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

In Free to Choose, Milton Friedman famously noted that there are four ways to spend money[1]:

  1. Spending your own money on yourself. For example, buying groceries or lunch. There is a strong incentive to economize and to get full value.
  2. Spending your own money on someone else. For example, buying a gift for another. There is a strong incentive to economize, but perhaps less to achieve full value from the other person’s point of view. Altruism is admirable, but it differs from value maximization, since—strictly speaking—giving cash would maximize the other’s value. Perhaps the point of a gift is that it does not amount to cash and the maximization of the other person’s welfare from their point of view.
  3. Spending someone else’s money on yourself. For example, an expensed business lunch. “Pass me the filet mignon and Chateau Lafite! Do you have one of those menus without any prices?” There is a strong incentive to get maximum utility, but there is little incentive to economize.
  4. Spending someone else’s money on someone else. For example, applying the proceeds of taxes or donations. There may be an indirect desire to see utility, but incentives for quality and cost management are often diminished.

This framework can be criticized. Altruism has a role. Not all motives are selfish. There is an important role for action to help those less fortunate, which might mean, for instance, that a charity gains more utility from category (4) (assisting the needy) than from category (3) (the charity’s holiday party). It always depends on the facts and the context. However, there is certainly a grain of truth in the observation that charity begins at home and that, in the final analysis, people are best at managing their own affairs.

How would this insight apply to data interoperability? The difficult cases of assisting the needy do not arise here: there is no serious sense in which data interoperability does, or does not, result in destitution. Thus, Friedman’s observations seem to ring true: when spending data, those whose data it is seem most likely to maximize its value. This is especially so where collection of data responds to incentives—that is, the amount of data collected and processed responds to how much control over the data is possible.

The obvious exception to this would be a case of market power. If there is a monopoly with persistent barriers to entry, then the incentive may not be to maximize total utility, and therefore to limit data handling to the extent that a higher price can be charged for the lesser amount of data that does remain available. This has arguably been seen with some data-handling rules: the “Jedi Blue” agreement on advertising bidding, Apple’s Intelligent Tracking Prevention and App Tracking Transparency, and Google’s proposed Privacy Sandbox, all restrict the ability of others to handle data. Indeed, they may fail Friedman’s framework, since they amount to the platform deciding how to spend others’ data—in this case, by not allowing them to collect and process it at all.

It should be emphasized, though, that this is a special case. It depends on market power, and existing antitrust and competition laws speak to it. The courts will decide whether cases like Daily Mail v Google and Texas et al. v Google show illegal monopolization of data flows, so as to fall within this special case of market power. Outside the United States, cases like the U.K. Competition and Markets Authority’s Google Privacy Sandbox commitments and the European Union’s proposed commitments with Amazon seek to allow others to continue to handle their data and to prevent exclusivity from arising from platform dynamics, which could happen if a large platform prevents others from deciding how to account for data they are collecting. It will be recalled that even Robert Bork thought that there was risk of market power harms from the large Microsoft Windows platform a generation ago.[2] Where market power risks are proven, there is a strong case that data exclusivity raises concerns because of an artificial barrier to entry. It would only be if the benefits of centralized data control were to outweigh the deadweight loss from data restrictions that this would be untrue (though query how well the legal processes verify this).

Yet the latest proposals go well beyond this. A broad interoperability right amounts to “open season” for spending others’ data. This makes perfect sense in the European Union, where there is no large domestic technology platform, meaning that the data is essentially owned via foreign entities (mostly, the shareholders of successful U.S. and Chinese companies). It must be very tempting to run an industrial policy on the basis that “we’ll never be Google” and thus to embrace “sharing is caring” as to others’ data.

But this would transgress the warning from Friedman: would people optimize data collection if it is open to mandatory sharing even without proof of market power? It is deeply concerning that the EU’s DATA Act is accompanied by an infographic that suggests that coffee-machine data might be subject to mandatory sharing, to allow competition in services related to the data (e.g., sales of pods; spare-parts automation). There being no monopoly in coffee machines, this simply forces vertical disintegration of data collection and handling. Why put a data-collection system into a coffee maker at all, if it is to be a common resource? Friedman’s category (4) would apply: the data is taken and spent by another. There is no guarantee that there would be sensible decision making surrounding the resource.

It will be interesting to see how common-law jurisdictions approach this issue. At the risk of stating the obvious, the polity in continental Europe differs from that in the English-speaking democracies when it comes to whether the collective, or the individual, should be in the driving seat. A close read of the UK CMA’s Google commitments is interesting, in that paragraph 30 requires no self-preferencing in data collection and requires future data-handling systems to be designed with impacts on competition in mind. No doubt the CMA is seeking to prevent data-handling exclusivity on the basis that this prevents companies from using their data collection to compete. This is far from the EU DATA Act’s position in that it is certainly not a right to handle Google’s data: it is simply a right to continue to process one’s own data.

U.S. proposals are at an earlier stage. It would seem important, as a matter of principle, not to make arbitrary decisions about vertical integration in data systems, and to identify specific market-power concerns instead, in line with common-law approaches to antitrust.

It might be very attractive to the EU to spend others’ data on their behalf, but that does not make it right. Those working on the U.S. proposals would do well to ensure that there is a meaningful market-power gate to avoid unintended consequences.

Disclaimer: The author was engaged for expert advice relating to the UK CMA’s Privacy Sandbox case on behalf of the complainant Marketers for an Open Web.


[1] Milton Friedman, Free to Choose, 1980, pp.115-119

[2] Comments at the Yale Law School conference, Robert H. Bork’s influence on Antitrust Law, Sep. 27-28, 2013.

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

May 2007, Palo Alto

The California sun shone warmly on Eric Schmidt’s face as he stepped out of his car and made his way to have dinner at Madera, a chic Palo Alto restaurant.

Dining out was a welcome distraction from the endless succession of strategy meetings with the nitpickers of the law department, which had been Schmidt’s bread and butter for the last few months. The lawyers seemed to take issue with any new project that Google’s engineers came up with. “How would rivals compete with our maps?”; “Our placement should be no less favorable than rivals’’; etc. The objections were endless. 

