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As a new year dawns, the Biden administration remains fixated on illogical, counterproductive “big is bad” nostrums.

Noted economist and former Clinton Treasury Secretary Larry Summers correctly stressed recently that using antitrust to fight inflation represents “science denial,” tweeting that:

In his extended Twitter thread, Summers notes that labor shortages are the primary cause of inflation over time and that lowering tariffs, paring back import restrictions (such as the Buy America Act), and reducing regulatory delays are vital to combat inflation.

Summers’ points, of course, are right on the mark. Indeed, labor shortages, supply-chain issues, and a dramatic increase in regulatory burdens have been key to the dramatic run-up of prices during the Biden administration’s first year. Reducing the weight of government on the private sector and thereby enhancing incentives for increased investment, labor participation, and supply are the appropriate weapons to slow price rises and incentivize economic growth.

More specifically, administration policies can be pinpointed as the cause, not the potential solution to, rapid price increases in specific sectors, particularly the oil and gas industry. As I recently commented, policies that disincentivize new energy production, and fail to lift excessive regulatory burdens, have been a key factor in sparking rises in gasoline prices. Administration claims that anticompetitive activity is behind these prices increases should be discounted. New Federal Trade Commission (FTC) investigations of oil and gas companies would waste resources and increase already large governmental burdens on those firms.

The administration, nevertheless, appears committed to using antitrust as an anti-inflationary “tool” against “big business” (or perhaps, really, as a symbolic hammer to shift blame to the private sector for rising prices). Recent  pronouncements about combatting “big meat” are a case in point.

The New ‘Big Meat’ Crusade

Part of the administration’s crusade against “big meat” involves providing direct government financial support for favored firms. A U.S. Department of Agriculture (USDA) plan to spend up to $1 billion to assist smaller meat processors is a subsidy that artificially favors one group of competitors. This misguided policy, which bears the scent of special-interest favoritism, wastes taxpayer dollars and distorts free-market outcomes. It will do nothing to cure supply and regulatory problems that affect rising meat prices. It will, however, misallocate resources.

The other key aspect of the big meat initiative smacks more of problematic, old-style, economics-free antitrust. It centers on: (1) threatening possible antitrust actions against four large meat processors based principally on their size and market share; and (2) initiating a planned rulemaking under the Packers and Stockyards Act. (That rulemaking was foreshadowed by language in the July 2021 Biden Administration Executive Order on Competition.)

The administration’s apparent focus on the “dominance” of four large meatpacking firms (which have the temerity to collectively hold greater than 50% market shares in the hog, cattle, and chicken sectors) and the 120% jump in their gross profits since the pandemic began is troubling. It echoes the structuralist “big is bad” philosophy of the 1950s and 1960s. In and of itself, large market share is not, of course, an antitrust problem, nor are large gross profits. Rather, those metrics typically signal a particular firm’s superior efficiency relative to the competition. (Gross profit “reflects the efficiency of a business in terms of making use of its labor, raw material and other supplies.”) Antitrust investigations of firms merely because they are large would inefficiently bloat those companies’ costs and discourage them from engaging in cost-reducing new capacity and production improvements. This would tend to raise, not lower, prices by major firms. It thus would lower consumer welfare, a result at odds with the guiding policy goal of antitrust, which is to promote consumer welfare.

The administration’s announcement that the USDA “will also propose rules this year to strengthen enforcement of the Packers and Stockyards Act” is troublesome. That act, dating back to 1921, uses broad terms that extend beyond antitrust law (such as a prohibition on “giv[ing] any undue or unreasonable preference or advantage to any particular person”) and threatens to penalize efficient conduct by individual competitors. “Ratcheting up” enforcement under this act also could undermine business efficiency and paradoxically raise, not lower, prices.

Obviously, the specifics of the forthcoming proposed rules have not yet been revealed. Nevertheless, the administration’s “big is bad” approach to “big meat” strongly signals that one may expect rules to generate new costly and inefficient restrictions on meat-packer conduct. Such restrictions, of course, would be at odds with vibrant competition and consumer-welfare enhancement.    

This is not to say, of course, that meat packing should be immune from antitrust attention. Such scrutiny, however, should not be transfixed by “big is bad” concerns. Rather, it should center on the core antitrust goal of combatting harmful business conduct that unreasonably restrains competition and reduces consumer welfare. A focus on ferreting out collusive agreements among meat processors, such as price-fixing schemes, should have pride of place. The U.S. Justice Department’s already successful ongoing investigation into price fixing in the broiler-chicken industry is precisely the sort of antitrust initiative on which the administration should expend its scarce enforcement resources.

Conclusion

In sum, the Biden administration could do a lot of good in antitrust land if it would only set aside its nostalgic “big is bad” philosophy. It should return to the bipartisan enlightened understanding that antitrust is a consumer-welfare prescription that is based on sound and empirically based economics and is concerned with economically inefficient conduct that softens or destroys competition.

If it wants to stray beyond mere enforcement, the administration could turn its focus toward dismantling welfare-reducing anticompetitive federal regulatory schemes, rather than adding to private-sector regulatory burdens. For more about how to do this, we recommend that the administration consult a just-released Mercatus Center policy brief that Andrew Mercado and I co-authored.

Even as delivery services work to ship all of those last-minute Christmas presents that consumers bought this season from digital platforms and other e-commerce sites, the U.S. House and Senate are contemplating Grinch-like legislation that looks to stop or limit how Big Tech companies can “self-preference” or “discriminate” on their platforms.

A platform “self-preferences” when it blends various services into the delivery of a given product in ways that third parties couldn’t do themselves. For example, Google self-preferences when it puts a Google Shopping box at the top of a Search page for Adidas sneakers. Amazon self-preferences when it offers its own AmazonBasics USB cables alongside those offered by Apple or Anker. Costco’s placement of its own Kirkland brand of paper towels on store shelves can also be a form of self-preferencing.

Such purportedly “discriminatory” behavior constitutes much of what platforms are designed to do. Virtually every platform that offers a suite of products and services will combine them in ways that users find helpful, even if competitors find it infuriating. It surely doesn’t help Yelp if Google Search users can see a Maps results box next to a search for showtimes at a local cinema. It doesn’t help other manufacturers of charging cables if Amazon sells a cheaper version under a brand that consumers trust. But do consumers really care about Yelp or Apple’s revenues, when all they want are relevant search results and less expensive products?

Until now, competition authorities have judged this type of conduct under the consumer welfare standard: does it hurt consumers in the long run, or does it help them? This test does seek to evaluate whether the conduct deprives consumers of choice by foreclosing rivals, which could ultimately allow the platform to exploit its customers. But it doesn’t treat harm to competitors—in the form of reduced traffic and profits for Yelp, for example—as a problem in and of itself.

“Non-discrimination” bills introduced this year in both the House and Senate aim to change that, but they would do so in ways that differ in important respects.

The House bill would impose a blanket ban on virtually all “discrimination” by platforms. This means that even such benign behavior as Facebook linking to Facebook Marketplace on its homepage would become presumptively unlawful. The measure would, as I’ve written before, break a lot of the Internet as we know it, but it has the virtue of being explicit and clear about its effects.

The Senate bill is, in this sense, a lot more circumspect. Instead of a blanket ban, it would prohibit what the bill refers to as “unfair” discrimination that “materially harm[s] competition on the covered platform,” with a carve-out exception for discrimination that was “necessary” to maintain or enhance the “core functionality” of the platform. In theory, this would avoid a lot of the really crazy effects of the House bill. Apple likely still could, for example, pre-install a Camera app on the iPhone.

But this greater degree of reasonableness comes at the price of ambiguity. The bill does not define “unfair discrimination,” nor what it would mean for something to be “necessary” to improve the core functionality of a platform. Faced with this ambiguity, companies would be wise to be overly cautious, given the steep penalties they would face for conduct found to be “unfair”: 15% of total U.S. revenues earned during the period when the conduct was ongoing. That’s a lot of money to risk over a single feature!

Also unlike the House legislation, the Senate bill would not create a private right of action, thereby limiting litigation to enforce the bill’s terms to actions brought by the Federal Trade Commission (FTC), U.S. Justice Department (DOJ), or state attorneys general.

Put together, these features create the perfect recipe for extensive discretionary power held by a handful of agencies. With such vague criteria and such massive penalties for lawbreaking, the mere threat of a lawsuit could force a company to change its behavior. The rules are so murky that companies might even be threatened with a lawsuit over conduct in one area in order to make them change their behavior in another.

It’s hardly unprecedented for powers like this to be misused. During the Obama administration, the Internal Revenue Service (IRS) was alleged to have targeted conservative groups for investigation, for which the agency eventually had to apologize (and settle a lawsuit brought by some of the targeted groups). More than a decade ago, the Bank Secrecy Act was used to uncover then-New York Attorney General Eliot Spitzer’s involvement in an international prostitution ring. Back in 2008, the British government used anti-terrorism powers to seize the assets of some Icelandic banks that had become insolvent and couldn’t repay their British depositors. To this day, municipal governments in Britain use anti-terrorism powers to investigate things like illegal waste dumping and people who wrongly park in spots reserved for the disabled.

The FTC itself has a history of abusing its authority. As Commissioners Noah Phillips and Christine Wilson remind us, the commission was nearly shut down in the 1970s after trying to use its powers to “protect” children from seeing ads for sugary foods, interpreting its consumer-protection mandate so broadly that it considered tooth decay as falling within its scope.

As I’ve written before, both Chair Lina Khan and Commissioner Rebecca Kelly Slaughter appear to believe that the FTC ought to take a broad vision of its goals. Slaughter has argued that antitrust ought to be “antiracist.” Khan believes that the “the dispersion of political and economic control” is the proper goal of antitrust, not consumer welfare or some other economic goal.

Khan in particular does not appear especially bound by the usual norms that might constrain this sort of regulatory overreach. In recent weeks, she has pushed through contentious decisions by relying on more than 20 “zombie votes” cast by former Commissioner Rohit Chopra on the final day before he left the agency. While it has been FTC policy since 1984 to count votes cast by departed commissioners unless they are superseded by their successors, Khan’s FTC has invoked this relatively obscure rule to swing more decisions than every single predecessor combined.

Thus, while the Senate bill may avoid immediately breaking large portions of the Internet in ways the House bill would, it would instead place massive discretionary powers into the hands of authorities who have expansive views about the goals those powers ought to be used to pursue.

This ought to be concerning to anyone who disapproves of public policy being made by unelected bureaucrats, rather than the people’s chosen representatives. If Republicans find an empowered Khan-led FTC worrying today, surely Democrats ought to feel the same about an FTC run by Trump-style appointees in a few years. Both sides may come to regret creating an agency with so much unchecked power.

Recent antitrust forays on both sides of the Atlantic have unfortunate echoes of the oldie-but-baddie “efficiencies offense” that once plagued American and European merger analysis (and, more broadly, reflected a “big is bad” theory of antitrust). After a very short overview of the history of merger efficiencies analysis under American and European competition law, we briefly examine two current enforcement matters “on both sides of the pond” that impliedly give rise to such a concern. Those cases may regrettably foreshadow a move by enforcers to downplay the importance of efficiencies, if not openly reject them.

Background: The Grudging Acceptance of Merger Efficiencies

Not long ago, economically literate antitrust teachers in the United States enjoyed poking fun at such benighted 1960s Supreme Court decisions as Procter & Gamble (following in the wake of Brown Shoe andPhiladelphia National Bank). Those holdings—which not only rejected efficiencies justifications for mergers, but indeed “treated efficiencies more as an offense”—seemed a thing of the past, put to rest by the rise of an economic approach to antitrust. Several early European Commission merger-control decisions also arguably embraced an “efficiencies offense.”  

Starting in the 1980s, the promulgation of increasingly economically sophisticated merger guidelines in the United States led to the acceptance of efficiencies (albeit less then perfectly) as an important aspect of integrated merger analysis. Several practitioners have claimed, nevertheless, that “efficiencies are seldom credited and almost never influence the outcome of mergers that are otherwise deemed anticompetitive.” Commissioner Christine Wilson has argued that the Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) still have work to do in “establish[ing] clear and reasonable expectations for what types of efficiency analysis will and will not pass muster.”

