Archives For American Innovation and Choice Online Act

Sens. Amy Klobuchar (D-Minn.) and Chuck Grassley (R-Iowa)—cosponsors of the American Innovation Online and Choice Act, which seeks to “rein in” tech companies like Apple, Google, Meta, and Amazon—contend that “everyone acknowledges the problems posed by dominant online platforms.”

In their framing, it is simply an acknowledged fact that U.S. antitrust law has not kept pace with developments in the digital sector, allowing a handful of Big Tech firms to exploit consumers and foreclose competitors from the market. To address the issue, the senators’ bill would bar “covered platforms” from engaging in a raft of conduct, including self-preferencing, tying, and limiting interoperability with competitors’ products.

That’s what makes the open letter to Congress published late last month by the usually staid American Bar Association’s (ABA) Antitrust Law Section so eye-opening. The letter is nothing short of a searing critique of the legislation, which the section finds to be poorly written, vague, and departing from established antitrust-law principles.

The ABA, of course, has a reputation as an independent, highly professional, and heterogenous group. The antitrust section’s membership includes not only in-house corporate counsel, but lawyers from nonprofits, consulting firms, federal and state agencies, judges, and legal academics. Given this context, the comments must be read as a high-level judgment that recent legislative and regulatory efforts to “discipline” tech fall outside the legal mainstream and would come at the cost of established antitrust principles, legal precedent, transparency, sound economic analysis, and ultimately consumer welfare.

The Antitrust Section’s Comments

As the ABA Antitrust Law Section observes:

The Section has long supported the evolution of antitrust law to keep pace with evolving circumstances, economic theory, and empirical evidence. Here, however, the Section is concerned that the Bill, as written, departs in some respects from accepted principles of competition law and in so doing risks causing unpredicted and unintended consequences.

Broadly speaking, the section’s criticisms fall into two interrelated categories. The first relates to deviations from antitrust orthodoxy and the principles that guide enforcement. The second is a critique of the AICOA’s overly broad language and ambiguous terminology.

Departing from established antitrust-law principles

Substantively, the overarching concern expressed by the ABA Antitrust Law Section is that AICOA departs from the traditional role of antitrust law, which is to protect the competitive process, rather than choosing to favor some competitors at the expense of others. Indeed, the section’s open letter observes that, out of the 10 categories of prohibited conduct spelled out in the legislation, only three require a “material harm to competition.”

Take, for instance, the prohibition on “discriminatory” conduct. As it stands, the bill’s language does not require a showing of harm to the competitive process. It instead appears to enshrine a freestanding prohibition of discrimination. The bill targets tying practices that are already prohibited by U.S. antitrust law, but while similarly eschewing the traditional required showings of market power and harm to the competitive process. The same can be said, mutatis mutandis, for “self-preferencing” and the “unfair” treatment of competitors.

The problem, the section’s letter to Congress argues, is not only that this increases the teleological chasm between AICOA and the overarching goals and principles of antitrust law, but that it can also easily lead to harmful unintended consequences. For instance, as the ABA Antitrust Law Section previously observed in comments to the Australian Competition and Consumer Commission, a prohibition of pricing discrimination can limit the extent of discounting generally. Similarly, self-preferencing conduct on a platform can be welfare-enhancing, while forced interoperability—which is also contemplated by AICOA—can increase prices for consumers and dampen incentives to innovate. Furthermore, some of these blanket prohibitions are arguably at loggerheads with established antitrust doctrine, such as in, e.g., Trinko, which established that even monopolists are generally free to decide with whom they will deal.

In response to the above, the ABA Antitrust Law Section (reasonably) urges Congress explicitly to require an effects-based showing of harm to the competitive process as a prerequisite for all 10 of the infringements contemplated in the AICOA. This also means disclaiming generalized prohibitions of “discrimination” and of “unfairness” and replacing blanket prohibitions (such as the one for self-preferencing) with measured case-by-case analysis.

Arguably, the reason why the Klobuchar-Grassley bill can so seamlessly exclude or redraw such a central element of antitrust law as competitive harm is because it deliberately chooses to ignore another, preceding one. Namely, the bill omits market power as a requirement for a finding of infringement or for the legislation’s equally crucial designation as a “covered platform.” It instead prescribes size metrics—number of users, market capitalization—to define which platforms are subject to intervention. Such definitions cast an overly wide net that can potentially capture consumer-facing conduct that doesn’t have the potential to harm competition at all.

