nicolas petit Archives

Archives For nicolas petit

Antitrust Statutorification

Nicolas Petit — 15 July 2021

[TOTM: The following is part of a symposium by TOTM guests and authors marking the release of Nicolas Petit’s “Big Tech and the Digital Economy: The Moligopoly Scenario.” The entire series of posts is available here.

This post is authored by Nicolas Petit himself, the Joint Chair in Competition Law at the Department of Law at European University Institute in Fiesole, Italy, and at EUI’s Robert Schuman Centre for Advanced Studies. He is also invited professor at the College of Europe in Bruges.]

A lot of water has gone under the bridge since my book was published last year. To close this symposium, I thought I would discuss the new phase of antirust statutorification taking place before our eyes. In the United States, Congress is working on five antitrust bills that propose to subject platforms to stringent obligations, including a ban on mergers and acquisitions, required data portability and interoperability, and line-of-business restrictions. In the European Union (EU), lawmakers are examining the proposed Digital Markets Act (“DMA”) that sets out a complicated regulatory system for digital “gatekeepers,” with per se behavioral limitations of their freedom over contractual terms, technological design, monetization, and ecosystem leadership.

Proponents of legislative reform on both sides of the Atlantic appear to share the common view that ongoing antitrust adjudication efforts are both instrumental and irrelevant. They are instrumental because government (or plaintiff) losses build the evidence needed to support the view that antitrust doctrine is exceedingly conservative, and that legal reform is needed. Two weeks ago, antitrust reform activists ran to Twitter to point out that the U.S. District Court dismissal of the Federal Trade Commission’s (FTC) complaint against Facebook was one more piece of evidence supporting the view that the antitrust pendulum needed to swing. They are instrumental because, again, government (or plaintiffs) wins will support scaling antitrust enforcement in the marginal case by adoption of governmental regulation. In the EU, antitrust cases follow each other almost like night the day, lending credence to the view that regulation will bring much needed coordination and economies of scale.

But both instrumentalities are, at the end of the line, irrelevant, because they lead to the same conclusion: legislative reform is long overdue. With this in mind, the logic of lawmakers is that they need not await the courts, and they can advance with haste and confidence toward the promulgation of new antitrust statutes.

The antitrust reform process that is unfolding is a cause for questioning. The issue is not legal reform in itself. There is no suggestion here that statutory reform is necessarily inferior, and no correlative reification of the judge-made-law method. Legislative intervention can occur for good reason, like when it breaks judicial inertia caused by ideological logjam.

The issue is rather one of precipitation. There is a lot of learning in the cases. The point, simply put, is that a supplementary court-legislative dialogue would yield additional information—or what Guido Calabresi has called “starting points” for regulation—that premature legislative intervention is sweeping under the rug. This issue is important because specification errors (see Doug Melamed’s symposium piece on this) in statutory legislation are not uncommon. Feedback from court cases create a factual record that will often be missing when lawmakers act too precipitously.

Moreover, a court-legislative iteration is useful when the issues in discussion are cross-cutting. The digital economy brings an abundance of them. As tech analysist Ben Evans has observed, data-sharing obligations raise tradeoffs between contestability and privacy. Chapter VI of my book shows that breakups of social networks or search engines might promote rivalry and, at the same time, increase the leverage of advertisers to extract more user data and conduct more targeted advertising. In such cases, Calabresi said, judges who know the legal topography are well-placed to elicit the preferences of society. He added that they are better placed than government agencies’ officials or delegated experts, who often attend to the immediate problem without the big picture in mind (all the more when officials are denied opportunities to engage with civil society and the press, as per the policy announced by the new FTC leadership).

Of course, there are three objections to this. The first consists of arguing that statutes are needed now because courts are too slow to deal with problems. The argument is not dissimilar to Frank Easterbrook’s concerns about irreversible harms to the economy, though with a tweak. Where Easterbook’s concern was one of ossification of Type I errors due to stare decisis, the concern here is one of entrenchment of durable monopoly power in the digital sector due to Type II errors. The concern, however, fails the test of evidence. The available data in both the United States and Europe shows unprecedented vitality in the digital sector. Venture capital funding cruises at historical heights, fueling new firm entry, business creation, and economic dynamism in the U.S. and EU digital sectors, topping all other industries. Unless we require higher levels of entry from digital markets than from other industries—or discount the social value of entry in the digital sector—this should give us reason to push pause on lawmaking efforts.

The second objection is that following an incremental process of updating the law through the courts creates intolerable uncertainty. But this objection, too, is unconvincing, at best. One may ask which of an abrupt legislative change of the law after decades of legal stability or of an experimental process of judicial renovation brings more uncertainty.

Besides, ad hoc statutes, such as the ones in discussion, are likely to pose quickly and dramatically the problem of their own legal obsolescence. Detailed and technical statutes specify rights, requirements, and procedures that often do not stand the test of time. For example, the DMA likely captures Windows as a core platform service subject to gatekeeping. But is the market power of Microsoft over Windows still relevant today, and isn’t it constrained in effect by existing antitrust rules? In antitrust, vagueness in critical statutory terms allows room for change.[1] The best way to give meaning to buzzwords like “smart” or “future-proof” regulation consists of building in first principles, not in creating discretionary opportunities for permanent adaptation of the law. In reality, it is hard to see how the methods of future-proof regulation currently discussed in the EU creates less uncertainty than a court process.

The third objection is that we do not need more information, because we now benefit from economic knowledge showing that existing antitrust laws are too permissive of anticompetitive business conduct. But is the economic literature actually supportive of stricter rules against defendants than the rule-of-reason framework that applies in many unilateral conduct cases and in merger law? The answer is surely no. The theoretical economic literature has travelled a lot in the past 50 years. Of particular interest are works on network externalities, switching costs, and multi-sided markets. But the progress achieved in the economic understanding of markets is more descriptive than normative.

Take the celebrated multi-sided market theory. The main contribution of the theory is its advice to decision-makers to take the periscope out, so as to consider all possible welfare tradeoffs, not to be more or less defendant friendly. Payment cards provide a good example. Economic research suggests that any antitrust or regulatory intervention on prices affect tradeoffs between, and payoffs to, cardholders and merchants, cardholders and cash users, cardholders and banks, and banks and card systems. Equally numerous tradeoffs arise in many sectors of the digital economy, like ridesharing, targeted advertisement, or social networks. Multi-sided market theory renders these tradeoffs visible. But it does not come with a clear recipe for how to solve them. For that, one needs to follow first principles. A system of measurement that is flexible and welfare-based helps, as Kelly Fayne observed in her critical symposium piece on the book.

Another example might be worth considering. The theory of increasing returns suggests that markets subject to network effects tend to converge around the selection of a single technology standard, and it is not a given that the selected technology is the best one. One policy implication is that social planners might be justified in keeping a second option on the table. As I discuss in Chapter V of my book, the theory may support an M&A ban against platforms in tipped markets, on the conjecture that the assets of fringe firms might be efficiently repositioned to offer product differentiation to consumers. But the theory of increasing returns does not say under what conditions we can know that the selected technology is suboptimal. Moreover, if the selected technology is the optimal one, or if the suboptimal technology quickly obsolesces, are policy efforts at all needed?

Last, as Bo Heiden’s thought provoking symposium piece argues, it is not a given that antitrust enforcement of rivalry in markets is the best way to maintain an alternative technology alive, let alone to supply the innovation needed to deliver economic prosperity. Government procurement, science and technology policy, and intellectual-property policy might be equally effective (note that the fathers of the theory, like Brian Arthur or Paul David, have been very silent on antitrust reform).

There are, of course, exceptions to the limited normative content of modern economic theory. In some areas, economic theory is more predictive of consumer harms, like in relation to algorithmic collusion, interlocking directorates, or “killer” acquisitions. But the applications are discrete and industry-specific. All are insufficient to declare that the antitrust apparatus is dated and that it requires a full overhaul. When modern economic research turns normative, it is often way more subtle in its implications than some wild policy claims derived from it. For example, the emerging studies that claim to identify broad patterns of rising market power in the economy in no way lead to an implication that there are no pro-competitive mergers.

Similarly, the empirical picture of digital markets is incomplete. The past few years have seen a proliferation of qualitative research reports on industry structure in the digital sectors. Most suggest that industry concentration has risen, particularly in the digital sector. As with any research exercise, these reports’ findings deserve to be subject to critical examination before they can be deemed supportive of a claim of “sufficient experience.” Moreover, there is no reason to subject these reports to a lower standard of accountability on grounds that they have often been drafted by experts upon demand from antitrust agencies. After all, we academics are ethically obliged to be at least equally exacting with policy-based research as we are with science-based research.

Now, with healthy skepticism at the back of one’s mind, one can see immediately that the findings of expert reports to date have tended to downplay behavioral observations that counterbalance findings of monopoly power—such as intense business anxiety, technological innovation, and demand-expansion investments in digital markets. This was, I believe, the main takeaway from Chapter IV of my book. And less than six months ago, The Economist ran its leading story on the new marketplace reality of “Tech’s Big Dust-Up.”

More importantly, the findings of the various expert reports never seriously contemplate the possibility of competition by differentiation in business models among the platforms. Take privacy, for example. As Peter Klein reasonably writes in his symposium article, we should not be quick to assume market failure. After all, we might have more choice than meets the eye, with Google free but ad-based, and Apple pricy but less-targeted. More generally, Richard Langlois makes a very convincing point that diversification is at the heart of competition between the large digital gatekeepers. We might just be too short-termist—here, digital communications technology might help create a false sense of urgency—to wait for the end state of the Big Tech moligopoly.

Similarly, the expert reports did not really question the real possibility of competition for the purchase of regulation. As in the classic George Stigler paper, where the railroad industry fought motor-trucking competition with state regulation, the businesses that stand to lose most from the digital transformation might be rationally jockeying to convince lawmakers that not all business models are equal, and to steer regulation toward specific business models. Again, though we do not know how to consider this issue, there are signs that a coalition of large news corporations and the publishing oligopoly are behind many antitrust initiatives against digital firms.

Now, as is now clear from these few lines, my cautionary note against antitrust statutorification might be more relevant to the U.S. market. In the EU, sunk investments have been made, expectations have been created, and regulation has now become inevitable. The United States, however, has a chance to get this right. Court cases are the way to go. And unlike what the popular coverage suggests, the recent District Court dismissal of the FTC case far from ruled out the applicability of U.S. antitrust laws to Facebook’s alleged killer acquisitions. On the contrary, the ruling actually contains an invitation to rework a rushed complaint. Perhaps, as Shane Greenstein observed in his retrospective analysis of the U.S. Microsoft case, we would all benefit if we studied more carefully the learning that lies in the cases, rather than haste to produce instant antitrust analysis on Twitter that fits within 280 characters.

[1] But some threshold conditions like agreement or dominance might also become dated.

The Antitrust Prohibition of Favoritism, or the Imposition of Corporate Selflessness

Aurelien Portuese — 16 December 2020

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

It is my endeavor to scrutinize the questionable assessment articulated against default settings in the U.S. Justice Department’s lawsuit against Google. Default, I will argue, is no antitrust fault. Default in the Google case drastically differs from default referred to in the Microsoft case. In Part I, I argue the comparison is odious. Furthermore, in Part II, it will be argued that the implicit prohibition of default settings echoes, as per listings, the explicit prohibition of self-preferencing in search results. Both aspects – default’s implicit prohibition and self-preferencing’s explicit prohibition – are the two legs of a novel and integrated theory of sanctioning corporate favoritism. The coming to the fore of such theory goes against the very essence of the capitalist grain. In Part III, I note the attempt to instill some corporate selflessness is at odds with competition on the merits and the spirit of fundamental economic freedoms.

