Search Results For digital markets act

Democratic leadership of the House Judiciary Committee have leaked the approach they plan to take to revise U.S. antitrust law and enforcement, with a particular focus on digital platforms. 

Broadly speaking, the bills would: raise fees for larger mergers and increase appropriations to the FTC and DOJ; require data portability and interoperability; declare that large platforms can’t own businesses that compete with other businesses that use the platform; effectively ban large platforms from making any acquisitions; and generally declare that large platforms cannot preference their own products or services. 

All of these are ideas that have been discussed before. They are very much in line with the EU’s approach to competition, which places more regulation-like burdens on big businesses, and which is introducing a Digital Markets Act that mirrors the Democrats’ proposals. Some Republicans are reportedly supportive of the proposals, which is surprising since they mean giving broad, discretionary powers to antitrust authorities that are controlled by Democrats who take an expansive view of antitrust enforcement as a way to achieve their other social and political goals. The proposals may also be unpopular with consumers if, for example, they would mean that popular features like integrating Maps into relevant Google Search results becomes prohibited.

The multi-bill approach here suggests that the committee is trying to throw as much at the wall as possible to see what sticks. It may reflect a lack of confidence among the proposers in their ability to get their proposals through wholesale, especially given that Amy Klobuchar’s CALERA bill in the Senate creates an alternative that, while still highly interventionist, does not create ex ante regulation of the Internet the same way these proposals do.

In general, the bills are misguided for three main reasons. 

One, they seek to make digital platforms into narrow conduits for other firms to operate on, ignoring the value created by platforms curating their own services by, for example, creating quality controls on entry (as Apple does on its App Store) or by integrating their services with related products (like, say, Google adding events from Gmail to users’ Google Calendars). 

Two, they ignore the procompetitive effects of digital platforms extending into each other’s markets and competing with each other there, in ways that often lead to far more intense competition—and better outcomes for consumers—than if the only firms that could compete with the incumbent platform were small startups.

Three, they ignore the importance of incentives for innovation. Platforms invest in new and better products when they can make money from doing so, and limiting their ability to do that means weakened incentives to innovate. Startups and their founders and investors are driven, in part, by the prospect of being acquired, often by the platforms themselves. Making those acquisitions more difficult, or even impossible, means removing one of the key ways startup founders can exit their firms, and hence one of the key rewards and incentives for starting an innovative new business. 

For more, our “Joint Submission of Antitrust Economists, Legal Scholars, and Practitioners” set out why many of the House Democrats’ assumptions about the state of the economy and antitrust enforcement were mistaken. And my post, “Buck’s “Third Way”: A Different Road to the Same Destination”, argued that House Republicans like Ken Buck were misguided in believing they could support some of the proposals and avoid the massive regulatory oversight that they said they rejected.

Platform Anti-Monopoly Act 

The flagship bill, introduced by Antitrust Subcommittee Chairman David Cicilline (D-R.I.), establishes a definition of “covered platform” used by several of the other bills. The measures would apply to platforms with at least 500,000 U.S.-based users, a market capitalization of more than $600 billion, and that is deemed a “critical trading partner” with the ability to restrict or impede the access that a “dependent business” has to its users or customers.

Cicilline’s bill would bar these covered platforms from being able to promote their own products and services over the products and services of competitors who use the platform. It also defines a number of other practices that would be regarded as discriminatory, including: 

  • Restricting or impeding “dependent businesses” from being able to access the platform or its software on the same terms as the platform’s own lines of business;
  • Conditioning access or status on purchasing other products or services from the platform; 
  • Using user data to support the platform’s own products in ways not extended to competitors; 
  • Restricting the platform’s commercial users from using or accessing data generated on the platform from their own customers;
  • Restricting platform users from uninstalling software pre-installed on the platform;
  • Restricting platform users from providing links to facilitate business off of the platform;
  • Preferencing the platform’s own products or services in search results or rankings;
  • Interfering with how a dependent business prices its products; 
  • Impeding a dependent business’ users from connecting to services or products that compete with those offered by the platform; and
  • Retaliating against users who raise concerns with law enforcement about potential violations of the act.

On a basic level, these would prohibit lots of behavior that is benign and that can improve the quality of digital services for users. Apple pre-installing a Weather app on the iPhone would, for example, run afoul of these rules, and the rules as proposed could prohibit iPhones from coming with pre-installed apps at all. Instead, users would have to manually download each app themselves, if indeed Apple was allowed to include the App Store itself pre-installed on the iPhone, given that this competes with other would-be app stores.

Apart from the obvious reduction in the quality of services and convenience for users that this would involve, this kind of conduct (known as “self-preferencing”) is usually procompetitive. For example, self-preferencing allows platforms to compete with one another by using their strength in one market to enter a different one; Google’s Shopping results in the Search page increase the competition that Amazon faces, because it presents consumers with a convenient alternative when they’re shopping online for products. Similarly, Amazon’s purchase of the video-game streaming service Twitch, and the self-preferencing it does to encourage Amazon customers to use Twitch and support content creators on that platform, strengthens the competition that rivals like YouTube face. 

It also helps innovation, because it gives firms a reason to invest in services that would otherwise be unprofitable for them. Google invests in Android, and gives much of it away for free, because it can bundle Google Search into the OS, and make money from that. If Google could not self-preference Google Search on Android, the open source business model simply wouldn’t work—it wouldn’t be able to make money from Android, and would have to charge for it in other ways that may be less profitable and hence give it less reason to invest in the operating system. 

This behavior can also increase innovation by the competitors of these companies, both by prompting them to improve their products (as, for example, Google Android did with Microsoft’s mobile operating system offerings) and by growing the size of the customer base for products of this kind. For example, video games published by console manufacturers (like Nintendo’s Zelda and Mario games) are often blockbusters that grow the overall size of the user base for the consoles, increasing demand for third-party titles as well.

For more, check out “Against the Vertical Discrimination Presumption” by Geoffrey Manne and Dirk Auer’s piece “On the Origin of Platforms: An Evolutionary Perspective”.

Ending Platform Monopolies Act 

Sponsored by Rep. Pramila Jayapal (D-Wash.), this bill would make it illegal for covered platforms to control lines of business that pose “irreconcilable conflicts of interest,” enforced through civil litigation powers granted to the Federal Trade Commission (FTC) and the U.S. Justice Department (DOJ).

Specifically, the bill targets lines of business that create “a substantial incentive” for the platform to advantage its own products or services over those of competitors that use the platform, or to exclude or disadvantage competing businesses from using the platform. The FTC and DOJ could potentially order that platforms divest lines of business that violate the act.

This targets similar conduct as the previous bill, but involves the forced separation of different lines of business. It also appears to go even further, seemingly implying that companies like Google could not even develop services like Google Maps or Chrome because their existence would create such “substantial incentives” to self-preference them over the products of their competitors. 

Apart from the straightforward loss of innovation and product developments this would involve, requiring every tech company to be narrowly focused on a single line of business would substantially entrench Big Tech incumbents, because it would make it impossible for them to extend into adjacent markets to compete with one another. For example, Apple could not develop a search engine to compete with Google under these rules, and Amazon would be forced to sell its video-streaming services that compete with Netflix and Youtube.

For more, check out Geoffrey Manne’s written testimony to the House Antitrust Subcommittee and “Platform Self-Preferencing Can Be Good for Consumers and Even Competitors” by Geoffrey and me. 

Platform Competition and Opportunity Act

Introduced by Rep. Hakeem Jeffries (D-N.Y.), this bill would bar covered platforms from making essentially any acquisitions at all. To be excluded from the ban on acquisitions, the platform would have to present “clear and convincing evidence” that the acquired business does not compete with the platform for any product or service, does not pose a potential competitive threat to the platform, and would not in any way enhance or help maintain the acquiring platform’s market position. 

The two main ways that founders and investors can make a return on a successful startup are to float the company at IPO or to be acquired by another business. The latter of these, acquisitions, is extremely important. Between 2008 and 2019, 90 percent of U.S. start-up exits happened through acquisition. In a recent survey, half of current startup executives said they aimed to be acquired. One study found that countries that made it easier for firms to be taken over saw a 40-50 percent increase in VC activity, and that U.S. states that made acquisitions harder saw a 27 percent decrease in VC investment deals

So this proposal would probably reduce investment in U.S. startups, since it makes it more difficult for them to be acquired. It would therefore reduce innovation as a result. It would also reduce inter-platform competition by banning deals that allow firms to move into new markets, like the acquisition of Beats that helped Apple to build a Spotify competitor, or the deals that helped Google, Microsoft, and Amazon build cloud-computing services that all compete with each other. It could also reduce competition faced by old industries, by preventing tech companies from buying firms that enable it to move into new markets—like Amazon’s acquisitions of health-care companies that it has used to build a health-care offering. Even Walmart’s acquisition of Jet.com, which it has used to build an Amazon competitor, could have been banned under this law if Walmart had had a higher market cap at the time.

For more, check out Dirk Auer’s piece “Facebook and the Pros and Cons of Ex Post Merger Reviews” and my piece “Cracking down on mergers would leave us all worse off”. 

ACCESS Act

The Augmenting Compatibility and Competition by Enabling Service Switching (ACCESS) Act, sponsored by Rep. Mary Gay Scanlon (D-Pa.), would establish data portability and interoperability requirements for platforms. 

Under terms of the legislation, covered platforms would be required to allow third parties to transfer data to their users or, with the user’s consent, to a competing business. It also would require platforms to facilitate compatible and interoperable communications with competing businesses. The law directs the FTC to establish technical committees to promulgate the standards for portability and interoperability. 

Data portability and interoperability involve trade-offs in terms of security and usability, and overseeing them can be extremely costly and difficult. In security terms, interoperability requirements prevent companies from using closed systems to protect users from hostile third parties. Mandatory openness means increasing—sometimes, substantially so—the risk of data breaches and leaks. In practice, that could mean users’ private messages or photos being leaked more frequently, or activity on a social media page that a user considers to be “their” private data, but that “belongs” to another user under the terms of use, can be exported and publicized as such. 

It can also make digital services more buggy and unreliable, by requiring that they are built in a more “open” way that may be more prone to unanticipated software mismatches. A good example is that of Windows vs iOS; Windows is far more interoperable with third-party software than iOS is, but tends to be less stable as a result, and users often prefer the closed, stable system. 

Interoperability requirements also entail ongoing regulatory oversight, to make sure data is being provided to third parties reliably. It’s difficult to build an app around another company’s data without assurance that the data will be available when users want it. For a requirement as broad as this bill’s, that could mean setting up quite a large new de facto regulator. 

In the UK, Open Banking (an interoperability requirement imposed on British retail banks) has suffered from significant service outages, and targets a level of uptime that many developers complain is too low for them to build products around. Nor has Open Banking yet led to any obvious competition benefits.

For more, check out Gus Hurwitz’s piece “Portable Social Media Aren’t Like Portable Phone Numbers” and my piece “Why Data Interoperability Is Harder Than It Looks: The Open Banking Experience”.

Merger Filing Fee Modernization Act

A bill that mirrors language in the Endless Frontier Act recently passed by the U.S. Senate, would significantly raise filing fees for the largest mergers. Rather than the current cap of $280,000 for mergers valued at more than $500 million, the bill—sponsored by Rep. Joe Neguse (D-Colo.)–the new schedule would assess fees of $2.25 million for mergers valued at more than $5 billion; $800,000 for those valued at between $2 billion and $5 billion; and $400,000 for those between $1 billion and $2 billion.

Smaller mergers would actually see their filing fees cut: from $280,000 to $250,000 for those between $500 million and $1 billion; from $125,000 to $100,000 for those between $161.5 million and $500 million; and from $45,000 to $30,000 for those less than $161.5 million. 

In addition, the bill would appropriate $418 million to the FTC and $252 million to the DOJ’s Antitrust Division for Fiscal Year 2022. Most people in the antitrust world are generally supportive of more funding for the FTC and DOJ, although whether this is actually good or not depends both on how it’s spent at those places. 

