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

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

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

Why Isn’t Everything Interoperable?

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

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

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

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

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

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

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

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

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

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

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

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

Interoperability for Digital Platforms

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

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

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

Interoperability and Contact-Tracing Apps

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

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

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

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

A ‘Super Tool’ for Digital Market Intervention?

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

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

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

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

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

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

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

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

If You Build It, They Still Might Not Come

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

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

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

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

Others already have noted that the Federal Trade Commission’s (FTC) recently released 6(b) report on the privacy practices of Internet service providers (ISPs) fails to comprehend that widespread adoption of privacy-enabling technology—in particular, Hypertext Transfer Protocol Secure (HTTPS) and DNS over HTTPS (DoH), but also the use of virtual private networks (VPNs)—largely precludes ISPs from seeing what their customers do online.

But a more fundamental problem with the report lies in its underlying assumption that targeted advertising is inherently nefarious. Indeed, much of the report highlights not actual violations of the law by the ISPs, but “concerns” that they could use customer data for targeted advertising much like Google and Facebook already do. The final subheading before the report’s conclusion declares: “Many ISPs in Our Study Can Be At Least As Privacy-Intrusive as Large Advertising Platforms.”

The report does not elaborate on why it would be bad for ISPs to enter the targeted advertising market, which is particularly strange given the public focus regulators have shone in recent months on the supposed dominance of Google, Facebook, and Amazon in online advertising. As the International Center for Law & Economics (ICLE) has argued in past filings on the issue, there simply is no justification to apply sector-specific regulations to ISPs for the mere possibility that they will use customer data for targeted advertising.

ISPs Could be Competition for the Digital Advertising Market

It is ironic to witness FTC warnings about ISPs engaging in targeted advertising even as there are open antitrust cases against Google for its alleged dominance of the digital advertising market. In fact, news reports suggest the U.S. Justice Department (DOJ) is preparing to join the antitrust suits against Google brought by state attorneys general. An obvious upshot of ISPs engaging in a larger amount of targeted advertising if that they could serve as a potential source of competition for Google, Facebook, and Amazon.

Despite the fears raised in the 6(b) report of rampant data collection for targeted ads, ISPs are, in fact, just a very small part of the $152.7 billion U.S. digital advertising market. As the report itself notes: “in 2020, the three largest players, Google, Facebook, and Amazon, received almost two-third of all U.S. digital advertising,” while Verizon pulled in just 3.4% of U.S. digital advertising revenues in 2018.

If the 6(b) report is correct that ISPs have access to troves of consumer data, it raises the question of why they don’t enjoy a bigger share of the digital advertising market. It could be that ISPs have other reasons not to engage in extensive advertising. Internet service provision is a two-sided market. ISPs could (and, over the years in various markets, some have) rely on advertising to subsidize Internet access. That they instead rely primarily on charging users directly for subscriptions may tell us something about prevailing demand on either side of the market.

Regardless of the reasons, the fact that ISPs have little presence in digital advertising suggests that it would be a misplaced focus for regulators to pursue industry-specific privacy regulation to crack down on ISP data collection for targeted advertising.

What’s the Harm in Targeted Advertising, Anyway?

At the heart of the FTC report is the commission’s contention that “advertising-driven surveillance of consumers’ online activity presents serious risks to the privacy of consumer data.” In Part V.B of the report, five of the six risks the FTC lists as associated with ISP data collection are related to advertising. But the only argument the report puts forth for why targeted advertising would be inherently pernicious is the assertion that it is contrary to user expectations and preferences.

As noted earlier, in a two-sided market, targeted ads could allow one side of the market to subsidize the other side. In other words, ISPs could engage in targeted advertising in order to reduce the price of access to consumers on the other side of the market. This is, indeed, one of the dominant models throughout the Internet ecosystem, so it wouldn’t be terribly unusual.

Taking away ISPs’ ability to engage in targeted advertising—particularly if it is paired with rumored net neutrality regulations from the Federal Communications Commission (FCC)—would necessarily put upward pricing pressure on the sector’s remaining revenue stream: subscriber fees. With bridging the so-called “digital divide” (i.e., building out broadband to rural and other unserved and underserved markets) a major focus of the recently enacted infrastructure spending package, it would be counterproductive to simultaneously take steps that would make Internet access more expensive and less accessible.

Even if the FTC were right that data collection for targeted advertising poses the risk of consumer harm, the report fails to justify why a regulatory scheme should apply solely to ISPs when they are such a small part of the digital advertising marketplace. Sector-specific regulation only makes sense if the FTC believes that ISPs are uniquely opaque among data collectors with respect to their collection practices.

Conclusion

The sector-specific approach implicitly endorsed by the 6(b) report would limit competition in the digital advertising market, even as there are already legal and regulatory inquiries into whether that market is sufficiently competitive. The report also fails to make the case the data collection for target advertising is inherently bad, or uniquely bad when done by an ISP.

There may or may not be cause for comprehensive federal privacy legislation, depending on whether it would pass cost-benefit analysis, but there is no reason to focus on ISPs alone. The FTC needs to go back to the drawing board.

Why do digital industries routinely lead to one company having a very large share of the market (at least if one defines markets narrowly)? To anyone familiar with competition policy discussions, the answer might seem obvious: network effects, scale-related economies, and other barriers to entry lead to winner-take-all dynamics in platform industries. Accordingly, it is that believed the first platform to successfully unlock a given online market enjoys a determining first-mover advantage.

This narrative has become ubiquitous in policymaking circles. Thinking of this sort notably underpins high-profile reports on competition in digital markets (here, here, and here), as well ensuing attempts to regulate digital platforms, such as the draft American Innovation and Choice Online Act and the EU’s Digital Markets Act.

But are network effects and the like the only ways to explain why these markets look like this? While there is no definitive answer, scholars routinely overlook an alternative explanation that tends to undercut the narrative that tech markets have become non-contestable.

The alternative model is simple: faced with zero prices and the almost complete absence of switching costs, users have every reason to join their preferred platform. If user preferences are relatively uniform and one platform has a meaningful quality advantage, then there is every reason to expect that most consumers will all join the same one—even though the market remains highly contestable. On the other side of the equation, because platforms face very few capacity constraints, there are few limits to a given platform’s growth. As will be explained throughout this piece, this intuition is as old as economics itself.

The Bertrand Paradox

In 1883, French mathematician Joseph Bertrand published a powerful critique of two of the most high-profile economic thinkers of his time: the late Antoine Augustin Cournot and Léon Walras (it would be another seven years before Alfred Marshall published his famous principles of economics).

Bertrand criticized several of Cournot and Walras’ widely accepted findings. This included Cournot’s conclusion that duopoly competition would lead to prices above marginal cost—or, in other words, that duopolies were imperfectly competitive.

By reformulating the problem slightly, Bertand arrived at the opposite conclusion. He argued that each firm’s incentive to undercut its rival would ultimately lead to marginal cost pricing, and one seller potentially capturing the entire market:

There is a decisive objection [to Cournot’s model]: According to his hypothesis, no [supracompetitive] equilibrium is possible. There is no limit to price decreases; whatever the joint price being charged by firms, a competitor could always undercut this price and, with few exceptions, attract all consumers. If the competitor is allowed to get away with this [i.e. the rival does not react], it will double its profits.

This result is mainly driven by the assumption that, unlike in Cournot’s model, firms can immediately respond to their rival’s chosen price/quantity. In other words, Bertrand implicitly framed the competitive process as price competition, rather than quantity competition (under price competition, firms do not face any capacity constraints and they cannot commit to producing given quantities of a good):

If Cournot’s calculations mask this result, it is because of a remarkable oversight. Referring to them as D and D’, Cournot deals with the quantities sold by each of the two competitors and treats them as independent variables. He assumes that if one were to change by the will of one of the two sellers, the other one could remain fixed. The opposite is evidently true.

This later came to be known as the “Bertrand paradox”—the notion that duopoly-market configurations can produce the same outcome as perfect competition (i.e., P=MC).

But while Bertrand’s critique was ostensibly directed at Cournot’s model of duopoly competition, his underlying point was much broader. Above all, Bertrand seemed preoccupied with the notion that expressing economic problems mathematically merely gives them a veneer of accuracy. In that sense, he was one of the first economists (at least to my knowledge) to argue that the choice of assumptions has a tremendous influence on the predictions of economic models, potentially rendering them unreliable:

On other occasions, Cournot introduces assumptions that shield his reasoning from criticism—scholars can always present problems in a way that suits their reasoning.

All of this is not to say that Bertrand’s predictions regarding duopoly competition necessarily hold in real-world settings; evidence from experimental settings is mixed. Instead, the point is epistemological. Bertrand’s reasoning was groundbreaking because he ventured that market structures are not the sole determinants of consumer outcomes. More broadly, he argued that assumptions regarding the competitive process hold significant sway over the results that a given model may produce (and, as a result, over normative judgements concerning the desirability of given market configurations).

The Theory of Contestable Markets

Bertrand is certainly not the only economist to have suggested market structures alone do not determine competitive outcomes. In the early 1980s, William Baumol (and various co-authors) went one step further. Baumol argued that, under certain conditions, even monopoly market structures could deliver perfectly competitive outcomes. This thesis thus rejected the Structure-Conduct-Performance (“SCP”) Paradigm that dominated policy discussions of the time.

Baumol’s main point was that industry structure is not the main driver of market “contestability,” which is the key determinant of consumer outcomes. In his words:

In the limit, when entry and exit are completely free, efficient incumbent monopolists and oligopolists may in fact be able to prevent entry. But they can do so only by behaving virtuously, that is, by offering to consumers the benefits which competition would otherwise bring. For every deviation from good behavior instantly makes them vulnerable to hit-and-run entry.

For instance, it is widely accepted that “perfect competition” leads to low prices because firms are price-takers; if one does not sell at marginal cost, it will be undercut by rivals. Observers often assume this is due to the number of independent firms on the market. Baumol suggests this is wrong. Instead, the result is driven by the sanction that firms face for deviating from competitive pricing.

In other words, numerous competitors are a sufficient, but not necessary condition for competitive pricing. Monopolies can produce the same outcome when there is a present threat of entry and an incumbent’s deviation from competitive pricing would be sanctioned. This is notably the case when there are extremely low barriers to entry.

Take this hypothetical example from the world of cryptocurrencies. It is largely irrelevant to a user whether there are few or many crypto exchanges on which to trade coins, nonfungible tokens (NFTs), etc. What does matter is that there is at least one exchange that meets one’s needs in terms of both price and quality of service. This could happen because there are many competing exchanges, or because a failure to meet my needs by the few (or even one) exchange that does exist would attract the entry of others to which I could readily switch—thus keeping the behavior of the existing exchanges in check.

This has far-reaching implications for antitrust policy, as Baumol was quick to point out:

This immediately offers what may be a new insight on antitrust policy. It tells us that a history of absence of entry in an industry and a high concentration index may be signs of virtue, not of vice. This will be true when entry costs in our sense are negligible.

Given what precedes, Baumol surmised that industry structure must be driven by endogenous factors—such as firms’ cost structures—rather than the intensity of competition that they face. For instance, scale economies might make monopoly (or another structure) the most efficient configuration in some industries. But so long as rivals can sanction incumbents for failing to compete, the market remains contestable. Accordingly, at least in some industries, both the most efficient and the most contestable market configuration may entail some level of concentration.

To put this last point in even more concrete terms, online platform markets may have features that make scale (and large market shares) efficient. If so, there is every reason to believe that competition could lead to more, not less, concentration. 

How Contestable Are Digital Markets?

The insights of Bertrand and Baumol have important ramifications for contemporary antitrust debates surrounding digital platforms. Indeed, it is critical to ascertain whether the (relatively) concentrated market structures we see in these industries are a sign of superior efficiency (and are consistent with potentially intense competition), or whether they are merely caused by barriers to entry.

The barrier-to-entry explanation has been repeated ad nauseam in recent scholarly reports, competition decisions, and pronouncements by legislators. There is thus little need to restate that thesis here. On the other hand, the contestability argument is almost systematically ignored.

Several factors suggest that online platform markets are far more contestable than critics routinely make them out to be.

First and foremost, consumer switching costs are extremely low for most online platforms. To cite but a few examples: Changing your default search engine requires at most a couple of clicks; joining a new social network can be done by downloading an app and importing your contacts to the app; and buying from an alternative online retailer is almost entirely frictionless, thanks to intermediaries such as PayPal.

These zero or near-zero switching costs are compounded by consumers’ ability to “multi-home.” In simple terms, joining TikTok does not require users to close their Facebook account. And the same applies to other online services. As a result, there is almost no opportunity cost to join a new platform. This further reduces the already tiny cost of switching.

Decades of app development have greatly improved the quality of applications’ graphical user interfaces (GUIs), to such an extent that costs to learn how to use a new app are mostly insignificant. Nowhere is this more apparent than for social media and sharing-economy apps (it may be less true for productivity suites that enable more complex operations). For instance, remembering a couple of intuitive swipe motions is almost all that is required to use TikTok. Likewise, ridesharing and food-delivery apps merely require users to be familiar with the general features of other map-based applications. It is almost unheard of for users to complain about usability—something that would have seemed impossible in the early 21st century, when complicated interfaces still plagued most software.

A second important argument in favor of contestability is that, by and large, online platforms face only limited capacity constraints. In other words, platforms can expand output rapidly (though not necessarily costlessly).

