The practice of so-called “self-preferencing” has come to embody the zeitgeist of competition policy for digital markets, as legislative initiatives are undertaken in jurisdictions around the world that to seek, in various ways, to constrain large digital platforms from granting favorable treatment to their own goods and services. The core concern cited by policymakers is that gatekeepers may abuse their dual role—as both an intermediary and a trader operating on the platform—to pursue a strategy of biased intermediation that entrenches their power in core markets (defensive leveraging) and extends it to associated markets (offensive leveraging).
In addition to active interventions by lawmakers, self-preferencing has also emerged as a new theory of harm before European courts and antitrust authorities. Should antitrust enforcers be allowed to pursue such a theory, they would gain significant leeway to bypass the legal standards and evidentiary burdens traditionally required to prove that a given business practice is anticompetitive. This should be of particular concern, given the broad range of practices and types of exclusionary behavior that could be characterized as self-preferencing—only some of which may, in some specific contexts, include exploitative or anticompetitive elements.
In a new working paper for the International Center for Law & Economics (ICLE), I provide an overview of the relevant traditional antitrust theories of harm, as well as the emerging case law, to analyze whether and to what extent self-preferencing should be considered a new standalone offense under EU competition law. The experience to date in European case law suggests that courts have been able to address platforms’ self-preferencing practices under existing theories of harm, and that it may not be sufficiently novel to constitute a standalone theory of harm.
European Case Law on Self-Preferencing
Practices by digital platforms that might be deemed self-preferencing first garnered significant attention from European competition enforcers with the European Commission’s Google Shoppinginvestigation, which examined whether the search engine’s results pages positioned and displayed its own comparison-shopping service more favorably than the websites of rival comparison-shopping services. According to the Commission’s findings, Google’s conduct fell outside the scope of competition on the merits and could have the effect of extending Google’s dominant position in the national markets for general Internet search into adjacent national markets for comparison-shopping services, in addition to protecting Google’s dominance in its core search market.
Rather than explicitly posit that self-preferencing (a term the Commission did not use) constituted a new theory of harm, the Google Shopping ruling described the conduct as belonging to the well-known category of “leveraging.” The Commission therefore did not need to propagate a new legal test, as it held that the conduct fell under a well-established form of abuse. The case did, however, spur debate over whether the legal tests the Commission did apply effectively imposed on Google a principle of equal treatment of rival comparison-shopping services.
But it should be noted that conduct similar to that alleged in the Google Shopping investigation actually came before the High Court of England and Wales several months earlier, this time in a dispute between Google and Streetmap. At issue in that case was favorable search results Google granted to its own maps, rather than to competing online maps. The UK Court held, however, that the complaint should have been appropriately characterized as an allegation of discrimination; it further found that Google’s conduct did not constitute anticompetitive foreclosure. A similar result was reached in May 2020 by the Amsterdam Court of Appeal in the Funda case.
Conversely, in June 2021, the French Competition Authority (AdlC) followed the European Commission into investigating Google’s practices in the digital-advertising sector. Like the Commission, the AdlC did not explicitly refer to self-preferencing, instead describing the conduct as “favoring.”
Given this background and the proliferation of approaches taken by courts and enforcers to address similar conduct, there was significant anticipation for the judgment that the European General Court would ultimately render in the appeal of the Google Shopping ruling. While the General Court upheld the Commission’s decision, it framed self-preferencing as a discriminatory abuse. Further, the Court outlined four criteria that differentiated Google’s self-preferencing from competition on the merits.
Specifically, the Court highlighted the “universal vocation” of Google’s search engine—that it is open to all users and designed to index results containing any possible content; the “superdominant” position that Google holds in the market for general Internet search; the high barriers to entry in the market for general search services; and what the Court deemed Google’s “abnormal” conduct—behaving in a way that defied expectations, given a search engine’s business model, and that changed after the company launched its comparison-shopping service.
While the precise contours of what the Court might consider discriminatory abuse aren’t yet clear, the decision’s listed criteria appear to be narrow in scope. This stands at odds with the much broader application of self-preferencing as a standalone abuse, both by the European Commission itself and by some national competition authorities (NCAs).
Indeed, just a few weeks after the General Court’s ruling, the Italian Competition Authority (AGCM) handed down a mammoth fine against Amazon over preferential treatment granted to third-party sellers who use the company’s own logistics and delivery services. Rather than reflecting the qualified set of criteria laid out by the General Court, the Italian decision was clearly inspired by the Commission’s approach in Google Shopping. Where the Commission described self-preferencing as a new form of leveraging abuse, AGCM characterized Amazon’s practices as tying.
Self-preferencing has also been raised as a potential abuse in the context of data and information practices. In November 2020, the European Commission sent Amazon a statement of objections detailing its preliminary view that the company had infringed antitrust rules by making systematic use of non-public business data, gathered from independent retailers who sell on Amazon’s marketplace, to advantage the company’s own retail business. (Amazon responded with a set of commitments currently under review by the Commission.)
Both the Commission and the U.K. Competition and Markets Authority have lodged similar allegations against Facebook over data gathered from advertisers and then used to compete with those advertisers in markets in which Facebook is active, such as classified ads. The Commission’s antitrust proceeding against Apple over its App Store rules likewise highlights concerns that the company may use its platform position to obtain valuable data about the activities and offers of its competitors, while competing developers may be denied access to important customer data.
These enforcement actions brought by NCAs and the Commission appear at odds with the more bounded criteria set out by the General Court in Google Shopping, and raise tremendous uncertainty regarding the scope and definition of the alleged new theory of harm.
Self-Preferencing, Platform Neutrality, and the Limits of Antitrust Law
The growing tendency to invoke self-preferencing as a standalone theory of antitrust harm could serve two significant goals for European competition enforcers. As mentioned earlier, it offers a convenient shortcut that could allow enforcers to skip the legal standards and evidentiary burdens traditionally required to prove anticompetitive behavior. Moreover, it can function, in practice, as a means to impose a neutrality regime on digital gatekeepers, with the aims of both ensuring a level playing field among competitors and neutralizing the potential conflicts of interests implicated by dual-mode intermediation.
The dual roles performed by some platforms continue to fuel the never-ending debate over vertical integration, as well as related concerns that, by giving preferential treatment to its own products and services, an integrated provider may leverage its dominance in one market to related markets. From this perspective, self-preferencing is an inevitable byproduct of the emergence of ecosystems.
However, as the Australian Competition and Consumer Commission has recognized, self-preferencing conduct is “often benign.” Furthermore, the total value generated by an ecosystem depends on the activities of independent complementors. Those activities are not completely under the platform’s control, although the platform is required to establish and maintain the governance structures regulating access to and interactions around that ecosystem.
Given this reality, a complete ban on self-preferencing may call the very existence of ecosystems into question, challenging their design and monetization strategies. Preferential treatment can take many different forms with many different potential effects, all stemming from platforms’ many different business models. This counsels for a differentiated, case-by-case, and effects-based approach to assessing the alleged competitive harms of self-preferencing.
Antitrust law does not impose on platforms a general duty to ensure neutrality by sharing their competitive advantages with rivals. Moreover, possessing a competitive advantage does not automatically equal an anticompetitive effect. As the European Court of Justice recently stated in Servizio Elettrico Nazionale, competition law is not intended to protect the competitive structure of the market, but rather to protect consumer welfare. Accordingly, not every exclusionary effect is detrimental to competition. Distinctions must be drawn between foreclosure and anticompetitive foreclosure, as only the latter may be penalized under antitrust.
[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]
In Free to Choose, Milton Friedman famously noted that there are four ways to spend money:
Spending your own money on yourself. For example, buying groceries or lunch. There is a strong incentive to economize and to get full value.
Spending your own money on someone else. For example, buying a gift for another. There is a strong incentive to economize, but perhaps less to achieve full value from the other person’s point of view. Altruism is admirable, but it differs from value maximization, since—strictly speaking—giving cash would maximize the other’s value. Perhaps the point of a gift is that it does not amount to cash and the maximization of the other person’s welfare from their point of view.
Spending someone else’s money on yourself. For example, an expensed business lunch. “Pass me the filet mignon and Chateau Lafite! Do you have one of those menus without any prices?” There is a strong incentive to get maximum utility, but there is little incentive to economize.
Spending someone else’s money on someone else. For example, applying the proceeds of taxes or donations. There may be an indirect desire to see utility, but incentives for quality and cost management are often diminished.
This framework can be criticized. Altruism has a role. Not all motives are selfish. There is an important role for action to help those less fortunate, which might mean, for instance, that a charity gains more utility from category (4) (assisting the needy) than from category (3) (the charity’s holiday party). It always depends on the facts and the context. However, there is certainly a grain of truth in the observation that charity begins at home and that, in the final analysis, people are best at managing their own affairs.
How would this insight apply to data interoperability? The difficult cases of assisting the needy do not arise here: there is no serious sense in which data interoperability does, or does not, result in destitution. Thus, Friedman’s observations seem to ring true: when spending data, those whose data it is seem most likely to maximize its value. This is especially so where collection of data responds to incentives—that is, the amount of data collected and processed responds to how much control over the data is possible.
The obvious exception to this would be a case of market power. If there is a monopoly with persistent barriers to entry, then the incentive may not be to maximize total utility, and therefore to limit data handling to the extent that a higher price can be charged for the lesser amount of data that does remain available. This has arguably been seen with some data-handling rules: the “Jedi Blue” agreement on advertising bidding, Apple’s Intelligent Tracking Prevention and App Tracking Transparency, and Google’s proposed Privacy Sandbox, all restrict the ability of others to handle data. Indeed, they may fail Friedman’s framework, since they amount to the platform deciding how to spend others’ data—in this case, by not allowing them to collect and process it at all.
It should be emphasized, though, that this is a special case. It depends on market power, and existing antitrust and competition laws speak to it. The courts will decide whether cases like Daily Mail v Google and Texas et al. v Google show illegal monopolization of data flows, so as to fall within this special case of market power. Outside the United States, cases like the U.K. Competition and Markets Authority’s Google Privacy Sandbox commitments and the European Union’s proposed commitments with Amazon seek to allow others to continue to handle their data and to prevent exclusivity from arising from platform dynamics, which could happen if a large platform prevents others from deciding how to account for data they are collecting. It will be recalled that even Robert Bork thought that there was risk of market power harms from the large Microsoft Windows platform a generation ago. Where market power risks are proven, there is a strong case that data exclusivity raises concerns because of an artificial barrier to entry. It would only be if the benefits of centralized data control were to outweigh the deadweight loss from data restrictions that this would be untrue (though query how well the legal processes verify this).
Yet the latest proposals go well beyond this. A broad interoperability right amounts to “open season” for spending others’ data. This makes perfect sense in the European Union, where there is no large domestic technology platform, meaning that the data is essentially owned via foreign entities (mostly, the shareholders of successful U.S. and Chinese companies). It must be very tempting to run an industrial policy on the basis that “we’ll never be Google” and thus to embrace “sharing is caring” as to others’ data.
But this would transgress the warning from Friedman: would people optimize data collection if it is open to mandatory sharing even without proof of market power? It is deeply concerning that the EU’s DATA Act is accompanied by an infographic that suggests that coffee-machine data might be subject to mandatory sharing, to allow competition in services related to the data (e.g., sales of pods; spare-parts automation). There being no monopoly in coffee machines, this simply forces vertical disintegration of data collection and handling. Why put a data-collection system into a coffee maker at all, if it is to be a common resource? Friedman’s category (4) would apply: the data is taken and spent by another. There is no guarantee that there would be sensible decision making surrounding the resource.
It will be interesting to see how common-law jurisdictions approach this issue. At the risk of stating the obvious, the polity in continental Europe differs from that in the English-speaking democracies when it comes to whether the collective, or the individual, should be in the driving seat. A close read of the UK CMA’s Google commitments is interesting, in that paragraph 30 requires no self-preferencing in data collection and requires future data-handling systems to be designed with impacts on competition in mind. No doubt the CMA is seeking to prevent data-handling exclusivity on the basis that this prevents companies from using their data collection to compete. This is far from the EU DATA Act’s position in that it is certainly not a right to handle Google’s data: it is simply a right to continue to process one’s own data.
U.S. proposals are at an earlier stage. It would seem important, as a matter of principle, not to make arbitrary decisions about vertical integration in data systems, and to identify specific market-power concerns instead, in line with common-law approaches to antitrust.
It might be very attractive to the EU to spend others’ data on their behalf, but that does not make it right. Those working on the U.S. proposals would do well to ensure that there is a meaningful market-power gate to avoid unintended consequences.
Disclaimer: The author was engaged for expert advice relating to the UK CMA’s Privacy Sandbox case on behalf of the complainant Marketers for an Open Web.