It’s hard to object if it goes towards deepening the agencies’ capacities and knowledge, by hiring and retaining higher quality staff with salaries that are more competitive with those offered by the private sector, and on greater efforts to study the effects of the antitrust laws and past cases on the economy. If it goes toward broadening the activities of the agencies, by doing more and enabling them to pursue a more aggressive enforcement agenda, and supporting whatever of the above proposals make it into law, then it could be very harmful. 

For more, check out my post “Buck’s “Third Way”: A Different Road to the Same Destination” and Thom Lambert’s post “Bad Blood at the FTC”.

It increasingly appears that the push to pass Sen. Amy Klobuchar’s American Innovation and Choice Online Act (AICOA) will go down to the wire, with a vote potentially taking place sometime before Congress leaves for its August recess.

Given the uncertainty surrounding this massive legislative project, this Truth on the Market symposium examines the possible future(s) of digital competition in ways somewhat different from those we usually publish.

Contributors were asked to write short pieces about what they think the world might look like—for better and/or worse—under regulations such as AICOA and the European Union’s Digital Markets Act (as well as other regulations that might prohibit self-preferencing or mandate interoperability), or the implications of a future world where such regulations are absent, and where antitrust laws have been relaxed.

Some of the pieces are traditional, scholarly blog posts; others have chosen different literary genres to explore this imagined future, such as short stories, parables, sci-fi inspired pieces—even poems or song lyrics.

The symposium pieces will be posted over the course of the next few days.

Confirmed Participants

As in the past (see examples of previous TOTM blog symposia here), we’ve lined up an outstanding and diverse group of scholars to discuss these issues, including:

Series Posts (in order of posting)

Happy Independence Day Week! Having started off with the holiday, this has been a relatively slow week on the antitrust front in the United States. But never fear, Europe is here to help fill out the weekly news roundup. And, even on a slow week there is plenty in the news domestically. Perhaps more important: everyone working on FTC and antitrust issues should take advantage of these respites when the come – any calm most likely is a harbinger of a storm to come.

This week’s headline is the passage of the Digital Markets Act (DMA) and Digital Services Act (DSA) by the European Parliament. The DMA has often been compared to the American Innovation and Choice Online Act (AICOA) – as of this week their biggest difference is that the DMA now is law while AICOA’s fate continues to appear fraught. For more details on the substance the DMA, we’ve discussed it on here on Truth on the Market, and both Axios and the Chamber of Commerce offer overviews.

Also on the European front, Europeans are beginning to reckon with the fact that soon Facebook may cease operations in Europe due to the bloc’s privacy rules. For pro-privacy regulators this may be viewed as a win. The rest of Europe was unavailable for comment (likely due to European privacy laws).

Back in the states the biggest news continues to be fallout from the Supreme Court’s embrace of the major questions doctrine. After a few days of misreporting on the opinion in West Virginia v. EPA as preventing the EPA from regulating greenhouse gasses, the media is now realizing that the import of the opinion goes to broader questions of the administrative state – and that it could impact tech regulation in particular.

Sophisticated thinkers have seen the potential impact of the case since before it was decided. In the days since they have been exploring the scope of the ruling and how the lower courts will implement it, discussing its implications for big tech, debating whether it will or will not limit the FCC’s net neutrality authority (answer: it will). And as numerous posts made as part of this TOTM FTC UMC Symposium have argued, it will likely substantially limit the FTC’s UMC rulemaking authority.

One thing I have wondered is how agencies will respond to the MQD in their rulemaking. Agencies often discuss the importance of their rules in an effort to justify them. Tom Wheeler was fond of discussing the Internet as the “most important network in the history of Man.” Arguing that the costs of regulatory action are very high helps to sell the benefits of regulation as substantial. But now, arguing that the costs of inaction are high might also make it easier to argue that the question being addressed in a major one – of vast political or economic significance. Will we start to see agencies downplay the importance of their work?

As usual, we can’t not have some updates on AICOA. The most salient update may be the lack of update. While Senator Klobuchar (D-MN) continues to push the bill forward, Leader Schumer (D-NY) has no apparent interest in bringing it to the floor. And even if it gets through the Senate, there may be trouble waiting in the House? Beyond that, this week saw both Zach Graves get off the fence and speak out against AICOA.

Quick hits: Protocol reports the CFPB is hoping to hire 25 technologists to help it wage war on the tech industry. Bloomberg reports the FTC is toying with the Robinson-Patman Act. And the FTC brings another right-to-repair action, this time against Weber, to prohibit warranties that are voided by independent repairs.

What you missed, What to watch? Last week’s Federalist Society discussion of Biden’s Antitrust Agenda: Mission Creep or Mission Achieved was a must-watch. Hope you didn’t miss it! If you did, you can redeem yourself by making it to AEI’s discussion with FTC Commissioner Noah Phillips on Crossing the Consumer Welfare Rubicon.

The European Union’s Digital Markets Act (DMA) has been finalized in principle, although some legislative details are still being negotiated. Alas, our earlier worries about user privacy still have not been addressed adequately.

The key rules to examine are the DMA’s interoperability mandates. The most recent DMA text introduced a potentially very risky new kind of compulsory interoperability “of number-independent interpersonal communications services” (e.g., for services like WhatsApp). However, this obligation comes with a commendable safeguard in the form of an equivalence standard: interoperability cannot lower the current level of user security. Unfortunately, the DMA’s other interoperability provisions lack similar security safeguards.

The lack of serious consideration of security issues is perhaps best illustrated by how the DMA might actually preclude makers of web browsers from protecting their users from some of the most common criminal attacks, like phishing.

Key privacy concern: interoperability mandates

​​The original DMA proposal included several interoperability and data-portability obligations regarding the “core platform services” of platforms designated as “gatekeepers”—i.e., the largest online platforms. Those provisions were changed considerably during the legislative process. Among its other provisions, the most recent (May 11, 2022) version of the DMA includes:

  1. a prohibition on restricting users—“technically or otherwise”—from switching among and subscribing to software and services “accessed using the core platform services of the gatekeeper” (Art 6(6));
  2. an obligation for gatekeepers to allow interoperability with their operating system or virtual assistant (Art 6(7)); and
  3. an obligation “on interoperability of number-independent interpersonal communications services” (Art 7).

To varying degrees, these provisions attempt to safeguard privacy and security interests, but the first two do so in a clearly inadequate way.

First, the Article 6(6) prohibition on restricting users from using third-party software or services “accessed using the core platform services of the gatekeeper” notably applies to web services (web content) that a user can access through the gatekeeper’s web browser (e.g., Safari for iOS). (Web browsers are defined as core platform services in Art 2(2) DMA.)

Given that web content is typically not installed in the operating system, but accessed through a browser (i.e., likely “accessed using a core platform service of the gatekeeper”), earlier “side-loading” provisions (Article 6(4), which is discussed further below) would not apply here. This leads to what appears to be a significant oversight: the gatekeepers appear to be almost completely disabled from protecting their users when they use the Internet through web browsers, one of the most significant channels of privacy and security risks.

The Federal Bureau of Investigation (FBI) has identified “phishing” as one of the three top cybercrime types, based on the number of victim complaints. A successful phishing attack normally involves a user accessing a website that is impersonating a service the user trusts (e.g., an email account or corporate login). Browser developers can prevent some such attacks, e.g., by keeping “block lists” of websites known to be malicious and warning about, or even preventing, access to such sites. Prohibiting platforms from restricting their users’ access to third-party services would also prohibit this vital cybersecurity practice.

Under Art 6(4), in the case of installed third-party software, the gatekeepers can take:

…measures to ensure that third party software applications or software application stores do not endanger the integrity of the hardware or operating system provided by the gatekeeper, provided that such measures go no further than is strictly necessary and proportionate and are duly justified by the gatekeeper.

The gatekeepers can also apply:

measures and settings other than default settings, enabling end users to effectively protect security in relation to third party software applications or software application stores, provided that such measures and settings go no further than is strictly necessary and proportionate and are duly justified by the gatekeeper.

None of those safeguards, insufficient as they are—see the discussion below of Art 6(7)—are present in Art 6(6). Worse still is that the anti-circumvention rule in Art 13(6) applies here, prohibiting gatekeepers from offering “choices to the end-user in a non-neutral manner.” That is precisely what a web-browser developer does when warning users of security risks or when blocking access to websites known to be malicious—e.g., to protect users from phishing attacks.

This concern is not addressed by the general provision in Art 8(1) requiring the gatekeepers to ensure “that the implementation” of the measures under the DMA complies with the General Data Protection Regulation (GDPR), as well as “legislation on cyber security, consumer protection, product safety.”

The first concern is that this would not allow the gatekeepers to offer a higher standard of user protection than that required by the arguably weak or overly vague existing legislation. Also, given that the DMA’s rules (including future delegated legislation) are likely to be more specific—in the sense of constituting lex specialis—than EU rules on privacy and security, establishing a coherent legal interpretation that would allow gatekeepers to protect their users is likely to be unnecessarily difficult.

Second, the obligation from Art 6(7) for gatekeepers to allow interoperability with their operating system or virtual assistant only includes the first kind of a safeguard from Art 6(4), concerning the risk of compromising “the integrity of the operating system, virtual assistant or software features provided by the gatekeeper.” However, the risks from which service providers aim to protect users are by no means limited to system “integrity.” A user may be a victim of, e.g., a phishing attack that does not explicitly compromise the integrity of the software they used.

Moreover, as in Art 6(4), there is a problem with the “strictly necessary and proportionate” qualification. This standard may be too high and may push gatekeepers to offer more lax security to avoid liability for adopting measures that would be judged by European Commission and the courts as going beyond what is strictly necessary or indispensable.

The relevant recitals from the DMA preamble, instead of aiding in interpretation, add more confusion. The most notorious example is in recital 50, which states that gatekeepers “should be prevented from implementing” measures that are “strictly necessary and proportionate” to effectively protect user security “as a default setting or as pre-installation.” What possible justification can there be for prohibiting providers from setting a “strictly necessary” security measure as a default? We can hope that this manifestly bizarre provision will be corrected in the final text, together with the other issues identified above.

Finally, there is the obligation “on interoperability of number-independent interpersonal communications services” from Art 7. Here, the DMA takes a different and much better approach to safeguarding user privacy and security. Art 7(3) states that:

The level of security, including the end-to-end encryption, where applicable, that the gatekeeper provides to its own end users shall be preserved across the interoperable services.

There may be some concern that the Commission or the courts will not treat this rule with sufficient seriousness. Ensuring that user security is not compromised by interoperability may take a long time and may require excluding many third-party services that had hoped to benefit from this DMA rule. Nonetheless, EU policymakers should resist watering down the standard of equivalence in security levels, even if it renders Art 7 a dead letter for the foreseeable future.

It is also worth noting that there will be no presumption of user opt-in to any interoperability scheme (Art 7(7)-(8)), which means that third-party service providers will not be able to simply “onboard” all users from a gatekeeper’s service without their explicit consent. This is to be commended.

Conclusion

Despite some improvements (the equivalence standard in Art 7(3) DMA), the current DMA language still betrays, as I noted previously, “a policy preference for privileging uncertain and speculative competition gains at the cost of introducing new and clear dangers to information privacy and security.” Jane Bambauer of the University of Arizona Law School came to similar conclusions in her analysis of the DMA, in which she warned:

EU lawmakers should be aware that the DMA is dramatically increasing the risk that data will be mishandled. Nevertheless, even though a new scandal from the DMA’s data interoperability requirement is entirely predictable, I suspect EU regulators will evade public criticism and claim that the gatekeeping platforms are morally and financially responsible.

The DMA’s text is not yet entirely finalized. It may still be possible to extend the approach adopted in Article 7(3) to other privacy-threatening rules, especially in Article 6. Such a requirement that any third-party service providers offer at least the same level of security as the gatekeepers is eminently reasonable and is likely what the users themselves would expect. Of course, there is always a risk that a safeguard of this kind will be effectively nullified in administrative or judicial practice, but this may not be very likely, given the importance that EU courts typically attach to privacy.

The European Commission has unveiled draft legislation (the Digital Services Act, or “DSA”) that would overhaul the rules governing the online lives of its citizens. The draft rules are something of a mixed bag. While online markets present important challenges for law enforcement, the DSA would significantly increase the cost of doing business in Europe and harm the very freedoms European lawmakers seek to protect. The draft’s newly proposed “Know Your Business Customer” (KYBC) obligations, however, will enable smoother operation of the liability regimes that currently apply to online intermediaries. 