Perhaps the clearest example of this is the sudden rise of the Zoom service in early 2020. As a result of the COVID pandemic, Zoom went from around 10 million daily active users in early 2020 to more than 300 million by late April 2020. Despite being a relatively data-intensive service, Zoom did not struggle to meet this new demand from a more than 30-fold increase in its user base. The service never had to turn down users, reduce call quality, or significantly increase its price. In short, capacity largely followed demand for its service. Online industries thus seem closer to the Bertrand model of competition, where the best platform can almost immediately serve any consumers that demand its services.

Conclusion

Of course, none of this should be construed to declare that online markets are perfectly contestable. The central point is, instead, that critics are too quick to assume they are not. Take the following examples.

Scholars routinely cite the putatively strong concentration of digital markets to argue that big tech firms do not face strong competition, but this is a non sequitur. As Bertrand and Baumol (and others) show, what matters is not whether digital markets are concentrated, but whether they are contestable. If a superior rival could rapidly gain user traction, this alone will discipline the behavior of incumbents.

Markets where incumbents do not face significant entry from competitors are just as consistent with vigorous competition as they are with barriers to entry. Rivals could decline to enter either because incumbents have aggressively improved their product offerings or because they are shielded by barriers to entry (as critics suppose). The former is consistent with competition, the latter with monopoly slack.

Similarly, it would be wrong to presume, as many do, that concentration in online markets is necessarily driven by network effects and other scale-related economies. As ICLE scholars have argued elsewhere (here, here and here), these forces are not nearly as decisive as critics assume (and it is debatable that they constitute barriers to entry).

Finally, and perhaps most importantly, this piece has argued that many factors could explain the relatively concentrated market structures that we see in digital industries. The absence of switching costs and capacity constraints are but two such examples. These explanations, overlooked by many observers, suggest digital markets are more contestable than is commonly perceived.

In short, critics’ failure to meaningfully grapple with these issues serves to shape the prevailing zeitgeist in tech-policy debates. Cournot and Bertrand’s intuitions about oligopoly competition may be more than a century old, but they continue to be tested empirically. It is about time those same standards were applied to tech-policy debates.

A bipartisan group of senators unveiled legislation today that would dramatically curtail the ability of online platforms to “self-preference” their own services—for example, when Apple pre-installs its own Weather or Podcasts apps on the iPhone, giving it an advantage that independent apps don’t have. The measure accompanies a House bill that included similar provisions, with some changes.

1. The Senate bill closely resembles the House version, and the small improvements will probably not amount to much in practice.

The major substantive changes we have seen between the House bill and the Senate version are:

  1. Violations in Section 2(a) have been modified to refer only to conduct that “unfairly” preferences, limits, or discriminates between the platform’s products and others, and that “materially harm[s] competition on the covered platform,” rather than banning all preferencing, limits, or discrimination.
  2. The evidentiary burden required throughout the bill has been changed from  “clear and convincing” to a “preponderance of evidence” (in other words, greater than 50%).
  3. An affirmative defense has been added to permit a platform to escape liability if it can establish that challenged conduct that “was narrowly tailored, was nonpretextual, and was necessary to… maintain or enhance the core functionality of the covered platform.”
  4. The minimum market capitalization for “covered platforms” has been lowered from $600 billion to $550 billion.
  5. The Senate bill would assess fines of 15% of revenues from the period during which the conduct occurred, in contrast with the House bill, which set fines equal to the greater of either 15% of prior-year revenues or 30% of revenues from the period during which the conduct occurred.
  6. Unlike the House bill, the Senate bill does not create a private right of action. Only the U.S. Justice Department (DOJ), Federal Trade Commission (FTC), and state attorneys-generals could bring enforcement actions on the basis of the bill.

Item one here certainly mitigates the most extreme risks of the House bill, which was drafted, bizarrely, to ban all “preferencing” or “discrimination” by platforms. If that were made law, it could literally have broken much of the Internet. The softened language reduces that risk somewhat.

However, Section 2(b), which lists types of conduct that would presumptively establish a violation under Section 2(a), is largely unchanged. As outlined here, this would amount to a broad ban on a wide swath of beneficial conduct. And “unfair” and “material” are notoriously slippery concepts. As a practical matter, their inclusion here may not significantly alter the course of enforcement under the Senate legislation from what would ensue under the House version.

Item three, which allows challenged conduct to be defended if it is “necessary to… maintain or enhance the core functionality of the covered platform,” may also protect some conduct. But because the bill requires companies to prove that challenged conduct is not only beneficial, but necessary to realize those benefits, it effectively implements a “guilty until proven innocent” standard that is likely to prove impossible to meet. The threat of permanent injunctions and enormous fines will mean that, in many cases, companies simply won’t be able to justify the expense of endeavoring to improve even the “core functionality” of their platforms in any way that could trigger the bill’s liability provisions. Thus, again, as a practical matter, the difference between the Senate and House bills may be only superficial.

The effect of this will likely be to diminish product innovation in these areas, because companies could not know in advance whether the benefits of doing so would be worth the legal risk. We have previously highlighted existing conduct that may be lost if a bill like this passes, such as pre-installation of apps or embedding maps and other “rich” results in boxes on search engine results pages. But the biggest loss may be things we don’t even know about yet, that just never happen because the reward from experimentation is not worth the risk of being found to be “discriminating” against a competitor.

We dove into the House bill in Breaking Down the American Choice and Innovation Online Act and Breaking Down House Democrats’ Forthcoming Competition Bills.

2. The prohibition on “unfair self-preferencing” is vague and expansive and will make Google, Amazon, Facebook, and Apple’s products worse. Consumers don’t want digital platforms to be dumb pipes, or to act like a telephone network or sewer system. The Internet is filled with a superabundance of information and options, as well as a host of malicious actors. Good digital platforms act as middlemen, sorting information in useful ways and taking on some of the risk that exists when, inevitably, we end up doing business with untrustworthy actors.

When users have the choice, they tend to prefer platforms that do quite a bit of “discrimination”—that is, favoring some sellers over others, or offering their own related products or services through the platform. Most people prefer Amazon to eBay because eBay is chaotic and riskier to use.

Competitors that decry self-preferencing by the largest platforms—integrating two different products with each other, like putting a maps box showing only the search engine’s own maps on a search engine results page—argue that the conduct is enabled only by a platform’s market dominance and does not benefit consumers.

Yet these companies often do exactly the same thing in their own products, regardless of whether they have market power. Yelp includes a map on its search results page, not just restaurant listings. DuckDuckGo does the same. If these companies offer these features, it is presumably because they think their users want such results. It seems perfectly plausible that Google does the same because it thinks its users—literally the same users, in most cases—also want them.

Fundamentally, and as we discuss in Against the Vertical Disrcimination Presumption, there is simply no sound basis to enact such a bill (even in a slightly improved version):

The notion that self-preferencing by platforms is harmful to innovation is entirely speculative. Moreover, it is flatly contrary to a range of studies showing that the opposite is likely true. In reality, platform competition is more complicated than simple theories of vertical discrimination would have it, and there is certainly no basis for a presumption of harm.

We discussed self-preferencing further in Platform Self-Preferencing Can Be Good for Consumers and Even Competitors, and showed that platform “discrimination” is often what consumers want from digital platforms in On the Origin of Platforms: An Evolutionary Perspective.

3. The bill massively empowers an FTC that seems intent to use antitrust to achieve political goals. The House bill would enable competitors to pepper covered platforms with frivolous lawsuits. The bill’s sponsors presumably hope that removing the private right of action will help to avoid that. But the bill still leaves intact a much more serious risk to the rule of law: the bill’s provisions are so broad that federal antitrust regulators will have enormous discretion over which cases they take.

This means that whoever is running the FTC and DOJ will be able to threaten covered platforms with a broad array of lawsuits, potentially to influence or control their conduct in other, unrelated areas. While some supporters of the bill regard this as a positive, most antitrust watchers would greet this power with much greater skepticism. Fundamentally, both bills grant antitrust enforcers wildly broad powers to pursue goals unrelated to competition. FTC Chair Lina Khan has, for example, argued that “the dispersion of political and economic control” ought to be antitrust’s goal. Commissioner Rebecca Kelly-Slaughter has argued that antitrust should be “antiracist”.

Whatever the desirability of these goals, the broad discretionary authority the bills confer on the antitrust agencies means that individual commissioners may have significantly greater scope to pursue the goals that they believe to be right, rather than Congress.

See discussions of this point at What Lina Khan’s Appointment Means for the House Antitrust Bills, Republicans Should Tread Carefully as They Consider ‘Solutions’ to Big Tech, The Illiberal Vision of Neo-Brandeisian Antitrust, and Alden Abbott’s discussion of FTC Antitrust Enforcement and the Rule of Law.

4. The bill adopts European principles of competition regulation. These are, to put it mildly, not obviously conducive to the sort of innovation and business growth that Americans may expect. Europe has no tech giants of its own, a condition that shows little sign of changing. Apple, alone, is worth as much as the top 30 companies in Germany’s DAX index, and the top 40 in France’s CAC index. Landmark European competition cases have seen Google fined for embedding Shopping results in the Search page—not because it hurt consumers, but because it hurt competing pricecomparison websites.

A fundamental difference between American and European competition regimes is that the U.S. system is far more friendly to businesses that obtain dominant market positions because they have offered better products more cheaply. Under the American system, successful businesses are normally given broad scope to charge high prices and refuse to deal with competitors. This helps to increase the rewards and incentive to innovate and invest in order to obtain that strong market position. The European model is far more burdensome.

The Senate bill adopts a European approach to refusals to deal—the same approach that led the European Commission to fine Microsoft for including Windows Media Player with Windows—and applies it across Big Tech broadly. Adopting this kind of approach may end up undermining elements of U.S. law that support innovation and growth.

For more, see How US and EU Competition Law Differ.

5. The proposals are based on a misunderstanding of the state of competition in the American economy, and of antitrust enforcement. It is widely believed that the U.S. economy has seen diminished competition. This is mistaken, particularly with respect to digital markets. Apparent rises in market concentration and profit margins disappear when we look more closely: local-level concentration is falling even as national-level concentration is rising, driven by more efficient chains setting up more stores in areas that were previously served by only one or two firms.

And markup rises largely disappear after accounting for fixed costs like R&D and marketing.

Where profits are rising, in areas like manufacturing, it appears to be mainly driven by increased productivity, not higher prices. Real prices have not risen in line with markups. Where profitability has increased, it has been mainly driven by falling costs.

Nor have the number of antitrust cases brought by federal antitrust agencies fallen. The likelihood of a merger being challenged more than doubled between 1979 and 2017. And there is little reason to believe that the deterrent effect of antitrust has weakened. Many critics of Big Tech have decided that there must be a problem and have worked backwards from that conclusion, selecting whatever evidence supports it and ignoring the evidence that does not. The consequence of such motivated reasoning is bills like this.

See Geoff’s April 2020 written testimony to the House Judiciary Investigation Into Competition in Digital Markets here.

Policymakers’ recent focus on how Big Tech should be treated under antitrust law has been accompanied by claims that companies like Facebook and Google hold dominant positions in various “markets.” Notwithstanding the tendency to conflate whether a firm is large with whether it hold a dominant position, we must first answer the question most of these claims tend to ignore: “dominant over what?”

For example, as set out in this earlier Truth on the Market post, a recent lawsuit filed by various states and the U.S. Justice Department outlined five areas related to online display advertising over which Google is alleged by the plaintiffs to hold a dominant position. But crucially, none appear to have been arrived at via the application of economic reasoning.

As that post explained, other forms of advertising (such as online search and offline advertising) might form part of a “relevant market” (i.e., the market in which a product actually competes) over which Google’s alleged dominance should be assessed. The post makes a strong case for the actual relevant market being much broader than that claimed in the lawsuit. Of course, some might disagree with that assessment, so it is useful to step back and examine the principles that underlie and motivate how a relevant market is defined.

In any antitrust case, defining the relevant market should be regarded as a means to an end, not an end in itself. While such definitions provide the basis to calculate market shares, the process of thinking about relevant markets also should provide a framework to consider and highlight important aspects of the case. The process enables one to think about how a particular firm and market operates, the constraints that it and rival firms face, and whether entry by other firms is feasible or likely.

Many naïve attempts to define the relevant market will limit their analysis to a particular industry. But an industry could include too few competitors, or it might even include too many—for example, if some firms in the industry generate products that do not constitute strong competitive constraints. If one were to define all cars as the “relevant” market, that would imply that a Dacia Sandero (a supermini model produced Renault’s Romanian subsidiary Dacia) constrains the price of Maserati’s Quattroporte luxury sports sedan as much as the Ferrari Portofino grand touring sports car does. This is very unlikely to hold in reality.[1]

The relevant market should be the smallest possible group of products and services that contains all such products and services that could provide a reasonable competitive constraint. But that, of course, merely raises the question of what is meant by a “reasonable competitive constraint.” Thankfully, by applying economic reasoning, we can answer that question.

More specifically, we have the “hypothetical monopolist test.” This test operates by considering whether a hypothetical monopolist (i.e., a single firm that controlled all the products considered part of the relevant market) could profitably undertake “a small but significant, non-transitory, increase in price” (typically shortened as the SSNIP test).[2]

If the hypothetical monopolist could profitably implement this increase in price, then the group of products under consideration is said to constitute a relevant market. On the other hand, if the hypothetical monopolist could not profitably increase the price of that group of products (due to demand-side or supply-side constraints on their ability to increase prices), then that group of products is not a relevant market, and more products need to be included in the candidate relevant market. The process of widening the group of products continues until the hypothetical monopolist could profitably increase prices over that group.