This is not how things were supposed to be. When Schmidt became Google’s chief executive officer in 2001, his mission was to take the company public and grow the firm into markets other than search. But then something unexpected happened. After campaigning on an anti-monopoly platform, a freshman senator from Minnesota managed to get her anti-discrimination bill through Congress in just her first few months in office. All companies with a market cap of more than $150 billion were now prohibited from favoring their own products. Google had recently crossed that Rubicon, putting a stop to years of carefree expansion into new markets.

But today was different. The waiter led Schmidt to his table overlooking Silicon Valley. His acquaintance was already seated. 

With his tall and slender figure, Andy Rubin had garnered quite a reputation among Silicon Valley’s elite. After engineering stints at Apple and Motorola, developing various handheld devices, Rubin had set up his own shop. The idea was bold: develop the first open mobile platform—based on Linux, nonetheless. Rubin had pitched the project to Google in 2005 but given the regulatory uncertainty over the future of antitrust—the same wave of populist sentiment that would carry Klobuchar to office one year later—Schmidt and his team had passed.

“There’s no money in open source,” the company’s CFO ruled. Schmidt had initially objected, but with more pressing matters to deal with, he ultimately followed his CFO’s advice.

Schmidt and Rubin were exchanging pleasantries about Microsoft and Java when the meals arrived–sublime Wagyu short ribs and charred spring onions paired with a 1986 Chateau Margaux.

Rubin finally cut to the chase. “Our mobile operating system will rely on state-of-the-art touchscreen technology. Just like the device being developed by Apple. Buying Android today might be your only way to avoid paying monopoly prices to access Apple’s mobile users tomorrow.”

Schmidt knew this all too well: The future was mobile, and few companies were taking Apple’s upcoming iPhone seriously enough. Even better, as a firm, Android was treading water. Like many other startups, it had excellent software but no business model. And with the Klobuchar bill putting the brakes on startup investment—monetizing an ecosystem had become a delicate legal proposition, deterring established firms from acquiring startups–Schmidt was in the middle of a buyer’s market. “Android we could make us a force to reckon with” Schmidt thought to himself.

But he quickly shook that thought, remembering the words of his CFO: “There is no money in open source.” In an ideal world, Google would have used Android to promote its search engine—placing a search bar on Android users to draw users to its search engine—or maybe it could have tied a proprietary app store to the operating system, thus earning money from in-app purchases. But with the Klobuchar bill, these were no longer options. Not without endless haggling with Google’s planning committee of lawyers.

And they would have a point, of course. Google risked heavy fines and court-issued injunctions that would stop the project in its tracks. Such risks were not to be taken lightly. Schmidt needed a plan to make the Android platform profitable while accommodating Google’s rivals, but he had none.

The desserts were served, Schmidt steered the conversation to other topics, and the sun slowly set over Sand Hill Road.

Present Day, Cupertino

Apple continues to dominate the smartphone industry with little signs of significant competition on the horizon. While there are continuing rumors that Google, Facebook, or even TikTok might enter the market, these have so far failed to transpire.

Google’s failed partnership with Samsung, back in 2012, still looms large over the industry. After lengthy talks to create an open mobile platform failed to materialize, Google ultimately entered into an agreement with the longstanding mobile manufacturer. Unfortunately, the deal was mired by antitrust issues and clashing visions—Samsung was believed to favor a closed ecosystem, rather than the open platform envisioned by Google.

The sense that Apple is running away with the market is only reinforced by recent developments. Last week, Tim Cook unveiled the company’s new iPhone 11—the first ever mobile device to come with three cameras. With an eye-watering price tag of $1,199 for the top-of-the-line Pro model, it certainly is not cheap. In his presentation, Cook assured consumers Apple had solved the security issues that have been an important bugbear for the iPhone and its ecosystem of competing app stores.

Analysts expect the new range of devices will help Apple cement the iPhone’s 50% market share. This is especially likely given the important challenges that Apple’s main rivals continue to face.

The Windows Phone’s reputation for buggy software continues to undermine its competitive position, despite its comparatively low price point. Andy Rubin, the head of the Windows Phone, was reassuring in a press interview, but there is little tangible evidence he will manage to successfully rescue the flailing ship. Meanwhile, Huawei has come under increased scrutiny for the threats it may pose to U.S. national security. The Chinese manufacturer may face a U.S. sales ban, unless the company’s smartphone branch is sold to a U.S. buyer. Oracle is said to be a likely candidate.

The sorry state of mobile competition has become an increasingly prominent policy issue. President Klobuchar took to Twitter and called on mobile-device companies to refrain from acting as monopolists, intimating elsewhere that failure to do so might warrant tougher regulation than her anti-discrimination bill:

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

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

Restrictions

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

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

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

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

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

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

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

Assumptions

The CTDAA assumes that:

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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

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

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

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

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

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

The Antitrust Section’s Comments

As the ABA Antitrust Law Section observes:

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

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

Departing from established antitrust-law principles

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

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

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

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

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

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

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

Opaque language for opaque ideas

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

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

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

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

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

Conclusion

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

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.

The Autorità Garante della Concorenza e del Mercato (AGCM), Italy’s competition and consumer-protection watchdog, on Nov. 25 handed down fines against Google and Apple of €10 million each—the maximum penalty contemplated by the law—for alleged unfair commercial practices. Ultimately, the two decisions stand as textbook examples of why regulators should, wherever possible, strongly defer to consumer preferences, rather than substitute their own.

The Alleged Infringements

The AGCM has made two practically identical cases built around two interrelated claims. The first claim is that the companies have not properly informed users that the data they consent to share will be used for commercial purposes. The second is that, by making users opt out if they don’t want to consent to data sharing, the companies unduly restrict users’ freedom of choice and constrain them to accept terms they would not have otherwise accepted.

According to the AGCM, Apple and Google’s behavior infringes Articles 20, 21, 22, 24 and 25 of the Italian Consumer Code. The first three provisions prohibit misleading business practices, and are typically applied to conduct such as lying, fraud, the sale of unsafe products, or the omission or otherwise deliberate misrepresentation of facts in ways that would deceive the average user. The conduct caught by the first claim would allegedly fall into this category.