These reforms come amid a rash of headlines about election meddling, misinformation, terrorist propaganda, child pornography, and other illegal and abhorrent content spread on digital platforms. These developments have galvanized debate about online liability rules.

Existing rules, codified in the e-Commerce Directive, largely absolve “passive” intermediaries that “play a neutral, merely technical and passive role” from liability for content posted by their users so long as they remove it once notified. “Active” intermediaries have more legal exposure. This regime isn’t perfect, but it seems to have served the EU well in many ways.

With its draft regulation, the European Commission is effectively arguing that those rules fail to address the legal challenges posed by the emergence of digital platforms. As the EC’s press release puts it:

The landscape of digital services is significantly different today from 20 years ago, when the eCommerce Directive was adopted. […]  Online intermediaries […] can be used as a vehicle for disseminating illegal content, or selling illegal goods or services online. Some very large players have emerged as quasi-public spaces for information sharing and online trade. They have become systemic in nature and pose particular risks for users’ rights, information flows and public participation.

Online platforms initially hoped lawmakers would agree to some form of self-regulation, but those hopes were quickly dashed. Facebook released a white paper this Spring proposing a more moderate path that would expand regulatory oversight to “ensure companies are making decisions about online speech in a way that minimizes harm but also respects the fundamental right to free expression.” The proposed regime would not impose additional liability for harmful content posted by users, a position that Facebook and other internet platforms reiterated during congressional hearings in the United States.

European lawmakers were not moved by these arguments. EU Commissioner for Internal Market and Services Thierry Breton, among other European officials, dismissed Facebook’s proposal within hours of its publication, saying:

It’s not enough. It’s too slow, it’s too low in terms of responsibility and regulation.

Against this backdrop, the draft DSA includes many far-reaching measures: transparency requirements for recommender systems, content moderation decisions, and online advertising; mandated sharing of data with authorities and researchers; and numerous compliance measures that include internal audits and regular communication with authorities. Moreover, the largest online platforms—so-called “gatekeepers”—will have to comply with a separate regulation that gives European authorities new tools to “protect competition” in digital markets (the Digital Markets Act, or “DMA”).

The upshot is that, if passed into law, the draft rules will place tremendous burdens upon online intermediaries. This would be self-defeating. 

Excessive regulation or liability would significantly increase their cost of doing business, leading to significantly smaller networks and significantly increased barriers to access for many users. Stronger liability rules would also encourage platforms to play it safe, such as by quickly de-platforming and refusing access to anyone who plausibly engaged in illegal activity. Such an outcome would harm the very freedoms European lawmakers seek to protect.

This could prove particularly troublesome for small businesses that find it harder to compete against large platforms due to rising compliance costs. In effect, the new rules will increase barriers to entry, as has already been seen with the GDPR.

In the commission’s defense, some of the proposed reforms are more appealing. This is notably the case with the KYBC requirements, as well as the decision to leave most enforcement to member states, where services providers have their main establishments. The latter is likely to preserve regulatory competition among EU members to attract large tech firms, potentially limiting regulatory overreach. 

Indeed, while the existing regime does, to some extent, curb the spread of online crime, it does little for the victims of cybercrime, who ultimately pay the price. Removing illegal content doesn’t prevent it from reappearing in the future, sometimes on the same platform. Importantly, hosts have no obligation to provide the identity of violators to authorities, or even to know their identity in the first place. The result is an endless game of “whack-a-mole”: illegal content is taken down, but immediately reappears elsewhere. This status quo enables malicious users to upload illegal content, such as that which recently led card networks to cut all ties with Pornhub

Victims arguably need additional tools. This is what the Commission seeks to achieve with the DSA’s “traceability of traders” requirement, a form of KYBC:

Where an online platform allows consumers to conclude distance contracts with traders, it shall ensure that traders can only use its services to promote messages on or to offer products or services to consumers located in the Union if, prior to the use of its services, the online platform has obtained the following information: […]

Instead of rewriting the underlying liability regime—with the harmful unintended consequences that would likely entail—the draft DSA creates parallel rules that require platforms to better protect victims.

Under the proposed rules, intermediaries would be required to obtain the true identity of commercial clients (as opposed to consumers) and to sever ties with businesses that refuse to comply (rather than just take down their content). Such obligations would be, in effect, a version of the “Know Your Customer” regulations that exist in other industries. Banks, for example, are required to conduct due diligence to ensure scofflaws can’t use legitimate financial services to further criminal enterprises. It seems reasonable to expect analogous due diligence from the Internet firms that power so much of today’s online economy.

Obligations requiring platforms to vet their commercial relationships may seem modest, but they’re likely to enable more effective law enforcement against the actual perpetrators of online harms without diminishing platform’s innovation and the economic opportunity they provide (and that everyone agrees is worth preserving).

There is no silver bullet. Illegal activity will never disappear entirely from the online world, just as it has declined, but not vanished, from other walks of life. But small regulatory changes that offer marginal improvements can have a substantial effect. Modest informational requirements would weed out the most blatant crimes without overly burdening online intermediaries. In short, it would make the Internet a safer place for European citizens.

Overview

Virtually all countries in the world have adopted competition laws over the last three decades. In a recent Mercatus Foundation Research Paper, I argue that the spread of these laws has benefits and risks. The abstract of my Paper states:

The United States stood virtually alone when it enacted its first antitrust statute in 1890. Today, almost all nations have adopted competition laws (the term used in most other nations), and US antitrust agencies interact with foreign enforcers on a daily basis. This globalization of antitrust is becoming increasingly important to the economic welfare of many nations, because major businesses (in particular, massive digital platforms like Google and Facebook) face growing antitrust scrutiny by multiple enforcement regimes worldwide. As such, the United States should take the lead in encouraging adoption of antitrust policies, here and abroad, that are conducive to economic growth and innovation. Antitrust policies centered on promoting consumer welfare would be best suited to advancing these desirable aims. Thus, the United States should oppose recent efforts (here and abroad) to turn antitrust into a regulatory system that seeks to advance many objectives beyond consumer welfare. American antitrust enforcers should also work with like-minded agencies—and within multilateral organizations such as the International Competition Network and the Organisation for Economic Cooperation and Development—to promote procedural fairness and the rule of law in antitrust enforcement.

A brief summary of my Paper follows.

Discussion

Widespread calls for “reform” of the American antitrust laws are based on the false premises that (1) U.S. economic concentration has increased excessively and competition has diminished in recent decades; and (2) U.S. antitrust enforcers have failed to effectively enforce the antitrust laws (the consumer welfare standard is sometimes cited as the culprit to blame for “ineffective” antitrust enforcement). In fact, sound economic scholarship, some of it cited in chapter 6 of the 2020 Economic Report of the President, debunks these claims. In reality, modern U.S. antitrust enforcement under the economics-based consumer welfare standard (despite being imperfect and subject to error costs) has done a good job overall of promoting competitive and efficient markets.

The adoption of competition laws by foreign nations was promoted by the U.S. Government. The development of European competition law in the 1950s, and its incorporation into treaties that laid the foundation for the European Union (EU), was particularly significant. The EU administrative approach to antitrust, based on civil law (as compared to the U.S. common law approach), has greatly influenced the contours of most new competition laws. The EU, like the U.S., focuses on anticompetitive joint conduct, single firm conduct, and mergers. EU enforcement (carried out through the European Commission’s Directorate General for Competition) initially relied more on formal agency guidance than American antitrust law, but it began to incorporate an economic effects-based consumer welfare-centric approach over the last 20 years. Nevertheless, EU enforcers still pay greater attention to the welfare of competitors than their American counterparts.

In recent years, the EU prosecutions of digital platforms have begun to adopt a “precautionary antitrust” perspective, which seeks to prevent potential monopoly abuses in their incipiency by sanctioning business conduct without showing that it is causing any actual or likely consumer harm. What’s more, the EU’s recently adopted “Digital Markets Act” for the first time imposes ex ante competition regulation of platforms. These developments reflect a move away from a consumer welfare approach. On the plus side, the EU (unlike the U.S.) subjects state-owned or controlled monopolies to liability for anticompetitive conduct and forbids anticompetitive government subsidies that seriously distort competition (“state aids”).

Developing and former communist bloc countries rapidly enacted and implemented competition laws over the last three decades. Many newly minted competition agencies suffer from poor institutional capacity. The U.S. Government and the EU have worked to enhance the quality and consistency of competition enforcement in these jurisdictions by supporting technical support and training.

Various institutions support efforts to improve competition law enforcement and develop support for a “competition culture.” The International Competition Network (ICN), established in 2001, is a “virtual network” comprised of almost all competition agencies. The ICN focuses on discrete projects aimed at procedural and substantive competition law convergence through the development of consensual, nonbinding “best practices” recommendations and reports. It also provides a significant role for nongovernmental advisers from the business, legal, economic, consumer, and academic communities, as well as for experts from other international organizations. ICN member agency staff are encouraged to communicate with each other about the fundamentals of investigations and evaluations and to use ICN-generated documents and podcasts to support training. The application of economic analysis to case-specific facts has been highlighted in ICN work product. The Organization for Economic Cooperation and Development (OECD) and the World Bank (both of which carry out economics-based competition policy research) have joined with the ICN in providing national competition agencies (both new and well established) with the means to advocate effectively for procompetitive, economically beneficial government policies. ICN and OECD “toolkits” provide strategies for identifying and working to dislodge (or not enact) anticompetitive laws and regulations that harm the economy.

While a fair degree of convergence has been realized, substantive uniformity among competition law regimes has not been achieved. This is not surprising, given differences among jurisdictions in economic development, political organization, economic philosophy, history, and cultural heritage—all of which may help generate a multiplicity of policy goals. In addition to consumer welfare, different jurisdictions’ competition laws seek to advance support for small and medium sized businesses, fairness and equality, public interest factors, and empowerment of historically disadvantaged persons, among other outcomes. These many goals may not take center stage in the evaluation of most proposed mergers or restrictive business arrangements, but they may affect the handling of particular matters that raise national sensitivities tied to the goals.

The spread of competition law worldwide has generated various tangible benefits. These include consensus support for combating hard core welfare-reducing cartels, fruitful international cooperation among officials dedicated to a pro-competition mission, and support for competition advocacy aimed at dismantling harmful government barriers to competition.

There are, however, six other factors that raise questions regarding whether competition law globalization has been cost-beneficial overall: (1) effective welfare-enhancing antitrust enforcement is stymied in jurisdictions where the rule of law is weak and private property is poorly protected; (2) high enforcement error costs (particularly in jurisdictions that consider factors other than consumer welfare) may undermine the procompetitive features of antitrust enforcement efforts; (3) enforcement demands by multiple competition authorities substantially increase the costs imposed on firms that are engaging in multinational transactions; (4) differences among national competition law rules create complications for national agencies as they seek to have their laws vindicated while maintaining good cooperative relationships with peer enforcers; (5) anticompetitive rent-seeking by less efficient rivals may generate counterproductive prosecutions of successful companies, thereby disincentivizing welfare-inducing business behavior; and (6) recent developments around the world suggest that antitrust policy directed at large digital platforms (and perhaps other dominant companies as well) may be morphing into welfare-inimical regulation. These factors are discussed at greater length in my paper.

One cannot readily quantify the positive and negative welfare effects of the consequences of competition law globalization. Accordingly, one cannot state with any degree of confidence whether globalization has been “good” or “bad” overall in terms of economic welfare.

Conclusion

The extent to which globalized competition law will be a boon to consumers and the global economy will depend entirely on the soundness of public policy decision-making.  The U.S. Government should take the lead in advancing a consumer welfare-centric competition policy at home and abroad. It should work with multilateral institutions and engage in bilateral and regional cooperation to support the rule of law, due process, and antitrust enforcement centered on the consumer welfare standard.

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

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

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

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

The Bertrand Paradox

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

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

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

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

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

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

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

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

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

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

The Theory of Contestable Markets

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

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

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

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

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

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

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

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

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

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

How Contestable Are Digital Markets?

