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The Federal Trade Commission (FTC) is at it again, threatening new sorts of regulatory interventions in the legitimate welfare-enhancing activities of businesses—this time in the realm of data collection by firms.

Discussion

In an April 11 speech at the International Association of Privacy Professionals’ Global Privacy Summit, FTC Chair Lina Khan set forth a litany of harms associated with companies’ data-acquisition practices. Certainly, fraud and deception with respect to the use of personal data has the potential to cause serious harm to consumers and is the legitimate target of FTC enforcement activity. At the same time, the FTC should take into account the substantial benefits that private-sector data collection may bestow on the public (see, for example, here, here, and here) in order to formulate economically beneficial law-enforcement protocols.

Chair Khan’s speech, however, paid virtually no attention to the beneficial side of data collection. To the contrary, after highlighting specific harmful data practices, Khan then waxed philosophical in condemning private data-collection activities (citations omitted):

Beyond these specific harms, the data practices of today’s surveillance economy can create and exacerbate deep asymmetries of information—exacerbating, in turn, imbalances of power. As numerous scholars have noted, businesses’ access to and control over such vast troves of granular data on individuals can give those firms enormous power to predict, influence, and control human behavior. In other words, what’s at stake with these business practices is not just one’s subjective preference for privacy, but—over the long term—one’s freedom, dignity, and equal participation in our economy and society.

Even if one accepts that private-sector data practices have such transcendent social implications, are the FTC’s philosopher kings ideally equipped to devise optimal policies that promote “freedom, dignity, and equal participation in our economy and society”? Color me skeptical. (Indeed, one could argue that the true transcendent threat to society from fast-growing growing data collection comes not from businesses but, rather, from the government, which unlike private businesses holds a legal monopoly on the right to use or authorize the use of force. This question is, however, beyond the scope of my comments.)

Chair Khan turned from these highfalutin musings to a more prosaic and practical description of her plans for “adapting the commission’s existing authority to address and rectify unlawful data practices.” She stressed “focusing on firms whose business practices cause widespread harm”; “assessing data practices through both a consumer protection and competition lens”; and “designing effective remedies that are informed by the business strategies that specific markets favor and reward.” These suggestions are not inherently problematic, but they need to be fleshed out in far greater detail. For example, there are potentially major consumer-protection risks posed by applying antitrust to “big data” problems (see here, here and here, for example).

Khan ended her presentation by inviting us “to consider how we might need to update our [FTC] approach further yet.” Her suggested “updates” raise significant problems.

First, she stated that the FTC “is considering initiating a rulemaking to address commercial surveillance and lax data security practices.” Even assuming such a rulemaking could withstand legal scrutiny (its best shot would be to frame it as a consumer protection rule, not a competition rule), it would pose additional serious concerns. One-size-fits-all rules prevent consideration of possible economic efficiencies associated with specific data-security and surveillance practices. Thus, some beneficial practices would be wrongly condemned. Such rules would also likely deter firms from experimenting and innovating in ways that could have led to improved practices. In both cases, consumer welfare would suffer.

Second, Khan asserted “the need to reassess the frameworks we presently use to assess unlawful conduct. Specifically, I am concerned that present market realities may render the ‘notice and consent’ paradigm outdated and insufficient.” Accordingly, she recommended that “we should approach data privacy and security protections by considering substantive limits rather than just procedural protections, which tend to create process requirements while sidestepping more fundamental questions about whether certain types of data collection should be permitted in the first place.”  

In support of this startling observation, Khan approvingly cites Daniel Solove’s article “The Myth of the Privacy Paradox,” which claims that “[t]he fact that people trade their privacy for products or services does not mean that these transactions are desirable in their current form. … [T]he mere fact that people make a tradeoff doesn’t mean that the tradeoff is fair, legitimate, or justifiable.”

Khan provides no economic justification for a data-collection ban. The implication that the FTC would consider banning certain types of otherwise legal data collection is at odds with free-market principles and would have disastrous economic consequences for both consumers and producers. It strikes at voluntary exchange, a basic principle of market economics that benefits transactors and enables markets to thrive.

Businesses monetize information provided by consumers to offer a host of goods and services that satisfy consumer interests. This is particularly true in the case of digital platforms. Preventing the voluntary transfer of data from consumers to producers based on arbitrary government concerns about “fairness” (for example) would strike at firms’ ability to monetize data and thereby generate additional consumer and producer surplus. The arbitrary destruction of such potential economic value by government fiat would be the essence of “unfairness.”

In particular, the consumer welfare benefits generated by digital platforms, which depend critically on large volumes of data, are enormous. As Erik Brynjolfsson of the Massachusetts Institute of Technology and his student Avinash Collis explained in a December 2019 article in the Harvard Business Review, such benefits far exceed those measured by conventional GDP. Online choice experiments based on digital-survey techniques enabled the authors “to estimate the consumer surplus for a great variety of goods, including free ones that are missing from GDP statistics.” Brynjolfsson and Collis found, for example, that U.S. consumers derived $231 billion in value from Facebook since its inception in 2004. Furthermore:

[O]ur estimates indicate that the [Facebook] platform generates a median consumer surplus of about $500 per person annually in the United States, and at least that much for users in Europe. In contrast, average revenue per user is only around $140 per year in United States and $44 per year in Europe. In other words, Facebook operates one of the most advanced advertising platforms, yet its ad revenues represent only a fraction of the total consumer surplus it generates. This reinforces research by NYU Stern School’s Michael Spence and Stanford’s Bruce Owen that shows that advertising revenues and consumer surplus are not always correlated: People can get a lot of value from content that doesn’t generate much advertising, such as Wikipedia or email. So it is a mistake to use advertising revenues as a substitute for consumer surplus…

In a similar vein, the authors found that various user-fee-based digital services yield consumer surplus five to ten times what users paid to access them. What’s more:

The effect of consumer surplus is even stronger when you look at categories of digital goods. We conducted studies to measure it for the most popular categories in the United States and found that search is the most valued category (with a median valuation of more than $17,000 a year), followed by email and maps. These categories do not have comparable off-line substitutes, and many people consider them essential for work and everyday life. When we asked participants how much they would need to be compensated to give up an entire category of digital goods, we found that the amount was higher than the sum of the value of individual applications in it. That makes sense, since goods within a category are often substitutes for one another.

In sum, the authors found:

To put the economic contributions of digital goods in perspective, we find that including the consumer surplus value of just one digital good—Facebook—in GDP would have added an average of 0.11 percentage points a year to U.S. GDP growth from 2004 through 2017. During this period, GDP rose by an average of 1.83% a year. Clearly, GDP has been substantially underestimated over that time.

Although far from definitive, this research illustrates how a digital-services model, based on voluntary data transfer and accumulation, has brought about enormous economic welfare benefits. Accordingly, FTC efforts to tamper with such a success story on abstruse philosophical grounds not only would be unwarranted, but would be economically disastrous. 

Conclusion

The FTC clearly plans to focus on “abuses” in private-sector data collection and usage. In so doing, it should hone in on those practices that impose clear harm to consumers, particularly in the areas of deception and fraud. It is not, however, the FTC’s role to restructure data-collection activities by regulatory fiat, through far-reaching inflexible rules and, worst of all, through efforts to ban collection of “inappropriate” information.

Such extreme actions would predictably impose substantial harm on consumers and producers. They would also slow innovation in platform practices and retard efficient welfare-generating business initiatives tied to the availability of broad collections of data. Eventually, the courts would likely strike down most harmful FTC data-related enforcement and regulatory initiatives, but substantial welfare losses (including harm due to a chilling effect on efficient business conduct) would be borne by firms and consumers in the interim. In short, the enforcement “updates” Khan recommends would reduce economic welfare—the opposite of what (one assumes) is intended.

For these reasons, the FTC should reject the chair’s overly expansive “updates.” It should instead make use of technologists, economists, and empirical research to unearth and combat economically harmful data practices. In doing so, the commission should pay attention to cost-benefit analysis and error-cost minimization. One can only hope that Khan’s fellow commissioners promptly endorse this eminently reasonable approach.   

A raft of progressive scholars in recent years have argued that antitrust law remains blind to the emergence of so-called “attention markets,” in which firms compete by converting user attention into advertising revenue. This blindness, the scholars argue, has caused antitrust enforcers to clear harmful mergers in these industries.

It certainly appears the argument is gaining increased attention, for lack of a better word, with sympathetic policymakers. In a recent call for comments regarding their joint merger guidelines, the U.S. Justice Department (DOJ) and Federal Trade Commission (FTC) ask:

How should the guidelines analyze mergers involving competition for attention? How should relevant markets be defined? What types of harms should the guidelines consider?

Unfortunately, the recent scholarly inquiries into attention markets remain inadequate for policymaking purposes. For example, while many progressives focus specifically on antitrust authorities’ decisions to clear Facebook’s 2012 acquisition of Instagram and 2014 purchase of WhatsApp, they largely tend to ignore the competitive constraints Facebook now faces from TikTok (here and here).

