Archives For Harm to Competition

Critics of Google have argued that users overvalue Google’s services in relation to the data they give away.  One breath-taking headline asked Who Would Pay $5,000 to Use Google?, suggesting that Google and its advertisers can make as much as $5,000 off of individuals whose data they track. Scholars, such as Nathan Newman, have used this to argue that Google exploits its users through data extraction. But, the question remains: how good of a deal is Google? My contention is that Google’s value to most consumers far surpasses the value supposedly extracted from them in data.

First off, it is unlikely that Google and its advertisers make anywhere close to $5,000 off the average user. Only very high volume online purchasers who consistently click through online ads are likely anywhere close to that valuable. Nonetheless, it is true that Google and its advertisers must be making money, or else Google would be charging users for its services.

PrivacyFix, a popular extension for Google Chrome, calculates your worth to Google based upon the amount of searches you have done. Far from $5,000, my total only comes in at $58.66 (and only $10.74 for Facebook). Now, I might not be the highest volume searcher out there. My colleague, Geoffrey Manne states that he is worth $125.18 on Google (and $10.74 for Facebook). But, I use Google search everyday for work in tech policy, along with Google Docs, Google Calendar, and Gmail (both my private email and work emails)… for FREE!*

The value of all of these services to me, or even just Google search alone, easily surpasses the value of my data attributed to Google. This is likely true for the vast majority of other users, as well. While not a perfect analogue, there are paid specialized search options out there (familiar to lawyers) that do little tracking and are not ad-supported: Westlaw, Lexis, and Bloomberg. But, the price for using these services are considerably higher than zero:

legalsearchcosts

Can you imagine having to pay anywhere near $14 per search on Google? Or a subscription that costs $450 per user per month like some firms pay for Bloomberg? It may be the case that the costs are significantly lower per search for Google than for specialized legal searches (though Google is increasingly used by young lawyers as more cases become available). But, the “price” of viewing a targeted ad is a much lower psychic burden for most people than paying even just a few cents per month for an ad-free experience. For instance, consumers almost always choose free apps over the 99 cent alternative without ads.

Maybe the real question about Google is: Great Deal or Greatest Deal?

* Otherwise known as unpriced for those that know there’s no such thing as a free lunch.

Joshua Wright is a Commissioner at the Federal Trade Commission

I’d like to thank Geoff and Thom for organizing this symposium and creating a forum for an open and frank exchange of ideas about the FTC’s unfair methods of competition authority under Section 5.  In offering my own views in a concrete proposed Policy Statement and speech earlier this summer, I hoped to encourage just such a discussion about how the Commission can define its authority to prosecute unfair methods of competition in a way that both strengthens the agency’s ability to target anticompetitive conduct and provides much needed guidance to the business community.  During the course of this symposium, I have enjoyed reading the many thoughtful posts providing feedback on my specific proposal, as well as offering other views on how guidance and limits can be imposed on the Commission’s unfair methods of competition authority.  Through this marketplace of ideas, I believe the Commission can develop a consensus position and finally accomplish the long overdue task of articulating its views on the application of the agency’s signature competition statute.  As this symposium comes to a close, I’d like to make a couple quick observations and respond to a few specific comments about my proposal.

There Exists a Vast Area of Agreement on Section 5

Although conventional wisdom may suggest it will be impossible to reach any meaningful consensus with respect to Section 5, this symposium demonstrates that there actually already exists a vast area of agreement on the subject.  In fact, it appears safe to draw at least two broad conclusions from the contributions that have been offered as part of this symposium.

First, an overwhelming majority of commentators believe that we need guidance on the scope of the FTC’s unfair methods of competition authority.  This is not surprising.  The absence of meaningful limiting principles distinguishing lawful conduct from unlawful conduct under Section 5 and the breadth of the Commission’s authority to prosecute unfair methods of competition creates significant uncertainty among the business community.  Moreover, without a coherent framework for applying Section 5, the Commission cannot possibly hope to fulfill Congress’s vision that Section 5 would play a key role in helping the FTC leverage its unique research and reporting functions to develop evidence-based competition policy.

Second, there is near unanimity that the FTC should challenge only conduct as an unfair method of competition if it results in “harm to competition” as the phrase is understood under the traditional federal antitrust laws.  Harm to competition is a concept that is readily understandable and has been deeply embedded into antitrust jurisprudence.  Incorporating this concept would require that any conduct challenged under Section 5 must both harm the competitive process and harm consumers.  Under this approach, the FTC should not consider non-economic factors, such as whether the practice harms small business or whether it violates public morals, in deciding whether to prosecute conduct as an unfair method of competition.  This is a simple commitment, but one that is not currently enshrined in the law.  By tethering the definition of unfair methods of competition to modern economics and to the understanding of competitive harm articulated in contemporary antitrust jurisprudence, we would ensure Section 5 enforcement focuses upon conduct that actually is anticompetitive.

