by the FTC majority . . . notes that the 2020 Vertical Merger Guidelines had improperly contravened the Clayton Act’s language with its approach to efficiencies, which are not recognized by the statute as a defense to an unlawful merger. The majority statement explains that the guidelines adopted a particularly flawed economic theory regarding purported pro-competitive benefits of mergers, despite having no basis of support in the law or market reality.

Also noteworthy is Khan’s seeming interest (found in her writings here, here, and here) in reviving Robinson-Patman Act enforcement. What’s worse, President Joe Biden’s July 2021 Executive Order on Competition explicitly endorses FTC investigation of “retailers’ practices on the conditions of competition in the food industries, including any practices that may violate [the] Robinson-Patman Act” (emphasis added). Those troubling statements from the administration ignore the widespread scholarly disdain for Robinson-Patman, which is almost unanimously viewed as an attack on efficiencies in distribution. For example, in recommending the act’s repeal in 2007, the congressionally established Antitrust Modernization Commission stressed that the act “protects competitors against competition and punishes the very price discounting and innovation and distribution methods that the antitrust otherwise encourage.”

Finally, newly confirmed Assistant Attorney General for Antitrust Jonathan Kanter (who is widely known as a Big Tech critic) has expressed his concerns about the consumer welfare standard and the emphasis on economics in antitrust analysis. Such concerns also suggest, at least by implication, that the Antitrust Division under Kanter’s leadership may manifest a heightened skepticism toward efficiencies justifications.

Conclusion

Recent straws in the wind suggest that an anti-efficiencies hay pile is in the works. Although antitrust agencies have not yet officially rejected the consideration of efficiencies, nor endorsed an “efficiencies offense,” the signs are troubling. Newly minted agency leaders’ skepticism toward antitrust economics, combined with their de-emphasis of the consumer welfare standard and efficiencies (at least in the merger context), suggest that even strongly grounded efficiency explanations may be summarily rejected at the agency level. In foreign jurisdictions, where efficiencies are even less well-established, and enforcement based on mere theory (as opposed to empiricism) is more widely accepted, the outlook for efficiencies stories appears to be no better.     

One powerful factor, however, should continue to constrain the anti-efficiencies movement, at least in the United States: the federal courts. As demonstrated most recently in the 9th U.S. Circuit Court of Appeals’ FTC v. Qualcomm decision, American courts remain committed to insisting on empirical support for theories of harm and on seriously considering business justifications for allegedly suspect contractual provisions. (The role of foreign courts in curbing prosecutorial excesses not grounded in economics, and in weighing efficiencies, depends upon the jurisdiction, but in general such courts are far less of a constraint on enforcers than American tribunals.)

While the DOJ and FTC (and, perhaps to a lesser extent, foreign enforcers) will have to keep the judiciary in mind in deciding to bring enforcement actions, the denigration of efficiencies by the agencies still will have an unfortunate demonstration effect on the private sector. Given the cost (both in resources and in reputational capital) associated with antitrust investigations, and the inevitable discounting for the risk of projects caught up in such inquiries, a publicly proclaimed anti-efficiencies enforcement philosophy will do damage. On the margin, it will lead businesses to introduce fewer efficiency-seeking improvements that could be (wrongly) characterized as “strengthening” or “entrenching” market dominance. Such business decisions, in turn, will be welfare-inimical; they will deny consumers the benefit of efficiencies-driven product and service enhancements, and slow the rate of business innovation.

As such, it is to be hoped that, upon further reflection, U.S. and foreign competition enforcers will see the light and publicly proclaim that they will fully weigh efficiencies in analyzing business conduct. The “efficiencies offense” was a lousy tune. That “oldie-but-baddie” should not be replayed.

On both sides of the Atlantic, 2021 has seen legislative and regulatory proposals to mandate that various digital services be made interoperable with others. Several bills to do so have been proposed in Congress; the EU’s proposed Digital Markets Act would mandate interoperability in certain contexts for “gatekeeper” platforms; and the UK’s competition regulator will be given powers to require interoperability as part of a suite of “pro-competitive interventions” that are hoped to increase competition in digital markets.

The European Commission plans to require Apple to use USB-C charging ports on iPhones to allow interoperability among different chargers (to save, the Commission estimates, two grams of waste per-European per-year). Interoperability demands for forms of interoperability have been at the center of at least two major lawsuits: Epic’s case against Apple and a separate lawsuit against Apple by the app called Coronavirus Reporter. In July, a group of pro-intervention academics published a white paper calling interoperability “the ‘Super Tool’ of Digital Platform Governance.”

What is meant by the term “interoperability” varies widely. It can refer to relatively narrow interventions in which user data from one service is made directly portable to other services, rather than the user having to download and later re-upload it. At the other end of the spectrum, it could mean regulations to require virtually any vertical integration be unwound. (Should a Tesla’s engine be “interoperable” with the chassis of a Land Rover?) And in between are various proposals for specific applications of interoperability—some product working with another made by another company.

Why Isn’t Everything Interoperable?

The world is filled with examples of interoperability that arose through the (often voluntary) adoption of standards. Credit card companies oversee massive interoperable payments networks; screwdrivers are interoperable with screws made by other manufacturers, although different standards exist; many U.S. colleges accept credits earned at other accredited institutions. The containerization revolution in shipping is an example of interoperability leading to enormous efficiency gains, with a government subsidy to encourage the adoption of a single standard.

And interoperability can emerge over time. Microsoft Word used to be maddeningly non-interoperable with other word processors. Once OpenOffice entered the market, Microsoft patched its product to support OpenOffice files; Word documents now work slightly better with products like Google Docs, as well.

But there are also lots of things that could be interoperable but aren’t, like the Tesla motors that can’t easily be removed and added to other vehicles. The charging cases for Apple’s AirPods and Sony’s wireless earbuds could, in principle, be shaped to be interoperable. Medical records could, in principle, be standardized and made interoperable among healthcare providers, and it’s easy to imagine some of the benefits that could come from being able to plug your medical history into apps like MyFitnessPal and Apple Health. Keurig pods could, in principle, be interoperable with Nespresso machines. Your front door keys could, in principle, be made interoperable with my front door lock.

The reason not everything is interoperable like this is because interoperability comes with costs as well as benefits. It may be worth letting different earbuds have different designs because, while it means we sacrifice easy interoperability, we gain the ability for better designs to be brought to market and for consumers to have choice among different kinds. We may find that, while digital health records are wonderful in theory, the compliance costs of a standardized format might outweigh those benefits.

Manufacturers may choose to sell an expensive device with a relatively cheap upfront price tag, relying on consumer “lock in” for a stream of supplies and updates to finance the “full” price over time, provided the consumer likes it enough to keep using it.

Interoperability can remove a layer of security. I don’t want my bank account to be interoperable with any payments app, because it increases the risk of getting scammed. What I like about my front door lock is precisely that it isn’t interoperable with anyone else’s key. Lots of people complain about popular Twitter accounts being obnoxious, rabble-rousing, and stupid; it’s not difficult to imagine the benefits of a new, similar service that wanted everyone to start from the same level and so did not allow users to carry their old Twitter following with them.

There thus may be particular costs that prevent interoperability from being worth the tradeoff, such as that:

  1. It might be too costly to implement and/or maintain.
  2. It might prescribe a certain product design and prevent experimentation and innovation.
  3. It might add too much complexity and/or confusion for users, who may prefer not to have certain choices.
  4. It might increase the risk of something not working, or of security breaches.
  5. It might prevent certain pricing models that increase output.
  6. It might compromise some element of the product or service that benefits specifically from not being interoperable.

In a market that is functioning reasonably well, we should be able to assume that competition and consumer choice will discover the desirable degree of interoperability among different products. If there are benefits to making your product interoperable with others that outweigh the costs of doing so, that should give you an advantage over competitors and allow you to compete them away. If the costs outweigh the benefits, the opposite will happen—consumers will choose products that are not interoperable with each other.

In short, we cannot infer from the absence of interoperability that something is wrong, since we frequently observe that the costs of interoperability outweigh the benefits.

Of course, markets do not always lead to optimal outcomes. In cases where a market is “failing”—e.g., because competition is obstructed, or because there are important externalities that are not accounted for by the market’s prices—certain goods may be under-provided. In the case of interoperability, this can happen if firms struggle to coordinate upon a single standard, or because firms’ incentives to establish a standard are not aligned with the social optimum (i.e., interoperability might be optimal and fail to emerge, or vice versa).

But the analysis cannot stop here: just because a market might not be functioning well and does not currently provide some form of interoperability, we cannot assume that if it was functioning well that it would provide interoperability.

Interoperability for Digital Platforms

Since we know that many clearly functional markets and products do not provide all forms of interoperability that we could imagine them providing, it is perfectly possible that many badly functioning markets and products would still not provide interoperability, even if they did not suffer from whatever has obstructed competition or effective coordination in that market. In these cases, imposing interoperability would destroy value.

It would therefore be a mistake to assume that more interoperability in digital markets would be better, even if you believe that those digital markets suffer from too little competition. Let’s say, for the sake of argument, that Facebook/Meta has market power that allows it to keep its subsidiary WhatsApp from being interoperable with other competing services. Even then, we still would not know if WhatsApp users would want that interoperability, given the trade-offs.

A look at smaller competitors like Telegram and Signal, which we have no reason to believe have market power, demonstrates that they also are not interoperable with other messaging services. Signal is run by a nonprofit, and thus has little incentive to obstruct users for the sake of market power. Why does it not provide interoperability? I don’t know, but I would speculate that the security risks and technical costs of doing so outweigh the expected benefit to Signal’s users. If that is true, it seems strange to assume away the potential costs of making WhatsApp interoperable, especially if those costs may relate to things like security or product design.

Interoperability and Contact-Tracing Apps

A full consideration of the trade-offs is also necessary to evaluate the lawsuit that Coronavirus Reporter filed against Apple. Coronavirus Reporter was a COVID-19 contact-tracing app that Apple rejected from the App Store in March 2020. Its makers are now suing Apple for, they say, stifling competition in the contact-tracing market. Apple’s defense is that it only allowed COVID-19 apps from “recognised entities such as government organisations, health-focused NGOs, companies deeply credentialed in health issues, and medical or educational institutions.” In effect, by barring it from the App Store, and offering no other way to install the app, Apple denied Coronavirus Reporter interoperability with the iPhone. Coronavirus Reporter argues it should be punished for doing so.

