Archives For antitrust populism

The Real Story about Amazon, Counterfeit Listings, and Minimum Advertised Price (MAP) Policies

Manne, Stout & Stapp —  13 September 2019

These days, lacking a coherent legal theory presents no challenge to the would-be antitrust crusader. In a previous post, we noted how Shaoul Sussman’s predatory pricing claims against Amazon lacked a serious legal foundation. Sussman has returned with a new post, trying to build out his fledgling theory, but fares little better under even casual scrutiny.

According to Sussman, Amazon’s allegedly anticompetitive 

conduct not only cemented its role as the primary destination for consumers that shop online but also helped it solidify its power over brands.

Further, the company 

was willing to go to great lengths to ensure brand availability and inventory, including turning to the grey market, recruiting unauthorized sellers, and even selling diverted goods and counterfeits to its customers.

Sussman is trying to make out a fairly convoluted predatory pricing case, but once again without ever truly connecting the dots in a way that develops a cognizable antitrust claim. According to Sussman: 

Amazon sold products as a first-party to consumers on its platform at below average variable cost and [] Amazon recently began to recoup its losses by shifting the bulk of the transactions that occur on the website to its marketplace, where millions of third-party sellers pay hefty fees that enable Amazon to take a deep cut of every transaction.

Sussman now bases this claim on an allegation that Amazon relied on  “grey market” sellers on its platform, the presence of which forces legitimate brands onto the Amazon Marketplace. Moreover, Sussman claims that — somehow — these brands coming on board on Amazon’s terms forces those brands raise prices elsewhere, and the net effect of this process at scale is that prices across the economy have risen. 

As we detail below, Sussman’s chimerical argument depends on conflating unrelated concepts and relies on non-public anecdotal accounts to piece together an argument that, even if you squint at it, doesn’t make out a viable theory of harm.

Conflating legal reselling and illegal counterfeit selling as the “grey market”

The biggest problem with Sussman’s new theory is that he conflates pro-consumer unauthorized reselling and anti-consumer illegal counterfeiting, erroneously labeling both the “grey market”: 

Amazon had an ace up its sleeve. My sources indicate that the company deliberately turned to and empowered the “grey market“ — where both genuine, authentic goods and knockoffs are purchased and resold outside of brands’ intended distribution pipes — to dominate certain brands.

By definition, grey market goods are — as the link provided by Sussman states — “goods sold outside the authorized distribution channels by entities which may have no relationship with the producer of the goods.” Yet Sussman suggests this also encompasses counterfeit goods. This conflation is no minor problem for his argument. In general, the grey market is legal and beneficial for consumers. Brands such as Nike may try to limit the distribution of their products to channels the company controls, but they cannot legally prevent third parties from purchasing Nike products and reselling them on Amazon (or anywhere else).

This legal activity can increase consumer choice and can lead to lower prices, even though Sussman’s framing omits these key possibilities:

In the course of my conversations with former Amazon employees, some reported that Amazon actively sought out and recruited unauthorized sellers as both third-party sellers and first-party suppliers. Being unauthorized, these sellers were not bound by the brands’ policies and therefore outside the scope of their supervision.

In other words, Amazon actively courted third-party sellers who could bring legitimate goods, priced competitively, onto its platform. Perhaps this gives Amazon “leverage” over brands that would otherwise like to control the activities of legal resellers, but it’s exceedingly strange to try to frame this as nefarious or anticompetitive behavior.

Of course, we shouldn’t ignore the fact that there are also potential consumer gains when Amazon tries to restrict grey market activity by partnering with brands. But it is up to Amazon and the brands to determine through a contracting process when it makes the most sense to partner and control the grey market, or when consumers are better served by allowing unauthorized resellers. The point is: there is simply no reason to assume that either of these approaches is inherently problematic. 

Yet, even when Amazon tries to restrict its platform to authorized resellers, it exposes itself to a whole different set of complaints. In 2018, the company made a deal with Apple to bring the iPhone maker onto its marketplace platform. In exchange for Apple selling its products directly on Amazon, the latter agreed to remove unauthorized Apple resellers from the platform. Sussman portrays this as a welcome development in line with the policy changes he recommends. 

But news reports last month indicate the FTC is reviewing this deal for potential antitrust violations. One is reminded of Ronald Coase’s famous lament that he “had gotten tired of antitrust because when the prices went up the judges said it was monopoly, when the prices went down they said it was predatory pricing, and when they stayed the same they said it was tacit collusion.” It seems the same is true for Amazon and its relationship with the grey market.

Amazon’s incentive to remove counterfeits

What is illegal — and explicitly against Amazon’s marketplace rules  — is selling counterfeit goods. Counterfeit goods destroy consumer trust in the Amazon ecosystem, which is why the company actively polices its listings for abuses. And as Sussman himself notes, when there is an illegal counterfeit listing, “Brands can then file a trademark infringement lawsuit against the unauthorized seller in order to force Amazon to suspend it.”

Sussman’s attempt to hang counterfeiting problems around Amazon’s neck belies the actual truth about counterfeiting: probably the most cost-effective way to stop counterfeiting is simply to prohibit all third-party sellers. Yet, a serious cost-benefit analysis of Amazon’s platforms could hardly support such an action (and would harm the small sellers that antitrust activists seem most concerned about).

But, more to the point, if Amazon’s strategy is to encourage piracy, it’s doing a terrible job. It engages in litigation against known pirates, and earlier this year it rolled out a suite of tools (called Project Zero) meant to help brand owners report and remove known counterfeits. As part of this program, according to Amazon, “brands provide key data points about themselves (e.g., trademarks, logos, etc.) and we scan over 5 billion daily listing update attempts, looking for suspected counterfeits.” And when a brand identifies a counterfeit listing, they can remove it using a self-service tool (without needing approval from Amazon). 

Any large platform that tries to make it easy for independent retailers to reach customers is going to run into a counterfeit problem eventually. In his rush to discover some theory of predatory pricing to stick on Amazon, Sussman ignores the tradeoffs implicit in running a large platform that essentially democratizes retail:

Indeed, the democratizing effect of online platforms (and of technology writ large) should not be underestimated. While many are quick to disparage Amazon’s effect on local communities, these arguments fail to recognize that by reducing the costs associated with physical distance between sellers and consumers, e-commerce enables even the smallest merchant on Main Street, and the entrepreneur in her garage, to compete in the global marketplace.

In short, Amazon Marketplace is designed to make it as easy as possible for anyone to sell their products to Amazon customers. As the WSJ reported: 

Counterfeiters, though, have been able to exploit Amazon’s drive to increase the site’s selection and offer lower prices. The company has made the process to list products on its website simple—sellers can register with little more than a business name, email and address, phone number, credit card, ID and bank account—but that also has allowed impostors to create ersatz versions of hot-selling items, according to small brands and seller consultants.

The existence of counterfeits is a direct result of policies designed to lower prices and increase consumer choice. Thus, we would expect some number of counterfeits to exist as a result of running a relatively open platform. The question is not whether counterfeits exist, but — at least in terms of Sussman’s attempt to use antitrust law — whether there is any reason to think that Amazon’s conduct with respect to counterfeits is actually anticompetitive. But, even if we assume for the moment that there is some plausible way to draw a competition claim out of the existence of counterfeit goods on the platform, his theory still falls apart. 

There is both theoretical and empirical evidence for why Amazon is likely not engaged in the conduct Sussman describes. As a platform owner involved in a repeated game with customers, sellers, and developers, Amazon has an incentive to increase trust within the ecosystem. Counterfeit goods directly destroy that trust and likely decrease sales in the long run. If individuals can’t depend on the quality of goods on Amazon, they can easily defect to Walmart, eBay, or any number of smaller independent sellers. That’s why Amazon enters into agreements with companies like Apple to ensure there are only legitimate products offered. That’s also why Amazon actively sues counterfeiters in partnership with its sellers and brands, and also why Project Zero is a priority for the company.

Sussman relies on private, anecdotal claims while engaging in speculation that is entirely unsupported by public data 

Much of Sussman’s evidence is “[b]ased on conversations [he] held with former employees, sellers, and brands following the publication of [his] paper”, which — to put it mildly — makes it difficult for anyone to take seriously, let alone address head on. Here’s one example:

One third-party seller, who asked to remain anonymous, was willing to turn over his books for inspection in order to illustrate the magnitude of the increase in consumer prices. Together, we analyzed a single product, of which tens of thousands of units have been sold since 2015. The minimum advertised price for this single product, at any and all outlets, has increased more than 30 percent in the past four years. Despite this fact, this seller’s margins on this product are tighter than ever due to Amazon’s fee increases.

Needless to say, sales data showing the minimum advertised price for a single product “has increased more than 30 percent in the past four years” is not sufficient to prove, well, anything. At minimum, showing an increase in prices above costs would require data from a large and representative sample of sellers. All we have to go on from the article is a vague anecdote representing — maybe — one data point.

Not only is Sussman’s own data impossible to evaluate, but he bases his allegations on speculation that is demonstrably false. For instance, he asserts that Amazon used its leverage over brands in a way that caused retail prices to rise throughout the economy. But his starting point assumption is flatly contradicted by reality: 

To remedy this, Amazon once again exploited brands’ MAP policies. As mentioned, MAP policies effectively dictate the minimum advertised price of a given product across the entire retail industry. Traditionally, this meant that the price of a typical product in a brick and mortar store would be lower than the price online, where consumers are charged an additional shipping fee at checkout.

Sussman presents no evidence for the claim that “the price of a typical product in a brick and mortar store would be lower than the price online.” The widespread phenomenon of showrooming — when a customer examines a product at a brick-and-mortar store but then buys it for a lower price online — belies the notion that prices are higher online. One recent study by Nielsen found that “nearly 75% of grocery shoppers have used a physical store to ‘showroom’ before purchasing online.”

In fact, the company’s downward pressure on prices is so large that researchers now speculate that Amazon and other internet retailers are partially responsible for the low and stagnant inflation in the US over the last decade (dubbing this the “Amazon effect”). It is also curious that Sussman cites shipping fees as the reason prices are higher online while ignoring all the overhead costs of running a brick-and-mortar store which online retailers don’t incur. The assumption that prices are lower in brick-and-mortar stores doesn’t pass the laugh test.

Conclusion

Sussman can keep trying to tell a predatory pricing story about Amazon, but the more convoluted his theories get — and the less based in empirical reality they are — the less convincing they become. There is a predatory pricing law on the books, but it’s hard to bring a case because, as it turns out, it’s actually really hard to profitably operate as a predatory pricer. Speculating over complicated new theories might be entertaining, but it would be dangerous and irresponsible if these sorts of poorly supported theories were incorporated into public policy.

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Why Don’t People Talk About Breaking Up Microsoft?

Alec Stapp —  8 August 2019

[This post is the seventh in an ongoing symposium on “Should We Break Up Big Tech?” that features analysis and opinion from various perspectives.]

[This post is authored by Alec Stapp, Research Fellow at the International Center for Law & Economics]

Should we break up Microsoft? 

In all the talk of breaking up “Big Tech,” no one seems to mention the biggest tech company of them all. Microsoft’s market cap is currently higher than those of Apple, Google, Amazon, and Facebook. If big is bad, then, at the moment, Microsoft is the worst.

Apart from size, antitrust activists also claim that the structure and behavior of the Big Four — Facebook, Google, Apple, and Amazon — is why they deserve to be broken up. But they never include Microsoft, which is curious given that most of their critiques also apply to the largest tech giant:

  1. Microsoft is big (current market cap exceeds $1 trillion)
  2. Microsoft is dominant in narrowly-defined markets (e.g., desktop operating systems)
  3. Microsoft is simultaneously operating and competing on a platform (i.e., the Microsoft Store)
  4. Microsoft is a conglomerate capable of leveraging dominance from one market into another (e.g., Windows, Office 365, Azure)
  5. Microsoft has its own “kill zone” for startups (196 acquisitions since 1994)
  6. Microsoft operates a search engine that preferences its own content over third-party content (i.e., Bing)
  7. Microsoft operates a platform that moderates user-generated content (i.e., LinkedIn)

To be clear, this is not to say that an antitrust case against Microsoft is as strong as the case against the others. Rather, it is to say that the cases against the Big Four on these dimensions are as weak as the case against Microsoft, as I will show below.

Big is bad

Tim Wu published a book last year arguing for more vigorous antitrust enforcement — including against Big Tech — called “The Curse of Bigness.” As you can tell by the title, he argues, in essence, for a return to the bygone era of “big is bad” presumptions. In his book, Wu mentions “Microsoft” 29 times, but only in the context of its 1990s antitrust case. On the other hand, Wu has explicitly called for antitrust investigations of Amazon, Facebook, and Google. It’s unclear why big should be considered bad when it comes to the latter group but not when it comes to Microsoft. Maybe bigness isn’t actually a curse, after all.

As the saying goes in antitrust, “Big is not bad; big behaving badly is bad.” This aphorism arose to counter erroneous reasoning during the era of structure-conduct-performance when big was presumed to mean bad. Thanks to an improved theoretical and empirical understanding of the nature of the competitive process, there is now a consensus that firms can grow large either via superior efficiency or by engaging in anticompetitive behavior. Size alone does not tell us how a firm grew big — so it is not a relevant metric.

Dominance in narrowly-defined markets

Critics of Google say it has a monopoly on search and critics of Facebook say it has a monopoly on social networking. Microsoft is similarly dominant in at least a few narrowly-defined markets, including desktop operating systems (Windows has a 78% market share globally): 

Source: StatCounter

Microsoft is also dominant in the “professional networking platform” market after its acquisition of LinkedIn in 2016. And the legacy tech giant is still the clear leader in the “paid productivity software” market. (Microsoft’s Office 365 revenue is roughly 10x Google’s G Suite revenue).

The problem here is obvious. These are overly-narrow market definitions for conducting an antitrust analysis. Is it true that Facebook’s platforms are the only service that can connect you with your friends? Should we really restrict the productivity market to “paid”-only options (as the EU similarly did in its Android decision) when there are so many free options available? These questions are laughable. Proper market definition requires considering whether a hypothetical monopolist could profitably impose a small but significant and non-transitory increase in price (SSNIP). If not (which is likely the case in the narrow markets above), then we should employ a broader market definition in each case.

Simultaneously operating and competing on a platform

Elizabeth Warren likes to say that if you own a platform, then you shouldn’t both be an umpire and have a team in the game. Let’s put aside the problems with that flawed analogy for now. What she means is that you shouldn’t both run the platform and sell products, services, or apps on that platform (because it’s inherently unfair to the other sellers). 

Warren’s solution to this “problem” would be to create a regulated class of businesses called “platform utilities” which are “companies with an annual global revenue of $25 billion or more and that offer to the public an online marketplace, an exchange, or a platform for connecting third parties.” Microsoft’s revenue last quarter was $32.5 billion, so it easily meets the first threshold. And Windows obviously qualifies as “a platform for connecting third parties.”

Just as in mobile operating systems, desktop operating systems are compatible with third-party applications. These third-party apps can be free (e.g., iTunes) or paid (e.g., Adobe Photoshop). Of course, Microsoft also makes apps for Windows (e.g., Word, PowerPoint, Excel, etc.). But the more you think about the technical details, the blurrier the line between the operating system and applications becomes. Is the browser an add-on to the OS or a part of it (as Microsoft Edge appears to be)? The most deeply-embedded applications in an OS are simply called “features.”

Even though Warren hasn’t explicitly mentioned that her plan would cover Microsoft, it almost certainly would. Previously, she left Apple out of the Medium post announcing her policy, only to later tell a journalist that the iPhone maker would also be prohibited from producing its own apps. But what Warren fails to include in her announcement that she would break up Apple is that trying to police the line between a first-party platform and third-party applications would be a nightmare for companies and regulators, likely leading to less innovation and higher prices for consumers (as they attempt to rebuild their previous bundles).

Leveraging dominance from one market into another

The core critique in Lina Khan’s “Amazon’s Antitrust Paradox” is that the very structure of Amazon itself is what leads to its anticompetitive behavior. Khan argues (in spite of the data) that Amazon uses profits in some lines of business to subsidize predatory pricing in other lines of businesses. Furthermore, she claims that Amazon uses data from its Amazon Web Services unit to spy on competitors and snuff them out before they become a threat.

Of course, this is similar to the theory of harm in Microsoft’s 1990s antitrust case, that the desktop giant was leveraging its monopoly from the operating system market into the browser market. Why don’t we hear the same concern today about Microsoft? Like both Amazon and Google, you could uncharitably describe Microsoft as extending its tentacles into as many sectors of the economy as possible. Here are some of the markets in which Microsoft competes (and note how the Big Four also compete in many of these same markets):

What these potential antitrust harms leave out are the clear consumer benefits from bundling and vertical integration. Microsoft’s relationships with customers in one market might make it the most efficient vendor in related — but separate — markets. It is unsurprising, for example, that Windows customers would also frequently be Office customers. Furthermore, the zero marginal cost nature of software makes it an ideal product for bundling, which redounds to the benefit of consumers.

The “kill zone” for startups

In a recent article for The New York Times, Tim Wu and Stuart A. Thompson criticize Facebook and Google for the number of acquisitions they have made. They point out that “Google has acquired at least 270 companies over nearly two decades” and “Facebook has acquired at least 92 companies since 2007”, arguing that allowing such a large number of acquisitions to occur is conclusive evidence of regulatory failure.

Microsoft has made 196 acquisitions since 1994, but they receive no mention in the NYT article (or in most of the discussion around supposed “kill zones”). But the acquisitions by Microsoft or Facebook or Google are, in general, not problematic. They provide a crucial channel for liquidity in the venture capital and startup communities (the other channel being IPOs). According to the latest data from Orrick and Crunchbase, between 2010 and 2018, there were 21,844 acquisitions of tech startups for a total deal value of $1.193 trillion. 

By comparison, according to data compiled by Jay R. Ritter, a professor at the University of Florida, there were 331 tech IPOs for a total market capitalization of $649.6 billion over the same period. Making it harder for a startup to be acquired would not result in more venture capital investment (and therefore not in more IPOs), according to recent research by Gordon M. Phillips and Alexei Zhdanov. The researchers show that “the passage of a pro-takeover law in a country is associated with more subsequent VC deals in that country, while the enactment of a business combination antitakeover law in the U.S. has a negative effect on subsequent VC investment.”

As investor and serial entrepreneur Leonard Speiser said recently, “If the DOJ starts going after tech companies for making acquisitions, venture investors will be much less likely to invest in new startups, thereby reducing competition in a far more harmful way.” 

Search engine bias

Google is often accused of biasing its search results to favor its own products and services. The argument goes that if we broke them up, a thousand search engines would bloom and competition among them would lead to less-biased search results. While it is a very difficult — if not impossible — empirical question to determine what a “neutral” search engine would return, one attempt by Josh Wright found that “own-content bias is actually an infrequent phenomenon, and Google references its own content more favorably than other search engines far less frequently than does Bing.” 

The report goes on to note that “Google references own content in its first results position when no other engine does in just 6.7% of queries; Bing does so over twice as often (14.3%).” Arguably, users of a particular search engine might be more interested in seeing content from that company because they have a preexisting relationship. But regardless of how we interpret these results, it’s clear this not a frequent phenomenon.

So why is Microsoft being left out of the antitrust debate now?

One potential reason why Google, Facebook, and Amazon have been singled out for criticism of practices that seem common in the tech industry (and are often pro-consumer) may be due to the prevailing business model in the journalism industry. Google and Facebook are by far the largest competitors in the digital advertising market, and Amazon is expected to be the third-largest player by next year, according to eMarketer. As Ramsi Woodcock pointed out, news publications are also competing for advertising dollars, the type of conflict of interest that usually would warrant disclosure if, say, a journalist held stock in a company they were covering.

Or perhaps Microsoft has successfully avoided receiving the same level of antitrust scrutiny as the Big Four because it is neither primarily consumer-facing like Apple or Amazon nor does it operate a platform with a significant amount of political speech via user-generated content (UGC) like Facebook or Google (YouTube). Yes, Microsoft moderates content on LinkedIn, but the public does not get outraged when deplatforming merely prevents someone from spamming their colleagues with requests “to add you to my professional network.”

Microsoft’s core areas are in the enterprise market, which allows it to sidestep the current debates about the supposed censorship of conservatives or unfair platform competition. To be clear, consumer-facing companies or platforms with user-generated content do not uniquely merit antitrust scrutiny. On the contrary, the benefits to consumers from these platforms are manifest. If this theory about why Microsoft has escaped scrutiny is correct, it means the public discussion thus far about Big Tech and antitrust has been driven by perception, not substance.


In Amazon, Antitrust & Competition, Apple, Economic Theory, European Union, Facebook, Google, International, International Center for Law & Economics, Justice Department, Market Definition, Platforms, Should We Break Up Big Tech? Symposium, Truth on the Market, Twitter , , , , , , , , , , , , , ,
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Should We Break Up Big Tech? A Look Behind the (Political) Scenes

Thibault Schrepel —  5 August 2019

[This post is the sixth in an ongoing symposium on “Should We Break Up Big Tech?” that features analysis and opinion from various perspectives.]

[This post is authored by Thibault Schrepel, Faculty Associate at the Berkman Center at Harvard University and Assistant Professor in European Economic Law at Utrecht University School of Law.]

The pretense of ignorance

Over the last few years, I have published a series of antitrust conversations with Nobel laureates in economics. I have discussed big tech dominance with most of them, and although they have different perspectives, all of them agreed on one thing: they do not know what the effect of breaking up big tech would be. In fact, I have never spoken with any economist who was able to show me convincing empirical evidence that breaking up big tech would on net be good for consumers. The same goes for political scientists; I have never read any article that, taking everything into consideration, proves empirically that breaking up tech companies would be good for protecting democracies, if that is the objective (please note that I am not even discussing the fact that using antitrust law to do that would violate the rule of law, for more on the subject, click here).

This reminds me of Friedrich Hayek’s Nobel memorial lecture, in which he discussed the “pretense of knowledge.” He argued that some issues will always remain too complex for humans (even helped by quantum computers and the most advanced AI; that’s right!). Breaking up big tech is one such issue; it is simply impossible simultaneously to consider the micro and macro-economic impacts of such an enormous undertaking, which would affect, literally, billions of people. Not to mention the political, sociological and legal issues, all of which combined are beyond human understanding.

Ignorance + fear = fame

In the absence of clear-cut conclusions, here is why (I think), some officials are arguing for breaking up big tech. First, it may be possible that some of them actually believe that it would be great. But I am sure we agree that beliefs should not be a valid basis for such actions. More realistically, the answer can be found in the work of another Nobel laureate, James Buchanan, and in particular his 1978 lecture in Vienna entitled “Politics Without Romance.”

In his lecture and the paper that emerged from it, Buchanan argued that while markets fail, so do governments. The latter is especially relevant insofar as top officials entrusted with public power may, occasionally at least, use that power to benefit their personal interests rather than the public interest. Thus, the presumption that government-imposed corrections for market failures always accomplish the desired objectives must be rejected. Taking that into consideration, it follows that the expected effectiveness of public action should always be established as precisely and scientifically as possible before taking action. Integrating these insights from Hayek and Buchanan, we must conclude that it is not possible to know whether the effects of breaking up big tech would on net be positive.

The question then is why, in the absence of positive empirical evidence, are some officials arguing for breaking up tech giants then? Well, because defending such actions may help them achieve their personal goals. Often, it is more important for public officials to show their muscle and take action, rather showing great care about reaching a positive net result for society. This is especially true when it is practically impossible to evaluate the outcome due to the scale and complexity of the changes that ensue. That enables these officials to take credit for being bold while avoiding blame for the harms.

But for such a call to be profitable for the public officials, they first must legitimize the potential action in the eyes of the majority of the public. Until now, most consumers evidently like the services of tech giants, which is why it is crucial for the top officials engaged in such a strategy to demonize those companies and further explain to consumers why they are wrong to enjoy them. Only then does defending the breakup of tech giants becomes politically valuable.

Some data, one trend

In a recent paper entitled “Antitrust Without Romance,” I have analyzed the speeches of the five current FTC commissioners, as well as the speeches of the current and three previous EU Competition Commissioners. What I found is an increasing trend to demonize big tech companies. In other words, public officials increasingly seek to prepare the general public for the idea that breaking up tech giants would be great.

In Europe, current Competition Commissioner Margrethe Vestager has sought to establish an opposition between the people (referred under the pronoun “us”) and tech companies (referred under the pronoun “them”) in more than 80% of her speeches. She further describes these companies as engaging in manipulation of the public and unleashing violence. She says they, “distort or fabricate information, manipulate people’s views and degrade public debate” and help “harmful, untrue information spread faster than ever, unleashing violence and undermining democracy.” Furthermore, she says they cause, “danger of death.” On this basis, she mentions the possibility of breaking them up (for more data about her speeches, see this link).

In the US, we did not observe a similar trend. Assistant Attorney General Makan Delrahim, who has responsibility for antitrust enforcement at the Department of Justice, describes the relationship between people and companies as being in opposition in fewer than 10% of his speeches. The same goes for most of the FTC commissioners (to see all the data about their speeches, see this link). The exceptions are FTC Chairman Joseph J. Simons, who describes companies’ behavior as “bad” from time to time (and underlines that consumers “deserve” better) and Commissioner Rohit Chopra, who describes the relationship between companies and the people as being in opposition to one another in 30% of his speeches. Chopra also frequently labels companies as “bad.” These are minor signs of big tech demonization compared to what is currently done by European officials. But, unfortunately, part of the US doctrine (which does not hide political objectives) pushes for demonizing big tech companies. One may have reason to fear that such a trend will grow in the US as it has in Europe, especially considering the upcoming presidential campaign in which far-right and far-left politicians seem to agree about the need to break up big tech.

And yet, let’s remember that no-one has any documented, tangible, and reproducible evidence that breaking up tech giants would be good for consumers, or societies at large, or, in fact, for anyone (even dolphins, okay). It might be a good idea; it might be a bad idea. Who knows? But the lack of evidence either way militates against taking such action. Meanwhile, there is strong evidence that these discussions are fueled by a handful of individuals wishing to benefit from such a call for action. They do so, first, by depicting tech giants as representing the new elite in opposition to the people and they then portray themselves as the only saviors capable of taking action.

Epilogue: who knows, life is not a Tarantino movie

For the last 30 years, antitrust law has been largely immune to strategic takeover by political interests. It may now be returning to a previous era in which it was the instrument of a few. This transformation is already happening in Europe (it is expected to hit case law there quite soon) and is getting real in the US, where groups display political goals and make antitrust law a Trojan horse for their personal interests.The only semblance of evidence they bring is a few allegedly harmful micro-practices (see Amazon’s Antitrust Paradox), which they use as a basis for defending the urgent need of macro, structural measures, such as breaking up tech companies. This is disproportionate, but most of all and in the absence of better knowledge, purely opportunistic and potentially foolish. Who knows at this point whether antitrust law will come out intact of this populist and moralist episode? And who knows what the next idea of those who want to use antitrust law for purely political purposes will be. Life is not a Tarantino movie; it may end up badly.

In Amazon, Antitrust & Competition, Platforms, Should We Break Up Big Tech? Symposium, Truth on the Market, Twitter , , , , , , , ,
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Big Tech and Antitrust

John Lopatka —  19 July 2019

[This post is the third in an ongoing symposium on “Should We Break Up Big Tech?” that will feature analysis and opinion from various perspectives.]

[This post is authored by John E. Lopatka, Robert Noll Distinguished Professor of Law, School of Law, The Pennsylvania State University]

Big Tech firms stand accused of many evils, and the clamor to break them up is loud.  Should we fetch our pitchforks? The antitrust laws are designed to address a range of wrongs and authorize a set of remedies, which include but do not emphasize divestiture.  When the harm caused by a Big Tech company is of a kind the antitrust laws are intended to prevent, an appropriate antitrust remedy can be devised. In such a case, it makes sense to use antitrust: If antitrust and its remedies are adequate to do the job fully, no legislative changes are required.  When the harm falls outside the ambit of antitrust and any other pertinent statute, a choice must be made. Antitrust can be expanded; other statutes can be amended or enacted; or any harms that are not perfectly addressed by existing statutory and common law can be left alone, for legal institutions are never perfect, and a disease can be less harmful than a cure.

A comprehensive list of the myriad and changing attacks on Big Tech firms would be difficult to compile.  Indeed, the identity of the offenders is not self-evident, though Google (Alphabet), Facebook, Amazon, and Apple have lately attracted the most attention.  The principal charges against Big Tech firms seem to be these: 1) compromising consumer privacy; 2) manipulating the news; 3) accumulating undue social and political influence; 4) stifling innovation by acquiring creative upstarts; 5) using market power in one market to injure competitors in adjacent markets; 6) exploiting input suppliers; 7) exploiting their own employees; and 8) damaging communities by location choices.

These charges are not uniform across the Big Tech targets.  Some charges have been directed more forcefully against some firms than others.  For instance, infringement of consumer privacy has been a focus of attacks on Facebook.  Both Facebook and Google have been accused of manipulating the news. And claims about the exploitation of input suppliers and employees and the destruction of communities have largely been directed at Amazon.

What is “Big Tech”?

Despite the variance among firms, the attacks against all of them proceed from the same syllogism: Some tech firms are big; big tech firms do social harm; therefore, big tech firms should be broken up.   From an antitrust perspective, something is missing. Start with the definition of a “tech” firm. In the modern economy, every firm relies on sophisticated technology – from an auto repair shop to an airplane manufacturer to a social media website operator.  Every firm is a tech firm. But critics have a more limited concept in mind. They are concerned about platforms, or intermediaries, in multi-sided markets. These markets exhibit indirect network effects. In a two-sided market, for instance, each side of the market benefits as the size of the other side grows.  Platforms provide value by coordinating the demand and supply of different groups of economic actors where the actors could not efficiently interact by themselves. In short, platforms reduce transaction costs. They have been around for centuries, but their importance has been magnified in recent years by rapid advances in technology.  Rational observers can sensibly ask whether platforms are peculiarly capable of causing harm. But critics tend to ignore or at least to discount the value that platforms provide, and doing so presents a distorted image that breeds bad policy.

Assuming we know what a tech firm is, what is “big”?  One could measure size by many standards. Most critics do not bother to define “big,” though at least Senator Elizabeth Warren has proposed defining one category of bigness as firms with annual global revenue of $25 billion or more and a second category as those with annual global revenue of between $90 million and $25 billion.  The proper standard for determining whether tech firms are objectionably large is not self-evident. Indeed, a size threshold embodied in any legal policy will almost always be somewhat arbitrary. That by itself is not a failing of a policy prescription. But why use a size screen at all? A few answers are possible. Large firms may do more harm than small firms when harm is proportionate to size.  Size may matter because government intervention is costly and less sensitive to firm size than is harm, implying that only harm caused by large firms is large enough to outweigh the costs of enforcement. And most important, the size of a firm may be related to the kind of harm the firm is accused of doing. Perhaps only a firm of a certain size can inflict a particular kind of injury. A clear standard of size and its justification ought to precede any policy prescription.

What’s the (antitrust) beef?

The social harms that Big Tech firms are accused of doing are a hodgepodge.  Some are familiar to antitrust scholars as either current or past objects of antitrust concern; others are not.  Antitrust protects against a certain kind of economic harm: The loss of economic welfare caused by a restriction on competition.  Though the terms are sometimes used in different ways, the core concept is reasonably clear and well accepted. In most cases, economic welfare is synonymous with consumer welfare.  Economic welfare, though, is a broader concept. For example, economic welfare is reduced when buyers exercise market power to the detriment of sellers and by productive inefficiencies.  But despite the claim of some Big Tech critics, when consumer welfare is at stake, it is not measured exclusively by the price consumers pay. Economists often explicitly refer to quality-adjusted prices and implicitly have the qualification in mind in any analysis of price.  Holding quality constant makes quantitative models easier to construct, but a loss of quality is a matter of conventional antitrust concern. The federal antitrust agencies’ horizontal merger guidelines recognize that “reduced product quality, reduced product variety, reduced service, [and] diminished innovation” are all cognizable adverse effects.  The scope of antitrust is not as constricted as some critics assert. Still, it has limits.

Leveraging market power is standard antitrust fare, though it is not nearly as prevalent as once thought.  Horizontal mergers that reduce economic welfare are an antitrust staple. The acquisition and use of monopsony power to the detriment of input suppliers is familiar antitrust ground.  If Big Tech firms have committed antitrust violations of this ilk, the offenses can be remedied under the antitrust laws.

Other complaints against the Big Tech firms do not fit comfortably or at all within the ambit of antitrust.  Antitrust does not concern itself with political or social influence. Influence is a function of size, but not relative to any antitrust market.  Firms that have more resources than other firms may have more influence, but the deployment of those resources across the economy is irrelevant. The use of antitrust to attack conglomerate mergers was an inglorious period in antitrust history.  Injuries to communities or to employees are not a proper antitrust concern when they result from increased efficiency. Acquisitions might stifle innovation, which is a proper antitrust concern, but they might spur innovation by inducing firms to create value and thereby become attractive acquisition targets or by facilitating integration.  Whether the consumer interest in informational privacy has much to do with competition is difficult to say. Privacy in this context means the collection and use of data. In a multi-sided market, one group of participants may value not only the size but also the composition and information about another group. Competition among platforms might or might not occur on the dimension of privacy.  For any platform, however, a reduction in the amount of valuable data it can collect from one side and provide to another side will reduce the price it can charge the second side, which can flow back and injure the first side. In all, antitrust falters when it is asked to do what it cannot do well, and whether other laws should be brought to bear depends on a cost/benefit calculus.

Does Big Tech’s conduct merit antitrust action?

When antitrust is used, it unquestionably requires a causal connection between conduct and harm.  Conduct must restrain competition, and the restraint must cause cognizable harm. Most of the attacks against Big Tech firms if pursued under the antitrust laws would proceed as monopolization claims.  A firm must have monopoly power in a relevant market; the firm must engage in anticompetitive conduct, typically conduct that excludes rivals without increasing efficiency; and the firm must have or retain its monopoly power because of the anticompetitive conduct.

Put aside the flaccid assumption that all the targeted Big Tech platforms have monopoly power in relevant markets.  Maybe they do, maybe they don’t, but an assumption is unwarranted. Focus instead on the conduct element of monopolization.  Most of the complaints about Big Tech firms concern their use of whatever power they have. Use isn’t enough. Each of the firms named above has achieved its prominence by extraordinary innovation, shrewd planning, and effective execution in an unforgiving business climate, one in which more platforms have failed than have succeeded.  This does not look like promising ground for antitrust.

Of course, even firms that generally compete lawfully can stray.  But to repeat, monopolists do not monopolize unless their unlawful conduct is causally connected to their market power.  The complaints against the Big Tech firms are notably weak on allegations of anticompetitive conduct that resulted in the acquisition or maintenance of their market positions.  Some critics have assailed Facebook’s acquisitions of WhatsApp and Instagram. Even assuming these firms competed with Facebook in well-defined antitrust markets, the claim that Facebook’s dominance in its core business was created or maintained by these acquisitions is a stretch.  

The difficulty fashioning remedies

The causal connection between conduct and monopoly power becomes particularly important when remedies are fashioned for monopolization.  Microsoft, the first major monopolization case against a high tech platform, is instructive.  DOJ in its complaint sought only conduct remedies for Microsoft’s alleged unlawful maintenance of a monopoly in personal computer operating systems.  The trial court found that Microsoft had illegally maintained its monopoly by squelching Netscape’s Navigator and Sun’s Java technologies, and by the end of trial DOJ sought and the court ordered structural relief in the form of “vertical” divestiture, separating Microsoft’s operating system business from its applications business.  Some commentators at the time argued for various kinds of “horizontal” divestiture, which would have created competing operating system platforms. The appellate court set aside the order, emphasizing that an antitrust remedy must bear a close causal connection to proven anticompetitive conduct. Structural remedies are drastic, and a plaintiff must meet a heightened standard of proof of causation to justify any kind of divestiture in a monopolization case.  On remand, DOJ abandoned its request for divestiture. The evidence that Microsoft maintained its market position by inhibiting the growth of middleware was sufficient to support liability, but not structural relief.

The court’s trepidation was well-founded.  Divestiture makes sense when monopoly power results from acquisitions, because the mergers expose joints at which the firm might be separated without rending fully integrated operations.  But imposing divestiture on a monopolist for engaging in single-firm exclusionary conduct threatens to destroy the integration that is the essence of any firm and is almost always disproportional to the offense.  Even if conduct remedies can be more costly to enforce than structural relief, the additional cost is usually less than the cost to the economy of forgone efficiency.   

The proposals to break up the Big Tech firms are ill-defined.  Based on what has been reported, no structural relief could be justified as antitrust relief.  Whatever conduct might have been unlawful was overwhelmingly unilateral. The few acquisitions that have occurred didn’t appreciably create or preserve monopoly power, and divestiture wouldn’t do much to correct the misbehavior critics see anyway.  Big Tech firms could be restructured through new legislation, but that would be a mistake. High tech platform markets typically yield dominant firms, though heterogeneous demand often creates space for competitors. Markets are better at achieving efficient structures than are government planners.  Legislative efforts at restructuring are likely to invite circumvention or lock in inefficiency.

Regulate “Big Tech” instead?

In truth, many critics are willing to put up with dominant tech platforms but want them regulated.  If we learned any lesson from the era of pervasive economic regulation of public utilities, it is that regulation is costly and often yields minimal benefits.  George Stigler and Claire Friedland demonstrated 57 years ago that electric utility regulation had little impact. The era of regulation was followed by an era of deregulation.  Yet the desire to regulate remains strong, and as Stigler and Friedland observed, “if wishes were horses, one would buy stock in a harness factory.” And just how would Big Tech platform regulators regulate?  Senator Warren offers a glimpse of the kind of regulation that critics might impose: “Platform utilities would be required to meet a standard of fair, reasonable, and nondiscriminatory dealing with users.” This kind of standard has some meaning in the context of a standard-setting organization dealing with patent holders.  What it would mean in the context of a social media platform, for example, is anyone’s guess. Would it prevent biasing of information for political purposes, and what government official should be entrusted with that determination? What is certain is that it would invite government intervention into markets that are working well, if not perfectly.  It would invite public officials to tradeoff economic welfare for a host of values embedded in the concept of fairness. Federal agencies charged with promoting the “public interest” have a difficult enough time reaching conclusions where competition is one of several specific values to be considered. Regulation designed to address all the evils high tech platforms are thought to perpetrate would make traditional economic or public-interest regulation look like child’s play.

Concluding remarks

Big Tech firms have generated immense value.  They may do real harm. From all that can now be gleaned, any harm has had little to do with antitrust, and it certainly doesn’t justify breaking them up.  Nor should they be broken up as an exercise in central economic planning. If abuses can be identified, such as undesirable invasions of privacy, focused legislation may be in order, but even then only if the government action is predictably less costly than the abuses.

In Amazon, Antitrust & Competition, Apple, Exclusionary Conduct, Facebook, Google, Intellectual Property, Justice Department, Merger Guidelines, Patent, Platforms, Should We Break Up Big Tech? Symposium , , ,
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Can Experts Structure Markets? Don’t Count On It.

Corbin K. Barthold —  28 May 2019

This guest post is by Corbin K. Barthold, Litigation Counsel at Washington Legal Foundation.

Complexity need not follow size. A star is huge but mostly homogenous. “It’s core is so hot,” explains Martin Rees, “that no chemicals can exist (complex molecules get torn apart); it is basically an amorphous gas of atomic nuclei and electrons.”

Nor does complexity always arise from remoteness of space or time. Celestial gyrations can be readily grasped. Thales of Miletus probably predicted a solar eclipse. Newton certainly could have done so. And we’re confident that in 4.5 billion years the Andromeda galaxy will collide with our own.

If the simple can be seen in the large and the distant, equally can the complex be found in the small and the immediate. A double pendulum is chaotic. Likewise the local weather, the fluctuations of a wildlife population, or the dispersion of the milk you pour into your coffee.

Our economy is not like a planetary orbit. It’s more like the weather or the milk. No one knows which companies will become dominant, which products will become popular, or which industries will become defunct. No one can see far ahead. Investing is inherently risky because the future of the economy, or even a single segment of it, is intractably uncertain. Do not hand your savings to any expert who says otherwise. Experts, in fact, often see the least of all.

But if a broker with a “sure thing” stock is a mountebank, what does that make an antitrust scholar with an “optimum structure” for a market? 

Not a prophet.

There is so much that we don’t know. Consider, for example, the notion that market concentration is a good measure of market competitiveness. The idea seems intuitive enough, and in many corners it remains an article of faith.

But the markets where this assumption is most plausible—hospital care and air travel come to mind—are heavily shaped by that grand monopolist we call government. Only a large institution can cope with the regulatory burden placed on the healthcare industry. As Tyler Cowen writes, “We get the level of hospital concentration that we have in essence chosen through politics and the law.”

As for air travel: the government promotes concentration by barring foreign airlines from the domestic market. In any case, the state of air travel does not support a straightforward conclusion that concentration equals power. The price of flying has fallen almost continuously since passage of the Airline Deregulation Act in 1978. The major airlines are disciplined by fringe carriers such as JetBlue and Southwest.

It is by no means clear that, aside from cases of government-imposed concentration, a consolidated market is something to fear. Technology lowers costs, lower costs enable scale, and scale tends to promote efficiency. Scale can arise naturally, therefore, from the process of creating better and cheaper products.

Say you’re a nineteenth-century cow farmer, and the railroad reaches you. Your shipping costs go down, and you start to sell to a wider market. As your farm grows, you start to spread your capital expenses over more sales. Your prices drop. Then refrigerated rail cars come along, you start slaughtering your cows on site, and your shipping costs go down again. Your prices drop further. Farms that fail to keep pace with your cost-cutting go bust. The cycle continues until beef is cheap and yours is one of the few cow farms in the area. The market improves as it consolidates.

As the decades pass, this story repeats itself on successively larger stages. The relentless march of technology has enabled the best companies to compete for regional, then national, and now global market share. We should not be surprised to see ever fewer firms offering ever better products and services.

Bear in mind, moreover, that it’s rarely the same company driving each leap forward. As Geoffrey Manne and Alec Stapp recently noted in this space, markets are not linear. Just after you adopt the next big advance in the logistics of beef production, drone delivery will disrupt your delivery network, cultured meat will displace your product, or virtual-reality flavoring will destroy your industry. Or—most likely of all—you’ll be ambushed by something you can’t imagine.

Does market concentration inhibit innovation? It’s possible. “To this day,” write Joshua Wright and Judge Douglas Ginsburg, “the complex relationship between static product market competition and the incentive to innovate is not well understood.” 

There’s that word again: complex. When will thumping company A in an antitrust lawsuit increase the net amount of innovation coming from companies A, B, C, and D? Antitrust officials have no clue. They’re as benighted as anyone. These are the people who will squash Blockbuster’s bid to purchase a rival video-rental shop less than two years before Netflix launches a streaming service.

And it’s not as if our most innovative companies are using market concentration as an excuse to relax. If its only concern were maintaining Google’s grip on the market for internet-search advertising, Alphabet would not have spent $16 billion on research and development last year. It spent that much because its long-term survival depends on building the next big market—the one that does not exist yet.

No expert can reliably make the predictions necessary to say when or how a market should look different. And if we empowered some experts to make such predictions anyway, no other experts would be any good at predicting what the empowered experts would predict. Experts trying to give us “well structured” markets will instead give us a costly, politicized, and stochastic antitrust enforcement process. 

Here’s a modest proposal. Instead of using the antitrust laws to address the curse of bigness, let’s create the Office of the Double Pendulum. We can place the whole section in a single room at the Justice Department. 

All we’ll need is some ping-pong balls, a double pendulum, and a monkey. On each ball will be the name of a major corporation. Once a quarter—or a month; reasonable minds can differ—a ball will be drawn, and the monkey prodded into throwing the pendulum. An even number of twirls saves the company on the ball. An odd number dooms it to being broken up.

This system will punish success just as haphazardly as anything our brightest neo-Brandeisian scholars can devise, while avoiding the ruinously expensive lobbying, rent-seeking, and litigation that arise when scholars succeed in replacing the rule of law with the rule of experts.

All hail the chaos monkey. Unutterably complex. Ineffably simple.

In Amazon, Antitrust & Competition, Google, Platforms, Truth on the Market , , ,
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Is Amazon Guilty of Predatory Pricing?

Kristian Stout & Alec Stapp —  7 May 2019

In 2014, Benedict Evans, a venture capitalist at Andreessen Horowitz, wrote “Why Amazon Has No Profits (And Why It Works),” a blog post in which he tried to explain Amazon’s business model. He began with a chart of Amazon’s revenue and net income that has now become (in)famous:

Source: Benedict Evans

A question inevitably followed in antitrust circles: How can a company that makes so little profit on so much revenue be worth so much money? It must be predatory pricing!

Predatory pricing is a rather rare anticompetitive practice because the “predator” runs the risk of bankrupting itself in the process of trying to drive rivals out of business with below-cost pricing. Furthermore, even if a predator successfully clears the field of competition, in developed markets with deep capital markets, keeping out new entrants is extremely unlikely.

Nonetheless, in those rare cases where plaintiffs can demonstrate that a firm actually has a viable scheme to drive competitors from the market with prices that are “too low” and has the ability to recoup its losses once it has cleared the market of those competitors, plaintiffs (including the DOJ) can prevail in court.

In other words, whoa if true.

Khan’s Predatory Pricing Accusation

In 2017, Lina Khan, then a law student at Yale, published “Amazon’s Antitrust Paradox” in a note for the Yale Law Journal and used Evans’ chart as supporting evidence that Amazon was guilty of predatory pricing. In the abstract she says, “Although Amazon has clocked staggering growth, it generates meager profits, choosing to price below-cost and expand widely instead.”

But if Amazon is selling below-cost, where does the money come from to finance those losses?

In her article, Khan hinted at two potential explanations: (1) Amazon is using profits from the cloud computing division (AWS) to cross-subsidize losses in the retail division or (2) Amazon is using money from investors to subsidize short-term losses:

Recently, Amazon has started reporting consistent profits, largely due to the success of Amazon Web Services, its cloud computing business. Its North America retail business runs on much thinner margins, and its international retail business still runs at a loss. But for the vast majority of its twenty years in business, losses—not profits—were the norm. Through 2013, Amazon had generated a positive net income in just over half of its financial reporting quarters. Even in quarters in which it did enter the black, its margins were razor-thin, despite astounding growth.

…

Just as striking as Amazon’s lack of interest in generating profit has been investors’ willingness to back the company. With the exception of a few quarters in 2014, Amazon’s shareholders have poured money in despite the company’s penchant for losses.

…

Revising predatory pricing doctrine to reflect the economics of platform markets, where firms can sink money for years given unlimited investor backing, would require abandoning the recoupment requirement in cases of below-cost pricing by dominant platforms.

Below-Cost Pricing Not Subsidized by Investors

But neither explanation withstands scrutiny. First, the money is not from investors. Amazon has not raised equity financing since 2003. Nor is it debt financing: The company’s net debt position has been near-zero or negative for its entire history (excluding the Whole Foods acquisition):

Source: Benedict Evans

Amazon does not require new outside financing because it has had positive operating cash flow since 2002:

Notably for a piece of analysis attempting to explain Amazon’s business practices, the text of Khan’s 93-page law review article does not include the word “cash” even once.

Below-Cost Pricing Not Cross-Subsidized by AWS

Source: The Information

As Priya Anand observed in a recent piece for The Information, since Amazon started breaking out AWS in its financials, operating income for the North America retail business has been significantly positive:

But [Khan] underplays its retail profits in the U.S., where the antitrust debate is focused. As the above chart shows, its North America operation has been profitable for years, and its operating income has been on the rise in recent quarters. While its North America retail operation has thinner margins than AWS, it still generated $2.84 billion in operating income last year, which isn’t exactly a rounding error compared to its $4.33 billion in AWS operating income.

Below-Cost Pricing in Retail Also Known as “Loss Leader” Pricing

Okay, so maybe Amazon isn’t using below-cost pricing in aggregate in its retail division. But it still could be using profits from some retail products to cross-subsidize below-cost pricing for other retail products (e.g., diapers), with the intention of driving competitors out of business to capture monopoly profits. This is essentially what Khan claims happened in the Diapers.com (Quidsi) case. But in the retail industry, diapers are explicitly cited as a loss leader that help retailers to develop a customer relationship with mothers in the hopes of selling them a higher volume of products over time. This is exactly what the founders of Diapers.com told Inc Magazine in a 2012 interview (emphasis added):

We saw brick-and-mortar stores, the Wal-Marts and Targets of the world, using these products to build relationships with mom and the end consumer, bringing them into the store and selling them everything else. So we thought that was an interesting model and maybe we could replicate that online. And so we started with selling the loss leader product to basically build a relationship with mom. And once they had the passion for the brand and they were shopping with us on a weekly or a monthly basis that they’d start to fall in love with that brand. We were losing money on every box of diapers that we sold. We weren’t able to buy direct from the manufacturers.

An anticompetitive scheme could be built into such bundling, but in many if not the overwhelming majority of these cases, consumers are the beneficiaries of lower prices and expanded output produced by these arrangements. It’s hard to definitively say whether any given firm that discounts its products is actually pricing below average variable cost (“AVC”) without far more granular accounting ledgers than are typically  maintained. This is part of the reason why these cases can be so hard to prove.

A successful predatory pricing strategy also requires blocking market entry when the predator eventually raises prices. But the Diapers.com case is an explicit example of repeated entry that would defeat recoupment. In an article for the American Enterprise Institute, Jeffrey Eisenach shares the rest of the story following Amazon’s acquisition of Diapers.com:

Amazon’s conduct did not result in a diaper-retailing monopoly. Far from it. According to Khan, Amazon had about 43 percent of online sales in 2016 — compared with Walmart at 23 percent and Target with 18 percent — and since many people still buy diapers at the grocery store, real shares are far lower.

…

In the end, Quidsi proved to be a bad investment for Amazon: After spending $545 million to buy the firm and operating it as a stand-alone business for more than six years, it announced in April 2017 it was shutting down all of Quidsi’s operations, Diapers.com included. In the meantime, Quidsi’s founders poured the proceeds of the Amazon sale into a new online retailer — Jet.com — which was purchased by Walmart in 2016 for $3.3 billion. Jet.com cofounder Marc Lore now runs Walmart’s e-commerce operations and has said publicly that his goal is to surpass Amazon as the top online retailer.

Sussman’s Predatory Pricing Accusation

Earlier this year, Shaoul Sussman, a law student at Fordham University, published “Prime Predator: Amazon and the Rationale of Below Average Variable Cost Pricing Strategies Among Negative-Cash Flow Firms” in the Journal of Antitrust Enforcement. The article, which was written up by David Dayen for In These Times, presents a novel two-part argument for how Amazon might be profitably engaging in predatory pricing without raising prices:

  1. Amazon’s “True” Cash Flow Is Negative

Sussman argues that the company has been inflating its free cash flow numbers by excluding “capital leases.” According to Sussman, “If all of those expenses as detailed in its statements are accounted for, Amazon experienced a negative cash outflow of $1.461 billion in 2017.” Even though it’s not dispositive of predatory pricing on its own, Sussman believes that a negative free cash flow implies the company has been selling below-cost to gain market share.

2. Amazon Recoups Losses By Lowering AVC, Not By Raising Prices

Instead of raising prices to recoup losses from pricing below-cost, Sussman argues that Amazon flies under the antitrust radar by keeping consumer prices low and progressively decreasing AVC, ostensibly through using its monopsony power to offload costs on suppliers and partners (although this point is not fully explored in his piece).

But Sussman’s argument contains errors in both legal reasoning as well as its underlying empirical assumptions.

Below-cost pricing?

While there are many different ways to calculate the “cost” of a product or service, generally speaking, “below-cost pricing” means the price is less than marginal cost or AVC. Typically, courts tend to rely on AVC when dealing with predatory pricing cases. And as Herbert Hovenkamp has noted, proving that a price falls below the AVC is exceedingly difficult, particularly when dealing with firms in dynamic markets that sell a number of differentiated but complementary goods or services. Amazon, the focus of Sussman’s article, is a useful example here.

When products are complements, or can otherwise be bundled, firms may also be able to offer discounts that are unprofitable when selling single items. In business this is known as the “razor and blades model” (i.e., sell the razor handle below-cost one time and recoup losses on future sales of blades — although it’s not clear if this ever actually happens). Printer manufacturers are also an oft-cited example here, where printers are often sold below AVC in the expectation that the profits will be realized on the ongoing sale of ink. Amazon’s Kindle functions similarly: Amazon sells the Kindle around its AVC, ostensibly on the belief that it will realize a profit on selling e-books in the Kindle store.

Yet, even ignoring this common and broadly inoffensive practice, Sussman’s argument is odd. In essence, he claims that Amazon is concealing some of its costs in the form of capital leases in an effort to conceal its below-AVC pricing while it works to simultaneously lower its real AVC below the prices it charges consumers. At the end of this process, once its real AVC is actually sufficiently below consumers prices, it will (so the argument goes) be in the position of a monopolist reaping monopoly profits.

The problem with this argument should be immediately apparent. For the moment, let’s ignore the classic recoupment problem where new entrants will be drawn into the market to win some of those monopoly prices based on the new AVC that is possible. The real problem with his logic is that Sussman basically suggests that if Amazon sharply lowers AVC — that is it makes production massively more efficient — and then does not drop prices, they are a “predator.” But by pricing below its AVC in the first place, consumers in essence were given a loan by Amazon — they were able to enjoy what Sussman believes are radically low prices while Amazon works to actually make those prices possible through creating production efficiencies. It seems rather strange to punish a firm for loaning consumers a large measure of wealth. Its doubly odd when you then re-factor the recoupment problem back in: as soon as other firms figure out that a lower AVC is possible, they will enter the market and bid away any monopoly profits from Amazon.

Sussman’s Technical Analysis Is Flawed

While there are issues with Sussman’s general theory of harm, there are also some specific problems with his technical analysis of Amazon’s financial statements.

Capital Leases Are a Fixed Cost

First, capital leases should be not be included in cost calculations for a predatory pricing case because they are fixed — not variable — costs. Again, “below-cost” claims in predatory pricing cases generally use AVC (and sometimes marginal cost) as relevant cost measures.

Capital Leases Are Mostly for Server Farms

Second, the usual story is that Amazon uses its wildly-profitable Amazon Web Services (AWS) division to subsidize predatory pricing in its retail division. But Amazon’s “capital leases” — Sussman’s hidden costs in the free cash flow calculations — are mostly for AWS capital expenditures (i.e., server farms).

According to the most recent annual report: “Property and equipment acquired under capital leases was $5.7 billion, $9.6 billion, and $10.6 billion in 2016, 2017, and 2018, with the increase reflecting investments in support of continued business growth primarily due to investments in technology infrastructure for AWS, which investments we expect to continue over time.”

In other words, any adjustments to the free cash flow numbers for capital leases would make Amazon Web Services appear less profitable, and would not have a large effect on the accounting for Amazon’s retail operation (the only division thus far accused of predatory pricing).

Look at Operating Cash Flow Instead of Free Cash Flow

Again, while cash flow measures cannot prove or disprove the existence of predatory pricing, a positive cash flow measure should make us more skeptical of such accusations. In the retail sector, operating cash flow is the appropriate metric to consider. As shown above, Amazon has had positive (and increasing) operating cash flow since 2002.

Your Theory of Harm Is Also Known as “Investment”

Third, in general, Sussman’s novel predatory pricing theory is indistinguishable from pro-competitive behavior in an industry with high fixed costs. From the abstract (emphasis added):

[N]egative cash flow firm[s] … can achieve greater market share through predatory pricing strategies that involve long-term below average variable cost prices … By charging prices in the present reflecting future lower costs based on prospective technological and scale efficiencies, these firms are able to rationalize their predatory pricing practices to investors and shareholders.

“’Charging prices in the present reflecting future lower costs based on prospective technological and scale efficiencies” is literally what it means to invest in capex and R&D.

Sussman’s paper presents a clever attempt to work around the doctrinal limitations on predatory pricing. But, if courts seriously adopt an approach like this, they will be putting in place a legal apparatus that quite explicitly focuses on discouraging investment. This is one of the last things we should want antitrust law to be doing.

In Amazon, Antitrust & Competition, Google, Justice Department, Platforms, Telecommunications, Truth on the Market, Twitter, Wireless , , , , , ,
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Amazon is not essential

Kristian Stout —  2 April 2019

(The following is adapted from a recent ICLE Issue Brief on the flawed essential facilities arguments undergirding the EU competition investigations into Amazon’s marketplace that I wrote with Geoffrey Manne.  The full brief is available here. )

Amazon has largely avoided the crosshairs of antitrust enforcers to date. The reasons seem obvious: in the US it handles a mere 5% of all retail sales (with lower shares worldwide), and it consistently provides access to a wide array of affordable goods. Yet, even with Amazon’s obvious lack of dominance in the general retail market, the EU and some of its member states are opening investigations.