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

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

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

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

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

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

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

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

Conclusion

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

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

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

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

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

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

The European Commission and its supporters were quick to claim victory following last week’s long-awaited General Court of the European Union ruling in the Google Shopping case. It’s hard to fault them. The judgment is ostensibly an unmitigated win for the Commission, with the court upholding nearly every aspect of its decision. 

However, the broader picture is much less rosy for both the Commission and the plaintiffs. The General Court’s ruling notably provides strong support for maintaining the current remedy package, in which rivals can bid for shopping box placement. This makes the Commission’s earlier rejection of essentially the same remedy  in 2014 look increasingly frivolous. It also pours cold water on rivals’ hopes that it might be replaced with something more far-reaching.

More fundamentally, the online world continues to move further from the idealistic conception of an “open internet” that regulators remain determined to foist on consumers. Indeed, users consistently choose convenience over openness, thus rejecting the vision of online markets upon which both the Commission’s decision and the General Court’s ruling are premised. 

The Google Shopping case will ultimately prove to be both a pyrrhic victory and a monument to the pitfalls of myopic intervention in digital markets.

Google’s big remedy win

The main point of law addressed in the Google Shopping ruling concerns the distinction between self-preferencing and refusals to deal. Contrary to Google’s defense, the court ruled that self-preferencing can constitute a standalone abuse of Article 102 of the Treaty on the Functioning of the European Union (TFEU). The Commission was thus free to dispense with the stringent conditions laid out in the 1998 Bronner ruling

This undoubtedly represents an important victory for the Commission, as it will enable it to launch new proceedings against both Google and other online platforms. However, the ruling will also constrain the Commission’s available remedies, and rightly so.

The origins of the Google Shopping decision are enlightening. Several rivals sought improved access to the top of the Google Search page. The Commission was receptive to those calls, but faced important legal constraints. The natural solution would have been to frame its case as a refusal to deal, which would call for a remedy in which a dominant firm grants rivals access to its infrastructure (be it physical or virtual). But going down this path would notably have required the Commission to show that effective access was “indispensable” for rivals to compete (one of the so-called Bronner conditions)—something that was most likely not the case here. 

Sensing these difficulties, the Commission framed its case in terms of self-preferencing, surmising that this would entail a much softer legal test. The General Court’s ruling vindicates this assessment (at least barring a successful appeal by Google):

240    It must therefore be concluded that the Commission was not required to establish that the conditions set out in the judgment of 26 November 1998, Bronner (C‑7/97, EU:C:1998:569), were satisfied […]. [T]he practices at issue are an independent form of leveraging abuse which involve […] ‘active’ behaviour in the form of positive acts of discrimination in the treatment of the results of Google’s comparison shopping service, which are promoted within its general results pages, and the results of competing comparison shopping services, which are prone to being demoted.

This more expedient approach, however, entails significant limits that will undercut both the Commission and rivals’ future attempts to extract more far-reaching remedies from Google.

Because the underlying harm is no longer the denial of access, but rivals being treated less favorably, the available remedies are much narrower. Google must merely ensure that it does not treat itself more preferably than rivals, regardless whether those rivals ultimately access its infrastructure and manage to compete. The General Court says this much when it explains the theory of harm in the case at hand:

287. Conversely, even if the results from competing comparison shopping services would be particularly relevant for the internet user, they can never receive the same treatment as results from Google’s comparison shopping service, whether in terms of their positioning, since, owing to their inherent characteristics, they are prone to being demoted by the adjustment algorithms and the boxes are reserved for results from Google’s comparison shopping service, or in terms of their display, since rich characters and images are also reserved to Google’s comparison shopping service. […] they can never be shown in as visible and as eye-catching a way as the results displayed in Product Universals.

Regulation 1/2003 (Art. 7.1) ensures the European Commission can only impose remedies that are “proportionate to the infringement committed and necessary to bring the infringement effectively to an end.” This has obvious ramifications for the Google Shopping remedy.

Under the remedy accepted by the Commission, Google agreed to auction off access to the Google Shopping box. Google and rivals would thus compete on equal footing to display comparison shopping results.

Illustrations taken from Graf & Mostyn, 2020

Rivals and their consultants decried this outcome; and Margrethe Vestager intimated the commission might review the remedy package. Both camps essentially argued the remedy did not meaningfully boost traffic to rival comparison shopping services (CSSs), because those services were not winning the best auction slots:

All comparison shopping services other than Google’s are hidden in plain sight, on a tab behind Google’s default comparison shopping page. Traffic cannot get to them, but instead goes to Google and on to merchants. As a result, traffic to comparison shopping services has fallen since the remedy—worsening the original abuse.

Or, as Margrethe Vestager put it:

We may see a show of rivals in the shopping box. We may see a pickup when it comes to clicks for merchants. But we still do not see much traffic for viable competitors when it comes to shopping comparison

But these arguments are entirely beside the point. If the infringement had been framed as a refusal to supply, it might be relevant that rivals cannot access the shopping box at what is, for them,  cost-effective price. Because the infringement was framed in terms of self-preferencing, all that matters is whether Google treats itself equally.

I am not aware of a credible claim that this is not the case. At best, critics have suggested the auction mechanism favors Google because it essentially pays itself:

The auction mechanism operated by Google to determine the price paid for PLA clicks also disproportionately benefits Google. CSSs are discriminated against per clickthrough, as they are forced to cede most of their profit margin in order to successfully bid […] Google, contrary to rival CSSs, does not, in reality, have to incur the auction costs and bid away a great part of its profit margins.

But this reasoning completely omits Google’s opportunity costs. Imagine a hypothetical (and oversimplified) setting where retailers are willing to pay Google or rival CSSs 13 euros per click-through. Imagine further that rival CSSs can serve these clicks at a cost of 2 euros, compared to 3 euros for Google (excluding the auction fee). Google is less efficient in this hypothetical. In this setting, rivals should be willing to bid up to 11 euros per click (the difference between what they expect to earn and their other costs). Critics claim Google will accept to bid higher because the money it pays itself during the auction is not really a cost (it ultimately flows to Google’s pockets). That is clearly false. 

To understand this, readers need only consider Google’s point of view. On the one hand, it could pay itself 11 euros (and some tiny increment) to win the auction. Its revenue per click-through would be 10 euros (13 euros per click-through, minus its cost of 3 euros). On the other hand, it could underbid rivals by a tiny increment, ensuring they bid 11 euros. When its critics argue that Google has an advantage because it pays itself, they are ultimately claiming that 10 is larger than 11.

Google’s remedy could hardly be more neutral. If it wins more auction slots than rivals CSSs, the appropriate inference should be that it is simply more efficient. Nothing in the Commission’s decision or the General Court’s ruling precludes that outcome. In short, while Google has (for the time being, at least) lost its battle to appeal the Commission’s decision, the remedy package—the same it put forward way back in 2014—has never looked stronger.

Good news for whom?

The above is mostly good news for both Google and consumers, who will be relieved that the General Court’s ruling preserves Google’s ability to show specialized boxes (of which the shopping unit is but one example). But that should not mask the tremendous downsides of both the Commission’s case and the court’s ruling. 

The Commission and rivals’ misapprehensions surrounding the Google Shopping remedy, as well as the General Court’s strong stance against self-preferencing, are revealing of a broader misunderstanding about online markets that also permeates through other digital regulation initiatives like the Digital Markets Act and the American Choice and Innovation Act. 

Policymakers wrongly imply that platform neutrality is a good in and of itself. They assume incumbent platforms generally have an incentive to favor their own services, and that preventing them from doing so is beneficial to both rivals and consumers. Yet neither of these statements is correct.

Economic research suggests self-preferencing is only harmful in exceptional circumstances. That is true of the traditional literature on platform threats (here and here), where harm is premised on the notion that rivals will use the downstream market, ultimately, to compete with an upstream incumbent. It’s also true in more recent scholarship that compares dual mode platforms to pure marketplaces and resellers, where harm hinges on a platform being able to immediately imitate rivals’ offerings. Even this ignores the significant efficiencies that might simultaneously arise from self-preferencing and closed platforms, more broadly. In short, rules that categorically prohibit self-preferening by dominant platforms overshoot the mark, and the General Court’s Google Shopping ruling is a troubling development in that regard.

It is also naïve to think that prohibiting self-preferencing will automatically benefit rivals and consumers (as opposed to harming the latter and leaving the former no better off). If self-preferencing is not anticompetitive, then propping up inefficient firms will at best be a futile exercise in preserving failing businesses. At worst, it would impose significant burdens on consumers by destroying valuable synergies between the platform and its own downstream service.

Finally, if the past years teach us anything about online markets, it is that consumers place a much heavier premium on frictionless user interfaces than on open platforms. TikTok is arguably a much more “closed” experience than other sources of online entertainment, like YouTube or Reddit (i.e. users have less direct control over their experience). Yet many observers have pinned its success, among other things, on its highly intuitive and simple interface. The emergence of Vinted, a European pre-owned goods platform, is another example of competition through a frictionless user experience.

There is a significant risk that, by seeking to boost “choice,” intervention by competition regulators against self-preferencing will ultimately remove one of the benefits users value most. By increasing the information users need to process, there is a risk that non-discrimination remedies will merely add pain points to the underlying purchasing process. In short, while Google Shopping is nominally a victory for the Commission and rivals, it is also a testament to the futility and harmfulness of myopic competition intervention in digital markets. Consumer preferences cannot be changed by government fiat, nor can the fact that certain firms are more efficient than others (at least, not without creating significant harm in the process). It is time this simple conclusion made its way into European competition thinking.

Early last month, the Italian competition authority issued a record 1.128 billion euro fine against Amazon for abuse of dominance under Article 102 of the Treaty on the Functioning of the European Union (TFEU). In its order, the Agenzia Garante della Concorrenza e del Mercato (AGCM) essentially argues that Amazon has combined its Amazon.it marketplace and Fulfillment by Amazon (FBA) services to exclude logistics rivals such as FedEx, DHL, UPS, and Poste Italiane. 

The sanctions came exactly one month after the European General Court seconded the European Commission’s “discovery” in the Google Shopping case of a new antitrust infringement known as “self-preferencing,” which also cited Article 102 TFEU. Perhaps not entirely coincidentally, legislation was introduced in the United States earlier this year to prohibit the practice. Meanwhile, the EU’s legislative bodies have been busy taking steps to approve the Digital Markets Act (DMA), which would regulate so-called digital “gatekeepers.”

Italy thus joins a wave of policymakers that have either imposed heavy-handed decisions to “rein in” online platforms, or are seeking to implement ex ante regulations toward that end. Ultimately, the decision is reminiscent of the self-preferencing prohibition contained in Article 6a of the current draft of the DMA and reflects much of what is wrong with the current approach to regulating tech. It presages some of the potential problems with punishing efficient behavior for the sake of protecting competitors through “common carrier antitrust.” However, if this decision is anything to go by, these efforts will end up hurting the very consumers authorities purport to protect and lending color to more general fears over the DMA. 

In this post, we discuss how the AGCM’s reasoning departs from sound legal and economic thinking to reach a conclusion at odds with the traditional goal of competition law—i.e., the protection of consumer welfare. Neo-Brandeisians and other competition scholars who dispute the centrality of the consumer welfare standard and would use antitrust to curb “bigness” may find this result acceptable, in principle. But even they must admit that the AGCM decision ultimately serves to benefit large (if less successful) competitors, and not the “small dealers and worthy men” of progressive lore.

Relevant Market Definition

Market definition constitutes a preliminary step in any finding of abuse under Article 102 TFEU. An excessively narrow market definition can result in false positives by treating neutral or efficient conduct as anticompetitive, while an overly broad market definition might allow anticompetitive conduct to slip through the cracks, leading to false negatives. 

Amazon Italy may be an example of the former. Here, the AGCM identified two relevant markets: the leveraging market, which it identified as the Italian market for online marketplace intermediation, and the leveraged market, which it identified as the market for e-commerce logistics. The AGCM charges that Amazon is dominant in the former and that it gained an illegal advantage in the latter. It found, in this sense, that online marketplaces constitute a uniquely relevant market that is not substitutable for other offline or online sales channels, such as brick-and-mortar shops, price-comparison websites (e.g., Google Shopping), or dedicated sales websites (e.g., Nike.com/it). Similarly, it concluded that e-commerce logistics are sufficiently different from other forms of logistics as to comprise a separate market.

