Archives For technology
I’m of two minds on the issue of tech expertise in Congress.
Yes there is good evidence that members of Congress and Congressional staff don’t have broad technical expertise. Scholars Zach Graves and Kevin Kosar have detailed these problems, as well as Travis Moore who wrote, “Of the 3,500 legislative staff on the Hill, I’ve found just seven that have any formal technical training.” Moore continued with a description of his time as a staffer that I think is honest,
In Congress, especially in a member’s office, very few people are subject-matter experts. The best staff depend on a network of trusted friends and advisors, built from personal relationships, who can help them break down the complexities of an issue.
But on the other hand, it is not clear that more tech expertise at Congress’ disposal would lead to better outcomes. Over at the American Action Forum, I explored this topic in depth. Since publishing that piece in October, I’ve come to recognize two gaps that I didn’t address in that original piece. The first relates to expert bias and the second concerns office organization.
Expert Bias In Tech Regulation
Let’s assume for the moment that legislators do become more technically proficient by any number of means. If policymakers are normal people, and let me tell you, they are, the result will be overconfidence of one sort or another. In psychology research, overconfidence includes three distinct ways of thinking. Overestimation is thinking that you are better than you are. Overplacement is the belief that you are better than others. And overprecision is excessive faith that you know the truth.
For political experts, overprecision is common. A long-term study of over 82,000 expert political forecasts by Philip E. Tetlock found that this group performed worse than they would have if they just randomly chosen an outcome. In the technical parlance, this means expert opinions were not calibrated; there wasn’t a correspondence between the predicted probabilities and the observed frequencies. Moreover, Tetlock found that events that experts deemed impossible occurred with some regularity. In a number of fields, these non-likely events came into being as much as 20 or 30 percent of the time. As Tetlock and co-author Dan Gardner explained, “our ability to predict human affairs is impressive only in its mediocrity.”
While there aren’t many studies on the topic of expertise within government, workers within agencies have been shown to have overconfidence as well. As researchers Xinsheng Liu, James Stoutenborough, and Arnold Vedlitz discovered in surveying bureaucrats,
Our analyses demonstrate that (a) the level of issue‐specific expertise perceived by individual bureaucrats is positively associated with their work experience/job relevance to climate change, (b) more experienced bureaucrats tend to be more overconfident in assessing their expertise, and (c) overconfidence, independently of sociodemographic characteristics, attitudinal factors and political ideology, correlates positively with bureaucrats’ risk‐taking policy choices.
The expert bias literature leads to two lessons. First, more expertise doesn’t necessarily lead to better predictions or outcomes. Indeed, there are good reasons to suspect that more expertise would lead to overconfident policymakers and more risky political ventures within the law.
But second, and more importantly, what is meant by tech expertise needs to be more closely examined. Advocates want better decision making processes within government, a laudable goal. But staffing government agencies and Congress with experts doesn’t get you there. Like countless other areas, there is a diminishing marginal predictive return for knowledge. Rather than an injection of expertise, better methods of judgement should be pursued. Getting to that point will be a much more difficult goal.
The Production Function of Political Offices
As last year was winding down, Google CEO Sundar Pichai appeared before the House Judiciary Committee to answer questions regarding Google’s search engine. The coverage of the event by various outlets was similar in taking to task members for their the apparent lack of knowledge about the search engine. Here is how Mashable’s Matt Binder described the event,
The main topic of the hearing — anti-conservative bias within Google’s search engine — really puts how little Congress understands into perspective. Early on in the hearing, Rep. Lamar Smith claimed as fact that 96 percent of Google search results come from liberal sources. Besides being proven false with a simple search of your own, Google’s search algorithm bases search rankings on attributes such as backlinks and domain authority. Partisanship of the news outlet does not come into play. Smith asserted that he believe the results are being manipulated, regardless of being told otherwise.