 Milton Friedman, Free to Choose, 1980, pp.115-119
 Comments at the Yale Law School conference, Robert H. Bork’s influence on Antitrust Law, Sep. 27-28, 2013.
[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]
May 2007, Palo Alto
The California sun shone warmly on Eric Schmidt’s face as he stepped out of his car and made his way to have dinner at Madera, a chic Palo Alto restaurant.
Dining out was a welcome distraction from the endless succession of strategy meetings with the nitpickers of the law department, which had been Schmidt’s bread and butter for the last few months. The lawyers seemed to take issue with any new project that Google’s engineers came up with. “How would rivals compete with our maps?”; “Our placement should be no less favorable than rivals’’; etc. The objections were endless.
This is not how things were supposed to be. When Schmidt became Google’s chief executive officer in 2001, his mission was to take the company public and grow the firm into markets other than search. But then something unexpected happened. After campaigning on an anti-monopoly platform, a freshman senator from Minnesota managed to get her anti-discrimination bill through Congress in just her first few months in office. All companies with a market cap of more than $150 billion were now prohibited from favoring their own products. Google had recently crossed that Rubicon, putting a stop to years of carefree expansion into new markets.
But today was different. The waiter led Schmidt to his table overlooking Silicon Valley. His acquaintance was already seated.
With his tall and slender figure, Andy Rubin had garnered quite a reputation among Silicon Valley’s elite. After engineering stints at Apple and Motorola, developing various handheld devices, Rubin had set up his own shop. The idea was bold: develop the first open mobile platform—based on Linux, nonetheless. Rubin had pitched the project to Google in 2005 but given the regulatory uncertainty over the future of antitrust—the same wave of populist sentiment that would carry Klobuchar to office one year later—Schmidt and his team had passed.
“There’s no money in open source,” the company’s CFO ruled. Schmidt had initially objected, but with more pressing matters to deal with, he ultimately followed his CFO’s advice.
Schmidt and Rubin were exchanging pleasantries about Microsoft and Java when the meals arrived–sublime Wagyu short ribs and charred spring onions paired with a 1986 Chateau Margaux.
Rubin finally cut to the chase. “Our mobile operating system will rely on state-of-the-art touchscreen technology. Just like the device being developed by Apple. Buying Android today might be your only way to avoid paying monopoly prices to access Apple’s mobile users tomorrow.”
Schmidt knew this all too well: The future was mobile, and few companies were taking Apple’s upcoming iPhone seriously enough. Even better, as a firm, Android was treading water. Like many other startups, it had excellent software but no business model. And with the Klobuchar bill putting the brakes on startup investment—monetizing an ecosystem had become a delicate legal proposition, deterring established firms from acquiring startups–Schmidt was in the middle of a buyer’s market. “Android we could make us a force to reckon with” Schmidt thought to himself.
But he quickly shook that thought, remembering the words of his CFO: “There is no money in open source.” In an ideal world, Google would have used Android to promote its search engine—placing a search bar on Android users to draw users to its search engine—or maybe it could have tied a proprietary app store to the operating system, thus earning money from in-app purchases. But with the Klobuchar bill, these were no longer options. Not without endless haggling with Google’s planning committee of lawyers.
And they would have a point, of course. Google risked heavy fines and court-issued injunctions that would stop the project in its tracks. Such risks were not to be taken lightly. Schmidt needed a plan to make the Android platform profitable while accommodating Google’s rivals, but he had none.
The desserts were served, Schmidt steered the conversation to other topics, and the sun slowly set over Sand Hill Road.
Present Day, Cupertino
Apple continues to dominate the smartphone industry with little signs of significant competition on the horizon. While there are continuing rumors that Google, Facebook, or even TikTok might enter the market, these have so far failed to transpire.
Google’s failed partnership with Samsung, back in 2012, still looms large over the industry. After lengthy talks to create an open mobile platform failed to materialize, Google ultimately entered into an agreement with the longstanding mobile manufacturer. Unfortunately, the deal was mired by antitrust issues and clashing visions—Samsung was believed to favor a closed ecosystem, rather than the open platform envisioned by Google.
The sense that Apple is running away with the market is only reinforced by recent developments. Last week, Tim Cook unveiled the company’s new iPhone 11—the first ever mobile device to come with three cameras. With an eye-watering price tag of $1,199 for the top-of-the-line Pro model, it certainly is not cheap. In his presentation, Cook assured consumers Apple had solved the security issues that have been an important bugbear for the iPhone and its ecosystem of competing app stores.
Analysts expect the new range of devices will help Apple cement the iPhone’s 50% market share. This is especially likely given the important challenges that Apple’s main rivals continue to face.
The Windows Phone’s reputation for buggy software continues to undermine its competitive position, despite its comparatively low price point. Andy Rubin, the head of the Windows Phone, was reassuring in a press interview, but there is little tangible evidence he will manage to successfully rescue the flailing ship. Meanwhile, Huawei has come under increased scrutiny for the threats it may pose to U.S. national security. The Chinese manufacturer may face a U.S. sales ban, unless the company’s smartphone branch is sold to a U.S. buyer. Oracle is said to be a likely candidate.
The sorry state of mobile competition has become an increasingly prominent policy issue. President Klobuchar took to Twitter and called on mobile-device companies to refrain from acting as monopolists, intimating elsewhere that failure to do so might warrant tougher regulation than her anti-discrimination bill:
[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]
About earth’s creatures great and small, Devices clever as can be, I see foremost a ruthless power; You, their ingenuity.
You see the beak upon the finch; I, the beaked skeleton. You see the wonders that they are; I, the things that might have been.
You see th’included batteries I, the poor excluded ones. You, the phone that simply works; I, restrain’d competition.
’Twould be a better world, I say, Were all the options to abide— All beaks and brands of battery— From which the public to decide.
You say that man the greatest is Because he dominates today, But meteor, not caveman, drove The ancient dinosaurs away.
If they were here when we were new, We might the age not have survived; They say some species could outwit The sharpest chimps today alive.
Just so, I say, ’twould better be Replacement batteries t’allow For sales alone can prove what brands Deserve el’vation to the Dow.
Designing batt’ries switchable Makes their selection fully public; It substitutes democracy For an engineering logic.
For only buyers should decide Which components to inter; Their taste alone determines worth, Though engineers be cleverer.
You: The meaning of component, We can always redefine. From batteries to molecules, We can draw most any line.
Of cogs, thus, an infinitude; Of time a finitude to lose. You cannot interchange all parts, Or each one carefully to choose.
Product choices corporate We cannot all democratize, At least so long as consumers Wish to get on with their lives.
Exclusion therefore cannot we Universally condemn; Oft must we let the firm decide Which components to put in.
Power, then, is everywhere— What is is built on what is not— And th’elimination of it Is no cornerstone of thought.
Of components infinite We must choose which few to free; Th’criterion for doing that, Abuse-of-power cannot be.
Power and oppression are, In life and goods ubiquitous. But value differentiates— Build we antitrust on this.
Alone when letting buyers say Which part into a product goes Would make those buyers happier, Must we interchange impose.
Batt’ry brand must matter much, Else, we seriously delude, To think consumers want to hear: “We the batt’ries not include.”
The same is true for Amazon. If it knows which seller’s best, Let it cast the others out for us— Give our scrolling bars a rest.
If Apple knows which app’s a dud, Let Apple cast it out as well. Which app’s a fraud and which a scam, Smartphone users cannot tell.
If Google wants to show me how To get from A to B to C, I’d rather that she use her maps Than search for others separately.
A rule against self-preferencing No legal principle provides; For what opposes power’s role Can’t be neutrally applied.
What goes for all third-party sales Goes for Amazon’s front-end. Self-preferencing alone prevents My designing a new skin.
We cannot hire its warehouse staff; We cannot choose its motor fleet; We cannot source its cargo planes; Or its trucks route through our streets.
But this is all self-preferencing; And it cannot all be banned; Unless we choice’s value weigh, We strike with arbitrary hand.
So say you and differ I: ’Twixt dinosaur and man must choose. If one alone fits on this earth— Wilt for man our power use?
These verses are based in part on arguments summarized in this blog post and this paper.
[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]
Earlier this month, Professors Fiona Scott Morton, Steve Salop, and David Dinielli penned a letter expressing their “strong support” for the proposed American Innovation and Choice Online Act (AICOA). In the letter, the professors address criticisms of AICOA and urge its approval, despite possible imperfections.
“Perhaps this bill could be made better if we lived in a perfect world,” the professors write, “[b]ut we believe the perfect should not be the enemy of the good, especially when change is so urgently needed.”
The problem is that the professors and other supporters of AICOA have shown neither that “change is so urgently needed” nor that the proposed law is, in fact, “good.”
Is Change ‘Urgently Needed’?
With respect to the purported urgency that warrants passage of a concededly imperfect bill, the letter authors assert two points. First, they claim that AICOA’s targets—Google, Apple, Facebook, Amazon, and Microsoft (collectively, GAFAM)—“serve as the essential gatekeepers of economic, social, and political activity on the internet.” It is thus appropriate, they say, to amend the antitrust laws to do something they have never before done: saddle a handful of identified firms with special regulatory duties.
But is this oft-repeated claim about “gatekeeper” status true? The label conjures up the oldTerminal Railroad case, where a group of firms controlled the only bridges over the Mississippi River at St. Louis. Freighters had no choice but to utilize their services. Do the GAFAM firms really play a similar role with respect to “economic, social, and political activity on the internet”? Hardly.
With respect to economic activity, Amazon may be a huge player, but it still accounts foronly 39.5% of U.S. ecommerce sales—and far less of retail sales overall. Consumers have gobs of other ecommerce options, and so do third-party merchants, which may sell their wares using Shopify, Ebay, Walmart, Etsy, numerous other ecommerce platforms, or their own websites.
For social activity on the internet, consumers need not rely on Facebook and Instagram. They can connect with others via Snapchat, Reddit, Pinterest, TikTok, Twitter, and scores of other sites. To be sure, all these services have different niches, but the letter authors’ claim that the GAFAM firms are “essential gatekeepers” of “social… activity on the internet” is spurious.
The second argument the letter authors assert in support of their claim of urgency is that “[t]he decline of antitrust enforcement in the U.S. is well known, pervasive, and has left our jurisprudence unable to protect and maintain competitive markets.” In other words, contemporary antitrust standards are anemic and have led to a lack of market competition in the United States.
The evidence for this claim, which is increasingly parroted in the press and among the punditry, is weak. Proponents primarily point to studies showing:
increasing industrial concentration;
higher markups on goods and services since 1980;
a declining share of surplus going to labor, which could indicate monopsony power in labor markets; and
a reduction in startup activity, suggesting diminished innovation.
Examined closely, however, those studies fail to establish a domestic market power crisis.
Industrial concentration has little to do with market power in actual markets. Indeed, research suggests that, while industries may be consolidating at the national level, competition at the market (local) level is increasing, as more efficient national firms open more competitive outlets in local markets. As Geoff Manne sums up this research:
Most recently, several working papers looking at the data on concentration in detail and attempting to identify the likely cause for the observed data, show precisely the opposite relationship. The reason for increased concentration appears to be technological, not anticompetitive. And, as might be expected from that cause, its effects are beneficial. Indeed, the story is both intuitive and positive.
What’s more, while national concentration does appear to be increasing in some sectors of the economy, it’s not actually so clear that the same is true for local concentration — which is often the relevant antitrust market.
With respect to the evidence on markups, the claim of a significant increase in the price-cost margin depends crucially on the measure of cost. The studies suggesting an increase in margins since 1980 use the “cost of goods sold” (COGS) metric, which excludes a firm’s management and marketing costs—both of which have become an increasingly significant portion of firms’ costs. Measuring costs using the “operating expenses” (OPEX) metric, which includes management and marketing costs,reveals that public-company markups increased only modestly since the 1980s and that the increase was within historical variation. (It is also likely that increased markups since 1980 reflect firms’ more extensive use of technology and their greater regulatory burdens, both of which raise fixed costs and require higher markups over marginal cost.)
As for the declining labor share, that dynamic is occurring globally. Indeed, the decline in the labor share in the United States has been less severe than in Japan, Canada, Italy, France, Germany, China, Mexico, and Poland, suggesting that anemic U.S. antitrust enforcement is not to blame. (A reduction in the relative productivity of labor is a more likely culprit.)
Finally, the claim of reduced startup activity is unfounded. In itsreport on competition in digital markets, the U.S. House Judiciary Committee asserted that, since the advent of the major digital platforms:
“[t]he number of new technology firms in the digital economy has declined”;
“the entrepreneurship rate—the share of startups and young firms in the [high technology] industry as a whole—has also fallen significantly”; and
“[u]nsurprisingly, there has also been a sharp reduction in early-stage funding for technology startups.” (pp. 46-47.)
