The blistering pace at which the European Union put forward and adopted the Digital Markets Act (DMA) has attracted the attention of legislators across the globe. In its wake, countries such as South Africa, India, Brazil, and Turkey have all contemplated digital-market regulations inspired by the DMA (and other models of regulation, such as the United Kingdom’s Digital Markets Unit and Australia’s sectoral codes of conduct).
Racing to be among the first jurisdictions to regulate might intuitively seem like a good idea. By emulating the EU, countries could hope to be perceived as on the cutting edge of competition policy, and hopefully earn a seat at the table when the future direction of such regulations is discussed.
There are, however, tradeoffs involved in regulating digital markets, which are arguably even more salient in the case of emerging markets. Indeed, as we will explain here, these jurisdictions often face challenges that significantly alter the ratio of costs and benefits when it comes to enacting regulation.
Drawing from a paper we wrote with Sam Bowman about competition policy in the Association of Southeast Asian Nations (ASEAN) zone, we highlight below three of the biggest issues these initiatives face.
To Regulate Competition, You First Need to Attract Competition
Perhaps the biggest factor cautioning emerging markets against adoption of DMA-inspired regulations is that such rules would impose heavy compliance costs to doing business in markets that are often anything but mature. It is probably fair to say that, in many (maybe most) emerging markets, the most pressing challenge is to attract investment from international tech firms in the first place, not how to regulate their conduct.
The most salient example comes from South Africa, which has sketched out plans to regulate digital markets. The Competition Commission has announced that Amazon, which is not yet available in the country, would fall under these new rules should it decide to enter—essentially on the presumption that Amazon would overthrow South Africa’s incumbent firms.
It goes without saying that, at the margin, such plans reduce either the likelihood that Amazon will enter the South African market at all, or the extent of its entry should it choose to do so. South African consumers thus risk losing the vast benefits such entry would bring—benefits that dwarf those from whatever marginal increase in competition might be gained from subjecting Amazon to onerous digital-market regulations.
While other tech firms—such as Alphabet, Meta, and Apple—are already active in most emerging jurisdictions, regulation might still have a similar deterrent effect to their further investment. Indeed, the infrastructure deployed by big tech firms in these jurisdictions is nowhere near as extensive as in Western countries. To put it mildly, emerging-market consumers typically only have access to slower versions of these firms’ services. A quick glimpse at Google Cloud’s global content-delivery network illustrates this point well (i.e., that there is far less infrastructure in developing markets):
Ultimately, emerging markets remain relatively underserved compared to those in the West. In such markets, the priority should be to attract tech investment, not to impose regulations that may further slow the deployment of critical internet infrastructure.
Growth Is Key
The potential to boost growth is the most persuasive argument for emerging markets to favor a more restrained approach to competition law and regulation, such as that currently employed in the United States.
Emerging nations may not have the means (or the inclination) to equip digital-market enforcers with resources similar to those of the European Commission. Given these resource constraints, it is essential that such jurisdictions focus their enforcement efforts on those areas that provide the highest return on investment, notably in terms of increased innovation.
This raises an important point. A recent empirical study by Ross Levine, Chen Lin, Lai Wei, and Wensi Xie finds that competition enforcement does, indeed, promote innovation. But among the study’s more surprising findings is that, unlike other areas of competition enforcement, the strength of a jurisdiction’s enforcement of “abuse of dominance” rules does not correlate with increased innovation. Furthermore, jurisdictions that allow for so-called “efficiency defenses” in unilateral-conduct cases also tend to produce more innovation. The authors thus conclude that:
From the perspective of maximizing patent-based innovation, therefore, a legal system that allows firms to exploit their dominant positions based on efficiency considerations could boost innovation.
These findings should give pause to policymakers who seek to emulate the European Union’s DMA—which, among other things, does not allow gatekeepers to put forward so-called “efficiency defenses” that would allow them to demonstrate that their behavior benefits consumers. If growth and innovation are harmed by overinclusive abuse-of-dominance regimes and rules that preclude firms from offering efficiency-based defenses, then this is probably even more true of digital-market regulations that replace case-by-case competition enforcement with per se prohibitions.
In short, the available evidence suggests that, faced with limited enforcement resources, emerging-market jurisdictions should prioritize other areas of competition policy, such as breaking up or mitigating the harmful effects of cartels and exercising appropriate merger controls.
These findings also cut in favor of emphasizing the traditional antitrust goal of maximizing consumer welfare—or, at least, protecting the competitive process. Many of the more recent digital-market regulations—such as the DMA, the UK DMU, and the ACCC sectoral codes of conduct—are instead focused on distributional issues. They seek to ensure that platform users earn a “fair share” of the benefits generated on a platform. In light of Levine et al.’s findings, this approach could be undesirable, as using competition policy to reduce monopoly rents may lead to less innovation.
In short, traditional antitrust law’s focus on consumer welfare and relatively limited enforcement in the area of unilateral conduct may be a good match for emerging nations that want competition regimes that maximize innovation under important resource constraints.
Consider Local Economic and Political Conditions
Emerging jurisdictions have diverse economic and political profiles. These features, in turn, affect the respective costs and benefits of digital-market regulations.
For example, digital-market regulations generally offer very broad discretion to competition enforcers. The DMA details dozens of open-ended prohibitions upon which enforcers can base infringement proceedings. Furthermore, because they are designed to make enforcers’ task easier, these regulations often remove protections traditionally afforded to defendants, such as appeals to the consumer welfare standard or efficiency defenses. The UK’s DMU initiative, for example, would lower the standard of proof that enforcers must meet.
Giving authorities broad powers with limited judicial oversight might be less problematic in jurisdictions where the state has a track record of self-restraint. The consequences of regulatory discretion might, however, be far more problematic in jurisdictions where authorities routinely overstep the mark and where the threat of corruption is very real.
To name but two, countries like South Africa and India rank relatively low in the World Bank’s “ease of doing business index” (84th and 62nd, respectively). They also rank relatively low on the Cato Institute’s “human freedom index” (77th and 119th, respectively—and both score particularly badly in terms of economic freedom). This suggests strongly that authorities in those jurisdictions are prone to misapply powers derived from digital-market regulations in ways that hurt growth and consumers.
To make matters worse, outright corruption is also a real problem in several emerging nations. Returning to South Africa and India, both jurisdictions face significant corruption issues (they rank 70th and 85th, respectively, on Transparency International’s “Corruption Perception Index”).
At a more granular level, an inquiry in South Africa revealed rampant corruption under former President Jacob Zuma, while current President Cyril Ramaphosa also faces significant corruption allegations. Writing in the Financial Times in 2018, Gaurav Dalmia—chair of Delhi-based Dalmia Group Holdings—opined that “India’s anti-corruption battle will take decades to win.”
This specter of corruption thus counsels in favor of establishing competition regimes with sufficient checks and balances, so as to prevent competition authorities from being captured by industry or political forces. But most digital-market regulations are designed precisely to remove those protections in order to streamline enforcement. The risk that they could be mobilized toward nefarious ends are thus anything but trivial. This is of particular concern, given that such regulations are typically mobilized against global firms in order to shield inefficient local firms—raising serious risks of protectionist enforcement that would harm local consumers.
The bottom line is that emerging markets would do well to reconsider the value of regulating digital markets that have yet to reach full maturity. Recent proposals threaten to deter tech investments in these jurisdictions, while raising significant risks of reduced growth, corruption, and consumer-harming protectionism.
[The following is a guest post from Andrew Mercado, a research assistant at the Mercatus Center at George Mason University and an adjunct professor and research assistant at George Mason’s Antonin Scalia Law School.]
Price-parity clauses have, until recently, been little discussed in the academic vertical-price-restraints literature. Their growing importance, however, cannot be ignored, and common misconceptions around their use and implementation need to be addressed. While similar in nature to both resale price maintenance and most-favored-nations clauses, the special vertical relationship between sellers and the platform inherent in price-parity clauses leads to distinct economic outcomes. Additionally, with a growing number of lawsuits targeting their use in online platform economies, it is critical to fully understand the economic incentives and outcomes stemming from price-parity clauses.
Vertical price restraints—of which resale price maintenance (RPM) and most favored nation clauses (MFN) are among many—are both common in business and widely discussed in the academic literature. While there remains a healthy debate among academics as to the true competitive effects of these contractual arrangements, the state of U.S. jurisprudence is clear. Since the Supreme Court’s Leeginand State Oildecisions, the use of RPM is not presumed anticompetitive. Their procompetitive and anticompetitive effects must instead be assessed under a “rule of reason” framework in order to determine their legality under antitrust law. The competitive effects of MFN are also generally analyzed under the rule of reason.
Distinct from these two types of clauses, however, are price-parity clauses (PPCs). A PPC is an agreement between a platform and an independent seller under which the seller agrees to offer their goods on the platform for their lowest advertised price. While sometimes termed “platform MFNs,” the economic effects of PPCs on modern online-commerce platforms are distinct.
This commentary seeks to fill a hole in the PPC literature left by its current focus on producers that sell exclusively nonfungible products on various platforms. That literature generally finds that a PPC reduces price competition between platforms. This finding, however, is not universal. Notably absent from the discussion is any concept of multiple sellers of the same good on the same platform. Correctly accounting for this oversight leads to the conclusion that PPCs generally are both efficient and procompetitive.
In a pair of lawsuits filed in California and the District of Columbia, Amazon has come under fire for its restrictions around pricing. These suits allege that Amazon’s restrictive PPCs harm consumers, arguing that sellers are penalized when the price for their good on Amazon is higher than on alternative platforms. They go on to claim that these provisions harm sellers, prevent platform competition, and ultimately force consumers to pay higher prices. The true competitive result of these provisions, however, is unclear.
That literature that does exist on the effects these provisions have on the competitive outcomes of platforms in online marketplaces falls fundamentally short. Jonathan Baker and Fiona Scott Morton (among others) fail to differentiate between PPCs and MFN clauses. This distinction is important because, while the impacts on consumers may be similar, the mechanisms by which the interaction occurs is not. An MFN provision stipulates that a supplier—when working with several distributors—must offer its goods to one particular distributor at terms that are better or equal to those offered to all other distributors.
PPCs, on the other hand, are agreements between sellers and platforms to ensure that the platform’s buyers have access to goods at better or equal terms as those offered the same buyers on other platforms. Sellers that are bound by a PPC and that intend to sell on multiple platforms will have to price uniformly across all platforms to satisfy the PPC. PPCs are contracts between sellers and platforms to define conduct between sellers and buyers. They do not determine conduct between sellers and the platform.
A common characteristic of MFN and PPC arrangements is that consumers are often unaware of the existence of either clause. What is not common, however, is the outcomes that stem from their use. An MFN clause only dictates the terms under which a good is sold to a distributor and does not constrain the interaction between distributors and consumers. While the lower prices realized by a distributor may be passed on as lower prices for the consumer, this is not universally true. A PPC clause, on the other hand, constrains the interactions between sellers and consumers, necessitating that the seller’s price on any given platform, by definition, must be as low as the price on all other platforms. This leads to the lowest prices for a given good in a market.
The fundamental oversight in the literature is any discussion of intra-platform competition in the market for fungible goods, within which multiple sellers sell the same good on multiple platforms. Up to this point, all the discussion surrounding PPCs has centered on the Booking.comcase in the European Union.
In Booking.com, the primary platform, Booking.com, instituted price-parity clauses with sellers of hotel rooms on its platform, mandating that they sell rooms on Booking.com for equal to or less than the price on all other platforms. This pricing restriction extended to the hotel’s first-party website as well.
In this case, it was alleged that consumers were worse off because the PPC unambiguously increased prices for hotel rooms. This is because, even if the hotel was willing to offer a lower price on its own website, it was unable to do so due to the PPC. This potential lower price would come about due to the low (possibly zero cost) commission a hotel must pay to sell on its own website. On the hotel’s own website, the room could be discounted by as much as the size of the commission that Booking.com took as a percentage of each sale. Further, if a competing platform chose to charge a lower commission than Booking.com, the discount could be the difference in commission rates.
While one other case, E-book MFN, is tangentially relevant, Booking.com is the only case where independent third-party sellers list a good or service for sale on a platform that imposes a PPC. While there is some evidence of harm in the market for the online booking of hotel rooms, however, hotel-room bookings are not analogous to platform-based sales of fungible goods. Sellers of hotel rooms are unable to compete to sell the same room; they can sell similarly situated, easily substitutable rooms, but the rooms are still non-fungible.
In online commerce, however, sellers regularly sell fungible goods. From lip balm and batteries to jeans and air filters, a seller of goods on an e-commerce site is among many similarly situated sellers selling nearly (or perfectly) identical products. These sellers not only have to compete with goods that are close substitutes to the good they are selling, but also with other sellers that offer an identical product.
Therefore, the conclusions found by critics of Booking.com’s PPC do not hold when removing the non-fungibility assumption. While there is some evidence that PPCs may reduce competition among platforms on the margin, there is no evidence that competition among sellers on a given platform is reduced. In fact, the PPC may increase competition by forcing all sellers on a platform to play by the same pricing rules.
We will delve into the competitive environment under a strict PPC—whereby sellers are banned from the platform when found to be in violation of the clause—and introduce the novel (and more realistic) implicit PPC, whereby sellers have incentive to comply with the PPC, but are not punished for deviation. First, however, we must understand the incentives of a seller not bound by a PPC.