When Default is No-Fault

The recent complaint filed by the DOJ and 11 state attorneys general claims that Google has abused its dominant position on the search-engine market through several ways, notably making Google the default search engine both in Google Chrome web browser for Android OS and in Apple’s Safari web browser for iOS. Undoubtedly, default setting confers a noticeable advantage for users’ attraction – it is sought and enforced on purpose. Nevertheless, the default setting confers an unassailable position unless the product remains competitive. Furthermore, the default setting can hardly be proven to be anticompetitive in the Google case. Indeed, the DOJ puts considerable effort in the complaint to make the Google case resemble the 20-year-old Microsoft case. Former Federal Trade Commission Chairman William Kovacic commented: “I suppose the Justice Department is telling the court, ‘You do not have to be scared of this case. You’ve done it before […] This is Microsoft part 2.”^[1]

However, irrespective of the merits of the Microsoft case two decades ago, the Google default setting case bears minimal resemblance to the Microsoft default setting of Internet Explorer. First, as opposed to the Microsoft case, where default by Microsoft meant pre-installed software (i.e., Internet Explorer)[2], the Google case does not relate to the pre-installment of the Google search engine (since it is just a webpage) but a simple setting. This technical difference is significant: although “sticky”[3], the default setting, can be outwitted with just one click[4]. It is dissimilar to the default setting, which can only be circumvented by uninstalling software[5], searching and installing a new one[6]. Moreover, with no certainty that consumers will effectively use Google search engine, default settings come with advertising revenue sharing agreements between Google and device manufacturers, mobile phone carriers, competing browsers and Apple[7]. These mutually beneficial deals represent a significant cost with no technical exclusivity [8]. In other words, the antitrust treatment of a tie-in between software and hardware in the Microsoft case cannot be convincingly extrapolated to the default setting of a “webware”[9] as relevant in the Google case.

Second, the Google case cannot legitimately resort to extrapolating the Microsoft case for another technical (and commercial) aspect: the Microsoft case was a classic tie-in case where the tied product (Internet Explorer) was tied into the main product (Windows). As a traditional tie-in scenario, the tied product (Internet Explorer) was “consistently offered, promoted, and distributed […] as a stand-alone product separate from, and not as a component of, Windows […]”[10]. In contrast, Google has never sold Google Chrome or Android OS. It offered both Google Chrome and Android OS for free, necessarily conditional to Google search engine as default setting. The very fact that Google Chrome or Android OS have never been “stand-alone” products, to use the Microsoft case’s language, together with the absence of software installation, dramatically differentiates the features pertaining to the Google case from those of the Microsoft case. The Google case is not a traditional tie-in case: it is a case against default setting when both products (the primary and related products) are given for free, are not saleable, are neither tangible nor intangible goods but only popular digital services due to significant innovativeness and ease of usage. The Microsoft “complaint challenge[d] only Microsoft’s concerted attempts to maintain its monopoly in operating systems and to achieve dominance in other markets, not by innovation and other competition on the merits, but by tie-ins.” Quite noticeably, the Google case does not mention tie-in ,as per Google Chrome or Android OS.

The complaint only refers to tie-ins concerning Google’s app being pre-installed on Android OS. Therefore, concerning Google’s dominance on the search engine market, it cannot be said that the default setting of Google search in Android OS entails tie-in. Google search engine has no distribution channel (since it is only a website) other than through downstream partnerships (i.e., vertical deals with Android device manufacturers). To sanction default setting on downstream trading partners is tantamount to refusing legitimate means to secure distribution channels of proprietary and zero-priced services. To further this detrimental logic, it would mean that Apple may no longer offer its own apps in its own iPhones or, in offline markets, that a retailer may no longer offer its own (default) bags at the till since it excludes rivals’ sale bags. Products and services naked of any adjacent products and markets (i.e., an iPhone or Android OS with no app or a shopkeeper with no bundled services) would dramatically increase consumers’ search costs while destroying innovators’ essential distribution channels for innovative business models and providing few departures from the status quo as long as consumers will continue to value default products[11].

Default should not be an antitrust fault: the Google case makes default settings a new line of antitrust injury absent tie-ins. In conclusion, as a free webware, Google search’s default setting cannot be compared to default installation in the Microsoft case since minimal consumer stickiness entails (almost) no switching costs. As free software, Google’s default apps cannot be compared to Microsoft case either since pre-installation is the sine qua non condition of the highly valued services (Android OS) voluntarily chosen by device manufacturers. Default settings on downstream products can only be reasonably considered as antitrust injury when the dominant company is erroneously treated as a de facto essential facility – something evidenced by the similar prohibition of self-preferencing.

When Self-Preference is No Defense

Self-preferencing is to listings what the default setting is to operating systems. They both are ways to market one’s own products (i.e., alternative to marketing toward end-consumers). While default setting may come with both free products and financial payments (Android OS and advertising revenue sharing), self-preferencing may come with foregone advertising revenues in order to promote one’s own products. Both sides can be apprehended as the two sides of the same coin:[12] generating the ad-funded main product’s distribution channels – Google’s search engine. Both are complex advertising channels since both venues favor one’s own products regarding consumers’ attention. Absent both channels, the payments made for default agreements and the foregone advertising revenues in self-preferencing one’s own products would morph into marketing and advertising expenses of Google search engine toward end-consumers.

The DOJ complaint lambasts that “Google’s monopoly in general search services also has given the company extraordinary power as the gateway to the internet, which uses to promote its own web content and increase its profits.” This blame was at the core of the European Commission’s Google Shopping decision in 2017[13]: it essentially holds Google accountable for having, because of its ad-funded business model, promoted its own advertising products and demoted organic links in search results. According to which Google’s search results are no longer relevant and listed on the sole motivation of advertising revenue

But this argument is circular: should these search results become irrelevant, Google’s core business would become less attractive, thereby generating less advertising revenue. This self-inflicted inefficiency would deprive Google of valuable advertising streams and incentivize end-consumers to switch to search engine rivals such as Bing, DuckDuckGo, Amazon (product search), etc. Therefore, an ad-funded company such as Google needs to reasonably arbitrage between advertising objectives and the efficiency of its core activities (here, zero-priced organic search services). To downplay (the ad-funded) self-referencing in order to foster (the zero-priced) organic search quality would disregard the two-sidedness of the Google platform: it would harm advertisers and the viability of the ad-funded business model without providing consumers and innovation protection it aims at providing. The problematic and undesirable concept of “search neutrality” would mean algorithmic micro-management for the sake of an “objective” listing considered acceptable only to the eyes of the regulator.

Furthermore, self-preferencing entails a sort of positive discrimination toward one’s own products[14]. If discrimination has traditionally been antitrust lines of injuries, self-preferencing is an “epithet”[15] outside antitrust remits for good reasons[16]. Indeed, should self-interested (i.e., rationally minded) companies and individuals are legally complied to self-demote their own products and services? If only big (how big?) companies are legally complied to self-demote their products and services, to what extent will exempted companies involved in self-preferencing become liable to do so?

Indeed, many uncertainties, legal and economic ones, may spawn from the emerging prohibition of self-preferencing. More fundamentally, antitrust liability may clash with basic corporate governance principles where self-interestedness allows self-preferencing and command such self-promotion. The limits of antitrust have been reached when two sets of legal regimes, both applicable to companies, suggest contradictory commercial conducts. To what extent may Amazon no longer promote its own series on Amazon Video in a similar manner Netflix does? To what extent can Microsoft no longer promote Bing’s search engine to compete with Google’s search engine effectively? To what extent Uber may no longer promote UberEATS in order to compete with delivery services effectively? Not only the business of business is doing business[17], but also it is its duty for which shareholders may hold managers to account.

The self is moral; there is a corporate morality of business self-interest. In other words, corporate selflessness runs counter to business ethics since corporate self-interest yields the self’s rivalrous positioning within a competitive order. Absent a corporate self-interest, self-sacrifice may generate value destruction for the sake of some unjustified and ungrounded claims. The emerging prohibition of self-preferencing, similar to the established ban on the default setting on one’s own products into other proprietary products, materializes the corporate self’s losing. Both directions coalesce to instill the legally embedded duty of self-sacrifice for the competitor’s welfare instead of the traditional consumer welfare and the dynamics of innovation, which never unleash absent appropriabilities. In conclusion, to expect firms, however big or small, to act irrespective of their identities (i.e., corporate selflessness) would constitute an antitrust error and would be at odds with capitalism.

Toward an Integrated Theory of Disintegrating Favoritism

The Google lawsuit primarily blames Google for default settings enforced via several deals. The lawsuit also makes self-preferencing anticompetitive conduct under antitrust rules. These two charges are novel and dubious in their remits. They nevertheless represent a fundamental catalyst for the development of a new and problematic unified antitrust theory prohibiting favoritism: companies may no longer favor their products and services, both vertically and horizontally, irrespective of consumer benefits, irrespective of superior efficiency arguments, and irrespective of dynamic capabilities enhancement. Indeed, via an unreasonably expanded vision of leveraging, antitrust enforcement is furtively banning a company to favor its own products and services based on greater consumer choice as a substitute to consumer welfare, based on the protection of the opportunities of rivals to innovate and compete as a substitute to the essence of competition and innovation, and based on limiting the outreach and size of companies as a substitute to the capabilities and efficiencies of these companies. Leveraging becomes suspicious and corporate self-favoritism under accusation. The Google lawsuit materializes this impractical trend, which further enshrines the precautionary approach to antitrust enforcement[18].

[1] Jessica Guynn, Google Justice Department antitrust lawsuit explained: this is what it means for you. USA Today, October 20, 2020.

[2] The software (Internet Explorer) was tied in the hardware (Windows PC).

[3] U.S. v Google LLC, Case A:20, October 20, 2020, 3 (referring to default settings as “especially sticky” with respect to consumers’ willingness to change).

[4] While the DOJ affirms that “being the preset default general search engine is particularly valuable because consumers rarely change the preset default”, it nevertheless provides no evidence of the breadth of such consumer stickiness. To be sure, search engine’s default status does not necessarily lead to usage as evidenced by the case of South Korea. In this country, despite Google’s preset default settings, the search engine Naver remains dominant in the national search market with over 70% of market shares. The rivalry exerted by Naver on Google demonstrates that limits of consumer stickiness to default settings. See Alesia Krush, Google vs. Naver: Why Can’t Google Dominate Search in Korea? Link-Assistant.Com, available at: https://www.link-assistant.com/blog/google-vs-naver-why-cant-google-dominate-search-in-korea/ . As dominant search engine in Korea, Naver is subject to antitrust investigations with similar leveraging practices as Google in other countries, see Shin Ji-hye, FTC sets up special to probe Naver, Google, The Korea Herald, November 19, 2019, available at : http://www.koreaherald.com/view.php?ud=20191119000798 ; Kim Byung-wook, Complaint against Google to be filed with FTC, The Investor, December 14, 2020, available at : https://www.theinvestor.co.kr/view.php?ud=20201123000984 (reporting a complaint by Naver and other Korean IT companies against Google’s 30% commission policy on Google Play Store’s apps).

[5] For instance, the then complaint acknowledged that “Microsoft designed Windows 98 so that removal of Internet Explorer by OEMs or end users is operationally more difficult than it was in Windows 95”, in U.S. v Microsoft Corp., Civil Action No 98-1232, May 18, 1998, para.20.

[6] The DOJ complaint itself quotes “one search competitor” who is reported to have noted consumer stickiness “despite the simplicity of changing a default setting to enable customer choice […]” (para.47). Therefore, default setting for search engine is remarkably simple to bypass but consumers do not often do so, either due to satisfaction with Google search engine and/or due to search and opportunity costs.

[7] See para.56 of the DOJ complaint.

[8] Competing browsers can always welcome rival search engines and competing search engine apps can always be downloaded despite revenue sharing agreements. See paras.78-87 of the DOJ complaint.

[9] Google search engine is nothing but a “webware” – a complex set of algorithms that work via online access of a webpage with no prior download. For a discussion on the definition of webware, see https://www.techopedia.com/definition/4933/webware .

[10] Id. para.21.