The AGCM’s findings combine qualitative and quantitative evidence, including retailer surveys and “small but significant and non-transitory increase in price” (SSNIP) tests. They also include a large dose of speculative reasoning.

For instance, the AGCM asserts that online marketplaces are fundamentally different from price-comparison sites because, in the latter case, purchase transactions do not take place on the platform. It asserts that e-commerce logistics are different from traditional logistics because the former require a higher degree of automation for transportation and storage. And in what can only be seen as a normative claim, rather than an objective assessment of substitutability, the Italian watchdog found that marketplaces are simply better than dedicated websites because, e.g., they offer greater visibility and allow retailers to save on marketing costs. While it is unclear what weights the AGCM assigned to each of these considerations when defining the relevant markets, it is reasonable to assume they played some part in defining the nature and scope of Amazon’s market presence in Italy.

In all of these instances, however, while the AGCM carefully delineated superficial distinctions between these markets, it did not actually establish that those differences are relevant to competition. Fetishizing granular but ultimately irrelevant differences between products and services—such as between marketplaces and shopping comparison sites—is a sure way to incur false positives, a misstep tantamount to punishing innocuous or efficient business conduct.

Dominance

The AGCM found that Amazon was “hyper-dominant” in the online marketplace intermediation market. Dominance was established by looking at revenue from marketplace sales, where Amazon’s share had risen from about 65% in 2016 to 75% in 2019. Taken in isolation, this figure might suggest that Amazon’s competitors cannot thrive in the market. A broader look at the data, however, paints a picture of more generalized growth, with some segments greatly benefiting newcomers and small, innovative marketplaces. 

For instance, virtually all companies active in the online marketplace intermediation market have experienced significant growth in terms of monthly visitors. It is true that Amazon’s visitors grew significantly, up 150%, but established competitors like Aliexpress and eBay also saw growth rates of 90% and 25%, respectively. Meanwhile, Wish grew a massive 10,000% from 2016 to 2019; while ManoMano and Zalando grew 450% and 100%, respectively.

In terms of active users (i.e., visits that result in a purchase), relative numbers seem to have stayed roughly the same, although the AGCM claims that eBay saw a 20-30% drop. The number of third-party products Amazon offered through Marketplace grew from between 100 and 500 million to between 500 million and 1 billion, while other marketplaces appear to have remained fairly constant, with some expanding and others contracting.

In sum, while Amazon has undeniably improved its position in practically all of the parameters considered by the AGCM, indicators show that the market as a whole has experienced and is experiencing growth. The improvement in Amazon’s position relative to some competitors—notably eBay, which AGCM asserts is Amazon’s biggest competitor—should therefore not obscure the fact that there is entry and expansion both at the fringes (ManoMano, Wish), and in the center of the market for online marketplace intermediation (Aliexpress).

Amazon’s Allegedly Abusive Conduct

According to the AGCM, Amazon has taken advantage of vertical integration to engage in self-preferencing. Specifically, the charge is that the company offers exclusive and purportedly crucial advantages on the Amazon.it marketplace to sellers who use Amazon’s own e-commerce logistics service, FBA. The purported advantages of this arrangement include, to name a few, the coveted Prime badge, the elimination of negative user feedback on sale or delivery, preferential algorithmic treatment, and exclusive participation in Amazon’s sales promotions (e.g., Black Friday, Cyber Monday). As a result, according to the AGCM, products sold through FBA enjoy more visibility and a better chance to win the “Buy Box.”

The AGCM claims this puts competing logistics operators like FedEx, Poste Italiane, and DHL at a disadvantage, because non-FBA products have less chance to be sold than FBA products, regardless of any efficiency or quality criteria. In the AGCM’s words, “Amazon has stolen demand for other e-commerce logistics operators.” 

Indirectly, Amazon’s “self-preferencing” purportedly also harms competing marketplaces like eBay by creating incentives for sellers to single-home—i.e., to sell only through Amazon Marketplace. The argument here is that retailers will not multi-home to avoid duplicative costs associated with FBA, e.g., storing goods in several warehouses. 

Although it is not necessary to demonstrate anticompetitive effects under Article 102 TFEU, the AGCM claims that Amazon’s behavior has caused drastic worsening in other marketplaces’ competitive position by constraining their ability to reach the minimum scale needed to enjoy direct and indirect network effects. The Italian authorities summarily assert that this results in consumer harm, although the gargantuan 250-page decision spends scarcely one paragraph on this point. 

Intuitively, however, Amazon’s behavior should, in principle, benefit consumers by offering something that most find tremendously valuable: a guarantee of quick delivery for a wide range of goods. Indeed, this is precisely why it is so misguided to condemn self-preferencing by online platforms.

As some have already argued, we cannot assume that something is bad for competition just because it is bad for certain competitors. For instance, a lot of unambiguously procompetitive behavior, like cutting prices, puts competitors at a disadvantage. The same might be true for a digital platform that preferences its own service because it is generally better than the alternatives provided by third-party sellers. In the case at hand, for example, Amazon’s granting marketplace privileges to FBA products may help users to select the products that Amazon can guarantee will best satisfy their needs. This is perfectly plausible, as customers have repeatedly shown that they often prefer less open, less neutral options.

The key question, therefore, should be whether the behavior in question excludes equally efficient rivals in such a way as to harm consumer welfare. Otherwise, we would essentially be asking companies to refrain from offering services that benefit their users in order to make competing products comparatively more attractive. This is antithetical to the nature of competition, which is based on the principle that what is good for consumers is frequently bad for competitors.

AGCM’s Theory of Harm Rests on Four Weak Pillars

Building on the logic that Amazon enjoys “hyper-dominance” in marketplace intermediation; that most online sales are marketplace sales; and that most marketplace sales are, in turn, Amazon.it sales, the AGCM decision finds that succeeding on Amazon.it is indispensable for any online retailer in Italy. This argument hinges largely on whether online and offline retailers are thought of as distinct relevant markets—i.e., whether, from the perspective of the retailer, online and offline sales channels are substitutable (see also the relevant market definition section above). 

Ultimately, the AGCM finds that they are not, as online sales enjoy such advantages as lower fixed costs, increased sale flexibility, and better geographical reach. To an outsider, the distinction between the two markets may seem artificial—and it largely is—but such theoretical market segmentation is the bread-and-butter of antitrust analysis. Still, even by EU competition law standards, the relevant market definitions on which the AGCM relies to conclude that selling on Amazon is indispensable appear excessively narrow. 

This market distinction also serves to set up the AGCM’s second, more controversial argument: that the benefits extended to products sold through the FBA channel are also indispensable for retailers’ success on the Amazon.it marketplace. Here, the AGCM seeks a middle ground between competitive advantage and indispensability, finally settling on the notion that a sufficiently large competitive advantage itself translates into indispensability.

But how big is too big? The facts that 40-45% of Amazon’s third-party retailers do not use FBA (p. 57 of the decision) and that roughly 40 of the top 100 products sold on Amazon.it are not fulfilled through Amazon’s logistics service (p. 58) would appear to suggest that FBA is more of a convenience than an obligation. At the least, it does not appear that the advantage conferred is so big as to amount to indispensability. This may be because sellers that choose not to use Amazon’s logistics service (including offline, of course) can and do cut prices to compete with FBA-sold products. If anything, this should be counted as a good thing from the perspective of consumer welfare.

Instead, and signaling the decision’s overarching preoccupation with protecting some businesses at the expense of others (and, ultimately, at the expense of consumers), the AGCM has expanded the already bloated notion of a self-preferencing offense to conclude that expecting sellers to compete on pricing parameters would unfairly slash profit margins for non-FBA sellers.

The third pillar of the AGCM’s theory of harm is the claim that the benefits conferred on products sold through FBA are not awarded based on any objective quality criteria, but purely on whether the seller has chosen FBA or third-party logistics. Thus, even if a logistics operator were, in principle, capable of offering a service as efficient as FBA’s, it would not qualify for the same benefits. 

But this is a disingenuous line of reasoning. One legitimate reason why Amazon could choose to confer exclusive advantages on products fulfilled by its own logistics operation is because no other service is, in fact, routinely as reliable. This does not necessarily mean that FBA is always superior to the alternatives, but rather that it makes sense for Amazon to adopt this presumption a general rule based on past experience, without spending the resources to constantly evaluate it. In other words, granting exclusive benefits is based on quality criteria, just on a prior measurement of quality rather than an ongoing assessment. This is presumably what a customer-obsessed business that does not want to take chances with consumer satisfaction would do. 

Fourth, the AGCM posits that Prime and FBA constitute two separate products that have been artificially tied by Amazon, thereby unfairly excluding third-party logistics operators. Co-opting Amazon’s own terminology, the AGCM claims that the company has created a flywheel of artificial interdependence, wherein Prime benefits increase the number of Prime users, which drives demand for Prime products, which creates demand for Prime-eligible FBA products, and so on. 

To support its case, the AGCM repeatedly adduces a 2015 letter in which Jeff Bezos told shareholders that Amazon Marketplace and Prime are “happily and deeply intertwined,” and that FBA is the “glue” that links them together. Instead of taking this for what it likely is—i.e., a case of legitimate, efficiency-enhancing vertical integration—the AGCM has preferred to read into it a case of illicit tying, an established offense under Article 102 TFEU whereby a dominant firm makes the purchase of one product conditional on the purchase of another, unrelated one. 

The problem with this narrative is that it is perfectly plausible that Prime and FBA are, in fact, meant to be one product that is more than the sum of its parts. For one, the inventory of sellers who use FBA is stowed in fulfillment centers, meaning that Amazon takes care of all logistics, customer service, and product returns. As Bezos put it in the same 2015 letter, this is a huge efficiency gain. It thus makes sense to nudge consumers towards products that use FBA.

In sum, the AGCM’s case rests on a series of questionable assumptions that build on each other: a narrow relevant market definition; a finding of “hyper-dominance” that downplays competitors’ growth and expansion, as well as competition from outside the narrowly defined market; a contrived notion of indispensability at two levels (Marketplace and FBA); and a refusal to contemplate the possibility that Amazon integrates its marketplace and logistics services in orders to enhance efficiency, rather than to exclude competitors.

Remedies

The AGCM sees “only one way to restore a level-playing field in e-commerce logistics”: Amazon must redesign its existing Self-Fulfilled Prime (SFP) program in such a way as to grant all logistics operators—FBA or non-FBA—equal treatment on Amazon.it, based on a set of objective, transparent, standard, uniform, and non-discriminatory criteria. Any logistics operator that demonstrates the ability to fulfill such criteria must be awarded SFP status and the accompanying Prime badge, along with all the perks associated with it. Further, SFP- and FBA-sold products must be subject to the same monitoring mechanism with regard to the observance of Prime standards, as well as to the same evaluation standards. 

In sum, Amazon Italy now has a duty to treat Marketplace sales fulfilled by third-party operators the same as those fulfilled by its own logistics service. This is a significant step toward “common carrier antitrust.” in which vertically integrated firms are expected to comply with perfect neutrality obligations with respect to customers, suppliers, and competitors

Beyond the philosophical question of whether successful private companies should be obliged by law to treat competitors analogously to its affiliates (they shouldn’t), the pitfalls of this approach are plain to see. Nearly all consumer-facing services use choice architectures as a means to highlight products that rank favorably in terms of price and quality, and ensuring consumers enjoy a seamless user experience: Supermarkets offer house brands that signal a product has certain desirable features; operating system developers pre-install certain applications to streamline users’ “out of the box “experience; app stores curate the apps that users will view; search engines use specialized boxes that anticipate the motives underlying users’ search queries, etc. Suppressing these practices through heavy-handed neutrality mandates is liable to harm consumers. 

Second, monitoring third-party logistics operators’ compliance with the requisite standards is going to come at a cost for Amazon (and, presumably, its customers)—a cost likely much higher than that of monitoring its own operations—while awarding the Prime badge liberally may deteriorate the consumer experience on Amazon Marketplace.