Competition by sellers not bound by price-parity clauses
An individual seller in this market chooses to sell identical products at different prices across different platforms, given that the platforms may choose various levels of commission per sale. To sell the highest number of units possible, there is an incentive for sellers to steer customers to platforms that charge the lowest commission, and thereby offer the seller the most revenue possible.
Since the platforms understand the incentive to steer consumers toward low-commission platforms to increase the seller’s revenue, they may not allocate resources toward additional perks, such as free shipping. Platforms may instead compete vigorously to reduce costs in order offer the lowest commissions possible. In the long run, this race to the bottom might leave the market with one dominant and ultra-efficient naturally monopolistic platform that offers the lowest possible commission.
While this sounds excellent for consumers, since they get the lowest possible prices on all goods, this simple scenario does not incorporate non-price factors into the equation. Free shipping, handling, and physical processing; payment processing; and the time spent waiting for the good to arrive are all additional considerations that consumers factor into the equation. For a higher commission, often on the seller side, platforms may offer a number of these perks that increase consumer welfare by a greater amount than the price increase often associated with higher commissions.
In this scenario, because of the under-allocation of resources to platform efficiency, a unified logistics market may not emerge, where buyers are able to search and purchase a good; sellers are able to sell the good; and the platform is able to facilitate the shipping, processing, and handling. By fragmenting these markets—due to the inefficient allocation of capital—consumer welfare is not maximized. And while the raw price of a good is minimized, the total price of the transaction is not.
Competition by sellers bound by strict price-parity clauses
In this scenario, each platform will have some version of a PPC. When the strict PPC is enforced, a seller is restricted from selling on that platform when they are found to have broken parity. Sellers choose the platforms on which they want to sell based on which platform may generate the greatest return; they then set a single price for all platforms. The seller might then make higher returns on platforms with lower commissions and lower returns on platforms with higher commissions. Fundamentally, to sell on a platform, the seller must at least cover its marginal cost.
Due to the potential of being banned for breaking parity, sellers may have an incentive to price so low that, on some platforms, they do not turn a profit (due to high commissions) while compensating for those losses with profits earned on other platforms with lower commissions. Alternatively, sellers may choose to forgo sales on a given platform altogether if the marginal cost associated with selling on the platform under parity is too great.
For a seller to continue to sell on a platform, or to decide to sell on an additional platform, the marginal revenue associated with selling on that platform must outweigh the marginal cost. In effect, even if the commission is so high that the seller merely breaks even, it is still in the seller’s best interest to continue on the platform; only if the seller is losing money by selling on the platform is it economically rational to exit.
Within the boundaries of the platform, sellers bound by a PPC have a strong incentive to vigorously compete. Additionally, they have an incentive to compete vigorously across platforms to generate the highest possible revenue and offset any losses from high-commission platforms.
Platforms have an incentive to vigorously compete to attract buyers and sellers by offering various incentives and additional services to increase the quality of a sale. Examples of such “add-ons” include fulfilment and processing undertaken by the platform, expedited shipping and insured shipping, and authentication services and warranties.
Platforms also have an incentive to find the correct level of commission based on the add-on services that they provide. A platform that wants to offer the lowest possible prices might provide no or few add-ons and charge a low commission. Alternatively, the platform that wants to provide the highest possible quality may charge a high commission in exchange for many add-ons.
As the value that platforms can offer buyers and sellers increases, and as sellers lower their prices to maintain or increase sales, the quality bestowed upon consumers is likely to rise. Competition within the platform, however, may decline. Highly efficient sellers (those with the lowest marginal cost) may use strict PPCs—under which sellers are removed from the platform for breaking parity—to price less-efficient sellers out of the market. Additionally, efficient platforms may be able to price less-efficient platforms out of the market by offering better add-ons, starving the platforms of buyers and sellers in the long run.
Even with the existence of marginally higher prices and lower competition in the marketplace compared to a world without price parity, the marginal benefit for the consumer is likely higher. This is because the add-on services used by platforms to entice buyers and sellers to transact on a given platform, over time, cost less to provide than the benefit they bestow. Regardless of whether every single consumer realizes the full value of such added benefits, the likely result is a level of consumer welfare that is greater under price parity than in its absence.
Implicit price parity: The case of Amazon
Amazon’s price-parity-policy conditions access to some seller perks on the adherence to parity, guiding sellers toward a unified pricing scheme. The term best suited for this type of policy is an “implicit price parity clause” (IPPC). Under this system, the incentive structure rewards sellers for pricing competitively on Amazon, without punishing alternative pricing measures. For example, if a seller sets prices higher on Amazon because it charges higher commissions than other platforms, that seller will not eligible for Amazon’s Buy Box. But they are still able to sell, market, and promote their own product on the platform. They still show up in the “other sellers” dropdown section of the product page, and consumers can choose that seller with little more than a scroll and an additional click.
While the remainder of this analysis focuses on the specific policies found on Amazon’s platform, IPPCs are found on other platforms, as well. Walmart’s marketplace contains a similar parity policy along with a similarly functioning “buy” box. eBay, too, offers a “best price guarantee,” through which the site offers match the price plus 10% of a qualified competitor within 48 hours. While this policy is not identical in nature, it is in result: prices that are identical for identical goods across multiple platforms.
Amazon’s policy may sound as if it is picking winners and losers on its platform, a system that might appear ripe for corruption and unjustified self-preferencing. But there are several reasons to believe this is not the case. Amazon has built a reputation of low prices, quick delivery, and a high level of customer service. This reputation provides the company an incentive to ensure a consistently high level of quality over time. As Amazon increases the number of products and services offered on its platform, it also needs to devise ways to ensure that its promise of low prices and outstanding service is maintained.
This is where the Buy Box comes in to play. All sellers on the platform can sell without utilizing the Buy Box. These transactions occur either on the seller’s own storefront, or by utilizing the “other sellers” portion of the purchase page for a given good. Amazon’s PPC does not affect the way that these sales occur. Additionally, the seller is free in this type of transaction to sell at whatever price it desires. This includes severely under- or overpricing the competition, as well as breaking price parity. Amazon’s policies do not directly determine prices.
The benefit of the Buy Box—and the reason that an IPPC can be so effective for buyers, sellers, and the platform—is that it both increases competition and decreases search costs. For sellers, there is a strong incentive to compete vigorously on price, since that should give them the best opportunity to sell through the Buy Box. Because the Buy Box is algorithmically driven—factoring in price parity, as well as a few other quality-centered metrics (reviews, shipping cost and speed, etc.)—the featured Buy Box seller can change multiple times per day.
Relative prices between sellers are not the only important factor in winning the Buy Box; absolute prices also play a role. For some products—where there are a limited number of sellers and none are observing parity or they are pricing far above sellers on other platforms—the Buy Box is not displayed at all. This forces consumers to make a deliberate choice to buy from a specific seller as opposed to from a preselected seller. In effect, the Buy Box’s omission removes Amazon’s endorsement of the seller’s practices, while still allowing the seller to offer goods on the platform.
For consumers, this vigorous price competition leads to significantly lower prices with a high level of service. When a consumer uses the Buy Box (as opposed to buying directly from a given seller), Amazon is offering an assurance that the price, shipping, cost, speed, and service associated with that seller and that good is the best of all possible options. Amazon is so confident with its algorithm that the assurance is backed up with a price guarantee; Amazon will match the price of relevant competitors and, until 2021, would foot the bill for any price drops that happened within seven days of purchase.
For Amazon, this commitment to low prices, high volume, and quality service leads to a sustained strong reputation. Since Amazon has an incentive to attract as many buyers and sellers as possible, to maximize its revenue through commissions on sales and advertising, the platform needs to carefully curate an environment that is conducive to repeated interactions. Buyers and sellers come together on the platform knowing that they are going to face the lowest prices, highest revenues, and highest level of service, because Amazon’s implicit price-parity clause (among other policies) aligns incentives in just the right way to optimize competition.
In some ways, an implicit price-parity clause is the Goldilocks of vertical price restraints.
Without a price-parity clause, there is little incentive to invest in the platform. Yes, there are low prices, but a race to the bottom may tend to lead to a single monopolistic platform. Additionally, consumer welfare is not maximized, since there are no services provided at an efficient level to bring additional value to buyers and sellers, leading to higher quality-adjusted prices.
Under a strict price-parity clause, there is a strong incentive to invest in the platform, but the nature of removing selling rights due to a violation can lead to reduced price competition. While the quality of service under this system may be higher, the quality-adjusted price may remain high, since there are lower levels of competition putting downward pressure on prices.
An implicit price-parity clause takes the best aspects of both no PPC and strict PPC policies but removes the worst. Sellers are free to set prices as they wish but have incentive to comply with the policy due to the additional benefits they may receive from the Buy Box. The platform has sufficient protection from free riding due to the revocation of certain services, leading to high levels of investment in efficient services that increase quality and decrease quality-adjusted prices. Finally, consumers benefit from the vigorous price competition for the Buy Box, leading to both lower prices and higher quality-adjusted prices when accounting for the efficient shipping and fulfilment undertaken by the platform.
Current attempts to find an antitrust violation associated with PPCs—both implicit and otherwise—are likely misplaced. Any evidence gathered on the market will probably show an increase in consumer welfare. The reduced search costs on the platforms alone could outweigh any alleged increase in price, not to mention the time costs associated with rapid processing and shipping.
Further, while there are many claims that PPC policies—and high commissions on sales—harm sellers, the alternative is even worse. The only credible counterfactual, given the widespread permeation of PPC policies, is that all sellers on the Internet only sell through their own website. Not only would this increase the cost for small businesses by a significant margin, but it would also likely drive many out of business. For sellers, the benefit of a platform is access to a multitude (in some cases, hundreds of millions) of potential consumers. To reach that number of consumers on its own, every single independent seller would have to employ a team of marketers that rivals a Fortune 500 company. Unfortunately, the value proposition is not on its side, and until it is, platforms are the only viable option.
Before labeling a specific contractual obligation as harmful and anticompetitive, we need to understand how it works in the real world. To this point, there has been insufficient discussion about the intra-platform competition that occurs because of price-parity clauses, and the potential consumer-welfare benefits associated with implicit price-parity clauses. Ideally, courts, regulators, and policymakers will take the time going forward to think deeply about the costs and benefits associated with the clauses and choose the least harmful approach to enforcement.
Ultimately, consumers are the ones who stand to lose the most as a result of overenforcement. As always, enforcers should keep in mind that it is the welfare of consumers, not competitors or platforms, that is the overarching concern of antitrust.
[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]
In Free to Choose, Milton Friedman famously noted that there are four ways to spend money:
Spending your own money on yourself. For example, buying groceries or lunch. There is a strong incentive to economize and to get full value.
Spending your own money on someone else. For example, buying a gift for another. There is a strong incentive to economize, but perhaps less to achieve full value from the other person’s point of view. Altruism is admirable, but it differs from value maximization, since—strictly speaking—giving cash would maximize the other’s value. Perhaps the point of a gift is that it does not amount to cash and the maximization of the other person’s welfare from their point of view.
Spending someone else’s money on yourself. For example, an expensed business lunch. “Pass me the filet mignon and Chateau Lafite! Do you have one of those menus without any prices?” There is a strong incentive to get maximum utility, but there is little incentive to economize.
Spending someone else’s money on someone else. For example, applying the proceeds of taxes or donations. There may be an indirect desire to see utility, but incentives for quality and cost management are often diminished.
This framework can be criticized. Altruism has a role. Not all motives are selfish. There is an important role for action to help those less fortunate, which might mean, for instance, that a charity gains more utility from category (4) (assisting the needy) than from category (3) (the charity’s holiday party). It always depends on the facts and the context. However, there is certainly a grain of truth in the observation that charity begins at home and that, in the final analysis, people are best at managing their own affairs.
How would this insight apply to data interoperability? The difficult cases of assisting the needy do not arise here: there is no serious sense in which data interoperability does, or does not, result in destitution. Thus, Friedman’s observations seem to ring true: when spending data, those whose data it is seem most likely to maximize its value. This is especially so where collection of data responds to incentives—that is, the amount of data collected and processed responds to how much control over the data is possible.
The obvious exception to this would be a case of market power. If there is a monopoly with persistent barriers to entry, then the incentive may not be to maximize total utility, and therefore to limit data handling to the extent that a higher price can be charged for the lesser amount of data that does remain available. This has arguably been seen with some data-handling rules: the “Jedi Blue” agreement on advertising bidding, Apple’s Intelligent Tracking Prevention and App Tracking Transparency, and Google’s proposed Privacy Sandbox, all restrict the ability of others to handle data. Indeed, they may fail Friedman’s framework, since they amount to the platform deciding how to spend others’ data—in this case, by not allowing them to collect and process it at all.
It should be emphasized, though, that this is a special case. It depends on market power, and existing antitrust and competition laws speak to it. The courts will decide whether cases like Daily Mail v Google and Texas et al. v Google show illegal monopolization of data flows, so as to fall within this special case of market power. Outside the United States, cases like the U.K. Competition and Markets Authority’s Google Privacy Sandbox commitments and the European Union’s proposed commitments with Amazon seek to allow others to continue to handle their data and to prevent exclusivity from arising from platform dynamics, which could happen if a large platform prevents others from deciding how to account for data they are collecting. It will be recalled that even Robert Bork thought that there was risk of market power harms from the large Microsoft Windows platform a generation ago. Where market power risks are proven, there is a strong case that data exclusivity raises concerns because of an artificial barrier to entry. It would only be if the benefits of centralized data control were to outweigh the deadweight loss from data restrictions that this would be untrue (though query how well the legal processes verify this).