Smith wasn’t alone as both Representative Steve Chabot and Representative Steve King brought up concerns of anti-conservative bias. Towards the end of piece Binder laid bare his concern, which is shared by many,
There are certainly many concerns and critiques to be had over algorithms and data collection when it comes to Google and its products like Google Search and Google Ads. Sadly, not much time was spent on this substance at Tuesday’s hearing. Google-owned YouTube, the second most trafficked website in the world after Google, was barely addressed at the hearing tool. [sic]
Notice the assumption built into this critique. True substantive debate would probe the data collection practices of Google instead of the bias of its search results. Using this framing, it seems clear that Congressional members don’t understand tech. But there is a better way to understand this hearing, which requires asking a more mundane question: Why is it that political actors like Representatives Chabot, King, and Smith were so concerned with how they appeared in Google results?
Political scientists Gary Lee Malecha and Daniel J. Reagan offer a convincing answer in The Public Congress. As they document, political offices over the past two decades have been reorientated by the 24-hours news cycle. Legislative life now unfolds live in front of cameras and microphones and on videos online. Over time, external communication has risen to a prominent role in Congressional political offices, in key ways overtaking policy analysis.
While this internal change doesn’t lend to any hard and fast conclusions, it could help explain why emboldened tech expertise hasn’t been a winning legislative issue. The demand just isn’t there. And based on the priorities they do display a preference for, it might not yield any benefits, while also giving offices a potential cover.
All of this being said, there are convincing reasons why more tech expertise could be beneficial. Yet, policymakers and the public shouldn’t assume that these reforms will be unalloyed goods.
Last week, the DOJ cleared the merger of CVS Health and Aetna (conditional on Aetna’s divesting its Medicare Part D business), a merger that, as I previously noted at a House Judiciary hearing, “presents a creative effort by two of the most well-informed and successful industry participants to try something new to reform a troubled system.” (My full testimony is available here).
Of course it’s always possible that the experiment will fail — that the merger won’t “revolutioniz[e] the consumer health care experience” in the way that CVS and Aetna are hoping. But it’s a low (antitrust) risk effort to address some of the challenges confronting the healthcare industry — and apparently the DOJ agrees.
I discuss the weakness of the antitrust arguments against the merger at length in my testimony. What I particularly want to draw attention to here is how this merger — like many vertical mergers — represents business model innovation by incumbents.
The CVS/Aetna merger is just one part of a growing private-sector movement in the healthcare industry to adopt new (mostly) vertical arrangements that seek to move beyond some of the structural inefficiencies that have plagued healthcare in the United States since World War II. Indeed, ambitious and interesting as it is, the merger arises amidst a veritable wave of innovative, vertical healthcare mergers and other efforts to integrate the healthcare services supply chain in novel ways.
These sorts of efforts (and the current DOJ’s apparent support for them) should be applauded and encouraged. I need not rehash the economic literature on vertical restraints here (see, e.g., Lafontaine & Slade, etc.). But especially where government interventions have already impaired the efficient workings of a market (as they surely have, in spades, in healthcare), it is important not to compound the error by trying to micromanage private efforts to restructure around those constraints.
Current trends in private-sector-driven healthcare reform
In the past, the most significant healthcare industry mergers have largely been horizontal (i.e., between two insurance providers, or two hospitals) or “traditional” business model mergers for the industry (i.e., vertical mergers aimed at building out managed care organizations). This pattern suggests a sort of fealty to the status quo, with insurers interested primarily in expanding their insurance business or providers interested in expanding their capacity to provide medical services.
Today’s health industry mergers and ventures seem more frequently to be different in character, and they portend an industry-wide experiment in the provision of vertically integrated healthcare that we should enthusiastically welcome.
Drug pricing and distribution innovations
To begin with, the CVS/Aetna deal, along with the also recently approved Cigna-Express Scripts deal, solidifies the vertical integration of pharmacy benefit managers (PBMs) with insurers.
But a number of other recent arrangements and business models center around relationships among drug manufacturers, pharmacies, and PBMs, and these tend to minimize the role of insurers. While not a “vertical” arrangement, per se, Walmart’s generic drug program, for example, offers $4 prescriptions to customers regardless of insurance (the typical generic drug copay for patients covered by employer-provided health insurance is $11), and Walmart does not seek or receive reimbursement from health plans for these drugs. It’s been offering this program since 2006, but in 2016 it entered into a joint buying arrangement with McKesson, a pharmaceutical wholesaler (itself vertically integrated with Rexall pharmacies), to negotiate lower prices. The idea, presumably, is that Walmart will entice consumers to its stores with the lure of low-priced generic prescriptions in the hope that they will buy other items while they’re there. That prospect presumably makes it worthwhile to route around insurers and PBMs, and their reimbursements.