No doubt, Apple’s decision did reduce competition among COVID-19 contact tracing apps. But increasing competition among COVID-19 contact-tracing apps via mandatory interoperability might have costs in other parts of the market. It might, for instance, confuse users who would like a very straightforward way to download their country’s official contact-tracing app. Or it might require access to certain data that users might not want to share, preferring to let an intermediary like Apple decide for them. Narrowing choice like this can be valuable, since it means individual users don’t have to research every single possible option every time they buy or use some product. If you don’t believe me, turn off your spam filter for a few days and see how you feel.

In this case, the potential costs of the access that Coronavirus Reporter wants are obvious: while it may have had the best contact-tracing service in the world, sorting it from other less reliable and/or scrupulous apps may have been difficult and the risk to users may have outweighed the benefits. As Apple and Facebook/Meta constantly point out, the security risks involved in making their services more interoperable are not trivial.

It isn’t competition among COVID-19 apps that is important, per se. As ever, competition is a means to an end, and maximizing it in one context—via, say, mandatory interoperability—cannot be judged without knowing the trade-offs that maximization requires. Even if we thought of Apple as a monopolist over iPhone users—ignoring the fact that Apple’s iPhones obviously are substitutable with Android devices to a significant degree—it wouldn’t follow that the more interoperability, the better.

A ‘Super Tool’ for Digital Market Intervention?

The Coronavirus Reporter example may feel like an “easy” case for opponents of mandatory interoperability. Of course we don’t want anything calling itself a COVID-19 app to have totally open access to people’s iPhones! But what’s vexing about mandatory interoperability is that it’s very hard to sort the sensible applications from the silly ones, and most proposals don’t even try. The leading U.S. House proposal for mandatory interoperability, the ACCESS Act, would require that platforms “maintain a set of transparent, third-party-accessible interfaces (including application programming interfaces) to facilitate and maintain interoperability with a competing business or a potential competing business,” based on APIs designed by the Federal Trade Commission.

The only nod to the costs of this requirement are provisions that further require platforms to set “reasonably necessary” security standards, and a provision to allow the removal of third-party apps that don’t “reasonably secure” user data. No other costs of mandatory interoperability are acknowledged at all.

The same goes for the even more substantive proposals for mandatory interoperability. Released in July 2021, “Equitable Interoperability: The ‘Super Tool’ of Digital Platform Governance” is co-authored by some of the most esteemed competition economists in the business. While it details obscure points about matters like how chat groups might work across interoperable chat services, it is virtually silent on any of the costs or trade-offs of its proposals. Indeed, the first “risk” the report identifies is that regulators might be too slow to impose interoperability in certain cases! It reads like interoperability has been asked what its biggest weaknesses are in a job interview.

Where the report does acknowledge trade-offs—for example, interoperability making it harder for a service to monetize its user base, who can just bypass ads on the service by using a third-party app that blocks them—it just says that the overseeing “technical committee or regulator may wish to create conduct rules” to decide.

Ditto with the objection that mandatory interoperability might limit differentiation among competitors – like, for example, how imposing the old micro-USB standard on Apple might have stopped us from getting the Lightning port. Again, they punt: “We recommend that the regulator or the technical committee consult regularly with market participants and allow the regulated interface to evolve in response to market needs.”

But if we could entrust this degree of product design to regulators, weighing the costs of a feature against its benefits, we wouldn’t need markets or competition at all. And the report just assumes away many other obvious costs: “​​the working hypothesis we use in this paper is that the governance issues are more of a challenge than the technical issues.” Despite its illustrious panel of co-authors, the report fails to grapple with the most basic counterargument possible: its proposals have costs as well as benefits, and it’s not straightforward to decide which is bigger than which.

Strangely, the report includes a section that “looks ahead” to “Google’s Dominance Over the Internet of Things.” This, the report says, stems from the company’s “market power in device OS’s [that] allows Google to set licensing conditions that position Google to maintain its monopoly and extract rents from these industries in future.” The report claims this inevitability can only be avoided by imposing interoperability requirements.

The authors completely ignore that a smart home interoperability standard has already been developed, backed by a group of 170 companies that include Amazon, Apple, and Google, as well as SmartThings, IKEA, and Samsung. It is open source and, in principle, should allow a Google Home speaker to work with, say, an Amazon Ring doorbell. In markets where consumers really do want interoperability, it can emerge without a regulator requiring it, even if some companies have apparent incentive not to offer it.

If You Build It, They Still Might Not Come

Much of the case for interoperability interventions rests on the presumption that the benefits will be substantial. It’s hard to know how powerful network effects really are in preventing new competitors from entering digital markets, and none of the more substantial reports cited by the “Super Tool” report really try.

In reality, the cost of switching among services or products is never zero. Simply pointing out that particular costs—such as network effect-created switching costs—happen to exist doesn’t tell us much. In practice, many users are happy to multi-home across different services. I use at least eight different messaging apps every day (Signal, WhatsApp, Twitter DMs, Slack, Discord, Instagram DMs, Google Chat, and iMessage/SMS). I don’t find it particularly costly to switch among them, and have been happy to adopt new services that seemed to offer something new. Discord has built a thriving 150-million-user business, despite these switching costs. What if people don’t actually care if their Instagram DMs are interoperable with Slack?