Yet the latest proposals go well beyond this. A broad interoperability right amounts to “open season” for spending others’ data. This makes perfect sense in the European Union, where there is no large domestic technology platform, meaning that the data is essentially owned via foreign entities (mostly, the shareholders of successful U.S. and Chinese companies). It must be very tempting to run an industrial policy on the basis that “we’ll never be Google” and thus to embrace “sharing is caring” as to others’ data.
But this would transgress the warning from Friedman: would people optimize data collection if it is open to mandatory sharing even without proof of market power? It is deeply concerning that the EU’s DATA Act is accompanied by an infographic that suggests that coffee-machine data might be subject to mandatory sharing, to allow competition in services related to the data (e.g., sales of pods; spare-parts automation). There being no monopoly in coffee machines, this simply forces vertical disintegration of data collection and handling. Why put a data-collection system into a coffee maker at all, if it is to be a common resource? Friedman’s category (4) would apply: the data is taken and spent by another. There is no guarantee that there would be sensible decision making surrounding the resource.
It will be interesting to see how common-law jurisdictions approach this issue. At the risk of stating the obvious, the polity in continental Europe differs from that in the English-speaking democracies when it comes to whether the collective, or the individual, should be in the driving seat. A close read of the UK CMA’s Google commitments is interesting, in that paragraph 30 requires no self-preferencing in data collection and requires future data-handling systems to be designed with impacts on competition in mind. No doubt the CMA is seeking to prevent data-handling exclusivity on the basis that this prevents companies from using their data collection to compete. This is far from the EU DATA Act’s position in that it is certainly not a right to handle Google’s data: it is simply a right to continue to process one’s own data.
U.S. proposals are at an earlier stage. It would seem important, as a matter of principle, not to make arbitrary decisions about vertical integration in data systems, and to identify specific market-power concerns instead, in line with common-law approaches to antitrust.
It might be very attractive to the EU to spend others’ data on their behalf, but that does not make it right. Those working on the U.S. proposals would do well to ensure that there is a meaningful market-power gate to avoid unintended consequences.
Disclaimer: The author was engaged for expert advice relating to the UK CMA’s Privacy Sandbox case on behalf of the complainant Marketers for an Open Web.
 Milton Friedman, Free to Choose, 1980, pp.115-119
 Comments at the Yale Law School conference, Robert H. Bork’s influence on Antitrust Law, Sep. 27-28, 2013.
[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]
About earth’s creatures great and small, Devices clever as can be, I see foremost a ruthless power; You, their ingenuity.
You see the beak upon the finch; I, the beaked skeleton. You see the wonders that they are; I, the things that might have been.
You see th’included batteries I, the poor excluded ones. You, the phone that simply works; I, restrain’d competition.
’Twould be a better world, I say, Were all the options to abide— All beaks and brands of battery— From which the public to decide.
You say that man the greatest is Because he dominates today, But meteor, not caveman, drove The ancient dinosaurs away.
If they were here when we were new, We might the age not have survived; They say some species could outwit The sharpest chimps today alive.
Just so, I say, ’twould better be Replacement batteries t’allow For sales alone can prove what brands Deserve el’vation to the Dow.
Designing batt’ries switchable Makes their selection fully public; It substitutes democracy For an engineering logic.
For only buyers should decide Which components to inter; Their taste alone determines worth, Though engineers be cleverer.
You: The meaning of component, We can always redefine. From batteries to molecules, We can draw most any line.
Of cogs, thus, an infinitude; Of time a finitude to lose. You cannot interchange all parts, Or each one carefully to choose.
Product choices corporate We cannot all democratize, At least so long as consumers Wish to get on with their lives.
Exclusion therefore cannot we Universally condemn; Oft must we let the firm decide Which components to put in.
Power, then, is everywhere— What is is built on what is not— And th’elimination of it Is no cornerstone of thought.
Of components infinite We must choose which few to free; Th’criterion for doing that, Abuse-of-power cannot be.
Power and oppression are, In life and goods ubiquitous. But value differentiates— Build we antitrust on this.
Alone when letting buyers say Which part into a product goes Would make those buyers happier, Must we interchange impose.
Batt’ry brand must matter much, Else, we seriously delude, To think consumers want to hear: “We the batt’ries not include.”
The same is true for Amazon. If it knows which seller’s best, Let it cast the others out for us— Give our scrolling bars a rest.
If Apple knows which app’s a dud, Let Apple cast it out as well. Which app’s a fraud and which a scam, Smartphone users cannot tell.
If Google wants to show me how To get from A to B to C, I’d rather that she use her maps Than search for others separately.
A rule against self-preferencing No legal principle provides; For what opposes power’s role Can’t be neutrally applied.
What goes for all third-party sales Goes for Amazon’s front-end. Self-preferencing alone prevents My designing a new skin.
We cannot hire its warehouse staff; We cannot choose its motor fleet; We cannot source its cargo planes; Or its trucks route through our streets.
But this is all self-preferencing; And it cannot all be banned; Unless we choice’s value weigh, We strike with arbitrary hand.
So say you and differ I: ’Twixt dinosaur and man must choose. If one alone fits on this earth— Wilt for man our power use?
These verses are based in part on arguments summarized in this blog post and this paper.
[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]
When I was a kid, I trailed behind my mother in the grocery store with a notepad and a pencil adding up the cost of each item she added to our cart. This was partly my mother’s attempt to keep my math skills sharp, but it was also a necessity. As a low-income family, there was no slack in the budget for superfluous spending. The Hostess cupcakes I longed for were a luxury item that only appeared in our cart if there was an unexpected windfall. If the antitrust populists who castigate all forms of market power succeed in their crusade to radically deconcentrate the economy, life will be much harder for low-income families like the one I grew up in.
Antitrust populists like Biden White House officialTim Wu and authorMatt Stoller decry the political influence of large firms. But instead of advocating for policies that tackle this political influence directly, they seek reforms to antitrust enforcement that aim to limit the economic advantages of these firms, believing that will translate into political enfeeblement. The economic advantages arising from scale benefit consumers, particularly low-income consumers, often at the expense of smaller economic rivals. But because the protection of small businesses is so paramount to their worldview, antitrust populists blithely ignore the harm that advancing their objectives would cause to low-income families.
This desire to protect small businesses, without acknowledging the economic consequences for low-income families, is plainly obvious in calls for reinvigorated Robinson-Patman Act enforcement (a law from the 1930s for which independent businesses advocated to limit the rise of chain stores) and in plans to revise the antitrust enforcement agencies’ merger guidelines. The U.S. Justice Department (DOJ) and the Federal Trade Commission (FTC) recently held a series of listening sessions to demonstrate the need for new guidelines. During the listening session on food and agriculture, independent grocer Anthony Pena described the difficulty he has competing with larger competitors like Walmart. He stated that:
Just months ago, I was buying a 59-ounce orange juice just north of $4 a unit, where we couldn’t get the supplier to sell it to us … Meanwhile, I go to the bigger box like a Walmart or a club store. Not only do they have it fully stocked, but they have it about half the price that I would buy it for at cost.
Half the price. Anthony Pena is complaining that competitors such as Walmart are selling the same product at half the price. To protect independent grocers like Anthony Pena, antitrust populists would have consumers, including low-income families, pay twice as much for groceries.
Walmart is an important food retailer for low-income families.Nearly a fifth of all spending through the Supplemental Nutrition Assistance Program (SNAP), the program formerly known as food stamps, takes place at Walmart. After housing and transportation, food is the largest expense for low-income families. The share of expenditures going toward food for low-income families (i.e., families in the lowest 20% of the income distribution) is34% higher than for high-income families (i.e., families in the highest 20% of the income distribution). This means that higher grocery prices disproportionately burden low-income families.
In 2019, the U.S. Department of Agriculture (USDA) launched theSNAP Online Purchasing Pilot, which allows SNAP recipients to use their benefits at online food retailers. The pandemic led to an explosion in the number ofSNAP recipients using their benefits online—increasing from just 35,000 households in March 2020 to nearly 770,000 households just three months later. While the pilot originally only included Walmart and Amazon, thenumber of eligible retailers has expanded rapidly. In order to make grocery delivery more accessible to low-income families, an important service during the pandemic, Amazon reduced itsPrime membership fee (which helps pay for free delivery) by 50% for SNAP recipients.
The antitrust populists are not only targeting the advantages of large brick-and-mortar retailers, such as Walmart, but also of large online retailers like Amazon. Again, these advantages largely flow to consumers—particularly low-income ones.
The proposedAmerican Innovation and Choice Online Act (AICOA), which was voted out of the Senate Judiciary Committee in February and may make an appearance on the Senate floor this summer, threatens those consumer benefits. AICOA would prohibit so-called “self-preferencing” by Amazon and other large technology platforms.
Should a ban on self-preferencing come to fruition, Amazon would not be able to prominently show its own products in any capacity—even when its products are a good match for a consumer’s search. In search results, Amazon will not be able to promote its private-label products, including Amazon Basics and 365 by Whole Foods, or products for which it is a first-party seller (i.e., a reseller of another company’s product). Amazon may also have to downgrade the ranking of popular products it sells, making them harder for consumers to find. Forcing Amazon to present offers that do not correspond to products consumers want to buy or are not a good value inflicts harm on all consumers but is particularly problematic for low-income consumers. All else equal, most consumers, especially low-income ones, obviously prefer cheaper products. It is important not to take that choice away from them.
Consider the case of orange juice, the product causing so much consternation for Mr. Pena. In a recent search on Amazon for a 59-ounce orange juice, as seen in the image below, the first four “organic” search results are SNAP-eligible, first-party, or private-label products sold by Amazon and ranging in price from $3.55 to $3.79. The next two results are from third-party sellers offering two 59-ounce bottles of orange juice at $38.99 and $84.54—more than five times the unit price offered by Amazon. By prohibiting self-preferencing, Amazon would be forced to promote products to consumers that are significantly more expensive and that are not SNAP-eligible. This increases costs directly for consumers who purchase more expensive products when cheaper alternatives are available but not presented. But it also increases costs indirectly by forcing consumers to search longer for better prices and SNAP-eligible products or by discouraging them from considering timesaving, online shopping altogether. Low-income families are least able to afford these increased costs.
The upshot is that antitrust populists are choosing to support (often well-off) small-business owners at the expense of vulnerable working people. Congress should not allow them to put the squeeze on low-income families. These families are already suffering due to record-high inflation—particularly for items that constitute the largest share of their expenditures, such as transportation and food. Proposed antitrust reforms such as AICOA and reinvigorated Robinson-Patman Act enforcement will only make it harder for low-income families to make ends meet.
[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]
Earlier this month, Professors Fiona Scott Morton, Steve Salop, and David Dinielli penned a letter expressing their “strong support” for the proposed American Innovation and Choice Online Act (AICOA). In the letter, the professors address criticisms of AICOA and urge its approval, despite possible imperfections.
“Perhaps this bill could be made better if we lived in a perfect world,” the professors write, “[b]ut we believe the perfect should not be the enemy of the good, especially when change is so urgently needed.”
The problem is that the professors and other supporters of AICOA have shown neither that “change is so urgently needed” nor that the proposed law is, in fact, “good.”
Is Change ‘Urgently Needed’?
With respect to the purported urgency that warrants passage of a concededly imperfect bill, the letter authors assert two points. First, they claim that AICOA’s targets—Google, Apple, Facebook, Amazon, and Microsoft (collectively, GAFAM)—“serve as the essential gatekeepers of economic, social, and political activity on the internet.” It is thus appropriate, they say, to amend the antitrust laws to do something they have never before done: saddle a handful of identified firms with special regulatory duties.
But is this oft-repeated claim about “gatekeeper” status true? The label conjures up the oldTerminal Railroad case, where a group of firms controlled the only bridges over the Mississippi River at St. Louis. Freighters had no choice but to utilize their services. Do the GAFAM firms really play a similar role with respect to “economic, social, and political activity on the internet”? Hardly.
With respect to economic activity, Amazon may be a huge player, but it still accounts foronly 39.5% of U.S. ecommerce sales—and far less of retail sales overall. Consumers have gobs of other ecommerce options, and so do third-party merchants, which may sell their wares using Shopify, Ebay, Walmart, Etsy, numerous other ecommerce platforms, or their own websites.
For social activity on the internet, consumers need not rely on Facebook and Instagram. They can connect with others via Snapchat, Reddit, Pinterest, TikTok, Twitter, and scores of other sites. To be sure, all these services have different niches, but the letter authors’ claim that the GAFAM firms are “essential gatekeepers” of “social… activity on the internet” is spurious.
The second argument the letter authors assert in support of their claim of urgency is that “[t]he decline of antitrust enforcement in the U.S. is well known, pervasive, and has left our jurisprudence unable to protect and maintain competitive markets.” In other words, contemporary antitrust standards are anemic and have led to a lack of market competition in the United States.
The evidence for this claim, which is increasingly parroted in the press and among the punditry, is weak. Proponents primarily point to studies showing:
increasing industrial concentration;
higher markups on goods and services since 1980;
a declining share of surplus going to labor, which could indicate monopsony power in labor markets; and
a reduction in startup activity, suggesting diminished innovation.
Examined closely, however, those studies fail to establish a domestic market power crisis.