Meanwhile, both Express Scripts and CVS Health (two of the country’s largest PBMs) have made moves toward direct-to-consumer sales themselves, establishing pricing for a small number of drugs independently of health plans and often in partnership with drug makers directly.
Also apparently focused on disrupting traditional drug distribution arrangements, Amazon has recently purchased online pharmacy PillPack (out from under Walmart, as it happens), and with it received pharmacy licenses in 49 states. The move introduces a significant new integrated distributor/retailer, and puts competitive pressure on other retailers and distributors and potentially insurers and PBMs, as well.
Whatever its role in driving the CVS/Aetna merger (and I believe it is smaller than many reports like to suggest), Amazon’s moves in this area demonstrate the fluid nature of the market, and the opportunities for a wide range of firms to create efficiencies in the market and to lower prices.
At the same time, the differences between Amazon and CVS/Aetna highlight the scope of product and service differentiation that should contribute to the ongoing competitiveness of these markets following mergers like this one.
While Amazon inarguably excels at logistics and the routinizing of “back office” functions, it seems unlikely for the foreseeable future to be able to offer (or to be interested in offering) a patient interface that can rival the service offerings of a brick-and-mortar CVS pharmacy combined with an outpatient clinic and its staff and bolstered by the capabilities of an insurer like Aetna. To be sure, online sales and fulfillment may put price pressure on important, largely mechanical functions, but, like much technology, it is first and foremost a complement to services offered by humans, rather than a substitute. (In this regard it is worth noting that McKesson has long been offering Amazon-like logistics support for both online and brick-and-mortar pharmacies. “‘To some extent, we were Amazon before it was cool to be Amazon,’ McKesson CEO John Hammergren said” on a recent earnings call).
Other efforts focus on integrating insurance and treatment functions or on bringing together other, disparate pieces of the healthcare industry in interesting ways — all seemingly aimed at finding innovative, private solutions to solve some of the costly complexities that plague the healthcare market.
Walmart, for example, announced a deal with Quest Diagnostics last year to experiment with offering diagnostic testing services and potentially other basic healthcare services inside of some Walmart stores. While such an arrangement may simply be a means of making doctor-prescribed diagnostic tests more convenient, it may also suggest an effort to expand the availability of direct-to-consumer (patient-initiated) testing (currently offered by Quest in Missouri and Colorado) in states that allow it. A partnership with Walmart to market and oversee such services has the potential to dramatically expand their use.
Capping off (for now) a buying frenzy in recent years that included the purchase of PBM, CatamaranRx, UnitedHealth is seeking approval from the FTC for the proposed merger of its Optum unit with the DaVita Medical Group — a move that would significantly expand UnitedHealth’s ability to offer medical services (including urgent care, outpatient surgeries, and health clinic services), give it a significant group of doctors’ clinics throughout the U.S., and turn UnitedHealth into the largest employer of doctors in the country. But of course this isn’t a traditional managed care merger — it represents a significant bet on the decentralized, ambulatory care model that has been slowly replacing significant parts of the traditional, hospital-centric care model for some time now.
And, perhaps most interestingly, some recent moves are bringing together drug manufacturers and diagnostic and care providers in innovative ways. Swiss pharmaceutical company, Roche, announced recently that “it would buy the rest of U.S. cancer data company Flatiron Health for $1.9 billion to speed development of cancer medicines and support its efforts to price them based on how well they work.” Not only is the deal intended to improve Roche’s drug development process by integrating patient data, it is also aimed at accommodating efforts to shift the pricing of drugs, like the pricing of medical services generally, toward an outcome-based model.