None of this is to argue that interoperability cannot be useful. But it is often overhyped, and it is difficult to do in practice (because of those annoying trade-offs). After nearly five years, Open Banking in the UK—cited by the “Super Tool” report as an example of what it wants for other markets—still isn’t really finished yet in terms of functionality. It has required an enormous amount of time and investment by all parties involved and has yet to deliver obvious benefits in terms of consumer outcomes, let alone greater competition among the current accounts that have been made interoperable with other services. (My analysis of the lessons of Open Banking for other services is here.) Phone number portability, which is also cited by the “Super Tool” report, is another example of how hard even simple interventions can be to get right.

The world is filled with cases where we could imagine some benefits from interoperability but choose not to have them, because the costs are greater still. None of this is to say that interoperability mandates can never work, but their benefits can be oversold, especially when their costs are ignored. Many of mandatory interoperability’s more enthusiastic advocates should remember that such trade-offs exist—even for policies they really, really like.

The European Commission and its supporters were quick to claim victory following last week’s long-awaited General Court of the European Union ruling in the Google Shopping case. It’s hard to fault them. The judgment is ostensibly an unmitigated win for the Commission, with the court upholding nearly every aspect of its decision. 

However, the broader picture is much less rosy for both the Commission and the plaintiffs. The General Court’s ruling notably provides strong support for maintaining the current remedy package, in which rivals can bid for shopping box placement. This makes the Commission’s earlier rejection of essentially the same remedy  in 2014 look increasingly frivolous. It also pours cold water on rivals’ hopes that it might be replaced with something more far-reaching.

More fundamentally, the online world continues to move further from the idealistic conception of an “open internet” that regulators remain determined to foist on consumers. Indeed, users consistently choose convenience over openness, thus rejecting the vision of online markets upon which both the Commission’s decision and the General Court’s ruling are premised. 

The Google Shopping case will ultimately prove to be both a pyrrhic victory and a monument to the pitfalls of myopic intervention in digital markets.

Google’s big remedy win

The main point of law addressed in the Google Shopping ruling concerns the distinction between self-preferencing and refusals to deal. Contrary to Google’s defense, the court ruled that self-preferencing can constitute a standalone abuse of Article 102 of the Treaty on the Functioning of the European Union (TFEU). The Commission was thus free to dispense with the stringent conditions laid out in the 1998 Bronner ruling

This undoubtedly represents an important victory for the Commission, as it will enable it to launch new proceedings against both Google and other online platforms. However, the ruling will also constrain the Commission’s available remedies, and rightly so.

The origins of the Google Shopping decision are enlightening. Several rivals sought improved access to the top of the Google Search page. The Commission was receptive to those calls, but faced important legal constraints. The natural solution would have been to frame its case as a refusal to deal, which would call for a remedy in which a dominant firm grants rivals access to its infrastructure (be it physical or virtual). But going down this path would notably have required the Commission to show that effective access was “indispensable” for rivals to compete (one of the so-called Bronner conditions)—something that was most likely not the case here. 

Sensing these difficulties, the Commission framed its case in terms of self-preferencing, surmising that this would entail a much softer legal test. The General Court’s ruling vindicates this assessment (at least barring a successful appeal by Google):

240    It must therefore be concluded that the Commission was not required to establish that the conditions set out in the judgment of 26 November 1998, Bronner (C‑7/97, EU:C:1998:569), were satisfied […]. [T]he practices at issue are an independent form of leveraging abuse which involve […] ‘active’ behaviour in the form of positive acts of discrimination in the treatment of the results of Google’s comparison shopping service, which are promoted within its general results pages, and the results of competing comparison shopping services, which are prone to being demoted.

This more expedient approach, however, entails significant limits that will undercut both the Commission and rivals’ future attempts to extract more far-reaching remedies from Google.

Because the underlying harm is no longer the denial of access, but rivals being treated less favorably, the available remedies are much narrower. Google must merely ensure that it does not treat itself more preferably than rivals, regardless whether those rivals ultimately access its infrastructure and manage to compete. The General Court says this much when it explains the theory of harm in the case at hand:

287. Conversely, even if the results from competing comparison shopping services would be particularly relevant for the internet user, they can never receive the same treatment as results from Google’s comparison shopping service, whether in terms of their positioning, since, owing to their inherent characteristics, they are prone to being demoted by the adjustment algorithms and the boxes are reserved for results from Google’s comparison shopping service, or in terms of their display, since rich characters and images are also reserved to Google’s comparison shopping service. […] they can never be shown in as visible and as eye-catching a way as the results displayed in Product Universals.

Regulation 1/2003 (Art. 7.1) ensures the European Commission can only impose remedies that are “proportionate to the infringement committed and necessary to bring the infringement effectively to an end.” This has obvious ramifications for the Google Shopping remedy.

Under the remedy accepted by the Commission, Google agreed to auction off access to the Google Shopping box. Google and rivals would thus compete on equal footing to display comparison shopping results.

Illustrations taken from Graf & Mostyn, 2020

Rivals and their consultants decried this outcome; and Margrethe Vestager intimated the commission might review the remedy package. Both camps essentially argued the remedy did not meaningfully boost traffic to rival comparison shopping services (CSSs), because those services were not winning the best auction slots:

All comparison shopping services other than Google’s are hidden in plain sight, on a tab behind Google’s default comparison shopping page. Traffic cannot get to them, but instead goes to Google and on to merchants. As a result, traffic to comparison shopping services has fallen since the remedy—worsening the original abuse.

Or, as Margrethe Vestager put it:

We may see a show of rivals in the shopping box. We may see a pickup when it comes to clicks for merchants. But we still do not see much traffic for viable competitors when it comes to shopping comparison

But these arguments are entirely beside the point. If the infringement had been framed as a refusal to supply, it might be relevant that rivals cannot access the shopping box at what is, for them,  cost-effective price. Because the infringement was framed in terms of self-preferencing, all that matters is whether Google treats itself equally.

I am not aware of a credible claim that this is not the case. At best, critics have suggested the auction mechanism favors Google because it essentially pays itself:

The auction mechanism operated by Google to determine the price paid for PLA clicks also disproportionately benefits Google. CSSs are discriminated against per clickthrough, as they are forced to cede most of their profit margin in order to successfully bid […] Google, contrary to rival CSSs, does not, in reality, have to incur the auction costs and bid away a great part of its profit margins.

But this reasoning completely omits Google’s opportunity costs. Imagine a hypothetical (and oversimplified) setting where retailers are willing to pay Google or rival CSSs 13 euros per click-through. Imagine further that rival CSSs can serve these clicks at a cost of 2 euros, compared to 3 euros for Google (excluding the auction fee). Google is less efficient in this hypothetical. In this setting, rivals should be willing to bid up to 11 euros per click (the difference between what they expect to earn and their other costs). Critics claim Google will accept to bid higher because the money it pays itself during the auction is not really a cost (it ultimately flows to Google’s pockets). That is clearly false. 

To understand this, readers need only consider Google’s point of view. On the one hand, it could pay itself 11 euros (and some tiny increment) to win the auction. Its revenue per click-through would be 10 euros (13 euros per click-through, minus its cost of 3 euros). On the other hand, it could underbid rivals by a tiny increment, ensuring they bid 11 euros. When its critics argue that Google has an advantage because it pays itself, they are ultimately claiming that 10 is larger than 11.

Google’s remedy could hardly be more neutral. If it wins more auction slots than rivals CSSs, the appropriate inference should be that it is simply more efficient. Nothing in the Commission’s decision or the General Court’s ruling precludes that outcome. In short, while Google has (for the time being, at least) lost its battle to appeal the Commission’s decision, the remedy package—the same it put forward way back in 2014—has never looked stronger.

Good news for whom?

The above is mostly good news for both Google and consumers, who will be relieved that the General Court’s ruling preserves Google’s ability to show specialized boxes (of which the shopping unit is but one example). But that should not mask the tremendous downsides of both the Commission’s case and the court’s ruling. 

The Commission and rivals’ misapprehensions surrounding the Google Shopping remedy, as well as the General Court’s strong stance against self-preferencing, are revealing of a broader misunderstanding about online markets that also permeates through other digital regulation initiatives like the Digital Markets Act and the American Choice and Innovation Act. 

Policymakers wrongly imply that platform neutrality is a good in and of itself. They assume incumbent platforms generally have an incentive to favor their own services, and that preventing them from doing so is beneficial to both rivals and consumers. Yet neither of these statements is correct.

Economic research suggests self-preferencing is only harmful in exceptional circumstances. That is true of the traditional literature on platform threats (here and here), where harm is premised on the notion that rivals will use the downstream market, ultimately, to compete with an upstream incumbent. It’s also true in more recent scholarship that compares dual mode platforms to pure marketplaces and resellers, where harm hinges on a platform being able to immediately imitate rivals’ offerings. Even this ignores the significant efficiencies that might simultaneously arise from self-preferencing and closed platforms, more broadly. In short, rules that categorically prohibit self-preferening by dominant platforms overshoot the mark, and the General Court’s Google Shopping ruling is a troubling development in that regard.

It is also naïve to think that prohibiting self-preferencing will automatically benefit rivals and consumers (as opposed to harming the latter and leaving the former no better off). If self-preferencing is not anticompetitive, then propping up inefficient firms will at best be a futile exercise in preserving failing businesses. At worst, it would impose significant burdens on consumers by destroying valuable synergies between the platform and its own downstream service.

Finally, if the past years teach us anything about online markets, it is that consumers place a much heavier premium on frictionless user interfaces than on open platforms. TikTok is arguably a much more “closed” experience than other sources of online entertainment, like YouTube or Reddit (i.e. users have less direct control over their experience). Yet many observers have pinned its success, among other things, on its highly intuitive and simple interface. The emergence of Vinted, a European pre-owned goods platform, is another example of competition through a frictionless user experience.

There is a significant risk that, by seeking to boost “choice,” intervention by competition regulators against self-preferencing will ultimately remove one of the benefits users value most. By increasing the information users need to process, there is a risk that non-discrimination remedies will merely add pain points to the underlying purchasing process. In short, while Google Shopping is nominally a victory for the Commission and rivals, it is also a testament to the futility and harmfulness of myopic competition intervention in digital markets. Consumer preferences cannot be changed by government fiat, nor can the fact that certain firms are more efficient than others (at least, not without creating significant harm in the process). It is time this simple conclusion made its way into European competition thinking.