Thus, one way for Amazon to comply with AGCM’s remedies while also minimizing monitoring costs is simply to dilute or even remove the criteria for Prime, thereby allowing sellers using any logistics provider to be eligible for Prime. While this would presumably insulate Amazon from any future claims against exclusionary self-preferencing, it would almost certainly also harm consumer welfare. 

A final point worth noting is that vertical integration may well be subsidizing Amazon’s own first-party products. In other words, even if FBA is not fully better than other logistics operators, the revenue that it derives from FBA enables Amazon to offer low prices, as well as a range of other benefits from Prime, such as, e.g., free video. Take that source of revenue away, and those subsidized prices go up and the benefits disappear. This is another reason why it may be legitimate to consider FBA and Prime as a single product.

Of course, this argument is moot if all one cares about is how Amazon’s vertical integration affects competitors, not consumers. But consumers care about the whole package. The rationale at play in the AGCM decision ultimately ends up imposing a narrow, boring business model on all sellers, precluding them from offering interesting consumer benefits to bolster their overall product.

Conclusion

Some have openly applauded AGCM’s use of EU competition law to protect traditional logistics operators like FedEx, Poste Italiane, DHL, and UPS. Others lament the competition authority’s apparent abandonment of the consumer welfare standard in favor of a renewed interest in punishing efficiency to favor laggard competitors under the guise of safekeeping “competition.” Both sides ultimately agree on one thing, however: Amazon Italy is about favoring Amazon’s competitors. If competition authorities insist on continuing down this populist rabbit hole,  the best they can hope for is a series of Pyrrhic victories against the businesses that are most bent on customer satisfaction, i.e., the successful ones.

Some may intuitively think that this is fair; that Amazon is just too big and that it strangles small competitors. But Amazon’s “small” competitors are hardly the “worthy men” of Brandeisian mythology. They are FedEx, DHL, UPS, and the state-backed goliath Poste Italiane; they are undeniably successful companies like eBay, Alibaba – or Walmart in the United States. It is, conversely, the smallest retailers and consumers who benefit the most from Amazon’s integrated logistics and marketplace services, as the company’s meteoric rise in popularity in Italy since 2016 attests. But it seems that, in the brave new world of antitrust, such stakeholders are now too small to matter.

[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]

Earlier this month, Professors Fiona Scott Morton, Steve Salop, and David Dinielli penned a letter expressing their “strong support” for the proposed American Innovation and Choice Online Act (AICOA). In the letter, the professors address criticisms of AICOA and urge its approval, despite possible imperfections.

“Perhaps this bill could be made better if we lived in a perfect world,” the professors write, “[b]ut we believe the perfect should not be the enemy of the good, especially when change is so urgently needed.”

The problem is that the professors and other supporters of AICOA have shown neither that “change is so urgently needed” nor that the proposed law is, in fact, “good.”

Is Change ‘Urgently Needed’?

With respect to the purported urgency that warrants passage of a concededly imperfect bill, the letter authors assert two points. First, they claim that AICOA’s targets—Google, Apple, Facebook, Amazon, and Microsoft (collectively, GAFAM)—“serve as the essential gatekeepers of economic, social, and political activity on the internet.” It is thus appropriate, they say, to amend the antitrust laws to do something they have never before done: saddle a handful of identified firms with special regulatory duties.

But is this oft-repeated claim about “gatekeeper” status true? The label conjures up the old Terminal Railroad case, where a group of firms controlled the only bridges over the Mississippi River at St. Louis. Freighters had no choice but to utilize their services. Do the GAFAM firms really play a similar role with respect to “economic, social, and political activity on the internet”? Hardly.

With respect to economic activity, Amazon may be a huge player, but it still accounts for only 39.5% of U.S. ecommerce sales—and far less of retail sales overall. Consumers have gobs of other ecommerce options, and so do third-party merchants, which may sell their wares using Shopify, Ebay, Walmart, Etsy, numerous other ecommerce platforms, or their own websites.

For social activity on the internet, consumers need not rely on Facebook and Instagram. They can connect with others via Snapchat, Reddit, Pinterest, TikTok, Twitter, and scores of other sites. To be sure, all these services have different niches, but the letter authors’ claim that the GAFAM firms are “essential gatekeepers” of “social… activity on the internet” is spurious.

Nor are the firms singled out by AICOA essential gatekeepers of “political activity on the internet.” The proposed law touches neither Twitter, the primary hub of political activity on the internet, nor TikTok, which is increasingly used for political messaging.

The second argument the letter authors assert in support of their claim of urgency is that “[t]he decline of antitrust enforcement in the U.S. is well known, pervasive, and has left our jurisprudence unable to protect and maintain competitive markets.” In other words, contemporary antitrust standards are anemic and have led to a lack of market competition in the United States.

The evidence for this claim, which is increasingly parroted in the press and among the punditry, is weak. Proponents primarily point to studies showing:

  1. increasing industrial concentration;
  2. higher markups on goods and services since 1980;
  3. a declining share of surplus going to labor, which could indicate monopsony power in labor markets; and
  4. a reduction in startup activity, suggesting diminished innovation. 

Examined closely, however, those studies fail to establish a domestic market power crisis.

Industrial concentration has little to do with market power in actual markets. Indeed, research suggests that, while industries may be consolidating at the national level, competition at the market (local) level is increasing, as more efficient national firms open more competitive outlets in local markets. As Geoff Manne sums up this research:

Most recently, several working papers looking at the data on concentration in detail and attempting to identify the likely cause for the observed data, show precisely the opposite relationship. The reason for increased concentration appears to be technological, not anticompetitive. And, as might be expected from that cause, its effects are beneficial. Indeed, the story is both intuitive and positive.

What’s more, while national concentration does appear to be increasing in some sectors of the economy, it’s not actually so clear that the same is true for local concentration — which is often the relevant antitrust market.

With respect to the evidence on markups, the claim of a significant increase in the price-cost margin depends crucially on the measure of cost. The studies suggesting an increase in margins since 1980 use the “cost of goods sold” (COGS) metric, which excludes a firm’s management and marketing costs—both of which have become an increasingly significant portion of firms’ costs. Measuring costs using the “operating expenses” (OPEX) metric, which includes management and marketing costs, reveals that public-company markups increased only modestly since the 1980s and that the increase was within historical variation. (It is also likely that increased markups since 1980 reflect firms’ more extensive use of technology and their greater regulatory burdens, both of which raise fixed costs and require higher markups over marginal cost.)

As for the declining labor share, that dynamic is occurring globally. Indeed, the decline in the labor share in the United States has been less severe than in Japan, Canada, Italy, France, Germany, China, Mexico, and Poland, suggesting that anemic U.S. antitrust enforcement is not to blame. (A reduction in the relative productivity of labor is a more likely culprit.)

Finally, the claim of reduced startup activity is unfounded. In its report on competition in digital markets, the U.S. House Judiciary Committee asserted that, since the advent of the major digital platforms:

  1. “[t]he number of new technology firms in the digital economy has declined”;
  2. “the entrepreneurship rate—the share of startups and young firms in the [high technology] industry as a whole—has also fallen significantly”; and
  3. “[u]nsurprisingly, there has also been a sharp reduction in early-stage funding for technology startups.” (pp. 46-47.)

Those claims, however, are based on cherry-picked evidence.

In support of the first two, the Judiciary Committee report cited a study based on data ending in 2011. As Benedict Evans has observed, “standard industry data shows that startup investment rounds have actually risen at least 4x since then.”

In support of the third claim, the report cited statistics from an article noting that the number and aggregate size of the very smallest venture capital deals—those under $1 million—fell between 2014 and 2018 (after growing substantially from 2008 to 2014). The Judiciary Committee report failed to note, however, the cited article’s observation that small venture deals ($1 million to $5 million) had not dropped and that larger venture deals (greater than $5 million) had grown substantially during the same time period. Nor did the report acknowledge that venture-capital funding has continued to increase since 2018.

Finally, there is also reason to think that AICOA’s passage would harm, not help, the startup environment:

AICOA doesn’t directly restrict startup acquisitions, but the activities it would restrict most certainly do dramatically affect the incentives that drive many startup acquisitions. If a platform is prohibited from engaging in cross-platform integration of acquired technologies, or if it can’t monetize its purchase by prioritizing its own technology, it may lose the motivation to make a purchase in the first place.

Despite the letter authors’ claims, neither a paucity of avenues for “economic, social, and political activity on the internet” nor the general state of market competition in the United States establishes an “urgent need” to re-write the antitrust laws to saddle a small group of firms with unprecedented legal obligations.

Is the Vagueness of AICOA’s Primary Legal Standard a Feature?

AICOA bars covered platforms from engaging in three broad classes of conduct (self-preferencing, discrimination among business users, and limiting business users’ ability to compete) where the behavior at issue would “materially harm competition.” It then forbids several specific business practices, but allows the defendant to avoid liability by proving that their use of the practice would not cause a “material harm to competition.”

Critics have argued that “material harm to competition”—a standard that is not used elsewhere in the antitrust laws—is too indeterminate to provide business planners and adjudicators with adequate guidance. The authors of the pro-AICOA letter, however, maintain that this “different language is a feature, not a bug.”

That is so, the letter authors say, because the language effectively signals to courts and policymakers that antitrust should prohibit more conduct. They explain:

To clarify to courts and policymakers that Congress wants something different (and stronger), new terminology is required. The bill’s language would open up a new space and move beyond the standards imposed by the Sherman Act, which has not effectively policed digital platforms.

Putting aside the weakness of the letter authors’ premise (i.e., that Sherman Act standards have proven ineffective), the legislative strategy they advocate—obliquely signal that you want “change” without saying what it should consist of—is irresponsible and risky.

The letter authors assert two reasons Congress should not worry about enacting a liability standard that has no settled meaning. One is that:

[t]he same judges who are called upon to render decisions under the existing, insufficient, antitrust regime, will also be called upon to render decisions under the new law. They will be the same people with the same worldview.

It is thus unlikely that “outcomes under the new law would veer drastically away from past understandings of core concepts….”

But this claim undermines the argument that a new standard is needed to get the courts to do “something different” and “move beyond the standards imposed by the Sherman Act.” If we don’t need to worry about an adverse outcome from a novel, ill-defined standard because courts are just going to continue applying the standard they’re familiar with, then what’s the point of changing the standard?

A second reason not to worry about the lack of clarity on AICOA’s key liability standard, the letter authors say, is that federal enforcers will define it:

The new law would mandate that the [Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice], the two expert agencies in the area of competition, together create guidelines to help courts interpret the law. Any uncertainty about the meaning of words like ‘competition’ will be resolved in those guidelines and over time with the development of caselaw.

This is no doubt music to the ears of members of Congress, who love to get credit for “doing something” legislatively, while leaving the details to an agency so that they can avoid accountability if things turn out poorly. Indeed, the letter authors explicitly play upon legislators’ unwholesome desire for credit-sans-accountability. They emphasize that “[t]he agencies must [create and] update the guidelines periodically. Congress doesn’t have to do much of anything very specific other than approve budgets; it certainly has no obligation to enact any new laws, let alone amend them.”

AICOA does not, however, confer rulemaking authority on the agencies; it merely directs them to create and periodically update “agency enforcement guidelines” and “agency interpretations” of certain affirmative defenses. Those guidelines and interpretations would not bind courts, which would be free to interpret AICOA’s new standard differently. The letter authors presume that courts would defer to the agencies’ interpretation of the vague standard, and they probably would. But that raises other problems.

For one thing, it reduces certainty, which is likely to chill innovation. Giving the enforcement agencies de facto power to determine and redetermine what behaviors “would materially harm competition” means that the rules are never settled. Administrations differ markedly in their views about what the antitrust laws should forbid, so business planners could never be certain that a product feature or revenue model that is legal today will not be deemed to “materially harm competition” by a future administration with greater solicitude for small rivals and upstarts. Such uncertainty will hinder investment in novel products, services, and business models.