When firms that compete for attention seek to merge, authorities need to infer whether the deal will lead to an “attention monopoly” (if the merging firms are the only, or primary, market competitors for some consumers’ attention) or whether other “attention goods” sufficiently constrain the merged entity. Put another way, the challenge is not just in determining which firms compete for attention, but in evaluating how strongly each constrains the others.

As this piece explains, recent attention-market scholarship fails to offer objective, let alone quantifiable, criteria that might enable authorities to identify firms that are unique competitors for user attention. These limitations should counsel policymakers to proceed with increased rigor when they analyze anticompetitive effects.

The Shaky Foundations of Attention Markets Theory

Advocates for more vigorous antitrust intervention have raised (at least) three normative arguments that pertain attention markets and merger enforcement.

  • First, because they compete for attention, firms may be more competitively related than they seem at first sight. It is sometimes said that these firms are nascent competitors.
  • Second, the scholars argue that all firms competing for attention should not automatically be included in the same relevant market.
  • Finally, scholars argue that enforcers should adopt policy tools to measure market power in these attention markets—e.g., by applying a SSNIC test (“small but significant non-transitory increase in cost”), rather than a SSNIP test (“small but significant non-transitory increase in price”).

There are some contradictions among these three claims. On the one hand, proponents advocate adopting a broad notion of competition for attention, which would ensure that firms are seen as competitively related and thus boost the prospects that antitrust interventions targeting them will be successful. When the shoe is on the other foot, however, proponents fail to follow the logic they have sketched out to its natural conclusion; that is to say, they underplay the competitive constraints that are necessarily imposed by wider-ranging targets for consumer attention. In other words, progressive scholars are keen to ensure the concept is not mobilized to draw broader market definitions than is currently the case:

This “massive market” narrative rests on an obvious fallacy. Proponents argue that the relevant market includes all substitutable sources of attention depletion,” so the market is “enormous.”

Faced with this apparent contradiction, scholars retort that the circle can be squared by deploying new analytical tools that measure attention for competition, such as the so-called SSNIC test. But do these tools actually resolve the contradiction? It would appear, instead, that they merely enable enforcers to selectively mobilize the attention-market concept in ways that fit their preferences. Consider the following description of the SSNIC test, by John Newman:

But if the focus is on the zero-price barter exchange, the SSNIP test requires modification. In such cases, the “SSNIC” (Small but Significant and Non-transitory Increase in Cost) test can replace the SSNIP. Instead of asking whether a hypothetical monopolist would increase prices, the analyst should ask whether the monopolist would likely increase attention costs. The relevant cost increases can take the form of more time or space being devoted to advertisements, or the imposition of more distracting advertisements. Alternatively, one might ask whether the hypothetical monopolist would likely impose an “SSNDQ” (Small but Significant and Non-Transitory Decrease in Quality). The latter framing should generally be avoided, however, for reasons discussed below in the context of anticompetitive effects. Regardless of framing, however, the core question is what would happen if the ratio between desired content to advertising load were to shift.

Tim Wu makes roughly the same argument:

The A-SSNIP would posit a hypothetical monopolist who adds a 5-second advertisement before the mobile map, and leaves it there for a year. If consumers accepted the delay, instead of switching to streaming video or other attentional options, then the market is correctly defined and calculation of market shares would be in order.

The key problem is this: consumer switching among platforms is consistent both with competition and with monopoly power. In fact, consumers are more likely to switch to other goods when they are faced with a monopoly. Perhaps more importantly, consumers can and do switch to a whole range of idiosyncratic goods. Absent some quantifiable metric, it is simply impossible to tell which of these alternatives are significant competitors.

None of this is new, of course. Antitrust scholars have spent decades wrestling with similar issues in connection with the price-related SSNIP test. The upshot of those debates is that the SSNIP test does not measure whether price increases cause users to switch. Instead, it examines whether firms can profitably raise prices above the competitive baseline. Properly understood, this nuance renders proposed SSNIC and SSNDQ tests (“small but significant non-transitory decrease in quality”) unworkable.

First and foremost, proponents wrongly presume to know how firms would choose to exercise their market power, rendering the resulting tests unfit for policymaking purposes. This mistake largely stems from the conflation of price levels and price structures in two-sided markets. In a two-sided market, the price level refers to the cumulative price charged to both sides of a platform. Conversely, the price structure refers to the allocation of prices among users on both sides of a platform (i.e., how much users on each side contribute to the costs of the platform). This is important because, as Jean Charles Rochet and Jean Tirole show in their Nobel-winning work, changes to either the price level or the price structure both affect economic output in two-sided markets.

This has powerful ramifications for antitrust policy in attention markets. To be analytically useful, SSNIC and SSNDQ tests would have to alter the price level while holding the price structure equal. This is the opposite of what attention-market theory advocates are calling for. Indeed, increasing ad loads or decreasing the quality of services provided by a platform, while holding ad prices constant, evidently alters platforms’ chosen price structure.

This matters. Even if the proposed tests were properly implemented (which would be difficult: it is unclear what a 5% quality degradation would look like), the tests would likely lead to false negatives, as they force firms to depart from their chosen (and, thus, presumably profit-maximizing) price structure/price level combinations.

Consider the following illustration: to a first approximation, increasing the quantity of ads served on YouTube would presumably decrease Google’s revenues, as doing so would simultaneously increase output in the ad market (note that the test becomes even more absurd if ad revenues are held constant). In short, scholars fail to recognize that the consumer side of these markets is intrinsically related to the ad side. Each side affects the other in ways that prevent policymakers from using single-sided ad-load increases or quality decreases as an independent variable.

This leads to a second, more fundamental, flaw. To be analytically useful, these increased ad loads and quality deteriorations would have to be applied from the competitive baseline. Unfortunately, it is not obvious what this baseline looks like in two-sided markets.

Economic theory tells us that, in regular markets, goods are sold at marginal cost under perfect competition. However, there is no such shortcut in two-sided markets. As David Evans and Richard Schmalensee aptly summarize:

An increase in marginal cost on one side does not necessarily result in an increase in price on that side relative to price on the other. More generally, the relationship between price and cost is complex, and the simple formulas that have been derived by single-handed markets do not apply.

In other words, while economic theory suggests perfect competition among multi-sided platforms should result in zero economic profits, it does not say what the allocation of prices will look like in this scenario. There is thus no clearly defined competitive baseline upon which to apply increased ad loads or quality degradations. And this makes the SSNIC and SSNDQ tests unsuitable.

In short, the theoretical foundations necessary to apply the equivalent of a SSNIP test on the “free” side of two-sided platforms are largely absent (or exceedingly hard to apply in practice). Calls to implement SSNIC and SSNDQ tests thus greatly overestimate the current state of the art, as well as decision-makers’ ability to solve intractable economic conundrums. The upshot is that, while proposals to apply the SSNIP test to attention markets may have the trappings of economic rigor, the resemblance is superficial. As things stand, these tests fail to ascertain whether given firms are in competition, and in what market.

The Bait and Switch: Qualitative Indicia

These problems with the new quantitative metrics likely explain why proponents of tougher enforcement in attention markets often fall back upon qualitative indicia to resolve market-definition issues. As John Newman writes:

Courts, including the U.S. Supreme Court, have long employed practical indicia as a flexible, workable means of defining relevant markets. This approach considers real-world factors: products’ functional characteristics, the presence or absence of substantial price differences between products, whether companies strategically consider and respond to each other’s competitive conduct, and evidence that industry participants or analysts themselves identify a grouping of activity as a discrete sphere of competition. …The SSNIC test may sometimes be massaged enough to work in attention markets, but practical indicia will often—perhaps usually—be the preferable method

Unfortunately, far from resolving the problems associated with measuring market power in digital markets (and of defining relevant markets in antitrust proceedings), this proposed solution would merely focus investigations on subjective and discretionary factors.

This can be easily understood by looking at the FTC’s Facebook complaint regarding its purchases of WhatsApp and Instagram. The complaint argues that Facebook—a “social networking service,” in the eyes of the FTC—was not interchangeable with either mobile-messaging services or online-video services. To support this conclusion, it cites a series of superficial differences. For instance, the FTC argues that online-video services “are not used primarily to communicate with friends, family, and other personal connections,” while mobile-messaging services “do not feature a shared social space in which users can interact, and do not rely upon a social graph that supports users in making connections and sharing experiences with friends and family.”

This is a poor way to delineate relevant markets. It wrongly portrays competitive constraints as a binary question, rather than a matter of degree. Pointing to the functional differences that exist among rival services mostly fails to resolve this question of degree. It also likely explains why advocates of tougher enforcement have often decried the use of qualitative indicia when the shoe is on the other foot—e.g., when authorities concluded that Facebook did not, in fact, compete with Instagram because their services were functionally different.