Those claims, however, are based on cherry-picked evidence.
In support of the first two, the Judiciary Committee report cited astudy based on data ending in 2011. As Benedict Evans hasobserved, “standard industry data shows that startup investment rounds have actually risen at least 4x since then.”
In support of the third claim, the report cited statistics from anarticle noting that the number and aggregate size of the very smallest venture capital deals—those under $1 million—fell between 2014 and 2018 (after growing substantially from 2008 to 2014). The Judiciary Committee report failed to note, however, the cited article’s observation that small venture deals ($1 million to $5 million) had not dropped and that larger venture deals (greater than $5 million) had grown substantially during the same time period. Nor did the report acknowledge that venture-capital funding hascontinued to increase since 2018.
Finally, there is also reason to think that AICOA’s passage would harm, not help, the startup environment:
AICOA doesn’t directly restrict startup acquisitions, but the activities it would restrict most certainly do dramatically affect the incentives that drive many startup acquisitions. If a platform is prohibited from engaging in cross-platform integration of acquired technologies, or if it can’t monetize its purchase by prioritizing its own technology, it may lose the motivation to make a purchase in the first place.
Despite the letter authors’ claims, neither a paucity of avenues for “economic, social, and political activity on the internet” nor the general state of market competition in the United States establishes an “urgent need” to re-write the antitrust laws to saddle a small group of firms with unprecedented legal obligations.
Is the Vagueness of AICOA’s Primary Legal Standard a Feature?
AICOA bars covered platforms from engaging in three broad classes of conduct (self-preferencing, discrimination among business users, and limiting business users’ ability to compete) where the behavior at issue would “materially harm competition.” It then forbids several specific business practices, but allows the defendant to avoid liability by proving that their use of the practice would not cause a “material harm to competition.”
Critics have argued that “material harm to competition”—a standard that is not used elsewhere in the antitrust laws—is too indeterminate to provide business planners and adjudicators with adequate guidance. The authors of the pro-AICOA letter, however, maintain that this “different language is a feature, not a bug.”
That is so, the letter authors say, because the language effectively signals to courts and policymakers that antitrust should prohibit more conduct. They explain:
To clarify to courts and policymakers that Congress wants something different (and stronger), new terminology is required. The bill’s language would open up a new space and move beyond the standards imposed by the Sherman Act, which has not effectively policed digital platforms.
Putting aside the weakness of the letter authors’ premise (i.e., that Sherman Act standards have proven ineffective), the legislative strategy they advocate—obliquely signal that you want “change” without saying what it should consist of—is irresponsible and risky.
The letter authors assert two reasons Congress should not worry about enacting a liability standard that has no settled meaning. One is that:
[t]he same judges who are called upon to render decisions under the existing, insufficient, antitrust regime, will also be called upon to render decisions under the new law. They will be the same people with the same worldview.
It is thus unlikely that “outcomes under the new law would veer drastically away from past understandings of core concepts….”
But this claim undermines the argument that a new standard is needed to get the courts to do “something different” and “move beyond the standards imposed by the Sherman Act.” If we don’t need to worry about an adverse outcome from a novel, ill-defined standard because courts are just going to continue applying the standard they’re familiar with, then what’s the point of changing the standard?
A second reason not to worry about the lack of clarity on AICOA’s key liability standard, the letter authors say, is that federal enforcers will define it:
The new law would mandate that the [Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice], the two expert agencies in the area of competition, together create guidelines to help courts interpret the law. Any uncertainty about the meaning of words like ‘competition’ will be resolved in those guidelines and over time with the development of caselaw.
This is no doubt music to the ears of members of Congress, who love to get credit for “doing something” legislatively, while leaving the details to an agency so that they can avoid accountability if things turn out poorly. Indeed, the letter authors explicitly play upon legislators’ unwholesome desire for credit-sans-accountability. They emphasize that “[t]he agencies must [create and] update the guidelines periodically. Congress doesn’t have to do much of anything very specific other than approve budgets; it certainly has no obligation to enact any new laws, let alone amend them.”
AICOA does not, however, confer rulemaking authority on the agencies; it merely directs them to create and periodically update “agency enforcement guidelines” and “agency interpretations” of certain affirmative defenses. Those guidelines and interpretations would not bind courts, which would be free to interpret AICOA’s new standard differently. The letter authors presume that courts would defer to the agencies’ interpretation of the vague standard, and they probably would. But that raises other problems.
For one thing, it reduces certainty, which is likely to chill innovation. Giving the enforcement agencies de facto power to determine and redetermine what behaviors “would materially harm competition” means that the rules are never settled. Administrations differ markedly in their views about what the antitrust laws should forbid, so business planners could never be certain that a product feature or revenue model that is legal today will not be deemed to “materially harm competition” by a future administration with greater solicitude for small rivals and upstarts. Such uncertainty will hinder investment in novel products, services, and business models.
Consider, for example, Google’s investment in the Android mobile operating system. Google makes money from Android—which it licenses to device manufacturers for free—by ensuring that Google’s revenue-generating services (e.g., its search engine and browser) are strongly preferenced on Android products. One administration might believe that this is a procompetitive arrangement, as itcreates a different revenue model for mobile operating systems (as opposed to Apple’s generation of revenue from hardware sales), resulting in both increased choice and lower prices for consumers. A subsequent administration might conclude that the arrangement materially harms competition by making it harder for rival search engines and web browsers to gain market share. It would make scant sense for a covered platform to make an investment like Google did with Android if its underlying business model could be upended by a new administration with de facto power to rewrite the law.
A second problem with having the enforcement agencies determine and redetermine what covered platforms may do is that it effectively transforms the agencies from law enforcers into sectoral regulators. Indeed, the letter authors agree that “the ability of expert agencies to incorporate additional protections in the guidelines” means that “the bill is not a pure antitrust law but also safeguards other benefits to consumers.” They tout that “the complementarity between consumer protection and competition can be addressed in the guidelines.”
Of course, to the extent that the enforcement guidelines address concerns besides competition, they will be less useful for interpreting AICOA’s “material harm to competition” standard; they might deem a practice suspect on non-competition grounds. Moreover, it is questionable whether creating a sectoral regulator for five widely diverse firms is a good idea. The history of sectoral regulation is littered with examples of agency capture, rent-seeking, and other public-choice concerns. At a minimum, Congress should carefully examine the potential downsides of sectoral regulation, install protections to mitigate those downsides, and explicitly establish the sectoral regulator.
Will AICOA Break Popular Products and Services?
Many popular offerings by the platforms covered by AICOA involve self-preferencing, discrimination among business users, or one of the other behaviors the bill presumptively bans.Pre-installation of iPhone apps and services like Siri, for example, involves self-preferencing or discrimination among business users of Apple’s iOS platform. But iPhone consumers value having a mobile device that offers extensive services right out of the box. Consumers love that Google’s search result for an establishment offers directions to the place, which involves the preferencing of Google Maps. And consumers positively adore Amazon Prime, which can provide free expedited delivery because Amazon conditions Prime designation on a third-party seller’s use of Amazon’s efficient, reliable “Fulfillment by Amazon” service—somethingAmazon could not do under AICOA.
The authors of the pro-AICOA letter insist that the law will not ban attractive product features like these. AICOA, they say:
provides a powerful defense that forecloses any thoughtful concern of this sort: conduct otherwise banned under the bill is permitted if it would ‘maintain or substantially enhance the core functionality of the covered platform.’
But the authors’ confidence that this affirmative defense will adequately protect popular offerings is misplaced. The defense is narrow and difficult to mount.
First, it immunizes only those behaviors that maintain or substantially enhance the “core” functionality of the covered platform. Courts would rightly interpret AICOA to give effect to that otherwise unnecessary word, which dictionariesdefine as “the central or most important part of something.” Accordingly, any self-preferencing, discrimination, or other presumptively illicit behavior that enhances a covered platform’s service but not its “central or most important” functions is not even a candidate for the defense.
Even if a covered platform could establish that a challenged practice would maintain or substantially enhance the platform’s core functionality, it would also have to prove that the conduct was “narrowly tailored” and “reasonably necessary” to achieve the desired end, and, for many behaviors, the “le[ast] discriminatory means” of doing so. That is a remarkably heavy burden, and it beggars belief to suppose that business planners considering novel offerings involving self-preferencing, discrimination, or some other presumptively illicit conduct would feel confident that they could make the required showing. It is likely, then, that AICOA would break existing products and services and discourage future innovation.
Of course, Congress could mitigate this concern by specifying that AICOA does not preclude certain things, such as pre-installed apps or consumer-friendly search results. But the legislation would then lose the support of the many interest groups who want the law to preclude various popular offerings that its text would now forbid. Unlike consumers, who are widely dispersed and difficult to organize, the groups and competitors that would benefit from things like stripped-down smartphones, map-free search results, and Prime-less Amazon are effective lobbyists.
Should the US Follow Europe?
Having responded to criticisms of AICOA, the authors of the pro-AICOA letter go on offense. They assert that enactment of the bill is needed to ensure that the United States doesn’t lose ground to Europe, both in regulatory leadership and in innovation. Observing that the European Union’s Digital Markets Act (DMA) has just become law, the authors write that:
[w]ithout [AICOA], the role of protecting competition and innovation in the digital sector outside China will be left primarily to the European Union, abrogating U.S. leadership in this sector.
Moreover, if Europe implements its DMA and the United States does not adopt AICOA, the authors claim:
the center of gravity for innovation and entrepreneurship [could] shift from the U.S. to Europe, where the DMA would offer greater protections to start ups and app developers, and even makers and artisans, against exclusionary conduct by the gatekeeper platforms.
Implicit in the argument that AICOA is needed to maintain America’s regulatory leadership is the assumption that to lead in regulatory policy is to have the most restrictive rules. The most restrictive regulator will necessarily be the “leader” in the sense that it will be the one with the most control over regulated firms. But leading in the sense of optimizing outcomes and thereby serving as a model for other jurisdictions entails crafting the best policies—those that minimize the aggregate social losses from wrongly permitting bad behavior, wrongly condemning good behavior, and determining whether conduct is allowed or forbidden (i.e., those that “minimize the sum of error and decision costs”). Rarely is the most restrictive regulatory regime the one that optimizes outcomes, and as I have elsewhereexplained, the rules set forth in the DMA hardly seem calibrated to do so.
As for “innovation and entrepreneurship” in the technological arena, it would be a seismic shift indeed if the center of gravity were to migrate to Europe, which is currently home tozero of the top 20 global tech companies. (The United States hosts 12; China, eight.)
It seems implausible, though, that imposing a bunch of restrictions on large tech companies that have significant resources for innovation and arescrambling to enter each other’s markets will enhance, rather than retard, innovation. The self-preferencing bans in AICOA and DMA, for example, would prevent Apple from developing its own search engine to compete with Google, as it has apparentlycontemplated. Why would Apple develop its own search engine if it couldn’t preference it on iPhones and iPads? And why would Google have started its shopping service to compete with Amazon if it couldn’t preference Google Shopping in search results? And why would any platform continually improve to gain more users as it neared the thresholds for enhanced duties under DMA or AICOA? It seems more likely that the DMA/AICOA approach will hinder, rather than spur, innovation.
At the very least, wouldn’t it be prudent to wait and see whether DMA leads to a flourishing of innovation and entrepreneurship in Europe before jumping on the European bandwagon? After all, technological innovations that occur in Europe won’t be available only to Europeans. Just as Europeans benefit from innovation by U.S. firms, American consumers will be able to reap the benefits of any DMA-inspired innovation occurring in Europe. Moreover, if DMA indeed furthers innovation by making it easier for entrants to gain footing, even American technology firms could benefit from the law by launching their products in Europe. There’s no reason for the tech sector to move to Europe to take advantage of a small-business-protective European law.
In fact, the optimal outcome might be to have one jurisdiction in which major tech platforms are free to innovate, enter each other’s markets via self-preferencing, etc. (the United States, under current law) and another that is more protective of upstart businesses that use the platforms (Europe under DMA). The former jurisdiction would create favorable conditions for platform innovation and inter-platform competition; the latter might enhance innovation among businesses that rely on the platforms. Consumers in each jurisdiction, however, would benefit from innovation facilitated by the other.
It makes little sense, then, for the United States to rush to adopt European-style regulation. DMA is a radical experiment. Regulatory history suggests that the sort of restrictiveness it imposes retards, rather than furthers, innovation. But in the unlikely event that things turn out differently this time, little harm would result from waiting to see DMA’s benefits before implementing its restrictive approach.
Does AICOA Threaten Platforms’ Ability to Moderate Content and Police Disinformation?
