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Today would have been Henry Manne’s 90th birthday. When he passed away in 2015 he left behind an immense and impressive legacy. In 1991, at the inaugural meeting of the American Law & Economics Association (ALEA), Manne was named a Life Member of ALEA and, along with Nobel Laureate Ronald Coase, and federal appeals court judges Richard Posner and Guido Calabresi, one of the four Founders of Law and Economics. The organization I founded, the International Center for Law & Economics is dedicated to his memory, along with that of his great friend and mentor, UCLA economist Armen Alchian.

Manne is best known for his work in corporate governance and securities law and regulation, of course. But sometimes forgotten is that his work on the market for corporate control was motivated by concerns about analytical flaws in merger enforcement. As former FTC commissioners Maureen Ohlhausen and Joshua Wright noted in a 2015 dissenting statement:

The notion that the threat of takeover would induce current managers to improve firm performance to the benefit of shareholders was first developed by Henry Manne. Manne’s pathbreaking work on the market for corporate control arose out of a concern that antitrust constraints on horizontal mergers would distort its functioning. See Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. POL. ECON. 110 (1965).

But Manne’s focus on antitrust didn’t end in 1965. Moreover, throughout his life he was a staunch critic of misguided efforts to expand the power of government, especially when these efforts claimed to have their roots in economic reasoning — which, invariably, was hopelessly flawed. As his obituary notes:

In his teaching, his academic writing, his frequent op-eds and essays, and his work with organizations like the Cato Institute, the Liberty Fund, the Institute for Humane Studies, and the Mont Pèlerin Society, among others, Manne advocated tirelessly for a clearer understanding of the power of markets and competition and the importance of limited government and economically sensible regulation.

Thus it came to be, in 1974, that Manne was called to testify before the Senate Judiciary Committee, Subcommittee on Antitrust and Monopoly, on Michigan Senator Philip A. Hart’s proposed Industrial Reorganization Act. His testimony is a tour de force, and a prescient rejoinder to the faddish advocates of today’s “hipster antitrust”— many of whom hearken longingly back to the antitrust of the 1960s and its misguided “gurus.”

Henry Manne’s trenchant testimony critiquing the Industrial Reorganization Act and its (ostensible) underpinnings is reprinted in full in this newly released ICLE white paper (with introductory material by Geoffrey Manne):

Henry G. Manne: Testimony on the Proposed Industrial Reorganization Act of 1973 — What’s Hip (in Antitrust) Today Should Stay Passé

Sen. Hart proposed the Industrial Reorganization Act in order to address perceived problems arising from industrial concentration. The bill was rooted in the belief that industry concentration led inexorably to monopoly power; that monopoly power, however obtained, posed an inexorable threat to freedom and prosperity; and that the antitrust laws (i.e., the Sherman and Clayton Acts) were insufficient to address the purported problems.

That sentiment — rooted in the reflexive application of the (largely-discredited structure-conduct-performance (SCP) paradigm) — had already become largely passé among economists in the 70s, but it has resurfaced today as the asserted justification for similar (although less onerous) antitrust reform legislation and the general approach to antitrust analysis commonly known as “hipster antitrust.”

The critiques leveled against the asserted economic underpinnings of efforts like the Industrial Reorganization Act are as relevant today as they were then. As Henry Manne notes in his testimony:

To be successful in this stated aim [“getting the government out of the market”] the following dreams would have to come true: The members of both the special commission and the court established by the bill would have to be satisfied merely to complete their assigned task and then abdicate their tremendous power and authority; they would have to know how to satisfactorily define and identify the limits of the industries to be restructured; the Government’s regulation would not sacrifice significant efficiencies or economies of scale; and the incentive for new firms to enter an industry would not be diminished by the threat of a punitive response to success.

The lessons of history, economic theory, and practical politics argue overwhelmingly against every one of these assumptions.

Both the subject matter of and impetus for the proposed bill (as well as Manne’s testimony explaining its economic and political failings) are eerily familiar. The preamble to the Industrial Reorganization Act asserts that

competition… preserves a democratic society, and provides an opportunity for a more equitable distribution of wealth while avoiding the undue concentration of economic, social, and political power; [and] the decline of competition in industries with oligopoly or monopoly power has contributed to unemployment, inflation, inefficiency, an underutilization of economic capacity, and the decline of exports….

The echoes in today’s efforts to rein in corporate power by adopting structural presumptions are unmistakable. Compare, for example, this language from Sen. Klobuchar’s Consolidation Prevention and Competition Promotion Act of 2017:

[C]oncentration that leads to market power and anticompetitive conduct makes it more difficult for people in the United States to start their own businesses, depresses wages, and increases economic inequality;

undue market concentration also contributes to the consolidation of political power, undermining the health of democracy in the United States; [and]

the anticompetitive effects of market power created by concentration include higher prices, lower quality, significantly less choice, reduced innovation, foreclosure of competitors, increased entry barriers, and monopsony power.

Remarkably, Sen. Hart introduced his bill as “an alternative to government regulation and control.” Somehow, it was the antithesis of “government control” to introduce legislation that, in Sen. Hart’s words,

involves changing the life styles of many of our largest corporations, even to the point of restructuring whole industries. It involves positive government action, not to control industry but to restore competition and freedom of enterprise in the economy

Like today’s advocates of increased government intervention to design the structure of the economy, Sen. Hart sought — without a trace of irony — to “cure” the problem of politicized, ineffective enforcement by doubling down on the power of the enforcers.

Henry Manne was having none of it. As he pointedly notes in his testimony, the worst problems of monopoly power are of the government’s own making. The real threat to democracy, freedom, and prosperity is the political power amassed in the bureaucratic apparatus that frequently confers monopoly, at least as much as the monopoly power it spawns:

[I]t takes two to make that bargain [political protection and subsidies in exchange for lobbying]. And as we look around at various industries we are constrained to ask who has not done this. And more to the point, who has not succeeded?

It is unhappily almost impossible to name a significant industry in the United States that has not gained some degree of protection from the rigors of competition from Federal, State or local governments.

* * *

But the solution to inefficiencies created by Government controls cannot lie in still more controls. The politically responsible task ahead for Congress is to dismantle our existing regulatory monster before it strangles us.