So how does this test work in practice? Let’s use an example to make things concrete. In particular, let’s focus on Google’s display advertising, as that has been a significant focus of attention. Starting from the narrowest possible market, Google’s own display advertising, the HM test would ask whether a hypothetical monopolist controlling these services (and just these services) could profitably increase prices of these services permanently by 5% to 10%.

At this initial stage, it is important to avoid the “cellophane fallacy,” in which a monopolist firm could not profitably increase its prices by 5% to 10% because it is already charging the monopoly price. This fallacy usually arises in situations where the product under consideration has very few (if any) substitutes. But as has been shown here, there are already plenty of alternatives to Google’s display-advertising services, so we can be reasonably confident that the fallacy does not apply here.

We would then consider what is likely to happen if Google were to increase the prices of its online display advertising services by 5% to 10%. Given the plethora of other options (such as Microsoft, Facebook, and Simpli.fi) customers have for obtaining online display ads, a sufficiently high number of Google’s customers are likely to switch away, such that the price increase would not be profitable. It is therefore necessary to expand the candidate relevant market to include those closest alternatives to which Google’s customers would switch.

We repeat the exercise, but now with the hypothetical monopolist also increasing the prices of those newly included products. It might be the case that alternatives such as online search ads (as opposed to display ads), print advertising, TV advertising and/or other forms of advertising would sufficiently constrain the hypothetical monopolist in this case that those other alternatives form part of the relevant market.

In determining whether an alternative sufficiently constrains our hypothetical monopolist, it is important to consider actual consumer/firm behavior, rather than relying on products having “similar” characteristics. Although constraints can come from either the demand side (i.e., customers switching to another provider) or the supply side (entry/switching by other providers to start producing the products offered by the HM), for market-definition purposes, it is almost always demand-side switching that matters most. Switching by consumers tends to happen much more quickly than does switching by providers, such that it can be a more effective constraint. (Note that supply-side switching is still important when assessing overall competitive constraints, but because such switching can take one or more years, it is usually considered in the overall competitive assessment, rather than at the market-definition stage.)

Identifying which alternatives consumers do and would switch to therefore highlights the rival products and services that constrain the candidate hypothetical monopolist. It is only once the hypothetical monopolist test has been completed and the relevant market has been found that market shares can be calculated.[3]

It is at that point than an assessment of a firm’s alleged market power (or of a proposed merger) can proceed. This is why claims that “Facebook is a monopolist” or that “Google has market power” often fail at the first hurdle (indeed, in the case of Facebook, they recently have.)

Indeed, I would go so far as to argue that any antitrust claim that does not first undertake a market-definition exercise with sound economic reasoning akin to that described above should be discounted and ignored.


[1] Some might argue that there is a “chain of substitution” from the Maserati to, for example, an Audi A4, to a Ford Focus, to a Mini, to a Dacia Sandero, such that the latter does, indeed, provide some constraint on the former. However, the size of that constraint is likely to be de minimis, given how many “links” there are in that chain.

[2] The “small but significant” price increase is usually taken to be between 5% and 10%.

[3] Even if a product or group of products ends up excluded from the definition of the relevant market, these products can still form a competitive constraint in the overall assessment and are still considered at that point.

Digital advertising is the economic backbone of the Internet. It allows websites and apps to monetize their userbase without having to charge them fees, while the emergence of targeted ads allows this to be accomplished affordably and with less wasted time wasted.

This advertising is facilitated by intermediaries using the “adtech stack,” through which advertisers and publishers are matched via auctions and ads ultimately are served to relevant users. This intermediation process has advanced enormously over the past three decades. Some now allege, however, that this market is being monopolized by its largest participant: Google.

A lawsuit filed by the State of Texas and nine other states in December 2020 alleges, among other things, that Google has engaged in anticompetitive conduct related to its online display advertising business. Those 10 original state plaintiffs were joined by another four states and the Commonwealth of Puerto Rico in March 2021, while South Carolina and Louisiana have also moved to be added as additional plaintiffs. Google also faces a pending antitrust lawsuit brought by the U.S. Justice Department (DOJ) and 14 states (originally 11) related to the company’s distribution agreements, as well as a separate action by the State of Utah, 35 other states, and the District of Columbia related to its search design.

In recent weeks, it has been reported that the DOJ may join the Texas suit or bring its own similar action against Google in the coming months. If it does, it should learn from the many misconceptions and errors in the Texas complaint that leave it on dubious legal and economic grounds.

​​Relevant market

The Texas complaint identifies at least five relevant markets within the adtech stack that it alleges Google either is currently monopolizing or is attempting to monopolize:

  1. Publisher ad servers;
  2. Display ad exchanges;
  3. Display ad networks;
  4. Ad-buying tools for large advertisers; and
  5. Ad-buying tools for small advertisers.

None of these constitute an economically relevant product market for antitrust purposes, since each “market” is defined according to how superficially similar the products are in function, not how substitutable they are. Nevertheless, the Texas complaint vaguely echoes how markets were conceived in the “Roadmap” for a case against Google’s advertising business, published last year by the Omidyar Network, which may ultimately influence any future DOJ complaint, as well.

The Omidyar Roadmap narrows the market from media advertising to digital advertising, then to the open supply of display ads, which comprises only 9% of the total advertising spending and less than 20% of digital advertising, as shown in the figure below. It then further narrows the defined market to the intermediation of the open supply of display ads. Once the market has been sufficiently narrowed, the Roadmap authors conclude that Google’s market share is “perhaps sufficient to confer market power.”

While whittling down the defined market may achieve the purposes of sketching a roadmap to prosecute Google, it also generates a mishmash of more than a dozen relevant markets for digital display and video advertising. In many of these, Google doesn’t have anything approaching market power, while, in some, Facebook is the most dominant player.

The Texas complaint adopts a non-economic approach to market definition.  It ignores potential substitutability between different kinds of advertising, both online and offline, which can serve as a competitive constraint on the display advertising market. The complaint considers neither alternative forms of display advertising, such as social media ads, nor alternative forms of advertising, such as search ads or non-digital ads—all of which can and do act as substitutes. It is possible, at the very least, that advertisers who choose to place ads on third-party websites may switch to other forms of advertising if the price of third-party website advertising was above competitive levels. To ignore this possibility, as the Texas complaint does, is to ignore the entire purpose of defining the relevant antitrust market altogether.

Offline advertising vs. online advertising

The fact that offline and online advertising employ distinct processes does not consign them to economically distinct markets. Indeed, online advertising has manifestly drawn advertisers from offline markets, just as previous technological innovations drew advertisers from other pre-existing channels.

Moreover, there is evidence that, in some cases, offline and online advertising are substitute products. For example, economists Avi Goldfarb and Catherine Tucker demonstrate that display advertising pricing is sensitive to the availability of offline alternatives. They conclude:

We believe our studies refute the hypothesis that online and offline advertising markets operate independently and suggest a default position of substitution. Online and offline advertising markets appear to be closely related. That said, it is important not to draw any firm conclusions based on historical behavior.

Display ads vs. search ads

There is perhaps even more reason to doubt that online display advertising constitutes a distinct, economically relevant market from online search advertising.

Although casual and ill-informed claims are often made to the contrary, various forms of targeted online advertising are significant competitors of each other. Bo Xing and Zhanxi Lin report firms spread their marketing budgets across these different sources of online marketing, and “search engine optimizers”—firms that help websites to maximize the likelihood of a valuable “top-of-list” organic search placement—attract significant revenue. That is, all of these different channels vie against each other for consumer attention and offer advertisers the ability to target their advertising based on data gleaned from consumers’ interactions with their platforms.

Facebook built a business on par with Google’s thanks in large part to advertising, by taking advantage of users’ more extended engagement with the platform to assess relevance and by enabling richer, more engaged advertising than previously appeared on Google Search. It’s an entirely different model from search, but one that has turned Facebook into a competitive ad platform.

And the market continues to shift. Somewhere between 37-56% of product searches start on Amazon, according to one survey, and advertisers have noticed. This is not surprising, given Amazon’s strong ability to match consumers with advertisements, and to do so when and where consumers are more likely to make a purchase.

‘Open’ display advertising vs. ‘owned-and-operated’ display advertising

The United Kingdom’s Competition and Markets Authority (like the Omidyar Roadmap report) has identified two distinct channels of display advertising, which they term “owned and operated” and “open.” The CMA concludes:

Over half of display expenditure is generated by Facebook, which owns both the Facebook platform and Instagram. YouTube has the second highest share of display advertising and is owned by Google. The open display market, in which advertisers buy inventory from many publishers of smaller scale (for example, newspapers and app providers) comprises around 32% of display expenditure.

The Texas complaint does not directly address the distinction between open and owned and operated, but it does allege anticompetitive conduct by Google with respect to YouTube in a separate “inline video advertising market.” 

The CMA finds that the owned-and-operated channel mostly comprises large social media platforms, which sell their own advertising inventory directly to advertisers or media agencies through self-service interfaces, such as Facebook Ads Manager or Snapchat Ads Manager.  In contrast, in the open display channel, publishers such as online newspapers and blogs sell their inventory to advertisers through a “complex chain of intermediaries.”  Through these, intermediaries run auctions that match advertisers’ ads to publisher inventory of ad space. In both channels, nearly all transactions are run through programmatic technology.

The CMA concludes that advertisers “largely see” the open and the owned-and-operated channels as substitutes. According to the CMA, an advertiser’s choice of one channel over the other is driven by each channel’s ability to meet the key performance metrics the advertising campaign is intended to achieve.

The Omidyar Roadmap argues, instead, that the CMA too narrowly focuses on the perspective of advertisers. The Roadmap authors claim that “most publishers” do not control supply that is “owned and operated.” As a result, they conclude that publishers “such as gardenandgun.com or hotels.com” do not have any owned-and-operated supply and can generate revenues from their supply “only through the Google-dominated adtech stack.” 

But this is simply not true. For example, in addition to inventory in its print media, Garden & Gun’s “Digital Media Kit” indicates that the publisher has several sources of owned-and-operated banner and video supply, including the desktop, mobile, and tablet ads on its website; a “homepage takeover” of its website; branded/sponsored content; its email newsletters; and its social media accounts. Hotels.com, an operating company of Expedia Group, has its own owned-and-operated search inventory, which it sells through its “Travel Ads Sponsored Listing,” as well owned-and-operated supply of standard and custom display ads.

Given that both perform the same function and employ similar mechanisms for matching inventory with advertisers, it is unsurprising that both advertisers and publishers appear to consider the owned-and-operated channel and the open channel to be substitutes.

[The following post was adapted from the International Center for Law & Economics White Paper “Polluting Words: Is There a Coasean Case to Regulate Offensive Speech?]

Words can wound. They can humiliate, anger, insult.

University students—or, at least, a vociferous minority of them—are keen to prevent this injury by suppressing offensive speech. To ensure campuses are safe places, they militate for the cancellation of talks by speakers with opinions they find offensive, often successfully. And they campaign to get offensive professors fired from their jobs.

Off campus, some want this safety to be extended to the online world and, especially, to the users of social media platforms such as Twitter and Facebook. In the United States, this would mean weakening the legal protections of offensive speech provided by Section 230 of the Communications Decency Act (as President Joe Biden has recommended) or by the First Amendment and. In the United Kingdom, the Online Safety Bill is now before Parliament. If passed, it will give a U.K. government agency the power to dictate the content-moderation policies of social media platforms.

You don’t need to be a woke university student or grandstanding politician to suspect that society suffers from an overproduction of offensive speech. Basic economics provides a reason to suspect it—the reason being that offense is an external cost of speech. The cost is borne not by the speaker but by his audience. And when people do not bear all the costs of an action, they do it too much.

Jack tweets “women don’t have penises.” This offends Jill, who is someone with a penis who considers herself (or himself, if Jack is right) to be a woman. And it offends many others, who agree with Jill that Jack is indulging in ugly transphobic biological essentialism. Lacking Bill Clinton’s facility for feeling the pain of others, Jack does not bear this cost. So, even if it exceeds whatever benefit Jack gets from saying that women don’t have penises, he will still say it. In other words, he will say it even when doing so makes society altogether worse off.

It shouldn’t be allowed!

That’s what we normally say when actions harm others more than they benefit the agent. The law normally conforms to John Stuart Mill’s “Harm Principle” by restricting activities—such as shooting people or treating your neighbours to death metal at 130 decibels at 2 a.m.—with material external costs. Those who seek legal reform to restrict offensive speech are surely doing no more than following an accepted general principle.

But it’s not so simple. As Ronald Coase pointed out in his famous 1960 article “The Problem of Social Cost,” externalities are a reciprocal problem. If Wayne had no neighbors, his playing death metal at 130 decibels at 2 a.m. would have no external costs. Their choice of address is equally a source of the problem. Similarly, if Jill weren’t a Twitter user, she wouldn’t have been offended by Jack’s tweet about who has a penis, since she wouldn’t have encountered it. Externalities are like tangos: they always have at least two perpetrators.

So, the legal question, “who should have a right to what they want?”—Wayne to his loud music or his neighbors to their sleep; Jack to expressing his opinion about women or Jill to not hearing such opinions—cannot be answered by identifying the party who is responsible for the external cost. Both parties are responsible.