The authors of the pro-AICOA letter conclude by addressing the concern that AICOA “will inadvertently make content moderation difficult because some of the prohibitions could be read… to cover and therefore prohibit some varieties of content moderation” by covered platforms.
The letter authors say that a reading of AICOA to prohibit content moderation is “strained.” They maintain that the act’s requirement of “competitive harm” would prevent imposition of liability based on content moderation and that the act is “plainly not intended to cover” instances of “purported censorship.” They further contend that the risk of judicial misconstrual exists with all proposed laws and therefore should not be a sufficient reason to oppose AICOA.
Each of these points is weak. Section 3(a)(3) of AICOA makes it unlawful for a covered platform to “discriminate in the application or enforcement of the terms of service of the covered platform among similarly situated business users in a manner that would materially harm competition.” It ishardly “strained” to reason that this provision is violated when, say, Google’s YouTube selectively demonetizes a business user for content that Google deems harmful or misleading. Or when Apple removes Parler, but not every other violator of service terms, from its App Store. Such conduct could “materially harm competition” by impeding the de-platformed business’ ability to compete with its rivals.
And it is hard to say that AICOA is “plainly not intended” to forbid these acts when a key supporting senatortouted the bill as a means of policing content moderation andobserved during markup that it would “make some positive improvement on the problem of censorship” (i.e., content moderation) because “it would provide protections to content providers, to businesses that are discriminated against because of the content of what they produce.”
At a minimum, we should expect some state attorneys general to try to use the law to police content moderation they disfavor, and the mere prospect of such legal action could chill anti-disinformation efforts and other forms of content moderation.
Of course, there’s a simple way for Congress to eliminate the risk of what the letter authors deem judicial misconstrual: It could clarify that AICOA’s prohibitions do not cover good-faith efforts to moderate content or police disinformation. Such clarification, however, would kill the bill, asseveral Republican legislators are supporting the act because it restricts content moderation.
The risk of judicial misconstrual with AICOA, then, is not the sort that exists with “any law, new or old,” as the letter authors contend. “Normal” misconstrual risk exists when legislators try to be clear about their intentions but, because language has its limits, some vagueness or ambiguity persists. AICOA’s architects have deliberately obscured their intentions in order to cobble together enough supporters to get the bill across the finish line.
The one thing that all AICOA supporters can agree on is that they deserve credit for “doing something” about Big Tech. If the law is construed in a way they disfavor, they can always act shocked and blame rogue courts. That’s shoddy, cynical lawmaking.
So, I respectfully disagree with Professors Scott Morton, Salop, and Dinielli on AICOA. There is no urgent need to pass the bill right now, especially as we are on the cusp of seeing an AICOA-like regime put to the test. The bill’s central liability standard is overly vague, and its plain terms would break popular products and services and thwart future innovation. The United States should equate regulatory leadership with the best, not the most restrictive, policies. And Congress should thoroughly debate and clarify its intentions on content moderation before enacting legislation that could upend the status quo on that important matter.
For all these reasons, Congress should reject AICOA. And for the same reasons, a future in which AICOA is adopted is extremely unlikely to resemble the Utopian world that Professors Scott Morton, Salop, and Dinielli imagine.
[The following is a guest post from Andrew Mercado, a research assistant at the Mercatus Center at George Mason University and an adjunct professor and research assistant at George Mason’s Antonin Scalia Law School.]
The Competition and Transparency in Digital Advertising Act (CTDAA), introduced May 19 by Sens. Mike Lee (R-Utah), Ted Cruz (R-Texas), Amy Klobuchar (D-Minn.), and Richard Blumenthal (D-Conn.), is the latest manifestation of the congressional desire to “do something” legislatively about big digital platforms. Although different in substance from the other antitrust bills introduced this Congress, it shares one key characteristic: it is fatally flawed and should not be enacted.
In brief, the CTDAA imposes revenue-based restrictions on the ownership structure of firms engaged in digital advertising. The CTDAA bars a firm with more than $20 billion in annual advertising revenue (adjusted annually for inflation) from:
owning a digital-advertising exchange if it owns either a sell-side ad brokerage or a buy-side ad brokerage; and
owning a sell-side brokerage if it owns a buy-side brokerage, or from owning a buy-side or sell-side brokerage if it is also a buyer or seller of advertising space.
The proposal’s ownership restrictions present the clearest harm to the future of the digital-advertising market. From an efficiency perspective, vertical integration of both sides of the market can lead to enormous gains. Since, for example, Google owns and operates an ad exchange, a sell-side broker, and a buy-side broker, there are very few frictions that exist between each side of the market. All of the systems are integrated and the supply of advertising space, demand for that space, and the marketplace conducting price-discovery auctions are automatically updated in real time.
While this instantaneous updating is not unique to Google’s system, and other buy- and sell-side firms can integrate into the system, the benefit to advertisers and publishers can be found in the cost savings that come from the integration. Since Google is able to create synergies on all sides of the market, the fees on any given transaction are lower. Further, incorporating Google’s vast trove of data allows for highly relevant and targeted ads. All of this means that advertisers spend less for the same quality of ad; publishers get more for each ad they place; and consumers see higher-quality, more relevant ads.
Without the ability to own and invest in the efficiency and transaction-cost reduction of an integrated platform, there will likely be less innovation and lower quality on all sides of the market. Further, advertisers and publishers will have to shoulder the burden of using non-integrated marketplaces and would likely pay higher fees for less-efficient brokers. Since Google is a one-stop shop for all of a company’s needs—whether that be on the advertising side or the publishing side—companies can move seamlessly from one side of the market to the other, all while paying lower costs per transaction, because of the integrated nature of the platform.
In the absence of such integration, a company would have to seek out one buy-side brokerage to place ads and another, separate sell-side brokerage to receive ads. These two brokers would then have to go to an ad exchange to facilitate the deal, bringing three different brokers into the mix. Each of these middlemen would take a proportionate cut of the deal. When comparing the situation between an integrated and non-integrated market, the fees associated with serving ads in a non-integrated market are almost certainly higher.
Additionally, under this proposal, the innovative potential of each individual firm is capped. If a firm grows big enough and gains sufficient revenue through integrating different sides of the market, they will be forced to break up their efficiency-inducing operations. Marginal improvements on each side of the market may be possible, but without integrating different sides of the market, the scale required to justify those improvements would be insurmountable.
The CTDAA assumes that:
there is a serious competitive problem in digital advertising; and
the structural separation and regulation of advertising brokerages run by huge digital-advertising platforms (as specified in the CTDAA) would enhance competition and benefit digital advertising customers and consumers.
The first assumption has not been proven and is subject to debate, while the second assumption is likely to be false.
Fundamental to the bill’s assumption that the digital-advertising market lacks competition is a misunderstanding of competitive forces and the idea that revenue and profit are inversely related to competition. While it is true that high profits can be a sign of consolidation and anticompetitive outcomes, the dynamic nature of the internet economy makes this theory unlikely.
As Christopher Kaiser and I have discussed, competition in the internet economy is incredibly dynamic. Vigorous competition can be achieved with just a handful of firms, despite claims from some quarters that four competitors is necessarily too few. Even in highly concentrated markets, there is the omnipresent threat that new entrants will emerge to usurp an incumbent’s reign. Additionally, while some studies may show unusually large profits in those markets, when adjusted for the consumer welfare created by large tech platforms, profits should actually be significantly higher than they are.
Evidence of dynamic entry in digital markets can be found in a recently announced product offering from a small (but more than $6 billion in revenue) competitor in digital advertising. Following the outcry associated with Google’s alleged abuse with Project Bernanke, the Trade Desk developed OpenPath. This allowed the Trade Desk, a buy-side broker, to handle some of the functions of a sell-side broker and eliminate harms from Google’s alleged bid-rigging to better serve its clients.
In developing the platform, the Trade Desk said it would discontinue serving any Google-based customers, effectively severing ties with the largest advertising exchange on the market. While this runs afoul of the letter of the law spelled out in CTDAA, it is well within the spirit its sponsor’s stated goal: businesses engaging in robust free-market competition. If Google’s market power was as omnipresent and suffocating as the sponsors allege, then eliminating traffic from Google would have been a death sentence for the Trade Desk.
While various theories of vertical and horizontal competitive harm have been put forward, there has not been an empirical showing that consumers and advertising customers have failed to benefit from the admittedly efficient aspects of digital-brokerage auctions administered by Google, Facebook, and a few other platforms. The rapid and dramatic growth of digital advertising and associated commerce strongly suggests that this has been an innovative and welfare-enhancing development. Moreover, the introduction of a new integrated brokerage platform by a “small” player in the advertising market indicates there is ample opportunity to increase this welfare further.
Interfering in brokerage operations under the unproven assumption that “monopoly rents” are being charged and that customers are being “exploited” is rhetoric unmoored from hard evidence. Furthermore, if specific platform practices are shown inefficiently to exclude potential entrants, existing antitrust law can be deployed on a case-specific basis. This approach is currently being pursued by a coalition of state attorneys general against Google (the merits of which are not relevant to this commentary).
Even assuming for the sake of argument that there are serious competition problems in the digital-advertising market, there is no reason to believe that the arbitrary provisions and definitions found in the CTDAA would enhance welfare. Indeed, it is likely that the act would have unforeseen consequences:
It would lead to divestitures supervised by the U.S. Justice Department (DOJ) that could destroy efficiencies derived from efficient targeting by brokerages integrated into platforms;
It would disincentivize improvements in advertising brokerages and likely would reduce future welfare on both the buy and sell sides of digital advertising;
It would require costly recordkeeping and disclosures by covered platforms that could have unforeseen consequences for privacy and potentially reduce the efficiency of bidding practices;
It would establish a fund for damage payments that would encourage wasteful litigation (see next two points);
It would spawn a great deal of wasteful private rent-seeking litigation that would discourage future platform and brokerage innovations; and
It would likely generate wasteful lawsuits by rent-seeking state attorneys general (and perhaps the DOJ as well).
The legislation would ultimately harm consumers who currently benefit from a highly efficient form of targeted advertising (for more on the welfare benefits of targeted advertising, see here). Since Google continually invests in creating a better search engine (to deliver ads directly to consumers) and collects more data to better target ads (to deliver ads to specific consumers), the value to advertisers of displaying ads on Google constantly increases.
Proposing a new regulatory structure that would directly affect the operations of highly efficient auction markets is the height of folly. It ignores the findings of Nobel laureate James M. Buchanan (among others) that, to justify regulation, there should first be a provable serious market failure and that, even if such a failure can be shown, the net welfare costs of government intervention should be smaller than the net welfare costs of non-intervention.
Given the likely substantial costs of government intervention and the lack of proven welfare costs from the present system (which clearly has been associated with a growth in output), the second prong of the Buchanan test clearly has not been met.
While there are allegations of abuses in the digital-advertising market, it is not at all clear that these abuses have had a long-term negative economic impact. As shown in a study by Erik Brynjolfsson and his student Avinash Collis—recently summarized in the Harvard Business Review (Alden Abbott offers commentary here)—the consumer surplus generated by digital platforms has far outstripped the advertising and services revenues received by the platforms. The CTDAA proposal would seek to unwind much of these gains.
If the goal is to create a multitude of small, largely inefficient advertising companies that charge high fees and provide low-quality service, this bill will deliver. The market for advertising will have a far greater number of players but it will be far less competitive, since no companies will be willing to exceed the $20 billion revenue threshold that would leave them subject to the proposal’s onerous ownership standards.
If, however, the goal is to increase consumer welfare, increase rigorous competition, and cement better outcomes for advertisers and publishers, then it is likely to fail. Ownership requirements laid out in the proposal will lead to a stagnant advertising market, higher fees for all involved, and lower-quality, less-relevant ads. Government regulatory interference in highly successful and efficient platform markets are a terrible idea.
We will learn more in the coming weeks about the fate of the proposed American Innovation and Choice Online Act (AICOA), legislation sponsored by Sens. Amy Klobuchar (D-Minn.) and Chuck Grassley (R-Iowa) that would, among other things, prohibit “self-preferencing” by large digital platforms like Google, Amazon, Facebook, Apple, and Microsoft. But while the bill has already been subject to significant scrutiny, a crucially important topic has been absent from that debate: the measure’s likely effect on startup acquisitions.
Of course, AICOA doesn’t directly restrict startup acquisitions, but the activities it would restrict most certainly do dramatically affect the incentives that drive many startup acquisitions. If a platform is prohibited from engaging in cross-platform integration of acquired technologies, or if it can’t monetize its purchase by prioritizing its own technology, it may lose the motivation to make a purchase in the first place.