[11] Such outcome would frustrate traditional ways of offering computers and mobile devices as acknowledged by the DOJ itself in the Google complaint: “new computers and new mobile devices generally come with a number of preinstalled apps and out-of-the-box setting. […] Each of these search access points can and almost always does have a preset default general search engine”, at para. 41. Also, it appears that present default general search engine is common commercial practices since, as the DOJ complaint itself notes when discussing Google’s rivals (Microsoft’s Bing and Amazon’s Fire OS), “Amazon preinstalled its own proprietary apps and agreed to make Microsoft’s Bing the preset default general search engine”, in para.130. The complaint fails to identify alternative search engines which are not preset defaults, thus implicitly recognizing this practice as a widespread practice.

[12] To use Vesterdof’s language, see Bo Vesterdorf, Theories of Self-Preferencing and Duty to Deal – Two Sides of the Same Coin, Competition Law & Policy Debate 1(1) 4, (2015). See also Nicolas Petit, Theories of Self-Preferencing under Article 102 TFEU: A Reply to Bo Vesterdorf, 5-7 (2015).

[13] Case 39740 Google Search (Shopping). Here the foreclosure effects of self-preferencing are only speculated: « the Commission is not required to prove that the Conduct has the actual effect of decreasing traffic to competing comparison shopping services and increasing traffic to Google’s comparison-shopping service. Rather, it is sufficient for the Commission to demonstrate that the Conduct is capable of having, or likely to have, such effects.” (para.601 of the Decision). See P. Ibáñez Colomo, Indispensability and Abuse of Dominance: From Commercial Solvents to Slovak Telekom and Google Shopping, 10 Journal of European Competition Law & Practice 532 (2019); Aurelien Portuese, When Demotion is Competition: Algorithmic Antitrust Illustrated, Concurrences, no 2, May 2018, 25-37; Aurelien Portuese, Fine is Only One Click Away, Symposium on the Google Shopping Decision, Case Note, 3 Competition and Regulatory Law Review, (2017).

[14] For a general discussion on law and economics of self-preferencing, see Michael A. Salinger, Self-Preferencing, Global Antitrust Institute Report, 329-368 (2020).

[15]Pablo Ibanez Colomo, Self-Preferencing: Yet Another Epithet in Need of Limiting Principles, 43 World Competition (2020) (concluding that self-preferencing is « misleading as a legal category »).

[16] See, for instances, Pedro Caro de Sousa, What Shall We Do About Self-Preferencing? Competition Policy International, June 2020.

[17] Milton Friedman, The Social Responsibility of Business is to Increase Its Profits, New York Times, September 13, 1970. This echoes Adam Smith’s famous statement that « It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard for their own self-interest » from the 1776 Wealth of Nations. In Ayn Rand’s philosophy, the only alternative to rational self-interest is to sacrifice one’s own interests either for fellowmen (altruism) or for supernatural forces (mysticism). See Ayn Rand, The Objectivist Ethics, in The Virtue of Selfishness, Signet, (1964).

[18] Aurelien Portuese, European Competition Enforcement and the Digital Economy : The Birthplace of Precautionary Antitrust, Global Antitrust Institute’s Report on the Digital Economy, 597-651.

Big Tech but Bigger Ideas

Bowman Heiden — 30 November 2020

[**TOTM**: The following is part of a symposium by TOTM guests and authors marking the release of Nicolas Petit’s “Big Tech and the Digital Economy: The Moligopoly Scenario.” The entire series of posts is available here.

This post is authored by Bowman Heiden (Co-director of the Center for Intellectual Property (CIP), a joint center between University of Gothenburg (Sweden), Chalmers University of Technology (Sweden), and the Norwegian University for Science and Technology).]

As an academic working at the intersection of economics, law, and innovation, I was excited to see Nicolas Petit apply an interdisciplinary approach to investigate big tech in the digital economy. Working across law, business, and engineering has taught me the importance of bringing together different theoretical perspectives and mindsets to address complex issues. [RL1] Below is a short discussion of a few interdisciplinary areas where Petit helps us to bridge the theoretical gap so as to unveil the complexity and provide new insights for policymakers.

Competition Strategy vs. Competition Law

Business schools do not typically teach competition law and law schools do not teach competition strategy. This creates a theoretical disconnect that spills over into professional life. Business schools tell students to create a sustainable competitive advantage, which often means building a dominant market position. Law schools, on the other hand, treat dominant positions as socially undesirable and likely illegal.

As Petit points out, one of the main competitive strategy frameworks—the Porter’s Five Forces model, named for Michael E. Porter of Harvard Business School—provides a much broader perspective on rivalry than legal regimes like the OECD’s Competition Assessment Toolkit, which use a product-centric “more restrictive method of competitive assessment.” The progression of technology and new creative business models, such as multisided platforms, thus continuously push the frontier. Over time, this fundamentally alters the nature of competition within product markets as a unit of analysis.

If one seeks answers within “the law,” there will always be a lag between commercial reality (i.e., market norms) and legal doctrine (i.e., statutory norms). Petit reminds us that big tech is a different kind of competition whose holistic nature may require a new analytic framework to understand its welfare effects. If the fundamental principles of market competition are changing, we will not likely find the answer in historical precedents.

Innovation and Entrepreneurship vs. Economics

Given the focus on innovation as the key source of economic development, it is strange that innovation plays such a small role in mainstream economics. Schumpeter tried to convince us some 80 years ago that the market power generated from innovation and entrepreneurship had a positive economic impact, even for larger firms. But his concept of “creative destruction” has never really been able to gain much ground over the “invisible hand.” One cannot help but conclude this is because the static world is easier to understand and model mathematically than the dynamic world.

But the world is not static. Even if we agree that we are concerned primarily with welfare, we still need to decide whether we want to be better off now or later. A static analysis of welfare promotes a world without innovation. It is almost as if economics doesn’t appreciate “time” as a variable. If Schumpeter is right and it is disequilibrium, not equilibrium, that is the most relevant economic phenomenon, then we have the cart in front of the horse. Does innovation breed competition or does competition breed innovation? If the market power associated with innovation produces greater welfare than perfect competition, then how useful is competition as a proxy for welfare? In other words, if perfect competition inhibits innovation and dynamic efficiency, then more competition cannot be a societal goal in of itself.

Having time as a core variable forces us to think about the future and how we get from here to there. It is not enough to model evolution in the short term as a sea full of fish, and in the long term, as a city full of people. How the world changes and how quickly it changes are also important. Even with the long-term benefits of creative destruction, it is important to remember that a significant group of voting-age citizens will likely suffer in the short term.

Petit’s discussion of big tech’s exploration, change and pivot flexibility implicitly reminds us that time matters. Time is the carrier of innovation and uncertainty. This has fundamental impacts on the nature of competition and competition’s impact on welfare, which cannot be properly understood only through comparative statics. Though he claims his goal is “not to formulate a new Schumpeterian theory of monopoly efficiency,” he is rightly Schumpeterian in moving innovation and uncertainty closer to the center stage of analysis in law and economics.

Certainly, in a dynamic, global market, there is credence to Petit’s supposition that market power in digital markets can be welfare enhancing in the short term and can potentially instigate innovation, particularly disruptive innovation, in the long term. Both constraints and uncertainty typically spur innovation.

Politics vs. Economics

If ignorance was our only challenge in pursuing enlightened public policy, there would be little to worry about. We would constantly generate hypotheses and test them empirically to adapt to a changing world. Unfortunately, we have two more formidable adversaries: ideology and self-interest.

Ideology is cognitive closure, a type of self-inflicted ignorance, where someone internalizes a set of beliefs that defines who they are. All new information that contradicts the chosen ideology will likely be rejected as a starting point (e.g., the notion that big is always bad). This is what Max Planck meant when he said “a new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.” The world is full of ideologues; nowadays, the objective centrist is the radical, which is where I see that Petit has positioned himself.

Policy is also highly influenced by self-interest, which in a capitalist society is entirely rational. Self-interest is the cornerstone of the concept of the ”invisible hand” and basic price theory when applied to the commerical market. But what are the implications when it is applied to policy? Is lobbying simply part of a free market for policies, where self-interested actors compete, not in the game itself, but to change the rules of the game in their favor? The idea that those who control the economic base control the infrastructure of society is not new. From a policy perspective, is the invisible hand leading us to prosperity or is it giving us the finger?[RL2]

Just as economist Robert Solow helped us to understand the extent of our ignorance about economic growth, so has this work by Nicolas Petit. Hopefully, it will ignite a new conversation about the role of innovation and uncertainty, not only in antitrust, but also in mainstream economic thought, all without the need for Planck’s funeral procession.

In Amazon, Intellectual Property, Platforms, Symposia, Symposium on Big Tech and the Digital Economy: The Moligopoly Scenario, Truth on the Market entrepreneurship, innovation, moligopoly, nicolas petit, petit-moligopoly-symposium

The Limits of Rivalry

Kelly Fayne — 2 November 2020

Nicholas Petit, with Big Tech and the Digital Economy: The Moligopoly Scenario, enters the fray at this moment of peak consternation about big tech platforms to reexamine antitrust’s role as referee. Amongst calls on the one hand like those in the Majority Staff Report and Recommendation from the Subcommittee on Antitrust (“these firms have too much power, and that power must be reined in and subject to appropriate oversight and enforcement”) and, on the other hand, understandably strong disagreement from the firms targeted, Petit offers a diagnosis. A focus on the protection of rivalry for rivalry’s sake is insufficiently adaptive to the “distinctive features of digital industries, firms, and markets.”

I am left wondering, however, if he’s misdiagnosed the problem – or at least whether the cure he offers would be seen as sufficient by those most vocally asserting that antitrust is failing. And, of course, I recognize that his objective in writing this book is not to bring harmony to a deeply divided debate, but to offer an improved antitrust framework for navigating big tech.

Petit, in Chapter 5 (“Antitrust in Moligopoly Markets”), says: “So the real question is this: should we abandon, or at least radically alter traditional antitrust principals modeled on rivalry in digital markets? The answer is yes.” He argues that “protecting rivalry is not perforce socially beneficial in industries with increasing returns to adoption.” But it is his tethering to the notion of what is “socially beneficial” that creates a challenge.

Petit argues that the function of the current antitrust legal regimes – most significantly the US and EU – is to protect rivalry. He observes several issues with rivalry when applied as both a test and a remedy for market power. One of the most valuable insights Petit offers in his impressive work in this book, is that tipped markets may not be all that bad. In fact, when markets exhibit increasing returns to adoption, allowing the winner to take it all (or most) may be more welfare enhancing than trying to do the antitrust equivalent of forcing two magnets to remain apart. And, assuming all the Schumpeterian dynamics align, he’s right. Or rather, he’s right if you agree that welfare is the standard by which what is socially beneficial should be measured.

Spoiler alert: My own view is that antitrust requires an underlying system of measurement, and the best available system is welfare-based. More on this below.

When it comes to evaluating horizontal mergers, Petit suggests an alternative regime calibrated to handle the unique circumstances that arise in tech deals. But his new framework remains largely tethered to (or at least based in the intuitions of) a variation of the welfare standard that, for the most part, still underlies modern applications of antitrust laws. So the question becomes, if you alter the means, but leave the ends unchanged, do you get different results? At least in the merger context, I’m not so sure. And if the results are for the most part the same, do we really need an alternative path to achieving them? Probably not.

The Petit horizontal merger test (1) applies a non-rebuttable (OMG!) presumption of prohibition on mergers to monopoly by the dominant platform in “tipped markets,” and (2) permits some acquisitions in untipped markets without undue regard to whether the acquiring firm is dominant in another market. A non-rebuttable presumption, admittedly, elicited heavy-pressure red pen in the margins upon my first read. Upon further reflection … I still don’t like it. I am, however, somewhat comforted because I suspect that its practical application would land us largely in the same place as current applications of antitrust for at least the vast majority of tech transactions. And that is because Petit’s presumptive prohibition on mergers in tipped markets doesn’t cancel the fight, it changes the venue.