How, then, should the question be answered? In the same paper, Coase the showed that, in certain circumstances, who the courts favor will make no difference to what ends up happening, and that what ends up happening will be efficient. Suppose the court says that Wayne cannot bother his neighbors with death metal at 2 a.m. If Wayne would be willing to pay $100,000 to keep doing it and his neighbors, combined, would put up with it for anything more than $95,000, then they should be able to arrive at a mutually beneficial deal whereby Wayne pays them something between $95,000 and $100,000 to forgo their right to stop him making his dreadful noise.

That’s not exactly right. If negotiating a deal would cost more than $5,000, then no mutually beneficial deal is possible and the rights-trading won’t happen. Transaction costs being less than the difference between the two parties’ valuations is the circumstance in which the allocation of legal rights makes no difference to how resources get used, and where efficiency will be achieved, in any event.

But it is an unusual circumstance, especially when the external cost is suffered by many people. When the transaction cost is too high, efficiency does depend on the allocation of rights by courts or legislatures. As Coase argued, when this is so, efficiency will be served if a right to the disputed resource is granted to the party with the higher cost of avoiding the externality.

Given the (implausible) valuations Wayne and his neighbors place on the amount of noise in their environment at 2 a.m., efficiency is served by giving Wayne the right to play his death metal, unless he could soundproof his house or play his music at a much lower volume or take some other avoidance measure that costs him less than the $90,000 cost to his neighbours.

And given that Jack’s tweet about penises offends a large open-ended group of people, with whom Jack therefore cannot negotiate, it looks like they should be given the right not to be offended by Jack’s comment and he should be denied the right to make it. Coasean logic supports the woke censors!          

But, again, it’s not that simple—for two reasons.

The first is that, although those are offended may be harmed by the offending speech, they needn’t necessarily be. Physical pain is usually harmful, but not when experienced by a sexual masochist (in the right circumstances, of course). Similarly, many people take masochistic pleasure in being offended. You can tell they do, because they actively seek out the sources of their suffering. They are genuinely offended, but the offense isn’t harming them, just as the sexual masochist really is in physical pain but isn’t harmed by it. Indeed, real pain and real offense are required, respectively, for the satisfaction of the sexual masochist and the offense masochist.

How many of the offended are offense masochists? Where the offensive speech can be avoided at minimal cost, the answer must be most. Why follow Jordan Peterson on Twitter when you find his opinions offensive unless you enjoy being offended by him? Maybe some are keeping tabs on the dreadful man so that they can better resist him, and they take the pain for that reason rather than for masochistic glee. But how could a legislator or judge know? For all they know, most of those offended by Jordan Peterson are offense masochists and the offense he causes is a positive externality.

The second reason Coasean logic doesn’t support the would-be censors is that social media platforms—the venues of offensive speech that they seek to regulate—are privately owned. To see why this is significant, consider not offensive speech, but an offensive action, such as openly masturbating on a bus.

This is prohibited by law. But it is not the mere act that is illegal. You are allowed to masturbate in the privacy of your bedroom. You may not masturbate on a bus because those who are offended by the sight of it cannot easily avoid it. That’s why it is illegal to express obscenities about Jesus on a billboard erected across the road from a church but not at a meeting of the Angry Atheists Society. The laws that prohibit offensive speech in such circumstances—laws against public nuisance, harassment, public indecency, etc.—are generally efficient. The cost they impose on the offenders is less than the benefits to the offended.

But they are unnecessary when the giving and taking of offense occur within a privately owned place. Suppose no law prohibited masturbating on a bus. It still wouldn’t be allowed on buses owned by a profit-seeker. Few people want to masturbate on buses and most people who ride on buses seek trips that are masturbation-free. A prohibition on masturbation will gain the owner more customers than it loses him. The prohibition is simply another feature of the product offered by the bus company. Nice leather seats, punctual departures, and no wankers (literally). There is no more reason to believe that the bus company’s passenger-conduct rules will be inefficient than that its other product features will be and, therefore, no more reason to legally stipulate them.

The same goes for the content-moderation policies of social media platforms. They are just another product feature offered by a profit-seeking firm. If they repel more customers than they attract (or, more accurately, if they repel more advertising revenue than they attract), they would be inefficient. But then, of course, the company would not adopt them.

Of course, the owner of a social media platform might not be a pure profit-maximiser. For example, he might forgo $10 million in advertising revenue for the sake of banning speakers he personally finds offensive. But the outcome is still efficient. Allowing the speech would have cost more by way of the owner’s unhappiness than the lost advertising would have been worth.  And such powerful feelings in the owner of a platform create an opportunity for competitors who do not share his feelings. They can offer a platform that does not ban the offensive speakers and, if enough people want to hear what they have to say, attract users and the advertising revenue that comes with them. 

If efficiency is your concern, there is no problem for the authorities to solve. Indeed, the idea that the authorities would do a better job of deciding content-moderation rules is not merely absurd, but alarming. Politicians and the bureaucrats who answer to them or are appointed by them would use the power not to promote efficiency, but to promote agendas congenial to them. Jurisprudence in liberal democracies—and, especially, in America—has been suspicious of governmental control of what may be said. Nothing about social media provides good reason to become any less suspicious.

The dystopian novel is a powerful literary genre. It has given us such masterpieces as Nineteen Eighty-Four, Brave New World, and Fahrenheit 451. Though these novels often shed light on the risks of contemporary society and the zeitgeist of the era in which they were written, they also almost always systematically overshoot the mark (intentionally or not) and severely underestimate the radical improvements that stem from the technologies (or other causes) that they fear.

But dystopias are not just a literary phenomenon; they are also a powerful force in policy circles. This is epitomized by influential publications such as The Club of Rome’s 1972 report The Limits of Growth, whose dire predictions of Malthusian catastrophe have largely failed to materialize.

In an article recently published in the George Mason Law Review, we argue that contemporary antitrust scholarship and commentary is similarly afflicted by dystopian thinking. In that respect, today’s antitrust pessimists have set their sights predominantly on the digital economy—”Big Tech” and “Big Data”—in the process of alleging a vast array of potential harms.

Scholars have notably argued that the data created and employed by the digital economy produces network effects that inevitably lead to tipping and to more concentrated markets (e.g., here and here). In other words, firms will allegedly accumulate insurmountable data advantages and thus thwart competitors for extended periods of time.

Some have gone so far as to argue that this threatens the very fabric of western democracy. For instance, parallels between the novel Nineteen Eighty-Four and the power of large digital platforms were plain to see when Epic Games launched an antitrust suit against Apple and its App Store in August 2020. The gaming company released a short video clip parodying Apple’s famous “1984” ad (which, upon its release, was itself widely seen as a critique of the tech incumbents of the time). Similarly, a piece in the New Statesman—titled “Slouching Towards Dystopia: The Rise of Surveillance Capitalism and the Death of Privacy”—concluded that:

Our lives and behaviour have been turned into profit for the Big Tech giants—and we meekly click ‘Accept.’ How did we sleepwalk into a world without privacy?

In our article, we argue that these fears are symptomatic of two different but complementary phenomena, which we refer to as “Antitrust Dystopia” and “Antitrust Nostalgia.”

Antitrust Dystopia is the pessimistic tendency among competition scholars and enforcers to assert that novel business conduct will cause technological advances to have unprecedented, anticompetitive consequences. This is almost always grounded in the belief that “this time is different”—that, despite the benign or positive consequences of previous, similar technological advances, this time those advances will have dire, adverse consequences absent enforcement to stave off abuse.

Antitrust Nostalgia is the biased assumption—often built into antitrust doctrine itself—that change is bad. Antitrust Nostalgia holds that, because a business practice has seemingly benefited competition before, changing it will harm competition going forward. Thus, antitrust enforcement is often skeptical of, and triggered by, various deviations from status quo conduct and relationships (i.e., “nonstandard” business arrangements) when change is, to a first approximation, the hallmark of competition itself.

Our article argues that these two worldviews are premised on particularly questionable assumptions about the way competition unfolds, in this case, in data-intensive markets.

The Case of Big Data Competition

The notion that digital markets are inherently more problematic than their brick-and-mortar counterparts—if there even is a meaningful distinction—is advanced routinely by policymakers, journalists, and other observers. The fear is that, left to their own devices, today’s dominant digital platforms will become all-powerful, protected by an impregnable “data barrier to entry.” Against this alarmist backdrop, nostalgic antitrust scholars have argued for aggressive antitrust intervention against the nonstandard business models and contractual arrangements that characterize these markets.

But as our paper demonstrates, a proper assessment of the attributes of data-intensive digital markets does not support either the dire claims or the proposed interventions.

  1. Data is information

One of the most salient features of the data created and consumed by online firms is that, jargon aside, it is just information. As with other types of information, it thus tends to have at least some traits usually associated with public goods (i.e., goods that are non-rivalrous in consumption and not readily excludable). As the National Bureau of Economic Research’s Catherine Tucker argues, data “has near-zero marginal cost of production and distribution even over long distances,” making it very difficult to exclude others from accessing it. Meanwhile, multiple economic agents can simultaneously use the same data, making it non-rivalrous in consumption.

As we explain in our paper, these features make the nature of modern data almost irreconcilable with the alleged hoarding and dominance that critics routinely associate with the tech industry.

2. Data is not scarce; expertise is

Another important feature of data is that it is ubiquitous. The predominant challenge for firms is not so much in obtaining data but, rather, in drawing useful insights from it. This has two important implications for antitrust policy.

First, although data does not have the self-reinforcing characteristics of network effects, there is a sense that acquiring a certain amount of data and expertise is necessary to compete in data-heavy industries. It is (or should be) equally apparent, however, that this “learning by doing” advantage rapidly reaches a point of diminishing returns.

This is supported by significant empirical evidence. As our survey of the empirical literature shows, data generally entails diminishing marginal returns:

Second, it is firms’ capabilities, rather than the data they own, that lead to success in the marketplace. Critics who argue that firms such as Amazon, Google, and Facebook are successful because of their superior access to data might, in fact, have the causality in reverse. Arguably, it is because these firms have come up with successful industry-defining paradigms that they have amassed so much data, and not the other way around.

This dynamic can be seen at play in the early days of the search-engine market. In 2013, The Atlantic ran a piece titled “What the Web Looked Like Before Google.” By comparing the websites of Google and its rivals in 1998 (when Google Search was launched), the article shows how the current champion of search marked a radical departure from the status quo.

Even if it stumbled upon it by chance, Google immediately identified a winning formula for the search-engine market. It ditched the complicated classification schemes favored by its rivals and opted, instead, for a clean page with a single search box. This ensured that users could access the information they desired in the shortest possible amount of time—thanks, in part, to Google’s PageRank algorithm.

It is hardly surprising that Google’s rivals struggled to keep up with this shift in the search-engine industry. The theory of dynamic capabilities tells us that firms that have achieved success by indexing the web will struggle when the market rapidly moves toward a new paradigm (in this case, Google’s single search box and ten blue links). During the time it took these rivals to identify their weaknesses and repurpose their assets, Google kept on making successful decisions: notably, the introduction of Gmail, its acquisitions of YouTube and Android, and the introduction of Google Maps, among others.

Seen from this evolutionary perspective, Google thrived because its capabilities were perfect for the market at that time, while rivals were ill-adapted.

3.    Data as a byproduct of, and path to, platform monetization

Policymakers should also bear in mind that platforms often must go to great lengths in order to create data about their users—data that these same users often do not know about themselves. Under this framing, data is a byproduct of firms’ activity, rather than an input necessary for rivals to launch a business.

This is especially clear when one looks at the formative years of numerous online platforms. Most of the time, these businesses were started by entrepreneurs who did not own much data but, instead, had a brilliant idea for a service that consumers would value. Even if data ultimately played a role in the monetization of these platforms, it does not appear that it was necessary for their creation.

Data often becomes significant only at a relatively late stage in these businesses’ development. A quick glance at the digital economy is particularly revealing in this regard. Google and Facebook, in particular, both launched their platforms under the assumption that building a successful product would eventually lead to significant revenues.

It took five years from its launch for Facebook to start making a profit. Even at that point, when the platform had 300 million users, it still was not entirely clear whether it would generate most of its income from app sales or online advertisements. It was another three years before Facebook started to cement its position as one of the world’s leading providers of online ads. During this eight-year timespan, Facebook prioritized user growth over the monetization of its platform. The company appears to have concluded (correctly, it turns out) that once its platform attracted enough users, it would surely find a way to make itself highly profitable.

This might explain how Facebook managed to build a highly successful platform despite a large data disadvantage when compared to rivals like MySpace. And Facebook is no outlier. The list of companies that prevailed despite starting with little to no data (and initially lacking a data-dependent monetization strategy) is lengthy. Other examples include TikTok, Airbnb, Amazon, Twitter, PayPal, Snapchat, and Uber.

Those who complain about the unassailable competitive advantages enjoyed by companies with troves of data have it exactly backward. Companies need to innovate to attract consumer data or else consumers will switch to competitors, including both new entrants and established incumbents. As a result, the desire to make use of more and better data drives competitive innovation, with manifestly impressive results. The continued explosion of new products, services, and apps is evidence that data is not a bottleneck to competition, but a spur to drive it.

We’ve Been Here Before: The Microsoft Antitrust Saga

Dystopian and nostalgic discussions concerning the power of successful technology firms are nothing new. Throughout recent history, there have been repeated calls for antitrust authorities to reign in these large companies. These calls for regulation have often led to increased antitrust scrutiny of some form. The Microsoft antitrust cases—which ran from the 1990s to the early 2010s on both sides of the Atlantic—offer a good illustration of the misguided “Antitrust Dystopia.”