This would be a significant loss. As Dirk Auer, Sam Bowman, and I discuss in a recent article in the Missouri Law Review, acquisitions are arguably the most important component in providing vitality to the overall venture ecosystem:
Startups generally have two methods for achieving liquidity for their shareholders: IPOs or acquisitions. According to the latest data from Orrick and Crunchbase, between 2010 and 2018 there were 21,844 acquisitions of tech startups for a total deal value of $1.193 trillion. By comparison, according to data compiled by Jay R. Ritter, a professor at the University of Florida, there were 331 tech IPOs for a total market capitalization of $649.6 billion over the same period. As venture capitalist Scott Kupor said in his testimony during the FTC’s hearings on “Competition and Consumer Protection in the 21st Century,” “these large players play a significant role as acquirers of venture-backed startup companies, which is an important part of the overall health of the venture ecosystem.”
Moreover, acquisitions by large incumbents are known to provide a crucial channel for liquidity in the venture capital and startup communities: While at one time the source of the “liquidity events” required to yield sufficient returns to fuel venture capital was evenly divided between IPOs and mergers, “[t]oday that math is closer to about 80 percent M&A and about 20 percent IPOs—[with important implications for any] potential actions that [antitrust enforcers] might be considering with respect to the large platform players in this industry.” As investor and serial entrepreneur Leonard Speiser said recently, “if the DOJ starts going after tech companies for making acquisitions, venture investors will be much less likely to invest in new startups, thereby reducing competition in a far more harmful way.” (emphasis added)
Going after self-preferencing may have exactly the same harmful effect on venture investors and competition.
It’s unclear exactly how the legislation would be applied in any given context (indeed, this uncertainty is one of the most significant problems with the bill, as the ABA Antitrust Section has argued at length). But AICOA is designed, at least in part, to keep large online platforms in their own lanes—to keep them from “leveraging their dominance” to compete against more politically favored competitors in ancillary markets. Indeed, while covered platforms potentially could defend against application of the law by demonstrating that self-preferencing is necessary to “maintain or substantially enhance the core functionality” of the service, no such defense exists for non-core (whatever that means…) functionality, the enhancement of which through self-preferencing is strictly off limits under AICOA.
As I have written (and so have many, many, many, many others), this is terrible policy on its face. But it is also likely to have significant, adverse, indirect consequences for startup acquisitions, given the enormous number of such acquisitions that are outside the covered platforms’ “core functionality.”
Just take a quick look at a sample of the largest acquisitions made by Apple, Microsoft, Amazon, and Alphabet, for example. (These are screenshots of the first several acquisitions by size drawn from imperfect lists collected by Wikipedia, but for purposes of casual empiricism they are well-suited to give an idea of the diversity of acquisitions at issue):
Vanishingly few of these acquisitions go to the “core functionalities” of these platforms. Alphabet’s acquisitions, for example, involve (among many other things) cybersecurity; home automation; cloud computing; wearables, smart glasses, and AR hardware; GPS navigation software; communications security; satellite technology; and social gaming. Microsoft’s acquisitions include companies specializing in video games; social networking; software versioning; drawing software; cable television; cybersecurity; employee engagement; and e-commerce. The technologies and applications involved in acquisitions by Apple and Amazon are similarly varied.
Drilling down a bit, consider the companies Alphabet acquired and put to use in the service of Google Maps:
Which, if any, of these companies would Google have purchased if it knew it would be unable to prioritize Maps in its search results? Would Google have invested more than $1 billion in these companies—and likely significantly more in internal R&D to develop Maps—if it had to speculate whether it would be required (or even be able) to prove someday in the future that prioritizing Google Maps results would enhance its core functionality?
What about Xbox? As noted, AICOA’s terms aren’t perfectly clear, so I’m not certain it would apply to Xbox (is Xbox a “website, online or mobile application, operating system, digital assistant, or online service”?). Here are Microsoft’s video-gaming-related purchases:
The vast majority of these (and all of the acquisitions for which Wikipedia has purchase-price information, totaling some $80 billion of investment) involve video games, not the development of hardware or the functionality of the Xbox platform. Would Microsoft have made these investments if it knew it would be prohibited from prioritizing its own games or exclusively using data gleaned through these games to improve its platform? No one can say for certain, but, at the margin, it is absolutely certain that these self-preferencing bills would make such acquisitions less likely.
Perhaps the most obvious—and concerning—example of the problem arises in the context of Google’s Android platform. Google famously gives Android away for free, of course, and makes its operating system significantly open for bespoke use by all comers. In exchange, Google requires that implementers of the Android OS provide some modicum of favoritism to Google’s revenue-generating products, like Search. For all its uncertainty, there is no question that AICOA’s terms would prohibit this self-preferencing. Intentionally or not, it would thus prohibit the way in which Google monetizes Android and thus hopes to recoup some of the—literally—billions of dollars it has invested in the development and maintenance of Android.
Here are Google’s Android-related acquisitions:
Would Google have bought Android in the first place (to say nothing of subsequent acquisitions and its massive ongoing investment in Android) if it had been foreclosed from adopting its preferred business model to monetize its investment? In the absence of Google bidding for these companies, would they have earned as much from other potential bidders? Would they even have come into existence at all?
Of course, AICOA wouldn’t preclude Google chargingdevice makers for Android and thus raising the price of mobile devices. But that mechanism may not have been sufficient to support Google’s investment in Android, and it would certainly constrain its ability to compete. Even if rules like those proposed by AICOA didn’t undermine Google’s initial purchase of and investment in Android, it is manifestly unclear how forcing Google to adopt a business model that increases consumer prices and constrains its ability to compete head-to-head with Apple’s iOS ecosystem would benefit consumers. (This excellent series of posts—1, 2, 3, 4—by Dirk Auer on the European Commission’s misguided Android decision discusses in detail the significant costs of prohibiting self-preferencing on Android.)
There are innumerable further examples, as well. In all of these cases, it seems clear not only that an AICOA-like regime would diminish competition and reduce consumer welfare across important dimensions, but also that it would impoverish the startup ecosystem more broadly.
And that may be an even bigger problem. Even if you think, in the abstract, that it would be better for “Big Tech” not to own these startups, there is a real danger that putting that presumption into force would drive down acquisition prices, kill at least some tech-startup exits, and ultimately imperil the initial financing of tech startups. It should go without saying that this would be a troubling outcome. Yet there is no evidence to suggest that AICOA’s proponents have even considered whether the presumed benefits of the bill would be worth this immense cost.
Sens. Amy Klobuchar (D-Minn.) and Chuck Grassley (R-Iowa)—cosponsors of the American Innovation Online and Choice Act, which seeks to “rein in” tech companies like Apple, Google, Meta, and Amazon—contend that “everyone acknowledges the problems posed by dominant online platforms.”
In their framing, it is simply an acknowledged fact that U.S. antitrust law has not kept pace with developments in the digital sector, allowing a handful of Big Tech firms to exploit consumers and foreclose competitors from the market. To address the issue, the senators’ bill would bar “covered platforms” from engaging in a raft of conduct, including self-preferencing, tying, and limiting interoperability with competitors’ products.
That’s what makes the open letter to Congress published late last month by the usually staid American Bar Association’s (ABA) Antitrust Law Section so eye-opening. The letter is nothing short of a searing critique of the legislation, which the section finds to be poorly written, vague, and departing from established antitrust-law principles.
The ABA, of course, has a reputation as an independent, highly professional, and heterogenous group. The antitrust section’s membership includes not only in-house corporate counsel, but lawyers from nonprofits, consulting firms, federal and state agencies, judges, and legal academics. Given this context, the comments must be read as a high-level judgment that recent legislative and regulatory efforts to “discipline” tech fall outside the legal mainstream and would come at the cost of established antitrust principles, legal precedent, transparency, sound economic analysis, and ultimately consumer welfare.
The Antitrust Section’s Comments
As the ABA Antitrust Law Section observes:
The Section has long supported the evolution of antitrust law to keep pace with evolving circumstances, economic theory, and empirical evidence. Here, however, the Section is concerned that the Bill, as written, departs in some respects from accepted principles of competition law and in so doing risks causing unpredicted and unintended consequences.
Broadly speaking, the section’s criticisms fall into two interrelated categories. The first relates to deviations from antitrust orthodoxy and the principles that guide enforcement. The second is a critique of the AICOA’s overly broad language and ambiguous terminology.
Departing from established antitrust-law principles
Substantively, the overarching concern expressed by the ABA Antitrust Law Section is that AICOA departs from the traditional role of antitrust law, which is to protect the competitive process, rather than choosing to favor some competitors at the expense of others. Indeed, the section’s open letter observes that, out of the 10 categories of prohibited conduct spelled out in the legislation, only three require a “material harm to competition.”
Take, for instance, the prohibition on “discriminatory” conduct. As it stands, the bill’s language does not require a showing of harm to the competitive process. It instead appears to enshrine a freestanding prohibition of discrimination. The bill targets tying practices that are already prohibited by U.S. antitrust law, but while similarly eschewing the traditional required showings of market power and harm to the competitive process. The same can be said, mutatis mutandis, for “self-preferencing” and the “unfair” treatment of competitors.
The problem, the section’s letter to Congress argues, is not only that this increases the teleological chasm between AICOA and the overarching goals and principles of antitrust law, but that it can also easily lead to harmful unintended consequences. For instance, as the ABA Antitrust Law Section previously observed in comments to the Australian Competition and Consumer Commission, a prohibition of pricing discrimination can limit the extent of discounting generally. Similarly, self-preferencing conduct on a platform can be welfare-enhancing, while forced interoperability—which is also contemplated by AICOA—can increase prices for consumers and dampen incentives to innovate. Furthermore, some of these blanket prohibitions are arguably at loggerheads with established antitrust doctrine, such as in, e.g., Trinko, which established that even monopolists are generally free to decide with whom they will deal.
Arguably, the reason why the Klobuchar-Grassley bill can so seamlessly exclude or redraw such a central element of antitrust law as competitive harm is because it deliberately chooses to ignore another, preceding one. Namely, the bill omits market power as a requirement for a finding of infringement or for the legislation’s equally crucial designation as a “covered platform.” It instead prescribes size metrics—number of users, market capitalization—to define which platforms are subject to intervention. Such definitions cast an overly wide net that can potentially capture consumer-facing conduct that doesn’t have the potential to harm competition at all.
It is precisely for this reason that existing antitrust laws are tethered to market power—i.e., because it long has been recognized that only companies with market power can harm competition. As John B. Kirkwood of Seattle University School of Law has written:
Market power’s pivotal role is clear…This concept is central to antitrust because it distinguishes firms that can harm competition and consumers from those that cannot.
In response to the above, the ABA Antitrust Law Section (reasonably) urges Congress explicitly to require an effects-based showing of harm to the competitive process as a prerequisite for all 10 of the infringements contemplated in the AICOA. This also means disclaiming generalized prohibitions of “discrimination” and of “unfairness” and replacing blanket prohibitions (such as the one for self-preferencing) with measured case-by-case analysis.
Opaque language for opaque ideas
Another underlying issue is that the Klobuchar-Grassley bill is shot through with indeterminate language and fuzzy concepts that have no clear limiting principles. For instance, in order either to establish liability or to mount a successful defense to an alleged violation, the bill relies heavily on inherently amorphous terms such as “fairness,” “preferencing,” and “materiality,” or the “intrinsic” value of a product. But as the ABA Antitrust Law Section letter rightly observes, these concepts are not defined in the bill, nor by existing antitrust case law. As such, they inject variability and indeterminacy into how the legislation would be administered.
Moreover, it is also unclear how some incommensurable concepts will be weighed against each other. For example, how would concerns about safety and security be weighed against prohibitions on self-preferencing or requirements for interoperability? What is a “core function” and when would the law determine it has been sufficiently “enhanced” or “maintained”—requirements the law sets out to exempt certain otherwise prohibited behavior? The lack of linguistic and conceptual clarity not only explodes legal certainty, but also invites judicial second-guessing into the operation of business decisions, something against which the U.S. Supreme Court has long warned.
Finally, the bill’s choice of language and recent amendments to its terminology seem to confirm the dynamic discussed in the previous section. Most notably, the latest version of AICOA replaces earlier language invoking “harm to the competitive process” with “material harm to competition.” As the ABA Antitrust Law Section observes, this “suggests a shift away from protecting the competitive process towards protecting individual competitors.” Indeed, “material harm to competition” deviates from established categories such as “undue restraint of trade” or “substantial lessening of competition,” which have a clear focus on the competitive process. As a result, it is not unreasonable to expect that the new terminology might be interpreted as meaning that the actionable standard is material harm to competitors.