Commissioner Margarethe Vestager’s probe into Amazon, which came to light in September, centers on whether Amazon is illegally using its dominant position vis-á-vis third party merchants on its platforms in order to obtain data that it then uses either to promote its own direct sales, or else to develop competing products under its private label brands. More recently, Austria and Germany have launched separate investigations of Amazon rooted in many of the same concerns as those of the European Commission. The German investigation also focuses on whether the contractual relationships that third party sellers enter into with Amazon are unfair because these sellers are “dependent” on the platform.

One of the fundamental, erroneous assumptions upon which these cases are built is the alleged “essentiality” of the underlying platform or input. In truth, these sorts of cases are more often based on stories of firms that chose to build their businesses in a way that relies on a specific platform. In other words, their own decisions — from which they substantially benefited, of course — made their investments highly “asset specific” and thus vulnerable to otherwise avoidable risks. When a platform on which these businesses rely makes a disruptive move, the third parties cry foul, even though the platform was not — nor should have been — under any obligation to preserve the status quo on behalf of third parties.

Essential or not, that is the question

All three investigations are effectively premised on a version of an “essential facilities” theory — the claim that Amazon is essential to these companies’ ability to do business.

There are good reasons that the US has tightly circumscribed the scope of permissible claims invoking the essential facilities doctrine. Such “duty to deal” claims are “at or near the outer boundary” of US antitrust law. And there are good reasons why the EU and its member states should be similarly skeptical.

Characterizing one firm as essential to the operation of other firms is tricky because “[c]ompelling [innovative] firms to share the source of their advantage… may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities.” Further, the classification requires “courts to act as central planners, identifying the proper price, quantity, and other terms of dealing—a role for which they are ill-suited.”

The key difficulty is that alleged “essentiality” actually falls on a spectrum. On one end is something like a true monopoly utility that is actually essential to all firms that use its service as a necessary input; on the other is a firm that offers highly convenient services that make it much easier for firms to operate. This latter definition of “essentiality” describes firms like Google and Amazon, but it is not accurate to characterize such highly efficient and effective firms as truly “essential.” Instead, companies that choose to take advantage of the benefits such platforms offer, and to tailor their business models around them, suffer from an asset specificity problem.

Geoffrey Manne noted this problem in the context of the EU’s Google Shopping case:

A content provider that makes itself dependent upon another company for distribution (or vice versa, of course) takes a significant risk. Although it may benefit from greater access to users, it places itself at the mercy of the other — or at least faces great difficulty (and great cost) adapting to unanticipated, crucial changes in distribution over which it has no control.

Third-party sellers that rely upon Amazon without a contingency plan are engaging in a calculated risk that, as business owners, they would typically be expected to manage.  The investigations by European authorities are based on the notion that antitrust law might require Amazon to remove that risk by prohibiting it from undertaking certain conduct that might raise costs for its third-party sellers.

Implications and extensions

In the full issue brief, we consider the tensions in EU law between seeking to promote innovation and protect the competitive process, on the one hand, and the propensity of EU enforcers to rely on essential facilities-style arguments on the other. One of the fundamental errors that leads EU enforcers in this direction is that they confuse the distribution channel of the Internet with an antitrust-relevant market definition.

A claim based on some flavor of Amazon-as-essential-facility should be untenable given today’s market realities because Amazon is, in fact, just one mode of distribution among many. Commerce on the Internet is still just commerce. The only thing preventing a merchant from operating a viable business using any of a number of different mechanisms is the transaction costs it would incur adjusting to a different mode of doing business. Casting Amazon’s marketplace as an essential facility insulates third-party firms from the consequences of their own decisions — from business model selection to marketing and distribution choices. Commerce is nothing new and offline distribution channels and retail outlets — which compete perfectly capably with online — are well developed. Granting retailers access to Amazon’s platform on artificially favorable terms is no more justifiable than granting them access to a supermarket end cap, or a particular unit at a shopping mall. There is, in other words, no business or economic justification for granting retailers in the time-tested and massive retail market an entitlement to use a particular mode of marketing and distribution just because they find it more convenient.

In Amazon, Antitrust & Competition, European Union, Google, International, Market Definition, Platforms, Truth on the Market , , , , ,
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This Too Shall Pass: Unassailable Monopolies That Were, in Hindsight, Eminently Assailable

Geoffrey Manne & Alec Stapp —  1 April 2019
Source: Benedict Evans

[N]ew combinations are, as a rule, embodied, as it were, in new firms which generally do not arise out of the old ones but start producing beside them; … in general it is not the owner of stagecoaches who builds railways. – Joseph Schumpeter, January 1934

Elizabeth Warren wants to break up the tech giants — Facebook, Google, Amazon, and Apple — claiming they have too much power and represent a danger to our democracy. As part of our response to her proposal, we shared a couple of headlines from 2007 claiming that MySpace had an unassailable monopoly in the social media market.

Tommaso Valletti, the chief economist of the Directorate-General for Competition (DG COMP) of the European Commission, said, in what we assume was a reference to our posts, “they go on and on with that single example to claim that [Facebook] and [Google] are not a problem 15 years later … That’s not what I would call an empirical regularity.”

We appreciate the invitation to show that prematurely dubbing companies “unassailable monopolies” is indeed an empirical regularity.

It’s Tough to Make Predictions, Especially About the Future of Competition in Tech

No one is immune to this phenomenon. Antitrust regulators often take a static view of competition, failing to anticipate dynamic technological forces that will upend market structure and competition.

Scientists and academics make a different kind of error. They are driven by the need to satisfy their curiosity rather than shareholders. Upon inventing a new technology or discovering a new scientific truth, academics often fail to see the commercial implications of their findings.

Maybe the titans of industry don’t make these kinds of mistakes because they have skin in the game? The profit and loss statement is certainly a merciless master. But it does not give CEOs the power of premonition. Corporate executives hailed as visionaries in one era often become blinded by their success, failing to see impending threats to their company’s core value propositions.

Furthermore, it’s often hard as outside observers to tell after the fact whether business leaders just didn’t see a tidal wave of disruption coming or, worse, they did see it coming and were unable to steer their bureaucratic, slow-moving ships to safety. Either way, the outcome is the same.

Here’s the pattern we observe over and over: extreme success in one context makes it difficult to predict how and when the next paradigm shift will occur in the market. Incumbents become less innovative as they get lulled into stagnation by high profit margins in established lines of business. (This is essentially the thesis of Clay Christensen’s The Innovator’s Dilemma).

Even if the anti-tech populists are powerless to make predictions, history does offer us some guidance about the future. We have seen time and again that apparently unassailable monopolists are quite effectively assailed by technological forces beyond their control.

PCs

Source: Horace Dediu

Jan 1977: Commodore PET released

Jun 1977: Apple II released

Aug 1977: TRS-80 released

Feb 1978: “I.B.M. Says F.T.C. Has Ended Its Typewriter Monopoly Study” (NYT)

Mobile

Source: Comscore

Mar 2000: Palm Pilot IPO’s at $53 billion

Sep 2006: “Everyone’s always asking me when Apple will come out with a cellphone. My answer is, ‘Probably never.’” – David Pogue (NYT)

Apr 2007: “There’s no chance that the iPhone is going to get any significant market share.” Ballmer (USA TODAY)

Jun 2007: iPhone released

Nov 2007: “Nokia: One Billion Customers—Can Anyone Catch the Cell Phone King?” (Forbes)

Sep 2013: “Microsoft CEO Ballmer Bids Emotional Farewell to Wall Street” (Reuters)

If there’s one thing I regret, there was a period in the early 2000s when we were so focused on what we had to do around Windows that we weren’t able to redeploy talent to the new device form factor called the phone.

Search

Source: Distilled

Mar 1998: “How Yahoo! Won the Search Wars” (Fortune)

Once upon a time, Yahoo! was an Internet search site with mediocre technology. Now it has a market cap of $2.8 billion. Some people say it’s the next America Online.

Sep 1998: Google founded

Instant Messaging

Sep 2000: “AOL Quietly Linking AIM, ICQ” (ZDNet)

AOL’s dominance of instant messaging technology, the kind of real-time e-mail that also lets users know when others are online, has emerged as a major concern of regulators scrutinizing the company’s planned merger with Time Warner Inc. (twx). Competitors to Instant Messenger, such as Microsoft Corp. (msft) and Yahoo! Inc. (yhoo), have been pressing the Federal Communications Commission to force AOL to make its services compatible with competitors’.

Dec 2000: “AOL’s Instant Messaging Monopoly?” (Wired)

Dec 2015: Report for the European Parliament

There have been isolated examples, as in the case of obligations of the merged AOL / Time Warner to make AOL Instant Messenger interoperable with competing messaging services. These obligations on AOL are widely viewed as having been a dismal failure.

Oct 2017: AOL shuts down AIM

Jan 2019: “Zuckerberg Plans to Integrate WhatsApp, Instagram and Facebook Messenger” (NYT)

Retail

Source: Seeking Alpha

May 1997: Amazon IPO

Mar 1998: American Booksellers Association files antitrust suit against Borders, B&N

Feb 2005: Amazon Prime launches

Jul 2006: “Breaking the Chain: The Antitrust Case Against Wal-Mart” (Harper’s)

Feb 2011: “Borders Files for Bankruptcy” (NYT)

Social

Feb 2004: Facebook founded

Jan 2007: “MySpace Is a Natural Monopoly” (TechNewsWorld)

Seventy percent of Yahoo 360 users, for example, also use other social networking sites — MySpace in particular. Ditto for Facebook, Windows Live Spaces and Friendster … This presents an obvious, long-term business challenge to the competitors. If they cannot build up a large base of unique users, they will always be on MySpace’s periphery.

Feb 2007: “Will Myspace Ever Lose Its Monopoly?” (Guardian)

Jun 2011: “Myspace Sold for $35m in Spectacular Fall from $12bn Heyday” (Guardian)

Music

Source: RIAA

Dec 2003: “The subscription model of buying music is bankrupt. I think you could make available the Second Coming in a subscription model, and it might not be successful.” – Steve Jobs (Rolling Stone)

Apr 2006: Spotify founded

Jul 2009: “Apple’s iPhone and iPod Monopolies Must Go” (PC World)

Jun 2015: Apple Music announced

Video

Source: OnlineMBAPrograms

Apr 2003: Netflix reaches one million subscribers for its DVD-by-mail service

Mar 2005: FTC blocks Blockbuster/Hollywood Video merger

Sep 2006: Amazon launches Prime Video

Jan 2007: Netflix streaming launches

Oct 2007: Hulu launches

May 2010: Hollywood Video’s parent company files for bankruptcy

Sep 2010: Blockbuster files for bankruptcy

The Only Winning Move Is Not to Play

Predicting the future of competition in the tech industry is such a fraught endeavor that even articles about how hard it is to make predictions include incorrect predictions. The authors just cannot help themselves. A March 2012 BBC article “The Future of Technology… Who Knows?” derided the naysayers who predicted doom for Apple’s retail store strategy. Its kicker?

And that is why when you read that the Blackberry is doomed, or that Microsoft will never make an impression on mobile phones, or that Apple will soon dominate the connected TV market, you need to take it all with a pinch of salt.

But Blackberry was doomed and Microsoft never made an impression on mobile phones. (Half credit for Apple TV, which currently has a 15% market share).