In the mid-1990s, Microsoft was one of the most successful and vilified companies in America. After it obtained a commanding position in the desktop operating system market, the company sought to establish a foothold in the burgeoning markets that were developing around the Windows platform (many of which were driven by the emergence of the Internet). These included the Internet browser and media-player markets.

The business tactics employed by Microsoft to execute this transition quickly drew the ire of the press and rival firms, ultimately landing Microsoft in hot water with antitrust authorities on both sides of the Atlantic.

However, as we show in our article, though there were numerous calls for authorities to adopt a precautionary principle-type approach to dealing with Microsoft—and antitrust enforcers were more than receptive to these calls—critics’ worst fears never came to be.

This positive outcome is unlikely to be the result of the antitrust cases that were brought against Microsoft. In other words, the markets in which Microsoft operated seem to have self-corrected (or were misapprehended as competitively constrained) and, today, are generally seen as being unproblematic.

This is not to say that antitrust interventions against Microsoft were necessarily misguided. Instead, our critical point is that commentators and antitrust decisionmakers routinely overlooked or misinterpreted the existing and nonstandard market dynamics that ultimately prevented the worst anticompetitive outcomes from materializing. This is supported by several key factors.

First, the remedies that were imposed against Microsoft by antitrust authorities on both sides of the Atlantic were ultimately quite weak. It is thus unlikely that these remedies, by themselves, prevented Microsoft from dominating its competitors in adjacent markets.

Note that, if this assertion is wrong, and antitrust enforcement did indeed prevent Microsoft from dominating online markets, then there is arguably no need to reform the antitrust laws on either side of the Atlantic, nor even to adopt a particularly aggressive enforcement position. The remedies that were imposed on Microsoft were relatively localized. Accordingly, if antitrust enforcement did indeed prevent Microsoft from dominating other online markets, then it is antitrust enforcement’s deterrent effect that is to thank, and not the remedies actually imposed.

Second, Microsoft lost its bottleneck position. One of the biggest changes that took place in the digital space was the emergence of alternative platforms through which consumers could access the Internet. Indeed, as recently as January 2009, roughly 94% of all Internet traffic came from Windows-based computers. Just over a decade later, this number has fallen to about 31%. Android, iOS, and OS X have shares of roughly 41%, 16%, and 7%, respectively. Consumers can thus access the web via numerous platforms. The emergence of these alternatives reduced the extent to which Microsoft could use its bottleneck position to force its services on consumers in online markets.

Third, it is possible that Microsoft’s own behavior ultimately sowed the seeds of its relative demise. In particular, the alleged barriers to entry (rooted in nostalgic market definitions and skeptical analysis of “ununderstandable” conduct) that were essential to establishing the antitrust case against the company may have been pathways to entry as much as barriers.

Consider this error in the Microsoft court’s analysis of entry barriers: the court pointed out that new entrants faced a barrier that Microsoft didn’t face, in that Microsoft didn’t have to contend with a powerful incumbent impeding its entry by tying up application developers.

But while this may be true, Microsoft did face the absence of any developers at all, and had to essentially create (or encourage the creation of) businesses that didn’t previously exist. Microsoft thus created a huge positive externality for new entrants: existing knowledge and organizations devoted to software development, industry knowledge, reputation, awareness, and incentives for schools to offer courses. It could well be that new entrants, in fact, faced lower barriers with respect to app developers than did Microsoft when it entered.

In short, new entrants may face even more welcoming environments because of incumbents. This enabled Microsoft’s rivals to thrive.

Conclusion

Dystopian antitrust prophecies are generally doomed to fail, just like those belonging to the literary world. The reason is simple. While it is easy to identify what makes dominant firms successful in the present (i.e., what enables them to hold off competitors in the short term), it is almost impossible to conceive of the myriad ways in which the market could adapt. Indeed, it is today’s supra-competitive profits that spur the efforts of competitors.

Surmising that the economy will come to be dominated by a small number of successful firms is thus the same as believing that all market participants can be outsmarted by a few successful ones. This might occur in some cases or for some period of time, but as our article argues, it is bound to happen far less often than pessimists fear.

In short, dystopian scholars have not successfully made the case for precautionary antitrust. Indeed, the economic features of data make it highly unlikely that today’s tech giants could anticompetitively maintain their advantage for an indefinite amount of time, much less leverage this advantage in adjacent markets.

With this in mind, there is one dystopian novel that offers a fitting metaphor to end this Article. The Man in the High Castle tells the story of an alternate present, where Axis forces triumphed over the Allies during the second World War. This turns the dystopia genre on its head: rather than argue that the world is inevitably sliding towards a dark future, The Man in the High Castle posits that the present could be far worse than it is.

In other words, we should not take any of the luxuries we currently enjoy for granted. In the world of antitrust, critics routinely overlook that the emergence of today’s tech industry might have occurred thanks to, and not in spite of, existing antitrust doctrine. Changes to existing antitrust law should thus be dictated by a rigorous assessment of the various costs and benefits they would entail, rather than a litany of hypothetical concerns. The most recent wave of calls for antitrust reform have so far failed to clear this low bar.

[This post adapts elements of “Technology Mergers and the Market for Corporate Control,” forthcoming in the Missouri Law Review.]

In recent years, a growing chorus of voices has argued that existing merger rules fail to apprehend competitively significant mergers, either because they fall below existing merger-filing thresholds or because they affect innovation in ways that are purportedly ignored.

These fears are particularly acute in the pharmaceutical and tech industries, where several high-profile academic articles and reports claim to have identified important gaps in current merger-enforcement rules, particularly with respect to acquisitions involving nascent and potential competitors (here, here, and here, among many others).

Such fears have led activists, lawmakers, and enforcers to call for tougher rules, including the introduction of more stringent merger-filing thresholds and other substantive changes, such as the inversion of the burden of proof when authorities review mergers and acquisitions involving digital platforms.

However, as we discuss in a recent working paper—forthcoming in the Missouri Law Review and available on SSRN—these proposals tend to overlook the important tradeoffs that would ensue from attempts to decrease the number of false positives under existing merger rules and thresholds.

The paper draws from two key strands of economic literature that are routinely overlooked (or summarily dismissed) by critics of the status quo.

For a start, antitrust enforcement is not costless. In the case of merger enforcement, not only is it expensive for agencies to detect anticompetitive deals but, more importantly, overbearing rules may deter beneficial merger activity that creates value for consumers.

Second, critics tend to overlook the possibility that incumbents’ superior managerial or other capabilities (i.e., what made them successful in the first place) makes them the ideal acquisition partners for entrepreneurs and startup investors looking to sell.

The result is a body of economic literature that focuses almost entirely on hypothetical social costs, while ignoring the redeeming benefits of corporate acquisitions, as well as the social cost of enforcement.

Kill Zones

One of the most significant allegations leveled against large tech firms is that their very presence in a market may hinder investments, entry, and innovation, creating what some have called a “kill zone.” The strongest expression in the economic literature of this idea of a kill zone stems from a working paper by Sai Krishna Kamepalli, Raghuram Rajan, and Luigi Zingales.

The paper makes two important claims, one theoretical and one empirical. From a theoretical standpoint, the authors argue that the prospect of an acquisition by a dominant platform deters consumers from joining rival platforms, and that this, in turn, hampers the growth of these rivals. The authors then test a similar hypothesis empirically. They find that acquisitions by a dominant platform—such as Google or Facebook—decrease investment levels and venture capital deals in markets that are “similar” to that of the target firm.

But both findings are problematic. For a start, Zingales and his co-authors’ theoretical model is premised on questionable assumptions about the way in which competition develops in the digital space. The first is that early adopters of new platforms—called “techies” in the authors’ parlance—face high switching costs because of their desire to learn these platforms in detail. As an initial matter, it would appear facially contradictory that “techies” both are the group with the highest switching costs and that they switch the most. The authors further assume that “techies” would incur lower adoption costs if they remained on the incumbent platform and waited for the rival platform to be acquired.

Unfortunately, while these key behavioral assumptions drive the results of the theoretical model, the paper presents no evidence to support their presence in real-world settings. In that sense, the authors commit the same error as previous theoretical work concerning externalities, which have tended to overestimate their frequency.

Second, the empirical analysis put forward in the paper is unreliable for policymaking purposes. The authors notably find that:

[N]ormalized VC investments in start-ups in the same space as the company acquired by Google and Facebook drop by over 40% and the number of deals falls by over 20% in the three years following an acquisition.

However, the results of this study are derived from the analysis of only nine transactions. The study also fails to clearly show that firms in the treatment and controls are qualitatively similar. In a nutshell, the study compares industry acquisitions exceeding $500 million to Facebook and Google’s acquisitions that exceed that amount. This does not tell us whether the mergers in both groups involved target companies with similar valuations or similar levels of maturity. This does not necessarily invalidate the results, but it does suggest that policymakers should be circumspect in interpreting those results.

Finally, the paper fails to demonstrate evidence that existing antitrust regimes fail to achieve an optimal error-cost balance. The central problem is that the paper has indeterminate welfare implications. For instance, as the authors note, the declines in investment in spaces adjacent to the incumbent platforms occurred during a time of rapidly rising venture capital investment, both in terms of the number of deals and dollars invested. It is entirely plausible that venture capital merely shifted to other sectors.

Put differently, on its own terms, the evidence merely suggests that acquisitions by Google and Facebook affected the direction of innovation, not its overall rate. And there is little to suggest that this shift was suboptimal, from a welfare standpoint.

In short, as the authors themselves conclude: “[i]t would be premature to draw any policy conclusion on antitrust enforcement based solely on our model and our limited evidence.”

Mergers and Potential Competition

Scholars have also posited more direct effects from acquisitions of startups or nascent companies by incumbent technology market firms.

Some scholars argue that incumbents might acquire rivals that do not yet compete with them directly, in order to reduce the competitive pressure they will face in the future. In his paper “Potential Competition and Antitrust Analysis: Monopoly Profits Exceed Duopoly Profits,” Steven Salop argues:

Acquisitions of potential or nascent competitors by a dominant firm raise inherent anticompetitive concerns. By eliminating the procompetitive impact of the entry, an acquisition can allow the dominant firm to continue to exercise monopoly power and earn monopoly profits. The dominant firm also can neutralize the potential innovation competition that the entrant would provide.

However, these antitrust theories of harm suffer from several important flaws. They rest upon several restrictive assumptions that are not certain to occur in real-world settings. Most are premised on the notion that, in a given market, monopoly profits generally exceed joint duopoly profits. This allegedly makes it profitable, and mutually advantageous, for an incumbent to protect its monopoly position by preemptively acquiring potential rivals.

Accordingly, under these theories, anticompetitive mergers are only possible when the acquired rival could effectively challenge the incumbent. But these are, of course, only potential challengers; there is no guarantee that any one of them could or would mount a viable competitive threat.

Less obviously, it must be the case that the rival can hope to share only duopoly profits, as opposed to completely overthrowing the incumbent or surpassing them with a significantly larger share of the market. Where competition is “for the market” itself, monopoly maintenance would fail to explain a rival’s decision to sell.  Because there would be no asymmetry between the expected profits of the incumbent and the rival, monopoly maintenance alone would not give rise to mutually advantageous deals.

Second, potential competition does not always increase consumer welfare.  Indeed, while the presence of potential competitors might increase price competition, it can also have supply-side effects that cut in the opposite direction.

For example, as Nobel laureate Joseph Stiglitz observed, a monopolist threatened by potential competition may invest in socially wasteful R&D efforts or entry-deterrence mechanisms, and it may operate at below-optimal scale in anticipation of future competitive entry.

There are also pragmatic objections. Analyzing a merger’s effect on potential competition would compel antitrust authorities and courts to make increasingly speculative assessments concerning the counterfactual setting of proposed acquisitions.

In simple terms, it is far easier to determine whether a merger between McDonald’s and Burger King would lead to increased hamburger prices in the short run than it is to determine whether a gaming platform like Steam or the Epic Games Store might someday compete with video-streaming or music-subscription platforms like Netflix or Spotify. It is not that the above models are necessarily wrong, but rather that applying them to practical cases would require antitrust enforcers to estimate mostly unknowable factors.

Finally, the real test for regulators is not just whether they can identify possibly anticompetitive mergers, but whether they can do so in a cost-effective manner. Whether it is desirable to implement a given legal test is not simply a function of its accuracy, the cost to administer it, and the respective costs of false positives and false negatives. It also critically depends on how prevalent the conduct is that adjudicators would be seeking to foreclose.

Consider two hypothetical settings. Imagine there are 10,000 tech mergers in a given year, of which either 1,000 or 2,500 are anticompetitive (the remainder are procompetitive or competitively neutral). Suppose that authorities can either attempt to identify anticompetitive mergers with 75% accuracy, or perform no test at all—i.e., letting all mergers go through unchallenged.

If there are 1,000 anticompetitive mergers, applying the test would result in 7,500 correct decisions and 2,500 incorrect ones (2,250 false positives and 250 false negatives). Doing nothing would lead to 9,000 correct decisions and 1,000 false negatives. If the number of anticompetitive deals were 2,500, applying the test would lead to the same number of incorrect decisions as not applying it (1,875 false positives and 625 false negatives, versus 2,500 false negatives). The advantage would tilt toward applying the test if anticompetitive mergers were even more widespread.

This hypothetical example holds a simple lesson for policymakers: the rarer the conduct that they are attempting to identify, the more accurate their identification method must be, and the more costly false negatives must be relative to false positives.