In its letter, the antitrust section urges Congress not only to define more clearly the novel terminology used in the bill, but also to do so in a manner consistent with existing antitrust law. Indeed:
The Section further recommends that these definitions direct attention to analysis consistent with antitrust principles: effects-based inquiries concerned with harm to the competitive process, not merely harm to particular competitors
The AICOA is a poorly written, misguided, and rushed piece of regulation that contravenes both basic antitrust-law principles and mainstream economic insights in the pursuit of a pre-established populist political goal: punishing the success of tech companies. If left uncorrected by Congress, these mistakes could have potentially far-reaching consequences for innovation in digital markets and for consumer welfare. They could also set antitrust law on a regressive course back toward a policy of picking winners and losers.
After years of debate and negotiations, European Lawmakers have agreed upon what will most likely be the final iteration of the Digital Markets Act (“DMA”), following the March 24 final round of “trilogue” talks.
For the uninitiated, the DMA is one in a string of legislative proposals around the globe intended to “rein in” tech companies like Google, Amazon, Facebook, and Apple through mandated interoperability requirements and other regulatory tools, such as bans on self-preferencing. Other important bills from across the pond include the American Innovation and Choice Online Act, the ACCESS Act, and the Open App Markets Act.
In many ways, the final version of the DMA represents the worst possible outcome, given the items that were still up for debate. The Commission caved to some of the Parliament’s more excessive demands—such as sweeping interoperability provisions that would extend not only to “ancillary” services, such as payments, but also to messaging services’ basic functionalities. Other important developments include the addition of voice assistants and web browsers to the list of Core Platform Services (“CPS”), and symbolically higher “designation” thresholds that further ensure the act will apply overwhelmingly to just U.S. companies. On a brighter note, lawmakers agreed that companies could rebut their designation as “gatekeepers,” though it remains to be seen how feasible that will be in practice.
We offer here an overview of the key provisions included in the final version of the DMA and a reminder of the shaky foundations it rests on.
Among the most important of the DMA’s new rules concerns mandatory interoperability among online platforms. In a nutshell, digital platforms that are designated as “gatekeepers” will be forced to make their services “interoperable” (i.e., compatible) with those of rivals. It is argued that this will make online markets more contestable and thus boost consumer choice. But as ICLE scholars have been explaining for some time, this is unlikely to be the case (here, here, and here). Interoperability is not the panacea EU legislators claim it to be. As former ICLE Director of Competition Policy Sam Bowman has written, there are many things that could be interoperable, but aren’t. The reason is that interoperability comes with costs as well as benefits. For instance, it may be worth letting different earbuds have different designs because, while it means we sacrifice easy interoperability, we gain the ability for better designs to be brought to the market and for consumers to be able to choose among them. Economists Michael L. Katz and Carl Shapiro concur:
Although compatibility has obvious benefits, obtaining and maintaining compatibility often involves a sacrifice in terms of product variety or restraints on innovation.
There are other potential downsides to interoperability. For instance, a given set of interoperable standards might be too costly to implement and/or maintain; it might preclude certain pricing models that increase output; or it might compromise some element of a product or service that offers benefits specifically because it is not interoperable (such as, e.g., security features). Consumers may also genuinely prefer closed (i.e., non-interoperable) platforms. Indeed: “open” and “closed” are not synonyms for “good” and “bad.” Instead, as Boston University’s Andrei Hagiu has shown, there are fundamental welfare tradeoffs at play that belie simplistic characterizations of one being inherently superior to the other.
Further, as Sam Bowman observed, narrowing choice through a more curated experience can also be valuable for users, as it frees them from having to research every possible option every time they buy or use some product (if you’re unconvinced, try turning off your spam filter for a couple of days). Instead, the relevant choice consumers exercise might be in choosing among brands. In sum, where interoperability is a desirable feature, consumer preferences will tend to push for more of it. However, it is fundamentally misguided to treat mandatory interoperability as a cure-all elixir or a “super tool” of “digital platform governance.” In a free-market economy, it is not—or, it should not—be up to courts and legislators to substitute for businesses’ product-design decisions and consumers’ revealed preferences with their own, based on diffuse notions of “fairness.” After all, if we could entrust such decisions to regulators, we wouldn’t need markets or competition in the first place.
Of course, it was always clear that the DMA would contemplate some degree of mandatory interoperability – indeed, this was arguably the new law’s biggest selling point. What was up in the air until now was the scope of such obligations. The Commission had initially pushed for a comparatively restrained approach, requiring interoperability “only” in ancillary services, such as payment systems (“vertical interoperability”). By contrast, the European Parliament called for more expansive requirements that would also encompass social-media platforms and other messaging services (“horizontal interoperability”).
The problem with such far-reaching interoperability requirements is that they are fundamentally out of pace with current privacy and security capabilities. As ICLE Senior Scholar Mikolaj Barczentewicz has repeatedly argued, the Parliament’s insistence on going significantly beyond the original DMA’s proposal and mandating interoperability of messaging services is overly broad and irresponsible. Indeed, as Mikolaj notes, the “likely result is less security and privacy, more expenses, and less innovation.”The DMA’s defensers would retort that the law allows gatekeepers to do what is “strictly necessary” (Council) or “indispensable” (Parliament) to protect safety and privacy (it is not yet clear which wording the final version has adopted). Either way, however, the standard may be too high and companies may very well offer lower security to avoid liability for adopting measures that would be judged by the Commission and the courts as going beyond what is “strictly necessary” or “indispensable.” These safeguards will inevitably be all the more indeterminate (and thus ineffectual) if weighed against other vague concepts at the heart of the DMA, such as “fairness.”
Gatekeeper Thresholds and the Designation Process
Another important issue in the DMA’s construction concerns the designation of what the law deems “gatekeepers.” Indeed, the DMA will only apply to such market gatekeepers—so-designated because they meet certain requirements and thresholds. Unfortunately, the factors that the European Commission will consider in conducting this designation process—revenues, market capitalization, and user base—are poor proxies for firms’ actual competitive position. This is not surprising, however, as the procedure is mainly designed to ensure certain high-profile (and overwhelmingly American) platforms are caught by the DMA.
From this perspective, the last-minute increase in revenue and market-capitalization thresholds—from 6.5 billion euros to 7.5 billion euros, and from 65 billion euros to 75 billion euros, respectively—won’t change the scope of the companies covered by the DMA very much. But it will serve to confirm what we already suspected: that the DMA’s thresholds are mostly tailored to catch certain U.S. companies, deliberately leaving out EU and possibly Chinese competitors (see here and here). Indeed, what would have made a difference here would have been lowering the thresholds, but this was never really on the table. Ultimately, tilting the European Union’s playing field against its top trading partner, in terms of exports and trade balance, is economically, politically, and strategically unwise.
As a consolation of sorts, it seems that the Commission managed to squeeze in a rebuttal mechanism for designated gatekeepers. Imposing far-reaching obligations on companies with no (or very limited) recourse to escape the onerous requirements of the DMA would be contrary to the basic principles of procedural fairness. Still, it remains to be seen how this mechanism will be articulated and whether it will actually be viable in practice.
Double (and Triple?) Jeopardy
Two recent judgments from the European Court of Justice (ECJ)—Nordzucker and bpost—are likely to underscore the unintended effects of cumulative application of both the DMA and EU and/or national competition laws. The bpost decision is particularly relevant, because it lays down the conditions under which cases that evaluate the same persons and the same facts in two separate fields of law (sectoral regulation and competition law) do not violate the principle of ne bis in idem, also known as “double jeopardy.” As paragraph 51 of the judgment establishes:
There must be precise rules to determine which acts or omissions are liable to be subject to duplicate proceedings;
The two sets of proceedings must have been conducted in a sufficiently coordinated manner and within a similar timeframe; and
The overall penalties must match the seriousness of the offense.
It is doubtful whether the DMA fulfills these conditions. This is especially unfortunate considering the overlapping rules, features, and goals among the DMA and national-level competition laws, which are bound to lead to parallel procedures. In a word: expect double and triple jeopardy to be hotly litigated in the aftermath of the DMA.
Of course, other relevant questions have been settled which, for reasons of scope, we will have to leave for another time. These include the level of fines(up to 10% worldwide revenue, or 20% in the case of repeat offenses); the definition and consequences of systemic noncompliance (it seems that the Parliament’s draconian push for a general ban on acquisitions in case of systemic noncompliance has been dropped); and the addition of more core platform services (web browsers and voice assistants).
The DMA’s Dubious Underlying Assumptions
The fuss and exhilaration surrounding the impending adoption of the EU’s most ambitious competition-related proposal in decades should not obscure some of the more dubious assumptions which underpin it, such as that:
It is still unclear that intervention in digital markets is necessary, let alone urgent.
Even if it were clear, there is scant evidence to suggest that tried and tested ex post instruments, such as those envisioned in EU competition law, are not up to the task.
Even if the prior two points had been established beyond any reasonable doubt (which they haven’t), it is still far from clear that DMA-style ex ante regulation is the right tool to address potential harms to competition and to consumers that arise in digital markets.
It is unclear that intervention is necessary
Despite a mounting moral panic around and zealous political crusading against Big Tech (an epithet meant to conjure antipathy and distrust), it is still unclear that intervention in digital markets is necessary. Much of the behavior the DMA assumes to be anti-competitive has plausible pro-competitive justifications. Self-preferencing, for instance, is a normal part of how platforms operate, both to improve the value of their core products and to earn returns to reinvest in their development. As ICLE’s Dirk Auer points out, since platforms’ incentives are to maximize the value of their entire product ecosystem, those that preference their own products frequently end up increasing the total market’s value by growing the share of users of a particular product (the example of Facebook’s integration of Instagram is a case in point). Thus, while self-preferencing may, in some cases,be harmful, a blanket presumption of harm is thoroughly unwarranted.
Similarly, the argument that switching costs and data-related increasing returns to scale (in fact, data generally entails diminishing returns) have led to consumer lock-in and thereby raised entry barriers has also been exaggerated to epic proportions (pun intended). As we have discussed previously, there are plenty of counterexamples where firms have easily overcome seemingly “insurmountable” barriers to entry, switching costs, and network effects to disrupt incumbents.
To pick a recent case: how many of us had heard of Zoom before the pandemic? Where was TikTok three years ago? (see here for a multitude of other classic examples, including Yahoo and Myspace).
Can you really say, with a straight face, that switching costs between messaging apps are prohibitive? I’m not even that active and I use at least six such apps on a daily basis: Facebook Messenger, Whatsapp, Instagram, Twitter, Viber, Telegram, and Slack (it took me all of three minutes to download and start using Slack—my newest addition). In fact, chances are that, like me, you have always multihomed nonchalantly and had never even considered that switching costs were impossibly high (or that they were a thing) until the idea that you were “locked-in” by Big Tech was drilled into your head by politicians and other busybodies looking for trophies to adorn their walls.
What about the “unprecedented,” quasi-fascistic levels of economic concentration? First, measures of market concentration are sometimes anchored in flawed methodology and market definitions (see, e.g., Epic’s insistence that Apple is a monopolist in the market for operating systems, conveniently ignoring that competition occurs at the smartphone level, where Apple has a worldwide market share of 15%—see pages 45-46 here). But even if such measurements were accurate, high levels of concentration don’t necessarily mean that firms do not face strong competition. In fact, as Nicolas Petit has shown, tech companies compete vigorously against each other across markets.
As Giuseppe Colangelo has argued persuasively (here and here), it is not at all clear that ex post competition regulation is insufficient to tackle anti-competitive behavior in the digital sector:
Ongoing antitrust investigations demonstrate that standard competition law still provides a flexible framework to scrutinize several practices described as new and peculiar to app stores.
The recent Google Shopping decision, in which the Commission found that Google had abused its dominant position by preferencing its own online-shopping service in Google Search results, is a case in point (the decision was confirmed by the General Court and is now pending review before the European Court of Justice). The “self-preferencing” category has since been applied by other EU competition authorities. The Italian competition authority, for instance, fined Amazon 1 billion euros for preferencing its own distribution service, Fulfilled by Amazon, on the Amazon marketplace (i.e., Amazon.it). Thus, Article 102, which includes prohibitions on “applying dissimilar conditions to similar transactions,” appears sufficiently flexible to cover self-preferencing, as well as other potentially anti-competitive offenses relevant to digital markets (e.g., essential facilities).
For better or for worse, EU competition law has historically been sufficiently pliable to serve a range of goals and values. It has also allowed for experimentation and incorporated novel theories of harm and economic insights. Here, the advantage of competition law is that it allows for a more refined, individualized approach that can avoid some of the pitfalls of applying a one-size fits all model across all digital platforms. Those pitfalls include: harming consumers, jeopardizing the business models of some of the most successful and pro-consumer companies in existence, and ignoring the differences among platforms, such as between Google and Apple’s app stores. I turn to these issues next.