Consider, for example, Google’s investment in the Android mobile operating system. Google makes money from Android—which it licenses to device manufacturers for free—by ensuring that Google’s revenue-generating services (e.g., its search engine and browser) are strongly preferenced on Android products. One administration might believe that this is a procompetitive arrangement, as it creates a different revenue model for mobile operating systems (as opposed to Apple’s generation of revenue from hardware sales), resulting in both increased choice and lower prices for consumers. A subsequent administration might conclude that the arrangement materially harms competition by making it harder for rival search engines and web browsers to gain market share. It would make scant sense for a covered platform to make an investment like Google did with Android if its underlying business model could be upended by a new administration with de facto power to rewrite the law.

A second problem with having the enforcement agencies determine and redetermine what covered platforms may do is that it effectively transforms the agencies from law enforcers into sectoral regulators. Indeed, the letter authors agree that “the ability of expert agencies to incorporate additional protections in the guidelines” means that “the bill is not a pure antitrust law but also safeguards other benefits to consumers.” They tout that “the complementarity between consumer protection and competition can be addressed in the guidelines.”

Of course, to the extent that the enforcement guidelines address concerns besides competition, they will be less useful for interpreting AICOA’s “material harm to competition” standard; they might deem a practice suspect on non-competition grounds. Moreover, it is questionable whether creating a sectoral regulator for five widely diverse firms is a good idea. The history of sectoral regulation is littered with examples of agency capture, rent-seeking, and other public-choice concerns. At a minimum, Congress should carefully examine the potential downsides of sectoral regulation, install protections to mitigate those downsides, and explicitly establish the sectoral regulator.

Will AICOA Break Popular Products and Services?

Many popular offerings by the platforms covered by AICOA involve self-preferencing, discrimination among business users, or one of the other behaviors the bill presumptively bans. Pre-installation of iPhone apps and services like Siri, for example, involves self-preferencing or discrimination among business users of Apple’s iOS platform. But iPhone consumers value having a mobile device that offers extensive services right out of the box. Consumers love that Google’s search result for an establishment offers directions to the place, which involves the preferencing of Google Maps. And consumers positively adore Amazon Prime, which can provide free expedited delivery because Amazon conditions Prime designation on a third-party seller’s use of Amazon’s efficient, reliable “Fulfillment by Amazon” service—something Amazon could not do under AICOA.

The authors of the pro-AICOA letter insist that the law will not ban attractive product features like these. AICOA, they say:

provides a powerful defense that forecloses any thoughtful concern of this sort: conduct otherwise banned under the bill is permitted if it would ‘maintain or substantially enhance the core functionality of the covered platform.’

But the authors’ confidence that this affirmative defense will adequately protect popular offerings is misplaced. The defense is narrow and difficult to mount.

First, it immunizes only those behaviors that maintain or substantially enhance the “core” functionality of the covered platform. Courts would rightly interpret AICOA to give effect to that otherwise unnecessary word, which dictionaries define as “the central or most important part of something.” Accordingly, any self-preferencing, discrimination, or other presumptively illicit behavior that enhances a covered platform’s service but not its “central or most important” functions is not even a candidate for the defense.

Even if a covered platform could establish that a challenged practice would maintain or substantially enhance the platform’s core functionality, it would also have to prove that the conduct was “narrowly tailored” and “reasonably necessary” to achieve the desired end, and, for many behaviors, the “le[ast] discriminatory means” of doing so. That is a remarkably heavy burden, and it beggars belief to suppose that business planners considering novel offerings involving self-preferencing, discrimination, or some other presumptively illicit conduct would feel confident that they could make the required showing. It is likely, then, that AICOA would break existing products and services and discourage future innovation.

Of course, Congress could mitigate this concern by specifying that AICOA does not preclude certain things, such as pre-installed apps or consumer-friendly search results. But the legislation would then lose the support of the many interest groups who want the law to preclude various popular offerings that its text would now forbid. Unlike consumers, who are widely dispersed and difficult to organize, the groups and competitors that would benefit from things like stripped-down smartphones, map-free search results, and Prime-less Amazon are effective lobbyists.

Should the US Follow Europe?

Having responded to criticisms of AICOA, the authors of the pro-AICOA letter go on offense. They assert that enactment of the bill is needed to ensure that the United States doesn’t lose ground to Europe, both in regulatory leadership and in innovation. Observing that the European Union’s Digital Markets Act (DMA) has just become law, the authors write that:

[w]ithout [AICOA], the role of protecting competition and innovation in the digital sector outside China will be left primarily to the European Union, abrogating U.S. leadership in this sector.

Moreover, if Europe implements its DMA and the United States does not adopt AICOA, the authors claim:

the center of gravity for innovation and entrepreneurship [could] shift from the U.S. to Europe, where the DMA would offer greater protections to start ups and app developers, and even makers and artisans, against exclusionary conduct by the gatekeeper platforms.

Implicit in the argument that AICOA is needed to maintain America’s regulatory leadership is the assumption that to lead in regulatory policy is to have the most restrictive rules. The most restrictive regulator will necessarily be the “leader” in the sense that it will be the one with the most control over regulated firms. But leading in the sense of optimizing outcomes and thereby serving as a model for other jurisdictions entails crafting the best policies—those that minimize the aggregate social losses from wrongly permitting bad behavior, wrongly condemning good behavior, and determining whether conduct is allowed or forbidden (i.e., those that “minimize the sum of error and decision costs”). Rarely is the most restrictive regulatory regime the one that optimizes outcomes, and as I have elsewhere explained, the rules set forth in the DMA hardly seem calibrated to do so.

As for “innovation and entrepreneurship” in the technological arena, it would be a seismic shift indeed if the center of gravity were to migrate to Europe, which is currently home to zero of the top 20 global tech companies. (The United States hosts 12; China, eight.)

It seems implausible, though, that imposing a bunch of restrictions on large tech companies that have significant resources for innovation and are scrambling to enter each other’s markets will enhance, rather than retard, innovation. The self-preferencing bans in AICOA and DMA, for example, would prevent Apple from developing its own search engine to compete with Google, as it has apparently contemplated. Why would Apple develop its own search engine if it couldn’t preference it on iPhones and iPads? And why would Google have started its shopping service to compete with Amazon if it couldn’t preference Google Shopping in search results? And why would any platform continually improve to gain more users as it neared the thresholds for enhanced duties under DMA or AICOA? It seems more likely that the DMA/AICOA approach will hinder, rather than spur, innovation.

At the very least, wouldn’t it be prudent to wait and see whether DMA leads to a flourishing of innovation and entrepreneurship in Europe before jumping on the European bandwagon? After all, technological innovations that occur in Europe won’t be available only to Europeans. Just as Europeans benefit from innovation by U.S. firms, American consumers will be able to reap the benefits of any DMA-inspired innovation occurring in Europe. Moreover, if DMA indeed furthers innovation by making it easier for entrants to gain footing, even American technology firms could benefit from the law by launching their products in Europe. There’s no reason for the tech sector to move to Europe to take advantage of a small-business-protective European law.

In fact, the optimal outcome might be to have one jurisdiction in which major tech platforms are free to innovate, enter each other’s markets via self-preferencing, etc. (the United States, under current law) and another that is more protective of upstart businesses that use the platforms (Europe under DMA). The former jurisdiction would create favorable conditions for platform innovation and inter-platform competition; the latter might enhance innovation among businesses that rely on the platforms. Consumers in each jurisdiction, however, would benefit from innovation facilitated by the other.

It makes little sense, then, for the United States to rush to adopt European-style regulation. DMA is a radical experiment. Regulatory history suggests that the sort of restrictiveness it imposes retards, rather than furthers, innovation. But in the unlikely event that things turn out differently this time, little harm would result from waiting to see DMA’s benefits before implementing its restrictive approach. 

Does AICOA Threaten Platforms’ Ability to Moderate Content and Police Disinformation?

The authors of the pro-AICOA letter conclude by addressing the concern that AICOA “will inadvertently make content moderation difficult because some of the prohibitions could be read… to cover and therefore prohibit some varieties of content moderation” by covered platforms.

The letter authors say that a reading of AICOA to prohibit content moderation is “strained.” They maintain that the act’s requirement of “competitive harm” would prevent imposition of liability based on content moderation and that the act is “plainly not intended to cover” instances of “purported censorship.” They further contend that the risk of judicial misconstrual exists with all proposed laws and therefore should not be a sufficient reason to oppose AICOA.

Each of these points is weak. Section 3(a)(3) of AICOA makes it unlawful for a covered platform to “discriminate in the application or enforcement of the terms of service of the covered platform among similarly situated business users in a manner that would materially harm competition.” It is hardly “strained” to reason that this provision is violated when, say, Google’s YouTube selectively demonetizes a business user for content that Google deems harmful or misleading. Or when Apple removes Parler, but not every other violator of service terms, from its App Store. Such conduct could “materially harm competition” by impeding the de-platformed business’ ability to compete with its rivals.

And it is hard to say that AICOA is “plainly not intended” to forbid these acts when a key supporting senator touted the bill as a means of policing content moderation and observed during markup that it would “make some positive improvement on the problem of censorship” (i.e., content moderation) because “it would provide protections to content providers, to businesses that are discriminated against because of the content of what they produce.”

At a minimum, we should expect some state attorneys general to try to use the law to police content moderation they disfavor, and the mere prospect of such legal action could chill anti-disinformation efforts and other forms of content moderation.

Of course, there’s a simple way for Congress to eliminate the risk of what the letter authors deem judicial misconstrual: It could clarify that AICOA’s prohibitions do not cover good-faith efforts to moderate content or police disinformation. Such clarification, however, would kill the bill, as several Republican legislators are supporting the act because it restricts content moderation.

The risk of judicial misconstrual with AICOA, then, is not the sort that exists with “any law, new or old,” as the letter authors contend. “Normal” misconstrual risk exists when legislators try to be clear about their intentions but, because language has its limits, some vagueness or ambiguity persists. AICOA’s architects have deliberately obscured their intentions in order to cobble together enough supporters to get the bill across the finish line.

The one thing that all AICOA supporters can agree on is that they deserve credit for “doing something” about Big Tech. If the law is construed in a way they disfavor, they can always act shocked and blame rogue courts. That’s shoddy, cynical lawmaking.

Conclusion

So, I respectfully disagree with Professors Scott Morton, Salop, and Dinielli on AICOA. There is no urgent need to pass the bill right now, especially as we are on the cusp of seeing an AICOA-like regime put to the test. The bill’s central liability standard is overly vague, and its plain terms would break popular products and services and thwart future innovation. The United States should equate regulatory leadership with the best, not the most restrictive, policies. And Congress should thoroughly debate and clarify its intentions on content moderation before enacting legislation that could upend the status quo on that important matter.

For all these reasons, Congress should reject AICOA. And for the same reasons, a future in which AICOA is adopted is extremely unlikely to resemble the Utopian world that Professors Scott Morton, Salop, and Dinielli imagine.

[The following is a guest post from Andrew Mercado, a research assistant at the Mercatus Center at George Mason University and an adjunct professor and research assistant at George Mason’s Antonin Scalia Law School.]

The Competition and Transparency in Digital Advertising Act (CTDAA), introduced May 19 by Sens. Mike Lee (R-Utah), Ted Cruz (R-Texas), Amy Klobuchar (D-Minn.), and Richard Blumenthal (D-Conn.), is the latest manifestation of the congressional desire to “do something” legislatively about big digital platforms. Although different in substance from the other antitrust bills introduced this Congress, it shares one key characteristic: it is fatally flawed and should not be enacted.  

Restrictions

In brief, the CTDAA imposes revenue-based restrictions on the ownership structure of firms engaged in digital advertising. The CTDAA bars a firm with more than $20 billion in annual advertising revenue (adjusted annually for inflation) from:

  1. owning a digital-advertising exchange if it owns either a sell-side ad brokerage or a buy-side ad brokerage; and
  2. owning a sell-side brokerage if it owns a buy-side brokerage, or from owning a buy-side or sell-side brokerage if it is also a buyer or seller of advertising space.

The proposal’s ownership restrictions present the clearest harm to the future of the digital-advertising market. From an efficiency perspective, vertical integration of both sides of the market can lead to enormous gains. Since, for example, Google owns and operates an ad exchange, a sell-side broker, and a buy-side broker, there are very few frictions that exist between each side of the market. All of the systems are integrated and the supply of advertising space, demand for that space, and the marketplace conducting price-discovery auctions are automatically updated in real time.