Similarly interesting, and in a related vein, early this year a group of hospital systems including Intermountain Health, Ascension, and Trinity Health announced plans to begin manufacturing generic prescription drugs. This development further reflects the perceived benefits of vertical integration in healthcare markets, and the move toward creative solutions to the unique complexity of coordinating the many interrelated layers of healthcare provision. In this case,
[t]he nascent venture proposes a private solution to ensure contestability in the generic drug market and consequently overcome the failures of contracting [in the supply and distribution of generics]…. The nascent venture, however it solves these challenges and resolves other choices, will have important implications for the prices and availability of generic drugs in the US.
More enforcement decisions like CVS/Aetna and Bayer/Monsanto; fewer like AT&T/Time Warner
In the face of all this disruption, it’s difficult to credit anticompetitive fears like those expressed by the AMA in opposing the CVS-Aetna merger and a recent CEA report on pharmaceutical pricing, both of which are premised on the assumption that drug distribution is unavoidably dominated by a few PBMs in a well-defined, highly concentrated market. Creative arrangements like the CVS-Aetna merger and the initiatives described above (among a host of others) indicate an ease of entry, the fluidity of traditional markets, and a degree of business model innovation that suggest a great deal more competitiveness than static PBM market numbers would suggest.
This kind of incumbent innovation through vertical restructuring is an increasingly important theme in antitrust, and efforts to tar such transactions with purported evidence of static market dominance is simply misguided.
While the current DOJ’s misguided (and, remarkably, continuing) attempt to stop the AT&T/Time Warner merger is an aberrant step in the wrong direction, the leadership at the Antitrust Division generally seems to get it. Indeed, in spite of strident calls for stepped-up enforcement in the always-controversial ag-biotech industry, the DOJ recently approved three vertical ag-biotech mergers in fairly rapid succession.
As I noted in a discussion of those ag-biotech mergers, but equally applicable here, regulatory humility should continue to carry the day when it comes to structural innovation by incumbent firms:
But it is also important to remember that innovation comes from within incumbent firms, as well, and, often, that the overall level of innovation in an industry may be increased by the presence of large firms with economies of scope and scale.
In sum, and to paraphrase Olympia Dukakis’ character in Moonstruck: “what [we] don’t know about [the relationship between innovation and market structure] is a lot.”
What we do know, however, is that superficial, concentration-based approaches to antitrust analysis will likely overweight presumed foreclosure effects and underweight innovation effects.
We shouldn’t fetishize entry, or access, or head-to-head competition over innovation, especially where consumer welfare may be significantly improved by a reduction in the former in order to get more of the latter.
It is a truth universally acknowledged that unwanted telephone calls are among the most reviled annoyances known to man. But this does not mean that laws intended to prohibit these calls are themselves necessarily good. Indeed, in one sense we know intuitively that they are not good. These laws have proven wholly ineffective at curtailing the robocall menace — it is hard to call any law as ineffective as these “good”. And these laws can be bad in another sense: because they fail to curtail undesirable speech but may burden desirable speech, they raise potentially serious First Amendment concerns.
I presented my exploration of these concerns, coming out soon in the Brooklyn Law Review, last month at TPRC. The discussion, which I get into below, focuses on the Telephone Consumer Protection Act (TCPA), the main law that we have to fight against robocalls. It considers both narrow First Amendment concerns raised by the TCPA as well as broader concerns about the Act in the modern technological setting.
It is hard to imagine that there is a need to explain how much of a pain telemarketing is. Indeed, it is rare that I give a talk on the subject without receiving a call during the talk. At the last FCC Open Meeting, after the Commission voted on a pair of enforcement actions taken against telemarketers, Commissioner Rosenworcel picked up her cell phone to share that she had received a robocall during the vote. Robocalls are the most complained of issue at both the FCC and FTC. Today, there are well over 4 billion robocalls made every month. It’s estimated that half of all phone calls made in 2019 will be scams (most of which start with a robocall). .
It’s worth noting that things were not always this way. Unsolicited and unwanted phone calls have been around for decades — but they have become something altogether different and more problematic in the past 10 years. The origin of telemarketing was the simple extension of traditional marketing to the medium of the telephone. This form of telemarketing was a huge annoyance — but fundamentally it was, or at least was intended to be, a mere extension of legitimate business practices. There was almost always a real business on the other end of the line, trying to advertise real business opportunities.