Nobel Prize-winning economist Paul Krugman wrote a piece for Red Herring magazine (seriously) in June 1998 with the title “Why most economists’ predictions are wrong.” Headline-be-damned, near the end of the article he made the following prediction:

The growth of the Internet will slow drastically, as the flaw in “Metcalfe’s law”—which states that the number of potential connections in a network is proportional to the square of the number of participants—becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.

Robert Metcalfe himself predicted in a 1995 column that the Internet would “go spectacularly supernova and in 1996 catastrophically collapse.” After pledging to “eat his words” if the prediction did not come true, “in front of an audience, he put that particular column into a blender, poured in some water, and proceeded to eat the resulting frappe with a spoon.”

A Change Is Gonna Come

Benedict Evans, a venture capitalist at Andreessen Horowitz, has the best summary of why competition in tech is especially difficult to predict:

IBM, Microsoft and Nokia were not beaten by companies doing what they did, but better. They were beaten by companies that moved the playing field and made their core competitive assets irrelevant. The same will apply to Facebook (and Google, Amazon and Apple).

Elsewhere, Evans tried to reassure his audience that we will not be stuck with the current crop of tech giants forever:

With each cycle in tech, companies find ways to build a moat and make a monopoly. Then people look at the moat and think it’s invulnerable. They’re generally right. IBM still dominates mainframes and Microsoft still dominates PC operating systems and productivity software. But… It’s not that someone works out how to cross the moat. It’s that the castle becomes irrelevant. IBM didn’t lose mainframes and Microsoft didn’t lose PC operating systems. Instead, those stopped being ways to dominate tech. PCs made IBM just another big tech company. Mobile and the web made Microsoft just another big tech company. This will happen to Google or Amazon as well. Unless you think tech progress is over and there’ll be no more cycles … It is deeply counter-intuitive to say ‘something we cannot predict is certain to happen’. But this is nonetheless what’s happened to overturn pretty much every tech monopoly so far.

If this time is different — or if there are more false negatives than false positives in the monopoly prediction game — then the advocates for breaking up Big Tech should try to make that argument instead of falling back on “big is bad” rhetoric. As for us, we’ll bet that we have not yet reached the end of history — tech progress is far from over.

 

In Amazon, Antitrust & Competition, Antitrust Division, Apple, Corporate & Securities Law, European Union, Facebook, Federal Communications Commission, Federal Trade Commission, Google, International, Monopolization, Platforms, Telecommunications, Truth on the Market, Twitter , , , , , , , , , , , , , , , , , , , ,
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Elizabeth Warren wants to turn the internet into a literal sewer (service)

Geoffrey Manne & Alec Stapp —  9 March 2019

Near the end of her new proposal to break up Facebook, Google, Amazon, and Apple, Senator Warren asks, “So what would the Internet look like after all these reforms?”

It’s a good question, because, as she herself notes, “Twenty-five years ago, Facebook, Google, and Amazon didn’t exist. Now they are among the most valuable and well-known companies in the world.”

To Warren, our most dynamic and innovative companies constitute a problem that needs solving.

She described the details of that solution in a blog post:

First, [my administration would restore competition to the tech sector] by passing legislation that requires large tech platforms to be designated as “Platform Utilities” and broken apart from any participant on that platform.

* * *

For smaller companies…, their platform utilities would be required to meet the same standard of fair, reasonable, and nondiscriminatory dealing with users, but would not be required to structurally separate….

* * *
Second, my administration would appoint regulators committed to reversing illegal and anti-competitive tech mergers….
I will appoint regulators who are committed to… unwind[ing] anti-competitive mergers, including:

– Amazon: Whole Foods; Zappos;
– Facebook: WhatsApp; Instagram;
– Google: Waze; Nest; DoubleClick

Elizabeth Warren’s brave new world

Let’s consider for a moment what this brave new world will look like — not the nirvana imagined by regulators and legislators who believe that decimating a company’s business model will deter only the “bad” aspects of the model while preserving the “good,” as if by magic, but the inevitable reality of antitrust populism.  

Utilities? Are you kidding? For an overview of what the future of tech would look like under Warren’s “Platform Utility” policy, take a look at your water, electricity, and sewage service. Have you noticed any improvement (or reduction in cost) in those services over the past 10 or 15 years? How about the roads? Amtrak? Platform businesses operating under a similar regulatory regime would also similarly stagnate. Enforcing platform “neutrality” necessarily requires meddling in the most minute of business decisions, inevitably creating unintended and costly consequences along the way.

Network companies, like all businesses, differentiate themselves by offering unique bundles of services to customers. By definition, this means vertically integrating with some product markets and not others. Why are digital assistants like Siri bundled into mobile operating systems? Why aren’t the vast majority of third-party apps also bundled into the OS? If you want utilities regulators instead of Google or Apple engineers and designers making these decisions on the margin, then Warren’s “Platform Utility” policy is the way to go.

Grocery Stores. To take one specific case cited by Warren, how much innovation was there in the grocery store industry before Amazon bought Whole Foods? Since the acquisition, large grocery retailers, like Walmart and Kroger, have increased their investment in online services to better compete with the e-commerce champion. Many industry analysts expect grocery stores to use computer vision technology and artificial intelligence to improve the efficiency of check-out in the near future.

Smartphones. Imagine how forced neutrality would play out in the context of iPhones. If Apple can’t sell its own apps, it also can’t pre-install its own apps. A brand new iPhone with no apps — and even more importantly, no App Store — would be, well, just a phone, out of the box. How would users even access a site or app store from which to download independent apps? Would Apple be allowed to pre-install someone else’s apps? That’s discriminatory, too. Maybe it will be forced to offer a menu of all available apps in all categories (like the famously useless browser ballot screen demanded by the European Commission in its Microsoft antitrust case)? It’s hard to see how that benefits consumers — or even app developers.

Source: Free Software Magazine

Internet Search. Or take search. Calls for “search neutrality” have been bandied about for years. But most proponents of search neutrality fail to recognize that all Google’s search results entail bias in favor of its own offerings. As Geoff Manne and Josh Wright noted in 2011 at the height of the search neutrality debate:

[S]earch engines offer up results in the form not only of typical text results, but also maps, travel information, product pages, books, social media and more. To the extent that alleged bias turns on a search engine favoring its own maps, for example, over another firm’s, the allegation fails to appreciate that text results and maps are variants of the same thing, and efforts to restrain a search engine from offering its own maps is no different than preventing it from offering its own search results.

Nevermind that Google with forced non-discrimination likely means Google offering only the antiquated “ten blue links” search results page it started with in 1998 instead of the far more useful “rich” results it offers today; logically it would also mean Google somehow offering the set of links produced by any and all other search engines’ algorithms, in lieu of its own. If you think Google will continue to invest in and maintain the wealth of services it offers today on the strength of the profits derived from those search results, well, Elizabeth Warren is probably already your favorite politician.

Source: Web Design Museum  

And regulatory oversight of algorithmic content won’t just result in an impoverished digital experience; it will inevitably lead to an authoritarian one, as well:

Any agency granted a mandate to undertake such algorithmic oversight, and override or reconfigure the product of online services, thereby controls the content consumers may access…. This sort of control is deeply problematic… [because it saddles users] with a pervasive set of speech controls promulgated by the government. The history of such state censorship is one which has demonstrated strong harms to both social welfare and rule of law, and should not be emulated.

Digital Assistants. Consider also the veritable cage match among the tech giants to offer “digital assistants” and “smart home” devices with ever-more features at ever-lower prices. Today the allegedly non-existent competition among these companies is played out most visibly in this multi-featured market, comprising advanced devices tightly integrated with artificial intelligence, voice recognition, advanced algorithms, and a host of services. Under Warren’s nondiscrimination principle this market disappears. Each device can offer only a connectivity platform (if such a service is even permitted to be bundled with a physical device…) — and nothing more.

But such a world entails not only the end of an entire, promising avenue of consumer-benefiting innovation, it also entails the end of a promising avenue of consumer-benefiting competition. It beggars belief that anyone thinks consumers would benefit by forcing technology companies into their own silos, ensuring that the most powerful sources of competition for each other are confined to their own fiefdoms by order of law.

Breaking business models

Beyond the product-feature dimension, Sen. Warren’s proposal would be devastating for innovative business models. Why is Amazon Prime Video bundled with free shipping? Because the marginal cost of distribution for video is close to zero and bundling it with Amazon Prime increases the value proposition for customers. Why is almost every Google service free to users? Because Google’s business model is supported by ads, not monthly subscription fees. Each of the tech giants has carefully constructed an ecosystem in which every component reinforces the others. Sen. Warren’s plan would not only break up the companies, it would prohibit their business models — the ones that both created and continue to sustain these products. Such an outcome would manifestly harm consumers.

Both of Warren’s policy “solutions” are misguided and will lead to higher prices and less innovation. Her cause for alarm is built on a multitude of mistaken assumptions, but let’s address just a few (Warren in bold):

  • “Nearly half of all e-commerce goes through Amazon.” Yes, but it has only 5% of total retail in the United States. As my colleague Kristian Stout says, “the Internet is not a market; it’s a distribution channel.”
  • “Amazon has used its immense market power to force smaller competitors like Diapers.com to sell at a discounted rate.” The real story, as the founders of Diapers.com freely admitted, is that they sold diapers as what they hoped would be a loss leader, intending to build out sales of other products once they had a base of loyal customers:

And so we started with selling the loss leader product to basically build a relationship with mom. And once they had the passion for the brand and they were shopping with us on a weekly or a monthly basis that they’d start to fall in love with that brand. We were losing money on every box of diapers that we sold. We weren’t able to buy direct from the manufacturers.

Like all entrepreneurs, Diapers.com’s founders took a calculated risk that didn’t pay off as hoped. Amazon subsequently acquired the company (after it had declined a similar buyout offer from Walmart). (Antitrust laws protect consumers, not inefficient competitors). And no, this was not a case of predatory pricing. After many years of trying to make the business profitable as a subsidiary, Amazon shut it down in 2017.

  • “In the 1990s, Microsoft — the tech giant of its time — was trying to parlay its dominance in computer operating systems into dominance in the new area of web browsing. The federal government sued Microsoft for violating anti-monopoly laws and eventually reached a settlement. The government’s antitrust case against Microsoft helped clear a path for Internet companies like Google and Facebook to emerge.” The government’s settlement with Microsoft is not the reason Google and Facebook were able to emerge. Neither company entered the browser market at launch. Instead, they leapfrogged the browser entirely and created new platforms for the web (only later did Google create Chrome).

    Furthermore, if the Microsoft case is responsible for “clearing a path” for Google is it not also responsible for clearing a path for Google’s alleged depredations? If the answer is that antitrust enforcement should be consistently more aggressive in order to rein in Google, too, when it gets out of line, then how can we be sure that that same more-aggressive enforcement standard wouldn’t have curtailed the extent of the Microsoft ecosystem in which it was profitable for Google to become Google? Warren implicitly assumes that only the enforcement decision in Microsoft was relevant to Google’s rise. But Microsoft doesn’t exist in a vacuum. If Microsoft cleared a path for Google, so did every decision not to intervene, which, all combined, created the legal, business, and economic environment in which Google operates.

Warren characterizes Big Tech as a weight on the American economy. In fact, nothing could be further from the truth. These superstar companies are the drivers of productivity growth, all ranking at or near the top for most spending on research and development. And while data may not be the new oil, extracting value from it may require similar levels of capital expenditure. Last year, Big Tech spent as much or more on capex as the world’s largest oil companies:

Source: WSJ

Warren also faults Big Tech for a decline in startups, saying,

The number of tech startups has slumped, there are fewer high-growth young firms typical of the tech industry, and first financing rounds for tech startups have declined 22% since 2012.

But this trend predates the existence of the companies she criticizes, as this chart from Quartz shows:

The exact causes of the decline in business dynamism are still uncertain, but recent research points to a much more mundane explanation: demographics. Labor force growth has been declining, which has led to an increase in average firm age, nudging fewer workers to start their own businesses.

Furthermore, it’s not at all clear whether this is actually a decline in business dynamism, or merely a change in business model. We would expect to see the same pattern, for example, if would-be startup founders were designing their software for acquisition and further development within larger, better-funded enterprises.

Will Rinehart recently looked at the literature to determine whether there is indeed a “kill zone” for startups around Big Tech incumbents. One paper finds that “an increase in fixed costs explains most of the decline in the aggregate entrepreneurship rate.” Another shows an inverse correlation across 50 countries between GDP and entrepreneurship rates. Robert Lucas predicted these trends back in 1978, pointing out that productivity increases would lead to wage increases, pushing marginal entrepreneurs out of startups and into big companies.

It’s notable that many in the venture capital community would rather not have Sen. Warren’s “help”:

Arguably, it is also simply getting harder to innovate. As economists Nick Bloom, Chad Jones, John Van Reenen and Michael Webb argue,

just to sustain constant growth in GDP per person, the U.S. must double the amount of research effort searching for new ideas every 13 years to offset the increased difficulty of finding new ideas.

If this assessment is correct, it may well be that coming up with productive and profitable innovations is simply becoming more expensive, and thus, at the margin, each dollar of venture capital can fund less of it. Ironically, this also implies that larger firms, which can better afford the additional resources required to sustain exponential growth, are a crucial part of the solution, not the problem.

Warren believes that Big Tech is the cause of our social ills. But Americans have more trust in Amazon, Facebook, and Google than in the political institutions that would break them up. It would be wise for her to reflect on why that might be the case. By punishing our most valuable companies for past successes, Warren would chill competition and decrease returns to innovation.

Finally, in what can only be described as tragic irony, the most prominent political figure who shares Warren’s feelings on Big Tech is President Trump. Confirming the horseshoe theory of politics, far-left populism and far-right populism seem less distinguishable by the day. As our colleague Gus Hurwitz put it, with this proposal Warren is explicitly endorsing the unitary executive theory and implicitly endorsing Trump’s authority to direct his DOJ to “investigate specific cases and reach specific outcomes.” Which cases will he want to have investigated and what outcomes will he be seeking? More good questions that Senator Warren should be asking. The notion that competition, consumer welfare, and growth are likely to increase in such an environment is farcical.

In Amazon, Antitrust & Competition, Apple, European Union, Facebook, Google, International, Justice Department, Law & Economics, Mergers & Acquisitions, Monopolization, Platforms, Truth on the Market, Twitter, Vertical Restraints , , , , , , , , , , , , , , ,
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Amazon-Whole Foods symposium wrap-up

Geoffrey Manne & Kristian Stout —  29 August 2018

On Tuesday, August 28, 2018, Truth on the Market and the International Center for Law and Economics presented a blog symposium — Is Amazon’s Appetite Bottomless? The Whole Foods Merger After One Year — that looked at the concerns surrounding the closing of the Amazon-Whole Foods merger, and how those concerns had played out over the last year.

The difficulty presented by the merger was, in some ways, its lack of difficulty: Even critics, while hearkening back to the Brandeisian fear of large firms, had little by way of legal objection to offer against the merger. Despite the acknowledged lack of an obvious legal basis for challenging the merger, most critics nevertheless expressed a somewhat inchoate and generalized concern that the merger would hasten the death of brick-and-mortar retail and imperil competition in the grocery industry. Critics further pointed to particular, related issues largely outside the scope of modern antitrust law — issues relating to the presumed effects of the merger on “localism” (i.e., small, local competitors), retail workers, startups with ancillary businesses (e.g., delivery services), data collection and use, and the like.

Steven Horwitz opened the symposium with an insightful and highly recommended post detailing the development of the grocery industry from its inception. Tracing through that history, Horwitz was optimistic that

Viewed from the long history of the evolution of the grocery store, the Amazon-Whole Foods merger made sense as the start of the next stage of that historical process. The combination of increased wealth that is driving the demand for upscale grocery stores, and the corresponding increase in the value of people’s time that is driving the demand for one-stop shopping and various forms of pick-up and delivery, makes clear the potential benefits of this merger.

Others in the symposium similarly acknowledged the potential transformation of the industry brought on by the merger, but challenged the critics’ despairing characterization of that transformation (Auer, Manne & Stout, Rinehart, Fruits, Atkinson).

At the most basic level, it was noted that, in the immediate aftermath of the merger, Whole Foods dropped prices across a number of categories as it sought to shore up its competitive position (Auer). Further, under relevant antitrust metrics — e.g., market share, ease of competitive entry, potential for exclusionary conduct — the merger was completely unobjectionable under existing doctrine (Fruits).

To critics’ claims that Amazon in general, and the merger in particular, was decimating the retail industry, several posts discussed the updated evidence suggesting that retail is not actually on the decline (although some individual retailers are certainly struggling to compete) (Auer, Manne & Stout). Moreover, and following from Horwitz’s account of the evolution of the grocery industry, it appears that the actual trajectory of the industry is not an either/or between online and offline, but instead a movement toward integrating both models into a single retail experience (Manne & Stout). Further, the post-merger flurry of business model innovation, venture capital investment, and new startup activity demonstrates that, confronted with entrepreneurial competitors like Walmart, Kroger, Aldi, and Instacart, Amazon’s impressive position online has not translated into an automatic domination of the traditional grocery industry (Manne & Stout).  

Symposium participants more circumspect about the merger suggested that Amazon’s behavior may be laying the groundwork for an eventual monopsony case (Sagers). Further, it was suggested, a future Section 2 case, difficult under prevailing antitrust orthodoxy, could be brought with a creative approach to market definition in light of Amazon’s conduct with its marketplace participants, its aggressive ebook contracting practices, and its development and roll-out of its own private label brands (Sagers).

Skeptics also picked up on early critics’ concerns about the aggregation of large amounts of consumer data, and worried that the merger could be part of a pattern representing a real, long-term threat to consumers that antitrust does not take seriously enough (Bona & Levitsky). Sounding a further alarm, Hal Singer noted that Amazon’s interest in pushing into new markets with data generated by, for example, devices like its Echo line could bolster its ability to exclude competitors.

More fundamentally, these contributors echoed the merger critics’ concerns that antitrust does not adequately take account of other values such as “promoting local, community-based, organic food production or ‘small firms’ in general.” (Bona & Levitsky; Singer).

Rob Atkinson, however, pointed out that these values are idiosyncratic and not likely shared by the vast majority of the population — and that antitrust law shouldn’t have anything to do with them:

In short, most of the opposition to Amazon/Whole Foods merger had little or nothing to do with economics and consumer welfare. It had everything to do with a competing vision for the kind of society we want to live in. The neo-Brandesian opponents, who Lind and I term “progressive localists”, seek an alternative economy predominantly made up of small firms, supported by big government and protected from global competition.

And Dirk Auer noted that early critics’ prophecies of foreclosure of competition through “data leveraging” and below-cost pricing hadn’t remotely come to pass, thus far.

Meanwhile, other contributors noted the paucity of evidence supporting many of these assertions, and pointed out the manifest value the merger seemed to be creating by pressuring competitors to adapt and better respond to consumers’ preferences (Horwitz, Rinehart, Auer, Fruits, Manne & Stout) — in the process shoring up, rather than killing, even smaller retailers that are willing and able to evolve with changing technology and shifting consumer preferences. “For all the talk of retail dying, the stores that are actually dying are the ones that fail to cater to their customers, not the ones that happen to be offline” (Manne & Stout).

At the same time, not all merger skeptics were moved by the Neo-Brandeisian assertions. Chris Sagers, for example, finds much of the populist antitrust objection more public relations than substance. He suggested perhaps not taking these ideas and their promoters so seriously, and instead focusing on antitrust advocates with “real ideas” (like Sagers himself, of course).

Coming from a different angle, Will Rinehart also suggested not taking the criticisms too seriously, pointing to the evolving and complicated effects of the merger as Exhibit A for the need for regulatory humility:

Finally, this deal reiterates the need for regulatory humility. Almost immediately after the Amazon-Whole Foods merger was closed, prices at the store dropped and competitors struck a flurry of deals. Investments continue and many in the grocery retail space are bracing for a wave of enhancement to take hold. Even some of the most fierce critics of deal will have to admit there is a lot of uncertainty. It is unclear what business model will make the most sense in the long run, how these technologies will ultimately become embedded into production processes, and how consumers will benefit. Combined, these features underscore the difficulty, but the necessity, in implementing dynamic insights into antitrust institutions.

Offering generous praise for this symposium (thanks, Will!) and echoing the points made by other participants regarding the dynamic and unknowable course of competition (Auer, Horwitz, Manne & Stout, Fruits), Rinehart concludes:

Retrospectives like this symposium offer a chance to understand what the discussion missed at the time and what is needed to better understand innovation and competition in markets. While it might be too soon to close the book on this case, the impact can already be felt in the positions others are taking in response. In the end, the deal probably won’t be remembered for extending Amazon’s dominance into another market because that is a phantom concern. Rather, it will probably be best remembered as the spark that drove traditional retail outlets to modernize their logistics and fulfillment efforts.  

For a complete rundown of the arguments both for and against, the full archive of symposium posts from our outstanding and diverse group of scholars, practitioners, and other experts is available at this link, and individual posts can be easily accessed by clicking on the authors’ names below.

We’d like to thank all of the participants for their excellent contributions!

 

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The Amazon-Whole Foods merger: Natural and organic competition in the evolving grocery industry

Geoffrey Manne & Kristian Stout —  28 August 2018

What actually happened in the year following the merger is nearly the opposite: Competition among grocery stores has been more fierce than ever. “Offline” retailers are expanding — and innovating — to meet Amazon’s challenge, and many of them are booming. Disruption is never neat and tidy, but, in addition to saving Whole Foods from potential oblivion, the merger seems to have lit a fire under the rest of the industry.
This result should not be surprising to anyone who understands the nature of the competitive process. But it does highlight an important lesson: competition often comes from unexpected quarters and evolves in unpredictable ways, emerging precisely out of the kinds of adversity opponents of the merger bemoaned.

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Whole Foods? Seriously? Why Are We Talking About Whole Foods?

Chris Sagers —  28 August 2018

So why this deal, in this symposium, and why now? The best substantive reason I could think of is admittedly one that I personally find important. As I said, I think we should take it much more seriously as a general matter, especially in highly dynamic contexts like Silicon Valley. There has been a history of arguably pre-emptive, market-occupying vertical and conglomerate acquisitions, by big firms of smaller ones that are technologically or otherwise disruptive. The idea is that the big firms sit back and wait as some new market develops in some adjacent sector. When that new market ripens to the point of real promise, the big firm buys some significant incumbent player. The aim is not. just to facilitate its own benevolent, wholesome entry, but to set up hopefully prohibitive challenges to other de novo entrants. Love it or leave it, that theory plausibly characterizes lots and lots of acquisitions in recent decades that secured easy antitrust approval, precisely because they weren’t obviously, presently horizontal. Many people think that is true of some of Amazon’s many acquisitions, like its notoriously aggressive, near-hostile takeover of Diapers.com.

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