[Judge Douglas Ginsburg was invited to respond to the Beesley Lecture given by Andrea Coscelli, chief executive of the U.K. Competition and Markets Authority (CMA). Both the lecture and Judge Ginsburg’s response were broadcast by the BBC on Oct. 28, 2021. The text of Mr. Coscelli’s Beesley lecture is available on the CMA’s website. Judge Ginsburg’s response follows below.]

Thank you, Victoria, for the invitation to respond to Mr. Coscelli and his proposal for a legislatively founded Digital Markets Unit. Mr. Coscelli is one of the most talented, successful, and creative heads a competition agency has ever had. In the case of the DMU [ed., Digital Markets Unit], however, I think he has let hope triumph over experience and prudence. This is often the case with proposals for governmental reform: Indeed, it has a name, the Nirvana Fallacy, which comes from comparing the imperfectly functioning marketplace with the perfectly functioning government agency. Everything we know about the regulation of competition tells us the unintended consequences may dwarf the intended benefits and the result may be a less, not more, competitive economy. The precautionary principle counsels skepticism about such a major and inherently risky intervention.

Mr. Coscelli made a point in passing that highlights the difference in our perspectives: He said the SMS [ed., strategic market status] merger regime would entail “a more cautious standard of proof.” In our shared Anglo-American legal culture, a more cautious standard of proof means the government would intervene in fewer, not more, market activities; proof beyond a reasonable doubt in criminal cases is a more cautious standard than a mere preponderance of the evidence. I, too, urge caution, but of the traditional kind.

I will highlight five areas of concern with the DMU proposal.

I. Chilling Effects

The DMU’s ability to designate a firm as being of strategic market significance—or SMS—will place a potential cloud over innovative activity in far more sectors than Mr. Coscelli could mention in his lecture. He views the DMU’s reach as limited to a small number of SMS-designated firms; and that may prove true, but there is nothing in the proposal limiting DMU’s reach.

Indeed, the DMU’s authority to regulate digital markets is surely going to be difficult to confine. Almost every major retail activity or consumer-facing firm involves an increasingly significant digital component, particularly after the pandemic forced many more firms online. Deciding which firms the DMU should cover seems easy in theory, but will prove ever more difficult and cumbersome in practice as digital technology continues to evolve. For instance, now that money has gone digital, a bank is little more than a digital platform bringing together lenders (called depositors) and borrowers, much as Amazon brings together buyers and sellers; so, is every bank with market power and an entrenched position to be subject to rules and remedies laid down by the DMU as well as supervision by the bank regulators? Is Aldi in the crosshairs now that it has developed an online retail platform? Match.com, too? In short, the number of SMS firms will likely grow apace in the next few years.

II. SMS Designations Should Not Apply to the Whole Firm

The CMA’s proposal would apply each SMS designation firm-wide, even if the firm has market power in a single line of business. This will inhibit investment in further diversification and put an SMS firm at a competitive disadvantage across all its businesses.

Perhaps company-wide SMS designations could be justified if the unintended costs were balanced by expected benefits to consumers, but this will not likely be the case. First, there is little evidence linking consumer harm to lines of business in which large digital firms do not have market power. On the contrary, despite the discussion of Amazon’s supposed threat to competition, consumers enjoy lower prices from many more retailers because of the competitive pressure Amazon brings to bear upon them.

Second, the benefits Mr. Coscelli expects the economy to reap from faster government enforcement are, at best, a mixed blessing. The proposal, you see, reverses the usual legal norm, instead making interim relief the rule rather than the exception. If a firm appeals its SMS designation, then under the CMA’s proposal, the DMU’s SMS designations and pro-competition interventions, or PCIs, will not be stayed pending appeal, raising the prospect that a firm’s activities could be regulated for a significant period even though it was improperly designated. Even prevailing in the courts may be a Pyrrhic victory because opportunities will have slipped away. Making matters worse, the DMU’s designation of a firm as SMS will likely receive a high degree of judicial deference, so that errors may never be corrected.

III. The DMU Cannot Be Evidence-based Given its Goals and Objectives

The DMU’s stated goal is to “further the interests of consumers and citizens in digital markets by promoting competition and innovation.”[1] DMU’s objectives for developing codes of conduct are: fair trading, open choices, and trust and transparency.[2] Fairness, openness, trust, and transparency are all concepts that are difficult to define and probably impossible to quantify. Therefore, I fear Mr. Coscelli’s aspiration that the DMU will be an evidence-based, tailored, and predictable regime seem unrealistic. The CMA’s idea of “an evidence-based regime” seems destined to rely mostly upon qualitative conjecture about the potential for the code of conduct to set “rules of the game” that encourage fair trading, open choices, trust, and transparency. Even if the DMU commits to considering empirical evidence at every step of its process, these fuzzy, qualitative objectives will allow it to come to virtually any conclusion about how a firm should be regulated.

Implementing those broad goals also throws into relief the inevitable tensions among them. Some potential conflicts between DMU’s objectives for developing codes of conduct are clear from the EU’s experience. For example, one of the things DMU has considered already is stronger protection for personal data. The EU’s experience with the GDPR shows that data protection is costly and, like any costly requirement, tends to advantage incumbents and thereby discourage new entry. In other words, greater data protections may come at the expense of start-ups or other new entrants and the contribution they would otherwise have made to competition, undermining open choices in the name of data transparency.