As discussed below, current empirical evidence does not suggest that anticompetitive mergers of this sort are particularly widespread, nor does it offer accurate heuristics to detect the ones that are. Finally, there is little sense that the cost of false negatives significantly outweighs that of false positives. In short, there is currently little evidence to suggest that tougher enforcement would benefit consumers.

Killer Acquisitions

Killer acquisitions are, effectively, a subset of the “potential competitor” mergers discussed in the previous section. As defined by Colleen Cunningham, Florian Ederer, and Song Ma, they are those deals where “an incumbent firm may acquire an innovative target and terminate the development of the target’s innovations to preempt future competition.”

Cunningham, Ederer, and Ma’s highly influential paper on killer acquisitions has been responsible for much of the recent renewed interest in the effect that mergers exert on innovation. The authors studied thousands of pharmaceutical mergers and concluded that between 5.3% and 7.4% of them were killer acquisitions. As they write:

[W]e empirically compare development probabilities of overlapping acquisitions, which are, in our theory, motivated by a mix of killer and development intentions, and non-overlapping acquisitions, which are motivated only by development intentions. We find an increase in acquisition probability and a decrease in post-acquisition development for overlapping acquisitions and interpret that as evidence for killer acquisitions. […]

[W]e find that projects acquired by an incumbent with an overlapping drug are 23.4% less likely to have continued development activity compared to drugs acquired by non-overlapping incumbents.

From a policy standpoint, the question is what weight antitrust authorities, courts, and legislators should give to these findings. Stated differently, does the paper provide sufficient evidence to warrant reform of existing merger-filing thresholds and review standards? There are several factors counseling that policymakers should proceed with caution.

To start, the study’s industry-specific methodology means that it may not be a useful guide to understand acquisitions in other industries, like the tech sector, for example.

Second, even if one assumes that the findings of Cunningham, et al., are correct and apply with equal force in the tech sector (as some official reports have), it remains unclear whether the 5.3–7.4% of mergers they describe warrant a departure from the status quo.

Antitrust enforcers operate under uncertainty. The critical policy question is thus whether this subset of anticompetitive deals can be identified ex-ante. If not, is there a heuristic that would enable enforcers to identify more of these anticompetitive deals without producing excessive false positives?

The authors focus on the effect that overlapping R&D pipelines have on project discontinuations. In the case of non-overlapping mergers, acquired projects continue 17.5% of the time, while this number is 13.4% when there are overlapping pipelines. The authors argue that this gap is evidence of killer acquisitions. But it misses the bigger picture: under the authors’ own numbers and definition of a “killer acquisition,” a vast majority of overlapping acquisitions are perfectly benign; prohibiting them would thus have important social costs.

Third, there are several problems with describing this kind of behavior as harmful. Indeed, Cunningham, et al., acknowledge that this kind of behavior could increase innovation by boosting the returns to innovation.

And even if one ignores incentives to innovate, product discontinuations can improve consumer welfare. This question ultimately boils down to identifying the counterfactual to a merger. As John Yun writes:

For instance, an acquisition that results in a discontinued product is not per se evidence of either consumer harm or benefit. The answer involves comparing the counterfactual world without the acquisition with the world with the acquisition. The comparison includes potential efficiencies that were gained from the acquisition, including integration of intellectual property, the reduction of transaction costs, economies of scope, and better allocation of skilled labor.

One of the reasons R&D project discontinuation may be beneficial is simply cost savings. R&D is expensive. Pharmaceutical firms spend up to 27.8% of their annual revenue on R&D. Developing a new drug has an estimated median cost of $985.3 million. Cost-cutting—notably as it concerns R&D—is thus a critical part of pharmaceutical (as well as tech) companies’ businesses. As a report by McKinsey concludes:

The recent boom in M&A in the pharma industry is partly the result of attempts to address short-term productivity challenges. An acquiring or merging company typically designs organization-wide integration programs to capture synergies, especially in costs. Such programs usually take up to three years to complete and deliver results.

Another report finds that:

Maximizing the efficiency of production labor and equipment is one important way top-quartile drugmakers break out of the pack. Their rates of operational-equipment effectiveness are more than twice those of bottom-quartile companies (Exhibit 1), and when we looked closely we found that processes account for two-thirds of the difference.

In short, pharmaceutical companies do not just compete along innovation-related parameters, though these are obviously important, but also on more traditional grounds such as cost-rationalization. Accordingly, as the above reports suggest, pharmaceutical mergers are often about applying an incumbent’s superior managerial efficiency to the acquired firm’s assets through operation of the market for corporate control.

This cost-cutting (and superior project selection) ultimately enables companies to offer lower prices, thereby benefiting consumers and increasing their incentives to invest in R&D in the first place by making successfully developed drugs more profitable.

In that sense, Henry Manne’s seminal work relating to mergers and the market for corporate control sheds at least as much light on pharmaceutical (and tech) mergers as the killer acquisitions literature. And yet, it is hardly ever mentioned in modern economic literature on this topic.

While Colleen Cunningham and her co-authors do not entirely ignore these considerations, as we discuss in our paper, their arguments for dismissing them are far from watertight.

A natural extension of the killer acquisitions work is to question whether mergers of this sort also take place in the tech industry. Interest in this question is notably driven by the central role that digital markets currently occupy in competition-policy discussion, but also by the significant number of startup acquisitions that take place in the tech industry. However, existing studies provide scant evidence that killer acquisitions are a common occurrence in these markets.

This is not surprising. Unlike in the pharmaceutical industry—where drugs need to go through a lengthy and visible regulatory pipeline before they can be sold—incumbents in digital industries will likely struggle to identify their closest rivals and prevent firms from rapidly pivoting to seize new commercial opportunities. As a result, the basic conditions for killer acquisitions to take place (i.e., firms knowing they are in a position to share monopoly profits) are less likely to be present; it also would be harder to design research methods to detect these mergers.

The empirical literature on killer acquisitions in the tech sector is still in its infancy. But, as things stand, no study directly examines whether killer acquisitions actually take place in digital industries (i.e., whether post-merger project discontinuations are more common in overlapping than non-overlapping tech mergers). This is notably the case for studies by Axel Gautier & Joe Lamesch, and Elena Argentesi and her co-authors. Instead, these studies merely show that product discontinuations are common after an acquisition by a big tech company.

To summarize, while studies of this sort might suggest that the clearance of certain mergers might not have been optimal, it is hardly a sufficient basis on which to argue that enforcement should be tightened.

The reason for this is simple. The fact that some anticompetitive mergers may have escaped scrutiny and/or condemnation is never a sufficient basis to tighten rules. For that, it is also necessary to factor in the administrative costs of increased enforcement, as well as potential false convictions to which it might give rise. As things stand, economic research on killer acquisitions in the tech sector does not warrant tougher antitrust enforcement, though it does show the need for further empirical research on the topic.

Conclusion

Many proposed merger-enforcement reforms risk throwing the baby out with the bathwater. Mergers are largely beneficial to society (here, here and here); anticompetitive ones are rare; and there is little way, at the margin, to tell good from bad. To put it mildly, there is a precious baby that needs to be preserved and relatively little bathwater to throw out.

Take the fulcrum of policy debates that is the pharmaceutical industry. It is not hard to point to pharmaceutical mergers (or long-term agreements) that have revolutionized patient outcomes. Most recently, Pfizer and BioNTech’s efforts to successfully market an mRNA vaccine against COVID-19 offers a case in point.

The deal struck by both firms could naïvely be construed as bearing hallmarks of a killer acquisition or an anticompetitive agreement (long-term agreements can easily fall into either of these categories). Pfizer was a powerful incumbent in the vaccine industry; BioNTech threatened to disrupt the industry with new technology; and the deal likely caused Pfizer to forgo some independent R&D efforts. And yet, it also led to the first approved COVID-19 vaccine and groundbreaking advances in vaccine technology.

Of course, the counterfactual is unclear, and the market might be more competitive absent the deal, just as there might be only one approved mRNA vaccine today instead of two—we simply do not know. More importantly, this counterfactual was even less knowable at the time of the deal. And much the same could be said about countless other pharmaceutical mergers.

The key policy question is how authorities should handle this uncertainty. Critics of the status quo argue that current rules and thresholds leave certain anticompetitive deals unchallenged. But these calls for tougher enforcement fail to satisfy the requirements of the error-cost framework. Critics have so far failed to show that, on balance, mergers harm social welfare—even overlapping ones or mergers between potential competitors—just as they are yet to suggest alternative institutional arrangements that would improve social welfare.

In other words, they mistakenly analyze purported false negatives of merger-enforcement regimes in isolation. In doing so, they ignore how measures that aim to reduce such judicial errors may lead to other errors, as well as higher enforcement costs. In short, they paint a world where policy decisions involve facile tradeoffs, and this undermines their policy recommendations.

Given these significant limitations, this body of academic research should be met with an appropriate degree of caution. For all the criticism it has faced, the current merger-review system is mostly a resounding success. It is administrable, predictable, and timely. Yet it also eliminates a vast majority of judicial errors: even its critics concede that false negatives make up only a tiny fraction of decisions. Policymakers must decide whether the benefits from catching the very few arguably anticompetitive mergers that currently escape prosecution outweigh the significant costs that are required to achieve this goal. There is currently little evidence to suggest that this is, indeed, the case.

In recent years, a diverse cross-section of advocates and politicians have leveled criticisms at Section 230 of the Communications Decency Act and its grant of legal immunity to interactive computer services. Proposed legislative changes to the law have been put forward by both Republicans and Democrats.

It remains unclear whether Congress (or the courts) will amend Section 230, but any changes are bound to expand the scope, uncertainty, and expense of content risks. That’s why it’s important that such changes be developed and implemented in ways that minimize their potential to significantly disrupt and harm online activity. This piece focuses on those insurable content risks that most frequently result in litigation and considers the effect of the direct and indirect costs caused by frivolous suits and lawfare, not just the ultimate potential for a court to find liability. The experience of the 1980s asbestos-litigation crisis offers a warning of what could go wrong.

Enacted in 1996, Section 230 was intended to promote the Internet as a diverse medium for discourse, cultural development, and intellectual activity by shielding interactive computer services from legal liability when blocking or filtering access to obscene, harassing, or otherwise objectionable content. Absent such immunity, a platform hosting content produced by third parties could be held equally responsible as the creator for claims alleging defamation or invasion of privacy.

In the current legislative debates, Section 230’s critics on the left argue that the law does not go far enough to combat hate speech and misinformation. Critics on the right claim the law protects censorship of dissenting opinions. Legal challenges to the current wording of Section 230 arise primarily from what constitutes an “interactive computer service,” “good faith” restriction of content, and the grant of legal immunity, regardless of whether the restricted material is constitutionally protected. 

While Congress and various stakeholders debate various alternate statutory frameworks, several test cases simultaneously have been working their way through the judicial system and some states have either passed or are considering legislation to address complaints with Section 230. Some have suggested passing new federal legislation classifying online platforms as common carriers as an alternate approach that does not involve amending or repealing Section 230. Regardless of the form it may take, change to the status quo is likely to increase the risk of litigation and liability for those hosting or publishing third-party content.

The Nature of Content Risk

The class of individuals and organizations exposed to content risk has never been broader. Any information, content, or communication that is created, gathered, compiled, or amended can be considered “material” which, when disseminated to third parties, may be deemed “publishing.” Liability can arise from any step in that process. Those who republish material are generally held to the same standard of liability as if they were the original publisher. (See, e.g., Rest. (2d) of Torts § 578 with respect to defamation.)

Digitization has simultaneously reduced the cost and expertise required to publish material and increased the potential reach of that material. Where it was once limited to books, newspapers, and periodicals, “publishing” now encompasses such activities as creating and updating a website; creating a podcast or blog post; or even posting to social media. Much of this activity is performed by individuals and businesses who have only limited experience with the legal risks associated with publishing.

This is especially true regarding the use of third-party material, which is used extensively by both sophisticated and unsophisticated platforms. Platforms that host third-party-generated content—e.g., social media or websites with comment sections—have historically engaged in only limited vetting of that content, although this is changing. When combined with the potential to reach consumers far beyond the original platform and target audience—lasting digital traces that are difficult to identify and remove—and the need to comply with privacy and other statutory requirements, the potential for all manner of “publishers” to incur legal liability has never been higher.

Even sophisticated legacy publishers struggle with managing the litigation that arises from these risks. There are a limited number of specialist counsel, which results in higher hourly rates. Oversight of legal bills is not always effective, as internal counsel often have limited resources to manage their daily responsibilities and litigation. As a result, legal fees often make up as much as two-thirds of the average claims cost. Accordingly, defense spending and litigation management are indirect, but important, risks associated with content claims.

Effective risk management is any publisher’s first line of defense. The type and complexity of content risk management varies significantly by organization, based on its size, resources, activities, risk appetite, and sophistication. Traditional publishers typically have a formal set of editorial guidelines specifying policies governing the creation of content, pre-publication review, editorial-approval authority, and referral to internal and external legal counsel. They often maintain a library of standardized contracts; have a process to periodically review and update those wordings; and a process to verify the validity of a potential licensor’s rights. Most have formal controls to respond to complaints and to retraction/takedown requests.

Insuring Content Risks

Insurance is integral to most publishers’ risk-management plans. Content coverage is present, to some degree, in most general liability policies (i.e., for “advertising liability”). Specialized coverage—commonly referred to as “media” or “media E&O”—is available on a standalone basis or may be packaged with cyber-liability coverage. Terms of specialized coverage can vary significantly, but generally provides at least basic coverage for the three primary content risks of defamation, copyright infringement, and invasion of privacy.