A second, and related, problem with the use of qualitative indicia is that they are, almost by definition, arbitrary. Take two services that may or may not be competitors, such as Instagram and TikTok. The two share some similarities, as well as many differences. For instance, while both services enable users to share and engage with video content, they differ significantly in the way this content is displayed. Unfortunately, absent quantitative evidence, it is simply impossible to tell whether, and to what extent, the similarities outweigh the differences. 

There is significant risk that qualitative indicia may lead to arbitrary enforcement, where markets are artificially narrowed by pointing to superficial differences among firms, and where competitive constraints are overemphasized by pointing to consumer switching. 

The Way Forward

The difficulties discussed above should serve as a good reminder that market definition is but a means to an end.

As William Landes, Richard Posner, and Louis Kaplow have all observed (here and here), market definition is merely a proxy for market power, which in turn enables policymakers to infer whether consumer harm (the underlying question to be answered) is likely in a given case.

Given the difficulties inherent in properly defining markets, policymakers should redouble their efforts to precisely measure both potential barriers to entry (the obstacles that may lead to market power) or anticompetitive effects (the potentially undesirable effect of market power), under a case-by-case analysis that looks at both sides of a platform.

Unfortunately, this is not how the FTC has proceeded in recent cases. The FTC’s Facebook complaint, to cite but one example, merely assumes the existence of network effects (a potential barrier to entry) with no effort to quantify their magnitude. Likewise, the agency’s assessment of consumer harm is just two pages long and includes superficial conclusions that appear plucked from thin air:

The benefits to users of additional competition include some or all of the following: additional innovation … ; quality improvements … ; and/or consumer choice … . In addition, by monopolizing the U.S. market for personal social networking, Facebook also harmed, and continues to harm, competition for the sale of advertising in the United States.

Not one of these assertions is based on anything that could remotely be construed as empirical or even anecdotal evidence. Instead, the FTC’s claims are presented as self-evident. Given the difficulties surrounding market definition in digital markets, this superficial analysis of anticompetitive harm is simply untenable.

In short, discussions around attention markets emphasize the important role of case-by-case analysis underpinned by the consumer welfare standard. Indeed, the fact that some of antitrust enforcement’s usual benchmarks are unreliable in digital markets reinforces the conclusion that an empirically grounded analysis of barriers to entry and actual anticompetitive effects must remain the cornerstones of sound antitrust policy. Or, put differently, uncertainty surrounding certain aspects of a case is no excuse for arbitrary speculation. Instead, authorities must meet such uncertainty with an even more vigilant commitment to thoroughness.

The International Center for Law & Economics (ICLE) filed an amicus brief on behalf of itself and 26 distinguished law & economics scholars with the 9th U.S. Circuit Court of Appeals in the hotly anticipated and intensely important Epic Games v Apple case.

A fantastic group of attorneys from White & Case generously assisted us with the writing and filing of the brief, including George Paul, Jack Pace, Gina Chiapetta, and Nicholas McGuire. The scholars who signed the brief are listed at the end of this post. A summary of the brief’s arguments follows. For some of our previous writings on the case, see here, here, here, and here.

Introduction

In Epic Games v. Apple, Epic challenged Apple’s prohibition of third-party app stores and in-app payments (IAP) systems from operating on its proprietary iOS platform as a violation of antitrust law. The U.S. District Court for the Northern District of California ruled against Epic, finding that Epic’s real concern is its own business interests in the face of Apple’s business model—in particular, the commission Apple charges for use of its IAP system—rather than harm to consumers and to competition more broadly.

Epic appealed to the 9th Circuit on several grounds. Our brief primarily addresses two of Epic’s arguments:

  • First, Epic takes issue with the district court’s proper finding that Apple’s procompetitive justifications outweigh the anticompetitive effects of Apple’s business model. But Epic’s case fails at step one of the rule-of-reason analysis, as it didn’t demonstrate that Apple’s app distribution and IAP practices caused the significant, market-wide, anticompetitive effects that the Supreme Court, in 2018’s Ohio v. American Express (“Amex”), deemed necessary to show anticompetitive harm in cases involving two-sided transaction markets (like Apple’s App Store).
  • Second, Epic argues that the theoretical existence of less restrictive alternatives (“LRA”) to Apple’s business model is sufficient to meet its burden under the rule of reason. But the reliance on LRA in this case is misplaced. Forcing Apple to adopt the “open” platform that Epic champions would reduce interbrand competition and improperly permit antitrust plaintiffs to commandeer the judiciary to modify routine business conduct any time a plaintiff’s attorney or district court can imagine a less restrictive version of a challenged practice—irrespective of whether the practice promotes consumer welfare. This is especially true in the context of two-sided platform businesses, where such an approach would sacrifice interbrand, systems-level competition for the sake of a superficial increase in competition among a small subset of platform users.

Competitive Effects in Two-Sided Markets

Two-sided markets connect distinct sets of users whose demands for the platform are interdependent—i.e., consumers’ demand for a platform increases as more products are available, and conversely, product developers’ demand for a platform increases as additional consumers use the platform, increasing the overall potential for transactions. As a result of these complex dynamics, conduct that may appear anticompetitive when considering the effects on only one set of customers may be entirely consistent with—and actually promote—healthy competition when examining the effects on both sides.

That’s why the Supreme Court recognized in Amex that it was improper to focus on only one side of a two-sided platform. And this holding doesn’t require adherence to the Court’s contentious finding of a two-sided relevant market in Amex. Indeed, even scholars highly critical of the Amex decision recognize the importance of considering effects on both sides of a two-sided platform.

While the district court did find that Epic demonstrated some anticompetitive effects, Epic’s evidence focused only on the effects that Apple’s conduct had on certain app developers; it failed to appropriately examine whether consumers were harmed overall. As Geoffrey Manne has observed, in two-sided markets, “some harm” is not the same thing as “competitively relevant harm.” Supracompetitive prices on one side do not tell us much about the existence or exercise of (harmful) market power in two-sided markets. As the Supreme Court held in Amex:

The fact that two-sided platforms charge one side a price that is below or above cost reflects differences in the two sides’ demand elasticity, not market power or anticompetitive pricing. Price increases on one side of the platform likewise do not suggest anticompetitive effects without some evidence that they have increased the overall cost of the platform’s services.

Without further evidence of the effect of Apple’s practices on consumers, no conclusions can be drawn about the competitive effects of Apple’s conduct. 

Nor can an appropriate examination of anticompetitive effects ignore output. The ability to restrict output, after all, is what allows a monopolist to increase prices. Whereas price effects alone might appear predatory on one side of the market and supra-competitive on the other, output reflects what is happening in the market as a whole. It is therefore the most appropriate measure for antitrust law generally, and it is especially useful in two-sided markets, where asymmetrical price changes are of little use in determining anticompetitive effects.

Ultimately, the question before the court must be whether Apple’s overall pricing structure and business model reduces output, either by deterring app developers from participating in the market or by deterring users from purchasing apps (or iOS devices) as a consequence of the app-developer commission. The district court here noted that it could not ascertain whether Apple’s alleged restrictions had a “positive or negative impact on game transaction volume.”

Thus, Epic’s case fails at step one of the rule of reason analysis because it simply hasn’t demonstrated the requisite harm to competition.

Less Restrictive Alternatives and the Rule of Reason

But even if that weren’t the case, Epic’s claims also don’t make it past step three of the rule of reason analysis.

Epic’s appeal relies on theoretical “less restrictive alternatives” (LRA) to Apple’s business model, which highlights longstanding questions about the role and limits of LRA analysis under the rule of reason. 

According to Epic, because the district court identified some anticompetitive effects on one side of the market, and because alternative business models could, in theory, be implemented to achieve the same procompetitive benefits as Apple’s current business model, the court should have ruled in Epic’s favor at step three. 

There are several problems with this.

First, the existence of an LRA is irrelevant if anticompetitive harm has not been established, of course (as is the case here).

Nor does the fact that some hypothetically less restrictive alternative exists automatically render the conduct under consideration anticompetitive. As the Court held in Trinko, antitrust laws do not “give judges carte blanche to insist that a monopolist alter its way of doing business whenever some other approach might yield greater competition.” 

While, following the Supreme Court’s recent Alston decision, LRA analysis may well be appropriate in some contexts to identify anticompetitive conduct in the face of procompetitive justifications, there is no holding (in either the 9th Circuit or the Supreme Court) requiring it in the context of two-sided markets. (Amex refers to LRA analysis as constituting step three, but because that case was resolved at step one, it must be viewed as mere dictum).And for good reason. In the context of two-sided platforms, an LRA approach would inevitably require courts to second guess the particular allocation of costs, prices, and product attributes across platform users. As Tom Nachbar writes:

Platform defendants, even if they are able to establish the general procompetitive justifications for charging above and below cost prices on the two sides of their platforms, will have to defend the precise combination of prices they have chosen [under an LRA approach] . . . . The relative difficulty of defending any particular allocation of costs will present considerable risk of destabilizing platform markets.