It is precisely for this reason that existing antitrust laws are tethered to market power—i.e., because it long has been recognized that only companies with market power can harm competition. As John B. Kirkwood of Seattle University School of Law has written:

Market power’s pivotal role is clear…This concept is central to antitrust because it distinguishes firms that can harm competition and consumers from those that cannot.

In response to the above, the ABA Antitrust Law Section (reasonably) urges Congress explicitly to require an effects-based showing of harm to the competitive process as a prerequisite for all 10 of the infringements contemplated in the AICOA. This also means disclaiming generalized prohibitions of “discrimination” and of “unfairness” and replacing blanket prohibitions (such as the one for self-preferencing) with measured case-by-case analysis.

Opaque language for opaque ideas

Another underlying issue is that the Klobuchar-Grassley bill is shot through with indeterminate language and fuzzy concepts that have no clear limiting principles. For instance, in order either to establish liability or to mount a successful defense to an alleged violation, the bill relies heavily on inherently amorphous terms such as “fairness,” “preferencing,” and “materiality,” or the “intrinsic” value of a product. But as the ABA Antitrust Law Section letter rightly observes, these concepts are not defined in the bill, nor by existing antitrust case law. As such, they inject variability and indeterminacy into how the legislation would be administered.

Moreover, it is also unclear how some incommensurable concepts will be weighed against each other. For example, how would concerns about safety and security be weighed against prohibitions on self-preferencing or requirements for interoperability? What is a “core function” and when would the law determine it has been sufficiently “enhanced” or “maintained”—requirements the law sets out to exempt certain otherwise prohibited behavior? The lack of linguistic and conceptual clarity not only explodes legal certainty, but also invites judicial second-guessing into the operation of business decisions, something against which the U.S. Supreme Court has long warned.

Finally, the bill’s choice of language and recent amendments to its terminology seem to confirm the dynamic discussed in the previous section. Most notably, the latest version of AICOA replaces earlier language invoking “harm to the competitive process” with “material harm to competition.” As the ABA Antitrust Law Section observes, this “suggests a shift away from protecting the competitive process towards protecting individual competitors.” Indeed, “material harm to competition” deviates from established categories such as “undue restraint of trade” or “substantial lessening of competition,” which have a clear focus on the competitive process. As a result, it is not unreasonable to expect that the new terminology might be interpreted as meaning that the actionable standard is material harm to competitors.

In its letter, the antitrust section urges Congress not only to define more clearly the novel terminology used in the bill, but also to do so in a manner consistent with existing antitrust law. Indeed:

The Section further recommends that these definitions direct attention to analysis consistent with antitrust principles: effects-based inquiries concerned with harm to the competitive process, not merely harm to particular competitors

Conclusion

The AICOA is a poorly written, misguided, and rushed piece of regulation that contravenes both basic antitrust-law principles and mainstream economic insights in the pursuit of a pre-established populist political goal: punishing the success of tech companies. If left uncorrected by Congress, these mistakes could have potentially far-reaching consequences for innovation in digital markets and for consumer welfare. They could also set antitrust law on a regressive course back toward a policy of picking winners and losers.

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

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

Interoperability

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Device Neutrality (Sideloading)

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

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

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

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

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

Conclusion

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

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

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

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

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

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

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

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

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

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

Platform and Device Neutrality Regime

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

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

Antitrust v. Regulation

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

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

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

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

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

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

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

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

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

The bill marks the culmination of misguided efforts to bring Big Tech to heel, regardless of the negative costs imposed upon consumers in the process. ICLE scholars have written about these developments in detail since the bill was introduced in October.

Below are 10 significant misconceptions that underpin the legislation.

1. There Is No Evidence that Self-Preferencing Is Generally Harmful

Self-preferencing is a normal part of how platforms operate, both to improve the value of their core products and to earn returns so that they have reason to continue investing in their development.