The last two provisions, by contrast, refer to aggressive business practices such as coercion, blackmail, verbal threats, and even physical harassment capable of “limiting the freedom of choice of users.” The conduct described in the second claim would fall here.

The First Claim

The AGCM’s first claim does not dispute that the companies informed users about the commercial use of their data. Instead, the authority argues that the companies are not sufficiently transparent in how they inform users.

Let’s start with Google. Upon creating a Google ID, users can click to view the “Privacy and Terms” disclosure, which details the types of data that Google processes and the reasons that it does so. As Figure 1 below demonstrates, the company explains that it processes data: “to publish personalized ads, based on your account settings, on Google services as well as on other partner sites and apps” (translation of the Italian text highlighted in the first red rectangle). Below, under the “data combination” heading, the user is further informed that: “in accordance with the settings of your account, we show you personalized ads based on the information gathered from your combined activity on Google and YouTube” (the section in the second red rectangle).

Figure 1: ACGM Google decision, p. 7

After creating a Google ID, a pop-up once again reminds the user that “this Google account is configured to include the personalization function, which provides tips and personalized ads based on the information saved on your account. [And that] you can select ‘other options’ to change the personalization settings as well as the information saved in your account.”

The AGCM sees two problems with this. First, the user must click on “Privacy and Terms” to be told what Google does with their data and why. Viewing this information is not simply an unavoidable step in the registration process. Second, the AGCM finds it unacceptable that the commercial use of data is listed together with other, non-commercial uses, such as improved quality, security, etc. (the other items listed in Figure 1). The allegation is that this leads to confusion and makes it less likely that users will notice the commercial aspects of data usage.

A similar argument is made in the Apple decision, where the AGCM similarly contends that users are not properly informed that their data may be used for commercial purposes. As shown in Figure 2, upon creating an Apple ID, users are asked to consent to receive “communications” (notifications, tips, and updates on Apple products, services, and software) and “Apps, music, TV, and other” (latest releases, exclusive content, special offers, tips on apps, music, films, TV programs, books, podcasts, Apple Pay and others).

Figure 2: AGCM Apple decision, p. 8

If users click on “see how your data is managed”—located just above the “Continue” button, as shown in Figure 2—they are taken to another page, where they are given more detailed information about what data Apple collects and how it is used. Apple discloses that it may employ user data to send communications and marketing e-mails about new products and services. Categories are clearly delineated and users are reminded that, if they wish to change their marketing email preferences, they can do so by going to appleid.apple.com. The word “data” is used 40 times and the taxonomy of the kind of data gathered by Apple is truly comprehensive. See for yourself.

The App Store, Apple Book Store, and iTunes Store have similar clickable options (“see how your data is managed”) that lead to pages with detailed information about how Apple uses data. This includes unambiguous references to so-called “commercial use” (e.g., “Apple uses information on your purchases, downloads, and other activities to send you tailored ads and notifications relative to Apple marketing campaigns.”)

But these disclosures failed to convince the AGCM that users are sufficiently aware that their data may be used for commercial purposes. The two reasons cited in the opinion mirror those in the Google decision. First, the authority claims that the design of the “see how your data is managed” option does not “induce the user to click on it” (see the marked area in Figure 2). Further, it notes that accessing the “Apple ID Privacy” page requires a “voluntary and eventual [i.e., hypothetical]” action by the user. According to the AGCM, this leads to a situation in which “the average user” is not “directly and intuitively” aware of the magnitude of data used for commercial purposes, and is instead led to believe that data is shared to improve the functionality of the Apple product and the Apple ecosystem.

The Second Claim

The AGCM’s second claim contends that the opt-out mechanism used by both Apple and Google “limits and conditions” users’ freedom of choice by nudging them toward the companies’ preferred option—i.e., granting the widest possible consent to process data for commercial use.

In Google’s case, the AGCM first notes that, when creating a Google ID, a user must take an additional discretionary step before they can opt out of data sharing. This refers to mechanism in which a user must click the words “OTHER OPTIONS,” in bright blue capitalized font, as shown in Figure 3 below (first blue rectangle, upper right corner).

Figure 3: AGCM Google decision, p. 22

The AGCM’s complaint here is that it is insufficient to grant users merely the possibility of opting out, as Google does. Rather, the authority contends, users must be explicitly asked whether they wish to share their data. As in the first claim, the AGCM holds that questions relating to the commercial use of data must be woven in as unavoidable steps in the registration process.

The AGCM also posits that the opt-out mechanism itself (in the lower left corner of Figure 3) “restricts and conditions” users’ freedom of choice by preventing them from “expressly and preventively” manifesting their real preferences. The contention is that, if presented with an opt-in checkbox, users would choose differently—and thus, from the authority’s point of view, choose correctly. Indeed, the AGCM concludes from the fact that the vast majority of users have not opted out from data sharing (80-100%, according to the authority), that the only reasonable conclusion is that “a significant number of subscribers have been induced to make a commercial decision without being aware of it.”

A similar argument is made in the Apple decision. Here, the issue is the supposed difficulty of the opt-out mechanism, which the AGCM describes as “intricate and non-immediate.” If a user wishes to opt out of data sharing, he or she would not only have to “uncheck” the checkboxes displayed in Figure 2, but also do the same in the Apple Store with respect to their preferences for other individual Apple products. This “intricate” process generally involves two to three steps. For instance, to opt out of “personalized tips,” a user must first go to Settings, then select their name, then multimedia files, and then “deactivate personalized tips.”

According to the AGCM, the registration process is set up in such a way that the users’ consent is not informed, free, and specific. It concludes:

The consumer, entangled in this system, of which he is not aware, is conditioned in his choices, undergoing the transfer of his data, which the professional can dispose of for his own promotional purposes.

The AGCM’s decisions fail on three fronts. They are speculative, paternalistic, and subject to the Nirvana Fallacy. They are also underpinned by an extremely uncharitable conception of what the “average user” knows and understands.