Another example of tension is clear from the distinction between Apple’s iOS and Google’s Android ecosystems. They take different approaches to the trade-off between data privacy and flexibility in app development. Apple emphasizes consumer privacy at the expense of allowing developers flexibility in their design choices and offers its products at higher prices. Android devices have fewer consumer-data protections but allow app developers greater freedom to design their apps to satisfy users and are offered at lower prices. The case of Epic Games v. Apple put on display the purportedly pro-competitive arguments the DMU could use to justify shutting down Apple’s “walled garden,” whereas the EU’s GDPR would cut against Google’s open ecosystem with limited consumer protections. Apple’s model encourages consumer trust and adoption of a single, transparent model for app development, but Google’s model encourages app developers to choose from a broader array of design and payment options and allows consumers to choose between the options; no matter how the DMU designs its code of conduct, it will be creating winners and losers at the cost of either “open choices” or “trust and transparency.” As experience teaches is always the case, it is simply not possible for an agency with multiple goals to serve them all at the same time. The result is an unreviewable discretion to choose among them ad hoc.

Finally, notice that none of the DMU’s objectives—fair trading, open choices, and trust and transparency—revolves around quantitative evidence; at bottom, these goals are not amenable to the kind of rigor Mr. Coscelli hopes for.

IV. Speed of Proposals

Mr. Coscelli has emphasized the slow pace of competition law matters; while I empathize, surely forcing merging parties to prove a negative and truncating their due process rights is not the answer.

As I mentioned earlier, it seems a more cautious standard of proof to Mr. Coscelli is one in which an SMS firm’s proposal to acquire another firm is presumed, or all but presumed, to be anticompetitive and unlawful. That is, the DMU would block the transaction unless the firms can prove their deal would not be anticompetitive—an extremely difficult task. The most self-serving version of the CMA’s proposal would require it to prove only that the merger poses a “realistic prospect” of lessening competition, which is vague, but may in practice be well below a 50% chance. Proving that the merged entity does not harm competition will still require a predictive forward-looking assessment with inherent uncertainty, but the CMA wants the costs of uncertainty placed upon firms, rather than it. Given the inherent uncertainty in merger analysis, the CMA’s proposal would pose an unprecedented burden of proof on merging parties.

But it is not only merging parties the CMA would deprive of due process; the DMU’s so-called pro-competitive interventions, or PCI, SMS designations, and code-of-conduct requirements generally would not be stayed pending appeal. Further, an SMS firm could overturn the CMA’s designation only if it could overcome substantial deference to the DMU’s fact-finding. It is difficult to discern, then, the difference between agency decisions and final orders.

The DMU would not have to show or even assert an extraordinary need for immediate relief. This is the opposite of current practice in every jurisdiction with which I am familiar.  Interim orders should take immediate effect only in exceptional circumstances, when there would otherwise be significant and irreversible harm to consumers, not in the ordinary course of agency decision making.

V. Antitrust Is Not Always the Answer

Although one can hardly disagree with Mr. Coscelli’s premise that the digital economy raises new legal questions and practical challenges, it is far from clear that competition law is the answer to them all. Some commentators of late are proposing to use competition law to solve consumer protection and even labor market problems. Unfortunately, this theme also recurs in Mr. Coscelli’s lecture. He discusses concerns with data privacy and fair and reasonable contract terms, but those have long been the province of consumer protection and contract law; a government does not need to step in and regulate all realms of activity by digital firms and call it competition law. Nor is there reason to confine needed protections of data privacy or fair terms of use to SMS firms.

Competition law remedies are sometimes poorly matched to the problems a government is trying to correct. Mr. Coscelli discusses the possibility of strong interventions, such as forcing the separation of a platform from its participation in retail markets; for example, the DMU could order Amazon to spin off its online business selling and shipping its own brand of products. Such powerful remedies can be a sledgehammer; consider forced data sharing or interoperability to make it easier for new competitors to enter. For example, if Apple’s App Store is required to host all apps submitted to it in the interest of consumer choice, then Apple loses its ability to screen for security, privacy, and other consumer benefits, as its refusal   to deal is its only way to prevent participation in its store. Further, it is not clear consumers want Apple’s store to change; indeed, many prefer Apple products because of their enhanced security.

Forced data sharing would also be problematic; the hiQ v. LinkedIn case in the United States should serve as a cautionary tale. The trial court granted a preliminary injunction forcing LinkedIn to allow hiQ to scrape its users’ profiles while the suit was ongoing. LinkedIn ultimately won the suit because it did not have market power, much less a monopoly, in any relevant market. The court concluded each theory of anticompetitive conduct was implausible, but meanwhile LinkedIn had been forced to allow hiQ to scrape its data for an extended period before the final decision. There is no simple mechanism to “unshare” the data now that LinkedIn has prevailed. This type of case could be common under the CMA proposal because the DMU’s orders will go into immediate effect.