Moreover, LRAs—like the ones proposed by Epic—that are based on maximizing competitor effectiveness by “opening” an incumbent’s platform would convert the rule of reason into a regulatory tool that may not promote competition at all. As Alan Devlin deftly puts it:

This construction of antitrust law—that dominant companies must affirmatively support their fringe rivals’ ability to compete effectively—adopts a perspective of antitrust that is regulatory in nature. . . . [I]f one adopts the increasingly prevalent view that antitrust must facilitate unfettered access to markets, thus spurring free entry and expansion by incumbent rivals, the Sherman Act goes from being a prophylactic device aimed at protecting consumers against welfare-reducing acts to being a misplaced regulatory tool that potentially sacrifices both consumer welfare and efficiency in a misguided pursuit of more of both.

Open Platforms Are not Necessarily Less Restrictive Platforms

It is also important to note that Epic’s claimed LRAs are neither viable alternatives nor actually “less restrictive.” Epic’s proposal would essentially turn Apple’s iOS into an open platform more similar to Google’s Android, its largest market competitor.

“Open” and “closed” platforms both have distinct benefits and drawbacks; one is not inherently superior to the other. Closed proprietary platforms like Apple’s iOS create incentives for companies to internalize positive indirect network effects, which can lead to higher levels of product variety, user adoption, and total social welfare. As Andrei Hagiu has written:

A proprietary platform may in fact induce more developer entry (i.e., product variety), user adoption and higher total social welfare than an open platform.

For example, by filtering which apps can access the App Store and precluding some transactions from taking place on it, a closed or semi-closed platform like Apple’s may ultimately increase the number of apps and transactions on its platform, where doing so makes the iOS ecosystem more attractive to both consumers and developers. 

Any analysis of a supposedly less restrictive alternative to Apple’s “walled garden” model thus needs to account for the tradeoffs between open and closed platforms, and not merely assume that “open” equates to “good,” and “closed” to “bad.” 

Further, such analysis also must consider tradeoffs among consumers and among developers. More vigilant users might be better served by an “open” platform because they find it easier to avoid harmful content; less vigilant ones may want more active assistance in screening for malware, spyware, or software that simply isn’t optimized for the user’s device. There are similar tradeoffs on the developer side: Apple’s model lowers the cost to join the App store, which particularly benefits smaller developers and those whose apps fall outside the popular gaming sector. In a nutshell, the IAP fee cross-subsidizes the delivery of services to the approximately 80% of apps on the App Store that are free and pay no IAP fees.

In fact, the overwhelming irony of Epic’s proposed approach is that Apple could avoid condemnation if it made its overall platform more restrictive. If, for example, Apple had not adopted an App Store model and offered a completely closed and fully integrated device, there would be no question of relative costs and benefits imposed on independent app developers; there would be no independent developers on the iOS platform at all. 

Thus, Epic’s proposed LRA approach, which amounts to converting iOS to an open platform, proves too much. It would enable any contractual or employment relationship for a complementary product or service to be challenged because it could be offered through a “less restrictive” open market mechanism—in other words, that any integrated firm should be converted into an open platform. 

At least since the Supreme Court’s seminal 1977 Sylvania ruling, U.S. antitrust law has been unequivocal in its preference for interbrand over intrabrand competition. Paradoxically, turning a closed platform into an open one (as Epic intends) would, under the guise of protecting competition, actually destroy competition where it matters most: at the interbrand, systems level.

Conclusion

Forcing Apple to adopt the “open” platform that Epic champions would reduce interbrand competition among platform providers. It would also more broadly allow antitrust plaintiffs to insist the courts modify routine business conduct any time a plaintiff’s attorney or district court can imagine a less restrictive version of a challenged practice, regardless of whether that practice nevertheless promotes consumer welfare. In the context of two-sided platform businesses, this would mean sacrificing systems-level competition for the sake of a superficial increase in competition among a small subset of platform users.

The bottom line is that an order compelling Apple to allow competing app stores would require the company to change the way in which it monetizes the App Store. This might have far-reaching distributional consequences for both groups— consumers and distributors. Courts (and, obviously, competitors) are ill-suited to act as social planners and to balance out such complex tradeoffs, especially in the absence of clear anticompetitive harm and the presence of plausible procompetitive benefits.

Amici Scholars Signing on to the Brief


(The ICLE brief presents the views of the individual signers listed below. Institutions are listed for identification purposes only.)

Alden Abbott
Senior Research Fellow, Mercatus Center, George Mason University
Former General Counsel, U.S. Federal Trade Commission
Ben Klein
Professor of Economics Emeritus, University of California Los Angeles
Thomas C. Arthur
L. Q. C. Lamar Professor of Law, Emory University School of Law
Peter Klein
Professor of Entrepreneurship and Corporate Innovation, Baylor University, Hankamer School of Business
Dirk Auer
Director of Competition Policy, International Center for Law & Economics
Adjunct Professor, University of Liège (Belgium)
Jonathan Klick
Charles A. Heimbold, Jr. Professor of Law, University of Pennsylvania Carey Law School
Jonathan M. Barnett
Torrey H. Webb Professor of Law, University of Southern California, Gould School of Law
Daniel Lyons
Professor of Law, Boston College Law School
Donald J. Boudreaux
Professor of Economics, former Economics Department Chair, George Mason University
Geoffrey A. Manne
President and Founder, International Center for Law & Economics
Distinguished Fellow, Northwestern University Center on Law, Business & Economics
Giuseppe Colangelo
Jean Monnet Chair in European Innovation Policy and Associate Professor of Competition Law and Economics, University of Basilicata and Libera Università Internazionale degli Studi Sociali
Francisco Marcos
Associate Professor of Law, IE University Law School (Spain)
Anthony Dukes
Chair and Professor of Marketing, University of Southern California, Marshall School of Business
Scott E. Masten
Professor of Business Economics and Public Policy, University of Michigan, Ross Business School
Richard A. Epstein
Laurence A. Tisch Professor of Law, New York University, School of Law James Parker Hall Distinguished Service Professor of Law Emeritus, University of Chicago Law School
Alan J. Meese
Ball Professor of Law, College of William & Mary Law School
Vivek Ghosal
Economics Department Chair and Virginia and Lloyd W. Rittenhouse Professor of Economics, Rensselaer Polytechnic Institute
Igor Nikolic
Research Fellow, Robert Schuman Centre for Advanced Studies, European University Institute (Italy)
Janice Hauge
Professor of Economics, University of North Texas
Paul H. Rubin
Samuel Candler Dobbs Professor of Economics Emeritus, Emory University
Justin (Gus) Hurwitz
Professor of Law, University of Nebraska College of Law
Vernon L. Smith
George L. Argyros Endowed Chair in Finance and Economics and Professor of Economics and Law, Chapman University Nobel Laureate in Economics (2002)
Michael S. Jacobs
Distinguished Research Professor of Law Emeritus, DePaul University College of Law
Michael Sykuta
Associate Professor of Economics, University of Missouri
Mark A. Jamison
Gerald Gunter Professor of the Public Utility Research Center, University of Florida, Warrington College of Business
Alexander “Sasha” Volokh
Associate Professor of Law, Emory University School of Law

On March 31, I and several other law and economics scholars filed an amicus brief in Epic Games v. Apple, which is on appeal to the U.S. Court of Appeals for Ninth Circuit.  In this post, I summarize the central arguments of the brief, which was joined by Alden Abbott, Henry Butler, Alan Meese, Aurelien Portuese, and John Yun and prepared with the assistance of Don Falk of Schaerr Jaffe LLP.

First, some background for readers who haven’t followed the case.

Epic, maker of the popular Fortnite video game, brought antitrust challenges against two policies Apple enforces against developers of third-party apps that run on iOS, the mobile operating system for Apple’s popular iPhones and iPads.  One policy requires that all iOS apps be distributed through Apple’s own App Store.  The other requires that any purchases of digital goods made while using an iOS app utilize Apple’s In App Purchase system (IAP).  Apple collects a share of the revenue from sales made through its App Store and using IAP, so these two policies provide a way for it to monetize its innovative app platform.   

Epic maintains that Apple’s app policies violate the federal antitrust laws.  Following a trial, the district court disagreed, though it condemned another of Apple’s policies under California state law.  Epic has appealed the antitrust rulings against it. 

My fellow amici and I submitted our brief in support of Apple to draw the Ninth Circuit’s attention to a distinction that is crucial to ensuring that antitrust promotes long-term consumer welfare: the distinction between the mere extraction of surplus through the exercise of market power and the enhancement of market power via the weakening of competitive constraints.

The central claim of our brief is that Epic’s antitrust challenges to Apple’s app store policies should fail because Epic has not shown that the policies enhance Apple’s market power in any market.  Moreover, condemnation of the practices would likely induce Apple to use its legitimately obtained market power to extract surplus in a different way that would leave consumers worse off than they are under the status quo.   