Epistemic Modesty Under Uncertainty

The AGCM makes far-reaching and speculative assumptions about user behavior based on incomplete knowledge. For instance, both Google and Apple’s registration processes make clear that they gather users’ data for advertising purposes—which, especially in the relevant context, cannot be interpreted by a user as anything but “commercial” (even under the AGCM’s pessimistic assumptions about the “average user.”) It’s true that the disclosure requires the user to click “see how your data is managed” (Apple) or “Privacy and Terms” (Google). But it’s not at all clear that this is less transparent than, say, the obligatory scroll-text that most users will ignore before blindly clicking to accept.

For example, in registering for a Blizzard account (a gaming service), users are forced to read the company’s lengthy terms and conditions, with information on the “commercial use” of data buried somewhere in a seven-page document of legalese. Does it really follow from this that Blizzard users are better informed about the commercial use of their data? I don’t think so.

Rather than the obligatory scroll-text, the AGCM may have in mind some sort of pop-up screen. But would this mean that companies should also include separate, obligatory pop-ups for every other relevant aspect of their terms and conditions? This would presumably take us back to square one, as the AGCM’s complaint was that Google amalgamated commercial and non-commercial uses of data under the same title. Perhaps the pop-up for the commercial use of data would have to be made more conspicuous. This would presumably require a normative hierarchy of the companies’ terms and conditions, listed in order of relevance for users. That would raise other thorny questions. For instance, should information about the commercial use of data be more prominently displayed than information about safety and security?

A reasonable alternative—especially under conditions of uncertainty—would be to leave Google and Apple alone to determine the best way to inform consumers, because nobody reads the terms and conditions anyway, no matter how they are presented. Moreover, the AGCM offers no evidence to support its contention that companies’ opt-out mechanisms lead more users to share their data than would freely choose to do so.

Whose Preferences?

The AGCM also replaces revealed user preferences with its own view of what those preferences should be. For instance, the AGCM doesn’t explain why opting to share data for commercial purposes would be, in principle, a bad thing. There are a number of plausible and legitimate explanations for why a user would opt for more generous data-sharing arrangements: they may believe that data sharing will improve their experience; may wish to receive tailored ads rather than generic ones; or may simply value a company’s product and see data sharing as a fair exchange. None of these explanations—or, indeed, any others—are ever contemplated in the AGCM decision.

Assuming that opt-outs, facultative terms and conditions screens, and two-to-three-step procedures to change one’s preferences truncate users’ “freedom of choice” is paternalistic and divorced from the reality of the average person, and the average Italian.

Ideal or Illegal?

At the heart of the AGCM decisions is the notion that it is proper to punish market actors wherever the real doesn’t match a regulator’s vision of the ideal—commonly known as “the Nirvana fallacy.” When the AGCM claims that Apple and Google do not properly disclose the commercial use of user data, or that the offered opt-out mechanism is opaque or manipulative, the question is: compared to what? There will always be theoretically “better” ways of granting users the choice to opt out of sharing their data. The test should not be whether a company falls short of some ideal imagined practice, but whether the existing mechanism actually deceives users.

There is nothing in the AGCM’s decisions to suggest that it does. Depending on how precipitously one lowers the bar for what the “average user” would understand, just about any intervention might be justified, in principle. But to justify the AGCM’s intervention in this case requires stretching the plausible ignorance of the average user to its absolute theoretical limits.

Conclusion

Even if a court were to buy the AGCM’s impossibly low view of the “average user” and grant the first claim—which would be unfortunate, but plausible — not even the most liberal reading of Articles 24 and 25 can support the view that “overly complex, non-immediate” opt-outs, as interpreted by the AGCM, limit users’ freedom of choice in any way comparable to the type of conduct described in those provisions (coercion, blackmail, verbal threats, etc.)

The AGCM decisions are shot through with unsubstantiated assumptions about users’ habits and preferences, and risk imposing undue burdens not only on the companies, but on users themselves. With some luck, they will be stricken down by a sensible judge. In the meantime, however, the trend of regulatory paternalism and over-enforcement continues. Much like in the United States, where the Federal Trade Commission (FTC) has occasionally engaged in product-design decisions that substitute the commission’s own preferences for those of consumers, regulators around the world continue to think they know better than consumers about what’s in their best interests.

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

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

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

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

Google’s big remedy win

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

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

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

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

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

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

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

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

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

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

Illustrations taken from Graf & Mostyn, 2020

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

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

Or, as Margrethe Vestager put it:

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

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

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

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

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

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

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

Good news for whom?

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

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

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

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

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

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

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

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 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.

Policymakers’ recent focus on how Big Tech should be treated under antitrust law has been accompanied by claims that companies like Facebook and Google hold dominant positions in various “markets.” Notwithstanding the tendency to conflate whether a firm is large with whether it hold a dominant position, we must first answer the question most of these claims tend to ignore: “dominant over what?”

For example, as set out in this earlier Truth on the Market post, a recent lawsuit filed by various states and the U.S. Justice Department outlined five areas related to online display advertising over which Google is alleged by the plaintiffs to hold a dominant position. But crucially, none appear to have been arrived at via the application of economic reasoning.

As that post explained, other forms of advertising (such as online search and offline advertising) might form part of a “relevant market” (i.e., the market in which a product actually competes) over which Google’s alleged dominance should be assessed. The post makes a strong case for the actual relevant market being much broader than that claimed in the lawsuit. Of course, some might disagree with that assessment, so it is useful to step back and examine the principles that underlie and motivate how a relevant market is defined.

In any antitrust case, defining the relevant market should be regarded as a means to an end, not an end in itself. While such definitions provide the basis to calculate market shares, the process of thinking about relevant markets also should provide a framework to consider and highlight important aspects of the case. The process enables one to think about how a particular firm and market operates, the constraints that it and rival firms face, and whether entry by other firms is feasible or likely.

Many naïve attempts to define the relevant market will limit their analysis to a particular industry. But an industry could include too few competitors, or it might even include too many—for example, if some firms in the industry generate products that do not constitute strong competitive constraints. If one were to define all cars as the “relevant” market, that would imply that a Dacia Sandero (a supermini model produced Renault’s Romanian subsidiary Dacia) constrains the price of Maserati’s Quattroporte luxury sports sedan as much as the Ferrari Portofino grand touring sports car does. This is very unlikely to hold in reality.[1]

The relevant market should be the smallest possible group of products and services that contains all such products and services that could provide a reasonable competitive constraint. But that, of course, merely raises the question of what is meant by a “reasonable competitive constraint.” Thankfully, by applying economic reasoning, we can answer that question.