This changed in the 2000s with the creation of the Do Not Call (DNC) registry. The DNC registry effectively killed the “legitimate” telemarketing business. Companies faced significant penalties if they called individuals on the DNC registry, and most telemarketing firms tied the registry into their calling systems so that numbers on it could not be called. And, unsurprisingly, an overwhelming majority of Americans put their phone numbers on the registry. As a result the business proposition behind telemarketing quickly dried up. There simply weren’t enough individuals not on the DNC list to justify the risk of accidentally calling individuals who were on the list.
Of course, anyone with a telephone today knows that the creation of the DNC registry did not eliminate robocalls. But it did change the nature of the calls. The calls we receive today are, overwhelmingly, not coming from real businesses trying to market real services or products. Rather, they’re coming from hucksters, fraudsters, and scammers — from Rachels from Cardholder Services and others who are looking for opportunities to defraud. Sometimes they may use these calls to find unsophisticated consumers who can be conned out of credit card information. Other times they are engaged in any number of increasingly sophisticated scams designed to trick consumers into giving up valuable information.
There is, however, a more important, more basic difference between pre-DNC calls and the ones we receive today. Back in the age of legitimate businesses trying to use the telephone for marketing, the relationship mattered. Those businesses couldn’t engage in business anonymously. But today’s robocallers are scam artists. They need no identity to pull off their scams. Indeed, a lack of identity can be advantageous to them. And this means that legal tools such as the DNC list or the TCPA (which I turn to below), which are premised on the ability to take legal action against bad actors who can be identified and who have assets than can be attached through legal proceedings, are wholly ineffective against these newfangled robocallers.
The TCPA Sucks
The TCPA is the first law that was adopted to fight unwanted phone calls. Adopted in 1992, it made it illegal to call people using autodialers or prerecorded messages without prior express consent. (The details have more nuance than this, but that’s the gist.) It also created a private right of action with significant statutory damages of up to $1,500 per call.
Importantly, the justification for the TCPA wasn’t merely “telemarketing sucks.” Had it been, the TCPA would have had a serious problem: telemarketing, although exceptionally disliked, is speech, which means that it is protected by the First Amendment. Rather, the TCPA was enacted primarily upon two grounds. First, telemarketers were invading the privacy of individuals’ homes. The First Amendment is license to speak; it is not license to break into someone’s home and force them to listen. And second, telemarketing calls could impose significant real costs on the recipients of calls. At the time, receiving a telemarketing call could, for instance, cost cellular customers several dollars; and due to the primitive technologies used for autodialing, these calls would regularly tie up residential and commercial phone lines for extended periods of time, interfere with emergency calls, and fill up answering machine tapes.
It is no secret that the TCPA was not particularly successful. As the technologies for making robocalls improved throughout the 1990s and their costs went down, firms only increased their use of them. And we were still in a world of analog telephones, and Caller ID was still a new and not universally-available technology, which made it exceptionally difficult to bring suits under the TCPA. Perhaps more important, while robocalls were annoying, they were not the omnipresent fact of life that they are today: cell phones were still rare; most of these calls came to landline phones during dinner where they were simply ignored.
As discussed above, the first generation of robocallers and telemarketers quickly died off following adoption of the DNC registry.
And the TCPA is proving no more effective during this second generation of robocallers. This is unsurprising. Callers who are willing to blithely ignore the DNC registry are just as willing to blithely ignore the TCPA. Every couple of months the FCC or FTC announces a large fine — millions or tens of millions of dollars — against a telemarketing firm that was responsible for making millions or tens of millions or even hundreds of millions of calls over a multi-month period. At a time when there are over 4 billion of these calls made every month, such enforcement actions are a drop in the ocean.
Which brings us to the FIrst Amendment and the TCPA, presented in very cursory form here (see the paper for more detailed analysis). First, it must be acknowledged that the TCPA was challenged several times following its adoption and was consistently upheld by courts applying intermediate scrutiny to it, on the basis that it was regulation of commercial speech (which traditionally has been reviewed under that more permissive standard). However, recent Supreme Court opinions, most notably that in Reed v. Town of Gilbert, suggest that even the commercial speech at issue in the TCPA may need to be subject to the more probing review of strict scrutiny — a conclusion that several lower courts have reached.
But even putting the question of whether the TCPA should be reviewed subject to strict or intermediate scrutiny, a contemporary facial challenge to the TCPA on First Amendment grounds would likely succeed (no matter what standard of review was applied). Generally, courts are very reluctant to allow regulation of speech that is either under- or over-inclusive — and the TCPA is substantially both. We know that it is under-inclusive because robocalls have been a problem for a long time and the problem is only getting worse. And, at the same time, there are myriad stories of well-meaning companies getting caught up on the TCPA’s web of strict liability for trying to do things that clearly should not be deemed illegal: sports venues sending confirmation texts when spectators participate in text-based games on the jumbotron; community banks getting sued by their own members for trying to send out important customer information; pharmacies reminding patients to get flu shots. There is discussion to be had about how and whether calls like these should be permitted — but they are unquestionably different in kind from the sort of telemarketing robocalls animating the TCPA (and general public outrage).
In other words the TCPA prohibits some amount of desirable, Constitutionally-protected, speech in a vainglorious and wholly ineffective effort to curtail robocalls. That is a recipe for any law to be deemed an unconstitutional restriction on speech under the First Amendment.
Good News: Things Don’t Need to Suck!
But there is another, more interesting, reason that the TCPA would likely not survive a First Amendment challenge today: there are lots of alternative approaches to addressing the problem of robocalls. Interestingly, the FCC itself has the ability to direct implementation of some of these approaches. And, more important, the FCC itself is the greatest impediment to some of them being implemented. In the language of the First Amendment, restrictions on speech need to be narrowly tailored. It is hard to say that a law is narrowly tailored when the government itself controls the ability to implement more tailored approaches to addressing a speech-related problem. And it is untenable to say that the government can restrict speech to address a problem that is, in fact, the result of the government’s own design.
In particular, the FCC regulates a great deal of how the telephone network operates, including over the protocols that carriers use for interconnection and call completion. Large parts of the telephone network are built upon protocols first developed in the era of analog phones and telephone monopolies. And the FCC itself has long prohibited carriers from blocking known-scam calls (on the ground that, as common carriers, it is their principal duty to carry telephone traffic without regard to the content of the calls).
Fortunately, some of these rules are starting to change. The Commission is working to implement rules that will give carriers and their customers greater ability to block calls. And we are tantalizingly close to transitioning the telephone network away from its traditional unauthenticated architecture to one that uses a strong cyrptographic infrastructure to provide fully authenticated calls (in other words, Caller ID that actually works).
The irony of these efforts is that they demonstrate the unconstitutionality of the TCPA: today there are better, less burdensome, more effective ways to deal with the problems of uncouth telemarketers and robocalls. At the time the TCPA was adopted, these approaches were technologically infeasible, so the its burdens upon speech were more reasonable. But that cannot be said today. The goal of the FCC and legislators (both of whom are looking to update the TCPA and its implementation) should be less about improving the TCPA and more about improving our telecommunications architecture so that we have less need for cludgel-like laws in the mold of the TCPA.
Last week, I objected to Senator Warner relying on the flawed AOL/Time Warner merger conditions as a template for tech regulatory policy, but there is a much deeper problem contained in his proposals. Although he does not explicitly say “big is bad” when discussing competition issues, the thrust of much of what he recommends would serve to erode the power of larger firms in favor of smaller firms without offering a justification for why this would result in a superior state of affairs. And he makes these recommendations without respect to whether those firms actually engage in conduct that is harmful to consumers.
In the Data Portability section, Warner says that “As platforms grow in size and scope, network effects and lock-in effects increase; consumers face diminished incentives to contract with new providers, particularly if they have to once again provide a full set of data to access desired functions.“ Thus, he recommends a data portability mandate, which would theoretically serve to benefit startups by providing them with the data that large firms possess. The necessary implication here is that it is a per se good that small firms be benefited and large firms diminished, as the proposal is not grounded in any evaluation of the competitive behavior of the firms to which such a mandate would apply.
