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The FTC Did Not ‘Fumble the Future’ in Its Google Search Investigation

Geoffrey Manne & Dirk Auer —  26 March 2021

Politico has released a cache of confidential Federal Trade Commission (FTC) documents in connection with a series of articles on the commission’s antitrust probe into Google Search a decade ago. The headline of the first piece in the series argues the FTC “fumbled the future” by failing to follow through on staff recommendations to pursue antitrust intervention against the company. 

But while the leaked documents shed interesting light on the inner workings of the FTC, they do very little to substantiate the case that the FTC dropped the ball when the commissioners voted unanimously not to bring an action against Google.

Drawn primarily from memos by the FTC’s lawyers, the Politico report purports to uncover key revelations that undermine the FTC’s decision not to sue Google. None of the revelations, however, provide evidence that Google’s behavior actually harmed consumers.

The report’s overriding claim—and the one most consistently forwarded by antitrust activists on Twitter—is that FTC commissioners wrongly sided with the agency’s economists (who cautioned against intervention) rather than its lawyers (who tenuously recommended very limited intervention). 

Indeed, the overarching narrative is that the lawyers knew what was coming and the economists took wildly inaccurate positions that turned out to be completely off the mark:

But the FTC’s economists successfully argued against suing the company, and the agency’s staff experts made a series of predictions that would fail to match where the online world was headed:

— They saw only “limited potential for growth” in ads that track users across the web — now the backbone of Google parent company Alphabet’s $182.5 billion in annual revenue.

— They expected consumers to continue relying mainly on computers to search for information. Today, about 62 percent of those queries take place on mobile phones and tablets, nearly all of which use Google’s search engine as the default.

— They thought rivals like Microsoft, Mozilla or Amazon would offer viable competition to Google in the market for the software that runs smartphones. Instead, nearly all U.S. smartphones run on Google’s Android and Apple’s iOS.

— They underestimated Google’s market share, a heft that gave it power over advertisers as well as companies like Yelp and Tripadvisor that rely on search results for traffic.

The report thus asserts that:

The agency ultimately voted against taking action, saying changes Google made to its search algorithm gave consumers better results and therefore didn’t unfairly harm competitors.

That conclusion underplays what the FTC’s staff found during the probe. In 312 pages of documents, the vast majority never publicly released, staffers outlined evidence that Google had taken numerous steps to ensure it would continue to dominate the market — including emerging arenas such as mobile search and targeted advertising. [EMPHASIS ADDED]

What really emerges from the leaked memos, however, is analysis by both the FTC’s lawyers and economists infused with a healthy dose of humility. There were strong political incentives to bring a case. As one of us noted upon the FTC’s closing of the investigation: “It’s hard to imagine an agency under more pressure, from more quarters (including the Hill), to bring a case around search.” Yet FTC staff and commissioners resisted that pressure, because prediction is hard. 

Ironically, the very prediction errors that the agency’s staff cautioned against are now being held against them. Yet the claims that these errors (especially the economists’) systematically cut in one direction (i.e., against enforcement) and that all of their predictions were wrong are both wide of the mark. 

Decisions Under Uncertainty

In seeking to make an example out of the FTC economists’ inaccurate predictions, critics ignore that antitrust investigations in dynamic markets always involve a tremendous amount of uncertainty; false predictions are the norm. Accordingly, the key challenge for policymakers is not so much to predict correctly, but to minimize the impact of incorrect predictions.

Seen in this light, the FTC economists’ memo is far from the laissez-faire manifesto that critics make it out to be. Instead, it shows agency officials wrestling with uncertain market outcomes, and choosing a course of action under the assumption the predictions they make might indeed be wrong. 

Consider the following passage from FTC economist Ken Heyer’s memo:

The great American philosopher Yogi Berra once famously remarked “Predicting is difficult, especially about the future.” How right he was. And yet predicting, and making decisions based on those predictions, is what we are charged with doing. Ignoring the potential problem is not an option. So I will be reasonably clear about my own tentative conclusions and recommendation, recognizing that reasonable people, perhaps applying a somewhat different standard, may disagree. My recommendation derives from my read of the available evidence, combined with the standard I personally find appropriate to apply to Commission intervention. [EMPHASIS ADDED]

In other words, contrary to what many critics have claimed, it simply is not the case that the FTC’s economists based their recommendations on bullish predictions about the future that ultimately failed to transpire. Instead, they merely recognized that, in a dynamic and unpredictable environment, antitrust intervention requires both a clear-cut theory of anticompetitive harm and a reasonable probability that remedies can improve consumer welfare. According to the economists, those conditions were absent with respect to Google Search.