We have spawned a gigantic bureaucracy whose own political power threatens the democratic legitimacy of government.

We are rapidly moving toward the worst features of a centrally planned economy with none of the redeeming political, economic, or ethical features usually claimed for such systems.

The new white paper includes Manne’s testimony in full, including his exchange with Sen. Hart and committee staffers following his prepared remarks.

It is, sadly, nearly as germane today as it was then.

One final note: The subtitle for the paper is a reference to the song “What Is Hip?” by Tower of Power. Its lyrics are decidedly apt:

You done went and found you a guru,

In your effort to find you a new you,

And maybe even managed

To raise your conscious level.

While you’re striving to find the right road,

There’s one thing you should know:

What’s hip today

Might become passé.

— Tower of Power, What Is Hip? (Emilio Castillo, John David Garibaldi & Stephen M. Kupka, What Is Hip? (Bob-A-Lew Songs 1973), from the album TOWER OF POWER (Warner Bros. 1973))

And here’s the song, in all its glory:

 

One of the hottest antitrust topics of late has been institutional investors’ “common ownership” of minority stakes in competing firms.  Writing in the Harvard Law Review, Einer Elhauge proclaimed that “[a]n economic blockbuster has recently been exposed”—namely, “[a] small group of institutions has acquired large shareholdings in horizontal competitors throughout our economy, causing them to compete less vigorously with each other.”  In the Antitrust Law Journal, Eric Posner, Fiona Scott Morton, and Glen Weyl contended that “the concentration of markets through large institutional investors is the major new antitrust challenge of our time.”  Those same authors took to the pages of the New York Times to argue that “[t]he great, but mostly unknown, antitrust story of our time is the astonishing rise of the institutional investor … and the challenge that it poses to market competition.”

Not surprisingly, these scholars have gone beyond just identifying a potential problem; they have also advocated policy solutions.  Elhauge has called for allowing government enforcers and private parties to use Section 7 of the Clayton Act, the provision primarily used to prevent anticompetitive mergers, to police institutional investors’ ownership of minority positions in competing firms.  Posner et al., concerned “that private litigation or unguided public litigation could cause problems because of the interactive nature of institutional holdings on competition,” have proposed that federal antitrust enforcers adopt an enforcement policy that would encourage institutional investors either to avoid common ownership of firms in concentrated industries or to limit their influence over such firms by refraining from voting their shares.

The position of these scholars is thus (1) that common ownership by institutional investors significantly diminishes competition in concentrated industries, and (2) that additional antitrust intervention—beyond generally applicable rules on, say, hub-and-spoke conspiracies and anticompetitive information exchanges—is appropriate to prevent competitive harm.

Mike Sykuta and I have recently posted a paper taking issue with this two-pronged view.  With respect to the first prong, we contend that there are serious problems with both the theory of competitive harm stemming from institutional investors’ common ownership and the empirical evidence that has been marshalled in support of that theory.  With respect to the second, we argue that even if competition were softened by institutional investors’ common ownership of small minority interests in competing firms, the unintended negative consequences of an antitrust fix would outweigh any benefits from such intervention.

Over the next few days, we plan to unpack some of the key arguments in our paper, The Case for Doing Nothing About Institutional Investors’ Common Ownership of Small Stakes in Competing Firms.  In the meantime, we encourage readers to download the paper and send us any comments.

The paper’s abstract is below the fold. Continue Reading…

The FTC will hold an “Informational Injury Workshop” in December “to examine consumer injury in the context of privacy and data security.” Defining the scope of cognizable harm that may result from the unauthorized use or third-party hacking of consumer information is, to be sure, a crucial inquiry, particularly as ever-more information is stored digitally. But the Commission — rightly — is aiming at more than mere definition. As it notes, the ultimate objective of the workshop is to address questions like:

How do businesses evaluate the benefits, costs, and risks of collecting and using information in light of potential injuries? How do they make tradeoffs? How do they assess the risks of different kinds of data breach? What market and legal incentives do they face, and how do these incentives affect their decisions?

How do consumers perceive and evaluate the benefits, costs, and risks of sharing information in light of potential injuries? What obstacles do they face in conducting such an evaluation? How do they evaluate tradeoffs?

Understanding how businesses and consumers assess the risk and cost “when information about [consumers] is misused,” and how they conform their conduct to that risk, entails understanding not only the scope of the potential harm, but also the extent to which conduct affects the risk of harm. This, in turn, requires an understanding of the FTC’s approach to evaluating liability under Section 5 of the FTC Act.

The problem, as we discuss in comments submitted by the International Center for Law & Economics to the FTC for the workshop, is that the Commission’s current approach troublingly mixes the required separate analyses of risk and harm, with little elucidation of either.

The core of the problem arises from the Commission’s reliance on what it calls a “reasonableness” standard for its evaluation of data security. By its nature, a standard that assigns liability for only unreasonable conduct should incorporate concepts resembling those of a common law negligence analysis — e.g., establishing a standard of due care, determining causation, evaluating the costs of and benefits of conduct that would mitigate the risk of harm, etc. Unfortunately, the Commission’s approach to reasonableness diverges from the rigor of a negligence analysis. In fact, as it has developed, it operates more like a strict liability regime in which largely inscrutable prosecutorial discretion determines which conduct, which firms, and which outcomes will give rise to liability.

Most troublingly, coupled with the Commission’s untenably lax (read: virtually nonexistent) evidentiary standards, the extremely liberal notion of causation embodied in its “reasonableness” approach means that the mere storage of personal information, even absent any data breach, could amount to an unfair practice under the Act — clearly not a “reasonable” result.

The notion that a breach itself can constitute injury will, we hope, be taken up during the workshop. But even if injury is limited to a particular type of breach — say, one in which sensitive, personal information is exposed to a wide swath of people — unless the Commission’s definition of what it means for conduct to be “likely to cause” harm is fixed, it will virtually always be the case that storage of personal information could conceivably lead to the kind of breach that constitutes injury. In other words, better defining the scope of injury does little to cabin the scope of the agency’s discretion when conduct creating any risk of that injury is actionable.