Warner also proposes an “interoperability” requirement on “dominant platforms” (which I criticized previously) in situations where, “data portability alone will not produce procompetitive outcomes.” Again, the necessary implication is that it is a per se good that established platforms share their services with start ups without respect to any competitive analysis of how those firms are behaving. The goal is preemptively to “blunt their ability to leverage their dominance over one market or feature into complementary or adjacent markets or products.”
Perhaps most perniciously, Warner recommends treating large platforms as essential facilities in some circumstances. To this end he states that:
Legislation could define thresholds – for instance, user base size, market share, or level of dependence of wider ecosystems – beyond which certain core functions/platforms/apps would constitute ‘essential facilities’, requiring a platform to provide third party access on fair, reasonable and non-discriminatory (FRAND) terms and preventing platforms from engaging in self-dealing or preferential conduct.
But, as i’ve previously noted with respect to imposing “essential facilities” requirements on tech platforms,
[T]he essential facilities doctrine is widely criticized, by pretty much everyone. In their respected treatise, Antitrust Law, Herbert Hovenkamp and Philip Areeda have said that “the essential facility doctrine is both harmful and unnecessary and should be abandoned”; Michael Boudin has noted that the doctrine is full of “embarrassing weaknesses”; and Gregory Werden has opined that “Courts should reject the doctrine.”
Indeed, as I also noted, “the Supreme Court declined to recognize the essential facilities doctrine as a distinct rule in Trinko, where it instead characterized the exclusionary conduct in Aspen Skiing as ‘at or near the outer boundary’ of Sherman Act § 2 liability.”
In short, it’s very difficult to know when access to a firm’s internal functions might be critical to the facilitation of a market. It simply cannot be true that a firm becomes bound under onerous essential facilities requirements (or classification as a public utility) simply because other firms find it more convenient to use its services than to develop their own.
The truth of what is actually happening in these cases, however, is that third-party firms are choosing to anchor their business to the processes of another firm which generates an “asset specificity” problem that they then seek the government to remedy:
A content provider that makes itself dependent upon another company for distribution (or vice versa, of course) takes a significant risk. Although it may benefit from greater access to users, it places itself at the mercy of the other — or at least faces great difficulty (and great cost) adapting to unanticipated, crucial changes in distribution over which it has no control.
This is naturally a calculated risk that a firm may choose to make, but it is a risk. To pry open Google or Facebook for the benefit of competitors that choose to play to Google and Facebook’s user base, rather than opening markets of their own, punishes the large players for being successful while also rewarding behavior that shies away from innovation. Further, such a policy would punish the large platforms whenever they innovate with their services in any way that might frustrate third-party “integrators” (see, e.g., Foundem’s claims that Google’s algorithm updates meant to improve search quality for users harmed Foundem’s search rankings).
Rather than encouraging innovation, blessing this form of asset specificity would have the perverse result of entrenching the status quo.
In all of these recommendations from Senator Warner, there is no claim that any of the targeted firms will have behaved anticompetitively, but merely that they are above a certain size. This is to say that, in some cases, big is bad.
Senator Warner’s policies would harm competition and innovation
As Geoffrey Manne and Gus Hurwitz have recently noted these views run completely counter to the last half-century or more of economic and legal learning that has occurred in antitrust law. From its murky, politically-motivated origins through the early 60’s when the Structure-Conduct-Performance (“SCP”) interpretive framework was ascendant, antitrust law was more or less guided by the gut feeling of regulators that big business necessarily harmed the competitive process.
Thus, at its height with SCP, “big is bad” antitrust relied on presumptions that large firms over a certain arbitrary threshold were harmful and should be subjected to more searching judicial scrutiny when merging or conducting business.
A paradigmatic example of this approach can be found in Von’s Grocery where the Supreme Court prevented the merger of two relatively small grocery chains. Combined, the two chains would have constitutes a mere 9 percent of the market, yet the Supreme Court, relying on the SCP aversion to concentration in itself, prevented the merger despite any procompetitive justifications that would have allowed the combined entity to compete more effectively in a market that was coming to be dominated by large supermarkets.