Insureds typically retain the first dollar loss up to a specific dollar threshold. They may also retain a coinsurance percentage of every dollar thereafter in partnership with their insurer. For example, an insured may be responsible for the first $25,000 of loss, and for 10% of loss above that threshold. Such coinsurance structures often are used by insurers as a non-monetary tool to help control legal spending and to incentivize an organization to employ effective oversight of counsel’s billing practices.

The type and amount of loss retained will depend on the insured’s size, resources, risk profile, risk appetite, and insurance budget. Generally, but not always, increases in an insured’s retention or an insurer’s attachment (e.g., raising the threshold to $50,000, or raising the insured’s coinsurance to 15%) will result in lower premiums. Most insureds will seek the smallest retention feasible within their budget. 

Contract limits (the maximum coverage payout available) will vary based on the same factors. Larger policyholders often build a “tower” of insurance made up of multiple layers of the same or similar coverage issued by different insurers. Two or more insurers may partner on the same “quota share” layer and split any loss incurred within that layer on a pre-agreed proportional basis.  

Navigating the strategic choices involved in developing an insurance program can be complex, depending on an organization’s risks. Policyholders often use commercial brokers to aide them in developing an appropriate risk-management and insurance strategy that maximizes coverage within their budget and to assist with claims recoveries. This is particularly important for small and mid-sized insureds who may lack the sophistication or budget of larger organizations. Policyholders and brokers try to minimize the gaps in coverage between layers and among quota-share participants, but such gaps can occur, leaving a policyholder partially self-insured.

An organization’s options to insure its content risk may also be influenced by the dynamics of the overall insurance market or within specific content lines. Underwriters are not all created equal; it is a challenging responsibility requiring a level of prediction, and some underwriters may fail to adequately identify and account for certain risks. It can also be challenging to accurately measure risk aggregation and set appropriate reserves. An insurer’s appetite for certain lines and the availability of supporting reinsurance can fluctuate based on trends in the general capital markets. Specialty media/content coverage is a small niche within the global commercial insurance market, which makes insurers in this line more sensitive to these general trends.

Litigation Risks from Changes to Section 230

A full repeal or judicial invalidation of Section 230 generally would make every platform responsible for all the content they disseminate, regardless of who created the material requiring at least some additional editorial review. This would significantly disadvantage those platforms that host a significant volume of third-party content. Internet service providers, cable companies, social media, and product/service review companies would be put under tremendous strain, given the daily volume of content produced. To reduce the risk that they serve as a “deep pocket” target for plaintiffs, they would likely adopt more robust pre-publication screening of content and authorized third-parties; limit public interfaces; require registration before a user may publish content; employ more reactive complaint response/takedown policies; and ban problem users more frequently. Small and mid-sized enterprises (SMEs), as well as those not focused primarily on the business of publishing, would likely avoid many interactive functions altogether. 

A full repeal would be, in many ways, a blunderbuss approach to dealing with criticisms of Section 230, and would cause as many or more problems as it solves. In the current polarized environment, it also appears unlikely that Congress will reach bipartisan agreement on amended language for Section 230, or to classify interactive computer services as common carriers, given that the changes desired by the political left and right are so divergent. What may be more likely is that courts encounter a test case that prompts them to clarify the application of the existing statutory language—i.e., whether an entity was acting as a neutral platform or a content creator, whether its conduct was in “good faith,” and whether the material is “objectionable” within the meaning of the statute.

A relatively greater frequency of litigation is almost inevitable in the wake of any changes to the status quo, whether made by Congress or the courts. Major litigation would likely focus on those social-media platforms at the center of the Section 230 controversy, such as Facebook and Twitter, given their active role in these issues, deep pockets and, potentially, various admissions against interest helpful to plaintiffs regarding their level of editorial judgment. SMEs could also be affected in the immediate wake of a change to the statute or its interpretation. While SMEs are likely to be implicated on a smaller scale, the impact of litigation could be even more damaging to their viability if they are not adequately insured.

Over time, the boundaries of an amended Section 230’s application and any consequential effects should become clearer as courts develop application criteria and precedent is established for different fact patterns. Exposed platforms will likely make changes to their activities and risk-management strategies consistent with such developments. Operationally, some interactive features—such as comment sections or product and service reviews—may become less common.

In the short and medium term, however, a period of increased and unforeseen litigation to resolve these issues is likely to prove expensive and damaging. Insurers of content risks are likely to bear the brunt of any changes to Section 230, because these risks and their financial costs would be new, uncertain, and not incorporated into historical pricing of content risk. 

Remembering the Asbestos Crisis

The introduction of a new exposure or legal risk can have significant financial effects on commercial insurance carriers. New and revised risks must be accounted for in the assumptions, probabilities, and load factors used in insurance pricing and reserving models. Even small changes in those values can have large aggregate effects, which may undermine confidence in those models, complicate obtaining reinsurance, or harm an insurer’s overall financial health.

For example, in the 1980s, certain courts adopted the triple-trigger and continuous trigger methods[1] of determining when a policyholder could access coverage under an “occurrence” policy for asbestos claims. As a result, insurers paid claims under policies dating back to the early 1900s and, in some cases, under all policies from that date until the date of the claim. Such policies were written when mesothelioma related to asbestos was unknown and not incorporated into the policy pricing.

Insurers had long-since released reserves from the decades-old policy years, so those resources were not available to pay claims. Nor could underwriters retroactively increase premiums for the intervening years and smooth out the cost of these claims. This created extreme financial stress for impacted insurers and reinsurers, with some ultimately rendered insolvent. Surviving carriers responded by drastically reducing coverage and increasing prices, which resulted in a major capacity shortage that resolved only after the creation of the Bermuda insurance and reinsurance market. 

The asbestos-related liability crisis represented a perfect storm that is unlikely to be replicated. Given the ubiquitous nature of digital content, however, any drastic or misconceived changes to Section 230 protections could still cause significant disruption to the commercial insurance market. 

Content risk is covered, at least in part, by general liability and many cyber policies, but it is not currently a primary focus for underwriters. Specialty media underwriters are more likely to be monitoring Section 230 risk, but the highly competitive market will make it difficult for them to respond to any changes with significant price increases. In addition, the current market environment for U.S. property and casualty insurance generally is in the midst of correcting for years of inadequate pricing, expanding coverage, developing exposures, and claims inflation. It would be extremely difficult to charge an adequate premium increase if the potential severity of content risk were to increase suddenly.

In the face of such risk uncertainty and challenges to adequately increasing premiums, underwriters would likely seek to reduce their exposure to online content risks, i.e., by reducing the scope of coverage, reducing limits, and increasing retentions. How these changes would manifest, and the pain for all involved, would likely depend on how quickly such changes in policyholders’ risk profiles manifest. 

Small or specialty carriers caught unprepared could be forced to exit the market if they experienced a sharp spike in claims or unexpected increase in needed reserves. Larger, multiline carriers may respond by voluntarily reducing or withdrawing their participation in this space. Insurers exposed to ancillary content risk may simply exclude it from cover if adequate price increases are impractical. Such reactions could result in content coverage becoming harder to obtain or unavailable altogether. This, in turn, would incentivize organizations to limit or avoid certain digital activities.

Finding a More Thoughtful Approach

The tension between calls for reform of Section 230 and the potential for disrupting online activity does not mean that political leaders and courts should ignore these issues. Rather, it means that what’s required is a thoughtful, clear, and predictable approach to any changes, with the goal of maximizing the clarity of the changes and their application and minimizing any resulting litigation. Regardless of whether accomplished through legislation or the judicial process, addressing the following issues could minimize the duration and severity of any period of harmful disruption regarding content-risk:

  1. Presumptive immunity – Including an express statement in the definition of “interactive computer service,” or inferring one judicially, to clarify that platforms hosting third-party content enjoy a rebuttable presumption that statutory immunity applies would discourage frivolous litigation as courts establish precedent defining the applicability of any other revisions. 
  1. Specify the grounds for losing immunity – Clarify, at a minimum, what constitutes “good faith” with respect to content restrictions and further clarify what material is or is not “objectionable,” as it relates to newsworthy content or actions that trigger loss of immunity.
  1. Specify the scope and duration of any loss of immunity – Clarify whether the loss of immunity is total, categorical, or specific to the situation under review and the duration of that loss of immunity, if applicable.
  1. Reinstatement of immunity, subject to burden-shifting – Clarify what a platform must do to reinstate statutory immunity on a go-forward basis and clarify that it bears the burden of proving its go-forward conduct entitled it to statutory protection.
  1. Address associated issues – Any clarification or interpretation should address other issues likely to arise, such as the effect and weight to be given to a platform’s application of its community standards, adherence to neutral takedown/complain procedures, etc. Care should be taken to avoid overcorrecting and creating a “heckler’s veto.” 
  1. Deferred effect – If change is made legislatively, the effective date should be deferred for a reasonable time to allow platforms sufficient opportunity to adjust their current risk-management policies, contractual arrangements, content publishing and storage practices, and insurance arrangements in a thoughtful, orderly fashion that accounts for the new rules.

Ultimately, legislative and judicial stakeholders will chart their own course to address the widespread dissatisfaction with Section 230. More important than any of these specific policy suggestions is the principle underpins them: that any changes incorporate due consideration for the potential direct and downstream harm that can be caused if policy is not clear, comprehensive, and designed to minimize unnecessary litigation. 

It is no surprise that, in the years since Section 230 of the Communications Decency Act was passed, the environment and risks associated with digital platforms have evolved or that those changes have created a certain amount of friction in the law’s application. Policymakers should employ a holistic approach when evaluating their legislative and judicial options to revise or clarify the application of Section 230. Doing so in a targeted, predictable fashion should help to mitigate or avoid the risk of increased litigation and other unintended consequences that might otherwise prove harmful to online platforms in the commercial insurance market.

Aaron Tilley is a senior insurance executive with more than 16 years of commercial insurance experience in executive management, underwriting, legal, and claims working in or with the U.S., Bermuda, and London markets. He has served as chief underwriting officer of a specialty media E&O and cyber-liability insurer and as coverage counsel representing international insurers with respect to a variety of E&O and advertising liability claims


[1] The triple-trigger method allowed a policy to be accessed based on the date of the injury-in-fact, manifestation of injury, or exposure to substances known to cause injury. The continuous trigger allowed all policies issued by an insurer, not just one, to be accessed if a triggering event could be established during the policy period.

In a recent op-ed, Robert Bork Jr. laments the Biden administration’s drive to jettison the Consumer Welfare Standard that has formed nearly half a century of antitrust jurisprudence. The move can be seen in the near-revolution at the Federal Trade Commission, in the president’s executive order on competition enforcement, and in several of the major antitrust bills currently before Congress.

Bork notes the Competition and Antitrust Law Enforcement Reform Act, introduced by Sen. Amy Klobuchar (D-Minn.), would “outlaw any mergers or acquisitions for the more than 80 large U.S. companies valued over $100 billion.”

Bork is correct that it will be more than 80 companies, but it is likely to be way more. While the Klobuchar bill does not explicitly outlaw such mergers, under certain circumstances, it shifts the burden of proof to the merging parties, who must demonstrate that the benefits of the transaction outweigh the potential risks. Under current law, the burden is on the government to demonstrate the potential costs outweigh the potential benefits.

One of the measure’s specific triggers for this burden-shifting is if the acquiring party has a market capitalization, assets, or annual net revenue of more than $100 billion and seeks a merger or acquisition valued at $50 million or more. About 120 or more U.S. companies satisfy at least one of these conditions. The end of this post provides a list of publicly traded companies, according to Zacks’ stock screener, that would likely be subject to the shift in burden of proof.

If the goal is to go after Big Tech, the Klobuchar bill hits the mark. All of the FAANG companies—Facebook, Amazon, Apple, Netflix, and Alphabet (formerly known as Google)—satisfy one or more of the criteria. So do Microsoft and PayPal.

But even some smaller tech firms will be subject to the shift in burden of proof. Zoom and Square have market caps that would trigger under Klobuchar’s bill and Snap is hovering around $100 billion in market cap. Twitter and eBay, however, are well under any of the thresholds. Likewise, privately owned Advance Communications, owner of Reddit, would also likely fall short of any of the triggers.

Snapchat has a little more than 300 million monthly active users. Twitter and Reddit each have about 330 million monthly active users. Nevertheless, under the Klobuchar bill, Snapchat is presumed to have more market power than either Twitter or Reddit, simply because the market assigns a higher valuation to Snap.

But this bill is about more than Big Tech. Tesla, which sold its first car only 13 years ago, is now considered big enough that it will face the same antitrust scrutiny as the Big 3 automakers. Walmart, Costco, and Kroger would be subject to the shifted burden of proof, while Safeway and Publix would escape such scrutiny. An acquisition by U.S.-based Nike would be put under the microscope, but a similar acquisition by Germany’s Adidas would not fall under the Klobuchar bill’s thresholds.

Tesla accounts for less than 2% of the vehicles sold in the United States. I have no idea what Walmart, Costco, Kroger, or Nike’s market share is, or even what comprises “the” market these companies compete in. What we do know is that the U.S. Department of Justice and Federal Trade Commission excel at narrowly crafting market definitions so that just about any company can be defined as dominant.

So much of the recent interest in antitrust has focused on Big Tech. But even the biggest of Big Tech firms operate in dynamic and competitive markets. None of my four children use Facebook or Twitter. My wife and I don’t use Snapchat. We all use Netflix, but we also use Hulu, Disney+, HBO Max, YouTube, and Amazon Prime Video. None of these services have a monopoly on our eyeballs, our attention, or our pocketbooks.