Our comments elaborate on these issues, as well as providing our thoughts on how the subjective nature of informational injuries can fit into Section 5, with a particular focus on the problem of assessing informational injury given evolving social context, and the need for appropriately assessing benefits in any cost-benefit analysis of conduct leading to informational injury.

ICLE’s full comments are available here.

The comments draw upon our article, When ‘Reasonable’ Isn’t: The FTC’s Standard-Less Data Security Standard, forthcoming in the Journal of Law, Economics and Policy.

In a recent post at the (appallingly misnamed) ProMarket blog (the blog of the Stigler Center at the University of Chicago Booth School of Business — George Stigler is rolling in his grave…), Marshall Steinbaum keeps alive the hipster-antitrust assertion that lax antitrust enforcement — this time in the labor market — is to blame for… well, most? all? of what’s wrong with “the labor market and the broader macroeconomic conditions” in the country.

In this entry, Steinbaum takes particular aim at the US enforcement agencies, which he claims do not consider monopsony power in merger review (and other antitrust enforcement actions) because their current consumer welfare framework somehow doesn’t recognize monopsony as a possible harm.

This will probably come as news to the agencies themselves, whose Horizontal Merger Guidelines devote an entire (albeit brief) section (section 12) to monopsony, noting that:

Mergers of competing buyers can enhance market power on the buying side of the market, just as mergers of competing sellers can enhance market power on the selling side of the market. Buyer market power is sometimes called “monopsony power.”

* * *

Market power on the buying side of the market is not a significant concern if suppliers have numerous attractive outlets for their goods or services. However, when that is not the case, the Agencies may conclude that the merger of competing buyers is likely to lessen competition in a manner harmful to sellers.

Steinbaum fails to mention the HMGs, but he does point to a US submission to the OECD to make his point. In that document, the agencies state that

The U.S. Federal Trade Commission (“FTC”) and the Antitrust Division of the Department of Justice (“DOJ”) [] do not consider employment or other non-competition factors in their antitrust analysis. The antitrust agencies have learned that, while such considerations “may be appropriate policy objectives and worthy goals overall… integrating their consideration into a competition analysis… can lead to poor outcomes to the detriment of both businesses and consumers.” Instead, the antitrust agencies focus on ensuring robust competition that benefits consumers and leave other policies such as employment to other parts of government that may be specifically charged with or better placed to consider such objectives.

Steinbaum, of course, cites only the first sentence. And he uses it as a launching-off point to attack the notion that antitrust is an improper tool for labor market regulation. But if he had just read a little bit further in the (very short) document he cites, Steinbaum might have discovered that the US antitrust agencies have, in fact, challenged the exercise of collusive monopsony power in labor markets. As footnote 19 of the OECD submission notes:

Although employment is not a relevant policy goal in antitrust analysis, anticompetitive conduct affecting terms of employment can violate the Sherman Act. See, e.g., DOJ settlement with eBay Inc. that prevents the company from entering into or maintaining agreements with other companies that restrain employee recruiting or hiring; FTC settlement with ski equipment manufacturers settling charges that companies illegally agreed not to compete for one another’s ski endorsers or employees. (Emphasis added).

And, ironically, while asserting that labor market collusion doesn’t matter to the agencies, Steinbaum himself points to “the Justice Department’s 2010 lawsuit against Silicon Valley employers for colluding not to hire one another’s programmers.”

Steinbaum instead opts for a willful misreading of the first sentence of the OECD submission. But what the OECD document refers to, of course, are situations where two firms merge, no market power is created (either in input or output markets), but people are laid off because the merged firm does not need all of, say, the IT and human resources employees previously employed in the pre-merger world.

Does Steinbaum really think this is grounds for challenging the merger on antitrust grounds?

Actually, his post suggests that he does indeed think so, although he doesn’t come right out and say it. What he does say — as he must in order to bring antitrust enforcement to bear on the low- and unskilled labor markets (e.g., burger flippers; retail cashiers; Uber drivers) he purports to care most about — is that:

Employers can have that control [over employees, as opposed to independent contractors] without first establishing themselves as a monopoly—in fact, reclassification [of workers as independent contractors] is increasingly standard operating procedure in many industries, which means that treating it as a violation of Section 2 of the Sherman Act should not require that outright monopolization must first be shown. (Emphasis added).

Honestly, I don’t have any idea what he means. Somehow, because firms hire independent contractors where at one time long ago they might have hired employees… they engage in Sherman Act violations, even if they don’t have market power? Huh?

I get why he needs to try to make this move: As I intimated above, there is probably not a single firm in the world that hires low- or unskilled workers that has anything approaching monopsony power in those labor markets. Even Uber, the example he uses, has nothing like monopsony power, unless perhaps you define the market (completely improperly) as “drivers already working for Uber.” Even then Uber doesn’t have monopsony power: There can be no (or, at best, virtually no) markets in the world where an Uber driver has no other potential employment opportunities but working for Uber.

Moreover, how on earth is hiring independent contractors evidence of anticompetitive behavior? ”Reclassification” is not, in fact, “standard operating procedure.” It is the case that in many industries firms (unilaterally) often decide to contract out the hiring of low- and unskilled workers over whom they do not need to exercise direct oversight to specialized firms, thus not employing those workers directly. That isn’t “reclassification” of existing workers who have no choice but to accept their employer’s terms; it’s a long-term evolution of the economy toward specialization, enabled in part by technology.

And if we’re really concerned about what “employee” and “independent contractor” mean for workers and employment regulation, we should reconsider those outdated categories. Firms are faced with a binary choice: hire workers or independent contractors. Neither really fits many of today’s employment arrangements very well, but that’s the choice firms are given. That they sometimes choose “independent worker” over “employee” is hardly evidence of anticompetitive conduct meriting antitrust enforcement.

The point is: The notion that any of this is evidence of monopsony power, or that the antitrust enforcement agencies don’t care about monopsony power — because, Bork! — is absurd.

Even more absurd is the notion that the antitrust laws should be used to effect Steinbaum’s preferred market regulations — independent of proof of actual anticompetitive effect. I get that it’s hard to convince Congress to pass the precise laws you want all the time. But simply routing around Congress and using the antitrust statutes as a sort of meta-legislation to enact whatever happens to be Marshall Steinbaum’s preferred regulation du jour is ridiculous.