As Manne and Hurwitz observe: “this decision meant breaking up a merger that did not harm consumers, on the one hand, while preventing firms from remaining competitive in an evolving market by achieving efficient scale, on the other.” And this gets to the central defect of Senator Warner’s proposals. He ties his decisions to interfere in the operations of large tech firms to their size without respect to any demonstrable harm to consumers.
To approach antitrust this way — that is, to roll the clock back to a period before there was a well-defined and administrable standard for antitrust — is to open the door for regulation by political whim. But the value of the contemporary consumer welfare test is that it provides knowable guidance that limits both the undemocratic conduct of politically motivated enforcers as well as the opportunities for private firms to engage in regulatory capture. As Manne and Hurwitz observe:
Perhaps the greatest virtue of the consumer welfare standard is not that it is the best antitrust standard (although it is) — it’s simply that it is a standard. The story of antitrust law for most of the 20th century was one of standard-less enforcement for political ends. It was a tool by which any entrenched industry could harness the force of the state to maintain power or stifle competition.
While it is unlikely that Senator Warner intends to entrench politically powerful incumbents, or enable regulation by whim, those are the likely effects of his proposals.
Antitrust law has a rich set of tools for dealing with competitive harm. Introducing legislation to define arbitrary thresholds for limiting the potential power of firms will ultimately undermine the power of those tools and erode the welfare of consumers.
Senator Mark Warner has proposed 20 policy prescriptions for bringing “big tech” to heel. The proposals — which run the gamut from policing foreign advertising on social networks to regulating feared competitive harms — provide much interesting material for Congress to consider.
On the positive side, Senator Warner introduces the idea that online platforms may be able to function as least-cost avoiders with respect to certain tortious behavior of their users. He advocates for platforms to implement technology that would help control the spread of content that courts have found violated certain rights of third-parties.
Yet, on other accounts — specifically the imposition of an “interoperability” mandate on platforms — his proposals risk doing more harm than good.
The interoperability mandate was included by Senator Warner in order to “blunt [tech platforms’] ability to leverage their dominance over one market or feature into complementary or adjacent markets or products.” According to Senator Warner, such a measure would enable startups to offset the advantages that arise from network effects on large tech platforms by building their services more easily on the backs of successful incumbents.
Whatever you think of the moats created by network effects, the example of “successful” previous regulation on this issue that Senator Warner relies upon is perplexing:
A prominent template for [imposing interoperability requirements] was in the AOL/Time Warner merger, where the FCC identified instant messaging as the ‘killer app’ – the app so popular and dominant that it would drive consumers to continue to pay for AOL service despite the existence of more innovative and efficient email and internet connectivity services. To address this, the FCC required AOL to make its instant messaging service (AIM, which also included a social graph) interoperable with at least one rival immediately and with two other rivals within 6 months.
But the AOL/Time Warner merger and the FCC’s conditions provide an example that demonstrates the exact opposite of what Senator Warner suggests. The much-feared 2001 megamerger prompted, as the Senator notes, fears that the new company would be able to leverage its dominance in the nascent instant messaging market to extend its influence into adjacent product markets.
Except, by 2003, despite it being unclear that AOL had developed interoperable systems, two large competitors had arisen that did not run interoperable IM networks (Yahoo! and Microsoft). In that same period, AOL’s previously 100% IM market share had declined by about half. By 2009, after eight years of heavy losses, Time Warner shed AOL, and by last year AIM was completely dead.
Not only was it not clear that AOL was able to make AIM interoperable, AIM was never able to catch up once better, rival services launched. What the conditions did do, however, was prevent AOL from launching competitive video chat services as it flailed about in the wake of the deal, thus forcing it to miss out on a market opportunity available to unencumbered competitors like Microsoft and Yahoo!
And all of this of course ignores the practical impossibility entailed in interfering in highly integrated technology platforms.
The AOL/Time Warner merger conditions are no template for successful tech regulation. Congress would be ill-advised to rely upon such templates for crafting policy around tech and innovation.