There is potentially much redeeming power in the Digital Regulation Co-operation Forum as Mr. Coscelli described it, but I take a different lesson from this admirable attempt to coordinate across agencies: Perhaps it is time to look beyond antitrust to solve problems that are not based upon market power. As the DRCF highlights, there are multiple agencies with overlapping authority in the digital market space. ICO and Ofcom each have authority to take action against a firm that disseminates fake news or false advertisements. Mr. Coscelli says it would be too cumbersome to take down individual bad actors, but, if so, then the solution is to adopt broader consumer protection rules, not apply an ill-fitting set of competition law rules. For example, the U.K. could change its notice-and-takedown rules to subject platforms to strict liability if they host fake news, even without knowledge that they are doing so, or perhaps only if they are negligent in discharging their obligation to police against it.

Alternatively, the government could shrink the amount of time platforms have to take down information; France gives platforms only about an hour to remove harmful information. That sort of solution does not raise the same prospect of broadly chilling market activity, but still addresses one of the concerns Mr. Coscelli raises with digital markets.

In sum, although Mr. Coscelli is of course correct that competition authorities and governments worldwide are considering whether to adopt broad reforms to their competition laws, the case against broadening remains strong. Instead of relying upon the self-corrective potential of markets, which is admittedly sometimes slower than anyone would like, the CMA assumes markets need regulation until firms prove otherwise. Although clearly well-intentioned, the DMU proposal is in too many respects not met to the task of protecting competition in digital markets; at worst, it will inhibit innovation in digital markets to the point of driving startups and other innovators out of the U.K.


[1] See Digital markets Taskforce, A new pro-competition regime for digital markets, at 22, Dec. 2020, available at: https://assets.publishing.service.gov.uk/media/5fce7567e90e07562f98286c/Digital_Taskforce_-_Advice.pdf; Oliver Dowden & Kwasi Kwarteng, A New Pro-competition Regime for Digital Markets, July 2021, available from: https://www.gov.uk/government/consultations/a-new-pro-competition-regime-for-digital-markets, at ¶ 27.

[2] Sam Bowman, Sam Dumitriu & Aria Babu, Conflicting Missions:The Risks of the Digital Markets Unit to Competition and Innovation, Int’l Center for L. & Econ., June 2021, at 13.

There has been a rapid proliferation of proposals in recent years to closely regulate competition among large digital platforms. The European Union’s Digital Markets Act (DMA, which will become effective in 2023) imposes a variety of data-use, interoperability, and non-self-preferencing obligations on digital “gatekeeper” firms. A host of other regulatory schemes are being considered in Australia, France, Germany, and Japan, among other countries (for example, see here). The United Kingdom has established a Digital Markets Unit “to operationalise the future pro-competition regime for digital markets.” Recently introduced U.S. Senate and House Bills—although touted as “antitrust reform” legislation—effectively amount to “regulation in disguise” of disfavored business activities by very large companies,  including the major digital platforms (see here and here).

Sorely missing from these regulatory proposals is any sense of the fallibility of regulation. Indeed, proponents of new regulatory proposals seem to implicitly assume that government regulation of platforms will enhance welfare, ignoring real-life regulatory costs and regulatory failures (see here, for example). Without evidence, new regulatory initiatives are put forth as superior to long-established, consumer-based antitrust law enforcement.

The hope that new regulatory tools will somehow “solve” digital market competitive “problems” stems from the untested assumption that established consumer welfare-based antitrust enforcement is “not up to the task.” Untested assumptions, however, are an unsound guide to public policy decisions. Rather, in order to optimize welfare, all proposed government interventions in the economy, including regulation and antitrust, should be subject to decision-theoretic analysis that is designed to minimize the sum of error and decision costs (see here). What might such an analysis reveal?

Wonder no more. In a just-released Mercatus Center Working Paper, Professor Thom Lambert has conducted a decision-theoretic analysis that evaluates the relative merits of U.S. consumer welfare-based antitrust, ex ante regulation, and ongoing agency oversight in addressing the market power of large digital platforms. While explaining that antitrust and its alternatives have their respective costs and benefits, Lambert concludes that antitrust is the welfare-superior approach to dealing with platform competition issues. According to Lambert:

This paper provides a comparative institutional analysis of the leading approaches to addressing the market power of large digital platforms: (1) the traditional US antitrust approach; (2) imposition of ex ante conduct rules such as those in the EU’s Digital Markets Act and several bills recently advanced by the Judiciary Committee of the US House of Representatives; and (3) ongoing agency oversight, exemplified by the UK’s newly established “Digital Markets Unit.” After identifying the advantages and disadvantages of each approach, this paper examines how they might play out in the context of digital platforms. It first examines whether antitrust is too slow and indeterminate to tackle market power concerns arising from digital platforms. It next considers possible error costs resulting from the most prominent proposed conduct rules. It then shows how three features of the agency oversight model—its broad focus, political susceptibility, and perpetual control—render it particularly vulnerable to rent-seeking efforts and agency capture. The paper concludes that antitrust’s downsides (relative indeterminacy and slowness) are likely to be less significant than those of ex ante conduct rules (large error costs resulting from high informational requirements) and ongoing agency oversight (rent-seeking and agency capture).

Lambert’s analysis should be carefully consulted by American legislators and potential rule-makers (including at the Federal Trade Commission) before they institute digital platform regulation. One also hopes that enlightened foreign competition officials will also take note of Professor Lambert’s well-reasoned study.