Mere Surplus Extraction vs. Market Power Extension

As the Supreme Court has observed, “Congress designed the Sherman Act as a ‘consumer welfare prescription.’”  The Act endeavors to protect consumers from harm resulting from “market power,” which is the ability of a firm lacking competitive constraints to enhance its profits by reducing its output—either quantitively or qualitatively—from the level that would persist if the firm faced vigorous competition.  A monopolist, for example, might cut back on the quantity it produces (to drive up market price) or it might skimp on quality (to enhance its per-unit profit margin).  A firm facing vigorous competition, by contrast, couldn’t raise market price simply by reducing its own production, and it would lose significant sales to rivals if it raised its own price or unilaterally cut back on product quality.  Market power thus stems from deficient competition.

As Dennis Carlton and Ken Heyer have observed, two different types of market power-related business behavior may injure consumers and are thus candidates for antitrust prohibition.  One is an exercise of market power: an action whereby a firm lacking competitive constraints increases its returns by constricting its output so as to raise price or otherwise earn higher profit margins.  When a firm engages in this sort of conduct, it extracts a greater proportion of the wealth, or “surplus,” generated by its transactions with its customers.

Every voluntary transaction between a buyer and seller creates surplus, which is the difference between the subjective value the consumer attaches to an item produced and the cost of producing and distributing it.  Price and other contract terms determine how that surplus is allocated between the buyer and the seller.  When a firm lacking competitive constraints exercises its market power by, say, raising price, it extracts for itself a greater proportion of the surplus generated by its sale.

The other sort of market power-related business behavior involves an effort by a firm to enhance its market power by weakening competitive constraints.  For example, when a firm engages in unreasonably exclusionary conduct that drives its rivals from the market or increases their costs so as to render them less formidable competitors, its market power grows.

U.S. antitrust law treats these two types of market power-related conduct differently.  It forbids behavior that enhances market power and injures consumers, but it permits actions that merely exercise legitimately obtained market power without somehow enhancing it.  For example, while charging a monopoly price creates immediate consumer harm by extracting for the monopolist a greater share of the surplus created by the transaction, the Supreme Court observed in Trinko that “[t]he mere possession of monopoly power, and the concomitant charging of monopoly prices, is not . . . unlawful.”  (See also linkLine: “Simply possessing monopoly power and charging monopoly prices does not violate [Sherman Act] § 2….”)

Courts have similarly refused to condemn mere exercises of market power in cases involving surplus-extractive arrangements more complicated than simple monopoly pricing.  For example, in its Independent Ink decision, the U.S. Supreme Court expressly declined to adopt a rule that would have effectively banned “metering” tie-ins.

In a metering tie-in, a seller with market power on some unique product that is used with a competitively supplied complement that is consumed in varying amounts—say, a highly unique printer that uses standard ink—reduces the price of its unique product (the printer), requires buyers to also purchase from it their requirements of the complement (the ink), and then charges a supracompetitive price for the latter product.  This allows the seller to charge higher effective prices to high-volume users of its unique tying product (buyers who use lots of ink) and lower prices to lower-volume users. 

Assuming buyers’ use of the unique product correlates with the value they ascribe to it, a metering tie-in allows the seller to price discriminate, charging higher prices to buyers who value its unique product more.  This allows the seller to extract more of the surplus generated by sales of its product, but it in no way extends the seller’s market power.

In refusing to adopt a rule that would have condemned most metering tie-ins, the Independent Ink Court observed that “it is generally recognized that [price discrimination] . . . occurs in fully competitive markets” and that tying arrangements involving requirements ties may be “fully consistent with a free, competitive market.” The Court thus reasoned that mere price discrimination and surplus extraction, even when accomplished through some sort of contractual arrangement like a tie-in, are not by themselves anticompetitive harms warranting antitrust’s condemnation.    

The Ninth Circuit has similarly recognized that conduct that exercises market power to extract surplus but does not somehow enhance that power does not create antitrust liability.  In Qualcomm, the court refused to condemn the chipmaker’s “no license, no chips” policy, which enabled it to enhance its profits by earning royalties on original equipment manufacturers’ sales of their high-priced products.

In reversing the district court’s judgment in favor of the FTC, the Ninth Circuit conceded that Qualcomm’s policies were novel and that they allowed it to enhance its profits by extracting greater surplus.  The court refused to condemn the policies, however, because they did not injure competition by weakening competitive constraints:

This is not to say that Qualcomm’s “no license, no chips” policy is not “unique in the industry” (it is), or that the policy is not designed to maximize Qualcomm’s profits (Qualcomm has admitted as much). But profit-seeking behavior alone is insufficient to establish antitrust liability. As the Supreme Court stated in Trinko, the opportunity to charge monopoly prices “is an important element of the free-market system” and “is what attracts ‘business acumen’ in the first place; it induces risk taking that produces innovation and economic growth.”

The Qualcomm court’s reference to Trinko highlights one reason courts should not condemn exercises of market power that merely extract surplus without enhancing market power: allowing such surplus extraction furthers dynamic efficiency—welfare gain that accrues over time from the development of new and improved products and services.

Dynamic efficiency results from innovation, which entails costs and risks.  Firms are more willing to incur those costs and risks if their potential payoff is higher, and an innovative firm’s ability to earn supracompetitive profits off its “better mousetrap” enhances its payoff. 

Allowing innovators to extract such profits also helps address the fact most of the benefits of product innovation inure to people other than the innovator.  Private actors often engage in suboptimal levels of behaviors that produce such benefit spillovers, or “positive externalities,”  because they bear all the costs of those behaviors but capture just a fraction of the benefit produced.  By enhancing the benefits innovators capture from their innovative efforts, allowing non-power-enhancing surplus extraction helps generate a closer-to-optimal level of innovative activity.

Not only do supracompetitive profits extracted through the exercise of legitimately obtained market power motivate innovation, they also enable it by helping to fund innovative efforts.  Whereas businesses that are forced by competition to charge prices near their incremental cost must secure external funding for significant research and development (R&D) efforts, firms collecting supracompetitive returns can finance R&D internally.  Indeed, of the top fifteen global spenders on R&D in 2018, eleven were either technology firms accused of possessing monopoly power (#1 Apple, #2 Alphabet/Google, #5 Intel, #6 Microsoft, #7 Apple, and #14 Facebook) or pharmaceutical companies whose patent protections insulate their products from competition and enable supracompetitive pricing (#8 Roche, #9 Johnson & Johnson, #10 Merck, #12 Novartis, and #15 Pfizer).

In addition to fostering dynamic efficiency by motivating and enabling innovative efforts, a policy acquitting non-power-enhancing exercises of market power allows courts to avoid an intractable question: which instances of mere surplus extraction should be precluded?

Precluding all instances of surplus extraction by firms with market power would conflict with precedents like Trinko and linkLine (which say that legitimate monopolists may legally charge monopoly prices) and would be impracticable given the ubiquity of above-cost pricing in niche and brand-differentiated markets.

A rule precluding surplus extraction when accomplished by a practice more complicated that simple monopoly pricing—say, some practice that allows price discrimination against buyers who highly value a product—would be both arbitrary and backward.  The rule would be arbitrary because allowing supracompetitive profits from legitimately obtained market power motivates and enables innovation regardless of the means used to extract surplus. The rule would be backward because, while simple monopoly pricing always reduces overall market output (as output-reduction is the very means by which the producer causes price to rise), more complicated methods of extracting surplus, such as metering tie-ins, often enhance market output and overall social welfare.

A third possibility would be to preclude exercising market power to extract more surplus than is necessary to motivate and enable innovation.  That position, however, would require courts to determine how much surplus extraction is required to induce innovative efforts.  Courts are poorly positioned to perform such a task, and their inevitable mistakes could significantly chill entrepreneurial activity.

Consider, for example, a firm contemplating a $5 million investment that might return up to $50 million.  Suppose the managers of the firm weighed expected costs and benefits and decided the risky gamble was just worth taking.  If the gamble paid off but a court stepped in and capped the firm’s returns at $20 million—a seemingly generous quadrupling of the firm’s investment—future firms in the same position would not make similar investments.  After all, the firm here thought this gamble was just barely worth taking, given the high risk of failure, when available returns were $50 million.

In the end, then, the best policy is to draw the line as both the U.S. Supreme Court and the Ninth Circuit have done: Whereas enhancements of market power are forbidden, merely exercising legitimately obtained market power to extract surplus is permitted.

Apple’s Policies Do Not Enhance Its Market Power

Under the legal approach described above, the two Apple policies Epic has challenged do not give rise to antitrust liability.  While the policies may boost Apple’s profits by facilitating its extraction of surplus from app transactions on its mobile devices, they do not enhance Apple’s market power in any conceivable market.

As the creator and custodian of the iOS operating system, Apple has the ability to control which applications will run on its iPhones and iPads.  Developers cannot produce operable iOS apps unless Apple grants them access to the Application Programming Interfaces (APIs) required to enable the functionality of the operating system and hardware. In addition, Apple can require developers to obtain digital certificates that will enable their iOS apps to operate.  As the district court observed, “no certificate means the code will not run.”

Because Apple controls which apps will work on the operating system it created and maintains, Apple could collect the same proportion of surplus it currently extracts from iOS app sales and in-app purchases on iOS apps even without the policies Epic is challenging.  It could simply withhold access to the APIs or digital certificates needed to run iOS apps unless developers promised to pay it 30% of their revenues from app sales and in-app purchases of digital goods.

This means that the challenged policies do not give Apple any power it doesn’t already possess in the putative markets Epic identified: the markets for “iOS app distribution” and “iOS in-app payment processing.” 

The district court rejected those market definitions on the ground that Epic had not established cognizable aftermarkets for iOS-specific services.  It defined the relevant market instead as “mobile gaming transactions.”  But no matter.  The challenged policies would not enhance Apple’s market power in that broader market either.

In “mobile gaming transactions” involving non-iOS (e.g., Android) mobile apps, Apple’s policies give it no power at all.  Apple doesn’t distribute non-iOS apps or process in-app payments on such apps.  Moreover, even if Apple were to being doing so—say, by distributing Android apps in its App Store or allowing producers of Android apps to include IAP as their in-app payment system—it is implausible that Apple’s policies would allow it to gain new market power.  There are giant, formidable competitors in non-iOS app distribution (e.g., Google’s Play Store) and in payment processing for non-iOS in-app purchases (e.g., Google Play Billing).  It is inconceivable that Apple’s policies would allow it to usurp so much scale from those rivals that Apple could gain market power over non-iOS mobile gaming transactions.

That leaves only the iOS segment of the mobile gaming transactions market.  And, as we have just seen, Apple’s policies give it no new power to extract surplus from those transactions; because it controls access to iOS, it could do so using other means.

Nor do the challenged policies enable Apple to maintain its market power in any conceivable market.  This is not a situation like Microsoft where a firm in a market adjacent to a monopolist’s could somehow pose a challenge to that monopolist, and the monopolist nips the potential competition in the bud by reducing the potential rival’s scale.  There is no evidence in the record to support the (implausible) notion that rival iOS app stores or in-app payment processing systems could ever evolve in a manner that would pose a challenge to Apple’s position in mobile devices, mobile operating systems, or any other market in which it conceivably has market power. 

Epic might retort that but for the challenged policies, rivals could challenge Apple’s market share in iOS app distribution and in-app purchase processing.  Rivals could not, however, challenge Apple’s market power in such markets, as that power stems from its control of iOS.  The challenged policies therefore do not enable Apple to shore up any existing market power.

Alternative Means of Extracting Surplus Would Likely Reduce Consumer Welfare

Because the policies Epic has challenged are not the source of Apple’s ability to extract surplus from iOS app transactions, judicial condemnation of the policies would likely induce Apple to extract surplus using different means.  Changing how it earns profits off iOS app usage, however, would likely leave consumers worse off than they are under the status quo.

Apple could simply charge third-party app developers a flat fee for access to the APIs needed to produce operable iOS apps but then allow them to distribute their apps and process in-app payments however they choose.  Such an approach would allow Apple to monetize its innovative app platform while permitting competition among providers of iOS app distribution and in-app payment processing services.  Relative to the status quo, though, such a model would likely reduce consumer welfare by:

  • Reducing the number of free and niche apps,as app developers could no longer avoid a fee to Apple by adopting a free (likely ad-supported) business model, and producers of niche apps may not generate enough revenue to justify Apple’s flat fee;
  • Raising business risks for app developers, who, if Apple cannot earn incremental revenue off sales and use of their apps, may face a greater likelihood that the functionality of those apps will be incorporated into future versions of iOS;
  • Reducing Apple’s incentive to improve iOS and its mobile devices, as eliminating Apple’s incremental revenue from app usage reduces its motivation to make costly enhancements that keep users on their iPhones and iPads;
  • Raising the price of iPhones and iPads and generating deadweight loss, as Apple could no longer charge higher effective prices to people who use apps more heavily and would thus likely hike up its device prices, driving marginal consumers from the market; and
  • Reducing user privacy and security, as jettisoning a closed app distribution model (App Store only) would impair Apple’s ability to screen iOS apps for features and bugs that create security and privacy risks.

An alternative approach—one that would avoid many of the downsides just stated by allowing Apple to continue earning incremental revenue off iOS app usage—would be for Apple to charge app developers a revenue-based fee for access to the APIs and other amenities needed to produce operable iOS apps.  That approach, however, would create other costs that would likely leave consumers worse off than they are under the status quo.

The policies Epic has challenged allow Apple to collect a share of revenues from iOS app transactions immediately at the point of sale.  Replacing those policies with a revenue-based  API license system would require Apple to incur additional costs of collecting revenues and ensuring that app developers are accurately reporting them.  In order to extract the same surplus it currently collects—and to which it is entitled given its legitimately obtained market power—Apple would have to raise its revenue-sharing percentage above its current commission rate to cover its added collection and auditing costs.

The fact that Apple has elected not to adopt this alternative means of collecting the revenues to which it is entitled suggests that the added costs of moving to the alternative approach (extra collection and auditing costs) would exceed any additional consumer benefit such a move would produce.  Because Apple can collect the same revenue percentage from app transactions two different ways, it has an incentive to select the approach that maximizes iOS app transaction revenues.  That is the approach that creates the greatest value for consumers and also for Apple. 

If Apple believed that the benefits to app users of competition in app distribution and in-app payment processing would exceed the extra costs of collection and auditing, it would have every incentive to switch to a revenue-based licensing regime and increase its revenue share enough to cover its added collection and auditing costs.  As such an approach would enhance the net value consumers receive when buying apps and making in-app purchases, it would raise overall app revenues, boosting Apple’s bottom line.  The fact that Apple has not gone in this direction, then, suggests that it does not believe consumers would receive greater benefit under the alternative system.  Apple might be wrong, of course.  But it has a strong motivation to make the consumer welfare-enhancing decision here, as doing so maximizes its own profits.

The policies Epic has challenged do not enhance or shore up Apple’s market power, a salutary pre-requisite to antitrust liability.  Furthermore, condemning the policies would likely lead Apple to monetize its innovative app platform in a manner that would reduce consumer welfare relative to the status quo.  The Ninth Circuit should therefore affirm the district court’s rejection of Epic’s antitrust claims.  

The Biden administration finally has taken a public position on parallel House (H.R. 3816) and Senate (S. 2992) bills that would impose new welfare-reducing regulatory constraints on the ability of large digital platforms to engage in innovative business practices that benefit consumers and the economy.

The administration’s articulation of its position—set forth in a March 28 U.S. Justice Department (DOJ letter to House and Senate Judiciary Committee leadership—is a fine example of draftsmanship. With just a few very minor redline edits, which I suggest below, the letter would advance sound and enlightened procompetitive policy.

I hope the DOJ will accept my modest redlines and incorporate them into a new letter to Congress, superseding the March 28 draft. My edited redline and clean revisions of the current draft follow (redline draft is in italics, clean draft in bold italics):

Redline Version

Dear Chairman Nadler, Chairman Cicilline, Representative Jordan, and Representative Buck:

The Department of Justice (Department) appreciates the considerable attention and resources devoted by the House and Senate Committees on the Judiciary over the past several years to ensuring the competitiveness of our digital economy, and writes today to express support for oppose the American Innovation and Choice Online Act, Senate bill S. 2992, and the American Innovation and Choice Online Act, House bill H.R. 3816, which contain similar prohibitions on discriminatory conduct by dominant platforms (the “bills”). Unfortunately, the legislative efforts expended on these bills have been a waste of time.

The Department views the rise of major digitaldominant platforms as presenting a great boon tothreat to open markets and competition, with bestowing benefits onrisks for consumers, businesses, innovation, resiliency, global competitiveness, and our democracy. By enhancing value controllingtransmitted through key arteries of the nation’s commerce and communications, such platforms have promoted a more vibrant and innovative can exercise outsized market power in our modern economy. Vesting in government the power to pick winners and losers across markets through legislative regulation as found in the bills in a small number of corporations contravenes the foundations of our capitalist system, and given the increasing importance of these markets, the economic benefits flowing frompower of such platforms activity areis likely to be curtailed if the bills are passed continue to grow unless checked. Enactment of the bills wouldThis puts at risk the nation’s economic progress and prosperity, ultimately threatening the economic liberty that undergirds our democracy.

The legislation, if enacted, would emphasize causes of action prohibiting the largest digital platforms from discriminating in favor of their own products or services, or among third parties. In so doing, it would eliminate and disincentivize many provide important clarification from Congress on types of discriminatory conduct efficient business arrangements that can materially enhanceharm competition. This would thereby undermineimprove upon the system of ex ante enforcement through which the United States maintains competitive markets with legal prohibitions on competitively harmful corporate conduct. By mistakenly characterizing confirming the illegality of as anticompetitive platform behaviors that in reality enhancereduce incentives for vigorous innovation and dynamic competition, smaller or newer firms to innovate and compete, the legislation would underminesupplement the existing antitrust laws. Specifically, the legislation would  in preventing the largest digital companies from managing their business transactions in an efficient welfare-enhancing manner, abusing and exploiting their dominant positions to the detriment of competition and the competitive process. The Department is strongly concerned aboutsupportive of these harmful effects.objectives and As such, it encourages both the Committees and Congress to work to abandon all efforts to finalize this legislationfinalize this legislation[1] and pass it into law.

The Department views the legislation’s new prohibitions on discrimination as a harmful detrimenthelpful complement to, and interference withclarification of, existing antitrust authority. In our view, the most significant harmbenefits would arise where the legislation seeks to elucidates Congress’ views of anticompetitive conduct—particularly with respect to harmful types of discrimination and self-preferencing by dominant platforms. Enumerating specific  discriminatory and self-preferencing conduct that Congress views as anticompetitive and therefore illegal would undermine the economically informed, fact-specific evaluation of business conduct that lies at the heart of modern antitrust analysis, centered on consumer welfare. Modern economic analysis demonstrates that a great deal of superficially “discriminatory” and “self-preferencing” conduct often represents consumer welfare-enhancing behavior that adds to economic surplus. Deciding whether such conduct is procompetitive (welfare-enhancing) or anticompetitive in a particular instance is the role of existing case-by-case antitrust enforcement. This approach vindicates competition while avoiding the wrongful condemnation of economically beneficial behavior. In contrast, by creating a new class of antitrust “wrongs,” the bills would lead to the incorrect condemnation of many business practices that enhance market efficiency and strengthen the economy.clarify the antitrust laws and supplement the available causes of action and legal frameworks to pursue that conduct. Doing so would enhance the ability of the DOJ and FTC to challenge that conduct efficiently and effectively and better enable them to promote competition in digital markets. The legislation also has the potential to effectively harmonize broad prohibitions with the particularized needs and business practices of individual platforms over time.

If enacted, we believe that this legislation has the potential to have a major negativepositive effect on dynamism in digital markets going forward. Our future global competitiveness depends on innovators and entrepreneurs having the ability to access markets, free from counterproductive inflexible government market regulationdominant incumbents that impede innovation, competition, resiliency, and widespread prosperity. Discriminatory conduct by majordominant platforms, properly understood, often benefits can sap the rewards from other innovators and entrepreneurs, increasingreducing the incentives for entrepreneurship and innovation. Even more importantly, the legislation may undercutsupport the creation and growth of new tech businesses adjacent to the platforms., Such an unfortunate result would reduce the welfare-enhancing initiatives of new businesses that are complementary to the economically beneficial activity (to consumers and producers) generated by the platforms. which may ultimately pose a critically needed competitive check to the covered platforms themselves. We view reduction of these new business initiatives benefits  as a significant harm that would stem from passage of the bills. For these reasons, the Department strongly supports the principles and goals animating opposes the legislation and looks forward to working with Congress to further explain why this undoubtedly well-meaning legislative initiative is detrimental to vigorous competition and a strong American economy.ensure that the final legislation enacted meets these goals.

Thank you for the opportunity to present our views. We hope this information is helpful. Please do not hesitate to contact this office if we may be of additional assistance to you.


[1] In other words,As , the Department respectfully recommends that members of Congress stop wasting time seeking to revise and enact this legislation.members continue to revise the legislation, the Department will provide under separate cover additional assistance to ensure that the bills achieve their goals.

Clean Version (incorporating all redline edits)

Dear Chairman Nadler, Chairman Cicilline, Representative Jordan, and Representative Buck:

The Department of Justice (Department) appreciates the considerable attention and resources devoted by the House and Senate Committees on the Judiciary over the past several years to ensuring the competitiveness of our digital economy, and writes today to oppose the American Innovation and Choice Online Act, Senate bill S. 2992, and the American Innovation and Choice Online Act, House bill H.R. 3816, which contain similar prohibitions on discriminatory conduct by dominant platforms (the “bills”). Unfortunately, the legislative efforts expended on these bills have been a waste of time.

The Department views the rise of major digital platforms as presenting a great boon to open markets and competition, bestowing benefits on consumers, businesses, innovation, resiliency, global competitiveness, and our democracy. By enhancing value transmitted through key arteries of the nation’s commerce and communications, such platforms have promoted a more vibrant and innovative modern economy. Vesting in government the power to pick winners and losers across markets through legislative regulation as found in the bills contravenes the foundations of our capitalist system, and given the increasing importance of these markets, the economic benefits flowing from platform activity are likely to be curtailed if the bills are passed. Enactment of the bills would put at risk the nation’s economic progress and prosperity, ultimately threatening the economic liberty that undergirds our democracy.

The legislation, if enacted, would emphasize causes of action prohibiting the largest digital platforms from “discriminating” in favor of their own products or services, or among third parties. In so doing, it would eliminate and disincentivize many efficient business arrangements that can materially enhance competition. This would thereby undermine the system of ex ante enforcement through which the United States maintains competitive markets with legal prohibitions on competitively harmful corporate conduct. By mistakenly characterizing as anticompetitive platform behaviors that in reality enhance incentives for vigorous innovation and dynamic competition, the legislation would undermine the existing antitrust laws. Specifically, the legislation would prevent the largest digital companies from managing their business transactions in an efficient welfare-enhancing manner, to the detriment of competition and the competitive process. The Department is strongly concerned about these harmful effects. As such, it encourages both the Committees and Congress to abandon all efforts to finalize this legislation and pass it into law.[1]

The Department views the legislation’s new prohibitions on discrimination as a harmful detriment to, and interference with, existing antitrust authority. In our view, the most significant harm would arise where the legislation seeks to elucidate Congress’ views of anticompetitive conduct—particularly with respect to harmful types of discrimination and self-preferencing by dominant platforms. Enumerating specific “discriminatory” and “self-preferencing” conduct that Congress views as anticompetitive and therefore illegal would undermine the economically informed, fact-specific evaluation of business conduct that lies at the heart of modern antitrust analysis, centered on consumer welfare. Modern economic analysis demonstrates that a great deal of superficially “discriminatory” and “self-preferencing” conduct often represents consumer welfare-enhancing behavior that adds to economic surplus. Deciding whether such conduct is procompetitive (welfare-enhancing) or anticompetitive in a particular instance is the role of existing case-by-case antitrust enforcement. This approach vindicates competition while avoiding the wrongful condemnation of economically beneficial behavior. In contrast, by creating a new class of antitrust “wrongs,” the bills would lead to the incorrect condemnation of many business practices that enhance market efficiency and strengthen the economy.

If enacted, we believe that this legislation has the potential to have a major negative effect on dynamism in digital markets going forward. Our future global competitiveness depends on innovators and entrepreneurs having the ability to access markets, free from counterproductive inflexible government market regulation that impede innovation, competition, resiliency, and widespread prosperity. “Discriminatory” conduct by major platforms, properly understood, often benefits innovators and entrepreneurs, increasing the incentives for entrepreneurship and innovation. Even more importantly, the legislation may undercut the creation and growth of new tech businesses adjacent to the platforms. Such an unfortunate result would reduce the welfare-enhancing initiatives of new businesses that are complementary to the economically beneficial activity (to consumers and producers) generated by the platforms. We view reduction of these new business initiatives as a significant harm that would stem from passage of the bills. For these reasons, the Department strongly opposes the legislation and looks forward to working with Congress to further explain why this undoubtedly well-meaning legislative initiative is detrimental to vigorous competition and a strong American economy.

Thank you for the opportunity to present our views. We hope this information is helpful. Please do not hesitate to contact this office if we may be of additional assistance to you.


[1] In other words, the Department respectfully recommends that members of Congress stop wasting time seeking to revise and enact this legislation.

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.

Interoperability

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:

  1. There must be precise rules to determine which acts or omissions are liable to be subject to duplicate proceedings;
  2. The two sets of proceedings must have been conducted in a sufficiently coordinated manner and within a similar timeframe; and
  3. 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:

  1. It is still unclear that intervention in digital markets is necessary, let alone urgent.
  2. 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.
  3. 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.

But perhaps the DMA’s raison d’etre rests less on market failure, but rather on a legal or enforcement failure? This, too, is misguided.

EU competition law is already up to the task

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).

Conclusion

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.

Acknowledging the continuum between competition law and the DMA, the European Competition Network and some member states (self-appointed as “friends of an effective DMA”) have proposed empowering national competition authorities (NCAs) to enforce DMA obligations.

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.