More specifically, we have the “hypothetical monopolist test.” This test operates by considering whether a hypothetical monopolist (i.e., a single firm that controlled all the products considered part of the relevant market) could profitably undertake “a small but significant, non-transitory, increase in price” (typically shortened as the SSNIP test).[2]

If the hypothetical monopolist could profitably implement this increase in price, then the group of products under consideration is said to constitute a relevant market. On the other hand, if the hypothetical monopolist could not profitably increase the price of that group of products (due to demand-side or supply-side constraints on their ability to increase prices), then that group of products is not a relevant market, and more products need to be included in the candidate relevant market. The process of widening the group of products continues until the hypothetical monopolist could profitably increase prices over that group.

So how does this test work in practice? Let’s use an example to make things concrete. In particular, let’s focus on Google’s display advertising, as that has been a significant focus of attention. Starting from the narrowest possible market, Google’s own display advertising, the HM test would ask whether a hypothetical monopolist controlling these services (and just these services) could profitably increase prices of these services permanently by 5% to 10%.

At this initial stage, it is important to avoid the “cellophane fallacy,” in which a monopolist firm could not profitably increase its prices by 5% to 10% because it is already charging the monopoly price. This fallacy usually arises in situations where the product under consideration has very few (if any) substitutes. But as has been shown here, there are already plenty of alternatives to Google’s display-advertising services, so we can be reasonably confident that the fallacy does not apply here.

We would then consider what is likely to happen if Google were to increase the prices of its online display advertising services by 5% to 10%. Given the plethora of other options (such as Microsoft, Facebook, and Simpli.fi) customers have for obtaining online display ads, a sufficiently high number of Google’s customers are likely to switch away, such that the price increase would not be profitable. It is therefore necessary to expand the candidate relevant market to include those closest alternatives to which Google’s customers would switch.

We repeat the exercise, but now with the hypothetical monopolist also increasing the prices of those newly included products. It might be the case that alternatives such as online search ads (as opposed to display ads), print advertising, TV advertising and/or other forms of advertising would sufficiently constrain the hypothetical monopolist in this case that those other alternatives form part of the relevant market.

In determining whether an alternative sufficiently constrains our hypothetical monopolist, it is important to consider actual consumer/firm behavior, rather than relying on products having “similar” characteristics. Although constraints can come from either the demand side (i.e., customers switching to another provider) or the supply side (entry/switching by other providers to start producing the products offered by the HM), for market-definition purposes, it is almost always demand-side switching that matters most. Switching by consumers tends to happen much more quickly than does switching by providers, such that it can be a more effective constraint. (Note that supply-side switching is still important when assessing overall competitive constraints, but because such switching can take one or more years, it is usually considered in the overall competitive assessment, rather than at the market-definition stage.)

Identifying which alternatives consumers do and would switch to therefore highlights the rival products and services that constrain the candidate hypothetical monopolist. It is only once the hypothetical monopolist test has been completed and the relevant market has been found that market shares can be calculated.[3]

It is at that point than an assessment of a firm’s alleged market power (or of a proposed merger) can proceed. This is why claims that “Facebook is a monopolist” or that “Google has market power” often fail at the first hurdle (indeed, in the case of Facebook, they recently have.)

Indeed, I would go so far as to argue that any antitrust claim that does not first undertake a market-definition exercise with sound economic reasoning akin to that described above should be discounted and ignored.


[1] Some might argue that there is a “chain of substitution” from the Maserati to, for example, an Audi A4, to a Ford Focus, to a Mini, to a Dacia Sandero, such that the latter does, indeed, provide some constraint on the former. However, the size of that constraint is likely to be de minimis, given how many “links” there are in that chain.

[2] The “small but significant” price increase is usually taken to be between 5% and 10%.

[3] Even if a product or group of products ends up excluded from the definition of the relevant market, these products can still form a competitive constraint in the overall assessment and are still considered at that point.

Digital advertising is the economic backbone of the Internet. It allows websites and apps to monetize their userbase without having to charge them fees, while the emergence of targeted ads allows this to be accomplished affordably and with less wasted time wasted.

This advertising is facilitated by intermediaries using the “adtech stack,” through which advertisers and publishers are matched via auctions and ads ultimately are served to relevant users. This intermediation process has advanced enormously over the past three decades. Some now allege, however, that this market is being monopolized by its largest participant: Google.

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. Those 10 original state plaintiffs were joined by another four states and the Commonwealth of Puerto Rico in March 2021, while South Carolina and Louisiana have also moved to be added as additional plaintiffs. Google also faces a pending antitrust lawsuit brought by the U.S. Justice Department (DOJ) and 14 states (originally 11) related to the company’s distribution agreements, as well as a separate action by the State of Utah, 35 other states, and the District of Columbia related to its search design.

In recent weeks, it has been reported that the 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.

​​Relevant market

The Texas complaint identifies at least five relevant markets within the adtech stack that it alleges Google either is currently monopolizing or is attempting to monopolize:

  1. Publisher ad servers;
  2. Display ad exchanges;
  3. Display ad networks;
  4. Ad-buying tools for large advertisers; and
  5. Ad-buying tools for small advertisers.

None of these constitute an economically relevant product market for antitrust purposes, since each “market” is defined according to how superficially similar the products are in function, not how substitutable they are. Nevertheless, the Texas complaint vaguely echoes how markets were conceived in the “Roadmap” for a case against Google’s advertising business, published last year by the Omidyar Network, which may ultimately influence any future DOJ complaint, as well.

The Omidyar Roadmap narrows the market from media advertising to digital advertising, then to the open supply of display ads, which comprises only 9% of the total advertising spending and less than 20% of digital advertising, as shown in the figure below. It then further narrows the defined market to the intermediation of the open supply of display ads. Once the market has been sufficiently narrowed, the Roadmap authors conclude that Google’s market share is “perhaps sufficient to confer market power.”