Industrial concentration has little to do with market power in actual markets. Indeed, research suggests that, while industries may be consolidating at the national level, competition at the market (local) level is increasing, as more efficient national firms open more competitive outlets in local markets. As Geoff Manne sums up this research:
Most recently, several working papers looking at the data on concentration in detail and attempting to identify the likely cause for the observed data, show precisely the opposite relationship. The reason for increased concentration appears to be technological, not anticompetitive. And, as might be expected from that cause, its effects are beneficial. Indeed, the story is both intuitive and positive.
What’s more, while national concentration does appear to be increasing in some sectors of the economy, it’s not actually so clear that the same is true for local concentration — which is often the relevant antitrust market.
With respect to the evidence on markups, the claim of a significant increase in the price-cost margin depends crucially on the measure of cost. The studies suggesting an increase in margins since 1980 use the “cost of goods sold” (COGS) metric, which excludes a firm’s management and marketing costs—both of which have become an increasingly significant portion of firms’ costs. Measuring costs using the “operating expenses” (OPEX) metric, which includes management and marketing costs,reveals that public-company markups increased only modestly since the 1980s and that the increase was within historical variation. (It is also likely that increased markups since 1980 reflect firms’ more extensive use of technology and their greater regulatory burdens, both of which raise fixed costs and require higher markups over marginal cost.)
As for the declining labor share, that dynamic is occurring globally. Indeed, the decline in the labor share in the United States has been less severe than in Japan, Canada, Italy, France, Germany, China, Mexico, and Poland, suggesting that anemic U.S. antitrust enforcement is not to blame. (A reduction in the relative productivity of labor is a more likely culprit.)
Finally, the claim of reduced startup activity is unfounded. In itsreport on competition in digital markets, the U.S. House Judiciary Committee asserted that, since the advent of the major digital platforms:
“[t]he number of new technology firms in the digital economy has declined”;
“the entrepreneurship rate—the share of startups and young firms in the [high technology] industry as a whole—has also fallen significantly”; and
“[u]nsurprisingly, there has also been a sharp reduction in early-stage funding for technology startups.” (pp. 46-47.)
Those claims, however, are based on cherry-picked evidence.
In support of the first two, the Judiciary Committee report cited astudy based on data ending in 2011. As Benedict Evans hasobserved, “standard industry data shows that startup investment rounds have actually risen at least 4x since then.”
In support of the third claim, the report cited statistics from anarticle noting that the number and aggregate size of the very smallest venture capital deals—those under $1 million—fell between 2014 and 2018 (after growing substantially from 2008 to 2014). The Judiciary Committee report failed to note, however, the cited article’s observation that small venture deals ($1 million to $5 million) had not dropped and that larger venture deals (greater than $5 million) had grown substantially during the same time period. Nor did the report acknowledge that venture-capital funding hascontinued to increase since 2018.
Finally, there is also reason to think that AICOA’s passage would harm, not help, the startup environment:
AICOA doesn’t directly restrict startup acquisitions, but the activities it would restrict most certainly do dramatically affect the incentives that drive many startup acquisitions. If a platform is prohibited from engaging in cross-platform integration of acquired technologies, or if it can’t monetize its purchase by prioritizing its own technology, it may lose the motivation to make a purchase in the first place.
Despite the letter authors’ claims, neither a paucity of avenues for “economic, social, and political activity on the internet” nor the general state of market competition in the United States establishes an “urgent need” to re-write the antitrust laws to saddle a small group of firms with unprecedented legal obligations.
Is the Vagueness of AICOA’s Primary Legal Standard a Feature?
AICOA bars covered platforms from engaging in three broad classes of conduct (self-preferencing, discrimination among business users, and limiting business users’ ability to compete) where the behavior at issue would “materially harm competition.” It then forbids several specific business practices, but allows the defendant to avoid liability by proving that their use of the practice would not cause a “material harm to competition.”
Critics have argued that “material harm to competition”—a standard that is not used elsewhere in the antitrust laws—is too indeterminate to provide business planners and adjudicators with adequate guidance. The authors of the pro-AICOA letter, however, maintain that this “different language is a feature, not a bug.”
That is so, the letter authors say, because the language effectively signals to courts and policymakers that antitrust should prohibit more conduct. They explain:
To clarify to courts and policymakers that Congress wants something different (and stronger), new terminology is required. The bill’s language would open up a new space and move beyond the standards imposed by the Sherman Act, which has not effectively policed digital platforms.
Putting aside the weakness of the letter authors’ premise (i.e., that Sherman Act standards have proven ineffective), the legislative strategy they advocate—obliquely signal that you want “change” without saying what it should consist of—is irresponsible and risky.
The letter authors assert two reasons Congress should not worry about enacting a liability standard that has no settled meaning. One is that:
[t]he same judges who are called upon to render decisions under the existing, insufficient, antitrust regime, will also be called upon to render decisions under the new law. They will be the same people with the same worldview.
It is thus unlikely that “outcomes under the new law would veer drastically away from past understandings of core concepts….”
But this claim undermines the argument that a new standard is needed to get the courts to do “something different” and “move beyond the standards imposed by the Sherman Act.” If we don’t need to worry about an adverse outcome from a novel, ill-defined standard because courts are just going to continue applying the standard they’re familiar with, then what’s the point of changing the standard?
A second reason not to worry about the lack of clarity on AICOA’s key liability standard, the letter authors say, is that federal enforcers will define it:
The new law would mandate that the [Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice], the two expert agencies in the area of competition, together create guidelines to help courts interpret the law. Any uncertainty about the meaning of words like ‘competition’ will be resolved in those guidelines and over time with the development of caselaw.
This is no doubt music to the ears of members of Congress, who love to get credit for “doing something” legislatively, while leaving the details to an agency so that they can avoid accountability if things turn out poorly. Indeed, the letter authors explicitly play upon legislators’ unwholesome desire for credit-sans-accountability. They emphasize that “[t]he agencies must [create and] update the guidelines periodically. Congress doesn’t have to do much of anything very specific other than approve budgets; it certainly has no obligation to enact any new laws, let alone amend them.”
AICOA does not, however, confer rulemaking authority on the agencies; it merely directs them to create and periodically update “agency enforcement guidelines” and “agency interpretations” of certain affirmative defenses. Those guidelines and interpretations would not bind courts, which would be free to interpret AICOA’s new standard differently. The letter authors presume that courts would defer to the agencies’ interpretation of the vague standard, and they probably would. But that raises other problems.
For one thing, it reduces certainty, which is likely to chill innovation. Giving the enforcement agencies de facto power to determine and redetermine what behaviors “would materially harm competition” means that the rules are never settled. Administrations differ markedly in their views about what the antitrust laws should forbid, so business planners could never be certain that a product feature or revenue model that is legal today will not be deemed to “materially harm competition” by a future administration with greater solicitude for small rivals and upstarts. Such uncertainty will hinder investment in novel products, services, and business models.
Consider, for example, Google’s investment in the Android mobile operating system. Google makes money from Android—which it licenses to device manufacturers for free—by ensuring that Google’s revenue-generating services (e.g., its search engine and browser) are strongly preferenced on Android products. One administration might believe that this is a procompetitive arrangement, as itcreates a different revenue model for mobile operating systems (as opposed to Apple’s generation of revenue from hardware sales), resulting in both increased choice and lower prices for consumers. A subsequent administration might conclude that the arrangement materially harms competition by making it harder for rival search engines and web browsers to gain market share. It would make scant sense for a covered platform to make an investment like Google did with Android if its underlying business model could be upended by a new administration with de facto power to rewrite the law.
A second problem with having the enforcement agencies determine and redetermine what covered platforms may do is that it effectively transforms the agencies from law enforcers into sectoral regulators. Indeed, the letter authors agree that “the ability of expert agencies to incorporate additional protections in the guidelines” means that “the bill is not a pure antitrust law but also safeguards other benefits to consumers.” They tout that “the complementarity between consumer protection and competition can be addressed in the guidelines.”
Of course, to the extent that the enforcement guidelines address concerns besides competition, they will be less useful for interpreting AICOA’s “material harm to competition” standard; they might deem a practice suspect on non-competition grounds. Moreover, it is questionable whether creating a sectoral regulator for five widely diverse firms is a good idea. The history of sectoral regulation is littered with examples of agency capture, rent-seeking, and other public-choice concerns. At a minimum, Congress should carefully examine the potential downsides of sectoral regulation, install protections to mitigate those downsides, and explicitly establish the sectoral regulator.
Will AICOA Break Popular Products and Services?
Many popular offerings by the platforms covered by AICOA involve self-preferencing, discrimination among business users, or one of the other behaviors the bill presumptively bans.Pre-installation of iPhone apps and services like Siri, for example, involves self-preferencing or discrimination among business users of Apple’s iOS platform. But iPhone consumers value having a mobile device that offers extensive services right out of the box. Consumers love that Google’s search result for an establishment offers directions to the place, which involves the preferencing of Google Maps. And consumers positively adore Amazon Prime, which can provide free expedited delivery because Amazon conditions Prime designation on a third-party seller’s use of Amazon’s efficient, reliable “Fulfillment by Amazon” service—somethingAmazon could not do under AICOA.
The authors of the pro-AICOA letter insist that the law will not ban attractive product features like these. AICOA, they say:
provides a powerful defense that forecloses any thoughtful concern of this sort: conduct otherwise banned under the bill is permitted if it would ‘maintain or substantially enhance the core functionality of the covered platform.’
But the authors’ confidence that this affirmative defense will adequately protect popular offerings is misplaced. The defense is narrow and difficult to mount.
First, it immunizes only those behaviors that maintain or substantially enhance the “core” functionality of the covered platform. Courts would rightly interpret AICOA to give effect to that otherwise unnecessary word, which dictionariesdefine as “the central or most important part of something.” Accordingly, any self-preferencing, discrimination, or other presumptively illicit behavior that enhances a covered platform’s service but not its “central or most important” functions is not even a candidate for the defense.
Even if a covered platform could establish that a challenged practice would maintain or substantially enhance the platform’s core functionality, it would also have to prove that the conduct was “narrowly tailored” and “reasonably necessary” to achieve the desired end, and, for many behaviors, the “le[ast] discriminatory means” of doing so. That is a remarkably heavy burden, and it beggars belief to suppose that business planners considering novel offerings involving self-preferencing, discrimination, or some other presumptively illicit conduct would feel confident that they could make the required showing. It is likely, then, that AICOA would break existing products and services and discourage future innovation.
Of course, Congress could mitigate this concern by specifying that AICOA does not preclude certain things, such as pre-installed apps or consumer-friendly search results. But the legislation would then lose the support of the many interest groups who want the law to preclude various popular offerings that its text would now forbid. Unlike consumers, who are widely dispersed and difficult to organize, the groups and competitors that would benefit from things like stripped-down smartphones, map-free search results, and Prime-less Amazon are effective lobbyists.
Should the US Follow Europe?
Having responded to criticisms of AICOA, the authors of the pro-AICOA letter go on offense. They assert that enactment of the bill is needed to ensure that the United States doesn’t lose ground to Europe, both in regulatory leadership and in innovation. Observing that the European Union’s Digital Markets Act (DMA) has just become law, the authors write that:
[w]ithout [AICOA], the role of protecting competition and innovation in the digital sector outside China will be left primarily to the European Union, abrogating U.S. leadership in this sector.
Moreover, if Europe implements its DMA and the United States does not adopt AICOA, the authors claim:
the center of gravity for innovation and entrepreneurship [could] shift from the U.S. to Europe, where the DMA would offer greater protections to start ups and app developers, and even makers and artisans, against exclusionary conduct by the gatekeeper platforms.
Implicit in the argument that AICOA is needed to maintain America’s regulatory leadership is the assumption that to lead in regulatory policy is to have the most restrictive rules. The most restrictive regulator will necessarily be the “leader” in the sense that it will be the one with the most control over regulated firms. But leading in the sense of optimizing outcomes and thereby serving as a model for other jurisdictions entails crafting the best policies—those that minimize the aggregate social losses from wrongly permitting bad behavior, wrongly condemning good behavior, and determining whether conduct is allowed or forbidden (i.e., those that “minimize the sum of error and decision costs”). Rarely is the most restrictive regulatory regime the one that optimizes outcomes, and as I have elsewhereexplained, the rules set forth in the DMA hardly seem calibrated to do so.
As for “innovation and entrepreneurship” in the technological arena, it would be a seismic shift indeed if the center of gravity were to migrate to Europe, which is currently home tozero of the top 20 global tech companies. (The United States hosts 12; China, eight.)
It seems implausible, though, that imposing a bunch of restrictions on large tech companies that have significant resources for innovation and arescrambling to enter each other’s markets will enhance, rather than retard, innovation. The self-preferencing bans in AICOA and DMA, for example, would prevent Apple from developing its own search engine to compete with Google, as it has apparentlycontemplated. Why would Apple develop its own search engine if it couldn’t preference it on iPhones and iPads? And why would Google have started its shopping service to compete with Amazon if it couldn’t preference Google Shopping in search results? And why would any platform continually improve to gain more users as it neared the thresholds for enhanced duties under DMA or AICOA? It seems more likely that the DMA/AICOA approach will hinder, rather than spur, innovation.
At the very least, wouldn’t it be prudent to wait and see whether DMA leads to a flourishing of innovation and entrepreneurship in Europe before jumping on the European bandwagon? After all, technological innovations that occur in Europe won’t be available only to Europeans. Just as Europeans benefit from innovation by U.S. firms, American consumers will be able to reap the benefits of any DMA-inspired innovation occurring in Europe. Moreover, if DMA indeed furthers innovation by making it easier for entrants to gain footing, even American technology firms could benefit from the law by launching their products in Europe. There’s no reason for the tech sector to move to Europe to take advantage of a small-business-protective European law.