While this instantaneous updating is not unique to Google’s system, and other buy- and sell-side firms can integrate into the system, the benefit to advertisers and publishers can be found in the cost savings that come from the integration. Since Google is able to create synergies on all sides of the market, the fees on any given transaction are lower. Further, incorporating Google’s vast trove of data allows for highly relevant and targeted ads. All of this means that advertisers spend less for the same quality of ad; publishers get more for each ad they place; and consumers see higher-quality, more relevant ads.

Without the ability to own and invest in the efficiency and transaction-cost reduction of an integrated platform, there will likely be less innovation and lower quality on all sides of the market. Further, advertisers and publishers will have to shoulder the burden of using non-integrated marketplaces and would likely pay higher fees for less-efficient brokers. Since Google is a one-stop shop for all of a company’s needs—whether that be on the advertising side or the publishing side—companies can move seamlessly from one side of the market to the other, all while paying lower costs per transaction, because of the integrated nature of the platform.

In the absence of such integration, a company would have to seek out one buy-side brokerage to place ads and another, separate sell-side brokerage to receive ads. These two brokers would then have to go to an ad exchange to facilitate the deal, bringing three different brokers into the mix. Each of these middlemen would take a proportionate cut of the deal. When comparing the situation between an integrated and non-integrated market, the fees associated with serving ads in a non-integrated market are almost certainly higher.

Additionally, under this proposal, the innovative potential of each individual firm is capped. If a firm grows big enough and gains sufficient revenue through integrating different sides of the market, they will be forced to break up their efficiency-inducing operations. Marginal improvements on each side of the market may be possible, but without integrating different sides of the market, the scale required to justify those improvements would be insurmountable.

Assumptions

The CTDAA assumes that:

  1. there is a serious competitive problem in digital advertising; and
  2. the structural separation and regulation of advertising brokerages run by huge digital-advertising platforms (as specified in the CTDAA) would enhance competition and benefit digital advertising customers and consumers.

The first assumption has not been proven and is subject to debate, while the second assumption is likely to be false.

Fundamental to the bill’s assumption that the digital-advertising market lacks competition is a misunderstanding of competitive forces and the idea that revenue and profit are inversely related to competition. While it is true that high profits can be a sign of consolidation and anticompetitive outcomes, the dynamic nature of the internet economy makes this theory unlikely.

As Christopher Kaiser and I have discussed, competition in the internet economy is incredibly dynamic. Vigorous competition can be achieved with just a handful of firms,  despite claims from some quarters that four competitors is necessarily too few. Even in highly concentrated markets, there is the omnipresent threat that new entrants will emerge to usurp an incumbent’s reign. Additionally, while some studies may show unusually large profits in those markets, when adjusted for the consumer welfare created by large tech platforms, profits should actually be significantly higher than they are.

Evidence of dynamic entry in digital markets can be found in a recently announced product offering from a small (but more than $6 billion in revenue) competitor in digital advertising. Following the outcry associated with Google’s alleged abuse with Project Bernanke, the Trade Desk developed OpenPath. This allowed the Trade Desk, a buy-side broker, to handle some of the functions of a sell-side broker and eliminate harms from Google’s alleged bid-rigging to better serve its clients.

In developing the platform, the Trade Desk said it would discontinue serving any Google-based customers, effectively severing ties with the largest advertising exchange on the market. While this runs afoul of the letter of the law spelled out in CTDAA, it is well within the spirit its sponsor’s stated goal: businesses engaging in robust free-market competition. If Google’s market power was as omnipresent and suffocating as the sponsors allege, then eliminating traffic from Google would have been a death sentence for the Trade Desk.

While various theories of vertical and horizontal competitive harm have been put forward, there has not been an empirical showing that consumers and advertising customers have failed to benefit from the admittedly efficient aspects of digital-brokerage auctions administered by Google, Facebook, and a few other platforms. The rapid and dramatic growth of digital advertising and associated commerce strongly suggests that this has been an innovative and welfare-enhancing development. Moreover, the introduction of a new integrated brokerage platform by a “small” player in the advertising market indicates there is ample opportunity to increase this welfare further.  

Interfering in brokerage operations under the unproven assumption that “monopoly rents” are being charged and that customers are being “exploited” is rhetoric unmoored from hard evidence. Furthermore, if specific platform practices are shown inefficiently to exclude potential entrants, existing antitrust law can be deployed on a case-specific basis. This approach is currently being pursued by a coalition of state attorneys general against Google (the merits of which are not relevant to this commentary).   

Even assuming for the sake of argument that there are serious competition problems in the digital-advertising market, there is no reason to believe that the arbitrary provisions and definitions found in the CTDAA would enhance welfare. Indeed, it is likely that the act would have unforeseen consequences:

  • It would lead to divestitures supervised by the U.S. Justice Department (DOJ) that could destroy efficiencies derived from efficient targeting by brokerages integrated into platforms;
  • It would disincentivize improvements in advertising brokerages and likely would reduce future welfare on both the buy and sell sides of digital advertising;
  • It would require costly recordkeeping and disclosures by covered platforms that could have unforeseen consequences for privacy and potentially reduce the efficiency of bidding practices;
  • It would establish a fund for damage payments that would encourage wasteful litigation (see next two points);
  • It would spawn a great deal of wasteful private rent-seeking litigation that would discourage future platform and brokerage innovations; and
  • It would likely generate wasteful lawsuits by rent-seeking state attorneys general (and perhaps the DOJ as well).

The legislation would ultimately harm consumers who currently benefit from a highly efficient form of targeted advertising (for more on the welfare benefits of targeted advertising, see here). Since Google continually invests in creating a better search engine (to deliver ads directly to consumers) and collects more data to better target ads (to deliver ads to specific consumers), the value to advertisers of displaying ads on Google constantly increases.

Proposing a new regulatory structure that would directly affect the operations of highly efficient auction markets is the height of folly. It ignores the findings of Nobel laureate James M. Buchanan (among others) that, to justify regulation, there should first be a provable serious market failure and that, even if such a failure can be shown, the net welfare costs of government intervention should be smaller than the net welfare costs of non-intervention.

Given the likely substantial costs of government intervention and the lack of proven welfare costs from the present system (which clearly has been associated with a growth in output), the second prong of the Buchanan test clearly has not been met.

Conclusion

While there are allegations of abuses in the digital-advertising market, it is not at all clear that these abuses have had a long-term negative economic impact. As shown in a study by Erik Brynjolfsson and his student Avinash Collis—recently summarized in the Harvard Business Review (Alden Abbott offers commentary here)—the consumer surplus generated by digital platforms has far outstripped the advertising and services revenues received by the platforms. The CTDAA proposal would seek to unwind much of these gains.

If the goal is to create a multitude of small, largely inefficient advertising companies that charge high fees and provide low-quality service, this bill will deliver. The market for advertising will have a far greater number of players but it will be far less competitive, since no companies will be willing to exceed the $20 billion revenue threshold that would leave them subject to the proposal’s onerous ownership standards.

If, however, the goal is to increase consumer welfare, increase rigorous competition, and cement better outcomes for advertisers and publishers, then it is likely to fail. Ownership requirements laid out in the proposal will lead to a stagnant advertising market, higher fees for all involved, and lower-quality, less-relevant ads. Government regulatory interference in highly successful and efficient platform markets are a terrible idea.

[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]

26 July, 10 A.F. (after fairness)

Dear Fellow Inquisitors,

It has been more than a decade now since the Federal Neutrality Commission, born of the ashes of the old world, ushered in the Age of Fairness. 

As you all know, the FNC was created during the Online Era, when the emergence of the largest companies in human history opened our eyes to the original sin of the competitive process: unfairness.

In the course of their evolution, digital platforms—the vanity fairs of the XXI century—had created entire ecosystems that offered integrated services that were so comfortable to use together that they led to a double-sin: sloth on the part of the consumers, and the unfair exclusion of competitors, who were barred from exercising their God-given right to participate in every market and every platform—and to prosper.

Digital stores selling their own branded goods, social-media apps with their own messaging services, search engines using search statistics to generate optimally efficient tools that surpassed the (legitimate) confines of their core functions and spilled over into the dominion of job search, flight booking, or housing apps … App stores were even using their own recognizable software to guarantee that the apps they distributed met the highest standards of security and trustworthiness!

While these things might not seem entirely unreasonable (especially to the heathens: selfish and individualistic consumers who care about nothing other than satisfying their base hedonistic desires), they in fact led to unspeakable evils that flouted the common good.

For example, they made it very, very uncomfortable for someone who wanted to start their own real-estate business to compete with such strong rival companies, who could leverage their superior efficiency in their core markets to become nigh-unbeatable in offering the cheapest, most relevant housing ads. To make matters worse, the gargantuan spending of the digital platforms on research and development built additional moats of quality and innovation around their products—both core and adjacent—that made them utterly unimpregnable to rivals specializing in just one area.

By constantly leveraging their core services to offer better and improved products on adjacent markets, digital platforms had made it unfairly difficult for other companies to join the race and deliver us to “perfect competition”—the euphoric state of blissful equilibrium foretold by the high priests of the only true belief system, Economics.

But not all was lost, and we hadn’t been forsaken. In those dark and faithless days, it was revealed to us by Sen. Amy Klobuchar—praise be her name—that the loathsome practice whereby online companies favored their own products and services over their rivals had a name, “self-preferencing,” and that it was a sin. And, most importantly, that it could be eradicated.

Fortunately, and thanks to the vigilance of the FNC, legal steps were swiftly taken to make the praxis of the Digital Economy more closely resemble its theory, as passed on to us by our forefathers.

And it worked, brothers and sisters! The prohibition of self-preferencing in digital markets made online products much more homogenous, thus validating one of the main assumptions of Economics. In addition, new competition-law Acts, with mechanisms such as forced data sharing, have eliminated all the messy experimentation that had hitherto led to varied (and risky) business models and diversified approaches. By turning competition into forced collaboration, we had finally made it stable, equal, and predictable; in one word: fair.

And what of the sinner in every one of us? Before the great revelation, blasphemous “consumers”—an anachronistic and reductive term for “socially responsible citizens”—were committing the sin of laziness: sloth. Now, choice is finally mandated, and nothing can be pre-selected or even integrated. No more arbitrary safe-browsing mechanisms, integrated malware detectors and spam filters. Where digital platforms experimented and imposed results on us, we are now coercively free to experiment by ourselves—and on ourselves! Online searches today lead to thousands of indistinguishable links hiding an infinity of surprises, requiring us to be more circumspect and informed than ever before. In one word: the prohibition of self-preferencing has improved the moral character of the human stock.

It is universally known that we owe the dawn of the Age of Fairness to the American Innovation and Choice Online Act, adopted by Congress in the year 2022; and the unwavering vigilance of the FNC. What is lesser known—and what I am here to instill in you today—is that that was just the beginning. The success of AICOA has opened our eyes to an even more ancient and perverse evil: self-preferencing in offline markets. It revealed to us that—for centuries, if not millennia—companies in various industries—from togas to wine, from cosmetics to insurance—had, in fact, always preferred their own initiatives over those of their rivals!

Just as the ancient chariot constructors designed chariots to suit the build of their own thoroughbred horses (thereby foreclosing horses raised by other breeders), the XX century car producers were using spare parts delivered by a supplier organizationally related to their company.

This realization has accelerated the birth pangs of the American Innovation and Choice Offline Act, which we are here to announce today. With it, the FNC will eliminate all remnants of unfair rivalry—online and offline—so that we, as one community of faith, can finally enjoy the true benefits of competition. But we must never forget that this tenuous equilibrium hangs by a thread, and that we owe it all to the indefatigable efforts of the FNC agents patrolling the streets, supermarkets, restaurants, gyms, factories, and just about everything else every single day.

Of course, there is still a lot to be done. But every long journey must begin somewhere.

Today, I want to warn you against sin and urge you to adopt the religion of fairness[1] before the day of judgment comes.

Amen.


[1] Or any other religion that condemns self-preferencing. I want to recommend them all equally.