Which is a point the OECD submission made (again, if only Steinbaum had read beyond the first sentence…):

[T]wo difficulties with expanding the scope of antitrust analysis to include employment concerns warrant discussion. First, a full accounting of employment effects would require consideration of short-term effects, such as likely layoffs by the merged firm, but also long-term effects, which could include employment gains elsewhere in the industry or in the economy arising from efficiencies generated by the merger. Measuring these effects would [be extremely difficult.]. Second, unless a clear policy spelling out how the antitrust agency would assess the appropriate weight to give employment effects in relation to the proposed conduct or transaction’s procompetitive and anticompetitive effects could be developed, [such enforcement would be deeply problematic, and essentially arbitrary].

To be sure, the agencies don’t recognize enough that they already face the problem of reconciling multidimensional effects — e.g., short-, medium-, and long-term price effects, innovation effects, product quality effects, etc. But there is no reason to exacerbate the problem by asking them to also consider employment effects. Especially not in Steinbaum’s world in which certain employment effects are problematic even without evidence of market power or even actual anticompetitive harm, just because he says so.

Consider how this might play out:

Suppose that Pepsi, Coca-Cola, Dr. Pepper… and every other soft drink company in the world attempted to merge, creating a monopoly soft drink manufacturer. In what possible employment market would even this merger create a monopsony in which anticompetitive harm could be tied to the merger? In the market for “people who know soft drink secret formulas?” Yet Steinbaum would have the Sherman Act enforced against such a merger not because it might create a product market monopoly, but because the existence of a product market monopoly means the firm must be able to bad things in other markets, as well. For Steinbaum and all the other scolds who see concentration as the source of all evil, the dearth of evidence to support such a claim is no barrier (on which, see, e.g., this recent, content-less NYT article (that, naturally, quotes Steinbaum) on how “big business may be to blame” for the slowing rate of startups).

The point is, monopoly power in a product market does not necessarily have any relationship to monopsony power in the labor market. Simply asserting that it does — and lambasting the enforcement agencies for not just accepting that assertion — is farcical.

The real question, however, is what has happened to the University of Chicago that it continues to provide a platform for such nonsense?

My new book, How to Regulate: A Guide for Policymakers, will be published in a few weeks.  A while back, I promised a series of posts on the book’s key chapters.  I posted an overview of the book and a description of the book’s chapter on externalities.  I then got busy on another writing project (on horizontal shareholdings—more on that later) and dropped the ball.  Today, I resume my book summary with some thoughts from the book’s chapter on public goods.

With most goods, the owner can keep others from enjoying what she owns, and, if one person enjoys the good, no one else can do so.  Consider your coat or your morning cup of Starbucks.  You can prevent me from wearing your coat or drinking your coffee, and if you choose to let me wear the coat or drink the coffee, it’s not available to anyone else.

There are some amenities, though, that are “non-excludable,” meaning that the owner can’t prevent others from enjoying them, and “non-rivalrous,” meaning that one person’s consumption of them doesn’t prevent others from enjoying them as well.  National defense and local flood control systems (levees, etc.) are like this.  So are more mundane things like public art projects and fireworks displays.  Amenities that are both non-excludable and non-rivalrous are “public goods.”

[NOTE:  Amenities that are either non-excludable or non-rivalrous, but not both, are “quasi-public goods.”  Such goods include excludable but non-rivalrous “club goods” (e.g., satellite radio programming) and non-excludable but rivalrous “commons goods” (e.g., public fisheries).  The public goods chapter of How to Regulate addresses both types of quasi-public goods, but I won’t discuss them here.]

The primary concern with public goods is that they will be underproduced.  That’s because the producer, who must bear all the cost of producing the good, cannot exclude benefit recipients who do not contribute to the good’s production and thus cannot capture many of the benefits of his productive efforts.

Suppose, for example, that a levee would cost $5 million to construct and would create $10 million of benefit by protecting 500 homeowners from expected losses of $20,000 each (i.e., the levee would eliminate a 10% chance of a big flood that would cause each homeowner a $200,000 loss).  To maximize social welfare, the levee should be built.  But no single homeowner has an incentive to build the levee.  At least 250 homeowners would need to combine their resources to make the levee project worthwhile for participants (250 * $20,000 in individual benefit = $5 million), but most homeowners would prefer to hold out and see if their neighbors will finance the levee project without their help.  The upshot is that the levee never gets built, even though its construction is value-enhancing.

Economists have often jumped from the observation that public goods are susceptible to underproduction to the conclusion that the government should tax people and use the revenues to provide public goods.  Consider, for example, this passage from a law school textbook by several renowned economists:

It is apparent that public goods will not be adequately supplied by the private sector. The reason is plain: because people can’t be excluded from using public goods, they can’t be charged money for using them, so a private supplier can’t make money from providing them. … Because public goods are generally not adequately supplied by the private sector, they have to be supplied by the public sector.

[Howell E. Jackson, Louis Kaplow, Steven Shavell, W. Kip Viscusi, & David Cope, Analytical Methods for Lawyers 362-63 (2003) (emphasis added).]

That last claim seems demonstrably false.   Continue Reading…

Last week the editorial board of the Washington Post penned an excellent editorial responding to the European Commission’s announcement of its decision in its Google Shopping investigation. Here’s the key language from the editorial:

Whether the demise of any of [the complaining comparison shopping sites] is specifically traceable to Google, however, is not so clear. Also unclear is the aggregate harm from Google’s practices to consumers, as opposed to the unlucky companies. Birkenstock-seekers may well prefer to see a Google-generated list of vendors first, instead of clicking around to other sites…. Those who aren’t happy anyway have other options. Indeed, the rise of comparison shopping on giants such as Amazon and eBay makes concerns that Google might exercise untrammeled power over e-commerce seem, well, a bit dated…. Who knows? In a few years we might be talking about how Facebook leveraged its 2 billion users to disrupt the whole space.

That’s actually a pretty thorough, if succinct, summary of the basic problems with the Commission’s case (based on its PR and Factsheet, at least; it hasn’t released the full decision yet).