The exercise of determining whether or not the market is tipped in effect replicates the exercise of assessing whether the dominant firm has a significant degree of market power, and concludes in the affirmative. Enforcers around the world already look skeptically at firms with perceived market power when they make horizontal acquisitions (among an already rare group of cases in which such deals are attempted). I recognize that there is theoretical daylight between Petit’s proposed test and one in which the merging parties are permitted an efficiencies defense, but in practice, the number of deals cleared solely on the basis of countervailing procompetitive efficiencies has historically been small. Thus, the universe of deals swept up in the per se prohibition could easily end up a null set. (Or at least, I think it should be a null set given how quickly the tech industry evolves and transforms).

As for the untipped markets, Petit argues that it is “unwarranted to treat firms with monopoly positions in tipped markets more strictly than others when they make indirect entry in untipped markets.” He further argues that there is “no economic basis to prefer indirect entry by an incumbent firm from a tipped market over entry from (i) a new firm or (ii) an established firm from an untipped market. Firm type is not determinative of the weight of social welfare brought by a unit of innovation.” His position is closely aligned with the existing guidance on vertical and conglomerate mergers, including in the recently issued FTC and DOJ Vertical Merger Guidelines, although his discussion contains a far more nuanced perspective on how network effects and the leveraging of market power from one market to another overlay into the vertical merger math. In the end, however, whether one applies the existing vertical merger approach or the Petit proposal, I hypothesize little divergence in outcomes.

All of the above notwithstanding, Petit’s endeavor to devise a framework more closely calibrated to the unique features of tech platforms is admirable, as is the care and thoughtfulness he’s taken to the task. If the audience for this book takes the view that the core principals of economic welfare should underlie antitrust laws and their application, Petit is likely to find it receptive. While many (me included) may not think a new regime is necessary, the way that he articulates the challenges presented by platforms and evolving technologies is enlightening even for those who think an old approach can learn new tricks. And, of course, the existing approach, but has the added benefit of being adaptable to applications outside of tech platforms.

Still, the purpose of antitrust law is where the far more difficult debate is taking place. And this is where, as I mentioned above, I think Petit may have misdiagnosed the shortcomings of neo-structuralism (or the neo-Brandeisian school, or Antitrust 2.0, or Hipster Antitrust, and so on). In short, these are frameworks that focus first on the number and size of players in an industry and guard against concentration, even in the absence of a causal link between these structural elements and adverse impact on consumer, and/or total welfare. Petit describes neo-structuralism as focusing on rivalry without having an “an evaluative premise” (i.e., an explanation for why big = bad). I’m less sure that it lacks an evaluative premise, rather, I think it might have several (potentially competing) evaluative premises.

Rivalry indeed has no inherent value, it is good – or perceived as good – as a means to an end. If that end is consumer welfare, then the limiting principle on when rivalry is achieving its end is whether welfare is enhanced or not. But many have argued that rivalry could have other potential benefits. For instance, the Antitrust Subcommittee House Report, identifies several potential objectives for competition law: driving innovation and entrepreneurship, privacy, the protection of political and economic liberties, and controlling influence of private firms over the policymaking process. Even if we grant that competition could be a means to achieving these ends, the measure of success for competition laws would have to be the degree to which the ends are achieved. For example, if one argues that competition law should be used to promote privacy, we would measure the success of those laws by whether they do in fact promote privacy, not whether they maintain a certain number of players in an industry. Although, we should also consider whether competition law really is the most efficient and effective means to those ends.

Returning again to merger control, in the existing US regime, and under the Petit proposal, a dominant tech platform might be permitted to acquire a large player in an unrelated market assuming there is no augmentation of market power as a result of the interplay between the two and if the deal is, on net, efficiency enhancing. In simpler terms, if consumers are made better off through lower prices, better services, increased innovation etc. the deal is permitted to proceed. Yet, if antitrust were calibrated, e.g., for a primary purpose of disaggregating corporate control over capital to minimize political influence by large firms, you could see the same transition failing to achieve approval. If privacy were the primary goal, perhaps certain deals would be blocked if the merging parties are both in possession of detailed consumer data without regard to their size or existence of other players in the same space.

The failure of neo-structuralism (etc.) is, in my view, also likely the basis for its growing popularity. Petit argues that the flaw is that it promotes rivalry as an end in itself. I posit instead that neo-structuralism is flawed because it promotes rivalry as a means and is agnostic to the ends. As a result, people with strongly differing views on the optimal ends of competition law can appear to agree with one another by agreeing on the means and in doing so, promote a competition law framework that risks being untethered and undisciplined. In the absence of a clearly articulated policy goal – whether it is privacy, or economic equality, or diluting political influence, or even consumer welfare – there is no basis on which to evaluate whether any given competition law is structured or applied optimally. If rivalry is to be the means by which we implement our policy goals, how do we know when we have enough rivalry, or too little? We can’t.

It is on this point that I think there is more work to undertake in a complete critique of the failings of neo-structuralism (and any other neo-isms to come). In addition to other merits, welfare maximization gives us a framework to hold the construct and application of competition law accountable. It is irresponsible to replace a system that has, as Petit puts it, an “evaluative premise” with one possesses no ends-based framework for evaluation, leaving the law rudderless and susceptible to arbitrary or even selective enforcement.

In Amazon, Antitrust & Competition, Justice Department, Merger Guidelines, Platforms, Symposia, Symposium on Big Tech and the Digital Economy: The Moligopoly Scenario, Truth on the Market antitrust, antitrust and platforms, antitrust law, entrepreneurship, nicolas petit

It’s Not So Simple Who Owns “Your” Data

Peter Klein — 22 October 2020

Nicolas Petit’s insightful and provocative book ends with a chapter on “Big Tech’s Novel Harms,” asking whether antitrust is the appropriate remedy for popular (and academic) concerns about privacy, fake news, and hate speech. In each case, he asks whether the alleged harms are caused by a lack of competition among platforms – which could support a case for breaking them up – or by the nature of the underlying technologies and business models. He concludes that these problems are not alleviated (and may even be exacerbated) by applying competition policy and suggests that regulation, not antitrust, is the more appropriate tool for protecting privacy and truth.

What kind of regulation? Treating digital platforms like public utilities won’t work, Petit argues, because the product is multidimensional and competition takes place on multiple margins (the larger theme of the book): “there is a plausible chance that increased competition in digital markets will lead to a race to the bottom, in which price competition (e.g., on ad markets) will be the winner, and non-price competition (e.g., on privacy) will be the loser.” Utilities regulation also provides incentives for rent-seeking by less efficient rivals. Retail regulation, aimed at protecting small firms, may end up helping incumbents instead by raising rivals’ costs.

Petit concludes that consumer protection regulation (such as Europe’s GDPR) is a better tool for guarding privacy and truth, though it poses challenges as well. More generally, he highlights the vast gulf between the economic analysis of privacy and speech and the increasingly loud calls for breaking up the big tech platforms, which would do little to alleviate these problems.

As in the rest of the book, Petit’s treatment of these complex issues is thoughtful, careful, and systematic. I have more fundamental problems with conventional antitrust remedies and think that consumer protection is problematic when applied to data services (even more so than in other cases). Inspired by this chapter, let me offer some additional thoughts on privacy and the nature of data which speak to regulation of digital platforms and services.

First, privacy, like information, is not an economic good. Just as we don’t buy and sell information per se but information goods (books, movies, communications infrastructure, consultants, training programs, etc.), we likewise don’t produce and consume privacy but what we might call privacy goods: sunglasses, disguises, locks, window shades, land, fences and, in the digital realm, encryption software, cookie blockers, data scramblers, and so on.

Privacy goods and services can be analyzed just like other economic goods. Entrepreneurs offer bundled services that come with varying degrees of privacy protection: encrypted or regular emails, chats, voice and video calls; browsers that block cookies or don’t; social media sites, search engines, etc. that store information or not; and so on. Most consumers seem unwilling to sacrifice other functionality for increased privacy, as suggested by the small market shares held by DuckDuckGo, Telegram, Tor, and the like suggest. Moreover, while privacy per se is appealing, there are huge efficiency gains from matching on buyer and seller characteristics on sharing platforms, digital marketplaces, and dating sites. There are also substantial cost savings from electronic storage and sharing of private information such as medical records and credit histories. And there is little evidence of sellers exploiting such information to engage in price discrimination. (Aquisti, Taylor, and Wagman, 2016 provide a detailed discussion of many of these issues.)

Regulating markets for privacy goods via bans on third-party access to customer data, mandatory data portability, and stiff penalties for data breaches is tricky. Such policies could make digital services more valuable, but it is not obvious why the market cannot figure this out. If consumers are willing to pay for additional privacy, entrepreneurs will be eager to supply it. Of course, bans on third-party access and other forms of sharing would require a fundamental change in the ad-based revenue model that makes free or low-cost access possible, so platforms would have to devise other means of monetizing their services. (Again, many platforms already offer ad-free subscriptions, so it’s unclear why those who prefer ad-based, free usage should be prevented from doing so.)

What about the idea that I own “my” data and that, therefore, I should have full control over how it is used? Some of the utilities-based regulatory models treat platforms as neutral storage places or conduits for information belonging to users. Proposals for data portability suggest that users of technology platforms should be able to move their data from platform to platform, downloading all their personal information from one platform then uploading it to another, then enjoying the same functionality on the new platform as longtime users.

Of course, there are substantial technical obstacles to such proposals. Data would have to be stored in a universal format – not just the text or media users upload to platforms, but also records of all interactions (likes, shares, comments), the search and usage patterns of users, and any other data generated as a result of the user’s actions and interactions with other users, advertisers, and the platform itself. It is unlikely that any universal format could capture this information in a form that could be transferred from one platform to another without a substantial loss of functionality, particularly for platforms that use algorithms to determine how information is presented to users based on past use. (The extreme case is a platform like TikTok which uses usage patterns as a substitute for follows, likes, and shares, portability to construct a “feed.”)

Moreover, as each platform sets its own rules for what information is allowed, the import functionality would have to screen the data for information allowed on the original platform but not the new (and the reverse would be impossible – a user switching from Twitter to Gab, for instance, would have no way to add the content that would have been permitted on Gab but was never created in the first place because it would have violated Twitter rules).

There is a deeper, philosophical issue at stake, however. Portability and neutrality proposals take for granted that users own “their” data. Users create data, either by themselves or with their friends and contacts, and the platform stores and displays the data, just as a safe deposit box holds documents or jewelry and a display case shows of an art collection. I should be able to remove my items from the safe deposit box and take them home or to another bank, and a “neutral” display case operator should not prevent me from showing off my preferred art (perhaps subject to some general rules about obscenity or harmful personal information).

These analogies do not hold for user-generated information on internet platforms, however. “My data” is a record of all my interactions with platforms, with other users on those platforms, with contractual partners of those platforms, and so on. It is co-created by these interactions. I don’t own these records any more than I “own” the fact that someone saw me in the grocery store yesterday buying apples. Of course, if I have a contract with the grocer that says he will keep my purchase records private, and he shares them with someone else, then I can sue him for breach of contract. But this isn’t theft. He hasn’t “stolen” anything; there is nothing for him to steal. If a grocer — or an owner of a tech platform — wants to attract my business by monetizing the records of our interactions and giving me a cut, he should go for it. I still might prefer another store. In any case, I don’t have the legal right to demand this revenue stream.

Likewise, “privacy” refers to what other people know about me – it is knowledge in their heads, not mine. Information isn’t property. If I know something about you, that knowledge is in my head; it’s not something I took from you. Of course, if I obtained or used that info in violation of a prior agreement, then I’m guilty of breach, and I use that information to threaten or harass you, I may be guilty of other crimes. But the popular idea that tech companies are stealing and profiting from something that’s “ours” isn’t right.

The concept of co-creation is important, because these digital records, like other co-created assets, can be more or less relationship specific. The late Oliver Williamson devoted his career to exploring the rich variety of contractual relationships devised by market participants to solve complex contracting problems, particularly in the face of asset specificity. Relationship-specific investments can be difficult for trading parties to manage, but they typically create more value. A legal regime in which only general-purpose, easily redeployable technologies were permitted would alleviate the holdup problem, but at the cost of a huge loss in efficiency. Likewise, a world in which all digital records must be fully portable reduces switching costs, but results in technologies for creating, storing, and sharing information that are less valuable. Why would platform operators invest in efficiency improvements if they cannot capture some of that value by means of proprietary formats, interfaces, sharing rules, and other arrangements?

In short, we should not be quick to assume “market failure” in the market for privacy goods (or “true” news, whatever that is). Entrepreneurs operating in a competitive environment – not the static, partial-equilibrium notion of competition from intermediate micro texts but the rich, dynamic, complex, and multimarket kind of competition described in Petit’s book – can provide the levels of privacy and truthiness that consumers prefer.

In Amazon, Antitrust & Competition, Apple, Platforms, Price Discrimination, Symposia, Symposium on Big Tech and the Digital Economy: The Moligopoly Scenario, Truth on the Market, Twitter antitrust, big tech, Competition law, encryption, entrepreneurship, fake news, nicolas petit, petit-moligopoly-symposium, raising rivals’ costs

The Fox and Shepherd Problem

Shane Greenstein — 18 October 2020

In his book, Nicolas Petit approaches antitrust issues by analyzing their economic foundations, and he aspires to bridge gaps between those foundations and the common points of view. In light of the divisiveness of today’s debates, I appreciate Petit’s calm and deliberate view of antitrust, and I respect his clear and engaging prose.

I spent a lot of time with this topic when writing a book (How the Internet Became Commercial, 2015, Princeton Press). If I have something unique to add to a review of Petit’s book, it comes from the role Microsoft played in the events in my book.

Many commentators have speculated on what precise charges could be brought against Facebook, Google/Alphabet, Apple, and Amazon. For the sake of simplicity, let’s call these the “big four.” While I have no special insight to bring to such speculation, for this post I can do something different, and look forward by looking back. For the time being, Microsoft has been spared scrutiny by contemporary political actors. (It seems safe to presume Microsoft’s managers prefer to be left out.) While it is tempting to focus on why this has happened, let’s focus on a related issue: What shadow did Microsoft’s trials cast on the antitrust issues facing the big four?

Two types of lessons emerged from Microsoft’s trials, and both tend to be less appreciated by economists. One set of lessons emerged from the media flood of the flotsam and jetsam of sensationalistic factoids and sound bites, drawn from Congressional and courtroom testimony. That yielded lessons about managing sound and fury – i.e., mostly about reducing the cringe-worthy quotes from CEOs and trial witnesses.

Another set of lessons pertained to the role and limits of economic reasoning. Many decision makers reasoned by analogy and metaphor. That is especially so for lawyers and executives. These metaphors do not make economic reasoning wrong, but they do tend to shape how an antitrust question takes center stage with a judge, as well as in the court of public opinion. These metaphors also influence the stories a CEO tells to employees.

If you asked me to forecast how things will go for the big four, based on what I learned from studying Microsoft’s trials, I forecast that the outcome depends on which metaphor and analogy gets the upper hand.

In that sense, I want to argue that Microsoft’s experience depended on “the fox and shepherd problem.” When is a platform leader better thought of as a shepherd, helping partners achieve a healthy outcome, or as a fox in charge of a henhouse, ready to sacrifice a partner for self-serving purposes? I forecast the same metaphors will shape experience of the big four.

Gaps and analysis

The fox-shepherd problem never shows up when a platform leader is young and its platform is small. As the platform reaches bigger scale, however, the problem becomes more salient. Conflicts of interests emerge and focus attention on platform leadership.

Petit frames these issues within a Schumpeterian vision. In this view, firms compete for dominant positions over time, potentially with one dominant firm replacing another. Potential competition has a salutary effect if established firms perceive a threat from the future shadow of such competitors, motivating innovation. In this view, antitrust’s role might be characterized as “keeping markets open so there is pressure on the dominant firm from potential competition.”

In the Microsoft trial economists framed the Schumpeterian tradeoff in the vocabulary of economics. Firms who supply complements at one point could become suppliers of substitutes at a later point if they are allowed to. In other words, platform leaders today support complements that enhance the value of the platform, while also having the motive and ability to discourage those same business partners from developing services that substitute for the platform’s services, which could reduce the platform’s value. Seen through this lens, platform leaders inherently face a conflict of interest, and antitrust law should intervene if platform leaders could place excessive limitations on existing business partners.

This economic framing is not wrong. Rather, it is necessary, but not sufficient. If I take a sober view of events in the Microsoft trial, I am not convinced the economics alone persuaded the judge in Microsoft’s case, or, for that matter, the public.

As judges sort through the endless detail of contracting provisions, they need a broad perspective, one that sharpens their focus on a key question. One central question in particular inhabits a lot of a judge’s mindshare: how did the platform leader use its discretion, and for what purposes? In case it is not obvious, shepherds deserve a lot of discretion, while only a fool gives a fox much license.

Before the trial, when it initially faced this question from reporters and Congress, Microsoft tried to dismiss the discussion altogether. Their representatives argued that high technology differs from every other market in its speed and productivity, and, therefore, ought to be thought of as incomparable to other antitrust examples. This reflected the high tech elite’s view of their own exceptionalism.

Reporters dutifully restated this argument, and, long story short, it did not get far with the public once the sensationalism started making headlines, and it especially did not get far with the trial judge. To be fair, if you watched recent congressional testimony, it appears as if the lawyers for the big four instructed their CEOs not to try it this approach this time around.

Origins

Well before lawyers and advocates exaggerate claims, the perspective of both sides usually have some merit, and usually the twain do not meet. Most executives tend to remember every detail behind growth, and know the risks confronted and overcome, and usually are reluctant to give up something that works for their interests, and sometimes these interests can be narrowly defined. In contrast, many partners will know examples of a rule that hindered them, and point to complaints that executives ignored, and aspire to have rules changed, and, again, their interests tend to be narrow.

Consider the quality-control process today for iPhone apps as an example. The merits and absurdity of some of Apples conduct get a lot of attention in online forums, especially the 30% take for Apple. Apple can reasonably claim the present set of rules work well overall, and only emerged after considerable experimentation, and today they seek to protect all who benefit from the entire system, like a shepherd. It is no surprise however, that some partners accuse Apple of tweaking rules to their own benefit, and using the process to further Apple’s ambitions at the expense of the partner’s, like a fox in a henhouse. So it goes.

More generally, based on publically available information, all of the big four already face this debate. Self-serving behavior shows up in different guise in different parts of the big four’s business, but it is always there. As noted, Apple’s apps compete with the apps of others, so it has incentives to shape distribution of other apps. Amazon’s products compete with some products coming from its third—party sellers, and it too faces mixed incentives. Google’s services compete with online services who also advertise on their search engine, and they too face issues over their charges for listing on the Play store. Facebook faces an additional issues, because it has bought firms that were trying to grow their own platforms to compete with Facebook.

Look, those four each contain rather different businesses in their details, which merits some caution in making a sweeping characterization. My only point: the question about self-serving behavior arises in each instance. That frames a fox-shepherd problem for prosecutors in each case.

Lessons from prior experience

Circling back to lessons of the past for antitrust today, the Shepherd-Fox problem was one of the deeper sources of miscommunication leading up to the Microsoft trial. In the late 1990s Microsoft could reasonably claim to be a shepherd for all its platform’s partners, and it could reasonably claim to have improved the platform in ways that benefited partners. Moreover, for years some of the industry gossip about their behavior stressed misinformed nonsense. Accordingly, Microsoft’s executives had learned to trust their own judgment and to mistrust the complaints of outsiders. Right in line with that mistrust, many employees and executives took umbrage to being characterized as a fox in a henhouse, dismissing the accusations out of hand.

Those habits-of-mind poorly positioned the firm for a court case. As any observer of the trial knowns, When prosecutors came looking, they found lots of examples that looked like fox-like behavior. Onerous contract restrictions and cumbersome processes for business partners produced plenty of bad optics in court, and fueled the prosecution’s case that the platform had become too self-serving at the expense of competitive processes. Prosecutors had plenty to work with when it came time to prove motive, intent, and ability to misuse discretion.

What is the lesson for the big four? Ask an executive in technology today, and sometimes you will hear the following: As long as a platform’s actions can be construed as friendly to customers, the platform leader will be off the hook. That is not wrong lessons, but it is an incomplete one. Looking with hindsight and foresight, that perspective seems too sanguine about the prospects for the big four. Microsoft had done plenty for its customers, but so what? There was plenty of evidence of acting like a fox in a hen-house. The bigger lesson is this: all it took were a few bad examples to paint a picture of a pattern, and every firm has such examples.

Do not get me wrong. I am not saying a fox and hen-house analogy is fair or unfair to platform leaders. Rather, I am saying that economists like to think the economic trade-off between the interests of platform leaders, platform partners, and platform customers emerge from some grand policy compromise. That is not how prosecutors think, nor how judges decide. In the Microsoft case there was no such grand consideration. The economic framing of the case only went so far. As it was, the decision was vulnerable to metaphor, shrewdly applied and convincingly argued. Done persuasively, with enough examples of selfish behavior, excuses about “helping customers” came across as empty.

Policy

Some advocates argue, somewhat philosophically, that platforms deserve discretion, and governments are bound to err once they intervene. I have sympathy with that point of view, but only up to a point. Below are two examples from outside antitrust where government routinely do not give the big four a blank check.

First, when it started selling ads, Google banned ads for cigarettes, porn and alcohol, and it downgraded in its quality score for websites that used deceptive means to attract users. That helped the service foster trust with new users, enabling it to grow. After it became bigger should Google have continued to have unqualified discretion to shepherd the entire ad system? Nobody thinks so. A while ago the Federal Trade Commission decided to investigate deceptive online advertising, just as it investigates deceptive advertising in other media. It is not a big philosophical step to next ask whether Google should have unfettered discretion to structure the ad business, search process, and related e-commerce to its own benefit.

Here is another example, this one about Facebook. Over the years Facebook cycled through a number of rules for sharing information with business partners, generally taking a “relaxed” attitude enforcing those policies. Few observers cared when Facebook was small, but many governments started to care after Facebook grew to billions of users. Facebook’s lax monitoring did not line up with the preferences of many governments. It should not come as a surprise now that many governments want to regulate Facebook’s handling of data. Like it or not, this question lies squarely within the domain of government privacy policy. Again, the next step is small. Why should other parts of its business remain solely in Facebook’s discretion, like its ability to buy other businesses?

This gets us to the other legacy of the Microsoft case: As we think about future policy dilemmas, are there a general set of criteria for the antitrust issues facing all four firms? Veterans of court cases will point out that every court case is its own circus. Just because Microsoft failed to be persuasive in its day does not imply any of the big four will be unpersuasive.

Looking back on the Microsoft trial, it did not articulate a general set of principles about acceptable or excusable self-serving behavior from a platform leader. It did not settle what criteria best determine when a court should consider a platform leader’s behavior closer to that of a shepherd or a fox. The appropriate general criteria remains unclear.

Diversification Is At The Heart Of Competition

Richard Langlois — 15 October 2020

Market share has long been the talisman of antitrust economics. Once we properly define what “the product” is, all we have to do is look at shares in the relevant market. In such an exercise, today’s high-tech firms come off badly. Each of them has a large share of the market for some “product.” What I appreciate about Nicolas Petit’s notion of “moligopoly” is that it recognizes that genuine competition is a far more complex and interesting phenomenon, one that goes beyond the category of “the product.”

In his chapter 4, Petit lays out how this works with six of today’s large high-tech companies, adding Netflix to the usual Big Five of Amazon, Apple, Facebook, Google, and Microsoft. If I understand properly, what he means by “moligopoly” is that these large firms have their hands in many different relevant markets. Because they seem to be selling different “products,” they don’t seem to be competing with one another. Yet, in a fundamental sense, they are very much competing with one another, and perhaps with firms that do not yet exist.

In this view, diversification is at the heart of competition. Indeed, Petit wonders at one point whether we are in a new era of “conglomeralism.” I would argue that the diversified high-tech firms we see today are actually very unlike the conglomerates of the late twentieth century. In my view, the earlier conglomerates were not equilibrium phenomena but rather short-lived vehicles for the radical restructuring of the American economy in the post- Bretton Woods era of globalization. A defining characteristic of those firms was that their diversification was unrelated, not just in terms of the SIC codes of their products but also in terms of their underlying capabilities. If we look only at the products on the demand side, today’s high-tech firms might also seem to reflect unrelated diversification. In fact, however, unlike in the twentieth-century conglomerates, the activities of present-day high-tech firms are connected on the supply side by a common set of capabilities involving the deployment of digital technology.

Thus the boundaries of markets can shift and morph unexpectedly. Enterprises that may seem entirely different actually harbor the potential to invade one other’s territory (or invade new territory – “competing against non-consumption”). What Amazon can do, Google can do; and so can Microsoft. The arena is competitive not because firms have a small share of relevant markets but because all of them sit beneath four or five damocletian swords, suspended by the thinnest of horsehairs. No wonder the executives of high-tech firms sound paranoid.

Petit speculates that today’s high-tech companies have diversified (among other reasons) because of complementarities. That may be part of the story. But as Carliss Baldwin argues (and as Petit mentions in passing), we can think about the investments high-tech firms seem to be making as options – experiments that may or may not pay off. The more uncertain the environment, the more valuable it is to have many diverse options. A decade or so after the breakup of AT&T, the “baby Bells” were buying into landline, cellular, cable, satellite, and many other things, not because, as many thought at the time, that these were complementary, but because no one had any idea what would be important in the future (including whether there would be any complementarities). As uncertainty resolved, these lines of business became more specialized, and the babies unbundled. (As I write, AT&T, the baby Bell that snagged the original company name, is probably about to sell off DirectTV at a loss.) From this perspective, the high degree of diversification we observe today implies not control of markets but the opposite – existential uncertainty about the future.

I wonder whether this kind of competition is unique to the age of the Internet. There is an entire genre of business-school case built around an epiphany of the form: “we thought we were in the X business, but we were really in the Y business all along!” I have recently read (listened to, technically) Marc Levinson’s wonderful history of containerized shipping. Here the real competition occurred across modes of transport, not within existing well-defined markets. The innovators came to realize that they were in the logistics business, not in the trucking business or the railroad business or the ocean-shipping business. (Some of the most interesting parts of the story were about how entrepreneurship happens in a heavily regulated environment. At one point early in the story, Malcolm McLean, the most important of these entrepreneurs, had to buy up other trucking firms just to obtain the ICC permits necessary to redesign routes efficiently.) Of course, containerized shipping is also a modular system that some economists have accused of being a general-purpose technology like the Internet.

In Amazon, Apple, Facebook, Google, Platforms, Symposia, Symposium on Big Tech and the Digital Economy: The Moligopoly Scenario, Truth on the Market antitrust, big tech, Competition law, entrepreneurship, nicolas petit, petit-moligopoly-symposium

It’s All About What We Don’t Know

Doug Melamed — 12 October 2020

The big digital platforms make people uneasy. Part of the unease is no doubt attributable to widespread populist concerns about large and powerful business entities. Platforms like Facebook and Google in particular cause unease because they affect sensitive issues of communications, community, and politics. But the platforms also make people uneasy because they seem boundless – enduring monopolies protected by ever-increasing scale and network economies, and growing monopolies aided by scope economies that enable them to conquer complementary markets. They provoke a discussion about whether antitrust law is sufficient for the challenge.

Nicolas Petit’s Big Tech and the Digital Economy: The Moligopoly Scenario provides an insightful and valuable antidote to this unease. While neither Panglossian nor comprehensive, Petit’s analysis persuasively argues that some of the concerns about the platforms are misguided or at least overstated. As Petit sees it, the platforms are not so much monopolies in discrete markets – search, social networking, online commerce, and so on – as “multibusiness firms with business units in partly overlapping markets” that are engaged in a “dynamic oligopoly game” that might be “the socially optimal industry structure.” Petit suggests that we should “abandon or at least radically alter traditional antitrust principles,” which are aimed at preserving “rivalry,” and “adapt to the specific non-rival economics of digital markets.” In other words, the law should not try to diminish the platforms’ unique dominance in their individual sectors, which have already tipped to a winner-take-all (or most) state and in which protecting rivalry is not “socially beneficial.” Instead, the law should encourage reductions of output in tipped markets in which the dominant firm “extracts a monopoly rent” in order to encourage rivalry in untipped markets.

Petit’s analysis rests on the distinction between “tipped markets,” in which “tech firms with observed monopoly positions can take full advantage of their market power,” and “untipped markets,” which are “characterized by entry, instability and uncertainty.” Notably, however, he does not expect “dispositive findings” as to whether a market is tipped or untipped. The idea is to define markets, not just by “structural” factors like rival goods and services, market shares and entry barriers, but also by considering “uncertainty” and “pressure for change.”

Not surprisingly, given Petit’s training and work as a European scholar, his discussion of “antitrust in moligopoly markets” includes prescriptions that seem to one schooled in U.S. antitrust law to be a form of regulation that goes beyond proscribing unlawful conduct. Petit’s principal concern is with reducing monopoly rents available to digital platforms. He rejects direct reduction of rents by price regulation as antithetical to antitrust’s DNA and proposes instead indirect reduction of rents by permitting users on the inelastic side of a platform (the side from which the platform gains most of its revenues) to collaborate in order to gain countervailing market power and by restricting the platforms’ use of vertical restraints to limit user bypass.

He would create a presumption against all horizontal mergers by dominant platforms in order to “prevent marginal increases of the output share on which the firms take a monopoly rent” and would avoid the risk of defining markets narrowly and thus failing to recognize that platforms are conglomerates that provide actual or potential competition in multiple partially overlapping commercial segments. By contrast, Petit would restrict the platforms’ entry into untipped markets only in “exceptional circumstances.” For this, Petit suggests four inquiries: whether leveraging of network effects is involved; whether platform entry deters or forecloses entry by others; whether entry by others pressures the monopoly rents; and whether entry into the untipped market is intended to deter entry by others or is a long-term commitment.

One might question the proposition, which is central to much of Petit’s argument, that reducing monopoly rents in tipped markets will increase the platforms’ incentives to enter untipped markets. Entry into untipped markets is likely to depend more on expected returns in the untipped market, the cost of capital, and constraints on managerial bandwidth than on expected returns in the tipped market. But the more important issue, at least from the perspective of competition law, is whether – even assuming the correctness of all aspects of Petit’s economic analysis — the kind of categorical regulatory intervention proposed by Petit is superior to a law enforcement regime that proscribes only anticompetitive conduct that increases or threatens to increase market power. Under U.S. law, anticompetitive conduct is conduct that tends to diminish the competitive efficacy of rivals and does not sufficiently enhance economic welfare by reducing costs, increasing product quality, or reducing above-cost prices.

If there were no concerns about the ability of legal institutions to know and understand the facts, a law enforcement regime would seem clearly superior. Consider, for example, Petit’s recommendation that entry by a platform monopoly into untipped markets should be restricted only when network effects are involved and after taking into account whether the entry tends to protect the tipped market monopoly and whether it reflects a long-term commitment. Petit’s proposed inquiries might make good sense as a way of understanding as a general matter whether market extension by a dominant platform is likely to be problematic. But it is hard to see how economic welfare is promoted by permitting a platform to enter an adjacent market (e.g., Amazon entering a complementary product market) by predatory pricing or by otherwise unprofitable self-preferencing, even if the entry is intended to be permanent and does not protect the platform monopoly.

Similarly, consider the proposed presumption against horizontal mergers. That might not be a good idea if there is a small (10%) chance that the acquired firm would otherwise endure and modestly reduce the platform’s monopoly rents and an equal or even smaller chance that the acquisition will enable the platform, by taking advantage of economies of scope and asset complementarities, to build from the acquired firm an improved business that is much more valuable to consumers. In that case, the expected value of the merger in welfare terms might be very positive. Similarly, Petit would permit acquisitions by a platform of firms outside the tipped market as long as the platform has the ability and incentive to grow the target. But the growth path of the target is not set in stone. The platform might use it as a constrained complement, while an unaffiliated owner might build it into something both more valuable to consumers and threatening to the platform. Maybe one of these stories describes Facebook’s acquisition of Instagram.

The prototypical anticompetitive horizontal merger story is one in which actual or potential competitors agree to share the monopoly rents that would be dissipated by competition between them. That story is confounded by communications that seem like threats, which imply a story of exclusion rather than collusion. Petit refers to one such story. But the threat story can be misleading. Suppose, for example, that Platform sees Startup introduce a new business concept and studies whether it could profitably emulate Startup. Suppose further that Platform concludes that, because of scale and scope economies available to it, it could develop such a business and come to dominate the market for a cost of $100 million acting alone or $25 million if it can acquire Startup and take advantage of its existing expertise, intellectual property, and personnel. In that case, Platform might explain to Startup the reality that Platform is going to take the new market either way and propose to buy Startup for $50 million (thus offering Startup two-thirds of the gains from trade). Startup might refuse, perhaps out of vanity or greed, in which case Platform as promised might enter aggressively and, without engaging in predatory or other anticompetitive conduct, drive Startup from the market. To an omniscient law enforcement regime, there should be no antitrust violation from either an acquisition or the aggressive competition. Either way, the more efficient provider prevails so the optimum outcome is realized in the new market. The merger would have been more efficient because it would have avoided wasteful duplication of startup costs, and the merger proposal (later characterized as a threat) was thus a benign, even procompetitive, invitation to collude. It would be a different story of course if Platform could overcome Startup’s first mover advantage only by engaging in anticompetitive conduct.

The problem is that antitrust decision makers often cannot understand all the facts. Take the threat story, for example. If Startup acquiesces and accepts the $50 million offer, the decision maker will have to determine whether Platform could have driven Startup from the market without engaging in predatory or anticompetitive conduct and, if not, whether absent the merger the parties would have competed against one another. In other situations, decision makers are asked to determine whether the conduct at issue would be more likely than the but-for world to promote innovation or other, similarly elusive matters.

U.S. antitrust law accommodates its unavoidable uncertainty by various default rules and practices. Some, like per se rules and the controversial Philadelphia National Bank presumption, might on occasion prohibit conduct that would actually have been benign or even procompetitive. Most, however, insulate from antitrust liability conduct that might actually be anticompetitive. These include rules applicable to predatory pricing, refusals to deal, two-sided markets, and various matters involving patents. Perhaps more important are proof requirements in general. U.S. antitrust law is based on the largely unexamined notion that false positives are worse than false negatives and thus, for the most part, puts the burden of uncertainty on the plaintiff.

Petit is proposing, in effect, an alternative approach for the digital platforms. This approach would not just proscribe anticompetitive conduct. It would, instead, apply to specific firms special rules that are intended to promote a desired outcome, the reduction in monopoly rents in tipped digital markets. So, one question suggested by Petit’s provocative study is whether the inevitable uncertainty surrounding issues of platform competition are best addressed by the kinds of categorical rules Petit proposes or by case-by-case application of abstract legal principles. Put differently, assuming that economic welfare is the objective, what is the best way to minimize error costs?

Broadly speaking, there are two kinds of error costs: specification errors and application errors. Specification errors reflect legal rules that do not map perfectly to the normative objectives of the law (e.g., a rule that would prohibit all horizontal mergers by dominant platforms when some such mergers are procompetitive or welfare-enhancing). Application errors reflect mistaken application of the legal rule to the facts of the case (e.g., an erroneous determination whether the conduct excludes rivals or provides efficiency benefits).

Application errors are the most likely source of error costs in U.S. antitrust law. The law relies largely on abstract principles that track the normative objectives of the law (e.g., conduct by a monopoly that excludes rivals and has no efficiency benefit is illegal). Several recent U.S. antitrust decisions (American Express, Qualcomm, and Farelogix among them) suggest that error costs in a law enforcement regime like that in the U.S. might be substantial and even that case-by-case application of principles that require applying economic understanding to diverse factual circumstances might be beyond the competence of generalist judges. Default rules applicable in special circumstances reduce application errors but at the expense of specification errors.

Specification errors are more likely with categorical rules, like those suggested by Petit. The total costs of those specification errors are likely to exceed the costs of mistaken decisions in individual cases because categorical rules guide firm conduct in general, not just in decided cases, and rules that embody specification errors are thus likely to encourage undesirable conduct and to discourage desirable conduct in matters that are not the subject of enforcement proceedings. Application errors, unless systematic and predictable, are less likely to impose substantial costs beyond the costs of mistaken decisions in the decided cases themselves. Whether any particular categorical rules are likely to have error costs greater than the error costs of the existing U.S. antitrust law will depend in large part on the specification errors of the rules and on whether their application is likely to be accompanied by substantial application costs.

As discussed above, the particular rules suggested by Petit appear to embody important specification errors. They are likely also to lead to substantial application errors because they would require determination of difficult factual issues. These include, for example, whether the market at issue has tipped, whether the merger is horizontal, and whether the platform’s entry into an untipped market is intended to be permanent. It thus seems unlikely, at least from this casual review, that adoption of the rules suggested by Petit will reduce error costs.

Petit’s impressive study might therefore be most valuable, not as a roadmap for action, but as a source of insight and understanding of the facts – what Petit calls a “mental model to help decision makers understand the idiosyncrasies of digital markets.” If viewed, not as a prescription for action, but as a description of the digital world, the Moligopoly Scenario can help address the urgent matter of reducing the costs of application errors in U.S. antitrust law.

Symposium on Big Tech and the Digital Economy: The Moligopoly Scenario

Sam Bowman — 12 October 2020

To mark the release of Nicolas Petit’s “Big Tech and the Digital Economy: The Moligopoly Scenario”, Truth on the Market and International Center for Law & Economics (ICLE) are hosting some of the world’s leading scholars and practitioners of competition law and economics to discuss some of the book’s themes.

In his book, Petit offers a “moligopoly” framework for understanding competition between large tech companies that may have significant market shares in their ‘home’ markets but nevertheless compete intensely in adjacent ones. Petit argues that tech giants coexist as both monopolies and oligopolies in markets defined by uncertainty and dynamism, and offers policy tools for dealing with the concerns people have about these markets that avoid crude “big is bad” assumptions and do not try to solve non-economic harms with the tools of antitrust.

This symposium asks contributors to give their thoughts either on the book as a whole or on a selected chapter that relates to their own work. In it we hope to explore some of Petit’s arguments with different perspectives from our contributors.

Confirmed Participants

As in the past (see examples of previous TOTM blog symposia here), we’ve lined up an outstanding and diverse group of scholars to discuss these issues, including:

Kelly Fayne, Antitrust Associate, Latham & Watkins
Shane Greenstein, Professor of Business Administration; Co-chair of the HBS Digital Initiative, Harvard Business School
Peter Klein, Professor of Entrepreneurship and Chair, Department of Entrepreneurship and Corporate Innovation, Baylor University
William Kovacic, Global Competition Professor of Law and Policy; Director, Competition Law Center, George Washington University Law
Kai-Uwe Kuhn, Academic Advisor, University of East Anglia
Richard Langlois, Professor of Economics, University of Connecticut
Doug Melamed, Professor of the Practice of Law, Stanford law School
David Teece, Professor in Global Business, University of California’s Haas School of Business (Berkeley); Director, Center for Global Strategy; Governance and Faculty Director, Institute for Business Innovation

Thank you again to all of the excellent authors for agreeing to participate in this interesting and timely symposium.

Look for the first posts starting later today, October 12, 2020.

Making Sense of the Google Android Decision (part 1): Four Problems with the EU Commission’s Market Definition

Dirk Auer — 14 November 2019

A screenshot of a cell phone

Description automatically generated

This is the first in a series of TOTM blog posts discussing the Commission’s recently published Google Android decision. It draws on research from a soon-to-be published ICLE white paper.

The European Commission’s recent Google Android decision will surely go down as one of the most important competition proceedings of the past decade. And yet, an in-depth reading of the 328 page decision should leave attentive readers with a bitter taste.

One of the Commission’s most significant findings is that the Android operating system and Apple’s iOS are not in the same relevant market, along with the related conclusion that Apple’s App Store and Google Play are also in separate markets.

This blog post points to a series of flaws that undermine the Commission’s reasoning on this point. As a result, the Commission’s claim that Google and Apple operate in separate markets is mostly unsupported.

1. Everyone but the European Commission thinks that iOS competes with Android

Surely the assertion that the two predominant smartphone ecosystems in Europe don’t compete with each other will come as a surprise to… anyone paying attention:

The internet is replete with “Android versus Apple” buying guides: “Apple iPhone 11 vs the Android competition”, “iOS 13 vs. Android 10: How Apple and Google match up”, “iPhone vs. Android: Which is better?”, etc.
Both Apple and Google have webpages that help users to switch from one platform to the other:

The business pages of newspapers routinely talk of the fierce rivalry that exists between Apple and Google: “Why competition between Apple and Google is more brutal than ever”, “Google vs. Apple: Why Their Competition Is Good For You”, etc.
Numerous competition policy papers reach a similar conclusion. Nicolas Petit refers to Apple and Google as “moligopolists”. David Evans speaks of “dynamic competition”. Marshall Van Alstyne and his co-authors have analyzed the strategies deployed by Google and Apple to compete against each other.
Finally, the annual reports of Apple and Google both cite the other firm as an important competitor (if not by name):

Apple 10-K:

The Company believes the availability of third-party software applications and services for its products depends in part on the developers’ perception and analysis of the relative benefits of developing, maintaining and upgrading such software and services for the Company’s products compared to competitors’ platforms, such as Android for smartphones and tablets and Windows for personal computers.

Google 10-K:

We face competition from: Companies that design, manufacture, and market consumer electronics products, including businesses that have developed proprietary platforms.

This leads to a critical question: Why did the Commission choose to depart from the instinctive conclusion that Google and Apple compete vigorously against each other in the smartphone and mobile operating system market?

As explained below, its justifications for doing so were deeply flawed.

2. It does not matter that OEMs cannot license iOS (or the App Store)

One of the main reasons why the Commission chose to exclude Apple from the relevant market is that OEMs cannot license Apple’s iOS or its App Store.

But is it really possible to infer that Google and Apple do not compete against each other because their products are not substitutes from OEMs’ point of view?

The answer to this question is likely no.

Relevant markets, and market shares, are merely a proxy for market power (which is the appropriate baseline upon which build a competition investigation). As Louis Kaplow puts it:

[T]he entire rationale for the market definition process is to enable an inference about market power.

If there is a competitive market for Android and Apple smartphones, then it is somewhat immaterial that Google is the only firm to successfully offer a licensable mobile operating system (as opposed to Apple and Blackberry’s “closed” alternatives).

By exercising its “power” against OEMs by, for instance, degrading the quality of Android, Google would, by the same token, weaken its competitive position against Apple. Google’s competition with Apple in the smartphone market thus constrains Google’s behavior and limits its market power in Android-specific aftermarkets (on this topic, see Borenstein et al., and Klein).

This is not to say that Apple’s iOS (and App Store) is, or is not, in the same relevant market as Google Android (and Google Play). But the fact that OEMs cannot license iOS or the App Store is mostly immaterial for market definition purposes.

3. Google would find itself in a more “competitive” market if it decided to stop licensing the Android OS

The Commission’s reasoning also leads to illogical outcomes from a policy standpoint.

Google could suddenly find itself in a more “competitive” market if it decided to stop licensing the Android OS and operated a closed platform (like Apple does). The direct purchasers of its products – consumers – would then be free to switch between Apple and Google’s products.

As a result, an act that has no obvious effect on actual market power — and that could have a distinctly negative effect on consumers — could nevertheless significantly alter the outcome of competition proceedings on the Commission’s theory.

One potential consequence is that firms might decide to close their platforms (or refuse to open them in the first place) in order to avoid competition scrutiny (because maintaining a closed platform might effectively lead competition authorities to place them within a wider relevant market). This might ultimately reduce product differentiation among mobile platforms (due to the disappearance of open ecosystems) – the exact opposite of what the Commission sought to achieve with its decision.

This is, among other things, what Antonin Scalia objected to in his Eastman Kodak dissent:

It is quite simply anomalous that a manufacturer functioning in a competitive equipment market should be exempt from the per se rule when it bundles equipment with parts and service, but not when it bundles parts with service [when the manufacturer has a high share of the “market” for its machines’ spare parts]. This vast difference in the treatment of what will ordinarily be economically similar phenomena is alone enough to call today’s decision into question.

4. Market shares are a poor proxy for market power, especially in narrowly defined markets

Finally, the problem with the Commission’s decision is not so much that it chose to exclude Apple from the relevant markets, but that it then cited the resulting market shares as evidence of Google’s alleged dominance:

(440) Google holds a dominant position in the worldwide market (excluding China) for the licensing of smart mobile OSs since 2011. This conclusion is based on:
(1) the market shares of Google and competing developers of licensable smart mobile OSs […]

In doing so, the Commission ignored one of the critical findings of the law & economics literature on market definition and market power: Although defining a narrow relevant market may not itself be problematic, the market shares thus adduced provide little information about a firm’s actual market power.

For instance, Richard Posner and William Landes have argued that:

If instead the market were defined narrowly, the firm’s market share would be larger but the effect on market power would be offset by the higher market elasticity of demand; when fewer substitutes are included in the market, substitution of products outside of the market is easier. […]
If all the submarket approach signifies is willingness in appropriate cases to call a narrowly defined market a relevant market for antitrust purposes, it is unobjectionable – so long as appropriately less weight is given to market shares computed in such a market.

Likewise, Louis Kaplow observes that:

In choosing between a narrower and a broader market (where, as mentioned, we are supposing that the truth lies somewhere in between), one would ask whether the inference from the larger market share in the narrower market overstates market power by more than the inference from the smaller market share in the broader market understates market power. If the lesser error lies with the former choice, then the narrower market is the relevant market; if the latter minimizes error, then the broader market is best.

The Commission failed to heed these important findings.

5. Conclusion

The upshot is that Apple should not have been automatically excluded from the relevant market.

To be clear, the Commission did discuss this competition from Apple later in the decision. And it also asserted that its findings would hold even if Apple were included in the OS and App Store markets, because Android’s share of devices sold would have ranged from 45% to 79%, depending on the year (although this ignores other potential metrics such as the value of devices sold or Google’s share of advertising revenue.

However, by gerrymandering the market definition (which European case law likely permitted it to do), the Commission ensured that Google would face an uphill battle, starting from a very high market share and thus a strong presumption of dominance.

Moreover, that it might reach the same result by adopting a more accurate market definition is no excuse for adopting a faulty one and resting its case (and undertaking its entire analysis) on it. In fact, the Commission’s choice of a faulty market definition underpins its entire analysis, and is far from a “harmless error.”

I shall discuss the consequences of this error in an upcoming blog post. Stay tuned.

The illiberal vision of neo-Brandeisian antitrust

Geoffrey Manne — 16 April 2018

Following is the (slightly expanded and edited) text of my remarks from the panel, Antitrust and the Tech Industry: What Is at Stake?, hosted last Thursday by CCIA. Bruce Hoffman (keynote), Bill Kovacic, Nicolas Petit, and Christine Caffarra also spoke. If we’re lucky Bruce will post his remarks on the FTC website; they were very good.

(NB: Some of these comments were adapted (or lifted outright) from a forthcoming Cato Policy Report cover story co-authored with Gus Hurwitz, so Gus shares some of the credit/blame.)

The urge to treat antitrust as a legal Swiss Army knife capable of correcting all manner of social and economic ills is apparently difficult for some to resist. Conflating size with market power, and market power with political power, many recent calls for regulation of industry — and the tech industry in particular — are framed in antitrust terms. Take Senator Elizabeth Warren, for example:

[T]oday, in America, competition is dying. Consolidation and concentration are on the rise in sector after sector. Concentration threatens our markets, threatens our economy, and threatens our democracy.

And she is not alone. A growing chorus of advocates are now calling for invasive, “public-utility-style” regulation or even the dissolution of some of the world’s most innovative companies essentially because they are “too big.”

According to critics, these firms impose all manner of alleged harms — from fake news, to the demise of local retail, to low wages, to the veritable destruction of democracy — because of their size. What is needed, they say, is industrial policy that shackles large companies or effectively mandates smaller firms in order to keep their economic and political power in check.

But consider the relationship between firm size and political power and democracy.

Say you’re successful in reducing the size of today’s largest tech firms and in deterring the creation of new, very-large firms: What effect might we expect this to have on their political power and influence?

For the critics, the effect is obvious: A re-balancing of wealth and thus the reduction of political influence away from Silicon Valley oligarchs and toward the middle class — the “rudder that steers American democracy on an even keel.”

But consider a few (and this is by no means all) countervailing points:

To begin, at the margin, if you limit firm growth as a means of competing with rivals, you make correspondingly more important competition through political influence. Erecting barriers to entry and raising rivals’ costs through regulation are time-honored American political traditions, and rent-seeking by smaller firms could both be more prevalent, and, paradoxically, ultimately lead to increased concentration.

Next, by imbuing antitrust with an ill-defined set of vague political objectives, you also make antitrust into a sort of “meta-legislation.” As a result, the return on influencing a handful of government appointments with authority over antitrust becomes huge — increasing the ability and the incentive to do so.

And finally, if the underlying basis for antitrust enforcement is extended beyond economic welfare effects, how long can we expect to resist calls to restrain enforcement precisely to further those goals? All of a sudden the effort and ability to get exemptions will be massively increased as the persuasiveness of the claimed justifications for those exemptions, which already encompass non-economic goals, will be greatly enhanced. We might even find, again, that we end up with even more concentration because the exceptions could subsume the rules.

All of which of course highlights the fundamental, underlying problem: If you make antitrust more political, you’ll get less democratic, more politically determined, results — precisely the opposite of what proponents claim to want.

Then there’s democracy, and calls to break up tech in order to save it. Calls to do so are often made with reference to the original intent of the Sherman Act and Louis Brandeis and his “curse of bigness.” But intentional or not, these are rallying cries for the assertion, not the restraint, of political power.

The Sherman Act’s origin was ambivalent: although it was intended to proscribe business practices that harmed consumers, it was also intended to allow politically-preferred firms to maintain high prices in the face of competition from politically-disfavored businesses.

The years leading up to the adoption of the Sherman Act in 1890 were characterized by dramatic growth in the efficiency-enhancing, high-tech industries of the day. For many, the purpose of the Sherman Act was to stem this growth: to prevent low prices — and, yes, large firms — from “driving out of business the small dealers and worthy men whose lives have been spent therein,” in the words of Trans-Missouri Freight, one of the early Supreme Court decisions applying the Act.

Left to the courts, however, the Sherman Act didn’t quite do the trick. By 1911 (in Standard Oil and American Tobacco) — and reflecting consumers’ preferences for low prices over smaller firms — only “unreasonable” conduct was actionable under the Act. As one of the prime intellectual engineers behind the Clayton Antitrust Act and the Federal Trade Commission in 1914, Brandeis played a significant role in the (partial) legislative and administrative overriding of the judiciary’s excessive support for economic efficiency.

Brandeis was motivated by the belief that firms could become large only by illegitimate means and by deceiving consumers. But Brandeis was no advocate for consumer sovereignty. In fact, consumers, in Brandeis’ view, needed to be saved from themselves because they were, at root, “servile, self-indulgent, indolent, ignorant.”

There’s a lot that today we (many of us, at least) would find anti-democratic in the underpinnings of progressivism in US history: anti-consumerism; racism; elitism; a belief in centrally planned, technocratic oversight of the economy; promotion of social engineering, including through eugenics; etc. The aim of limiting economic power was manifestly about stemming the threat it posed to powerful people’s conception of what political power could do: to mold and shape the country in their image — what economist Thomas Sowell calls “the vision of the anointed.”

That may sound great when it’s your vision being implemented, but today’s populist antitrust resurgence comes while Trump is in the White House. It’s baffling to me that so many would expand and then hand over the means to design the economy and society in their image to antitrust enforcers in the executive branch and presidentially appointed technocrats.

Throughout US history, it is the courts that have often been the bulwark against excessive politicization of the economy, and it was the courts that shepherded the evolution of antitrust away from its politicized roots toward rigorous, economically grounded policy. And it was progressives like Brandeis who worked to take antitrust away from the courts. Now, with efforts like Senator Klobuchar’s merger bill, the “New Brandeisians” want to rein in the courts again — to get them out of the way of efforts to implement their “big is bad” vision.

But the evidence that big is actually bad, least of all on those non-economic dimensions, is thin and contested.

While Zuckerberg is grilled in Congress over perceived, endemic privacy problems, politician after politician and news article after news article rushes to assert that the real problem is Facebook’s size. Yet there is no convincing analysis (maybe no analysis of any sort) that connects its size with the problem, or that evaluates whether the asserted problem would actually be cured by breaking up Facebook.

Barry Lynn claims that the origins of antitrust are in the checks and balances of the Constitution, extended to economic power. But if that’s right, then the consumer welfare standard and the courts are the only things actually restraining the disruption of that order. If there may be gains to be had from tweaking the minutiae of the process of antitrust enforcement and adjudication, by all means we should have a careful, lengthy discussion about those tweaks.

But throwing the whole apparatus under the bus for the sake of an unsubstantiated, neo-Brandeisian conception of what the economy should look like is a terrible idea.

Ag-biotech merger symposium wrap-up [Ag-Biotech Symposium]

Geoffrey Manne — 5 April 2017

On Thursday, March 30, Friday March 31, and Monday April 3, Truth on the Market and the International Center for Law and Economics presented a blog symposium — Agricultural and Biotech Mergers: Implications for Antitrust Law and Economics in Innovative Industries — discussing three proposed agricultural/biotech industry mergers awaiting judgment by antitrust authorities around the globe. These proposed mergers — Bayer/Monsanto, Dow/DuPont and ChemChina/Syngenta — present a host of fascinating issues, many of which go to the core of merger enforcement in innovative industries — and antitrust law and economics more broadly.

The big issue for the symposium participants was innovation (as it was for the European Commission, which cleared the Dow/DuPont merger last week, subject to conditions, one of which related to the firms’ R&D activities).

Critics of the mergers, as currently proposed, asserted that the increased concentration arising from the “Big 6” Ag-biotech firms consolidating into the Big 4 could reduce innovation competition by (1) eliminating parallel paths of research and development (Moss); (2) creating highly integrated technology/traits/seeds/chemicals platforms that erect barriers to new entry platforms (Moss); (3) exploiting eventual network effects that may result from the shift towards data-driven agriculture to block new entry in input markets (Lianos); or (4) increasing incentives to refuse to license, impose discriminatory restrictions in technology licensing agreements, or tacitly “agree” not to compete (Moss).

Rather than fixating on horizontal market share, proponents of the mergers argued that innovative industries are often marked by disruptions and that investment in innovation is an important signal of competition (Manne). An evaluation of the overall level of innovation should include not only the additional economies of scale and scope of the merged firms, but also advancements made by more nimble, less risk-averse biotech companies and smaller firms, whose innovations the larger firms can incentivize through licensing or M&A (Shepherd). In fact, increased efficiency created by economies of scale and scope can make funds available to source innovation outside of the large firms (Shepherd).

In addition, innovation analysis must also account for the intricately interwoven nature of agricultural technology across seeds and traits, crop protection, and, now, digital farming (Sykuta). Combined product portfolios generate more data to analyze, resulting in increased data-driven value for farmers and more efficiently targeted R&D resources (Sykuta).

While critics voiced concerns over such platforms erecting barriers to entry, markets are contestable to the extent that incumbents are incentivized to compete (Russell). It is worth noting that certain industries with high barriers to entry or exit, significant sunk costs, and significant costs disadvantages for new entrants (including automobiles, wireless service, and cable networks) have seen their prices decrease substantially relative to inflation over the last 20 years — even as concentration has increased (Russell). Not coincidentally, product innovation in these industries, as in ag-biotech, has been high.

Ultimately, assessing the likely effects of each merger using static measures of market structure is arguably unreliable or irrelevant in dynamic markets with high levels of innovation (Manne).

Regarding patents, critics were skeptical that combining the patent portfolios of the merging companies would offer benefits beyond those arising from cross-licensing, and would serve to raise rivals’ costs (Ghosh). While this may be true in some cases, IP rights are probabilistic, especially in dynamic markets, as Nicolas Petit noted:

There is no certainty that R&D investments will lead to commercially successful applications; (ii) no guarantee that IP rights will resist to invalidity proceedings in court; (iii) little safety to competition by other product applications which do not practice the IP but provide substitute functionality; and (iv) no inevitability that the environmental, toxicological and regulatory authorization rights that (often) accompany IP rights will not be cancelled when legal requirements change.

In spite of these uncertainties, deals such as the pending ag-biotech mergers provide managers the opportunity to evaluate and reorganize assets to maximize innovation and return on investment in such a way that would not be possible absent a merger (Sykuta). Neither party would fully place its IP and innovation pipeline on the table otherwise.

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

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

Truth on the Market

Archives For nicolas petit

Antitrust Statutorification

Like this:

Big Tech but Bigger Ideas

Like this:

The Limits of Rivalry

Like this:

It’s Not So Simple Who Owns “Your” Data

Like this:

The Fox and Shepherd Problem

Like this:

Diversification Is At The Heart Of Competition

Like this:

It’s All About What We Don’t Know

Like this:

Symposium on Big Tech and the Digital Economy: The Moligopoly Scenario

Confirmed Participants

Like this:

Making Sense of the Google Android Decision (part 1): Four Problems with the EU Commission’s Market Definition

1. Everyone but the European Commission thinks that iOS competes with Android

2. It does not matter that OEMs cannot license iOS (or the App Store)

3. Google would find itself in a more “competitive” market if it decided to stop licensing the Android OS

4. Market shares are a poor proxy for market power, especially in narrowly defined markets

5. Conclusion

Like this:

The illiberal vision of neo-Brandeisian antitrust

Like this:

Ag-biotech merger symposium wrap-up [Ag-Biotech Symposium]

Like this:

Search TOTM

A Top 100 Economics Blog

Recent Posts

Authors

Posts by Author

Bloggers Emeriti

Posts by Past Authors & Guests

TOTM Archives

Subscribe by Email

Subscribe by RSS

Archives For nicolas petit

Share this:

Like this:

When Default is No-Fault

When Self-Preference is No Defense

Toward an Integrated Theory of Disintegrating Favoritism

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Confirmed Participants

Share this:

Like this:

1. Everyone but the European Commission thinks that iOS competes with Android

2. It does not matter that OEMs cannot license iOS (or the App Store)

3. Google would find itself in a more “competitive” market if it decided to stop licensing the Android OS

4. Market shares are a poor proxy for market power, especially in narrowly defined markets

5. Conclusion

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Search TOTM

A Top 100 Economics Blog

Recent Posts

Authors

Posts by Author

Bloggers Emeriti

Posts by Past Authors & Guests

Categories

TOTM Archives

Subscribe by Email

Subscribe by RSS

Follow Us