During the exceptional rise in stock-market valuations from March 2020 to January 2022, both equity investors and antitrust regulators have implicitly agreed that so-called “Big Tech” firms enjoyed unbeatable competitive advantages as gatekeepers with largely unmitigated power over the digital ecosystem.

Investors bid up the value of tech stocks to exceptional levels, anticipating no competitive threat to incumbent platforms. Antitrust enforcers and some legislators have exhibited belief in the same underlying assumption. In their case, it has spurred advocacy of dramatic remedies—including breaking up the Big Tech platforms—as necessary interventions to restore competition. 

Other voices in the antitrust community have been more circumspect. A key reason is the theory of contestable markets, developed in the 1980s by the late William Baumol and other economists, which holds that even extremely large market shares are at best a potential indicator of market power. To illustrate, consider the extreme case of a market occupied by a single firm. Intuitively, the firm would appear to have unqualified pricing power. Not so fast, say contestable market theorists. Suppose entry costs into the market are low and consumers can easily move to other providers. This means that the apparent monopolist will act as if the market is populated by other competitors. The takeaway: market share alone cannot demonstrate market power without evidence of sufficiently strong barriers to market entry.

While regulators and some legislators have overlooked this inconvenient principle, it appears the market has not. To illustrate, look no further than the Feb. 3 $230 billion crash in the market value of Meta Platforms—parent company of Facebook, Instagram, and WhatsApp, among other services.

In its antitrust suit against Meta, the Federal Trade Commission (FTC) has argued that Meta’s Facebook service enjoys a social-networking monopoly, a contention that the judge in the case initially rejected in June 2021 as so lacking in factual support that the suit was provisionally dismissed. The judge’s ruling (which he withdrew last month, allowing the suit to go forward after the FTC submitted a revised complaint) has been portrayed as evidence for the view that existing antitrust law sets overly demanding evidentiary standards that unfairly shelter corporate defendants. 

Yet, the record-setting single-day loss in Meta’s value suggests the evidentiary standard is set just about right and the judge’s skepticism was fully warranted. Consider one of the principal reasons behind Meta’s plunge in value: its service had suffered substantial losses of users to TikTok, a formidable rival in a social-networking market in which the FTC claims that Facebook faces no serious competition. The market begs to differ. In light of the obvious competitive threat posed by TikTok and other services, investors reassessed Facebook’s staying power, which was then reflected in its owner Meta’s downgraded stock price.

Just as the investment bubble that had supported the stock market’s case for Meta has popped, so too must the regulatory bubble that had supported the FTC’s antitrust case against it. Investors’ reevaluation rebuts the FTC’s strained market definition that had implausibly excluded TikTok as a competitor.

Even more fundamentally, the market’s assessment shows that Facebook’s users face nominal switching costs—in which case, its leadership position is contestable and the Facebook “monopoly” is not much of a monopoly. While this conclusion might seem surprising, Facebook’s vulnerability is hardly exceptional: Nokia, Blackberry, AOL, Yahoo, Netscape, and PalmPilot illustrate how often seemingly unbeatable tech leaders have been toppled with remarkable speed.

The unraveling of the FTC’s case against what would appear to be an obviously dominant platform should be a wake-up call for those policymakers who have embraced populist antitrust’s view that existing evidentiary requirements, which minimize the risk of “false positive” findings of anticompetitive conduct, should be set aside as an inconvenient obstacle to regulatory and judicial intervention. 

None of this should be interpreted to deny that concentration levels in certain digital markets raise significant antitrust concerns that merit close scrutiny. In particular, regulators have overlooked how some leading platforms have devalued intellectual-property rights in a manner that distorts technology and content markets by advantaging firms that operate integrated product and service ecosystems while disadvantaging firms that specialize in supplying the technological and creative inputs on which those ecosystems rely.  

The fundamental point is that potential risks to competition posed by any leading platform’s business practices can be assessed through rigorous fact-based application of the existing toolkit of antitrust analysis. This is critical to evaluate whether a given firm likely occupies a transitory, rather than durable, leadership position. The plunge in Meta’s stock in response to a revealed competitive threat illustrates the perils of discarding that surgical toolkit in favor of a blunt “big is bad” principle.

Contrary to what has become an increasingly common narrative in policy discussions and political commentary, the existing framework of antitrust analysis was not designed by scholars strategically acting to protect “big business.” Rather, this framework was designed and refined by scholars dedicated to rationalizing, through the rigorous application of economic principles, an incoherent body of case law that had often harmed consumers by shielding incumbents against threats posed by more efficient rivals. The legal shortcuts being pursued by antitrust populists to detour around appropriately demanding evidentiary requirements are writing a “back to the future” script that threatens to return antitrust law to that unfortunate predicament.

In Fleites v. MindGeek—currently before the U.S. District Court for the District of Central California, Southern Division—plaintiffs seek to hold MindGeek subsidiary PornHub liable for alleged instances of human trafficking under the Racketeer Influenced and Corrupt Organizations (RICO) and the Trafficking Victims Protection Reauthorization Act (TVPRA). Writing for the International Center for Law & Economics (ICLE), we have filed a motion for leave to submit an amicus brief regarding whether it is valid to treat co-defendant Visa Inc. as a proper party under principles of collateral liability.

The proposed brief draws on our previous work on the law & economics of collateral liability, and argues that holding Visa liable as a participant under RICO or TVPRA would amount to stretching collateral liability far beyond what is reasonable. Such a move, we posit, would “generate a massive amount of social cost that would outweigh the potential deterrent or compensatory gains sought.”

Collateral liability can make sense when intermediaries are in a position to effectively monitor and control potential harms. That is, it can be appropriate to apply collateral liability to parties who are what is often referred to as a “least cost avoider.” As we write:

In some circumstances it is indeed proper to hold third parties liable even though they are not primary actors directly implicated in wrongdoing. Most significantly, such liability may be appropriate when a collateral actor stands in a relationship to the wrongdoing (or wrongdoers or victims) such that the threat of liability can incentivize it to take action (or refrain from taking action) to prevent or mitigate the wrongdoing. That is to say, collateral liability may be appropriate when the third party has a significant enough degree of control over the primary actors such that its actions can cause them to reduce the risk of harm at reasonable cost. Importantly, however, such liability is appropriate only when direct deterrence is insufficient and/or the third party can prevent harm at lower cost or more effectively than direct enforcement… From an economic perspective, liability should be imposed upon the party or parties best positioned to deter the harms in question, such that the costs of enforcement do not exceed the social gains realized.

The law of negligence under the common law, as well as contributory infringement under copyright law, both help illustrate this principle. Under the common law, collateral actors have a duty in only limited circumstances, when the harms are “reasonably foreseeable” and the actor has special access to particularized information about the victims or the perpetrators, as well as a special ability to control harmful conditions. Under copyright law, collateral liability is similarly limited to circumstances where collateral actors are best positioned to prevent the harm, and the benefits of holding such actors liable exceed the harms. 

Neither of these conditions are true in Fleites v. MindGeek: Visa is not the type of collateral actor that has any access to specialized information or the ability to control actual bad actors. Visa, as a card-payment network, simply processes payments. The only tool at the disposal of Visa is a giant sledgehammer: it can foreclose all transactions to particular sites that run over its network. There is no dispute that the vast majority of content hosted on sites like MindGeek is lawful, however awful one may believe pornography to be. Holding card networks liable here would create incentives to avoid processing payments for such sites altogether in order to avoid legal consequences. 

The potential costs of the theory of liability asserted here stretch far beyond Visa or this particular case. The plaintiffs’ theory would hold anyone liable who provides services that “allow[] the alleged principal actors to continue to do business.” This would mean that Federal Express, for example, would be liable for continuing to deliver packages to MindGeek’s address or that a waste-management company could be liable for providing custodial services to the building where MindGeek has an office. 

According to the plaintiffs, even the mere existence of a newspaper article alleging a company is doing something illegal is sufficient to find that professionals who have provided services to that company “participate” in a conspiracy. This would have ripple effects for professionals from many other industries—from accountants to bankers to insurance—who all would see significantly increased risk of liability.

To read the rest of the brief, see here.

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

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

Interoperability

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Device Neutrality (Sideloading)

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

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

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

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

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

Conclusion

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

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

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

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

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

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

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

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

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

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

Platform and Device Neutrality Regime

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

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

Antitrust v. Regulation

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

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

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

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

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

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

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

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

The Senate Judiciary Committee is set to debate S. 2992, the American Innovation and Choice Online Act (or AICOA) during a markup session Thursday. If passed into law, the bill would force online platforms to treat rivals’ services as they would their own, while ensuring their platforms interoperate seamlessly.

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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:

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

In a market that is functioning reasonably well, we should be able to assume that competition and consumer choice will discover the desirable degree of interoperability among different products. If there are benefits to making your product interoperable 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.

As Geoff Manne observed in his April 2020 testimony to the House Judiciary Committee:

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.

Further reading:

Law review articles

Issue briefs

Shorter pieces