While it is not surprising that commentators offering a diverse set of perspectives on the appropriate scope of the FTC’s unfair methods of competition authority would agree on these two points, I think it is important to note that this consensus covers much of the Section 5 debate while leaving some room for debate on the margins as to how the FTC can best use its unfair methods of competition authority to complement its mission of protecting competition.

Some Clarifications Regarding My Proposed Policy Statement

In the spirit of furthering the debate along those margins, I also briefly would like to correct the record, or at least provide some clarification, on a few aspects of my proposed Policy Statement.

First, contrary to David Balto’s suggestion, my proposed Policy Statement acknowledges the fact that Congress envisioned Section 5 to be an incipiency statute.  Indeed, the first element of my proposed definition of unfair methods of competition requires the FTC to show that the act or practice in question “harms or is likely to harm competition significantly.”  In fact, it is by prosecuting practices that have not yet resulted in harm to competition, but are likely to result in anticompetitive effects if allowed to continue, that my definition reaches “invitations to collude.”  Paul Denis raises an interesting question about how the FTC should assess the likelihood of harm to competition, and suggests doing so using an expected value test.  My proposed policy statement does just that by requiring the FTC to assess both the magnitude and probability of the competitive harm when determining whether a practice that has not yet harmed competition, but potentially is likely to, is an unfair method of competition under Section 5.  Where the probability of competitive harm is smaller, the Commission should not find an unfair method of competition without reason to believe the conduct poses a substantial harm.  Moreover, by requiring the FTC to show that the conduct in question results in “harm to competition” as that phrase is understood under the traditional federal antitrust laws, my proposal also incorporates all the temporal elements of harm discussed in the antitrust case law and therefore puts the Commission on the same footing as the courts.

Second, both Dan Crane and Marina Lao have suggested that the efficiencies screen I have proposed results in a null (or very small) set of cases because there is virtually no conduct for which some efficiencies cannot be claimed.  This suggestion stems from an apparent misunderstanding of the efficiencies screen.  What these comments fail to recognize is that the efficiencies screen I offer intentionally leverages the Commission’s considerable expertise in identifying the presence of cognizable efficiencies in the merger context and explicitly ties the analysis to the well-developed framework offered in the Horizontal Merger Guidelines.  As any antitrust practitioner can attest, the Commission does not credit “cognizable efficiencies” lightly and requires a rigorous showing that the claimed efficiencies are merger-specific, verifiable, and not derived from an anticompetitive reduction in output or service.  Fears that the efficiencies screen in the Section 5 context would immunize patently anticompetitive conduct because a firm nakedly asserts cost savings arising from the conduct without evidence supporting its claim are unwarranted.  Under this strict standard, the FTC would almost certainly have no trouble demonstrating no cognizable efficiencies exist in Dan’s “blowing up of the competitor’s factory” example because the very act of sabotage amounts to an anticompetitive reduction in output.

Third, Marina Lao further argues that permitting the FTC to challenge conduct as an unfair method of competition only when there are no cognizable efficiencies is too strict a standard and that it would be better to allow the agency to balance the harms against the efficiencies.  The current formulation of the Commission’s unfair methods of competition enforcement has proven unworkable in large part because it lacks clear boundaries and is both malleable and ambiguous.  In my view, in order to make Section 5 a meaningful statute, and one that can contribute productively to the Commission’s competition enforcement mission as envisioned by Congress, the Commission must first confine its unfair methods of competition authority to those areas where it can leverage its unique institutional capabilities to target the conduct most harmful to consumers.  This in no way requires the Commission to let anticompetitive conduct run rampant.  Where the FTC identifies and wants to challenge conduct with both harms and benefits, it is fully capable of doing so successfully in federal court under the traditional antitrust laws.

I cannot think of a contribution the Commission can make to the FTC’s competition mission that is more important than issuing a Policy Statement articulating the appropriate application of Section 5.  I look forward to continuing to exchange ideas with those both inside and outside the agency regarding how the Commission can provide guidance about its unfair methods of competition authority.  Thank you once again to Truth on the Market for organizing and hosting this symposium and to the many participants for their thoughtful contributions.

*The views expressed here are my own and do not reflect those of the Commission or any other Commissioner.

Tad Lipsky is a partner in the law firm of Latham & Watkins LLP.