In fact, the optimal outcome might be to have one jurisdiction in which major tech platforms are free to innovate, enter each other’s markets via self-preferencing, etc. (the United States, under current law) and another that is more protective of upstart businesses that use the platforms (Europe under DMA). The former jurisdiction would create favorable conditions for platform innovation and inter-platform competition; the latter might enhance innovation among businesses that rely on the platforms. Consumers in each jurisdiction, however, would benefit from innovation facilitated by the other.
It makes little sense, then, for the United States to rush to adopt European-style regulation. DMA is a radical experiment. Regulatory history suggests that the sort of restrictiveness it imposes retards, rather than furthers, innovation. But in the unlikely event that things turn out differently this time, little harm would result from waiting to see DMA’s benefits before implementing its restrictive approach.
Does AICOA Threaten Platforms’ Ability to Moderate Content and Police Disinformation?
The authors of the pro-AICOA letter conclude by addressing the concern that AICOA “will inadvertently make content moderation difficult because some of the prohibitions could be read… to cover and therefore prohibit some varieties of content moderation” by covered platforms.
The letter authors say that a reading of AICOA to prohibit content moderation is “strained.” They maintain that the act’s requirement of “competitive harm” would prevent imposition of liability based on content moderation and that the act is “plainly not intended to cover” instances of “purported censorship.” They further contend that the risk of judicial misconstrual exists with all proposed laws and therefore should not be a sufficient reason to oppose AICOA.
Each of these points is weak. Section 3(a)(3) of AICOA makes it unlawful for a covered platform to “discriminate in the application or enforcement of the terms of service of the covered platform among similarly situated business users in a manner that would materially harm competition.” It ishardly “strained” to reason that this provision is violated when, say, Google’s YouTube selectively demonetizes a business user for content that Google deems harmful or misleading. Or when Apple removes Parler, but not every other violator of service terms, from its App Store. Such conduct could “materially harm competition” by impeding the de-platformed business’ ability to compete with its rivals.
And it is hard to say that AICOA is “plainly not intended” to forbid these acts when a key supporting senatortouted the bill as a means of policing content moderation andobserved during markup that it would “make some positive improvement on the problem of censorship” (i.e., content moderation) because “it would provide protections to content providers, to businesses that are discriminated against because of the content of what they produce.”
At a minimum, we should expect some state attorneys general to try to use the law to police content moderation they disfavor, and the mere prospect of such legal action could chill anti-disinformation efforts and other forms of content moderation.
Of course, there’s a simple way for Congress to eliminate the risk of what the letter authors deem judicial misconstrual: It could clarify that AICOA’s prohibitions do not cover good-faith efforts to moderate content or police disinformation. Such clarification, however, would kill the bill, asseveral Republican legislators are supporting the act because it restricts content moderation.
The risk of judicial misconstrual with AICOA, then, is not the sort that exists with “any law, new or old,” as the letter authors contend. “Normal” misconstrual risk exists when legislators try to be clear about their intentions but, because language has its limits, some vagueness or ambiguity persists. AICOA’s architects have deliberately obscured their intentions in order to cobble together enough supporters to get the bill across the finish line.
The one thing that all AICOA supporters can agree on is that they deserve credit for “doing something” about Big Tech. If the law is construed in a way they disfavor, they can always act shocked and blame rogue courts. That’s shoddy, cynical lawmaking.
So, I respectfully disagree with Professors Scott Morton, Salop, and Dinielli on AICOA. There is no urgent need to pass the bill right now, especially as we are on the cusp of seeing an AICOA-like regime put to the test. The bill’s central liability standard is overly vague, and its plain terms would break popular products and services and thwart future innovation. The United States should equate regulatory leadership with the best, not the most restrictive, policies. And Congress should thoroughly debate and clarify its intentions on content moderation before enacting legislation that could upend the status quo on that important matter.
For all these reasons, Congress should reject AICOA. And for the same reasons, a future in which AICOA is adopted is extremely unlikely to resemble the Utopian world that Professors Scott Morton, Salop, and Dinielli imagine.
The Biden administration’s antitrust reign of error continues apace. The U.S. Justice Department’s (DOJ) Antitrust Division has indicated in recent months that criminal prosecutions may be forthcoming under Section 2 of the Sherman Antitrust Act, but refuses to provide any guidance regarding enforcement criteria.
Earlier this month, Deputy Assistant Attorney General Richard Powers stated that “there’s ample case law out there to help inform those who have concerns or questions” regarding Section 2 criminal enforcement, conveniently ignoring the fact that criminal Section 2 cases have not been brought in almost half a century. Needless to say, those ancient Section 2 cases (which are relatively few in number) antedate the modern era of economic reasoning in antitrust analysis. What’s more, unlike Section 1 price-fixing and market-division precedents, they yield no clear rule as to what constitutes criminal unilateral behavior. Thus, DOJ’s suggestion that old cases be consulted for guidance is disingenuous at best.
It follows that DOJ criminal-monopolization prosecutions would be sheer folly. They would spawn substantial confusion and uncertainty and disincentivize dynamic economic growth.
Aggressive unilateral business conduct is a key driver of the competitive process. It brings about “creative destruction” that transforms markets, generates innovation, and thereby drives economic growth. As such, one wants to be particularly careful before condemning such conduct on grounds that it is anticompetitive. Accordingly, error costs here are particularly high and damaging to economic prosperity.
Moreover, error costs in assessing unilateral conduct are more likely than in assessing joint conduct, because it is very hard to distinguish between procompetitive and anticompetitive single-firm conduct, as DOJ’s 2008 Report on Single Firm Conduct Under Section 2 explains (citations omitted):
Courts and commentators have long recognized the difficulty of determining what means of acquiring and maintaining monopoly power should be prohibited as improper. Although many different kinds of conduct have been found to violate section 2, “[d]efining the contours of this element … has been one of the most vexing questions in antitrust law.” As Judge Easterbrook observes, “Aggressive, competitive conduct by any firm, even one with market power, is beneficial to consumers. Courts should prize and encourage it. Aggressive, exclusionary conduct is deleterious to consumers, and courts should condemn it. The big problem lies in this: competitive and exclusionary conduct look alike.”
The problem is not simply one that demands drawing fine lines separating different categories of conduct; often the same conduct can both generate efficiencies and exclude competitors. Judicial experience and advances in economic thinking have demonstrated the potential procompetitive benefits of a wide variety of practices that were once viewed with suspicion when engaged in by firms with substantial market power. Exclusive dealing, for example, may be used to encourage beneficial investment by the parties while also making it more difficult for competitors to distribute their products.
If DOJ does choose to bring a Section 2 criminal case soon, would it target one of the major digital platforms? Notably, a U.S. House Judiciary Committee letter recently called on DOJ to launch a criminal investigation of Amazon (see here). Also, current Federal Trade Commission (FTC) Chair Lina Khan launched her academic career with an article focusing on Amazon’s “predatory pricing” and attacking the consumer welfare standard (see here).
[DOJ’s criminal Section 2 prosecution of A&P, begun in 1944,] bear[s] an eerie resemblance to attacks today on leading online innovators. Increasingly integrated and efficient retailers—first A&P, then “big box” brick-and-mortar stores, and now online retailers—have challenged traditional retail models by offering consumers lower prices and greater convenience. For decades, critics across the political spectrum have reacted to such disruption by urging Congress, the courts, and the enforcement agencies to stop these American success stories by revising antitrust doctrine to protect small businesses rather than the interests of consumers. Using antitrust law to punish pro-competitive behavior makes no more sense today than it did when the government attacked A&P for cutting consumers too good a deal on groceries.
Before bringing criminal Section 2 charges against Amazon, or any other “dominant” firm, DOJ leaders should read and absorb the sobering Muris and Nuechterlein assessment.
Finally, not only would DOJ Section 2 criminal prosecutions represent bad public policy—they would also undermine the rule of law. In a very thoughtful 2017 speech, then-Acting Assistant Attorney General for Antitrust Andrew Finch succinctly summarized the importance of the rule of law in antitrust enforcement:
[H]ow do we administer the antitrust laws more rationally, accurately, expeditiously, and efficiently? … Law enforcement requires stability and continuity both in rules and in their application to specific cases.
Indeed, stability and continuity in enforcement are fundamental to the rule of law. The rule of law is about notice and reliance. When it is impossible to make reasonable predictions about how a law will be applied, or what the legal consequences of conduct will be, these important values are diminished. To call our antitrust regime a “rule of law” regime, we must enforce the law as written and as interpreted by the courts and advance change with careful thought.
The reliance fostered by stability and continuity has obvious economic benefits. Businesses invest, not only in innovation but in facilities, marketing, and personnel, and they do so based on the economic and legal environment they expect to face.
Of course, we want businesses to make those investments—and shape their overall conduct—in accordance with the antitrust laws. But to do so, they need to be able to rely on future application of those laws being largely consistent with their expectations. An antitrust enforcement regime with frequent changes is one that businesses cannot plan for, or one that they will plan for by avoiding certain kinds of investments.
Bringing criminal monopolization cases now, after a half-century of inaction, would be antithetical to the stability and continuity that underlie the rule of law. What’s worse, the failure to provide prosecutorial guidance would be squarely at odds with concerns of notice and reliance that inform the rule of law. As such, a DOJ decision to target firms for Section 2 criminal charges would offend the rule of law (and, sadly, follow the FTC ‘s recent example of flouting the rule of law, see here and here).
In sum, the case against criminal Section 2 prosecutions is overwhelming. At a time when DOJ is facing difficulties winning “slam dunk” criminal Section 1 prosecutions targeting facially anticompetitive joint conduct (see here, here, and here), the notion that it would criminally pursue unilateral conduct that may generate substantial efficiencies is ludicrous. Hopefully, DOJ leadership will come to its senses and drop any and all plans to bring criminal Section 2 cases.
[The following is a guest post from Andrew Mercado, a research assistant at the Mercatus Center at George Mason University and an adjunct professor and research assistant at George Mason’s Antonin Scalia Law School.]
The Competition and Transparency in Digital Advertising Act (CTDAA), introduced May 19 by Sens. Mike Lee (R-Utah), Ted Cruz (R-Texas), Amy Klobuchar (D-Minn.), and Richard Blumenthal (D-Conn.), is the latest manifestation of the congressional desire to “do something” legislatively about big digital platforms. Although different in substance from the other antitrust bills introduced this Congress, it shares one key characteristic: it is fatally flawed and should not be enacted.
In brief, the CTDAA imposes revenue-based restrictions on the ownership structure of firms engaged in digital advertising. The CTDAA bars a firm with more than $20 billion in annual advertising revenue (adjusted annually for inflation) from:
owning a digital-advertising exchange if it owns either a sell-side ad brokerage or a buy-side ad brokerage; and
owning a sell-side brokerage if it owns a buy-side brokerage, or from owning a buy-side or sell-side brokerage if it is also a buyer or seller of advertising space.
The proposal’s ownership restrictions present the clearest harm to the future of the digital-advertising market. From an efficiency perspective, vertical integration of both sides of the market can lead to enormous gains. Since, for example, Google owns and operates an ad exchange, a sell-side broker, and a buy-side broker, there are very few frictions that exist between each side of the market. All of the systems are integrated and the supply of advertising space, demand for that space, and the marketplace conducting price-discovery auctions are automatically updated in real time.
While this instantaneous updating is not unique to Google’s system, and other buy- and sell-side firms can integrate into the system, the benefit to advertisers and publishers can be found in the cost savings that come from the integration. Since Google is able to create synergies on all sides of the market, the fees on any given transaction are lower. Further, incorporating Google’s vast trove of data allows for highly relevant and targeted ads. All of this means that advertisers spend less for the same quality of ad; publishers get more for each ad they place; and consumers see higher-quality, more relevant ads.
Without the ability to own and invest in the efficiency and transaction-cost reduction of an integrated platform, there will likely be less innovation and lower quality on all sides of the market. Further, advertisers and publishers will have to shoulder the burden of using non-integrated marketplaces and would likely pay higher fees for less-efficient brokers. Since Google is a one-stop shop for all of a company’s needs—whether that be on the advertising side or the publishing side—companies can move seamlessly from one side of the market to the other, all while paying lower costs per transaction, because of the integrated nature of the platform.
In the absence of such integration, a company would have to seek out one buy-side brokerage to place ads and another, separate sell-side brokerage to receive ads. These two brokers would then have to go to an ad exchange to facilitate the deal, bringing three different brokers into the mix. Each of these middlemen would take a proportionate cut of the deal. When comparing the situation between an integrated and non-integrated market, the fees associated with serving ads in a non-integrated market are almost certainly higher.
Additionally, under this proposal, the innovative potential of each individual firm is capped. If a firm grows big enough and gains sufficient revenue through integrating different sides of the market, they will be forced to break up their efficiency-inducing operations. Marginal improvements on each side of the market may be possible, but without integrating different sides of the market, the scale required to justify those improvements would be insurmountable.
The CTDAA assumes that:
there is a serious competitive problem in digital advertising; and
the structural separation and regulation of advertising brokerages run by huge digital-advertising platforms (as specified in the CTDAA) would enhance competition and benefit digital advertising customers and consumers.
The first assumption has not been proven and is subject to debate, while the second assumption is likely to be false.