I’ll have more to say on the decision in due course, but for now I want to elaborate on two of the points raised by the WaPo editorial board, both in service of its crucial rejoinder to the Commission that “Also unclear is the aggregate harm from Google’s practices to consumers, as opposed to the unlucky companies.”

First, the WaPo editorial board points out that:

Birkenstock-seekers may well prefer to see a Google-generated list of vendors first, instead of clicking around to other sites.

It is undoubtedly true that users “may well prefer to see a Google-generated list of vendors first.” It’s also crucial to understanding the changes in Google’s search results page that have given rise to the current raft of complaints.

As I noted in a Wall Street Journal op-ed two years ago:

It’s a mistake to consider “general search” and “comparison shopping” or “product search” to be distinct markets.

From the moment it was technologically feasible to do so, Google has been adapting its traditional search results—that familiar but long since vanished page of 10 blue links—to offer more specialized answers to users’ queries. Product search, which is what is at issue in the EU complaint, is the next iteration in this trend.

Internet users today seek information from myriad sources: Informational sites (Wikipedia and the Internet Movie Database); review sites (Yelp and TripAdvisor); retail sites (Amazon and eBay); and social-media sites (Facebook and Twitter). What do these sites have in common? They prioritize certain types of data over others to improve the relevance of the information they provide.

“Prioritization” of Google’s own shopping results, however, is the core problem for the Commission:

Google has systematically given prominent placement to its own comparison shopping service: when a consumer enters a query into the Google search engine in relation to which Google’s comparison shopping service wants to show results, these are displayed at or near the top of the search results. (Emphasis in original).

But this sort of prioritization is the norm for all search, social media, e-commerce and similar platforms. And this shouldn’t be a surprise: The value of these platforms to the user is dependent upon their ability to sort the wheat from the chaff of the now immense amount of information coursing about the Web.

As my colleagues and I noted in a paper responding to a methodologically questionable report by Tim Wu and Yelp leveling analogous “search bias” charges in the context of local search results:

Google is a vertically integrated company that offers general search, but also a host of other products…. With its well-developed algorithm and wide range of products, it is hardly surprising that Google can provide not only direct answers to factual questions, but also a wide range of its own products and services that meet users’ needs. If consumers choose Google not randomly, but precisely because they seek to take advantage of the direct answers and other options that Google can provide, then removing the sort of “bias” alleged by [complainants] would affirmatively hurt, not help, these users. (Emphasis added).

And as Josh Wright noted in an earlier paper responding to yet another set of such “search bias” charges (in that case leveled in a similarly methodologically questionable report by Benjamin Edelman and Benjamin Lockwood):

[I]t is critical to recognize that bias alone is not evidence of competitive harm and it must be evaluated in the appropriate antitrust economic context of competition and consumers, rather individual competitors and websites. Edelman & Lockwood´s analysis provides a useful starting point for describing how search engines differ in their referrals to their own content. However, it is not useful from an antitrust policy perspective because it erroneously—and contrary to economic theory and evidence—presumes natural and procompetitive product differentiation in search rankings to be inherently harmful. (Emphasis added).

We’ll have to see what kind of analysis the Commission relies upon in its decision to reach its conclusion that prioritization is an antitrust problem, but there is reason to be skeptical that it will turn out to be compelling. The Commission states in its PR that:

The evidence shows that consumers click far more often on results that are more visible, i.e. the results appearing higher up in Google’s search results. Even on a desktop, the ten highest-ranking generic search results on page 1 together generally receive approximately 95% of all clicks on generic search results (with the top result receiving about 35% of all the clicks). The first result on page 2 of Google’s generic search results receives only about 1% of all clicks. This cannot just be explained by the fact that the first result is more relevant, because evidence also shows that moving the first result to the third rank leads to a reduction in the number of clicks by about 50%. The effects on mobile devices are even more pronounced given the much smaller screen size.

This means that by giving prominent placement only to its own comparison shopping service and by demoting competitors, Google has given its own comparison shopping service a significant advantage compared to rivals. (Emphasis added).

Whatever truth there is in the characterization that placement is more important than relevance in influencing user behavior, the evidence cited by the Commission to demonstrate that doesn’t seem applicable to what’s happening on Google’s search results page now.

Most crucially, the evidence offered by the Commission refers only to how placement affects clicks on “generic search results” and glosses over the fact that the “prominent placement” of Google’s “results” is not only a difference in position but also in the type of result offered.

Google Shopping results (like many of its other “vertical results” and direct answers) are very different than the 10 blue links of old. These “universal search” results are, for one thing, actual answers rather than merely links to other sites. They are also more visually rich and attractively and clearly displayed.

Ironically, Tim Wu and Yelp use the claim that users click less often on Google’s universal search results to support their contention that increased relevance doesn’t explain Google’s prioritization of its own content. Yet, as we note in our response to their study:

[I]f a consumer is using a search engine in order to find a direct answer to a query rather than a link to another site to answer it, click-through would actually represent a decrease in consumer welfare, not an increase.

In fact, the study fails to incorporate this dynamic even though it is precisely what the authors claim the study is measuring.

Further, as the WaPo editorial intimates, these universal search results (including Google Shopping results) are quite plausibly more valuable to users. As even Tim Wu and Yelp note:

No one truly disagrees that universal search, in concept, can be an important innovation that can serve consumers.

Google sees it exactly this way, of course. Here’s Tim Wu and Yelp again:

According to Google, a principal difference between the earlier cases and its current conduct is that universal search represents a pro-competitive, user-serving innovation. By deploying universal search, Google argues, it has made search better. As Eric Schmidt argues, “if we know the answer it is better for us to answer that question so [the user] doesn’t have to click anywhere, and in that sense we… use data sources that are our own because we can’t engineer it any other way.”

Of course, in this case, one would expect fewer clicks to correlate with higher value to users — precisely the opposite of the claim made by Tim Wu and Yelp, which is the surest sign that their study is faulty.

But the Commission, at least according to the evidence cited in its PR, doesn’t even seem to measure the relative value of the very different presentations of information at all, instead resting on assertions rooted in the irrelevant difference in user propensity to click on generic (10 blue links) search results depending on placement.