Ex ante regulation probably isn’t the right tool
Even if it were clear that intervention is necessary and that existing competition law was insufficient, it is not clear that the DMA is the right regulatory tool to address any potential harms to competition and consumers that may arise in the digital markets. Here, legislators need to be wary of unintended consequences, trade-offs, and regulatory fallibility. For one, It is possible that the DMA will essentially consolidate the power of tech platforms, turning them into de facto public utilities. This will not foster competition, but rather will make smaller competitors systematically dependent on so-called gatekeepers. Indeed, why become the next Google if you can just free ride off of the current Google? Why download an emerging messaging app if you can already interact with its users through your current one? In a way, then, the DMA may become a self-fulfilling prophecy.
Moreover, turning closed or semi-closed platforms such as the iOS into open platforms more akin to Android blurs the distinctions among products and dampens interbrand competition. It is a supreme paradox that interoperability and sideloading requirements purportedly give users more choice by taking away the option of choosing a “walled garden” model. As discussed above, overriding the revealed preferences of millions of users is neither pro-competitive nor pro-consumer (but it probably favors some competitors at the expense of those two things).
Nor are many of the other obligations contemplated in the DMA necessarily beneficial to consumers. Do users really not want to have default apps come preloaded on their devices and instead have to download and install them manually? Ditto for operating systems. What is the point of an operating system if it doesn’t come with certain functionalities, such as a web browser? What else should we unbundle—keyboard on iOS? Flashlight? Do consumers really want to choose from dozens of app stores when turning on their new phone for the first time? Do they really want to have their devices cluttered with pointless split-screens? Do users really want to find all their contacts (and be found by all their contacts) across all messaging services? (I switched to Viber because I emphatically didn’t.) Do they really want to have their privacy and security compromised because of interoperability requirements?Then there is the question of regulatory fallibility. As Alden Abott has written on the DMA and other ex ante regulatory proposals aimed at “reining in” tech companies:
Sorely missing from these regulatory proposals is any sense of the fallibility of regulation. Indeed, proponents of new regulatory proposals seem to implicitly assume that government regulation of platforms will enhance welfare, ignoring real-life regulatory costs and regulatory failures (see here, for example).
This brings us back to the second point: without evidence that antitrust law is “not up to the task,” far-reaching and untested regulatory initiatives with potentially high error costs are put forth as superior to long-established, consumer-based antitrust enforcement. Yes, antitrust may have downsides (e.g., relative indeterminacy and slowness), but these pale in comparison to the DMA’s (e.g., large error costs resulting from high information requirements, rent-seeking, agency capture).
The DMA is an ambitious piece of regulation purportedly aimed at ensuring “fair and open digital markets.” This implies that markets are not fair and open; or that they risk becoming unfair and closed absent far-reaching regulatory intervention at EU level. However, it is unclear to what extent such assumptions are borne out by the reality of markets. Are digital markets really closed? Are they really unfair? If so, is it really certain that regulation is necessary? Has antitrust truly proven insufficient? It also implies that DMA-style ex ante regulation is necessary to tackle it, and that the costs won’t outweigh the benefits. These are heroic assumptions that have never truly been seriously put to the test.
Considering such brittle empirical foundations, the DMA was always going to be a contentious piece of legislation. However, there was always the hope that EU legislators would show restraint in the face of little empirical evidence and high error costs. Today, these hopes have been dashed. With the adoption of the DMA, the Commission, Council, and the Parliament have arguably taken a bad piece of legislation and made it worse. The interoperability requirements in messaging services, which are bound to be a bane for user privacy and security, are a case in point.
After years trying to anticipate the whims of EU legislators, we finally know where we’re going, but it’s still not entirely sure why we’re going there.
As the European Union’s Digital Markets Act (DMA) has entered the final stage of its approval process, one matter the inter-institutional negotiations appears likely to leave unresolved is how the DMA’s the relationship with competition law affects the very rationale and legal basis for the intervention.
The DMA is explicitly grounded on the questionable assumption that competition law alone is insufficient to rein in digital gatekeepers. Accordingly, EU lawmakers have declared the proposal to be a necessary regulatory intervention that will complement antitrust rules by introducing a set of ex ante obligations.
To support this line of reasoning, the DMA’s drafters insist that it protects a different legal interest from antitrust. Indeed, the intervention is ostensibly grounded in Article 114 of the Treaty on the Functioning of the European Union (TFEU), rather than Article 103—the article that spells out the implementation of competition law. Pursuant to Article 114, the DMA opts for centralized enforcement at the EU level to ensure harmonized implementation of the new rules.
It has nonetheless been clear from the very beginning that the DMA lacks a distinct purpose. Indeed, the interests it nominally protects (the promotion of fairness and contestability) do not differ from the substance and scope of competition law. The European Parliament has even suggested that the law’s aims should also include fostering innovation and increasing consumer welfare, which also are within the purview of competition law. Moreover, the DMA’s obligations focus on practices that have already been the subject of past and ongoing antitrust investigations.
Where the DMA differs in substance from competition law is simply that it would free enforcers from the burden of standard antitrust analysis. The law is essentially a convenient shortcut that would dispense with the need to define relevant markets, prove dominance, and measure market effects (see here). It essentially dismisses economic analysis and the efficiency-oriented consumer welfare test in order to lower the legal standards and evidentiary burdens needed to bring an investigation.
Against this background, my new ICLE working paper pursues a twofold goal. First, it aims to show how, because of its ambiguous relationship with competition law, the DMA falls short of its goal of preventing regulatory fragmentation. Moreover, despite having significant doubts about the DMA’s content and rationale, I argue that fully centralized enforcement at the EU level should be preserved and that frictions with competition law would be better confined by limiting the law’s application to a few large platforms that are demonstrably able to orchestrate an ecosystem.
Welcome to the (Regulatory) Jungle
The DMA will not replace competition rules. It will instead be implemented alongside them, creating several overlapping layers of regulation. Indeed, my paper broadly illustrates how the very same practices that are targeted by the DMA may also be investigated by NCAs under European and national-level competition laws, under national competition laws specific to digital markets, and under national rules on economic dependence.
While the DMA nominally prohibits EU member states from imposing additional obligations on gatekeepers, member states remain free to adapt their competition laws to digital markets in accordance with the leeway granted by Article 3(3) of the Modernization Regulation. Moreover, NCAs may be eager to exploit national rules on economic dependence to tackle perceived imbalances of bargaining power between online platforms and their business counterparties.
The risk of overlap with competition law is also fostered by the DMA’s designation process, which may further widen the law’s scope in the future in terms of what sorts of digital services and firms may fall under the law’s rubric. As more and more industries explore platform business models, the DMA would—without some further constraints on its scope—be expected to cover a growing number of firms, including those well outside Big Tech or even native tech companies.
As a result, the European regulatory landscape could become even more fragmented in the post-DMA world. The parallel application of the DMA and antitrust rules poses the risks of double jeopardy (see here) and of conflicting decisions.
A Fully Centralized and Ecosystem-Based Regulatory Regime
To counter the risk that digital-market activity will be subject to regulatory double jeopardy and conflicting decisions across EU jurisdictions, DMA enforcement should not only be fully centralized at the EU level, but that centralization should be strengthened. This could be accomplished by empowering the Commission with veto rights, as was requested by the European Parliament.
This veto power should certainly extend to national measures targeting gatekeepers that run counter to the DMA or to decisions adopted by the Commission under the DMA. But it should also include prohibiting national authorities from carrying out investigations on their own initiative without prior authorization by the Commission.
Moreover, it will also likely be necessary to significantly redefine the DMA’s scope. Notably, EU leaders could mitigate the risk of fragmentation from the DMA’s frictions with competition law by circumscribing the law to ecosystem-related issues. This would effectively limit its application to a few large platforms who are demonstrably able to orchestrate an ecosystem. It also would reinstate the DMA’s original justification, which was to address the emergence of a few large platforms who are able act as gatekeepers and enjoy an entrenched position as a result of conglomerate ecosystems.
Changes to the designation process should also be accompanied by confining the list of ex ante obligations the law imposes. These should reflect relevant differences in platforms’ business models and be tailored to the specific firm under scrutiny, rather than implementing a one-size-fits-all approach.
There are compelling arguments against the policy choice to regulate platforms and their ecosystems like utilities. The suggested adaptations would at least acknowledge the regulatory nature of the DMA, removing the suspicion that it is just an antitrust intervention vested by regulation.
In a new paper, Giuseppe Colangelo and Oscar Borgogno investigate whether antitrust policy is sufficiently flexible to keep up with the dynamics of digital app stores, and whether regulatory interventions are required in order to address their unique features. The authors summarize their findings in this blog post.
Likewise, the terms and conditions for accessing app stores—such as in-app purchasing rules, restrictions on freedom of choice for smartphone payment apps, and near field communication (NFC) limitations—face scrutiny from courts and antitrust authorities around the world.
Finally, legislative initiatives envisage obligations explicitly addressed to app stores. Notably, the EuropeanDigital Markets Act (DMA) and some U.S. bills (e.g., the American Innovation and Choice Online Act and the Open App Markets Act, both of which are scheduled to be marked up Jan. 20 by the Senate Judiciary Committee) prohibit designated platforms from, for example: discriminating among users by engaging in self-preferencing and applying unfair access conditions; preventing users from sideloading and uninstalling pre-installed apps; impeding data portability and interoperability; or imposing anti-steering provisions. Likewise, South Korea has recently prohibited app-store operators in dominant market positions from forcing payment systems upon content providers and inappropriately delaying the review of, or deleting, mobile content from app markets.
Despite their differences, these international legislative initiatives do share the same aims and concerns. By and large, they question the role of competition law in the digital economy. In the case of app stores, these regulatory interventions attempt to introduce a neutrality regime, with the aim of increasing contestability, facilitating the possibility of switching by users, tackling conflicts of interests, and addressing imbalances in the commercial relationship. Ultimately, these proposals would treat online platforms as akin to common carriers or public utilities.
All of these initiatives assume antitrust is currently falling, because competition rules apply ex post and require an extensive investigation on a case-by-case basis. But is that really the case?
Platform and Device Neutrality Regime
Focusing on the content of the European, German, and U.S. legislative initiatives, the neutrality regime envisaged for app stores would introduce obligations in terms of both device and platform neutrality. The former includes provisions on app uninstalling, sideloading, app switching, access to technical functionality, and the possibility of changing default settings. The latter entail data portability and interoperability obligations, and the ban on self-preferencing, Sherlocking, and unfair access conditions.
App Store Obligations: Comparison of EU, German, and U.S. Initiatives
Antitrust v. Regulation
Despite the growing consensus regarding the need to rely on ex ante regulation to govern digital markets and tackle the practices of large online platforms, recent and ongoing antitrust investigations demonstrate that standard competition law still provides a flexible framework to scrutinize several practices sometimes described as new and peculiar to app stores.
This is particularly true in Europe, where the antitrust framework grants significant leeway to antitrust enforcers relative to the U.S. scenario, as illustrated by the recentGoogle Shopping decision.
Indeed, considering legislative proposals to modernize antitrust law and to strengthen its enforcement, the U.S. House Judiciary Antitrust Subcommittee, along with someauthoritative scholars, have suggested emulating the European model—imposing particular responsibility on dominant firms through the notion of abuse of dominant position and overriding several Supreme Court decisions in order to clarify the prohibitions on monopoly leveraging, predatory pricing, denial of essential facilities, refusals to deal, and tying.
By contrast, regulation appears better suited to support interventions intended to implement industrial-policy objectives. This applies, in particular, to provisions prohibiting app stores from impeding or restricting sideloading, app uninstalling, the possibility of choosing third-party apps and app stores as defaults, as well as provisions that would mandate data portability and interoperability.
However, such regulatory proposals may ultimately harm consumers. Indeed, by questioning the core of digital platform business models and affecting their governance design, these interventions entrust public authorities with mammoth tasks that could ultimately jeopardize the profitability of app-store ecosystems. They also overlook the differences that may exist between the business models of different platforms, such as Google and Apple’s app stores.
To make matters worse, the difficulties encountered by regulators that have imposed product-design remedies on firms suggest that regulators may struggle to craft feasible and effective solutions. For instance, when the European General Court found that Google favored its own services in the Google Shopping case, it noted that this finding rested on the differential positioning and display of Shopping Units when compared to generic results. As a consequence, it could be argued that Google’s proposed auction remedy (whereby Google would compete with rivals for Shopping box placement) is compliant with the Court’s ruling because there is no dicrimination, regardless of the fact that Google might ultimately outbid its rivals (seehere).
Finally, the neutrality principle cannot be transposed perfectly to all online platforms. Indeed, the workings of the app-discovery and distribution markets differ from broadband networks, as rankings and mobile services by definition involve some form of continuous selection and differentiated treatment to optimize the mobile-customer experience.
For all these reasons, our analysis suggests that antitrust law provides a less intrusive and more individualized approach, which would eventually benefit consumers by safeguarding quality and innovation.