Perhaps more importantly, it is worth asking why the economists’ erroneous predictions matter at all. Do critics believe that developments the economists missed warrant a different normative stance today?

In that respect, it is worth noting that the economists’ skepticism appeared to have rested first and foremost on the speculative nature of the harms alleged and the difficulty associated with designing appropriate remedies. And yet, if anything, these two concerns appear even more salient today. 

Indeed, the remedies imposed against Google in the EU have not delivered the outcomes that enforcers expected (here and here). This could either be because the remedies were insufficient or because Google’s market position was not due to anticompetitive conduct. Similarly, there is still no convincing economic theory or empirical research to support the notion that exclusive pre-installation and self-preferencing by incumbents harm consumers, and a great deal of reason to think they benefit them (see, e.g., our discussions of the issue here and here). 

Against this backdrop, criticism of the FTC economists appears to be driven more by a prior assumption that intervention is necessary—and that it was and is disingenuous to think otherwise—than evidence that erroneous predictions materially affected the outcome of the proceedings.

To take one example, the fact that ad tracking grew faster than the FTC economists believed it would is no less consistent with vigorous competition—and Google providing a superior product—than with anticompetitive conduct on Google’s part. The same applies to the growth of mobile operating systems. Ditto the fact that no rival has managed to dislodge Google in its most important markets. 

In short, not only were the economist memos informed by the very prediction difficulties that critics are now pointing to, but critics have not shown that any of the staff’s (inevitably) faulty predictions warranted a different normative outcome.

Putting Erroneous Predictions in Context

So what were these faulty predictions, and how important were they? Politico asserts that “the FTC’s economists successfully argued against suing the company, and the agency’s staff experts made a series of predictions that would fail to match where the online world was headed,” tying this to the FTC’s failure to intervene against Google over “tactics that European regulators and the U.S. Justice Department would later label antitrust violations.” The clear message is that the current actions are presumptively valid, and that the FTC’s economists thwarted earlier intervention based on faulty analysis.

But it is far from clear that these faulty predictions would have justified taking a tougher stance against Google. One key question for antitrust authorities is whether they can be reasonably certain that more efficient competitors will be unable to dislodge an incumbent. This assessment is necessarily forward-looking. Framed this way, greater market uncertainty (for instance, because policymakers are dealing with dynamic markets) usually cuts against antitrust intervention.

This does not entirely absolve the FTC economists who made the faulty predictions. But it does suggest the right question is not whether the economists made mistakes, but whether virtually everyone did so. The latter would be evidence of uncertainty, and thus weigh against antitrust intervention.

In that respect, it is worth noting that the staff who recommended that the FTC intervene also misjudged the future of digital markets.For example, while Politico surmises that the FTC “underestimated Google’s market share, a heft that gave it power over advertisers as well as companies like Yelp and Tripadvisor that rely on search results for traffic,” there is a case to be made that the FTC overestimated this power. If anything, Google’s continued growth has opened new niches in the online advertising space.

Pinterest provides a fitting example; despite relying heavily on Google for traffic, its ad-funded service has witnessed significant growth. The same is true of other vertical search engines like Airbnb, Booking.com, and Zillow. While we cannot know the counterfactual, the vertical search industry has certainly not been decimated by Google’s “monopoly”; quite the opposite. Unsurprisingly, this has coincided with a significant decrease in the cost of online advertising, and the growth of online advertising relative to other forms.

Politico asserts not only that the economists’ market share and market power calculations were wrong, but that the lawyers knew better:

The economists, relying on data from the market analytics firm Comscore, found that Google had only limited impact. They estimated that between 10 and 20 percent of traffic to those types of sites generally came from the search engine.

FTC attorneys, though, used numbers provided by Yelp and found that 92 percent of users visited local review sites from Google. For shopping sites like eBay and TheFind, the referral rate from Google was between 67 and 73 percent.

This compares apples and oranges, or maybe oranges and grapefruit. The economists’ data, from Comscore, applied to vertical search overall. They explicitly noted that shares for particular sites could be much higher or lower: for comparison shopping, for example, “ranging from 56% to less than 10%.” This, of course, highlights a problem with the data provided by Yelp, et al.: it concerns only the websites of companies complaining about Google, not the overall flow of traffic for vertical search.