Add to this Pinar Akman’s important point that Google Shopping “results” aren’t necessarily search results at all, but paid advertising:

[O]nce one appreciates the fact that Google’s shopping results are simply ads for products and Google treats all ads with the same ad-relevant algorithm and all organic results with the same organic-relevant algorithm, the Commission’s order becomes impossible to comprehend. Is the Commission imposing on Google a duty to treat non-sponsored results in the same way that it treats sponsored results? If so, does this not provide an unfair advantage to comparison shopping sites over, for example, Google’s advertising partners as well as over Amazon, eBay, various retailers, etc…?

Randy Picker also picks up on this point:

But those Google shopping boxes are ads, Picker told me. “I can’t imagine what they’re thinking,” he said. “Google is in the advertising business. That’s how it makes its money. It has no obligation to put other people’s ads on its website.”

The bottom line here is that the WaPo editorial board does a better job characterizing the actual, relevant market dynamics in a single sentence than the Commission seems to have done in its lengthy releases summarizing its decision following seven full years of investigation.

The second point made by the WaPo editorial board to which I want to draw attention is equally important:

Those who aren’t happy anyway have other options. Indeed, the rise of comparison shopping on giants such as Amazon and eBay makes concerns that Google might exercise untrammeled power over e-commerce seem, well, a bit dated…. Who knows? In a few years we might be talking about how Facebook leveraged its 2 billion users to disrupt the whole space.

The Commission dismisses this argument in its Factsheet:

The Commission Decision concerns the effect of Google’s practices on comparison shopping markets. These offer a different service to merchant platforms, such as Amazon and eBay. Comparison shopping services offer a tool for consumers to compare products and prices online and find deals from online retailers of all types. By contrast, they do not offer the possibility for products to be bought on their site, which is precisely the aim of merchant platforms. Google’s own commercial behaviour reflects these differences – merchant platforms are eligible to appear in Google Shopping whereas rival comparison shopping services are not.

But the reality is that “comparison shopping,” just like “general search,” is just one technology among many for serving information and ads to consumers online. Defining the relevant market or limiting the definition of competition in terms of the particular mechanism that Google (or Foundem, or Amazon, or Facebook…) happens to use doesn’t reflect the extent of substitutability between these different mechanisms.

Properly defined, the market in which Google competes online is not search, but something more like online “matchmaking” between advertisers, retailers and consumers. And this market is enormously competitive. The same goes for comparison shopping.

And the fact that Amazon and eBay “offer the possibility for products to be bought on their site” doesn’t take away from the fact that they also “offer a tool for consumers to compare products and prices online and find deals from online retailers of all types.” Not only do these sites contain enormous amounts of valuable (and well-presented) information about products, including product comparisons and consumer reviews, but they also actually offer comparisons among retailers. In fact, Fifty percent of the items sold through Amazon’s platform, for example, are sold by third-party retailers — the same sort of retailers that might also show up on a comparison shopping site.

More importantly, though, as the WaPo editorial rightly notes, “[t]hose who aren’t happy anyway have other options.” Google just isn’t the indispensable gateway to the Internet (and definitely not to shopping on the Internet) that the Commission seems to think.

Today over half of product searches in the US start on Amazon. The majority of web page referrals come from Facebook. Yelp’s most engaged users now access it via its app (which has seen more than 3x growth in the past five years). And a staggering 40 percent of mobile browsing on both Android and iOS now takes place inside the Facebook app.

Then there are “closed” platforms like the iTunes store and innumerable other apps that handle copious search traffic (including shopping-related traffic) but also don’t figure in the Commission’s analysis, apparently.

In fact, billions of users reach millions of companies every day through direct browser navigation, social media, apps, email links, review sites, blogs, and countless other means — all without once touching Google.com. So-called “dark social” interactions (email, text messages, and IMs) drive huge amounts of some of the most valuable traffic on the Internet, in fact.

All of this, in turn, has led to a competitive scramble to roll out completely new technologies to meet consumers’ informational (and merchants’ advertising) needs. The already-arriving swarm of VR, chatbots, digital assistants, smart-home devices, and more will offer even more interfaces besides Google through which consumers can reach their favorite online destinations.

The point is this: Google’s competitors complaining that the world is evolving around them don’t need to rely on Google. That they may choose to do so does not saddle Google with an obligation to ensure that they can always do so.

Antitrust laws — in Europe, no less than in the US — don’t require Google or any other firm to make life easier for competitors. That’s especially true when doing so would come at the cost of consumer-welfare-enhancing innovations. The Commission doesn’t seem to have grasped this fundamental point, however.

The WaPo editorial board gets it, though:

The immense size and power of all Internet giants are a legitimate focus for the antitrust authorities on both sides of the Atlantic. Brussels vs. Google, however, seems to be a case of punishment without crime.

Regardless of the merits and soundness (or lack thereof) of this week’s European Commission Decision in the Google Shopping case — one cannot assess this until we have the text of the decision — two comments really struck me during the press conference.

First, it was said that Google’s conduct had essentially reduced innovation. If I heard correctly, this is a formidable statement. In 2016, another official EU service published stats that described Alphabet as increasing its R&D by 22% and ranked it as the world’s 4th top R&D investor. Sure it can always be better. And sure this does not excuse everything. But still. The press conference language on incentives to innovate was a bit of an oversell, to say the least.

Second, the Commission views this decision as a “precedent” or as a “framework” that will inform the way dominant Internet platforms should display, intermediate and market their services and those of their competitors. This may fuel additional complaints by other vertical search rivals against (i) Google in relation to other product lines, but also against (ii) other large platform players.

Beyond this, the Commission’s approach raises a gazillion questions of law and economics. Pending the disclosure of the economic evidence in the published decision, let me share some thoughts on a few (arbitrarily) selected legal issues.

First, the Commission has drawn the lesson of the Microsoft remedy quagmire. The Commission refrains from using a trustee to ensure compliance with the decision. This had been a bone of contention in the 2007 Microsoft appeal. Readers will recall that the Commission had imposed on Microsoft to appoint a monitoring trustee, who was supposed to advise on possible infringements in the implementation of the decision. On appeal, the Court eventually held that the Commission was solely responsible for this, and could not delegate those powers. Sure, the Commission could “retai[n] its own external expert to provide advice when it investigates the implementation of the remedies.” But no more than that.