The antitrust bills currently working their way through Congress abandon the long-standing balancing of pro- versus anti-competitive effects of mergers in favor of a “big is bad” approach. While the Klobuchar bill appears to provide clear guidance on the thresholds triggering a shift in the burden of proof, the arbitrary nature of the thresholds will result in arbitrary application of the burden of proof. If passed, we will soon be faced with a case in which two firms who differ only in market cap, assets, or sales will be subject to very different antitrust scrutiny, resulting in regulatory chaos.

Publicly traded companies with more than $100 billion in market capitalization

3MDanaher Corp.PepsiCo
Abbott LaboratoriesDeere & Co.Pfizer
AbbVieEli Lilly and Co.Philip Morris International
Adobe Inc.ExxonMobilProcter & Gamble
Advanced Micro DevicesFacebook Inc.Qualcomm
Alphabet Inc.General Electric Co.Raytheon Technologies
AmazonGoldman SachsSalesforce
American ExpressHoneywellServiceNow
American TowerIBMSquare Inc.
AmgenIntelStarbucks
Apple Inc.IntuitTarget Corp.
Applied MaterialsIntuitive SurgicalTesla Inc.
AT&TJohnson & JohnsonTexas Instruments
Bank of AmericaJPMorgan ChaseThe Coca-Cola Co.
Berkshire HathawayLockheed MartinThe Estée Lauder Cos.
BlackRockLowe’sThe Home Depot
BoeingMastercardThe Walt Disney Co.
Bristol Myers SquibbMcDonald’sThermo Fisher Scientific
Broadcom Inc.MedtronicT-Mobile US
Caterpillar Inc.Merck & Co.Union Pacific Corp.
Charles Schwab Corp.MicrosoftUnited Parcel Service
Charter CommunicationsMorgan StanleyUnitedHealth Group
Chevron Corp.NetflixVerizon Communications
Cisco SystemsNextEra EnergyVisa Inc.
CitigroupNike Inc.Walmart
ComcastNvidiaWells Fargo
CostcoOracle Corp.Zoom Video Communications
CVS HealthPayPal

Publicly traded companies with more than $100 billion in current assets

Ally FinancialFreddie Mac
American International GroupKeyBank
BNY MellonM&T Bank
Capital OneNorthern Trust
Citizens Financial GroupPNC Financial Services
Fannie MaeRegions Financial Corp.
Fifth Third BankState Street Corp.
First Republic BankTruist Financial
Ford Motor Co.U.S. Bancorp

Publicly traded companies with more than $100 billion in sales

AmerisourceBergenDell Technologies
AnthemGeneral Motors
Cardinal HealthKroger
Centene Corp.McKesson Corp.
CignaWalgreens Boots Alliance

[TOTM: The following is part of a symposium by TOTM guests and authors marking the release of Nicolas Petit’s “Big Tech and the Digital Economy: The Moligopoly Scenario.” The entire series of posts is available here.

This post is authored by Nicolas Petit himself, the Joint Chair in Competition Law at the Department of Law at European University Institute in Fiesole, Italy, and at EUI’s Robert Schuman Centre for Advanced Studies. He is also invited professor at the College of Europe in Bruges
.]

A lot of water has gone under the bridge since my book was published last year. To close this symposium, I thought I would discuss the new phase of antirust statutorification taking place before our eyes. In the United States, Congress is working on five antitrust bills that propose to subject platforms to stringent obligations, including a ban on mergers and acquisitions, required data portability and interoperability, and line-of-business restrictions. In the European Union (EU), lawmakers are examining the proposed Digital Markets Act (“DMA”) that sets out a complicated regulatory system for digital “gatekeepers,” with per se behavioral limitations of their freedom over contractual terms, technological design, monetization, and ecosystem leadership.

Proponents of legislative reform on both sides of the Atlantic appear to share the common view that ongoing antitrust adjudication efforts are both instrumental and irrelevant. They are instrumental because government (or plaintiff) losses build the evidence needed to support the view that antitrust doctrine is exceedingly conservative, and that legal reform is needed. Two weeks ago, antitrust reform activists ran to Twitter to point out that the U.S. District Court dismissal of the Federal Trade Commission’s (FTC) complaint against Facebook was one more piece of evidence supporting the view that the antitrust pendulum needed to swing. They are instrumental because, again, government (or plaintiffs) wins will support scaling antitrust enforcement in the marginal case by adoption of governmental regulation. In the EU, antitrust cases follow each other almost like night the day, lending credence to the view that regulation will bring much needed coordination and economies of scale.

But both instrumentalities are, at the end of the line, irrelevant, because they lead to the same conclusion: legislative reform is long overdue. With this in mind, the logic of lawmakers is that they need not await the courts, and they can advance with haste and confidence toward the promulgation of new antitrust statutes.

The antitrust reform process that is unfolding is a cause for questioning. The issue is not legal reform in itself. There is no suggestion here that statutory reform is necessarily inferior, and no correlative reification of the judge-made-law method. Legislative intervention can occur for good reason, like when it breaks judicial inertia caused by ideological logjam.

The issue is rather one of precipitation. There is a lot of learning in the cases. The point, simply put, is that a supplementary court-legislative dialogue would yield additional information—or what Guido Calabresi has called “starting points” for regulation—that premature legislative intervention is sweeping under the rug. This issue is important because specification errors (see Doug Melamed’s symposium piece on this) in statutory legislation are not uncommon. Feedback from court cases create a factual record that will often be missing when lawmakers act too precipitously.

Moreover, a court-legislative iteration is useful when the issues in discussion are cross-cutting. The digital economy brings an abundance of them. As tech analysist Ben Evans has observed, data-sharing obligations raise tradeoffs between contestability and privacy. Chapter VI of my book shows that breakups of social networks or search engines might promote rivalry and, at the same time, increase the leverage of advertisers to extract more user data and conduct more targeted advertising. In such cases, Calabresi said, judges who know the legal topography are well-placed to elicit the preferences of society. He added that they are better placed than government agencies’ officials or delegated experts, who often attend to the immediate problem without the big picture in mind (all the more when officials are denied opportunities to engage with civil society and the press, as per the policy announced by the new FTC leadership).

Of course, there are three objections to this. The first consists of arguing that statutes are needed now because courts are too slow to deal with problems. The argument is not dissimilar to Frank Easterbrook’s concerns about irreversible harms to the economy, though with a tweak. Where Easterbook’s concern was one of ossification of Type I errors due to stare decisis, the concern here is one of entrenchment of durable monopoly power in the digital sector due to Type II errors. The concern, however, fails the test of evidence. The available data in both the United States and Europe shows unprecedented vitality in the digital sector. Venture capital funding cruises at historical heights, fueling new firm entry, business creation, and economic dynamism in the U.S. and EU digital sectors, topping all other industries. Unless we require higher levels of entry from digital markets than from other industries—or discount the social value of entry in the digital sector—this should give us reason to push pause on lawmaking efforts.

The second objection is that following an incremental process of updating the law through the courts creates intolerable uncertainty. But this objection, too, is unconvincing, at best. One may ask which of an abrupt legislative change of the law after decades of legal stability or of an experimental process of judicial renovation brings more uncertainty.

Besides, ad hoc statutes, such as the ones in discussion, are likely to pose quickly and dramatically the problem of their own legal obsolescence. Detailed and technical statutes specify rights, requirements, and procedures that often do not stand the test of time. For example, the DMA likely captures Windows as a core platform service subject to gatekeeping. But is the market power of Microsoft over Windows still relevant today, and isn’t it constrained in effect by existing antitrust rules?  In antitrust, vagueness in critical statutory terms allows room for change.[1] The best way to give meaning to buzzwords like “smart” or “future-proof” regulation consists of building in first principles, not in creating discretionary opportunities for permanent adaptation of the law. In reality, it is hard to see how the methods of future-proof regulation currently discussed in the EU creates less uncertainty than a court process.

The third objection is that we do not need more information, because we now benefit from economic knowledge showing that existing antitrust laws are too permissive of anticompetitive business conduct. But is the economic literature actually supportive of stricter rules against defendants than the rule-of-reason framework that applies in many unilateral conduct cases and in merger law? The answer is surely no. The theoretical economic literature has travelled a lot in the past 50 years. Of particular interest are works on network externalities, switching costs, and multi-sided markets. But the progress achieved in the economic understanding of markets is more descriptive than normative.

Take the celebrated multi-sided market theory. The main contribution of the theory is its advice to decision-makers to take the periscope out, so as to consider all possible welfare tradeoffs, not to be more or less defendant friendly. Payment cards provide a good example. Economic research suggests that any antitrust or regulatory intervention on prices affect tradeoffs between, and payoffs to, cardholders and merchants, cardholders and cash users, cardholders and banks, and banks and card systems. Equally numerous tradeoffs arise in many sectors of the digital economy, like ridesharing, targeted advertisement, or social networks. Multi-sided market theory renders these tradeoffs visible. But it does not come with a clear recipe for how to solve them. For that, one needs to follow first principles. A system of measurement that is flexible and welfare-based helps, as Kelly Fayne observed in her critical symposium piece on the book.

Another example might be worth considering. The theory of increasing returns suggests that markets subject to network effects tend to converge around the selection of a single technology standard, and it is not a given that the selected technology is the best one. One policy implication is that social planners might be justified in keeping a second option on the table. As I discuss in Chapter V of my book, the theory may support an M&A ban against platforms in tipped markets, on the conjecture that the assets of fringe firms might be efficiently repositioned to offer product differentiation to consumers. But the theory of increasing returns does not say under what conditions we can know that the selected technology is suboptimal. Moreover, if the selected technology is the optimal one, or if the suboptimal technology quickly obsolesces, are policy efforts at all needed?

Last, as Bo Heiden’s thought provoking symposium piece argues, it is not a given that antitrust enforcement of rivalry in markets is the best way to maintain an alternative technology alive, let alone to supply the innovation needed to deliver economic prosperity. Government procurement, science and technology policy, and intellectual-property policy might be equally effective (note that the fathers of the theory, like Brian Arthur or Paul David, have been very silent on antitrust reform).

There are, of course, exceptions to the limited normative content of modern economic theory. In some areas, economic theory is more predictive of consumer harms, like in relation to algorithmic collusion, interlocking directorates, or “killer” acquisitions. But the applications are discrete and industry-specific. All are insufficient to declare that the antitrust apparatus is dated and that it requires a full overhaul. When modern economic research turns normative, it is often way more subtle in its implications than some wild policy claims derived from it. For example, the emerging studies that claim to identify broad patterns of rising market power in the economy in no way lead to an implication that there are no pro-competitive mergers.

Similarly, the empirical picture of digital markets is incomplete. The past few years have seen a proliferation of qualitative research reports on industry structure in the digital sectors. Most suggest that industry concentration has risen, particularly in the digital sector. As with any research exercise, these reports’ findings deserve to be subject to critical examination before they can be deemed supportive of a claim of “sufficient experience.” Moreover, there is no reason to subject these reports to a lower standard of accountability on grounds that they have often been drafted by experts upon demand from antitrust agencies. After all, we academics are ethically obliged to be at least equally exacting with policy-based research as we are with science-based research.

Now, with healthy skepticism at the back of one’s mind, one can see immediately that the findings of expert reports to date have tended to downplay behavioral observations that counterbalance findings of monopoly power—such as intense business anxiety, technological innovation, and demand-expansion investments in digital markets. This was, I believe, the main takeaway from Chapter IV of my book. And less than six months ago, The Economist ran its leading story on the new marketplace reality of “Tech’s Big Dust-Up.”

More importantly, the findings of the various expert reports never seriously contemplate the possibility of competition by differentiation in business models among the platforms. Take privacy, for example. As Peter Klein reasonably writes in his symposium article, we should not be quick to assume market failure. After all, we might have more choice than meets the eye, with Google free but ad-based, and Apple pricy but less-targeted. More generally, Richard Langlois makes a very convincing point that diversification is at the heart of competition between the large digital gatekeepers. We might just be too short-termist—here, digital communications technology might help create a false sense of urgency—to wait for the end state of the Big Tech moligopoly.

Similarly, the expert reports did not really question the real possibility of competition for the purchase of regulation. As in the classic George Stigler paper, where the railroad industry fought motor-trucking competition with state regulation, the businesses that stand to lose most from the digital transformation might be rationally jockeying to convince lawmakers that not all business models are equal, and to steer regulation toward specific business models. Again, though we do not know how to consider this issue, there are signs that a coalition of large news corporations and the publishing oligopoly are behind many antitrust initiatives against digital firms.

Now, as is now clear from these few lines, my cautionary note against antitrust statutorification might be more relevant to the U.S. market. In the EU, sunk investments have been made, expectations have been created, and regulation has now become inevitable. The United States, however, has a chance to get this right. Court cases are the way to go. And unlike what the popular coverage suggests, the recent District Court dismissal of the FTC case far from ruled out the applicability of U.S. antitrust laws to Facebook’s alleged killer acquisitions. On the contrary, the ruling actually contains an invitation to rework a rushed complaint. Perhaps, as Shane Greenstein observed in his retrospective analysis of the U.S. Microsoft case, we would all benefit if we studied more carefully the learning that lies in the cases, rather than haste to produce instant antitrust analysis on Twitter that fits within 280 characters.


[1] But some threshold conditions like agreement or dominance might also become dated.