In its first few years of merger review, which was authorized in 1989, the European Commission was hostile to merger-efficiency arguments.  In 2004, however, the EC promulgated horizontal merger guidelines that allow for the consideration of efficiencies, but only if three cumulative conditions (consumer benefit, merger specificity, and verifiability) are satisfied. A leading European competition practitioner has characterized several key European Commission merger decisions in the last decade as giving rather short shrift to efficiencies. In light of that observation, the practitioner has advocated that “the efficiency offence theory should, once again, be repudiated by the Commission, in order to avoid deterring notifying parties from bringing forward perfectly valid efficiency claims.”

In short, although the actual weight enforcers accord to efficiency claims is a matter of debate, efficiency justifications are cognizable, subject to constraints, as a matter of U.S. and European Union merger-enforcement policy. Whether that will remain the case is, unfortunately, uncertain, given DOJ and FTC plans to revise merger guidelines, as well as EU talk of convergence with U.S. competition law.

Two Enforcement Matters with ‘Efficiencies Offense’ Overtones

Two Facebook-related matters currently before competition enforcers—one in the United States and one in the United Kingdom—have implications for the possible revival of an antitrust “efficiencies offense” as a “respectable” element of antitrust policy. (I use the term Facebook to reference both the platform company and its corporate parent, Meta.)

FTC v. Facebook

The FTC’s 2020 federal district court monopolization complaint against Facebook, still in the motion to dismiss the amended complaint phase (see here for an overview of the initial complaint and the judge’s dismissal of it), rests substantially on claims that Facebook’s acquisitions of Instagram and WhatsApp harmed competition. As Facebook points out in its recent reply brief supporting its motion to dismiss the FTC’s amended complaint, Facebook appears to be touting merger-related efficiencies in critiquing those acquisitions. Specifically:

[The amended complaint] depends on the allegation that Facebook’s expansion of both Instagram and WhatsApp created a “protective ‘moat’” that made it harder for rivals to compete because Facebook operated these services at “scale” and made them attractive to consumers post-acquisition. . . . The FTC does not allege facts that, left on their own, Instagram and WhatsApp would be less expensive (both are free; Facebook made WhatsApp free); or that output would have been greater (their dramatic expansion at “scale” is the linchpin of the FTC’s “moat” theory); or that the products would be better in any specific way.

The FTC’s concerns about a scale-based merger-related output expansion that benefited consumers and thereby allegedly enhanced Facebook’s market position eerily echoes the commission’s concerns in Procter & Gamble that merger-related cost-reducing joint efficiencies in advertising had an anticompetitive “entrenchment” effect. Both positions, in essence, characterize output-increasing efficiencies as harmful to competition: in other words, as “efficiencies offenses.”

UK Competition and Markets Authority (CMA) v. Facebook

The CMA announced Dec. 1 that it had decided to block retrospectively Facebook’s 2020 acquisition of Giphy, which is “a company that provides social media and messaging platforms with animated GIF images that users can embed in posts and messages. . . .  These platforms license the use of Giphy for its users.”

The CMA theorized that Facebook could harm competition by (1) restricting access to Giphy’s digital libraries to Facebook’s competitors; and (2) prevent Giphy from developing into a potential competitor to Facebook’s display advertising business.

As a CapX analysis explains, the CMA’s theory of harm to competition, based on theoretical speculation, is problematic. First, a behavioral remedy short of divestiture, such as requiring Facebook to maintain open access to its gif libraries, would deal with the threat of restricted access. Indeed, Facebook promised at the time of the acquisition that Giphy would maintain its library and make it widely available. Second, “loss of a single, relatively small, potential competitor out of many cannot be counted as a significant loss for competition, since so many other potential and actual competitors remain.” Third, given the purely theoretical and questionable danger to future competition, the CMA “has blocked this deal on relatively speculative potential competition grounds.”

Apart from the weakness of the CMA’s case for harm to competition, the CMA appears to ignore a substantial potential dynamic integrative efficiency flowing from Facebook’s acquisition of Giphy. As David Teece explains:

Facebook’s acquisition of Giphy maintained Giphy’s assets and furthered its innovation in Facebook’s ecosystem, strengthening that ecosystem in competition with others; and via Giphy’s APIs, strengthening the ecosystems of other service providers as well.

There is no evidence that CMA seriously took account of this integrative efficiency, which benefits consumers by offering them a richer experience from Facebook and its subsidiary Instagram, and which spurs competing ecosystems to enhance their offerings to consumers as well. This is a failure to properly account for an efficiency. Moreover, to the extent that the CMA viewed these integrative benefits as somehow anticompetitive (to the extent that it enhanced Facebook’s competitive position) the improvement of Facebook’s ecosystem could have been deemed a type of “efficiencies offense.”

Are the Facebook Cases Merely Random Straws in the Wind?

It might appear at first blush to be reading too much into the apparent slighting of efficiencies in the two current Facebook cases. Nevertheless, recent policy rhetoric suggests that economic efficiencies arguments (whose status was tenuous at enforcement agencies to begin with) may actually be viewed as “offensive” by the new breed of enforcers.

In her Sept. 22 policy statement on “Vision and Priorities for the FTC,” Chair Lina Khan advocated focusing on the possible competitive harm flowing from actions of “gatekeepers and dominant middlemen,” and from “one-sided [vertical] contract provisions” that are “imposed by dominant firms.” No suggestion can be found in the statement that such vertical relationships often confer substantial benefits on consumers. This hints at a new campaign by the FTC against vertical restraints (as opposed to an emphasis on clearly welfare-inimical conduct) that could discourage a wide range of efficiency-producing contracts.

Chair Khan also sponsored the FTC’s July 2021 rescission of its Section 5 Policy Statement on Unfair Methods of Competition, which had emphasized the primacy of consumer welfare as the guiding principle underlying FTC antitrust enforcement. A willingness to set aside (or place a lower priority on) consumer welfare considerations suggests a readiness to ignore efficiency justifications that benefit consumers.

Even more troubling, a direct attack on the consideration of efficiencies is found in the statement accompanying the FTC’s September 2021 withdrawal of the 2020 Vertical Merger Guidelines:

The statement by the FTC majority . . . notes that the 2020 Vertical Merger Guidelines had improperly contravened the Clayton Act’s language with its approach to efficiencies, which are not recognized by the statute as a defense to an unlawful merger. The majority statement explains that the guidelines adopted a particularly flawed economic theory regarding purported pro-competitive benefits of mergers, despite having no basis of support in the law or market reality.

Also noteworthy is Khan’s seeming interest (found in her writings here, here, and here) in reviving Robinson-Patman Act enforcement. What’s worse, President Joe Biden’s July 2021 Executive Order on Competition explicitly endorses FTC investigation of “retailers’ practices on the conditions of competition in the food industries, including any practices that may violate [the] Robinson-Patman Act” (emphasis added). Those troubling statements from the administration ignore the widespread scholarly disdain for Robinson-Patman, which is almost unanimously viewed as an attack on efficiencies in distribution. For example, in recommending the act’s repeal in 2007, the congressionally established Antitrust Modernization Commission stressed that the act “protects competitors against competition and punishes the very price discounting and innovation and distribution methods that the antitrust otherwise encourage.”

Finally, newly confirmed Assistant Attorney General for Antitrust Jonathan Kanter (who is widely known as a Big Tech critic) has expressed his concerns about the consumer welfare standard and the emphasis on economics in antitrust analysis. Such concerns also suggest, at least by implication, that the Antitrust Division under Kanter’s leadership may manifest a heightened skepticism toward efficiencies justifications.

Conclusion

Recent straws in the wind suggest that an anti-efficiencies hay pile is in the works. Although antitrust agencies have not yet officially rejected the consideration of efficiencies, nor endorsed an “efficiencies offense,” the signs are troubling. Newly minted agency leaders’ skepticism toward antitrust economics, combined with their de-emphasis of the consumer welfare standard and efficiencies (at least in the merger context), suggest that even strongly grounded efficiency explanations may be summarily rejected at the agency level. In foreign jurisdictions, where efficiencies are even less well-established, and enforcement based on mere theory (as opposed to empiricism) is more widely accepted, the outlook for efficiencies stories appears to be no better.     

One powerful factor, however, should continue to constrain the anti-efficiencies movement, at least in the United States: the federal courts. As demonstrated most recently in the 9th U.S. Circuit Court of Appeals’ FTC v. Qualcomm decision, American courts remain committed to insisting on empirical support for theories of harm and on seriously considering business justifications for allegedly suspect contractual provisions. (The role of foreign courts in curbing prosecutorial excesses not grounded in economics, and in weighing efficiencies, depends upon the jurisdiction, but in general such courts are far less of a constraint on enforcers than American tribunals.)

While the DOJ and FTC (and, perhaps to a lesser extent, foreign enforcers) will have to keep the judiciary in mind in deciding to bring enforcement actions, the denigration of efficiencies by the agencies still will have an unfortunate demonstration effect on the private sector. Given the cost (both in resources and in reputational capital) associated with antitrust investigations, and the inevitable discounting for the risk of projects caught up in such inquiries, a publicly proclaimed anti-efficiencies enforcement philosophy will do damage. On the margin, it will lead businesses to introduce fewer efficiency-seeking improvements that could be (wrongly) characterized as “strengthening” or “entrenching” market dominance. Such business decisions, in turn, will be welfare-inimical; they will deny consumers the benefit of efficiencies-driven product and service enhancements, and slow the rate of business innovation.

As such, it is to be hoped that, upon further reflection, U.S. and foreign competition enforcers will see the light and publicly proclaim that they will fully weigh efficiencies in analyzing business conduct. The “efficiencies offense” was a lousy tune. That “oldie-but-baddie” should not be replayed.

Large group of people in the shape of two puzzle pieces on a white background.

The Federal Trade Commission (FTC) has taken another step away from case-specific evaluation of proposed mergers and toward an ex ante regulatory approach in its Oct. 25 “Statement of the Commission on Use of Prior Approval Provisions in Merger Orders.” Though not unexpected, this unfortunate initiative once again manifests the current FTC leadership’s disdain for long-accepted economically sound antitrust-enforcement principles.

Discussion

High levels of merger activity should, generally speaking, be viewed as a symptom of a vibrant economy, not a reason for economic concern. Horizontal mergers typically are driven by the potential to realize real cost savings, unrelated to anticompetitive reductions in output.

Non-horizontal mergers often put into force welfare-enhancing reductions of double marginalization, while uniting complements and achieving synergies in ways that seek efficiencies. More generally, proposed acquisitions frequently reflect an active market for corporate control that seeks to reallocate scarce resources to higher-valued uses (see, for example, Henry Manne’s seminal article on “Mergers and the Market for Corporate Control”). Finally, by facilitating cost reductions, synergies, and improvements in resource allocations within firms, mergers may allow the new consolidated entity to compete more effectively in the marketplace, thereby enhancing competition.

Given the economic benefits frequently generated by mergers, government antitrust enforcers should not discourage them, nor should they intervene to block them, absent a strong showing that a particular transaction would likely reduce competition and harm consumer welfare. In the United States, the Hart-Scott-Rodino Premerger Notification Act of 1976 (HSR) and its implementing regulations generally have reflected this understanding. They have done this by requiring that proposed transactions above a certain size threshold be notified to the FTC and the U.S. Justice Department (DOJ), and by providing a framework for timely review, allowing most notified mergers to close promptly.

In the relatively few cases where agency enforcement staff have identified competitive problems, the HSR framework usually has enabled timely negotiation of possible competitive fixes (divestitures and, less typically, behavioral remedies). Where fixes have not been feasible, filing parties generally have been able to decide whether to drop a transaction or prepare for litigation within a reasonable time period. Under the HSR framework, enforcers generally have respected the time sensitivity of merger proposals and acted expeditiously (with a few exceptions) to review complicated and competitively sensitive transactions. The vast majority of HSR filings that facially raise no plausible competitive issues historically have been dealt with swiftly—often through “early termination” policies that provide the merging parties an antitrust go-ahead well before the end of HSR’s initial 30-day review period.

In short, although far from perfect, HSR processes have sought to minimize regulatory impediments to merger activity, consistent with the statutory mandate to identify and prevent anticompetitive mergers.      

Regrettably, under the leadership of Chair Lina M. Khan, the FTC has taken unprecedented steps to undermine the well-understood HSR framework. As I wrote recently:

For decades, parties proposing mergers that are subject to statutory Hart-Scott-Rodino (HSR) Act pre-merger notification requirements have operated under the understanding that:

1. The FTC and U.S. Justice Department (DOJ) will routinely grant “early termination” of review (before the end of the initial 30-day statutory review period) to those transactions posing no plausible competitive threat; and

2. An enforcement agency’s decision not to request more detailed documents (“second requests”) after an initial 30-day pre-merger review effectively serves as an antitrust “green light” for the proposed acquisition to proceed.

Those understandings, though not statutorily mandated, have significantly reduced antitrust uncertainty and related costs in the planning of routine merger transactions. The rule of law has been advanced through an effective assurance that business combinations that appear presumptively lawful will not be the target of future government legal harassment. This has advanced efficiency in government, as well; it is a cost-beneficial optimal use of resources for DOJ and the FTC to focus exclusively on those proposed mergers that present a substantial potential threat to consumer welfare.

Two recent FTC pronouncements (one in tandem with DOJ), however, have generated great uncertainty by disavowing (at least temporarily) those two welfare-promoting review policies. Joined by DOJ, the FTC on Feb. 4 announced that the agencies would temporarily suspend early terminations, citing an “unprecedented volume of filings” and a transition to new leadership. More than six months later, this “temporary” suspension remains in effect.

Citing “capacity constraints” and a “tidal wave of merger filings,” the FTC subsequently published an Aug. 3 blog post that effectively abrogated the 30-day “green lighting” of mergers not subject to a second request. It announced that it was sending “warning letters” to firms reminding them that FTC investigations remain open after the initial 30-day period, and that “[c]ompanies that choose to proceed with transactions that have not been fully investigated are doing so at their own risk.”

The FTC’s actions interject unwarranted uncertainty into merger planning and undermine the rule of law. Preventing early termination on transactions that have been approved routinely not only imposes additional costs on business; it hints that some transactions might be subject to novel theories of liability that fall outside the antitrust consensus.

The FTC’s merger-review reign of error continues. Most recently, it released a policy guidance statement that effectively transforms the commission into a merger regulator whose assent is required for a specific category of mergers. This policy is at odds with HSR, which is designed to facilitate merger reviews, not to serve as a regulatory-approval mechanism. As the FTC explains in its Oct. 25 statement(citation to 1995 Statement omitted) (approved by a 3-2 vote, with Commissioners Noah Joshua Phillips and Christine S. Wilson dissenting):

On July 21, 2021, the Commission voted to rescind the 1995 Policy Statement on Prior Approval and Prior Notice Provisions (“1995 Statement”). The 1995 Statement ended the Commission’s then-longstanding practice of incorporating prior approval and prior notice provisions in Commission orders addressing mergers. With the rescission of the 1995 statement, the Commission returns now to its prior practice of routinely requiring merging parties subject to a Commission order to obtain prior approval from the FTC before closing any future transaction affecting each relevant market for which a violation was alleged. . . .

In addition, from now on, in matters where the Commission issues a complaint to block a merger and the parties subsequently abandon the transaction, the agency will engage in a case-specific determination as to whether to pursue a prior approval order, focusing on the factors identified below with respect to use of broader prior approval provisions. The fact that parties may abandon a merger after litigation commences does not guarantee that the

Commission will not subsequently pursue an order incorporating a prior approval provision. . . .
In some situations where stronger relief is needed, the Commission may decide to seek a prior approval provision that covers product and geographic markets beyond just the relevant product and geographic markets affected by the merger. No single factor is dispositive; rather, the Commission will take a holistic view of the circumstances when determining the length and breadth of prior approval provisions. [Six factors listed include the nature of the transaction; the level of market concentration; the degree to which the transaction increases concentration; the degree to which one of the parties pre-merger likely had market power; the parties’ history of acquisitiveness; and evidence of anticompetitive market dynamics.]

The Oct. 25 Statement is highly problematic in several respects. Its oversight requirements may discourage highly effective consent decree “fixes” of potential mergers, leading to wasteful litigation—or, alternatively, the abandonment of efficient transactions. What’s more, the threat of FTC prior approval orders (based on multiple criteria subject to manipulation by the FTC), even when parties abandon a proposed transaction (and thus, effectively have “done nothing”), smacks of unwarranted regulation of future corporate plans of disfavored firms, raising questions of fundamental fairness.

All told, the new requirements, combined with the FTC’s policies to end early terminations and to stop “greenlighting” routine merger transactions after a 30-day review, are yet signs that the well-understood HSR consensus has been unilaterally abandoned by the FTC, based on purely partisan commission votes, despite the lack of any public consultation. The FTC’s abrupt and arbitrary merger-review-related actions will harm the economy by discouraging welfare-promoting consolidations. These actions also fly in the face of sound public administration.  

Conclusion

The FTC continues to move from its historic role of antitrust enforcer to that of antitrust regulator at warp speed, based on a series of 3-2 votes. In particular, the commission’s abandonment of a well-established bipartisan approach to HSR policy is particularly troublesome, given the new risks it creates for private parties considering acquisitions. These new risks will likely deter an unknown number of efficiency-enhancing, innovative combinations that could have benefited consumers and substantially strengthened the American economy.

Perhaps the imminent confirmation of Jonathan Kanter—an individual with many years of practical experience as a leading antitrust practitioner—to be assistant attorney general for antitrust will bring a more reasonable perspective to antitrust agency HSR policies. It may even convince a majority of the commission to return to the bipartisan HSR merger-review framework that has served the American economy well.

If not, perhaps congressional overseers might wish to investigate the implications for the American innovation economy and the rule of law stemming from the FTC’s de facto abandonment of HSR principles. Whether to fundamentally alter merger-review procedures should be up to Congress, not to three unelected officials.    

The leading contribution to sound competition policy made by former Assistant U.S. Attorney General Makan Delrahim was his enunciation of the “New Madison Approach” to patent-antitrust enforcement—and, in particular, to the antitrust treatment of standard essential patent licensing (see, for example, here, here, and here). In short (citations omitted):

The New Madison Approach (“NMA”) advanced by former Assistant Attorney General for Antitrust Makan Delrahim is a simple analytical framework for understanding the interplay between patents and antitrust law arising out of standard setting. A key aspect of the NMA is its rejection of the application of antitrust law to the “hold-up” problem, whereby patent holders demand supposedly supra-competitive licensing fees to grant access to their patents that “read on” a standard – standard essential patents (“SEPs”). This scenario is associated with an SEP holder’s prior commitment to a standard setting organization (“SSO”), that is: if its patented technology is included in a proposed new standard, it will license its patents on fair, reasonable, and non-discriminatory (“FRAND”) terms. “Hold-up” is said to arise subsequently, when the SEP holder reneges on its FRAND commitment and demands that a technology implementer pay higher-than-FRAND licensing fees to access its SEPs.

The NMA has four basic premises that are aimed at ensuring that patent holders have adequate incentives to innovate and create welfare-enhancing new technologies, and that licensees have appropriate incentives to implement those technologies:

1. Hold-up is not an antitrust problem. Accordingly, an antitrust remedy is not the correct tool to resolve patent licensing disputes between SEP-holders and implementers of a standard.

2. SSOs should not allow collective actions by standard-implementers to disfavor patent holders in setting the terms of access to patents that cover a new standard.

3. A fundamental element of patent rights is the right to exclude. As such, SSOs and courts should be hesitant to restrict SEP holders’ right to exclude implementers from access to their patents, by, for example, seeking injunctions.

4. Unilateral and unconditional decisions not to license a patent should be per se legal.

Delrahim emphasizes that the threat of antitrust liability, specifically treble damages, distorts the incentives associated with good faith negotiations with SSOs over patent inclusion. Contract law, he goes on to note, is perfectly capable of providing an ex post solution to licensing disputes between SEP holders and implementers of a standard. Unlike antitrust law, a contract law framework allows all parties equal leverage in licensing negotiations.

As I have explained elsewhere, the NMA is best seen as a set of policies designed to spark dynamic economic growth:

[P]atented technology serves as a catalyst for the wealth-creating diffusion of innovation. This occurs through numerous commercialization methods; in the context of standardized technologies, the development of standards is a process of discovery. At each [SSO], the process of discussion and negotiation between engineers, businesspersons, and all other relevant stakeholders reveals the relative value of alternative technologies and tends to result in the best patents being integrated into a standard.

The NMA supports this process of discovery and implementation of the best patented technology born of the labors of the innovators who created it. As a result, the NMA ensures SEP valuations that allow SEP holders to obtain an appropriate return for the new economic surplus that results from the commercialization of standard-engendered innovations. It recognizes that dynamic economic growth is fostered through the incentivization of innovative activities backed by patents.

In sum, the NMA seeks to promote innovation by offering incentives for SEP-driven technological improvements. As such, it rejects as ill-founded prior Federal Trade Commission (FTC) litigation settlements and Obama-era U.S. Justice Department (DOJ) Antitrust Division policy statements that artificially favored implementor licensees’ interests over those of SEP licensors (see here).

In light of the NMA, DOJ cooperated with the U.S. Patent and Trademark Office and National Institute of Standards and Technology (NIST) in issuing a 2019 SEP Policy Statement clarifying that an SEP holder’s promise to license a patent on fair, reasonable, and non-discriminatory (FRAND) terms does not bar it from seeking any available remedy for patent infringement, including an injunction. This signaled that SEPs and non-SEP patents enjoy equivalent legal status.

DOJ also issued a 2020 supplement to its 2015 Institute of Electrical and Electronics Engineers (IEEE) business review letter. The 2015 letter had found no legal fault with revised IEEE standard-setting policies that implicitly favored implementers of standardized technology over SEP holders. The 2020 supplement characterized key elements of the 2015 letter as “outdated,” and noted that the anti-SEP bias of that document could “harm competition and chill innovation.”   

Furthermore, DOJ issued a July 2019 Statement of Interest before the 9th U.S. Circuit Court of Appeals in FTC v. Qualcomm, explaining that unilateral and unconditional decisions not to license a patent are legal under the antitrust laws. In October 2020, the 9th Circuit reversed a district court decision and rejected the FTC’s monopolization suit against Qualcomm. The circuit court, among other findings, held that Qualcomm had no antitrust duty to license its SEPs to competitors.

Regrettably, the Biden Administration appears to be close to rejecting the NMA and to reinstituting the anti-strong patents SEP-skeptical views of the Obama administration (see here and here). DOJ already has effectively repudiated the 2020 supplement to the 2015 IEEE letter and the 2019 SEP Policy Statement. Furthermore, written responses to Senate Judiciary Committee questions by assistant attorney general nominee Jonathan Kanter suggest support for renewed antitrust scrutiny of SEP licensing. These developments are highly problematic if one supports dynamic economic growth.

Conclusion

The NMA represents a pro-American, pro-growth innovation policy prescription. Its abandonment would reduce incentives to invest in patents and standard-setting activities, to the detriment of the U.S. economy. Such a development would be particularly unfortunate at a time when U.S. Supreme Court decisions have weakened American patent rights (see here); China is taking steps to strengthen Chinese patents and raise incentives to obtain Chinese patents (see here); and China is engaging in litigation to weaken key U.S. patents and undermine American technological leadership (see here).

The rejection of NMA would also be in tension with the logic of the 5th U.S. Circuit Court of Appeals’ 2021 HTC v. Ericsson decision, which held that the non-discrimination portion of the FRAND commitment required Ericsson to give HTC the same licensing terms as given to larger mobile-device manufacturers. Furthermore, recent important European court decisions are generally consistent with NMA principles (see here).

Given the importance of dynamic competition in an increasingly globalized world economy, Biden administration officials may wish to take a closer look at the economic arguments supporting the NMA before taking final action to condemn it. Among other things, the administration might take note that major U.S. digital platforms, which are the subject of multiple U.S. and foreign antitrust enforcement investigations, tend to firmly oppose strong patents rights. As one major innovation economist recently pointed out:

If policymakers and antitrust gurus are so concerned about stemming the rising power of Big Tech platforms, they should start by first stopping the relentless attack on IP. Without the IP system, only the big and powerful have the privilege to innovate[.]

A bipartisan group of senators unveiled legislation today that would dramatically curtail the ability of online platforms to “self-preference” their own services—for example, when Apple pre-installs its own Weather or Podcasts apps on the iPhone, giving it an advantage that independent apps don’t have. The measure accompanies a House bill that included similar provisions, with some changes.

1. The Senate bill closely resembles the House version, and the small improvements will probably not amount to much in practice.

The major substantive changes we have seen between the House bill and the Senate version are:

  1. Violations in Section 2(a) have been modified to refer only to conduct that “unfairly” preferences, limits, or discriminates between the platform’s products and others, and that “materially harm[s] competition on the covered platform,” rather than banning all preferencing, limits, or discrimination.
  2. The evidentiary burden required throughout the bill has been changed from  “clear and convincing” to a “preponderance of evidence” (in other words, greater than 50%).
  3. An affirmative defense has been added to permit a platform to escape liability if it can establish that challenged conduct that “was narrowly tailored, was nonpretextual, and was necessary to… maintain or enhance the core functionality of the covered platform.”
  4. The minimum market capitalization for “covered platforms” has been lowered from $600 billion to $550 billion.
  5. The Senate bill would assess fines of 15% of revenues from the period during which the conduct occurred, in contrast with the House bill, which set fines equal to the greater of either 15% of prior-year revenues or 30% of revenues from the period during which the conduct occurred.
  6. Unlike the House bill, the Senate bill does not create a private right of action. Only the U.S. Justice Department (DOJ), Federal Trade Commission (FTC), and state attorneys-generals could bring enforcement actions on the basis of the bill.

Item one here certainly mitigates the most extreme risks of the House bill, which was drafted, bizarrely, to ban all “preferencing” or “discrimination” by platforms. If that were made law, it could literally have broken much of the Internet. The softened language reduces that risk somewhat.

However, Section 2(b), which lists types of conduct that would presumptively establish a violation under Section 2(a), is largely unchanged. As outlined here, this would amount to a broad ban on a wide swath of beneficial conduct. And “unfair” and “material” are notoriously slippery concepts. As a practical matter, their inclusion here may not significantly alter the course of enforcement under the Senate legislation from what would ensue under the House version.

Item three, which allows challenged conduct to be defended if it is “necessary to… maintain or enhance the core functionality of the covered platform,” may also protect some conduct. But because the bill requires companies to prove that challenged conduct is not only beneficial, but necessary to realize those benefits, it effectively implements a “guilty until proven innocent” standard that is likely to prove impossible to meet. The threat of permanent injunctions and enormous fines will mean that, in many cases, companies simply won’t be able to justify the expense of endeavoring to improve even the “core functionality” of their platforms in any way that could trigger the bill’s liability provisions. Thus, again, as a practical matter, the difference between the Senate and House bills may be only superficial.

The effect of this will likely be to diminish product innovation in these areas, because companies could not know in advance whether the benefits of doing so would be worth the legal risk. We have previously highlighted existing conduct that may be lost if a bill like this passes, such as pre-installation of apps or embedding maps and other “rich” results in boxes on search engine results pages. But the biggest loss may be things we don’t even know about yet, that just never happen because the reward from experimentation is not worth the risk of being found to be “discriminating” against a competitor.

We dove into the House bill in Breaking Down the American Choice and Innovation Online Act and Breaking Down House Democrats’ Forthcoming Competition Bills.

2. The prohibition on “unfair self-preferencing” is vague and expansive and will make Google, Amazon, Facebook, and Apple’s products worse. Consumers don’t want digital platforms to be dumb pipes, or to act like a telephone network or sewer system. The Internet is filled with a superabundance of information and options, as well as a host of malicious actors. Good digital platforms act as middlemen, sorting information in useful ways and taking on some of the risk that exists when, inevitably, we end up doing business with untrustworthy actors.

When users have the choice, they tend to prefer platforms that do quite a bit of “discrimination”—that is, favoring some sellers over others, or offering their own related products or services through the platform. Most people prefer Amazon to eBay because eBay is chaotic and riskier to use.

Competitors that decry self-preferencing by the largest platforms—integrating two different products with each other, like putting a maps box showing only the search engine’s own maps on a search engine results page—argue that the conduct is enabled only by a platform’s market dominance and does not benefit consumers.

Yet these companies often do exactly the same thing in their own products, regardless of whether they have market power. Yelp includes a map on its search results page, not just restaurant listings. DuckDuckGo does the same. If these companies offer these features, it is presumably because they think their users want such results. It seems perfectly plausible that Google does the same because it thinks its users—literally the same users, in most cases—also want them.

Fundamentally, and as we discuss in Against the Vertical Disrcimination Presumption, there is simply no sound basis to enact such a bill (even in a slightly improved version):

The notion that self-preferencing by platforms is harmful to innovation is entirely speculative. Moreover, it is flatly contrary to a range of studies showing that the opposite is likely true. In reality, platform competition is more complicated than simple theories of vertical discrimination would have it, and there is certainly no basis for a presumption of harm.

We discussed self-preferencing further in Platform Self-Preferencing Can Be Good for Consumers and Even Competitors, and showed that platform “discrimination” is often what consumers want from digital platforms in On the Origin of Platforms: An Evolutionary Perspective.

3. The bill massively empowers an FTC that seems intent to use antitrust to achieve political goals. The House bill would enable competitors to pepper covered platforms with frivolous lawsuits. The bill’s sponsors presumably hope that removing the private right of action will help to avoid that. But the bill still leaves intact a much more serious risk to the rule of law: the bill’s provisions are so broad that federal antitrust regulators will have enormous discretion over which cases they take.

This means that whoever is running the FTC and DOJ will be able to threaten covered platforms with a broad array of lawsuits, potentially to influence or control their conduct in other, unrelated areas. While some supporters of the bill regard this as a positive, most antitrust watchers would greet this power with much greater skepticism. Fundamentally, both bills grant antitrust enforcers wildly broad powers to pursue goals unrelated to competition. FTC Chair Lina Khan has, for example, argued that “the dispersion of political and economic control” ought to be antitrust’s goal. Commissioner Rebecca Kelly-Slaughter has argued that antitrust should be “antiracist”.

Whatever the desirability of these goals, the broad discretionary authority the bills confer on the antitrust agencies means that individual commissioners may have significantly greater scope to pursue the goals that they believe to be right, rather than Congress.

See discussions of this point at What Lina Khan’s Appointment Means for the House Antitrust Bills, Republicans Should Tread Carefully as They Consider ‘Solutions’ to Big Tech, The Illiberal Vision of Neo-Brandeisian Antitrust, and Alden Abbott’s discussion of FTC Antitrust Enforcement and the Rule of Law.

4. The bill adopts European principles of competition regulation. These are, to put it mildly, not obviously conducive to the sort of innovation and business growth that Americans may expect. Europe has no tech giants of its own, a condition that shows little sign of changing. Apple, alone, is worth as much as the top 30 companies in Germany’s DAX index, and the top 40 in France’s CAC index. Landmark European competition cases have seen Google fined for embedding Shopping results in the Search page—not because it hurt consumers, but because it hurt competing pricecomparison websites.

A fundamental difference between American and European competition regimes is that the U.S. system is far more friendly to businesses that obtain dominant market positions because they have offered better products more cheaply. Under the American system, successful businesses are normally given broad scope to charge high prices and refuse to deal with competitors. This helps to increase the rewards and incentive to innovate and invest in order to obtain that strong market position. The European model is far more burdensome.

The Senate bill adopts a European approach to refusals to deal—the same approach that led the European Commission to fine Microsoft for including Windows Media Player with Windows—and applies it across Big Tech broadly. Adopting this kind of approach may end up undermining elements of U.S. law that support innovation and growth.

For more, see How US and EU Competition Law Differ.

5. The proposals are based on a misunderstanding of the state of competition in the American economy, and of antitrust enforcement. It is widely believed that the U.S. economy has seen diminished competition. This is mistaken, particularly with respect to digital markets. Apparent rises in market concentration and profit margins disappear when we look more closely: local-level concentration is falling even as national-level concentration is rising, driven by more efficient chains setting up more stores in areas that were previously served by only one or two firms.

And markup rises largely disappear after accounting for fixed costs like R&D and marketing.

Where profits are rising, in areas like manufacturing, it appears to be mainly driven by increased productivity, not higher prices. Real prices have not risen in line with markups. Where profitability has increased, it has been mainly driven by falling costs.

Nor have the number of antitrust cases brought by federal antitrust agencies fallen. The likelihood of a merger being challenged more than doubled between 1979 and 2017. And there is little reason to believe that the deterrent effect of antitrust has weakened. Many critics of Big Tech have decided that there must be a problem and have worked backwards from that conclusion, selecting whatever evidence supports it and ignoring the evidence that does not. The consequence of such motivated reasoning is bills like this.

See Geoff’s April 2020 written testimony to the House Judiciary Investigation Into Competition in Digital Markets here.

A debate has broken out among the four sitting members of the Federal Trade Commission (FTC) in connection with the recently submitted FTC Report to Congress on Privacy and Security. Chair Lina Khan argues that the commission “must explore using its rulemaking tools to codify baseline protections,” while Commissioner Rebecca Kelly Slaughter has urged the FTC to initiate a broad-based rulemaking proceeding on data privacy and security. By contrast, Commissioners Noah Joshua Phillips and Christine Wilson counsel against a broad-based regulatory initiative on privacy.

Decisions to initiate a rulemaking should be viewed through a cost-benefit lens (See summaries of Thom Lambert’s masterful treatment of regulation, of which rulemaking is a subset, here and here). Unless there is a market failure, rulemaking is not called for. Even in the face of market failure, regulation should not be adopted unless it is more cost-beneficial than reliance on markets (including the ability of public and private litigation to address market-failure problems, such as data theft). For a variety of reasons, it is unlikely that FTC rulemaking directed at privacy and data security would pass a cost-benefit test.

Discussion

As I have previously explained (see here and here), FTC rulemaking pursuant to Section 6(g) of the FTC Act (which authorizes the FTC “to make rules and regulations for the purpose of carrying out the provisions of this subchapter”) is properly read as authorizing mere procedural, not substantive, rules. As such, efforts to enact substantive competition rules would not pass a cost-benefit test. Such rules could well be struck down as beyond the FTC’s authority on constitutional law grounds, and as “arbitrary and capricious” on administrative law grounds. What’s more, they would represent retrograde policy. Competition rules would generate higher error costs than adjudications; could be deemed to undermine the rule of law, because the U.S. Justice Department (DOJ) could not apply such rules; and innovative efficiency-seeking business arrangements would be chilled.

Accordingly, the FTC likely would not pursue 6(g) rulemaking should it decide to address data security and privacy, a topic which best fits under the “consumer protection” category. Rather, the FTC presumably would most likely initiate a “Magnuson-Moss” rulemaking (MMR) under Section 18 of the FTC Act, which authorizes the commission to prescribe “rules which define with specificity acts or practices which are unfair or deceptive acts or practices in or affecting commerce within the meaning of Section 5(a)(1) of the Act.” Among other things, Section 18 requires that the commission’s rulemaking proceedings provide an opportunity for informal hearings at which interested parties are accorded limited rights of cross-examination. Also, before commencing an MMR proceeding, the FTC must have reason to believe the practices addressed by the rulemaking are “prevalent.” 15 U.S.C. Sec. 57a(b)(3).

MMR proceedings, which are not governed under the Administrative Procedure Act (APA), do not present the same degree of legal problems as Section 6(g) rulemakings (see here). The question of legal authority to adopt a substantive rule is not raised; “rule of law” problems are far less serious (the DOJ is not a parallel enforcer of consumer-protection law); and APA issues of “arbitrariness” and “capriciousness” are not directly presented. Indeed, MMR proceedings include a variety of procedures aimed at promoting fairness (see here, for example). An MMR proceeding directed at data privacy predictably would be based on the claim that the failure to adhere to certain data-protection norms is an “unfair act or practice.”

Nevertheless, MMR rules would be subject to two substantial sources of legal risk.

The first of these arises out of federalism. Three states (California, Colorado, and Virginia) recently have enacted comprehensive data-privacy laws, and a large number of other state legislatures are considering data-privacy bills (see here). The proliferation of state data-privacy statutes would raise the risk of inconsistent and duplicative regulatory norms, potentially chilling business innovations addressed at data protection (a severe problem in the Internet Age, when business data-protection programs typically will have interstate effects).

An FTC MMR data-protection regulation that successfully “occupied the field” and preempted such state provisions could eliminate that source of costs. The Magnuson–Moss Warranty Act, however, does not contain an explicit preemption clause, leaving in serious doubt the ability of an FTC rule to displace state regulations (see here for a summary of the murky state of preemption law, including the skepticism of textualist Supreme Court justices toward implied “obstacle preemption”). In particular, the long history of state consumer-protection and antitrust laws that coexist with federal laws suggests that the case for FTC rule-based displacement of state data protection is a weak one. The upshot, then, of a Section 18 FTC data-protection rule enactment could be “the worst of all possible worlds,” with drawn-out litigation leading to competing federal and state norms that multiplied business costs.

The second source of risk arises out of the statutory definition of “unfair practices,” found in Section 5(n) of the FTC Act. Section 5(n) codifies the meaning of unfair practices, and thereby constrains the FTC’s application of rulemakings covering such practices. Section 5(n) states:

The Commission shall have no authority . . . to declare unlawful an act or practice on the grounds that such an act or practice is unfair unless the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition. In determining whether an act or practice is unfair, the Commission may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.

In effect, Section 5(n) implicitly subjects unfair practices to a well-defined cost-benefit framework. Thus, in promulgating a data-privacy MMR, the FTC first would have to demonstrate that specific disfavored data-protection practices caused or were likely to cause substantial harm. What’s more, the commission would have to show that any actual or likely harm would not be outweighed by countervailing benefits to consumers or competition. One would expect that a data-privacy rulemaking record would include submissions that pointed to the efficiencies of existing data-protection policies that would be displaced by a rule.

Moreover, subsequent federal court challenges to a final FTC rule likely would put forth the consumer and competitive benefits sacrificed by rule requirements. For example, rule challengers might point to the added business costs passed on to consumers that would arise from particular rule mandates, and the diminution in competition among data-protection systems generated by specific rule provisions. Litigation uncertainties surrounding these issues could be substantial and would cast into further doubt the legal viability of any final FTC data protection rule.

Apart from these legal risk-based costs, an MMR data privacy predictably would generate error-based costs. Given imperfect information in the hands of government and the impossibility of achieving welfare-maximizing nirvana through regulation (see, for example, here), any MMR data-privacy rule would erroneously condemn some economically inefficient business protocols and disincentivize some efficiency-seeking behavior. The Section 5(n) cost-benefit framework, though helpful, would not eliminate such error. (For example, even bureaucratic efforts to accommodate some business suggestions during the rulemaking process might tilt the post-rule market in favor of certain business models, thereby distorting competition.) In the abstract, it is difficult to say whether the welfare benefits of a final MMA data-privacy rule (measured by reductions in data-privacy-related consumer harm) would outweigh the costs, even before taking legal costs into account.

Conclusion

At least two FTC commissioners (and likely a third, assuming that President Joe Biden’s highly credentialed nominee Alvaro Bedoya will be confirmed by the U.S. Senate) appear to support FTC data-privacy regulation, even in the absence of new federal legislation. Such regulation, which presumably would be adopted as an MMR pursuant to Section 18 of the FTC Act, would probably not prove cost-beneficial. Not only would adoption of a final data-privacy rule generate substantial litigation costs and uncertainty, it would quite possibly add an additional layer of regulatory burdens above and beyond the requirements of proliferating state privacy rules. Furthermore, it is impossible to say whether the consumer-privacy benefits stemming from such an FTC rule would outweigh the error costs (manifested through competitive distortions and consumer harm) stemming from the inevitable imperfections of the rule’s requirements. All told, these considerations counsel against the allocation of scarce FTC resources to a Section 18 data-privacy rulemaking initiative.

But what about legislation? New federal privacy legislation that explicitly preempted state law would eliminate costs arising from inconsistencies among state privacy rules. Ideally, if such legislation were to be pursued, it should to the extent possible embody a cost-benefit framework designed to minimize the sum of administrative (including litigation) and error costs. The nature of such a possible law, and the role the FTC might play in administering it, however, is a topic for another day.

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:

SOURCE: Finance Buzz

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.

A lawsuit filed by the State of Texas and nine other states in December 2020 alleges, among other things, that Google has engaged in anticompetitive conduct related to its online display-advertising business.

Broadly, the Texas complaint (previously discussed in this TOTM symposium) alleges that Google possesses market power in ad-buying tools and in search, illustrated in the figure below.

The complaint also alleges anticompetitive conduct by Google with respect to YouTube in a separate “inline video-advertising market.” According to the complaint, this market power is leveraged to force transactions through Google’s exchange, AdX, and its network, Google Display Network. The leverage is further exercised by forcing publishers to license Google’s ad server, Google Ad Manager.

Although the Texas complaint raises many specific allegations, the key ones constitute four broad claims: 

  1. Google forces publishers to license Google’s ad server and trade in Google’s ad exchange;
  2. Google uses its control over publishers’ inventory to block exchange competition;
  3. Google has disadvantaged technology known as “header bidding” in order to prevent publishers from accessing its competitors; and
  4. Google prevents rival ad-placement services from competing by not allowing them to buy YouTube ad space.

Alleged harms

The Texas complaint alleges Google’s conduct has caused harm to competing networks, exchanges, and ad servers. The complaint also claims that the plaintiff states’ economies have been harmed “by depriving the Plaintiff States and the persons within each Plaintiff State of the benefits of competition.”

In a nod to the widely accepted Consumer Welfare Standard, the Texas complaint alleges harm to three categories of consumers:

  1. Advertisers who pay for their ads to be displayed, but should be paying less;
  2. Publishers who are paid to provide space on their sites to display ads, but should be paid more; and
  3. Users who visit the sites, view the ads, and purchase or use the advertisers’ and publishers’ products and services.

The complaint claims users are harmed by above-competitive prices paid by advertisers, in that these higher costs are passed on in the form of higher prices and lower quality for the products and services they purchase from those advertisers. The complaint simultaneously claims that users are harmed by the below-market prices received by publishers in the form of “less content (lower output of content), lower-quality content, less innovation in content delivery, more paywalls, and higher subscription fees.”

Without saying so explicitly, the complaint insinuates that if intermediaries (e.g., Google and competing services) charged lower fees for their services, advertisers would pay less, publishers would be paid more, and consumers would be better off in the form of lower prices and better products from advertisers, as well as improved content and lower fees on publishers’ sites.

Effective competition is not an antitrust offense

A flawed premise underlies much of the Texas complaint. It asserts that conduct by a dominant incumbent firm that makes competition more difficult for competitors is inherently anticompetitive, even if that conduct confers benefits on users.

This amounts to a claim that Google is acting anti-competitively by innovating and developing products and services to benefit one or more display-advertising constituents (e.g., advertisers, publishers, or consumers) or by doing things that benefit the advertising ecosystem more generally. These include creating new and innovative products, lowering prices, reducing costs through vertical integration, or enhancing interoperability.

The argument, which is made explicitly elsewhere, is that Google must show that it has engineered and implemented its products to minimize obstacles its rivals face, and that any efficiencies created by its products must be shown to outweigh the costs imposed by those improvements on the company’s competitors.

Similarly, claims that Google has acted in an anticompetitive fashion rest on the unsupportable notion that the company acts unfairly when it designs products to benefit itself without considering how those designs would affect competitors. Google could, it is argued, choose alternate arrangements and practices that would possibly confer greater revenue on publishers or lower prices on advertisers without imposing burdens on competitors.

For example, a report published by the Omidyar Network sketching a “roadmap” for a case against Google claims that, if Google’s practices could possibly be reimagined to achieve the same benefits in ways that foster competition from rivals, then the practices should be condemned as anticompetitive:

It is clear even to us as lay people that there are less anticompetitive ways of delivering effective digital advertising—and thereby preserving the substantial benefits from this technology—than those employed by Google.

– Fiona M. Scott Morton & David C. Dinielli, “Roadmap for a Digital Advertising Monopolization Case Against Google”

But that’s not how the law—or the economics—works. This approach converts beneficial aspects of Google’s ad-tech business into anticompetitive defects, essentially arguing that successful competition and innovation create barriers to entry that merit correction through antitrust enforcement.

This approach turns U.S. antitrust law (and basic economics) on its head. As some of the most well-known words of U.S. antitrust jurisprudence have it:

A single producer may be the survivor out of a group of active competitors, merely by virtue of his superior skill, foresight and industry. In such cases a strong argument can be made that, although, the result may expose the public to the evils of monopoly, the Act does not mean to condemn the resultant of those very forces which it is its prime object to foster: finis opus coronat. The successful competitor, having been urged to compete, must not be turned upon when he wins.

– United States v. Aluminum Co. of America, 148 F.2d 416 (2d Cir. 1945)

U.S. antitrust law is intended to foster innovation that creates benefits for consumers, including innovation by incumbents. The law does not proscribe efficiency-enhancing unilateral conduct on the grounds that it might also inconvenience competitors, or that there is some other arrangement that could be “even more” competitive. Under U.S. antitrust law, firms are “under no duty to help [competitors] survive or expand.”  

To be sure, the allegations against Google are couched in terms of anticompetitive effect, rather than being described merely as commercial disagreements over the distribution of profits. But these effects are simply inferred, based on assumptions that Google’s vertically integrated business model entails an inherent ability and incentive to harm rivals.

The Texas complaint claims Google can surreptitiously derive benefits from display advertisers by leveraging its search-advertising capabilities, or by “withholding YouTube inventory,” rather than altruistically opening Google Search and YouTube up to rival ad networks. The complaint alleges Google uses its access to advertiser, publisher, and user data to improve its products without sharing this data with competitors.

All these charges may be true, but they do not describe inherently anticompetitive conduct. Under U.S. law, companies are not obliged to deal with rivals and certainly are not obliged to do so on those rivals’ preferred terms

As long ago as 1919, the U.S. Supreme Court held that:

In the absence of any purpose to create or maintain a monopoly, the [Sherman Act] does not restrict the long recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.

– United States v. Colgate & Co.

U.S. antitrust law does not condemn conduct on the basis that an enforcer (or a court) is able to identify or hypothesize alternative conduct that might plausibly provide similar benefits at lower cost. In alleging that there are ostensibly “better” ways that Google could have pursued its product design, pricing, and terms of dealing, both the Texas complaint and Omidyar “roadmap” assert that, had the firm only selected a different path, an alternative could have produced even more benefits or an even more competitive structure.

The purported cure of tinkering with benefit-producing unilateral conduct by applying an “even more competition” benchmark is worse than the supposed disease. The adjudicator is likely to misapply such a benchmark, deterring the very conduct the law seeks to promote.

For example, Texas complaint alleges: “Google’s ad server passed inside information to Google’s exchange and permitted Google’s exchange to purchase valuable impressions at artificially depressed prices.” The Omidyar Network’s “roadmap” claims that “after purchasing DoubleClick, which became its publisher ad server, Google apparently lowered its prices to publishers by a factor of ten, at least according to one publisher’s account related to the CMA. Low prices for this service can force rivals to depart, thereby directly reducing competition.”

In contrast, as current U.S. Supreme Court Associate Justice Stephen Breyer once explained, in the context of above-cost low pricing, “the consequence of a mistake here is not simply to force a firm to forego legitimate business activity it wishes to pursue; rather, it is to penalize a procompetitive price cut, perhaps the most desirable activity (from an antitrust perspective) that can take place in a concentrated industry where prices typically exceed costs.”  That commentators or enforcers may be able to imagine alternative or theoretically more desirable conduct is beside the point.

It has been reported that the U.S. Justice Department (DOJ) may join the Texas suit or bring its own similar action against Google in the coming months. If it does, it should learn from the many misconceptions and errors in the Texas complaint that leave it on dubious legal and economic grounds.

The language of the federal antitrust laws is extremely general. Over more than a century, the federal courts have applied common-law techniques to construe this general language to provide guidance to the private sector as to what does or does not run afoul of the law. The interpretive process has been fraught with some uncertainty, as judicial approaches to antitrust analysis have changed several times over the past century. Nevertheless, until very recently, judges and enforcers had converged toward relying on a consumer welfare standard as the touchstone for antitrust evaluations (see my antitrust primer here, for an overview).

While imperfect and subject to potential error in application—a problem of legal interpretation generally—the consumer welfare principle has worked rather well as the focus both for antitrust-enforcement guidance and judicial decision-making. The general stability and predictability of antitrust under a consumer welfare framework has advanced the rule of law. It has given businesses sufficient information to plan transactions in a manner likely to avoid antitrust liability. It thereby has cabined uncertainty and increased the probability that private parties would enter welfare-enhancing commercial arrangements, to the benefit of society.

In a very thoughtful 2017 speech, then Acting Assistant Attorney General for Antitrust Andrew Finch commented on the importance of the rule of law to principled antitrust enforcement. He noted:

[H]ow do we administer the antitrust laws more rationally, accurately, expeditiously, and efficiently? … Law enforcement requires stability and continuity both in rules and in their application to specific cases.

Indeed, stability and continuity in enforcement are fundamental to the rule of law. The rule of law is about notice and reliance. When it is impossible to make reasonable predictions about how a law will be applied, or what the legal consequences of conduct will be, these important values are diminished. To call our antitrust regime a “rule of law” regime, we must enforce the law as written and as interpreted by the courts and advance change with careful thought.

The reliance fostered by stability and continuity has obvious economic benefits. Businesses invest, not only in innovation but in facilities, marketing, and personnel, and they do so based on the economic and legal environment they expect to face.

Of course, we want businesses to make those investments—and shape their overall conduct—in accordance with the antitrust laws. But to do so, they need to be able to rely on future application of those laws being largely consistent with their expectations. An antitrust enforcement regime with frequent changes is one that businesses cannot plan for, or one that they will plan for by avoiding certain kinds of investments.

That is certainly not to say there has not been positive change in the antitrust laws in the past, or that we would have been better off without those changes. U.S. antitrust law has been refined, and occasionally recalibrated, with the courts playing their appropriate interpretive role. And enforcers must always be on the watch for new or evolving threats to competition.  As markets evolve and products develop over time, our analysis adapts. But as those changes occur, we pursue reliability and consistency in application in the antitrust laws as much as possible.

Indeed, we have enjoyed remarkable continuity and consensus for many years. Antitrust law in the U.S. has not been a “paradox” for quite some time, but rather a stable and valuable law enforcement regime with appropriately widespread support.

Unfortunately, policy decisions taken by the new Federal Trade Commission (FTC) leadership in recent weeks have rejected antitrust continuity and consensus. They have injected substantial uncertainty into the application of competition-law enforcement by the FTC. This abrupt change in emphasis undermines the rule of law and threatens to reduce economic welfare.

As of now, the FTC’s departure from the rule of law has been notable in two areas:

  1. Its rejection of previous guidance on the agency’s “unfair methods of competition” authority, the FTC’s primary non-merger-related enforcement tool; and
  2. Its new advice rejecting time limits for the review of generally routine proposed mergers.

In addition, potential FTC rulemakings directed at “unfair methods of competition” would, if pursued, prove highly problematic.

Rescission of the Unfair Methods of Competition Policy Statement

The FTC on July 1 voted 3-2 to rescind the 2015 FTC Policy Statement Regarding Unfair Methods of Competition under Section 5 of the FTC Act (UMC Policy Statement).

The bipartisan UMC Policy Statement has originally been supported by all three Democratic commissioners, including then-Chairwoman Edith Ramirez. The policy statement generally respected and promoted the rule of law by emphasizing that, in applying the facially broad “unfair methods of competition” (UMC) language, the FTC would be guided by the well-established principles of the antitrust rule of reason (including considering any associated cognizable efficiencies and business justifications) and the consumer welfare standard. The FTC also explained that it would not apply “standalone” Section 5 theories to conduct that would violate the Sherman or Clayton Acts.

In short, the UMC Policy Statement sent a strong signal that the commission would apply UMC in a manner fully consistent with accepted and well-understood antitrust policy principles. As in the past, the vast bulk of FTC Section 5 prosecutions would be brought against conduct that violated the core antitrust laws. Standalone Section 5 cases would be directed solely at those few practices that harmed consumer welfare and competition, but somehow fell into a narrow crack in the basic antitrust statutes (such as, perhaps, “invitations to collude” that lack plausible efficiency justifications). Although the UMC Statement did not answer all questions regarding what specific practices would justify standalone UMC challenges, it substantially limited business uncertainty by bringing Section 5 within the boundaries of settled antitrust doctrine.

The FTC’s announcement of the UMC Policy Statement rescission unhelpfully proclaimed that “the time is right for the Commission to rethink its approach and to recommit to its mandate to police unfair methods of competition even if they are outside the ambit of the Sherman or Clayton Acts.” As a dissenting statement by Commissioner Christine S. Wilson warned, consumers would be harmed by the commission’s decision to prioritize other unnamed interests. And as Commissioner Noah Joshua Phillips stressed in his dissent, the end result would be reduced guidance and greater uncertainty.

In sum, by suddenly leaving private parties in the dark as to how to conform themselves to Section 5’s UMC requirements, the FTC’s rescission offends the rule of law.

New Guidance to Parties Considering Mergers

For decades, parties proposing mergers that are subject to statutory Hart-Scott-Rodino (HSR) Act pre-merger notification requirements have operated under the understanding that:

  1. The FTC and U.S. Justice Department (DOJ) will routinely grant “early termination” of review (before the end of the initial 30-day statutory review period) to those transactions posing no plausible competitive threat; and
  2. An enforcement agency’s decision not to request more detailed documents (“second requests”) after an initial 30-day pre-merger review effectively serves as an antitrust “green light” for the proposed acquisition to proceed.

Those understandings, though not statutorily mandated, have significantly reduced antitrust uncertainty and related costs in the planning of routine merger transactions. The rule of law has been advanced through an effective assurance that business combinations that appear presumptively lawful will not be the target of future government legal harassment. This has advanced efficiency in government, as well; it is a cost-beneficial optimal use of resources for DOJ and the FTC to focus exclusively on those proposed mergers that present a substantial potential threat to consumer welfare.

Two recent FTC pronouncements (one in tandem with DOJ), however, have generated great uncertainty by disavowing (at least temporarily) those two welfare-promoting review policies. Joined by DOJ, the FTC on Feb. 4 announced that the agencies would temporarily suspend early terminations, citing an “unprecedented volume of filings” and a transition to new leadership. More than six months later, this “temporary” suspension remains in effect.

Citing “capacity constraints” and a “tidal wave of merger filings,” the FTC subsequently published an Aug. 3 blog post that effectively abrogated the 30-day “green lighting” of mergers not subject to a second request. It announced that it was sending “warning letters” to firms reminding them that FTC investigations remain open after the initial 30-day period, and that “[c]ompanies that choose to proceed with transactions that have not been fully investigated are doing so at their own risk.”

The FTC’s actions interject unwarranted uncertainty into merger planning and undermine the rule of law. Preventing early termination on transactions that have been approved routinely not only imposes additional costs on business; it hints that some transactions might be subject to novel theories of liability that fall outside the antitrust consensus.

Perhaps more significantly, as three prominent antitrust practitioners point out, the FTC’s warning letters states that:

[T]he FTC may challenge deals that “threaten to reduce competition and harm consumers, workers, and honest businesses.” Adding in harm to both “workers and honest businesses” implies that the FTC may be considering more ways that transactions can have an adverse impact other than just harm to competition and consumers [citation omitted].

Because consensus antitrust merger analysis centers on consumer welfare, not the protection of labor or business interests, any suggestion that the FTC may be extending its reach to these new areas is inconsistent with established legal principles and generates new business-planning risks.

More generally, the Aug. 6 FTC “blog post could be viewed as an attempt to modify the temporal framework of the HSR Act”—in effect, an effort to displace an implicit statutory understanding in favor of an agency diktat, contrary to the rule of law. Commissioner Wilson sees the blog post as a means to keep investigations open indefinitely and, thus, an attack on the decades-old HSR framework for handling most merger reviews in an expeditious fashion (see here). Commissioner Phillips is concerned about an attempt to chill legal M&A transactions across the board, particularly unfortunate when there is no reason to conclude that particular transactions are illegal (see here).

Finally, the historical record raises serious questions about the “resource constraint” justification for the FTC’s new merger review policies:

Through the end of July 2021, more than 2,900 transactions were reported to the FTC. It is not clear, however, whether these record-breaking HSR filing numbers have led (or will lead) to more deals being investigated. Historically, only about 13 percent of all deals reported are investigated in some fashion, and roughly 3 percent of all deals reported receive a more thorough, substantive review through the issuance of a Second Request. Even if more deals are being reported, for the majority of transactions, the HSR process is purely administrative, raising no antitrust concerns, and, theoretically, uses few, if any, agency resources. [Citations omitted.]

Proposed FTC Competition Rulemakings

The new FTC leadership is strongly considering competition rulemakings. As I explained in a recent Truth on the Market post, such rulemakings would fail a cost-benefit test. They raise serious legal risks for the commission and could impose wasted resource costs on the FTC and on private parties. More significantly, they would raise two very serious economic policy concerns:

First, competition rules would generate higher error costs than adjudications. Adjudications cabin error costs by allowing for case-specific analysis of likely competitive harms and procompetitive benefits. In contrast, competition rules inherently would be overbroad and would suffer from a very high rate of false positives. By characterizing certain practices as inherently anticompetitive without allowing for consideration of case-specific facts bearing on actual competitive effects, findings of rule violations inevitably would condemn some (perhaps many) efficient arrangements.

Second, competition rules would undermine the rule of law and thereby reduce economic welfare. FTC-only competition rules could lead to disparate legal treatment of a firm’s business practices, depending upon whether the FTC or the U.S. Justice Department was the investigating agency. Also, economic efficiency gains could be lost due to the chilling of aggressive efficiency-seeking business arrangements in those sectors subject to rules. [Emphasis added.]

In short, common law antitrust adjudication, focused on the consumer welfare standard, has done a good job of promoting a vibrant competitive economy in an efficient fashion. FTC competition rulemaking would not.

Conclusion

Recent FTC actions have undermined consensus antitrust-enforcement standards and have departed from established merger-review procedures with respect to seemingly uncontroversial consolidations. Those decisions have imposed costly uncertainty on the business sector and are thereby likely to disincentivize efficiency-seeking arrangements. What’s more, by implicitly rejecting consensus antitrust principles, they denigrate the primacy of the rule of law in antitrust enforcement. The FTC’s pursuit of competition rulemaking would further damage the rule of law by imposing arbitrary strictures that ignore matter-specific considerations bearing on the justifications for particular business decisions.

Fortunately, these are early days in the Biden administration. The problematic initial policy decisions delineated in this comment could be reversed based on further reflection and deliberation within the commission. Chairwoman Lina Khan and her fellow Democratic commissioners would benefit by consulting more closely with Commissioners Wilson and Phillips to reach agreement on substantive and procedural enforcement policies that are better tailored to promote consumer welfare and enhance vibrant competition. Such policies would benefit the U.S. economy in a manner consistent with the rule of law.

Image by Gerd Altmann from Pixabay

AT&T’s $102 billion acquisition of Time Warner in 2019 will go down in M&A history as an exceptionally ill-advised transaction, resulting in the loss of tens of billions of dollars of shareholder value. It should also go down in history as an exceptional ill-chosen target of antitrust intervention.  The U.S. Department of Justice, with support from many academic and policy commentators, asserted with confidence that the vertical combination of these content and distribution powerhouses would result in an entity that could exercise market power to the detriment of competitors and consumers.

The chorus of condemnation continued with vigor even after the DOJ’s loss in court and AT&T’s consummation of the transaction. With AT&T’s May 17 announcement that it will unwind the two-year-old acquisition and therefore abandon its strategy to integrate content and distribution, it is clear these predictions of impending market dominance were unfounded. 

This widely shared overstatement of antitrust risk derives from a simple but fundamental error: regulators and commentators were looking at the wrong market.  

The DOJ’s Antitrust Case against the Transaction

The business case for the AT&T/Time Warner transaction was straightforward: it promised to generate synergies by combining a leading provider of wireless, broadband, and satellite television services with a leading supplier of video content. The DOJ’s antitrust case against the transaction was similarly straightforward: the combined entity would have the ability to foreclose “must have” content from other “pay TV” (cable and satellite television) distributors, resulting in adverse competitive effects. 

This foreclosure strategy was expected to take two principal forms. First, AT&T could temporarily withhold (or threaten to withhold) content from rival distributors absent payment of a higher carriage fee, which would then translate into higher fees for subscribers. Second, AT&T could permanently withhold content from rival distributors, who would then lose subscribers to AT&T’s DirectTV satellite television service, further enhancing AT&T’s market power. 

Many commentators, both in the trade press and significant portions of the scholarly community, characterized the transaction as posing a high-risk threat to competitive conditions in the pay TV market. These assertions reflected the view that the new entity would exercise a bottleneck position over video-content distribution in the pay TV market and would exercise that power to impose one-sided terms to the detriment of content distributors and consumers. 

Notwithstanding this bevy of endorsements, the DOJ’s case was rejected by the district court and the decision was upheld by the D.C. appellate court. The district judge concluded that the DOJ had failed to show that the combined entity would exercise any credible threat to withhold “must have” content from distributors. A key reason: the lost carriage fees AT&T would incur if it did withhold content were so high, and the migration of subscribers from rival pay TV services so speculative, that it would represent an obviously irrational business strategy. In short: no sophisticated business party would ever take AT&T’s foreclosure threat seriously, in which case the DOJ’s predictions of market power were insufficiently compelling to justify the use of government power to block the transaction.

The Fundamental Flaws in the DOJ’s Antitrust Case

The logical and factual infirmities of the DOJ’s foreclosure hypothesis have been extensively and ably covered elsewhere and I will not repeat that analysis. Following up on my previous TOTM commentary on the transaction, I would like to emphasize the point that the DOJ’s case against the transaction was flawed from the outset for two more fundamental reasons. 

False Assumption #1

The assumption that the combined entity could withhold so-called “must have” content to cause significant and lasting competitive injury to rival distributors flies in the face of market realities.  Content is an abundant, renewable, and mobile resource. There are few entry barriers to the content industry: a commercially promising idea will likely attract capital, which will in turn secure the necessary equipment and personnel for production purposes. Any rival distributor can access a rich menu of valuable content from a plethora of sources, both domestically and worldwide, each of which can provide new content, as required. Even if the combined entity held a license to distribute purportedly “must have” content, that content would be up for sale (more precisely, re-licensing) to the highest bidder as soon as the applicable contract term expired. This is not mere theorizing: it is a widely recognized feature of the entertainment industry.

False Assumption #2

Even assuming the combined entity could wield a portfolio of “must have” content to secure a dominant position in the pay TV market and raise content acquisition costs for rival pay TV services, it still would lack any meaningful pricing power in the relevant consumer market. The reason: significant portions of the viewing population do not want any pay TV or only want dramatically “slimmed-down” packages. Instead, viewers increasingly consume content primarily through video-streaming services—a market in which platforms such as Amazon and Netflix already enjoyed leading positions at the time of the transaction. Hence, even accepting the DOJ’s theory that the combined entity could somehow monopolize the pay TV market consisting of cable and satellite television services, the theory still fails to show any reasonable expectation of anticompetitive effects in the broader and economically relevant market comprising pay TV and streaming services.  Any attempt to exercise pricing power in the pay TV market would be economically self-defeating, since it would likely prompt a significant portion of consumers to switch to (or start to only use) streaming services.

The Antitrust Case for the Transaction

When properly situated within the market that was actually being targeted in the AT&T/Time Warner acquisition, the combined entity posed little credible threat of exercising pricing power. To the contrary, the combined entity was best understood as an entrant that sought to challenge the two pioneer entities—Amazon and Netflix—in the “over the top” content market.

Each of these incumbent platforms individually had (and have) multi-billion-dollar content production budgets that rival or exceed the budgets of major Hollywood studios and enjoy worldwide subscriber bases numbering in the hundreds of millions. If that’s not enough, AT&T was not the only entity that observed the displacement of pay TV by streaming services, as illustrated by the roughly concurrent entry of Disney’s Disney+ service, Apple’s Apple TV+ service, Comcast NBCUniversal’s Peacock service, and others. Both the existing and new competitors are formidable entities operating in a market with formidable capital requirements. In 2019, Netflix, Amazon, and Apple TV expended approximately $15 billion, $6 billion, and again, $6 billion, respectively, on content; by contrast, HBO Max, AT&T’s streaming service, expended approximately $3.5 billion. 

In short, the combined entity faced stiff competition from existing and reasonably anticipated competitors, requiring several billions of dollars on “content spend” to even stay in the running. Far from being able to exercise pricing power in an imaginary market defined by DOJ litigators for strategic purposes, the AT&T/Time Warner entity faced the challenge of merely surviving in a real-world market populated by several exceptionally well-financed competitors. At best, the combined entity “threatened” to deliver incremental competitive benefits by adding a robust new platform to the video-streaming market; at worst, it would fail in this objective and cause no incremental competitive harm. As it turns out, the latter appears to be the case.

The Enduring Virtues of Antitrust Prudence

AT&T’s M&A fiasco has important lessons for broader antitrust debates about the evidentiary standards that should be applied by courts and agencies when assessing alleged antitrust violations, in general, and vertical restraints, in particular.  

Among some scholars, regulators, and legislators, it has become increasingly received wisdom that prevailing evidentiary standards, as reflected in federal case law and agency guidelines, are excessively demanding, and have purportedly induced chronic underenforcement. It has been widely asserted that the courts’ and regulators’ focus on avoiding “false positives” and the associated costs of disrupting innocuous or beneficial business practices has resulted in an overly cautious enforcement posture, especially with respect to mergers and vertical restraints.

In fact, these views were expressed by some commentators in endorsing the antitrust case against the AT&T/Time-Warner transaction. Some legislators have gone further and argued for substantial amendments to the antitrust law to provide enforcers and courts with greater latitude to block or re-engineer combinations that would not pose sufficiently demonstrated competitive risks under current statutory or case law.

The swift downfall of the AT&T/Time-Warner transaction casts great doubt on this critique and accompanying policy proposals. It was precisely the district court’s rigorous application of those “overly” demanding evidentiary standards that avoided what would have been a clear false-positive error. The failure of the “blockbuster” combination to achieve not only market dominance, but even reasonably successful entry, validates the wisdom of retaining those standards.

The fundamental mismatch between the widely supported antitrust case against the transaction and the widely overlooked business realities of the economically relevant consumer market illustrates the ease with which largely theoretical and decontextualized economic models of competitive harm can lead to enforcement actions that lack any reasonable basis in fact.   

[TOTM: The following is part of a digital symposium by TOTM guests and authors on the law, economics, and policy of the antitrust lawsuits against Google. The entire series of posts is available here.]

On October 20, 2020, the U.S. Department of Justice (DOJ) and eleven states with Republican attorneys general sued Google for monopolizing and attempting to monopolize the markets for general internet search services, search advertising, and “general search text” advertising (i.e., ads that resemble search results).  Last week, California joined the lawsuit, making it a bipartisan affair.

DOJ and the states (collectively, “the government”) allege that Google has used contractual arrangements to expand and cement its dominance in the relevant markets.  In particular, the government complains that Google has agreed to share search ad revenues in exchange for making Google Search the default search engine on various “search access points.” 

Google has entered such agreements with Apple (for search on iPhones and iPads), manufacturers of Android devices and the mobile service carriers that support them, and producers of web browsers.  Google is also pursuing default status on new internet-enabled consumer products, such as voice assistants and “smart” TVs, appliances, and wearables.  In the government’s telling, this all amounts to Google’s sharing of monopoly profits with firms that can ensure its continued monopoly by imposing search defaults that users are unlikely to alter.

There are several obvious weaknesses with the government’s case.  One is that preset internet defaults are super easy to change and, in other contexts, are regularly altered.  For example, while 88% of desktop and laptop computers use the Windows operating system, which defaults to a Microsoft browser (Internet Explorer or Edge), Google’s Chrome browser commands a 69% market share on desktops and laptops, compared to around 13% for Internet Explorer and Edge combined.  Changing a default search engine is as easy as changing a browser default—three simple steps on an iPhone!—and it seems consumers will change defaults they don’t actually prefer.

A second obvious weakness, related to the first, is that the government has alleged no facts suggesting that Google’s search rivals—primarily Bing, Yahoo, and DuckDuckGo—would have enjoyed more success but for Google’s purportedly exclusionary agreements.  Even absent default status, people likely would have selected Google Search because it’s the better search engine.  It doesn’t seem the challenged arrangements caused Google’s search dominance.

Admittedly, the standard of causation in monopolization cases (at least those seeking only injunctive relief) is low.  The D.C. Circuit’s Microsoft decision described it as “edentulous” or, less pretentiously, toothless.  Nevertheless, the government is unlikely to prevail in its action against Google—and that’s a good thing.  Below, I highlight the central deficiency in the government’s Google case and point out problems with the government’s challenges to each of Google’s purportedly exclusionary arrangements.   

The Lawsuit’s Overarching Deficiency

We’ve all had the experience of typing a query only to have Google, within a few key strokes, accurately predict what we were going to ask and provide us with exactly the answer we were looking for.  It’s both eerie and awesome, and it keeps us returning to Google time and again.

But it’s not magic.  Nor has Google hacked our brains.  Google is so good at predicting our questions and providing responsive search results because its top-notch algorithms process gazillions of searches and can “learn” from users’ engagement.  Scale is thus essential to Google’s quality. 

The government’s complaint concedes as much.  It acknowledges that “[g]reater scale improves the quality of a general search engine’s algorithms” (¶35) and that “[t]he additional data from scale allows improved automated learning for algorithms to deliver more relevant results, particularly on ‘fresh’ queries (queries seeking recent information), location-based queries (queries asking about something in the searcher’s vicinity), and ‘long-tail’ queries (queries used infrequently)” (¶36). The complaint also asserts that “[t]he most effective way to achieve scale is for the general search engine to be the preset default on mobile devices, computers, and other devices…” (¶38).

Oddly, though, the government chides Google for pursuing “[t]he most effective way” of securing the scale that concededly “improves the quality of a general search engine’s algorithms.”  Google’s efforts to ensure and enhance its own product quality are improper, the government says, because “they deny rivals scale to compete effectively” (¶8).  In the government’s view, Google is legally obligated to forego opportunities to make its own product better so as to give its rivals a chance to improve their own offerings.

This is inconsistent with U.S. antitrust law.  Just as firms are not required to hold their prices high to create a price umbrella for their less efficient rivals, they need not refrain from efforts to improve the quality of their own offerings so as to give their rivals a foothold. 

Antitrust does forbid anticompetitive foreclosure of rivals—i.e., business-usurping arrangements that are not the result of efforts to compete on the merits by reducing cost or enhancing quality.  But firms are, and should be, free to make their products better, even if doing so makes things more difficult for their rivals.  Antitrust, after all, protects competition, not competitors.    

The central deficiency in the government’s case is that it concedes that scale is crucial to search engine quality, but it does not assert that there is a “minimum efficient scale”—i.e., a point at which scale economies are exhausted.  If a firm takes actions to enhance its own scale beyond minimum efficient scale, and if its efforts may hold its rivals below such scale, then it may have engaged in anticompetitive foreclosure.  But a firm that pursues scale that makes its products better is simply competing on the merits.

The government likely did not allege that there is a minimum efficient scale in general internet search services because returns to scale go on indefinitely, or at least for a very long time.  But the absence of such an allegation damns the government’s case against Google, for it implies that Google’s efforts to secure the distribution, and thus the greater use, of its services make those services better.

In this regard, the Microsoft case, which the government points to as a model for its action against Google (¶10), is inapposite.  Inthat case, the government alleged that Microsoft had entered license agreements that foreclosed Netscape, a potential rival, from the best avenues of browser distribution: original equipment manufacturers (OEMs) and internet access providers.  The government here similarly alleges that Google has foreclosed rival search engines from the best avenues of search distribution: default settings on mobile devices and web browsers.  But a key difference (in addition to the fact that search defaults are quite easy to change) is that Microsoft’s license restrictions foreclosed Netscape without enhancing the quality of Microsoft’s offerings.  Indeed, the court emphasized that the challenged Microsoft agreements were anticompetitive because they “reduced rival browsers’ usage share not by improving [Microsoft’s] own product but, rather, by preventing OEMs from taking actions that could increase rivals’ share of usage” (emphasis added).  Here, any foreclosure of Google’s search rivals is incidental to Google’s efforts to improve its product by enhancing its scale.

Now, the government might contend that the anticompetitive harms from raising rivals’ distribution costs exceed the procompetitive benefits of enhancing the quality of Google’s search services.  Courts, though, have generally been skeptical of claims that exclusion-causing product enhancements are anticompetitive because they do more harm than good.  There’s a sound reason for this: courts are ill-equipped to weigh the benefits of product enhancements against the costs of competition reductions resulting from product-enhancement efforts.  For that reason, they should—and likely will—stick with the rule that this sort of product-enhancing conduct is competition on the merits, even if it has the incidental effect of raising rivals’ costs.  And if they do so, the government will lose this case.     

Problems with the Government’s Specific Challenges

Agreements with Android OEMs and Wireless Carriers

The government alleges that Google has foreclosed its search rivals from distribution opportunities on the Android platform.  It has done so, the government says, by entering into exclusion-causing agreements with OEMs that produce Android products (Samsung, Motorola, etc.) and with carriers that provide wireless service for Android devices (AT&T, Verizon, etc.).

Android is an open source operating system that is owned by Google and licensed, for free, to producers of mobile internet devices.  Under the terms of the challenged agreements, Google’s counterparties promise not to produce Android “forks”—operating systems that are Android-based but significantly alter or “fragment” the basic platform—in order to get access to proprietary Google apps that Android users typically desire and to certain application protocol interfaces (APIs) that enable various functionalities.  In addition to these “anti-forking agreements,” counterparties enter various “pre-installation agreements” obligating them to install a suite of Google apps that use Google Search as a default.  Installing that suite is a condition for obtaining the right to pre-install Google’s app store (Google Play) and other must-have apps.  Finally, OEMs and carriers enter “revenue sharing agreements” that require the use of Google Search as the sole preset default on a number of search access points in exchange for a percentage of search ad revenue derived from covered devices.  Taken together, the government says, these anti-forking, pre-installation, and revenue-sharing agreements preclude the emergence of Android rivals (from forks) and ensure the continued dominance of Google Search on Android devices.

Eliminating these agreements, though, would likely harm consumers by reducing competition in the market for mobile operating systems.  Within that market, there are two dominant players: Apple’s iOS and Google’s Android.  Apple earns money off iOS by selling hardware—iPhones and iPads that are pre-installed with iOS.  Google licenses Android to OEMs for free but then earns advertising revenue off users’ searches (which provide an avenue for search ads) and other activities (which generate user data for better targeted display ads).  Apple and Google thus compete on revenue models.  As Randy Picker has explained, Microsoft tried a third revenue model—licensing a Windows mobile operating system to OEMs for a fee—but it failed.  The continued competition between Apple and Google, though, allows for satisfaction of heterogenous consumer preferences: Apple products are more expensive but more secure (due to Apple’s tight control over software and hardware); Android devices are cheaper (as the operating system is ad-supported) and offer more innovations (as OEMs have more flexibility), but tend to be less secure.  Such variety—a result of business model competition—is good for consumers. 

If the government were to prevail and force Google to end the agreements described above, thereby reducing the advertising revenue Google derives from Android, Google would have to either copy Apple’s vertically integrated model so as to recoup its Android investments through hardware sales, charge OEMs for Android (a la Microsoft), or cut back on its investments in Android.  In each case, consumers would suffer.  The first option would take away an offering preferred by many consumers—indeed most globally, as Android dominates iOS on a worldwide basis.  The second option would replace Google’s business model with one that failed, suggesting that consumers value it less.  The third option would reduce product quality in the market for mobile operating systems. 

In the end, then, the government’s challenge to Google’s Android agreements is myopic and misguided.  Competition among business models, like competition along any dimension, inures to the benefit of consumers.  Precluding it as the government is demanding would be silly.       

Agreements with Browser Producers

Web browsers like Apple’s Safari and Mozilla’s Firefox are a primary distribution channel for search engines.  The government claims that Google has illicitly foreclosed rival search engines from this avenue of distribution by entering revenue-sharing agreements with the major non-Microsoft browsers (i.e., all but Microsoft’s Edge and Internet Explorer).  Under those agreements, Google shares up to 40% of ad revenues generated from a browser in exchange for being the preset default on both computer and mobile versions of the browser.

Surely there is no problem, though, with search engines paying royalties to web browsers.  That’s how independent browsers like Opera and Firefox make money!  Indeed, 95% of Firefox’s revenue comes from search royalties.  If browsers were precluded from sharing in search engines’ ad revenues, they would have to find an alternative source of financing.  Producers of independent browsers would likely charge license fees, which consumers would probably avoid.  That means the only available browsers would be those affiliated with an operating system (Microsoft’s Edge, Apple’s Safari) or a search engine (Google’s Chrome).  It seems doubtful that reducing the number of viable browsers would benefit consumers.  The law should therefore allow payment of search royalties to browsers.  And if such payments are permitted, a browser will naturally set its default search engine so as to maximize its payout.  

Google’s search rivals can easily compete for default status on a browser by offering a better deal to the browser producer.  In 2014, for example, search engine Yahoo managed to wrest default status on Mozilla’s Firefox away from Google.  The arrangement was to last five years, but in 2017, Mozilla terminated the agreement and returned Google to default status because so many Firefox users were changing the browser’s default search engine from Yahoo to Google.  This historical example undermines the government’s challenges to Google’s browser agreements by showing (1) that other search engines can attain default status by competing, and (2) that defaults aren’t as “sticky” as the government claims—at least, not when the default is set to a search engine other than the one most people prefer.

In short, there’s nothing anticompetitive about Google’s browser agreements, and enjoining such deals would likely injure consumers by reducing competition among browsers.

Agreements with Apple

That brings us to the allegations that have gotten the most attention in the popular press: those concerning Google’s arrangements with Apple.  The complaint alleges that Google pays Apple $8-12 billion a year—a whopping 15-20% of Apple’s net income—for granting Google default search status on iOS devices.  In the government’s telling, Google is agreeing to share a significant portion of its monopoly profits with Apple in exchange for Apple’s assistance in maintaining Google’s search monopoly.

An alternative view, of course, is that Google is just responding to Apple’s power: Apple has assembled a giant installed base of loyal customers and can demand huge payments to favor one search engine over another on its popular mobile devices.  In that telling, Google may be paying Apple to prevent it from making Bing or another search engine the default on Apple’s search access points.

If that’s the case, what Google is doing is both procompetitive and a boon to consumers.  Microsoft could easily outbid Google to have Bing set as the default search engine on Apple’s devices. Microsoft’s market capitalization exceeds that of Google parent Alphabet by about $420 billion ($1.62 trillion versus $1.2 trillion), which is roughly the value of Walmart.  Despite its ability to outbid Google for default status, Microsoft hasn’t done so, perhaps because it realizes that defaults aren’t that sticky when the default service isn’t the one most people prefer.  Microsoft knows that from its experience with Internet Explorer and Edge (which collectively command only around 13% of the desktop browser market even though they’re the defaults on Windows, which has a 88% market share on desktops and laptops), and from its experience with Bing (where “Google” is the number one search term).  Nevertheless, the possibility remains that Microsoft could outbid Google for default status, improve its quality to prevent users from changing the default (or perhaps pay users for sticking with Bing), and thereby take valuable scale from Google, impairing the quality of Google Search.  To prevent that from happening, Google shares with Apple a generous portion of its search ad revenues, which, given the intense competition for mobile device sales, Apple likely passes along to consumers in the form of lower phone and tablet prices.

If the government succeeds in enjoining Google’s payments to Apple for default status, other search engines will presumably be precluded from such arrangements as well.  After all, the “foreclosure” effect of paying for default search status on Apple products is the same regardless of which search engine does the paying, and U.S. antitrust law does not “punish” successful firms by forbidding them from engaging in competitive activities that are open to their rivals. 

Ironically, then, the government’s success in its challenge to Google’s Apple payments would benefit Google at the expense of consumers:  Google would almost certainly remain the default search engine on Apple products, as it is most preferred by consumers and no rival could pay to dislodge it; Google would not have to pay a penny to retain its default status; and Apple would lose revenues that it likely passes along to consumers in the form of lower prices.  The courts are unlikely to countenance this perverse result by ruling that Google’s arrangements with Apple violate the antitrust laws.

Arrangements with Producers of Internet-Enabled “Smart” Devices

The final part of the government’s case against Google starkly highlights a problem that is endemic to the entire lawsuit.  The government claims that Google, having locked up all the traditional avenues of search distribution with the arrangements described above, is now seeking to foreclose search distribution in the new avenues being created by internet-enabled consumer products like wearables (e.g., smart watches), voice assistants, smart TVs, etc.  The alleged monopolistic strategy is similar to those described above: Google will share some of its monopoly profits in exchange for search default status on these smart devices, thereby preventing rival search engines from attaining valuable scale.

It’s easy to see in this context, though, why Google’s arrangements are likely procompetitive.  Unlike web browsers, mobile phones, and tablets, internet-enabled smart devices are novel.  Innovators are just now discovering new ways to embed internet functionality into everyday devices. 

Putting oneself in the position of these innovators helps illuminate a key beneficial aspect of Google’s arrangements:  They create an incentive to develop new and attractive means of distributing search.  Innovators currently at work on internet-enabled devices are no doubt spurred on by the possibility of landing a lucrative distribution agreement with Google or another search engine.  Banning these sorts of arrangements—the consequence of governmental success in this lawsuit—would diminish the incentive to innovate.

But that can be said of every single one of the arrangements the government is challenging. Because of Google’s revenue-sharing with search distributors, each of them has an added incentive to make their distribution channels desirable to consumers.  Android OEMs and Apple will work harder to produce mobile devices that people will want to use for internet searches; browser producers will endeavor to improve their offerings.  By paying producers of search access points a portion of the search ad revenues generated on their platforms, Google motivates them to generate more searches, which they can best do by making their products as attractive as possible. 

At the end of the day, then, the government’s action against Google seeks to condemn conduct that benefits consumers.  Because of the challenged arrangements, Google makes its own search services better, is able to license Android for free, ensures the continued existence of independent web browsers like Firefox and Opera, helps lower the price of iPhones and iPads, and spurs innovators to develop new “Internet of Things” devices that can harness the power of the web. 

The Biden administration would do well to recognize this lawsuit for what it is: a poorly conceived effort to appear to be “doing something” about a Big Tech company that has drawn the ire (for different reasons) of both progressives and conservatives.  DOJ and its state co-plaintiffs should seek dismissal of this action.