Fundamental to the bill’s assumption that the digital-advertising market lacks competition is a misunderstanding of competitive forces and the idea that revenue and profit are inversely related to competition. While it is true that high profits can be a sign of consolidation and anticompetitive outcomes, the dynamic nature of the internet economy makes this theory unlikely.
As Christopher Kaiser and I have discussed, competition in the internet economy is incredibly dynamic. Vigorous competition can be achieved with just a handful of firms, despite claims from some quarters that four competitors is necessarily too few. Even in highly concentrated markets, there is the omnipresent threat that new entrants will emerge to usurp an incumbent’s reign. Additionally, while some studies may show unusually large profits in those markets, when adjusted for the consumer welfare created by large tech platforms, profits should actually be significantly higher than they are.
Evidence of dynamic entry in digital markets can be found in a recently announced product offering from a small (but more than $6 billion in revenue) competitor in digital advertising. Following the outcry associated with Google’s alleged abuse with Project Bernanke, the Trade Desk developed OpenPath. This allowed the Trade Desk, a buy-side broker, to handle some of the functions of a sell-side broker and eliminate harms from Google’s alleged bid-rigging to better serve its clients.
In developing the platform, the Trade Desk said it would discontinue serving any Google-based customers, effectively severing ties with the largest advertising exchange on the market. While this runs afoul of the letter of the law spelled out in CTDAA, it is well within the spirit its sponsor’s stated goal: businesses engaging in robust free-market competition. If Google’s market power was as omnipresent and suffocating as the sponsors allege, then eliminating traffic from Google would have been a death sentence for the Trade Desk.
While various theories of vertical and horizontal competitive harm have been put forward, there has not been an empirical showing that consumers and advertising customers have failed to benefit from the admittedly efficient aspects of digital-brokerage auctions administered by Google, Facebook, and a few other platforms. The rapid and dramatic growth of digital advertising and associated commerce strongly suggests that this has been an innovative and welfare-enhancing development. Moreover, the introduction of a new integrated brokerage platform by a “small” player in the advertising market indicates there is ample opportunity to increase this welfare further.
Interfering in brokerage operations under the unproven assumption that “monopoly rents” are being charged and that customers are being “exploited” is rhetoric unmoored from hard evidence. Furthermore, if specific platform practices are shown inefficiently to exclude potential entrants, existing antitrust law can be deployed on a case-specific basis. This approach is currently being pursued by a coalition of state attorneys general against Google (the merits of which are not relevant to this commentary).
Even assuming for the sake of argument that there are serious competition problems in the digital-advertising market, there is no reason to believe that the arbitrary provisions and definitions found in the CTDAA would enhance welfare. Indeed, it is likely that the act would have unforeseen consequences:
It would lead to divestitures supervised by the U.S. Justice Department (DOJ) that could destroy efficiencies derived from efficient targeting by brokerages integrated into platforms;
It would disincentivize improvements in advertising brokerages and likely would reduce future welfare on both the buy and sell sides of digital advertising;
It would require costly recordkeeping and disclosures by covered platforms that could have unforeseen consequences for privacy and potentially reduce the efficiency of bidding practices;
It would establish a fund for damage payments that would encourage wasteful litigation (see next two points);
It would spawn a great deal of wasteful private rent-seeking litigation that would discourage future platform and brokerage innovations; and
It would likely generate wasteful lawsuits by rent-seeking state attorneys general (and perhaps the DOJ as well).
The legislation would ultimately harm consumers who currently benefit from a highly efficient form of targeted advertising (for more on the welfare benefits of targeted advertising, see here). Since Google continually invests in creating a better search engine (to deliver ads directly to consumers) and collects more data to better target ads (to deliver ads to specific consumers), the value to advertisers of displaying ads on Google constantly increases.
Proposing a new regulatory structure that would directly affect the operations of highly efficient auction markets is the height of folly. It ignores the findings of Nobel laureate James M. Buchanan (among others) that, to justify regulation, there should first be a provable serious market failure and that, even if such a failure can be shown, the net welfare costs of government intervention should be smaller than the net welfare costs of non-intervention.
Given the likely substantial costs of government intervention and the lack of proven welfare costs from the present system (which clearly has been associated with a growth in output), the second prong of the Buchanan test clearly has not been met.
While there are allegations of abuses in the digital-advertising market, it is not at all clear that these abuses have had a long-term negative economic impact. As shown in a study by Erik Brynjolfsson and his student Avinash Collis—recently summarized in the Harvard Business Review (Alden Abbott offers commentary here)—the consumer surplus generated by digital platforms has far outstripped the advertising and services revenues received by the platforms. The CTDAA proposal would seek to unwind much of these gains.
If the goal is to create a multitude of small, largely inefficient advertising companies that charge high fees and provide low-quality service, this bill will deliver. The market for advertising will have a far greater number of players but it will be far less competitive, since no companies will be willing to exceed the $20 billion revenue threshold that would leave them subject to the proposal’s onerous ownership standards.
If, however, the goal is to increase consumer welfare, increase rigorous competition, and cement better outcomes for advertisers and publishers, then it is likely to fail. Ownership requirements laid out in the proposal will lead to a stagnant advertising market, higher fees for all involved, and lower-quality, less-relevant ads. Government regulatory interference in highly successful and efficient platform markets are a terrible idea.
We will learn more in the coming weeks about the fate of the proposed American Innovation and Choice Online Act (AICOA), legislation sponsored by Sens. Amy Klobuchar (D-Minn.) and Chuck Grassley (R-Iowa) that would, among other things, prohibit “self-preferencing” by large digital platforms like Google, Amazon, Facebook, Apple, and Microsoft. But while the bill has already been subject to significant scrutiny, a crucially important topic has been absent from that debate: the measure’s likely effect on startup acquisitions.
Of course, AICOA doesn’t directly restrict startup acquisitions, but the activities it would restrict most certainly do dramatically affect the incentives that drive many startup acquisitions. If a platform is prohibited from engaging in cross-platform integration of acquired technologies, or if it can’t monetize its purchase by prioritizing its own technology, it may lose the motivation to make a purchase in the first place.
This would be a significant loss. As Dirk Auer, Sam Bowman, and I discuss in a recent article in the Missouri Law Review, acquisitions are arguably the most important component in providing vitality to the overall venture ecosystem:
Startups generally have two methods for achieving liquidity for their shareholders: IPOs or acquisitions. According to the latest data from Orrick and Crunchbase, between 2010 and 2018 there were 21,844 acquisitions of tech startups for a total deal value of $1.193 trillion. By comparison, according to data compiled by Jay R. Ritter, a professor at the University of Florida, there were 331 tech IPOs for a total market capitalization of $649.6 billion over the same period. As venture capitalist Scott Kupor said in his testimony during the FTC’s hearings on “Competition and Consumer Protection in the 21st Century,” “these large players play a significant role as acquirers of venture-backed startup companies, which is an important part of the overall health of the venture ecosystem.”
Moreover, acquisitions by large incumbents are known to provide a crucial channel for liquidity in the venture capital and startup communities: While at one time the source of the “liquidity events” required to yield sufficient returns to fuel venture capital was evenly divided between IPOs and mergers, “[t]oday that math is closer to about 80 percent M&A and about 20 percent IPOs—[with important implications for any] potential actions that [antitrust enforcers] might be considering with respect to the large platform players in this industry.” As investor and serial entrepreneur Leonard Speiser said recently, “if the DOJ starts going after tech companies for making acquisitions, venture investors will be much less likely to invest in new startups, thereby reducing competition in a far more harmful way.” (emphasis added)
Going after self-preferencing may have exactly the same harmful effect on venture investors and competition.
It’s unclear exactly how the legislation would be applied in any given context (indeed, this uncertainty is one of the most significant problems with the bill, as the ABA Antitrust Section has argued at length). But AICOA is designed, at least in part, to keep large online platforms in their own lanes—to keep them from “leveraging their dominance” to compete against more politically favored competitors in ancillary markets. Indeed, while covered platforms potentially could defend against application of the law by demonstrating that self-preferencing is necessary to “maintain or substantially enhance the core functionality” of the service, no such defense exists for non-core (whatever that means…) functionality, the enhancement of which through self-preferencing is strictly off limits under AICOA.
As I have written (and so have many, many, many, many others), this is terrible policy on its face. But it is also likely to have significant, adverse, indirect consequences for startup acquisitions, given the enormous number of such acquisitions that are outside the covered platforms’ “core functionality.”
Just take a quick look at a sample of the largest acquisitions made by Apple, Microsoft, Amazon, and Alphabet, for example. (These are screenshots of the first several acquisitions by size drawn from imperfect lists collected by Wikipedia, but for purposes of casual empiricism they are well-suited to give an idea of the diversity of acquisitions at issue):
Vanishingly few of these acquisitions go to the “core functionalities” of these platforms. Alphabet’s acquisitions, for example, involve (among many other things) cybersecurity; home automation; cloud computing; wearables, smart glasses, and AR hardware; GPS navigation software; communications security; satellite technology; and social gaming. Microsoft’s acquisitions include companies specializing in video games; social networking; software versioning; drawing software; cable television; cybersecurity; employee engagement; and e-commerce. The technologies and applications involved in acquisitions by Apple and Amazon are similarly varied.
Drilling down a bit, consider the companies Alphabet acquired and put to use in the service of Google Maps:
Which, if any, of these companies would Google have purchased if it knew it would be unable to prioritize Maps in its search results? Would Google have invested more than $1 billion in these companies—and likely significantly more in internal R&D to develop Maps—if it had to speculate whether it would be required (or even be able) to prove someday in the future that prioritizing Google Maps results would enhance its core functionality?
What about Xbox? As noted, AICOA’s terms aren’t perfectly clear, so I’m not certain it would apply to Xbox (is Xbox a “website, online or mobile application, operating system, digital assistant, or online service”?). Here are Microsoft’s video-gaming-related purchases:
The vast majority of these (and all of the acquisitions for which Wikipedia has purchase-price information, totaling some $80 billion of investment) involve video games, not the development of hardware or the functionality of the Xbox platform. Would Microsoft have made these investments if it knew it would be prohibited from prioritizing its own games or exclusively using data gleaned through these games to improve its platform? No one can say for certain, but, at the margin, it is absolutely certain that these self-preferencing bills would make such acquisitions less likely.
Perhaps the most obvious—and concerning—example of the problem arises in the context of Google’s Android platform. Google famously gives Android away for free, of course, and makes its operating system significantly open for bespoke use by all comers. In exchange, Google requires that implementers of the Android OS provide some modicum of favoritism to Google’s revenue-generating products, like Search. For all its uncertainty, there is no question that AICOA’s terms would prohibit this self-preferencing. Intentionally or not, it would thus prohibit the way in which Google monetizes Android and thus hopes to recoup some of the—literally—billions of dollars it has invested in the development and maintenance of Android.
Here are Google’s Android-related acquisitions:
Would Google have bought Android in the first place (to say nothing of subsequent acquisitions and its massive ongoing investment in Android) if it had been foreclosed from adopting its preferred business model to monetize its investment? In the absence of Google bidding for these companies, would they have earned as much from other potential bidders? Would they even have come into existence at all?
Of course, AICOA wouldn’t preclude Google chargingdevice makers for Android and thus raising the price of mobile devices. But that mechanism may not have been sufficient to support Google’s investment in Android, and it would certainly constrain its ability to compete. Even if rules like those proposed by AICOA didn’t undermine Google’s initial purchase of and investment in Android, it is manifestly unclear how forcing Google to adopt a business model that increases consumer prices and constrains its ability to compete head-to-head with Apple’s iOS ecosystem would benefit consumers. (This excellent series of posts—1, 2, 3, 4—by Dirk Auer on the European Commission’s misguided Android decision discusses in detail the significant costs of prohibiting self-preferencing on Android.)
There are innumerable further examples, as well. In all of these cases, it seems clear not only that an AICOA-like regime would diminish competition and reduce consumer welfare across important dimensions, but also that it would impoverish the startup ecosystem more broadly.
And that may be an even bigger problem. Even if you think, in the abstract, that it would be better for “Big Tech” not to own these startups, there is a real danger that putting that presumption into force would drive down acquisition prices, kill at least some tech-startup exits, and ultimately imperil the initial financing of tech startups. It should go without saying that this would be a troubling outcome. Yet there is no evidence to suggest that AICOA’s proponents have even considered whether the presumed benefits of the bill would be worth this immense cost.
The wave of populist antitrust that has been embraced by regulators and legislators in the United States, United Kingdom, European Union, and other jurisdictions rests on the assumption that currently dominant platforms occupy entrenched positions that only government intervention can dislodge. Following this view, Facebook will forever dominate social networking, Amazon will forever dominate cloud computing, Uber and Lyft will forever dominate ridesharing, and Amazon and Netflix will forever dominate streaming. This assumption of platform invincibility is so well-established that some policymakers advocate significant interventions without making any meaningful inquiry into whether a seemingly dominant platform actually exercises market power.
Yet this assumption is not supported by historical patterns in platform markets. It is true that network effects drive platform markets toward “winner-take-most” outcomes. But the winner is often toppled quickly and without much warning. There is no shortage of examples.
In 2007, a columnist in The Guardian observed that “it may already be too late for competitors to dislodge MySpace” and quoted an economist as authority for the proposition that “MySpace is well on the way to becoming … a natural monopoly.” About one year later, Facebook had overtaken MySpace “monopoly” in the social-networking market. Similarly, it was once thought that Blackberry would forever dominate the mobile-communications device market, eBay would always dominate the online e-commerce market, and AOL would always dominate the internet-service-portal market (a market that no longer even exists). The list of digital dinosaurs could go on.
All those tech leaders were challenged by entrants and descended into irrelevance (or reduced relevance, in eBay’s case). This occurred through the force of competition, not government intervention.
Why This Time is Probably Not Different
Given this long line of market precedents, current legislative and regulatory efforts to “restore” competition through extensive intervention in digital-platform markets require that we assume that “this time is different.” Just as that slogan has been repeatedly rebutted in the financial markets, so too is it likely to be rebutted in platform markets.
There is already supporting evidence.
In the cloud market, Amazon’s AWS now faces vigorous competition from Microsoft Azure and Google Cloud. In the streaming market, Amazon and Netflix face stiff competition from Disney+ and Apple TV+, just to name a few well-resourced rivals. In the social-networking market, Facebook now competes head-to-head with TikTok and seems to be losing. The market power once commonly attributed to leading food-delivery platforms such as Grubhub, UberEats, and DoorDash is implausible after persistent losses in most cases, and the continuous entry of new services into a rich variety of local and product-market niches.
Those who have advocated antitrust intervention on a fast-track schedule may remain unconvinced by these inconvenient facts. But the market is not.
Investors have already recognized Netflix’s vulnerability to competition, as reflected by a 35% fall in its stock price on April 20 and a decline of more than 60% over the past 12 months. Meta, Facebook’s parent, also experienced a reappraisal, falling more than 26% on Feb. 3 and more than 35% in the past 12 months. Uber, the pioneer of the ridesharing market, has declined by almost 50% over the past 12 months, while Lyft, its principal rival, has lost more than 60% of its value. These price freefalls suggest that antitrust populists may be pursuing solutions to a problem that market forces are already starting to address.
The Forgotten Curse of the Incumbent
For some commentators, the sharp downturn in the fortunes of the so-called “Big Tech” firms would not come as a surprise.
It has long been observed by some scholars and courts that a dominant firm “carries the seeds of its own destruction”—a phrase used by then-professor and later-Judge Richard Posner, writing in the University of Chicago Law Review in 1971. The reason: a dominant firm is liable to exhibit high prices, mediocre quality, or lackluster innovation, which then invites entry by more adept challengers. However, this view has been dismissed as outdated in digital-platform markets, where incumbents are purportedly protected by network effects and switching costs that make it difficult for entrants to attract users. Depending on the set of assumptions selected by an economic modeler, each contingency is equally plausible in theory.
The plunging values of leading platforms supplies real-world evidence that favors the self-correction hypothesis. It is often overlooked that network effects can work in both directions, resulting in a precipitous fall from market leader to laggard. Once users start abandoning a dominant platform for a new competitor, network effects operating in reverse can cause a “run for the exits” that leaves the leader with little time to recover. Just ask Nokia, the world’s leading (and seemingly unbeatable) smartphone brand until the Apple iPhone came along.
Market self-correction inherently outperforms regulatory correction: it operates far more rapidly and relies on consumer preferences to reallocate market leadership—a result perfectly consistent with antitrust’s mission to preserve “competition on the merits.” In contrast, policymakers can misdiagnose the competitive effects of business practices; are susceptible to the influence of private interests (especially those that are unable to compete on the merits); and often mispredict the market’s future trajectory. For Exhibit A, see the protracted antitrust litigation by the U.S. Department against IBM, which started in 1975 and ended in withdrawal of the suit in 1982. Given the launch of the Apple II in 1977, the IBM PC in 1981, and the entry of multiple “PC clones,” the forces of creative destruction swiftly displaced IBM from market leadership in the computing industry.
Regulators and legislators around the world have emphasized the urgency of taking dramatic action to correct claimed market failures in digital environments, casting aside prudential concerns over the consequences if any such failure proves to be illusory or temporary.
But the costs of regulatory failure can be significant and long-lasting. Markets must operate under unnecessary compliance burdens that are difficult to modify. Regulators’ enforcement resources are diverted, and businesses are barred from adopting practices that would benefit consumers. In particular, proposed breakup remedies advocated by some policymakers would undermine the scale economies that have enabled platforms to push down prices, an important consideration in a time of accelerating inflation.
The high concentration levels and certain business practices in digital-platform markets certainly raise important concerns as a matter of antitrust (as well as privacy, intellectual property, and other bodies of) law. These concerns merit scrutiny and may necessitate appropriately targeted interventions. Yet, any policy steps should be anchored in the factually grounded analysis that has characterized decades of regulatory and judicial action to implement the antitrust laws with appropriate care. Abandoning this nuanced framework for a blunt approach based on reflexive assumptions of market power is likely to undermine, rather than promote, the public interest in competitive markets.
Sens. Amy Klobuchar (D-Minn.) and Chuck Grassley (R-Iowa)—cosponsors of the American Innovation Online and Choice Act, which seeks to “rein in” tech companies like Apple, Google, Meta, and Amazon—contend that “everyone acknowledges the problems posed by dominant online platforms.”
In their framing, it is simply an acknowledged fact that U.S. antitrust law has not kept pace with developments in the digital sector, allowing a handful of Big Tech firms to exploit consumers and foreclose competitors from the market. To address the issue, the senators’ bill would bar “covered platforms” from engaging in a raft of conduct, including self-preferencing, tying, and limiting interoperability with competitors’ products.
That’s what makes the open letter to Congress published late last month by the usually staid American Bar Association’s (ABA) Antitrust Law Section so eye-opening. The letter is nothing short of a searing critique of the legislation, which the section finds to be poorly written, vague, and departing from established antitrust-law principles.
The ABA, of course, has a reputation as an independent, highly professional, and heterogenous group. The antitrust section’s membership includes not only in-house corporate counsel, but lawyers from nonprofits, consulting firms, federal and state agencies, judges, and legal academics. Given this context, the comments must be read as a high-level judgment that recent legislative and regulatory efforts to “discipline” tech fall outside the legal mainstream and would come at the cost of established antitrust principles, legal precedent, transparency, sound economic analysis, and ultimately consumer welfare.
The Antitrust Section’s Comments
As the ABA Antitrust Law Section observes:
The Section has long supported the evolution of antitrust law to keep pace with evolving circumstances, economic theory, and empirical evidence. Here, however, the Section is concerned that the Bill, as written, departs in some respects from accepted principles of competition law and in so doing risks causing unpredicted and unintended consequences.
Broadly speaking, the section’s criticisms fall into two interrelated categories. The first relates to deviations from antitrust orthodoxy and the principles that guide enforcement. The second is a critique of the AICOA’s overly broad language and ambiguous terminology.
Departing from established antitrust-law principles
Substantively, the overarching concern expressed by the ABA Antitrust Law Section is that AICOA departs from the traditional role of antitrust law, which is to protect the competitive process, rather than choosing to favor some competitors at the expense of others. Indeed, the section’s open letter observes that, out of the 10 categories of prohibited conduct spelled out in the legislation, only three require a “material harm to competition.”
Take, for instance, the prohibition on “discriminatory” conduct. As it stands, the bill’s language does not require a showing of harm to the competitive process. It instead appears to enshrine a freestanding prohibition of discrimination. The bill targets tying practices that are already prohibited by U.S. antitrust law, but while similarly eschewing the traditional required showings of market power and harm to the competitive process. The same can be said, mutatis mutandis, for “self-preferencing” and the “unfair” treatment of competitors.
The problem, the section’s letter to Congress argues, is not only that this increases the teleological chasm between AICOA and the overarching goals and principles of antitrust law, but that it can also easily lead to harmful unintended consequences. For instance, as the ABA Antitrust Law Section previously observed in comments to the Australian Competition and Consumer Commission, a prohibition of pricing discrimination can limit the extent of discounting generally. Similarly, self-preferencing conduct on a platform can be welfare-enhancing, while forced interoperability—which is also contemplated by AICOA—can increase prices for consumers and dampen incentives to innovate. Furthermore, some of these blanket prohibitions are arguably at loggerheads with established antitrust doctrine, such as in, e.g., Trinko, which established that even monopolists are generally free to decide with whom they will deal.
Arguably, the reason why the Klobuchar-Grassley bill can so seamlessly exclude or redraw such a central element of antitrust law as competitive harm is because it deliberately chooses to ignore another, preceding one. Namely, the bill omits market power as a requirement for a finding of infringement or for the legislation’s equally crucial designation as a “covered platform.” It instead prescribes size metrics—number of users, market capitalization—to define which platforms are subject to intervention. Such definitions cast an overly wide net that can potentially capture consumer-facing conduct that doesn’t have the potential to harm competition at all.
It is precisely for this reason that existing antitrust laws are tethered to market power—i.e., because it long has been recognized that only companies with market power can harm competition. As John B. Kirkwood of Seattle University School of Law has written:
Market power’s pivotal role is clear…This concept is central to antitrust because it distinguishes firms that can harm competition and consumers from those that cannot.
In response to the above, the ABA Antitrust Law Section (reasonably) urges Congress explicitly to require an effects-based showing of harm to the competitive process as a prerequisite for all 10 of the infringements contemplated in the AICOA. This also means disclaiming generalized prohibitions of “discrimination” and of “unfairness” and replacing blanket prohibitions (such as the one for self-preferencing) with measured case-by-case analysis.
Opaque language for opaque ideas
Another underlying issue is that the Klobuchar-Grassley bill is shot through with indeterminate language and fuzzy concepts that have no clear limiting principles. For instance, in order either to establish liability or to mount a successful defense to an alleged violation, the bill relies heavily on inherently amorphous terms such as “fairness,” “preferencing,” and “materiality,” or the “intrinsic” value of a product. But as the ABA Antitrust Law Section letter rightly observes, these concepts are not defined in the bill, nor by existing antitrust case law. As such, they inject variability and indeterminacy into how the legislation would be administered.
Moreover, it is also unclear how some incommensurable concepts will be weighed against each other. For example, how would concerns about safety and security be weighed against prohibitions on self-preferencing or requirements for interoperability? What is a “core function” and when would the law determine it has been sufficiently “enhanced” or “maintained”—requirements the law sets out to exempt certain otherwise prohibited behavior? The lack of linguistic and conceptual clarity not only explodes legal certainty, but also invites judicial second-guessing into the operation of business decisions, something against which the U.S. Supreme Court has long warned.
Finally, the bill’s choice of language and recent amendments to its terminology seem to confirm the dynamic discussed in the previous section. Most notably, the latest version of AICOA replaces earlier language invoking “harm to the competitive process” with “material harm to competition.” As the ABA Antitrust Law Section observes, this “suggests a shift away from protecting the competitive process towards protecting individual competitors.” Indeed, “material harm to competition” deviates from established categories such as “undue restraint of trade” or “substantial lessening of competition,” which have a clear focus on the competitive process. As a result, it is not unreasonable to expect that the new terminology might be interpreted as meaning that the actionable standard is material harm to competitors.
In its letter, the antitrust section urges Congress not only to define more clearly the novel terminology used in the bill, but also to do so in a manner consistent with existing antitrust law. Indeed:
The Section further recommends that these definitions direct attention to analysis consistent with antitrust principles: effects-based inquiries concerned with harm to the competitive process, not merely harm to particular competitors
The AICOA is a poorly written, misguided, and rushed piece of regulation that contravenes both basic antitrust-law principles and mainstream economic insights in the pursuit of a pre-established populist political goal: punishing the success of tech companies. If left uncorrected by Congress, these mistakes could have potentially far-reaching consequences for innovation in digital markets and for consumer welfare. They could also set antitrust law on a regressive course back toward a policy of picking winners and losers.
After years of debate and negotiations, European Lawmakers have agreed upon what will most likely be the final iteration of the Digital Markets Act (“DMA”), following the March 24 final round of “trilogue” talks.
For the uninitiated, the DMA is one in a string of legislative proposals around the globe intended to “rein in” tech companies like Google, Amazon, Facebook, and Apple through mandated interoperability requirements and other regulatory tools, such as bans on self-preferencing. Other important bills from across the pond include the American Innovation and Choice Online Act, the ACCESS Act, and the Open App Markets Act.
In many ways, the final version of the DMA represents the worst possible outcome, given the items that were still up for debate. The Commission caved to some of the Parliament’s more excessive demands—such as sweeping interoperability provisions that would extend not only to “ancillary” services, such as payments, but also to messaging services’ basic functionalities. Other important developments include the addition of voice assistants and web browsers to the list of Core Platform Services (“CPS”), and symbolically higher “designation” thresholds that further ensure the act will apply overwhelmingly to just U.S. companies. On a brighter note, lawmakers agreed that companies could rebut their designation as “gatekeepers,” though it remains to be seen how feasible that will be in practice.
We offer here an overview of the key provisions included in the final version of the DMA and a reminder of the shaky foundations it rests on.
Among the most important of the DMA’s new rules concerns mandatory interoperability among online platforms. In a nutshell, digital platforms that are designated as “gatekeepers” will be forced to make their services “interoperable” (i.e., compatible) with those of rivals. It is argued that this will make online markets more contestable and thus boost consumer choice. But as ICLE scholars have been explaining for some time, this is unlikely to be the case (here, here, and here). Interoperability is not the panacea EU legislators claim it to be. As former ICLE Director of Competition Policy Sam Bowman has written, there are many things that could be interoperable, but aren’t. The reason is that interoperability comes with costs as well as benefits. For instance, 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 the market and for consumers to be able to choose among them. Economists Michael L. Katz and Carl Shapiro concur:
Although compatibility has obvious benefits, obtaining and maintaining compatibility often involves a sacrifice in terms of product variety or restraints on innovation.
There are other potential downsides to interoperability. For instance, a given set of interoperable standards might be too costly to implement and/or maintain; it might preclude certain pricing models that increase output; or it might compromise some element of a product or service that offers benefits specifically because it is not interoperable (such as, e.g., security features). Consumers may also genuinely prefer closed (i.e., non-interoperable) platforms. Indeed: “open” and “closed” are not synonyms for “good” and “bad.” Instead, as Boston University’s Andrei Hagiu has shown, there are fundamental welfare tradeoffs at play that belie simplistic characterizations of one being inherently superior to the other.
Further, as Sam Bowman observed, narrowing choice through a more curated experience can also be valuable for users, as it frees them from having to research every possible option every time they buy or use some product (if you’re unconvinced, try turning off your spam filter for a couple of days). Instead, the relevant choice consumers exercise might be in choosing among brands. In sum, where interoperability is a desirable feature, consumer preferences will tend to push for more of it. However, it is fundamentally misguided to treat mandatory interoperability as a cure-all elixir or a “super tool” of “digital platform governance.” In a free-market economy, it is not—or, it should not—be up to courts and legislators to substitute for businesses’ product-design decisions and consumers’ revealed preferences with their own, based on diffuse notions of “fairness.” After all, if we could entrust such decisions to regulators, we wouldn’t need markets or competition in the first place.
Of course, it was always clear that the DMA would contemplate some degree of mandatory interoperability – indeed, this was arguably the new law’s biggest selling point. What was up in the air until now was the scope of such obligations. The Commission had initially pushed for a comparatively restrained approach, requiring interoperability “only” in ancillary services, such as payment systems (“vertical interoperability”). By contrast, the European Parliament called for more expansive requirements that would also encompass social-media platforms and other messaging services (“horizontal interoperability”).
The problem with such far-reaching interoperability requirements is that they are fundamentally out of pace with current privacy and security capabilities. As ICLE Senior Scholar Mikolaj Barczentewicz has repeatedly argued, the Parliament’s insistence on going significantly beyond the original DMA’s proposal and mandating interoperability of messaging services is overly broad and irresponsible. Indeed, as Mikolaj notes, the “likely result is less security and privacy, more expenses, and less innovation.”The DMA’s defensers would retort that the law allows gatekeepers to do what is “strictly necessary” (Council) or “indispensable” (Parliament) to protect safety and privacy (it is not yet clear which wording the final version has adopted). Either way, however, the standard may be too high and companies may very well offer lower security to avoid liability for adopting measures that would be judged by the Commission and the courts as going beyond what is “strictly necessary” or “indispensable.” These safeguards will inevitably be all the more indeterminate (and thus ineffectual) if weighed against other vague concepts at the heart of the DMA, such as “fairness.”
Gatekeeper Thresholds and the Designation Process
Another important issue in the DMA’s construction concerns the designation of what the law deems “gatekeepers.” Indeed, the DMA will only apply to such market gatekeepers—so-designated because they meet certain requirements and thresholds. Unfortunately, the factors that the European Commission will consider in conducting this designation process—revenues, market capitalization, and user base—are poor proxies for firms’ actual competitive position. This is not surprising, however, as the procedure is mainly designed to ensure certain high-profile (and overwhelmingly American) platforms are caught by the DMA.
From this perspective, the last-minute increase in revenue and market-capitalization thresholds—from 6.5 billion euros to 7.5 billion euros, and from 65 billion euros to 75 billion euros, respectively—won’t change the scope of the companies covered by the DMA very much. But it will serve to confirm what we already suspected: that the DMA’s thresholds are mostly tailored to catch certain U.S. companies, deliberately leaving out EU and possibly Chinese competitors (see here and here). Indeed, what would have made a difference here would have been lowering the thresholds, but this was never really on the table. Ultimately, tilting the European Union’s playing field against its top trading partner, in terms of exports and trade balance, is economically, politically, and strategically unwise.
As a consolation of sorts, it seems that the Commission managed to squeeze in a rebuttal mechanism for designated gatekeepers. Imposing far-reaching obligations on companies with no (or very limited) recourse to escape the onerous requirements of the DMA would be contrary to the basic principles of procedural fairness. Still, it remains to be seen how this mechanism will be articulated and whether it will actually be viable in practice.
Double (and Triple?) Jeopardy
Two recent judgments from the European Court of Justice (ECJ)—Nordzucker and bpost—are likely to underscore the unintended effects of cumulative application of both the DMA and EU and/or national competition laws. The bpost decision is particularly relevant, because it lays down the conditions under which cases that evaluate the same persons and the same facts in two separate fields of law (sectoral regulation and competition law) do not violate the principle of ne bis in idem, also known as “double jeopardy.” As paragraph 51 of the judgment establishes:
There must be precise rules to determine which acts or omissions are liable to be subject to duplicate proceedings;
The two sets of proceedings must have been conducted in a sufficiently coordinated manner and within a similar timeframe; and
The overall penalties must match the seriousness of the offense.
It is doubtful whether the DMA fulfills these conditions. This is especially unfortunate considering the overlapping rules, features, and goals among the DMA and national-level competition laws, which are bound to lead to parallel procedures. In a word: expect double and triple jeopardy to be hotly litigated in the aftermath of the DMA.
Of course, other relevant questions have been settled which, for reasons of scope, we will have to leave for another time. These include the level of fines(up to 10% worldwide revenue, or 20% in the case of repeat offenses); the definition and consequences of systemic noncompliance (it seems that the Parliament’s draconian push for a general ban on acquisitions in case of systemic noncompliance has been dropped); and the addition of more core platform services (web browsers and voice assistants).
The DMA’s Dubious Underlying Assumptions
The fuss and exhilaration surrounding the impending adoption of the EU’s most ambitious competition-related proposal in decades should not obscure some of the more dubious assumptions which underpin it, such as that:
It is still unclear that intervention in digital markets is necessary, let alone urgent.
Even if it were clear, there is scant evidence to suggest that tried and tested ex post instruments, such as those envisioned in EU competition law, are not up to the task.
Even if the prior two points had been established beyond any reasonable doubt (which they haven’t), it is still far from clear that DMA-style ex ante regulation is the right tool to address potential harms to competition and to consumers that arise in digital markets.
It is unclear that intervention is necessary
Despite a mounting moral panic around and zealous political crusading against Big Tech (an epithet meant to conjure antipathy and distrust), it is still unclear that intervention in digital markets is necessary. Much of the behavior the DMA assumes to be anti-competitive has plausible pro-competitive justifications. Self-preferencing, for instance, is a normal part of how platforms operate, both to improve the value of their core products and to earn returns to reinvest in their development. As ICLE’s Dirk Auer points out, since platforms’ incentives are to maximize the value of their entire product ecosystem, those that preference their own products frequently end up increasing the total market’s value by growing the share of users of a particular product (the example of Facebook’s integration of Instagram is a case in point). Thus, while self-preferencing may, in some cases,be harmful, a blanket presumption of harm is thoroughly unwarranted.
Similarly, the argument that switching costs and data-related increasing returns to scale (in fact, data generally entails diminishing returns) have led to consumer lock-in and thereby raised entry barriers has also been exaggerated to epic proportions (pun intended). As we have discussed previously, there are plenty of counterexamples where firms have easily overcome seemingly “insurmountable” barriers to entry, switching costs, and network effects to disrupt incumbents.
To pick a recent case: how many of us had heard of Zoom before the pandemic? Where was TikTok three years ago? (see here for a multitude of other classic examples, including Yahoo and Myspace).
Can you really say, with a straight face, that switching costs between messaging apps are prohibitive? I’m not even that active and I use at least six such apps on a daily basis: Facebook Messenger, Whatsapp, Instagram, Twitter, Viber, Telegram, and Slack (it took me all of three minutes to download and start using Slack—my newest addition). In fact, chances are that, like me, you have always multihomed nonchalantly and had never even considered that switching costs were impossibly high (or that they were a thing) until the idea that you were “locked-in” by Big Tech was drilled into your head by politicians and other busybodies looking for trophies to adorn their walls.
What about the “unprecedented,” quasi-fascistic levels of economic concentration? First, measures of market concentration are sometimes anchored in flawed methodology and market definitions (see, e.g., Epic’s insistence that Apple is a monopolist in the market for operating systems, conveniently ignoring that competition occurs at the smartphone level, where Apple has a worldwide market share of 15%—see pages 45-46 here). But even if such measurements were accurate, high levels of concentration don’t necessarily mean that firms do not face strong competition. In fact, as Nicolas Petit has shown, tech companies compete vigorously against each other across markets.
As Giuseppe Colangelo has argued persuasively (here and here), it is not at all clear that ex post competition regulation is insufficient to tackle anti-competitive behavior in the digital sector:
Ongoing antitrust investigations demonstrate that standard competition law still provides a flexible framework to scrutinize several practices described as new and peculiar to app stores.
The recent Google Shopping decision, in which the Commission found that Google had abused its dominant position by preferencing its own online-shopping service in Google Search results, is a case in point (the decision was confirmed by the General Court and is now pending review before the European Court of Justice). The “self-preferencing” category has since been applied by other EU competition authorities. The Italian competition authority, for instance, fined Amazon 1 billion euros for preferencing its own distribution service, Fulfilled by Amazon, on the Amazon marketplace (i.e., Amazon.it). Thus, Article 102, which includes prohibitions on “applying dissimilar conditions to similar transactions,” appears sufficiently flexible to cover self-preferencing, as well as other potentially anti-competitive offenses relevant to digital markets (e.g., essential facilities).
For better or for worse, EU competition law has historically been sufficiently pliable to serve a range of goals and values. It has also allowed for experimentation and incorporated novel theories of harm and economic insights. Here, the advantage of competition law is that it allows for a more refined, individualized approach that can avoid some of the pitfalls of applying a one-size fits all model across all digital platforms. Those pitfalls include: harming consumers, jeopardizing the business models of some of the most successful and pro-consumer companies in existence, and ignoring the differences among platforms, such as between Google and Apple’s app stores. I turn to these issues next.
Ex ante regulation probably isn’t the right tool
Even if it were clear that intervention is necessary and that existing competition law was insufficient, it is not clear that the DMA is the right regulatory tool to address any potential harms to competition and consumers that may arise in the digital markets. Here, legislators need to be wary of unintended consequences, trade-offs, and regulatory fallibility. For one, It is possible that the DMA will essentially consolidate the power of tech platforms, turning them into de facto public utilities. This will not foster competition, but rather will make smaller competitors systematically dependent on so-called gatekeepers. Indeed, why become the next Google if you can just free ride off of the current Google? Why download an emerging messaging app if you can already interact with its users through your current one? In a way, then, the DMA may become a self-fulfilling prophecy.
Moreover, turning closed or semi-closed platforms such as the iOS into open platforms more akin to Android blurs the distinctions among products and dampens interbrand competition. It is a supreme paradox that interoperability and sideloading requirements purportedly give users more choice by taking away the option of choosing a “walled garden” model. As discussed above, overriding the revealed preferences of millions of users is neither pro-competitive nor pro-consumer (but it probably favors some competitors at the expense of those two things).
Nor are many of the other obligations contemplated in the DMA necessarily beneficial to consumers. Do users really not want to have default apps come preloaded on their devices and instead have to download and install them manually? Ditto for operating systems. What is the point of an operating system if it doesn’t come with certain functionalities, such as a web browser? What else should we unbundle—keyboard on iOS? Flashlight? Do consumers really want to choose from dozens of app stores when turning on their new phone for the first time? Do they really want to have their devices cluttered with pointless split-screens? Do users really want to find all their contacts (and be found by all their contacts) across all messaging services? (I switched to Viber because I emphatically didn’t.) Do they really want to have their privacy and security compromised because of interoperability requirements?Then there is the question of regulatory fallibility. As Alden Abott has written on the DMA and other ex ante regulatory proposals aimed at “reining in” tech companies:
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).
This brings us back to the second point: without evidence that antitrust law is “not up to the task,” far-reaching and untested regulatory initiatives with potentially high error costs are put forth as superior to long-established, consumer-based antitrust enforcement. Yes, antitrust may have downsides (e.g., relative indeterminacy and slowness), but these pale in comparison to the DMA’s (e.g., large error costs resulting from high information requirements, rent-seeking, agency capture).
The DMA is an ambitious piece of regulation purportedly aimed at ensuring “fair and open digital markets.” This implies that markets are not fair and open; or that they risk becoming unfair and closed absent far-reaching regulatory intervention at EU level. However, it is unclear to what extent such assumptions are borne out by the reality of markets. Are digital markets really closed? Are they really unfair? If so, is it really certain that regulation is necessary? Has antitrust truly proven insufficient? It also implies that DMA-style ex ante regulation is necessary to tackle it, and that the costs won’t outweigh the benefits. These are heroic assumptions that have never truly been seriously put to the test.
Considering such brittle empirical foundations, the DMA was always going to be a contentious piece of legislation. However, there was always the hope that EU legislators would show restraint in the face of little empirical evidence and high error costs. Today, these hopes have been dashed. With the adoption of the DMA, the Commission, Council, and the Parliament have arguably taken a bad piece of legislation and made it worse. The interoperability requirements in messaging services, which are bound to be a bane for user privacy and security, are a case in point.
After years trying to anticipate the whims of EU legislators, we finally know where we’re going, but it’s still not entirely sure why we’re going there.