Platforms’ incentives are to maximize the value of their entire product ecosystem, which includes both the core platform and the services attached to it. Platforms that preference their own products frequently end up increasing the total market’s value by growing the share of users of a particular product. Those that preference inferior products end up hurting their attractiveness to users of their “core” product, exposing themselves to competition from rivals.

As Geoff Manne concludes, the notion that it is harmful (notably to innovation) when platforms enter into competition with edge providers is entirely speculative. Indeed, a range of studies show that the opposite is likely true. Platform competition is more complicated than simple theories of vertical discrimination would have it, and there is certainly no basis for a presumption of harm.

Consider a few examples from the empirical literature:

  1. Li and Agarwal (2017) find that Facebook’s integration of Instagram led to a significant increase in user demand both for Instagram itself and for the entire category of photography apps. Instagram’s integration with Facebook increased consumer awareness of photography apps, which benefited independent developers, as well as Facebook.
  2. Foerderer, et al. (2018) find that Google’s 2015 entry into the market for photography apps on Android created additional user attention and demand for such apps generally.
  3. Cennamo, et al. (2018) find that video games offered by console firms often become blockbusters and expand the consoles’ installed base. As a result, these games increase the potential for all independent game developers to profit from their games, even in the face of competition from first-party games.
  4. Finally, while Zhu and Liu (2018) is often held up as demonstrating harm from Amazon’s competition with third-party sellers on its platform, its findings are actually far from clear-cut. As co-author Feng Zhu noted in the Journal of Economics & Management Strategy: “[I]f Amazon’s entries attract more consumers, the expanded customer base could incentivize more third‐ party sellers to join the platform. As a result, the long-term effects for consumers of Amazon’s entry are not clear.”

2. Interoperability Is Not Costless

There are many things that could be interoperable, but aren’t. The reason not everything is interoperable is because interoperability comes with costs, as well as benefits. It may be worth letting different earbuds have different designs because, while it means we sacrifice easy interoperability, we gain the ability for better designs to be brought to market and for consumers to have choice among different kinds.

As Sam Bowman has observed, there are often costs that prevent interoperability from being worth the tradeoff, such as that:

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

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

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

3. Consumers Often Prefer Closed Ecosystems

Digital markets could have taken a vast number of shapes. So why have they gravitated toward the very characteristics that authorities condemn? For instance, if market tipping and consumer lock-in are so problematic, why is it that new corners of the digital economy continue to emerge via closed platforms, as opposed to collaborative ones?

Indeed, if recent commentary is to be believed, it is the latter that should succeed, because they purportedly produce greater gains from trade. And if consumers and platforms cannot realize these gains by themselves, then we should see intermediaries step into that breach. But this does not seem to be happening in the digital economy.

The naïve answer is to say that the absence of “open” systems is precisely the problem. What’s harder is to try to actually understand why. As I have written, there are many reasons that consumers might prefer “closed” systems, even when they have to pay a premium for them.

Take the example of app stores. Maintaining some control over the apps that can access the store notably enables platforms to easily weed out bad players. Similarly, controlling the hardware resources that each app can use may greatly improve device performance. In other words, centralized platforms can eliminate negative externalities that “bad” apps impose on rival apps and on consumers. This is especially true when consumers struggle to attribute dips in performance to an individual app, rather than the overall platform.

It is also conceivable that consumers prefer to make many of their decisions at the inter-platform level, rather than within each platform. In simple terms, users arguably make their most important decision when they choose between an Apple or Android smartphone (or a Mac and a PC, etc.). In doing so, they can select their preferred app suite with one simple decision.

They might thus purchase an iPhone because they like the secure App Store, or an Android smartphone because they like the Chrome Browser and Google Search. Forcing too many “within-platform” choices upon users may undermine a product’s attractiveness. Indeed, it is difficult to create a high-quality reputation if each user’s experience is fundamentally different. In short, contrary to what antitrust authorities seem to believe, closed platforms might be giving most users exactly what they desire.

Too often, it is simply assumed that consumers benefit from more openness, and that shared/open platforms are the natural order of things. What some refer to as “market failures” may in fact be features that explain the rapid emergence of the digital economy. Ronald Coase said it best when he quipped that economists always find a monopoly explanation for things that they simply fail to understand.

4. Data Portability Can Undermine Security and Privacy

As explained above, platforms that are more tightly controlled can be regulated by the platform owner to avoid some of the risks present in more open platforms. Apple’s App Store, for example, is a relatively closed and curated platform, which gives users assurance that apps will meet a certain standard of security and trustworthiness.

Along similar lines, there are privacy issues that arise from data portability. Even a relatively simple requirement to make photos available for download can implicate third-party interests. Making a user’s photos more broadly available may tread upon the privacy interests of friends whose faces appear in those photos. Importing those photos to a new service potentially subjects those individuals to increased and un-bargained-for security risks.

As Sam Bowman and Geoff Manne observe, this is exactly what happened with Facebook and its Social Graph API v1.0, ultimately culminating in the Cambridge Analytica scandal. Because v1.0 of Facebook’s Social Graph API permitted developers to access information about a user’s friends without consent, it enabled third-party access to data about exponentially more users. It appears that some 270,000 users granted data access to Cambridge Analytica, from which the company was able to obtain information on 50 million Facebook users.

In short, there is often no simple solution to implement interoperability and data portability. Any such program—whether legally mandated or voluntarily adopted—will need to grapple with these and other tradeoffs.

5. Network Effects Are Rarely Insurmountable

Several scholars in recent years have called for more muscular antitrust intervention in networked industries on grounds that network externalities, switching costs, and data-related increasing returns to scale lead to inefficient consumer lock-in and raise entry barriers for potential rivals (see here, here, and here). But there are countless counterexamples where firms have easily overcome potential barriers to entry and network externalities, ultimately disrupting incumbents.

Zoom is one of the most salient instances. As I wrote in April 2019 (a year before the COVID-19 pandemic):

To get to where it is today, Zoom had to compete against long-established firms with vast client bases and far deeper pockets. These include the likes of Microsoft, Cisco, and Google. Further complicating matters, the video communications market exhibits some prima facie traits that are typically associated with the existence of network effects.

Geoff Manne and Alec Stapp have put forward a multitude of other examples,  including: the demise of Yahoo; the disruption of early instant-messaging applications and websites; and MySpace’s rapid decline. In all of these cases, outcomes did not match the predictions of theoretical models.

More recently, TikTok’s rapid rise offers perhaps the greatest example of a potentially superior social-networking platform taking significant market share away from incumbents. According to the Financial Times, TikTok’s video-sharing capabilities and powerful algorithm are the most likely explanations for its success.

While these developments certainly do not disprove network-effects theory, they eviscerate the belief, common in antitrust circles, that superior rivals are unable to overthrow incumbents in digital markets. Of course, this will not always be the case. The question is ultimately one of comparing institutions—i.e., do markets lead to more or fewer error costs than government intervention? Yet, this question is systematically omitted from most policy discussions.

6. Profits Facilitate New and Exciting Platforms

As I wrote in August 2020, the relatively closed model employed by several successful platforms (notably Apple’s App Store, Google’s Play Store, and the Amazon Retail Platform) allows previously unknown developers/retailers to rapidly expand because (i) users do not have to fear their apps contain some form of malware and (ii) they greatly reduce payments frictions, most notably security-related ones.

While these are, indeed, tremendous benefits, another important upside seems to have gone relatively unnoticed. The “closed” business model also gives firms significant incentives to develop new distribution mediums (smart TVs spring to mind) and to improve existing ones. In turn, this greatly expands the audience that software developers can reach. In short, developers get a smaller share of a much larger pie.

The economics of two-sided markets are enlightening here. For example, Apple and Google’s app stores are what Armstrong and Wright (here and here) refer to as “competitive bottlenecks.” That is, they compete aggressively (among themselves, and with other gaming platforms) to attract exclusive users. They can then charge developers a premium to access those users.

This dynamic gives firms significant incentive to continue to attract and retain new users. For instance, if Steve Jobs is to be believed, giving consumers better access to media such as eBooks, video, and games was one of the driving forces behind the launch of the iPad.

This model of innovation would be seriously undermined if developers and consumers could easily bypass platforms, as would likely be the case under the American Innovation and Choice Online Act.

7. Large Market Share Does Not Mean Anticompetitive Outcomes

Scholars routinely cite the putatively strong concentration of digital markets to argue that Big Tech firms do not face strong competition. But this is a non sequitur. Indeed, as economists like Joseph Bertrand and William Baumol have shown, what matters is not whether markets are concentrated, but whether they are contestable. If a superior rival could rapidly gain user traction, that alone will discipline incumbents’ behavior.

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

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

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

Unfortunately, critics’ failure to meaningfully grapple with these issues serves to shape the “conventional wisdom” in tech-policy debates.

8. Vertical Integration Generally Benefits Consumers

Vertical behavior of digital firms—whether through mergers or through contract and unilateral action—frequently arouses the ire of critics of the current antitrust regime. Many such critics point to a few recent studies that cast doubt on the ubiquity of benefits from vertical integration. But the findings of these few studies are regularly overstated and, even if taken at face value, represent a just minuscule fraction of the collected evidence, which overwhelmingly supports vertical integration.

There is strong and longstanding empirical evidence that vertical integration is competitively benign. This includes widely acclaimed work by economists Francine Lafontaine (former director of the Federal Trade Commission’s Bureau of Economics under President Barack Obama) and Margaret Slade, whose meta-analysis led them to conclude:

[U]nder most circumstances, profit-maximizing vertical integration decisions are efficient, not just from the firms’ but also from the consumers’ points of view. Although there are isolated studies that contradict this claim, the vast majority support it. Moreover, even in industries that are highly concentrated so that horizontal considerations assume substantial importance, the net effect of vertical integration appears to be positive in many instances. We therefore conclude that, faced with a vertical arrangement, the burden of evidence should be placed on competition authorities to demonstrate that that arrangement is harmful before the practice is attacked.

In short, there is a substantial body of both empirical and theoretical research showing that vertical integration (and the potential vertical discrimination and exclusion to which it might give rise) is generally beneficial to consumers. While it is possible that vertical mergers or discrimination could sometimes cause harm, the onus is on the critics to demonstrate empirically where this occurs. No legitimate interpretation of the available literature would offer a basis for imposing a presumption against such behavior.

9. There Is No Such Thing as Data Network Effects

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

This is supported by significant empirical evidence. As was shown by the survey pf the empirical literature that Geoff Manne and I performed (published in the George Mason Law Review), data generally entails diminishing marginal returns:

Critics who argue that firms such as Amazon, Google, and Facebook are successful because of their superior access to data might, in fact, have the causality in reverse. Arguably, it is because these firms have come up with successful industry-defining paradigms that they have amassed so much data, and not the other way around. Indeed, Facebook managed to build a highly successful platform despite a large data disadvantage when compared to rivals like MySpace.

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

10.  Antitrust Enforcement Has Not Been Lax

The popular narrative has it that lax antitrust enforcement has led to substantially increased concentration, strangling the economy, harming workers, and expanding dominant firms’ profit margins at the expense of consumers. Much of the contemporary dissatisfaction with antitrust arises from a suspicion that overly lax enforcement of existing laws has led to record levels of concentration and a concomitant decline in competition. But both beliefs—lax enforcement and increased anticompetitive concentration—wither under more than cursory scrutiny.

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

The number of Sherman Act cases brought by the federal antitrust agencies, meanwhile, has been relatively stable in recent years, but several recent blockbuster cases have been brought by the agencies and private litigants, and there has been no shortage of federal and state investigations. The vast majority of Section 2 cases dismissed on the basis of the plaintiff’s failure to show anticompetitive effect were brought by private plaintiffs pursuing treble damages; given the incentives to bring weak cases, it cannot be inferred from such outcomes that antitrust law is ineffective. But, in any case, it is highly misleading to count the number of antitrust cases and, using that number alone, to make conclusions about how effective antitrust law is. Firms act in the shadow of the law, and deploy significant legal resources to make sure they avoid activity that would lead to enforcement actions. Thus, any given number of cases brought could be just as consistent with a well-functioning enforcement regime as with an ill-functioning one.

The upshot is that naïvely counting antitrust cases (or the purported lack thereof), with little regard for the behavior that is deterred or the merits of the cases that are dismissed does not tell us whether or not antitrust enforcement levels are optimal.

Further reading:

Law review articles

Issue briefs

Shorter pieces