The FTC’s struggle to provide guidance for its enforcement of Section 5’s Unfair Methods of Competition (UMC) clause (or not – some oppose the provision of forward guidance by the agency, much as one occasionally heard opposition to the concept of merger guidelines in 1968 and again in 1982) could evoke a much broader long-run issue: is a federal law regulating single-firm conduct worth the trouble?  Antitrust law has its hard spots and its soft spots: I imagine that most antitrust lawyers think they can define “naked” price-fixing and other hard-core cartel conduct, and they would defend having a law that prohibits it.  Similarly with a law that prohibits anticompetitive mergers.  Monopolization perhaps not so much: 123 years of Section 2 enforcement and the best our Supreme Court can do is the Grinnell standard, defining monopolization as the “willful acquisition or maintenance of [monopoly] power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.”  Is this Grinnell definition that much better than “unfair methods of competition”?

The Court has created a few specific conduct categories within the Grinnell rubric: sham petitioning (objectively and subjectively baseless appeals for government action), predatory pricing (pricing below cost with a reasonable prospect of recoupment through the exercise of power obtained by achieving monopoly or disciplining competitors), and unlawful tying (using market power over one product to force the purchase of a distinct product – you probably know the rest).  These categories are neither perfectly clear (what measure of cost indicates a predatory price?) nor guaranteed to last (the presumption that a patent bestows market power within the meaning of the tying rule was abandoned in 2005).  At least the more specific categories give some guidance to lower courts, prosecutors, litigants and – most important of all – compliance-inclined businesses.  They provide more useful guidance than Grinnell.

The scope for differences of opinion regarding the definition of monopolization is at an historical zenith.  Some of the least civilized disagreements between the FTC and the Antitrust Division – the Justice Department’s visible contempt for the FTC’s ReaLemon decision in the early 1980’s, or the three-Commissioner vilification of the Justice Department’s 2008 report on unilateral conduct – concern these differences.  The 2009 Justice Department theatrically withdrew the 2008 Justice Department’s report, claiming (against clear objective evidence to the contrary) that the issue was settled in its favor by Lorain Journal, Aspen Skiing, and the D.C. Circuit decision in the main case involving Microsoft.

Although less noted in the copious scholarly output concerning UMC, disputes about the meaning of Section 5 are encouraged by the lack of definitive guidance on monopolization.  For every clarification provided by the Supreme Court, the FTC’s room for maneuver under UMC is reduced.  The FTC could not define sham litigation inconsistently with Professional Real Estate Investors v. Columbia Pictures Industries; it could not read recoupment out of the Brooke Group v. Brown & Williamson Tobacco Co. definition of predatory pricing.

The fact remains that there has been less-than-satisfactory clarification of single-firm conduct standards under either statute.  Grinnell remains the only “guideline” for the vast territory of Section 2 enforcement (aside from the specific mentioned categories), especially since the Supreme Court has shown no enthusiasm for either of the two main appellate-court approaches to a general test for unlawful unilateral conduct under Section 2, the “intent test” and the “essential facilities doctrine.”  (It has not rejected them, either.)  The current differences of opinion – even within the Commission itself, leave aside the appellate courts – are emblematic of a similar failure with regard to UMC.  Failure to clarify rules of such universal applicability has obvious costs and adverse impacts: creative and competitively benign business conduct is deterred (with corresponding losses in innovation, productivity and welfare), and the costs, delays, disruption and other burdens of litigation are amplified.  Are these costs worth bearing?

Years ago I heard it said that a certain old-line law firm had tightened its standards of partner performance: whereas formerly the firm would expel a partner who remained drunk for ten years, the new rule was that a partner could remain drunk only for five years.  The antitrust standards for unilateral conduct have vacillated for over a century.  For a time (as exemplified by United States v. United Shoe Machinery Corp.) any act of self-preservation by a monopolist – even if “honestly industrial” – was presumptively unlawful if not compelled by outside circumstances.  Even Grinnell looks good compared to that, but Grinnell still fails to provide much help in most Section 2 cases; and the debate over UMC says the same about Section 5.  I do not advocate the repeal of either statute, but shouldn’t we expect that someone might want to tighten our standards?  Maybe we can allow a statute a hundred years to be clarified through common-law application.  Section 2 passed that milepost twenty-three years ago, and Section 5 reaches that point next year.  We shouldn’t be surprised if someone wants to pull the plug beyond that point.

Paul Denis is a partner at Dechert LLP and Deputy Chair of the Firm’s Global Litigation Practice.  His views do not necessarily reflect those of his firm or its clients.

Deterrence ought to be an important objective of enforcement policy.  Some might argue it should be THE objective.  But it is difficult to know what is being deterred by a law if the agency enforcing the law cannot or will not explain its boundaries.  Commissioner Wright’s call for a policy statement on the scope of Section 5 enforcement is a welcome step toward Section 5 achieving meaningful deterrence of competitively harmful conduct.

The draft policy statement has considerable breadth.  I will limit myself to three concepts that I see as important to its application, the temporal dimension (applicable to both harm and efficiencies), the concept of harm to competition, and the concept of cognizable efficiencies.