Second, we learn that the Commission is no longer in the business of software design. Recall the failed untying of WMP and Windows — Windows Naked sold only 11,787 copies, likely bought by tech bootleggers willing to acquire the first piece of software ever designed by antitrust officials — or the browser “Choice Screen” compliance saga which eventually culminated with a €561 million fine. Nothing of this can be found here. The Commission leaves remedial design to the abstract concept of “equal treatment”.[1] This, certainly, is a (relatively) commendable approach, and one that could inspire remedies in other unilateral conduct cases, in particular, exploitative conduct ones where pricing remedies are both costly, impractical, and consequentially inefficient.

On the other hand, readers will also not fail to see the corollary implication of “equal treatment”: search neutrality could actually cut both ways, and lead to a lawful degradation in consumer welfare if Google were ever to decide to abandon rich format displays for both its own shopping services and those of rivals.

Third, neither big data nor algorithmic design is directly vilified in the case (“The Commission Decision does not object to the design of Google’s generic search algorithms or to demotions as such, nor to the way that Google displays or organises its search results pages”). In fact, the Commission objects to the selective application of Google’s generic search algorithms to its own products. This is an interesting, and subtle, clarification given all the coverage that this topic has attracted in recent antitrust literature. We are in fact very close to a run of the mill claim of disguised market manipulation, not causally related to data or algorithmic technology.

Fourth, Google said it contemplated a possible appeal of the decision. Now, here’s a challenging question: can an antitrust defendant effectively exercise its right to judicial review of an administrative agency (and more generally its rights of defense), when it operates under the threat of antitrust sanctions in ongoing parallel cases investigated by the same agency (i.e., the antitrust inquiries related to Android and Ads)? This question cuts further than the Google Shopping case. Say firm A contemplates a merger with firm B in market X, while it is at the same time subject to antitrust investigations in market Z. And assume that X and Z are neither substitutes nor complements so there is little competitive relationship between both products. Can the Commission leverage ongoing antitrust investigations in market Z to extract merger concessions in market X? Perhaps more to the point, can the firm interact with the Commission as if the investigations are completely distinct, or does it have to play a more nuanced game and consider the ramifications of its interactions with the Commission in both markets?

Fifth, as to the odds of a possible appeal, I don’t believe that arguments on the economic evidence or legal theory of liability will ever be successful before the General Court of the EU. The law and doctrine in unilateral conduct cases are disturbingly — and almost irrationally — severe. As I have noted elsewhere, the bottom line in the EU case-law on unilateral conduct is to consider the genuine requirement of “harm to competition” as a rhetorical question, not an empirical one. In EU unilateral conduct law, exclusion of every and any firm is a per se concern, regardless of evidence of efficiency, entry or rivalry.

In turn, I tend to opine that Google has a stronger game from a procedural standpoint, having been left with (i) the expectation of a settlement (it played ball three times by making proposals); (ii) a corollary expectation of the absence of a fine (settlement discussions are not appropriate for cases that could end with fines); and (iii) a full seven long years of an investigatory cloud. We know from the past that EU judges like procedural issues, but like comparably less to debate the substance of the law in unilateral conduct cases. This case could thus be a test case in terms of setting boundaries on how freely the Commission can U-turn a case (the Commissioner said “take the case forward in a different way”).

I’ll be participating in two excellent antitrust/consumer protection events next week in DC, both of which may be of interest to our readers:

5th Annual Public Policy Conference on the Law & Economics of Privacy and Data Security

hosted by the GMU Law & Economics Center’s Program on Economics & Privacy, in partnership with the Future of Privacy Forum, and the Journal of Law, Economics & Policy.

Conference Description:

Data flows are central to an increasingly large share of the economy. A wide array of products and business models—from the sharing economy and artificial intelligence to autonomous vehicles and embedded medical devices—rely on personal data. Consequently, privacy regulation leaves a large economic footprint. As with any regulatory enterprise, the key to sound data policy is striking a balance between competing interests and norms that leaves consumers better off; finding an approach that addresses privacy concerns, but also supports the benefits of technology is an increasingly complex challenge. Not only is technology continuously advancing, but individual attitudes, expectations, and participation vary greatly. New ideas and approaches to privacy must be identified and developed at the same pace and with the same focus as the technologies they address.

This year’s symposium will include panels on Unfairness under Section 5: Unpacking “Substantial Injury”, Conceptualizing the Benefits and Costs from Data Flows, and The Law and Economics of Data Security.

I will be presenting a draft paper, co-authored with Kristian Stout, on the FTC’s reasonableness standard in data security cases following the Commission decision in LabMD, entitled, When “Reasonable” Isn’t: The FTC’s Standard-less Data Security Standard.

Conference Details:

  • Thursday, June 8, 2017
  • 8:00 am to 3:40 pm
  • at George Mason University, Founders Hall (next door to the Law School)
    • 3351 Fairfax Drive, Arlington, VA 22201

Register here

View the full agenda here

 

The State of Antitrust Enforcement

hosted by the Federalist Society.

Panel Description:

Antitrust policy during much of the Obama Administration was a continuation of the Bush Administration’s minimal involvement in the market. However, at the end of President Obama’s term, there was a significant pivot to investigations and blocks of high profile mergers such as Halliburton-Baker Hughes, Comcast-Time Warner Cable, Staples-Office Depot, Sysco-US Foods, and Aetna-Humana and Anthem-Cigna. How will or should the new Administration analyze proposed mergers, including certain high profile deals like Walgreens-Rite Aid, AT&T-Time Warner, Inc., and DraftKings-FanDuel?

Join us for a lively luncheon panel discussion that will cover these topics and the anticipated future of antitrust enforcement.

Speakers:

  • Albert A. Foer, Founder and Senior Fellow, American Antitrust Institute
  • Profesor Geoffrey A. Manne, Executive Director, International Center for Law & Economics
  • Honorable Joshua D. Wright, Professor of Law, George Mason University School of Law
  • Moderator: Honorable Ronald A. Cass, Dean Emeritus, Boston University School of Law and President, Cass & Associates, PC

Panel Details:

  • Friday, June 09, 2017
  • 12:00 pm to 2:00 pm
  • at the National Press Club, MWL Conference Rooms
    • 529 14th Street, NW, Washington, DC 20045

Register here

Hope to see everyone at both events!

Today the International Center for Law & Economics (ICLE) Antitrust and Consumer Protection Research Program released a new white paper by Geoffrey A. Manne and Allen Gibby entitled:

A Brief Assessment of the Procompetitive Effects of Organizational Restructuring in the Ag-Biotech Industry

Over the past two decades, rapid technological innovation has transformed the industrial organization of the ag-biotech industry. These developments have contributed to an impressive increase in crop yields, a dramatic reduction in chemical pesticide use, and a substantial increase in farm profitability.

One of the most striking characteristics of this organizational shift has been a steady increase in consolidation. The recent announcements of mergers between Dow and DuPont, ChemChina and Syngenta, and Bayer and Monsanto suggest that these trends are continuing in response to new market conditions and a marked uptick in scientific and technological advances.

Regulators and industry watchers are often concerned that increased consolidation will lead to reduced innovation, and a greater incentive and ability for the largest firms to foreclose competition and raise prices. But ICLE’s examination of the underlying competitive dynamics in the ag-biotech industry suggests that such concerns are likely unfounded.

In fact, R&D spending within the seeds and traits industry increased nearly 773% between 1995 and 2015 (from roughly $507 million to $4.4 billion), while the combined market share of the six largest companies in the segment increased by more than 550% (from about 10% to over 65%) during the same period.

Firms today are consolidating in order to innovate and remain competitive in an industry replete with new entrants and rapidly evolving technological and scientific developments.

According to ICLE’s analysis, critics have unduly focused on the potential harms from increased integration, without properly accounting for the potential procompetitive effects. Our brief white paper highlights these benefits and suggests that a more nuanced and restrained approach to enforcement is warranted.

Our analysis suggests that, as in past periods of consolidation, the industry is well positioned to see an increase in innovation as these new firms unite complementary expertise to pursue more efficient and effective research and development. They should also be better able to help finance, integrate, and coordinate development of the latest scientific and technological developments — particularly in rapidly growing, data-driven “digital farming” —  throughout the industry.

Download the paper here.

And for more on the topic, revisit TOTM’s recent blog symposium, “Agricultural and Biotech Mergers: Implications for Antitrust Law and Economics in Innovative Industries,” here.

On Thursday, March 30, Friday March 31, and Monday April 3, Truth on the Market and the International Center for Law and Economics presented a blog symposium — Agricultural and Biotech Mergers: Implications for Antitrust Law and Economics in Innovative Industries — discussing three proposed agricultural/biotech industry mergers awaiting judgment by antitrust authorities around the globe. These proposed mergers — Bayer/Monsanto, Dow/DuPont and ChemChina/Syngenta — present a host of fascinating issues, many of which go to the core of merger enforcement in innovative industries — and antitrust law and economics more broadly.

The big issue for the symposium participants was innovation (as it was for the European Commission, which cleared the Dow/DuPont merger last week, subject to conditions, one of which related to the firms’ R&D activities).

Critics of the mergers, as currently proposed, asserted that the increased concentration arising from the “Big 6” Ag-biotech firms consolidating into the Big 4 could reduce innovation competition by (1) eliminating parallel paths of research and development (Moss); (2) creating highly integrated technology/traits/seeds/chemicals platforms that erect barriers to new entry platforms (Moss); (3) exploiting eventual network effects that may result from the shift towards data-driven agriculture to block new entry in input markets (Lianos); or (4) increasing incentives to refuse to license, impose discriminatory restrictions in technology licensing agreements, or tacitly “agree” not to compete (Moss).

Rather than fixating on horizontal market share, proponents of the mergers argued that innovative industries are often marked by disruptions and that investment in innovation is an important signal of competition (Manne). An evaluation of the overall level of innovation should include not only the additional economies of scale and scope of the merged firms, but also advancements made by more nimble, less risk-averse biotech companies and smaller firms, whose innovations the larger firms can incentivize through licensing or M&A (Shepherd). In fact, increased efficiency created by economies of scale and scope can make funds available to source innovation outside of the large firms (Shepherd).

In addition, innovation analysis must also account for the intricately interwoven nature of agricultural technology across seeds and traits, crop protection, and, now, digital farming (Sykuta). Combined product portfolios generate more data to analyze, resulting in increased data-driven value for farmers and more efficiently targeted R&D resources (Sykuta).

While critics voiced concerns over such platforms erecting barriers to entry, markets are contestable to the extent that incumbents are incentivized to compete (Russell). It is worth noting that certain industries with high barriers to entry or exit, significant sunk costs, and significant costs disadvantages for new entrants (including automobiles, wireless service, and cable networks) have seen their prices decrease substantially relative to inflation over the last 20 years — even as concentration has increased (Russell). Not coincidentally, product innovation in these industries, as in ag-biotech, has been high.

Ultimately, assessing the likely effects of each merger using static measures of market structure is arguably unreliable or irrelevant in dynamic markets with high levels of innovation (Manne).

Regarding patents, critics were skeptical that combining the patent portfolios of the merging companies would offer benefits beyond those arising from cross-licensing, and would serve to raise rivals’ costs (Ghosh). While this may be true in some cases, IP rights are probabilistic, especially in dynamic markets, as Nicolas Petit noted:

There is no certainty that R&D investments will lead to commercially successful applications; (ii) no guarantee that IP rights will resist to invalidity proceedings in court; (iii) little safety to competition by other product applications which do not practice the IP but provide substitute functionality; and (iv) no inevitability that the environmental, toxicological and regulatory authorization rights that (often) accompany IP rights will not be cancelled when legal requirements change.

In spite of these uncertainties, deals such as the pending ag-biotech mergers provide managers the opportunity to evaluate and reorganize assets to maximize innovation and return on investment in such a way that would not be possible absent a merger (Sykuta). Neither party would fully place its IP and innovation pipeline on the table otherwise.

For a complete rundown of the arguments both for and against, the full archive of symposium posts from our outstanding and diverse group of scholars, practitioners and other experts is available at this link, and individual posts can be easily accessed by clicking on the authors’ names below.

We’d like to thank all of the participants for their excellent contributions!