While whittling down the defined market may achieve the purposes of sketching a roadmap to prosecute Google, it also generates a mishmash of more than a dozen relevant markets for digital display and video advertising. In many of these, Google doesn’t have anything approaching market power, while, in some, Facebook is the most dominant player.

The Texas complaint adopts a non-economic approach to market definition.  It ignores potential substitutability between different kinds of advertising, both online and offline, which can serve as a competitive constraint on the display advertising market. The complaint considers neither alternative forms of display advertising, such as social media ads, nor alternative forms of advertising, such as search ads or non-digital ads—all of which can and do act as substitutes. It is possible, at the very least, that advertisers who choose to place ads on third-party websites may switch to other forms of advertising if the price of third-party website advertising was above competitive levels. To ignore this possibility, as the Texas complaint does, is to ignore the entire purpose of defining the relevant antitrust market altogether.

Offline advertising vs. online advertising

The fact that offline and online advertising employ distinct processes does not consign them to economically distinct markets. Indeed, online advertising has manifestly drawn advertisers from offline markets, just as previous technological innovations drew advertisers from other pre-existing channels.

Moreover, there is evidence that, in some cases, offline and online advertising are substitute products. For example, economists Avi Goldfarb and Catherine Tucker demonstrate that display advertising pricing is sensitive to the availability of offline alternatives. They conclude:

We believe our studies refute the hypothesis that online and offline advertising markets operate independently and suggest a default position of substitution. Online and offline advertising markets appear to be closely related. That said, it is important not to draw any firm conclusions based on historical behavior.

Display ads vs. search ads

There is perhaps even more reason to doubt that online display advertising constitutes a distinct, economically relevant market from online search advertising.

Although casual and ill-informed claims are often made to the contrary, various forms of targeted online advertising are significant competitors of each other. Bo Xing and Zhanxi Lin report firms spread their marketing budgets across these different sources of online marketing, and “search engine optimizers”—firms that help websites to maximize the likelihood of a valuable “top-of-list” organic search placement—attract significant revenue. That is, all of these different channels vie against each other for consumer attention and offer advertisers the ability to target their advertising based on data gleaned from consumers’ interactions with their platforms.

Facebook built a business on par with Google’s thanks in large part to advertising, by taking advantage of users’ more extended engagement with the platform to assess relevance and by enabling richer, more engaged advertising than previously appeared on Google Search. It’s an entirely different model from search, but one that has turned Facebook into a competitive ad platform.

And the market continues to shift. Somewhere between 37-56% of product searches start on Amazon, according to one survey, and advertisers have noticed. This is not surprising, given Amazon’s strong ability to match consumers with advertisements, and to do so when and where consumers are more likely to make a purchase.

‘Open’ display advertising vs. ‘owned-and-operated’ display advertising

The United Kingdom’s Competition and Markets Authority (like the Omidyar Roadmap report) has identified two distinct channels of display advertising, which they term “owned and operated” and “open.” The CMA concludes:

Over half of display expenditure is generated by Facebook, which owns both the Facebook platform and Instagram. YouTube has the second highest share of display advertising and is owned by Google. The open display market, in which advertisers buy inventory from many publishers of smaller scale (for example, newspapers and app providers) comprises around 32% of display expenditure.

The Texas complaint does not directly address the distinction between open and owned and operated, but it does allege anticompetitive conduct by Google with respect to YouTube in a separate “inline video advertising market.” 

The CMA finds that the owned-and-operated channel mostly comprises large social media platforms, which sell their own advertising inventory directly to advertisers or media agencies through self-service interfaces, such as Facebook Ads Manager or Snapchat Ads Manager.  In contrast, in the open display channel, publishers such as online newspapers and blogs sell their inventory to advertisers through a “complex chain of intermediaries.”  Through these, intermediaries run auctions that match advertisers’ ads to publisher inventory of ad space. In both channels, nearly all transactions are run through programmatic technology.

The CMA concludes that advertisers “largely see” the open and the owned-and-operated channels as substitutes. According to the CMA, an advertiser’s choice of one channel over the other is driven by each channel’s ability to meet the key performance metrics the advertising campaign is intended to achieve.

The Omidyar Roadmap argues, instead, that the CMA too narrowly focuses on the perspective of advertisers. The Roadmap authors claim that “most publishers” do not control supply that is “owned and operated.” As a result, they conclude that publishers “such as gardenandgun.com or hotels.com” do not have any owned-and-operated supply and can generate revenues from their supply “only through the Google-dominated adtech stack.” 

But this is simply not true. For example, in addition to inventory in its print media, Garden & Gun’s “Digital Media Kit” indicates that the publisher has several sources of owned-and-operated banner and video supply, including the desktop, mobile, and tablet ads on its website; a “homepage takeover” of its website; branded/sponsored content; its email newsletters; and its social media accounts. Hotels.com, an operating company of Expedia Group, has its own owned-and-operated search inventory, which it sells through its “Travel Ads Sponsored Listing,” as well owned-and-operated supply of standard and custom display ads.

Given that both perform the same function and employ similar mechanisms for matching inventory with advertisers, it is unsurprising that both advertisers and publishers appear to consider the owned-and-operated channel and the open channel to be substitutes.

The dystopian novel is a powerful literary genre. It has given us such masterpieces as Nineteen Eighty-Four, Brave New World, and Fahrenheit 451. Though these novels often shed light on the risks of contemporary society and the zeitgeist of the era in which they were written, they also almost always systematically overshoot the mark (intentionally or not) and severely underestimate the radical improvements that stem from the technologies (or other causes) that they fear.

But dystopias are not just a literary phenomenon; they are also a powerful force in policy circles. This is epitomized by influential publications such as The Club of Rome’s 1972 report The Limits of Growth, whose dire predictions of Malthusian catastrophe have largely failed to materialize.

In an article recently published in the George Mason Law Review, we argue that contemporary antitrust scholarship and commentary is similarly afflicted by dystopian thinking. In that respect, today’s antitrust pessimists have set their sights predominantly on the digital economy—”Big Tech” and “Big Data”—in the process of alleging a vast array of potential harms.

Scholars have notably argued that the data created and employed by the digital economy produces network effects that inevitably lead to tipping and to more concentrated markets (e.g., here and here). In other words, firms will allegedly accumulate insurmountable data advantages and thus thwart competitors for extended periods of time.

Some have gone so far as to argue that this threatens the very fabric of western democracy. For instance, parallels between the novel Nineteen Eighty-Four and the power of large digital platforms were plain to see when Epic Games launched an antitrust suit against Apple and its App Store in August 2020. The gaming company released a short video clip parodying Apple’s famous “1984” ad (which, upon its release, was itself widely seen as a critique of the tech incumbents of the time). Similarly, a piece in the New Statesman—titled “Slouching Towards Dystopia: The Rise of Surveillance Capitalism and the Death of Privacy”—concluded that:

Our lives and behaviour have been turned into profit for the Big Tech giants—and we meekly click ‘Accept.’ How did we sleepwalk into a world without privacy?

In our article, we argue that these fears are symptomatic of two different but complementary phenomena, which we refer to as “Antitrust Dystopia” and “Antitrust Nostalgia.”

Antitrust Dystopia is the pessimistic tendency among competition scholars and enforcers to assert that novel business conduct will cause technological advances to have unprecedented, anticompetitive consequences. This is almost always grounded in the belief that “this time is different”—that, despite the benign or positive consequences of previous, similar technological advances, this time those advances will have dire, adverse consequences absent enforcement to stave off abuse.

Antitrust Nostalgia is the biased assumption—often built into antitrust doctrine itself—that change is bad. Antitrust Nostalgia holds that, because a business practice has seemingly benefited competition before, changing it will harm competition going forward. Thus, antitrust enforcement is often skeptical of, and triggered by, various deviations from status quo conduct and relationships (i.e., “nonstandard” business arrangements) when change is, to a first approximation, the hallmark of competition itself.

Our article argues that these two worldviews are premised on particularly questionable assumptions about the way competition unfolds, in this case, in data-intensive markets.

The Case of Big Data Competition

The notion that digital markets are inherently more problematic than their brick-and-mortar counterparts—if there even is a meaningful distinction—is advanced routinely by policymakers, journalists, and other observers. The fear is that, left to their own devices, today’s dominant digital platforms will become all-powerful, protected by an impregnable “data barrier to entry.” Against this alarmist backdrop, nostalgic antitrust scholars have argued for aggressive antitrust intervention against the nonstandard business models and contractual arrangements that characterize these markets.

But as our paper demonstrates, a proper assessment of the attributes of data-intensive digital markets does not support either the dire claims or the proposed interventions.

  1. Data is information

One of the most salient features of the data created and consumed by online firms is that, jargon aside, it is just information. As with other types of information, it thus tends to have at least some traits usually associated with public goods (i.e., goods that are non-rivalrous in consumption and not readily excludable). As the National Bureau of Economic Research’s Catherine Tucker argues, data “has near-zero marginal cost of production and distribution even over long distances,” making it very difficult to exclude others from accessing it. Meanwhile, multiple economic agents can simultaneously use the same data, making it non-rivalrous in consumption.

As we explain in our paper, these features make the nature of modern data almost irreconcilable with the alleged hoarding and dominance that critics routinely associate with the tech industry.

2. Data is not scarce; expertise is

Another important feature of data is that it is ubiquitous. The predominant challenge for firms is not so much in obtaining data but, rather, in drawing useful insights from it. This has two important implications for antitrust policy.

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

This is supported by significant empirical evidence. As our survey of the empirical literature shows, data generally entails diminishing marginal returns:

Second, it is firms’ capabilities, rather than the data they own, that lead to success in the marketplace. Critics who argue that firms such as Amazon, Google, and Facebook are successful because of their superior access to data might, in fact, have the causality in reverse. Arguably, it is because these firms have come up with successful industry-defining paradigms that they have amassed so much data, and not the other way around.

This dynamic can be seen at play in the early days of the search-engine market. In 2013, The Atlantic ran a piece titled “What the Web Looked Like Before Google.” By comparing the websites of Google and its rivals in 1998 (when Google Search was launched), the article shows how the current champion of search marked a radical departure from the status quo.

Even if it stumbled upon it by chance, Google immediately identified a winning formula for the search-engine market. It ditched the complicated classification schemes favored by its rivals and opted, instead, for a clean page with a single search box. This ensured that users could access the information they desired in the shortest possible amount of time—thanks, in part, to Google’s PageRank algorithm.

It is hardly surprising that Google’s rivals struggled to keep up with this shift in the search-engine industry. The theory of dynamic capabilities tells us that firms that have achieved success by indexing the web will struggle when the market rapidly moves toward a new paradigm (in this case, Google’s single search box and ten blue links). During the time it took these rivals to identify their weaknesses and repurpose their assets, Google kept on making successful decisions: notably, the introduction of Gmail, its acquisitions of YouTube and Android, and the introduction of Google Maps, among others.

Seen from this evolutionary perspective, Google thrived because its capabilities were perfect for the market at that time, while rivals were ill-adapted.

3.    Data as a byproduct of, and path to, platform monetization

Policymakers should also bear in mind that platforms often must go to great lengths in order to create data about their users—data that these same users often do not know about themselves. Under this framing, data is a byproduct of firms’ activity, rather than an input necessary for rivals to launch a business.

This is especially clear when one looks at the formative years of numerous online platforms. Most of the time, these businesses were started by entrepreneurs who did not own much data but, instead, had a brilliant idea for a service that consumers would value. Even if data ultimately played a role in the monetization of these platforms, it does not appear that it was necessary for their creation.

Data often becomes significant only at a relatively late stage in these businesses’ development. A quick glance at the digital economy is particularly revealing in this regard. Google and Facebook, in particular, both launched their platforms under the assumption that building a successful product would eventually lead to significant revenues.

It took five years from its launch for Facebook to start making a profit. Even at that point, when the platform had 300 million users, it still was not entirely clear whether it would generate most of its income from app sales or online advertisements. It was another three years before Facebook started to cement its position as one of the world’s leading providers of online ads. During this eight-year timespan, Facebook prioritized user growth over the monetization of its platform. The company appears to have concluded (correctly, it turns out) that once its platform attracted enough users, it would surely find a way to make itself highly profitable.