Temporal Dimension

Commissioner Wright offers a compelling framework, but it is missing an important element — the temporal dimension.  Over what time period must likely harm to competition be felt in order to be actionable?  Similarly, over what time period must efficiencies be realized in order to be cognizable?  On page 8 of the draft policy statement he notes that the Commission may challenge “practices that have not yet resulted in harm to competition but are likely to result in anticompetitive effects if allowed to continue.”  When must those effects be felt?  How good is the Commission’s crystal ball for predicting harm to competition when the claim is that the challenged conduct precluded some future competition from coming to market?  Doesn’t that crystal ball get a bit murky when you are looking further into the future?  Doesn’t it get particularly murky when the future effect depends on one more other things happening between now and the time of feared anticompetitive effects?

We often hear from the Commission that arguments about future entry are too remote in time (although the bright line test of 2 years for entry to have an effect was pulled from the Horizontal Merger Guidelines).  Shouldn’t similar considerations be applied to claims of harm to competition?  The Commission has engaged in considerable innovation to try to get around the potential competition doctrine developed by the courts and the Commission under Section 7 of the Clayton Act.  The policy statement should consider whether there can be some temporal limit to Section 5 claims.  Perhaps the concept of likely harm to competition could be interpreted in an expected value sense, considering both probability of harm and timing of harm, but it is not obvious to me how that interpretation, whatever its theoretical appeal, could be made operational.  Bright line tests or presumptive time periods may be crude but may also be more easily applied.

Harm to Competition

On the “harm to competition” element, I was left unclear if this was a unified concept or whether there were two subparts to it.  Commissioner Wright paraphrases Chicago Board of Trade and concludes that “Conduct challenged under Section 5 must harm competition and cause an anticompetitive effect.” (emphasis supplied).  He then quotes Microsoft for the proposition that conduct “must harm the competitive process and thereby harm consumers.” (emphasis supplied).  The indicators referenced at the bottom of page 18 of his speech strike me as indicators of harm to consumers rather than indicators of harm to the competitive process.  Is there anything more to “harm to competition” than “harm to consumers?”  If so, what is it?  I think there probably should be something more than harm to consumers.  If I develop a new product that drives from the market all rivals, the effect may be to increase prices and reduce output.  But absent some bad act – some harm to the competitive process – my development of the new product should not expose me to a Section 5 claim or even the obligation to argue cognizable efficiencies.

On the subject of indicators, the draft policy statement notes that perhaps most relevant are price or output effects.  But Commissioner Wright’s speech goes on to note that increased prices, reduced output, diminished quality, or weakened incentives to innovate are also indicators (Speech at 19).  Shouldn’t this list be limited to output (or quality-adjusted output)?  If price goes up but output rises, isn’t that evidence that consumers have been benefitted?  Why should I have to defend myself by arguing that there are obvious efficiencies (as evidenced by the increased output)?  The reference to innovation is particularly confusing. I don’t believe there is a well developed theoretical or empirical basis for assessing innovation. The structural inferences that we make about price (often dubious themselves) don’t apply to innovation.  We don’t really know what leads to more or less innovation.  How is it that the Commission can see this indicator?  What is it that they are observing?

Cognizable Efficiencies

On cognizable efficiencies, there is a benefit in that the draft policy statement ties this element to the analogous concept used in merger enforcement.  But there is a disadvantage in that the FTC staff usually finds that efficiencies advanced by the parties in mergers are not cognizable for one reason or another.  Perhaps most of what the parties in mergers advance is not cognizable.  But it strikes me as implausible that after so many years of applying this concept that the Commission still rarely sees an efficiencies argument that is cognizable.  Are merging parties and their counsel really that dense?  Or is it that the goal posts keeping moving to ensure that no one ever scores?  Based on the history in mergers, I’m not sure this second element will amount to much.  The respondent will assert cognizable efficiencies, the staff will reject them, and we will be back in the litigation morass that the draft policy statement was trying to avoid, limited only by the Commission’s need to show harm to competition.

Regulating the Regulators: Guidance for the FTC’s Section 5 Unfair Methods of Competition Authority

August 1, 2013

Truthonthemarket.com

We’ve had a great day considering the possibility, and potential contours, of guidelines for implementing the FTC’s “unfair methods of competition” (UMC) authority.  Many thanks to our invited participants and to TOTM readers who took the time to follow today’s posts.  There’s lots of great stuff here, so be sure to read anything you missed.  And please continue to comment on posts.  A great thing about a blog symposium is that the discussion need not end immediately.  We hope to continue the conversation over the next few days.

I’m tempted to make some observations about general themes, points of (near) consensus, open questions, etc., but I won’t do that because we’re not quite finished.  We’re expecting to receive an additional post or two tomorrow, and to hear a response from Commissioner Josh Wright.  We hope you’ll join us tomorrow for final posts and Commissioner Wright’s response.

Here are links to the posts so far: