complements Archives

A White House administration typically announces major new antitrust initiatives in the fall and spring, and this year is no exception. Senior Biden administration officials kicked off the fall season at Fordham Law School (more on that below) by shedding additional light on their plans to expand the accepted scope of antitrust enforcement.

Their aggressive enforcement statements draw headlines, but will the administration’s neo-Brandeisians actually notch enforcement successes? The prospects are cloudy, to say the least.

The U.S. Justice Department (DOJ) has lost some cartel cases in court this year (what was the last time that happened?) and, on Sept. 19, a federal judge rejected the DOJ’s attempt to enjoin United Health’s $13.8 billion bid for Change Healthcare. The Federal Trade Commission (FTC) recently lost two merger challenges before its in-house administrative law judge. It now faces a challenge to its administrative-enforcement processes before the U.S. Supreme Court (the Axon case, to be argued in November).

(Incidentally, on the other side of the Atlantic, the European Commission has faced some obstacles itself. Despite its recent Google victory, the Commission has effectively lost two abuse of dominance cases this year—the Intel and Qualcomm matters—before the European General Court.)

So, are the U.S. antitrust agencies chastened? Will they now go back to basics? Far from it. They enthusiastically are announcing plans to charge ahead, asserting theories of antitrust violations that have not been taken seriously for decades, if ever. Whether this turns out to be wise enforcement policy remains to be seen, but color me highly skeptical. Let’s take a quick look at some of the big enforcement-policy ideas that are being floated.

Fordham Law’s Antitrust Conference

Admiral David Farragut’s order “Damn the torpedoes, full speed ahead!” was key to the Union Navy’s August 1864 victory in the Battle of Mobile Bay, a decisive Civil War clash. Perhaps inspired by this display of risk-taking, the heads of the two federal antitrust agencies—DOJ Assistant Attorney General (AAG) Jonathan Kanter and FTC Chair Lina Khan—took a “damn the economics, full speed ahead” attitude in remarks at the Sept. 16 session of Fordham Law School’s 49th Annual Conference on International Antitrust Law and Policy. Special Assistant to the President Tim Wu was also on hand and emphasized the “all of government” approach to competition policy adopted by the Biden administration.

In his remarks, AAG Kanter seemed to be endorsing a “monopoly broth” argument in decrying the current “Whac-a-Mole” approach to monopolization cases. The intent may be to lessen the burden of proof of anticompetitive effects, or to bring together a string of actions taken jointly as evidence of a Section 2 violation. In taking such an approach, however, there is a serious risk that efficiency-seeking actions may be mistaken for exclusionary tactics and incorrectly included in the broth. (Notably, the U.S. Court of Appeals for the D.C. Circuit’s 2001 Microsoft opinion avoided the monopoly-broth problem by separately discussing specific company actions and weighing them on their individual merits, not as part of a general course of conduct.)

Kanter also recommended going beyond “our horizontal and vertical framework” in merger assessments, despite the fact that vertical mergers (involving complements) are far less likely to be anticompetitive than horizontal mergers (involving substitutes).

Finally, and perhaps most problematically, Kanter endorsed the American Innovative and Choice Online Act (AICOA), citing the protection it would afford “would-be competitors” (but what about consumers?). In so doing, the AAG ignored the fact that AICOA would prohibit welfare-enhancing business conduct and could be harmfully construed to ban mere harm to rivals (see, for example, Stanford professor Doug Melamed’s trenchant critique).

Chair Khan’s presentation, which called for a far-reaching “course correction” in U.S. antitrust, was even more bold and alarming. She announced plans for a new FTC Act Section 5 “unfair methods of competition” (UMC) policy statement centered on bringing “standalone” cases not reachable under the antitrust laws. Such cases would not consider any potential efficiencies and would not be subject to the rule of reason. Endorsing that approach amounts to an admission that economic analysis will not play a serious role in future FTC UMC assessments (a posture that likely will cause FTC filings to be viewed skeptically by federal judges).

In noting the imminent release of new joint DOJ-FTC merger guidelines, Khan implied that they would be animated by an anti-merger philosophy. She cited “[l]awmakers’ skepticism of mergers” and congressional rejection “of economic debits and credits” in merger law. Khan thus asserted that prior agency merger guidance had departed from the law. I doubt, however, that many courts will be swayed by this “economics free” anti-merger revisionism.

Tim Wu’s remarks closing the Fordham conference had a “big picture” orientation. In an interview with GW Law’s Bill Kovacic, Wu briefly described the Biden administration’s “whole of government” approach, embodied in President Joe Biden’s July 2021 Executive Order on Promoting Competition in the American Economy. While the order’s notion of breaking down existing barriers to competition across the American economy is eminently sound, many of those barriers are caused by government restrictions (not business practices) that are not even alluded to in the order.

Moreover, in many respects, the order seeks to reregulate industries, misdiagnosing many phenomena as business abuses that actually represent efficient free-market practices (as explained by Howard Beales and Mark Jamison in a Sept. 12 Mercatus Center webinar that I moderated). In reality, the order may prove to be on net harmful, rather than beneficial, to competition.

Conclusion

What is one to make of the enforcement officials’ bold interventionist screeds? What seems to be missing in their presentations is a dose of humility and pragmatism, as well as appreciation for consumer welfare (scarcely mentioned in the agency heads’ presentations). It is beyond strange to see agencies that are having problems winning cases under conventional legal theories floating novel far-reaching initiatives that lack a sound economics foundation.

It is also amazing to observe the downplaying of consumer welfare by agency heads, given that, since 1979 (in Reiter v. Sonotone), the U.S. Supreme Court has described antitrust as a “consumer welfare prescription.” Unless there is fundamental change in the makeup of the federal judiciary (and, in particular, the Supreme Court) in the very near future, the new unconventional theories are likely to fail—and fail badly—when tested in court.

Bringing new sorts of cases to test enforcement boundaries is, of course, an entirely defensible role for U.S. antitrust leadership. But can the same thing be said for bringing “non-boundary” cases based on theories that would have been deemed far beyond the pale by both Republican and Democratic officials just a few years ago? Buckle up: it looks as if we are going to find out.

*Still from* **Squid Game***, Netflix and Siren Pictures Inc., 2021*

Recent commentary on the proposed merger between WarnerMedia and Discovery, as well as Amazon’s acquisition of MGM, often has included the suggestion that the online content-creation and video-streaming markets are excessively consolidated, or that they will become so absent regulatory intervention. For example, in a recent letter to the U.S. Justice Department (DOJ), the American Antitrust Institute and Public Knowledge opine that:

Slow and inadequate oversight risks the streaming market going the same route as cable—where consumers have little power, few options, and where consolidation and concentration reign supreme. A number of threats to competition are clear, as discussed in this section, including: (1) market power issues surrounding content and (2) the role of platforms in “gatekeeping” to limit competition.

But the AAI/PK assessment overlooks key facts about the video-streaming industry, some of which suggest that, if anything, these markets currently suffer from too much fragmentation.

The problem is well-known: any individual video-streaming service will offer only a fraction of the content that viewers want, but budget constraints limit the number of services that a household can afford to subscribe to. It may be counterintuitive, but consolidation in the market for video-streaming can solve both problems at once.

One subscription is not enough

Surveys find that U.S. households currently maintain, on average, four video-streaming subscriptions. This explains why even critics concede that a plethora of streaming services compete for consumer eyeballs. For instance, the AAI and PK point out that:

Today, every major media company realizes the value of streaming and a bevy of services have sprung up to offer different catalogues of content.
These companies have challenged the market leader, Netflix and include: Prime Video (2006), Hulu (2007), Paramount+ (2014), ESPN+ (2018), Disney+ (2019), Apple TV+ (2019), HBO Max (2020), Peacock (2020), and Discovery+ (2021).

With content scattered across several platforms, multiple subscriptions are the only way for households to access all (or most) of the programs they desire. Indeed, other than price, library sizes and the availability of exclusive content are reportedly the main drivers of consumer purchase decisions.

Of course, there is nothing inherently wrong with the current equilibrium in which consumers multi-home across multiple platforms. One potential explanation is demand for high-quality exclusive content, which requires tremendous investment to develop and promote. Production costs for TV series routinely run in the tens of millions of dollars per episode (see here and here). Economic theory predicts these relationship-specific investments made by both producers and distributors will cause producers to opt for exclusive distribution or vertical integration. The most sought-after content is thus exclusive to each platform. In other words, exclusivity is likely the price that users must pay to ensure that high-quality entertainment continues to be produced.

But while this paradigm has many strengths, the ensuing fragmentation can be detrimental to consumers, as this may lead to double marginalization or mundane issues like subscription fatigue. Consolidation can be a solution to both.

Substitutes, complements, or unrelated?

As Hal Varian explains in his seminal book, the relationship between two goods can range among three extremes: perfect substitutes (i.e., two goods are perfectly interchangeable); perfect complements (i.e., there is no value to owning one good without the other); or goods that exist in independent markets (i.e., the price of one good does not affect demand for the other).

These distinctions are critical when it comes to market concentration. All else equal—which is obviously not the case in reality—increased concentration leads to lower prices for complements, and higher prices for substitutes. Finally, if demand for two goods is unrelated, then bringing them under common ownership should not affect their price.

To at least some extent, streaming services should be seen as complements rather than substitutes—or, at least, as services with unrelated demand. If they were perfect substitutes, consumers would be indifferent between two Netflix subscriptions or one Netflix plan and one Amazon Prime plan. That is obviously not the case. Nor are they perfect complements, which would mean that Netflix is worthless without Amazon Prime, Disney+, and other services.

However, there is reason to believe there exists some complementarity between streaming services, or at least that demand for them is independent. Most consumers subscribe to multiple services, and almost no one subscribes to the same service twice:

This assertion is also supported by the ubiquitous bundling of subscriptions in the cable distribution industry, which also has recently been seen in video-streaming markets. For example, in the United States, Disney+ can be purchased in a bundle with Hulu and ESPN+.

The key question is: is each service more valuable, less valuable, or as valuable in isolation than they are when bundled? If households place some additional value on having a complete video offering (one that includes child entertainment, sports, more mature content, etc.), and if they value the convenience of accessing more of their content via a single app, then we can infer these services are to some extent complementary.

Finally, it is worth noting that any complementarity between these services would be largely endogenous. If the industry suddenly switched to a paradigm of non-exclusive content—as is broadly the case for audio streaming—the above analysis would be altered (though, as explained above, such a move would likely be detrimental to users). Streaming services would become substitutes if they offered identical catalogues.

In short, the extent to which streaming services are complements ultimately boils down to an empirical question that may fluctuate with industry practices. As things stand, there is reason to believe that these services feature some complementarities, or at least that demand for them is independent. In turn, this suggests that further consolidation within the industry would not lead to price increases and may even reduce them.

Consolidation can enable price discrimination

It is well-established that bundling entertainment goods can enable firms to better engage in price discrimination, often increasing output and reducing deadweight loss in the process.

Take George Stigler’s famous explanation for the practice of “block booking,” in which movie studios sold multiple films to independent movie theatres as a unit. Stigler assumes the underlying goods are neither substitutes nor complements:

Stigler, George J. (1963) “United States v. Loew’s Inc.: A Note on Block-Booking,” *Supreme Court Review*: Vol. 1963 : No. 1 , Article 2.

The upshot is that, when consumer tastes for content are idiosyncratic—as is almost certainly the case for movies and television series, movies—it can counterintuitively make sense to sell differing content as a bundle. In doing so, the distributor avoids pricing consumers out of the content upon which they place a lower value. Moreover, this solution is more efficient than price discriminating on an unbundled basis, as doing so would require far more information on the seller’s part and would be vulnerable to arbitrage.

In short, bundling enables each consumer to access a much wider variety of content. This, in turn, provides a powerful rationale for mergers in the video-streaming space—particularly where they can bring together varied content libraries. Put differently, it cuts in favor of more, not less, concentration in video-streaming markets (at least, up to a certain point).

Finally, a wide array of scale-related economies further support the case for concentration in video-streaming markets. These include potential economies of scale, network effects, and reduced transaction costs.

The simplest of these ideas is that the cost of video streaming may decrease at the margin (i.e., serving each marginal viewer might be cheaper than the previous one). In other words, mergers of video-streaming services mayenable platforms to operate at a more efficient scale. There has notably been some discussion of whether Netflix benefits from scale economies of this sort. But this is, of course, ultimately an empirical question. As I have written with Geoffrey Manne, we should not assume that this is the case for all digital platforms, or that these increasing returns are present at all ranges of output.

Likewise, the fact that content can earn greater revenues by reaching a wider audience (or a greater number of small niches) may increase a producer’s incentive to create high-quality content. For example, Netflix’s recent hit series Squid Game reportedly cost $16.8 million to produce a total of nine episodes. This is significant for a Korean-language thriller. These expenditures were likely only possible because of Netflix’s vast network of viewers. Video-streaming mergers can jump-start these effects by bringing previously fragmented audiences onto a single platform.

Finally, operating at a larger scale may enable firms and consumers to economize on various transaction and search costs. For instance, consumers don’t need to manage several subscriptions, and searching for content is easier within a single ecosystem.

Conclusion

In short, critics could hardly be more wrong in assuming that consolidation in the video-streaming industry will necessarily harm consumers. To the contrary, these mergers should be presumptively welcomed because, to a first approximation, they are likely to engender lower prices and reduce deadweight loss.

Critics routinely draw parallels between video streaming and the consolidation that previously moved through the cable industry. They suggest these events as evidence that consolidation was (and still is) inefficient and exploitative of consumers. As AAI and PK frame it:

Moreover, given the broader competition challenges that reside in those markets, and the lessons learned from a failure to ensure competition in the traditional MVPD markets, enforcers should be particularly vigilant.

But while it might not have been ideal for all consumers, the comparatively laissez-faire approach to competition in the cable industry arguably facilitated the United States’ emergence as a global leader for TV programming. We are now witnessing what appears to be a similar trend in the online video-streaming market.

This is mostly a good thing. While a single streaming service might not be the optimal industry configuration from a welfare standpoint, it would be equally misguided to assume that fragmentation necessarily benefits consumers. In fact, as argued throughout this piece, there are important reasons to believe that the status quo—with at least 10 significant players—is too fragmented and that consumers would benefit from additional consolidation.

Truth on the Market

Archives For complements