This might explain how Facebook managed to build a highly successful platform despite a large data disadvantage when compared to rivals like MySpace. And Facebook is no outlier. The list of companies that prevailed despite starting with little to no data (and initially lacking a data-dependent monetization strategy) is lengthy. Other examples include TikTok, Airbnb, Amazon, Twitter, PayPal, Snapchat, and Uber.

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

We’ve Been Here Before: The Microsoft Antitrust Saga

Dystopian and nostalgic discussions concerning the power of successful technology firms are nothing new. Throughout recent history, there have been repeated calls for antitrust authorities to reign in these large companies. These calls for regulation have often led to increased antitrust scrutiny of some form. The Microsoft antitrust cases—which ran from the 1990s to the early 2010s on both sides of the Atlantic—offer a good illustration of the misguided “Antitrust Dystopia.”

In the mid-1990s, Microsoft was one of the most successful and vilified companies in America. After it obtained a commanding position in the desktop operating system market, the company sought to establish a foothold in the burgeoning markets that were developing around the Windows platform (many of which were driven by the emergence of the Internet). These included the Internet browser and media-player markets.

The business tactics employed by Microsoft to execute this transition quickly drew the ire of the press and rival firms, ultimately landing Microsoft in hot water with antitrust authorities on both sides of the Atlantic.

However, as we show in our article, though there were numerous calls for authorities to adopt a precautionary principle-type approach to dealing with Microsoft—and antitrust enforcers were more than receptive to these calls—critics’ worst fears never came to be.

This positive outcome is unlikely to be the result of the antitrust cases that were brought against Microsoft. In other words, the markets in which Microsoft operated seem to have self-corrected (or were misapprehended as competitively constrained) and, today, are generally seen as being unproblematic.

This is not to say that antitrust interventions against Microsoft were necessarily misguided. Instead, our critical point is that commentators and antitrust decisionmakers routinely overlooked or misinterpreted the existing and nonstandard market dynamics that ultimately prevented the worst anticompetitive outcomes from materializing. This is supported by several key factors.

First, the remedies that were imposed against Microsoft by antitrust authorities on both sides of the Atlantic were ultimately quite weak. It is thus unlikely that these remedies, by themselves, prevented Microsoft from dominating its competitors in adjacent markets.

Note that, if this assertion is wrong, and antitrust enforcement did indeed prevent Microsoft from dominating online markets, then there is arguably no need to reform the antitrust laws on either side of the Atlantic, nor even to adopt a particularly aggressive enforcement position. The remedies that were imposed on Microsoft were relatively localized. Accordingly, if antitrust enforcement did indeed prevent Microsoft from dominating other online markets, then it is antitrust enforcement’s deterrent effect that is to thank, and not the remedies actually imposed.

Second, Microsoft lost its bottleneck position. One of the biggest changes that took place in the digital space was the emergence of alternative platforms through which consumers could access the Internet. Indeed, as recently as January 2009, roughly 94% of all Internet traffic came from Windows-based computers. Just over a decade later, this number has fallen to about 31%. Android, iOS, and OS X have shares of roughly 41%, 16%, and 7%, respectively. Consumers can thus access the web via numerous platforms. The emergence of these alternatives reduced the extent to which Microsoft could use its bottleneck position to force its services on consumers in online markets.

Third, it is possible that Microsoft’s own behavior ultimately sowed the seeds of its relative demise. In particular, the alleged barriers to entry (rooted in nostalgic market definitions and skeptical analysis of “ununderstandable” conduct) that were essential to establishing the antitrust case against the company may have been pathways to entry as much as barriers.

Consider this error in the Microsoft court’s analysis of entry barriers: the court pointed out that new entrants faced a barrier that Microsoft didn’t face, in that Microsoft didn’t have to contend with a powerful incumbent impeding its entry by tying up application developers.

But while this may be true, Microsoft did face the absence of any developers at all, and had to essentially create (or encourage the creation of) businesses that didn’t previously exist. Microsoft thus created a huge positive externality for new entrants: existing knowledge and organizations devoted to software development, industry knowledge, reputation, awareness, and incentives for schools to offer courses. It could well be that new entrants, in fact, faced lower barriers with respect to app developers than did Microsoft when it entered.

In short, new entrants may face even more welcoming environments because of incumbents. This enabled Microsoft’s rivals to thrive.

Conclusion

Dystopian antitrust prophecies are generally doomed to fail, just like those belonging to the literary world. The reason is simple. While it is easy to identify what makes dominant firms successful in the present (i.e., what enables them to hold off competitors in the short term), it is almost impossible to conceive of the myriad ways in which the market could adapt. Indeed, it is today’s supra-competitive profits that spur the efforts of competitors.

Surmising that the economy will come to be dominated by a small number of successful firms is thus the same as believing that all market participants can be outsmarted by a few successful ones. This might occur in some cases or for some period of time, but as our article argues, it is bound to happen far less often than pessimists fear.

In short, dystopian scholars have not successfully made the case for precautionary antitrust. Indeed, the economic features of data make it highly unlikely that today’s tech giants could anticompetitively maintain their advantage for an indefinite amount of time, much less leverage this advantage in adjacent markets.

With this in mind, there is one dystopian novel that offers a fitting metaphor to end this Article. The Man in the High Castle tells the story of an alternate present, where Axis forces triumphed over the Allies during the second World War. This turns the dystopia genre on its head: rather than argue that the world is inevitably sliding towards a dark future, The Man in the High Castle posits that the present could be far worse than it is.

In other words, we should not take any of the luxuries we currently enjoy for granted. In the world of antitrust, critics routinely overlook that the emergence of today’s tech industry might have occurred thanks to, and not in spite of, existing antitrust doctrine. Changes to existing antitrust law should thus be dictated by a rigorous assessment of the various costs and benefits they would entail, rather than a litany of hypothetical concerns. The most recent wave of calls for antitrust reform have so far failed to clear this low bar.