The bill marks the culmination of misguided efforts to bring Big Tech to heel, regardless of the negative costs imposed upon consumers in the process. ICLE scholars have written about these developments in detail since the bill was introduced in October.
Below are 10 significant misconceptions that underpin the legislation.
1. There Is No Evidence that Self-Preferencing Is Generally Harmful
Self-preferencing is a normal part of how platforms operate, both to improve the value of their core products and to earn returns so that they have reason to continue investing in their development.
Platforms’ incentives are to maximize the value of their entire product ecosystem, which includes both the core platform and the services attached to it. Platforms that preference their own products frequently end up increasing the total market’s value by growing the share of users of a particular product. Those that preference inferior products end up hurting their attractiveness to users of their “core” product, exposing themselves to competition from rivals.
As Geoff Manne concludes, the notion that it is harmful (notably to innovation) when platforms enter into competition with edge providers is entirely speculative. Indeed, a range of studies show that the opposite is likely true. 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.
Consider a few examples from the empirical literature:
Li and Agarwal (2017) find that Facebook’s integration of Instagram led to a significant increase in user demand both for Instagram itself and for the entire category of photography apps. Instagram’s integration with Facebook increased consumer awareness of photography apps, which benefited independent developers, as well as Facebook.
Foerderer, et al. (2018) find that Google’s 2015 entry into the market for photography apps on Android created additional user attention and demand for such apps generally.
Cennamo, et al. (2018) find that video games offered by console firms often become blockbusters and expand the consoles’ installed base. As a result, these games increase the potential for all independent game developers to profit from their games, even in the face of competition from first-party games.
Finally, while Zhu and Liu (2018) is often held up as demonstrating harm from Amazon’s competition with third-party sellers on its platform, its findings are actually far from clear-cut. As co-author Feng Zhu noted in the Journal of Economics & Management Strategy: “[I]f Amazon’s entries attract more consumers, the expanded customer base could incentivize more third‐ party sellers to join the platform. As a result, the long-term effects for consumers of Amazon’s entry are not clear.”
2. Interoperability Is Not Costless
There are many things that could be interoperable, but aren’t. The reason not everything is interoperable 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.
As Sam Bowman has observed, there are often costs that prevent interoperability from being worth the tradeoff, such as that:
It might be too costly to implement and/or maintain.
It might prescribe a certain product design and prevent experimentation and innovation.
It might add too much complexity and/or confusion for users, who may prefer not to have certain choices.
It might increase the risk of something not working, or of security breaches.
It might prevent certain pricing models that increase output.
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 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.
In short, we cannot infer from the mere absence of interoperability that something is wrong, since we frequently observe that the costs of interoperability outweigh the benefits.
3. Consumers Often Prefer Closed Ecosystems
Digital markets could have taken a vast number of shapes. So why have they gravitated toward the very characteristics that authorities condemn? For instance, if market tipping and consumer lock-in are so problematic, why is it that new corners of the digital economy continue to emerge via closed platforms, as opposed to collaborative ones?
Indeed, if recent commentary is to be believed, it is the latter that should succeed, because they purportedly produce greater gains from trade. And if consumers and platforms cannot realize these gains by themselves, then we should see intermediaries step into that breach. But this does not seem to be happening in the digital economy.
The naïve answer is to say that the absence of “open” systems is precisely the problem. What’s harder is to try to actually understand why. As I have written, there are many reasons that consumers might prefer “closed” systems, even when they have to pay a premium for them.
Take the example of app stores. Maintaining some control over the apps that can access the store notably enables platforms to easily weed out bad players. Similarly, controlling the hardware resources that each app can use may greatly improve device performance. In other words, centralized platforms can eliminate negative externalities that “bad” apps impose on rival apps and on consumers. This is especially true when consumers struggle to attribute dips in performance to an individual app, rather than the overall platform.
It is also conceivable that consumers prefer to make many of their decisions at the inter-platform level, rather than within each platform. In simple terms, users arguably make their most important decision when they choose between an Apple or Android smartphone (or a Mac and a PC, etc.). In doing so, they can select their preferred app suite with one simple decision.
They might thus purchase an iPhone because they like the secure App Store, or an Android smartphone because they like the Chrome Browser and Google Search. Forcing too many “within-platform” choices upon users may undermine a product’s attractiveness. Indeed, it is difficult to create a high-quality reputation if each user’s experience is fundamentally different. In short, contrary to what antitrust authorities seem to believe, closed platforms might be giving most users exactly what they desire.
Too often, it is simply assumed that consumers benefit from more openness, and that shared/open platforms are the natural order of things. What some refer to as “market failures” may in fact be features that explain the rapid emergence of the digital economy. Ronald Coase said it best when he quipped that economists always find a monopoly explanation for things that they simply fail to understand.
4. Data Portability Can Undermine Security and Privacy
As explained above, platforms that are more tightly controlled can be regulated by the platform owner to avoid some of the risks present in more open platforms. Apple’s App Store, for example, is a relatively closed and curated platform, which gives users assurance that apps will meet a certain standard of security and trustworthiness.
Along similar lines, there are privacy issues that arise from data portability. Even a relatively simple requirement to make photos available for download can implicate third-party interests. Making a user’s photos more broadly available may tread upon the privacy interests of friends whose faces appear in those photos. Importing those photos to a new service potentially subjects those individuals to increased and un-bargained-for security risks.
As Sam Bowman and Geoff Manne observe, this is exactly what happened with Facebook and its Social Graph API v1.0, ultimately culminating in the Cambridge Analytica scandal. Because v1.0 of Facebook’s Social Graph API permitted developers to access information about a user’s friends without consent, it enabled third-party access to data about exponentially more users. It appears that some 270,000 users granted data access to Cambridge Analytica, from which the company was able to obtain information on 50 million Facebook users.
In short, there is often no simple solution to implement interoperability and data portability. Any such program—whether legally mandated or voluntarily adopted—will need to grapple with these and other tradeoffs.
5. Network Effects Are Rarely Insurmountable
Several scholars in recent years have called for more muscular antitrust intervention in networked industries on grounds that network externalities, switching costs, and data-related increasing returns to scale lead to inefficient consumer lock-in and raise entry barriers for potential rivals (see here, here, and here). But there are countless counterexamples where firms have easily overcome potential barriers to entry and network externalities, ultimately disrupting incumbents.
Zoom is one of the most salient instances. As I wrote in April 2019 (a year before the COVID-19 pandemic):
To get to where it is today, Zoom had to compete against long-established firms with vast client bases and far deeper pockets. These include the likes of Microsoft, Cisco, and Google. Further complicating matters, the video communications market exhibits some prima facie traits that are typically associated with the existence of network effects.
Geoff Manne and Alec Stapp have put forward a multitude of other examples, including: the demise of Yahoo; the disruption of early instant-messaging applications and websites; and MySpace’s rapid decline. In all of these cases, outcomes did not match the predictions of theoretical models.
More recently, TikTok’s rapid rise offers perhaps the greatest example of a potentially superior social-networking platform taking significant market share away from incumbents. According to the Financial Times, TikTok’s video-sharing capabilities and powerful algorithm are the most likely explanations for its success.
While these developments certainly do not disprove network-effects theory, they eviscerate the belief, common in antitrust circles, that superior rivals are unable to overthrow incumbents in digital markets. Of course, this will not always be the case. The question is ultimately one of comparing institutions—i.e., do markets lead to more or fewer error costs than government intervention? Yet, this question is systematically omitted from most policy discussions.
6. Profits Facilitate New and Exciting Platforms
As I wrote in August 2020, the relatively closed model employed by several successful platforms (notably Apple’s App Store, Google’s Play Store, and the Amazon Retail Platform) allows previously unknown developers/retailers to rapidly expand because (i) users do not have to fear their apps contain some form of malware and (ii) they greatly reduce payments frictions, most notably security-related ones.
While these are, indeed, tremendous benefits, another important upside seems to have gone relatively unnoticed. The “closed” business model also gives firms significant incentives to develop new distribution mediums (smart TVs spring to mind) and to improve existing ones. In turn, this greatly expands the audience that software developers can reach. In short, developers get a smaller share of a much larger pie.
The economics of two-sided markets are enlightening here. For example, Apple and Google’s app stores are what Armstrong and Wright (here and here) refer to as “competitive bottlenecks.” That is, they compete aggressively (among themselves, and with other gaming platforms) to attract exclusive users. They can then charge developers a premium to access those users.
This dynamic gives firms significant incentive to continue to attract and retain new users. For instance, if Steve Jobs is to be believed, giving consumers better access to media such as eBooks, video, and games was one of the driving forces behind the launch of the iPad.
This model of innovation would be seriously undermined if developers and consumers could easily bypass platforms, as would likely be the case under the American Innovation and Choice Online Act.
7. Large Market Share Does Not Mean Anticompetitive Outcomes
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. Indeed, as economists like Joseph Bertrand and William Baumol have shown, what matters is not whether markets are concentrated, but whether they are contestable. If a superior rival could rapidly gain user traction, that alone will discipline incumbents’ behavior.
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, many factors could explain the relatively concentrated market structures that we see in digital industries. The absence of switching costs and capacity constraints are two such examples. These explanations, overlooked by many observers, suggest digital markets are more contestable than is commonly perceived.
Unfortunately, critics’ failure to meaningfully grapple with these issues serves to shape the “conventional wisdom” in tech-policy debates.
8. Vertical Integration Generally Benefits Consumers
Vertical behavior of digital firms—whether through mergers or through contract and unilateral action—frequently arouses the ire of critics of the current antitrust regime. Many such critics point to a few recent studies that cast doubt on the ubiquity of benefits from vertical integration. But the findings of these few studies are regularly overstated and, even if taken at face value, represent a just minuscule fraction of the collected evidence, which overwhelmingly supports vertical integration.
There is strong and longstanding empirical evidence that vertical integration is competitively benign. This includes widely acclaimed work by economists Francine Lafontaine (former director of the Federal Trade Commission’s Bureau of Economics under President Barack Obama) and Margaret Slade, whose meta-analysis led them to conclude:
[U]nder most circumstances, profit-maximizing vertical integration decisions are efficient, not just from the firms’ but also from the consumers’ points of view. Although there are isolated studies that contradict this claim, the vast majority support it. Moreover, even in industries that are highly concentrated so that horizontal considerations assume substantial importance, the net effect of vertical integration appears to be positive in many instances. We therefore conclude that, faced with a vertical arrangement, the burden of evidence should be placed on competition authorities to demonstrate that that arrangement is harmful before the practice is attacked.
In short, there is a substantial body of both empirical and theoretical research showing that vertical integration (and the potential vertical discrimination and exclusion to which it might give rise) is generally beneficial to consumers. While it is possible that vertical mergers or discrimination could sometimes cause harm, the onus is on the critics to demonstrate empirically where this occurs. No legitimate interpretation of the available literature would offer a basis for imposing a presumption against such behavior.
9. There Is No Such Thing as Data Network Effects
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 was shown by the survey pf the empirical literature that Geoff Manne and I performed (published in the George Mason Law Review), data generally entails diminishing marginal returns:
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. Indeed, Facebook managed to build a highly successful platform despite a large data disadvantage when compared to rivals like MySpace.
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.
10. Antitrust Enforcement Has Not Been Lax
The popular narrative has it that lax antitrust enforcement has led to substantially increased concentration, strangling the economy, harming workers, and expanding dominant firms’ profit margins at the expense of consumers. Much of the contemporary dissatisfaction with antitrust arises from a suspicion that overly lax enforcement of existing laws has led to record levels of concentration and a concomitant decline in competition. But both beliefs—lax enforcement and increased anticompetitive concentration—wither under more than cursory scrutiny.
The number of Sherman Act cases brought by the federal antitrust agencies, meanwhile, has been relatively stable in recent years, but several recent blockbuster cases have been brought by the agencies and private litigants, and there has been no shortage of federal and state investigations. The vast majority of Section 2 cases dismissed on the basis of the plaintiff’s failure to show anticompetitive effect were brought by private plaintiffs pursuing treble damages; given the incentives to bring weak cases, it cannot be inferred from such outcomes that antitrust law is ineffective. But, in any case, it is highly misleading to count the number of antitrust cases and, using that number alone, to make conclusions about how effective antitrust law is. Firms act in the shadow of the law, and deploy significant legal resources to make sure they avoid activity that would lead to enforcement actions. Thus, any given number of cases brought could be just as consistent with a well-functioning enforcement regime as with an ill-functioning one.
The upshot is that naïvely counting antitrust cases (or the purported lack thereof), with little regard for the behavior that is deterred or the merits of the cases that are dismissed does not tell us whether or not antitrust enforcement levels are optimal.