But the more important point is that none of the data discussed in the memos represents the overall flow of traffic for vertical search. Take Yelp, for example. According to the lawyers’ memo, 92 percent of Yelp searches were referred from Google. Only, that’s not true. We know it’s not true because, as Yelp CEO Jerry Stoppelman pointed out around this time in Yelp’s 2012 Q2 earnings call: 

When you consider that 40% of our searches come from mobile apps, there is quite a bit of un-monetized mobile traffic that we expect to unlock in the near future.

The numbers being analyzed by the FTC staff were apparently limited to referrals to Yelp’s website from browsers. But is there any reason to think that is the relevant market, or the relevant measure of customer access? Certainly there is nothing in the staff memos to suggest they considered the full scope of the market very carefully here. Indeed, the footnote in the lawyers’ memo presenting the traffic data is offered in support of this claim:

Vertical websites, such as comparison shopping and local websites, are heavily dependent on Google’s web search results to reach users. Thus, Google is in the unique position of being able to “make or break any web-based business.”

It’s plausible that vertical search traffic is “heavily dependent” on Google Search, but the numbers offered in support of that simply ignore the (then) 40 percent of traffic that Yelp acquired through its own mobile app, with no Google involvement at all. In any case, it is also notable that, while there are still somewhat fewer app users than web users (although the number has consistently increased), Yelp’s app users view significantly more pages than its website users do — 10 times as many in 2015, for example.

Also noteworthy is that, for whatever speculative harm Google might be able to visit on the company, at the time of the FTC’s analysis Yelp’s local ad revenue was consistently increasing — by 89% in Q3 2012. And that was without any ad revenue coming from its app (display ads arrived on Yelp’s mobile app in Q1 2013, a few months after the staff memos were written and just after the FTC closed its Google Search investigation). 

In short, the search-engine industry is extremely dynamic and unpredictable. Contrary to what many have surmised from the FTC staff memo leaks, this cuts against antitrust intervention, not in favor of it.

The FTC Lawyers’ Weak Case for Prosecuting Google

At the same time, although not discussed by Politico, the lawyers’ memo also contains errors, suggesting that arguments for intervention were also (inevitably) subject to erroneous prediction.

Among other things, the FTC attorneys’ memo argued the large upfront investments were required to develop cutting-edge algorithms, and that these effectively shielded Google from competition. The memo cites the following as a barrier to entry:

A search engine requires algorithmic technology that enables it to search the Internet, retrieve and organize information, index billions of regularly changing web pages, and return relevant results instantaneously that satisfy the consumer’s inquiry. Developing such algorithms requires highly specialized personnel with high levels of training and knowledge in engineering, economics, mathematics, sciences, and statistical analysis.

If there are barriers to entry in the search-engine industry, algorithms do not seem to be the source. While their market shares may be smaller than Google’s, rival search engines like DuckDuckGo and Bing have been able to enter and gain traction; it is difficult to say that algorithmic technology has proven a barrier to entry. It may be hard to do well, but it certainly has not proved an impediment to new firms entering and developing workable and successful products. Indeed, some extremely successful companies have entered into similar advertising markets on the backs of complex algorithms, notably Instagram, Snapchat, and TikTok. All of these compete with Google for advertising dollars.

The FTC’s legal staff also failed to see that Google would face serious competition in the rapidly growing voice assistant market. In other words, even its search-engine “moat” is far less impregnable than it might at first appear.

Moreover, as Ben Thompson argues in his Stratechery newsletter: 

The Staff memo is completely wrong too, at least in terms of the potential for their proposed remedies to lead to any real change in today’s market. This gets back to why the fundamental premise of the Politico article, along with much of the antitrust chatter in Washington, misses the point: Google is dominant because consumers like it.

This difficulty was deftly highlighted by Heyer’s memo:

If the perceived problems here can be solved only through a draconian remedy of this sort, or perhaps through a remedy that eliminates Google’s legitimately obtained market power (and thus its ability to “do evil”), I believe the remedy would be disproportionate to the violation and that its costs would likely exceed its benefits. Conversely, if a remedy well short of this seems likely to prove ineffective, a remedy would be undesirable for that reason. In brief, I do not see a feasible remedy for the vertical conduct that would be both appropriate and effective, and which would not also be very costly to implement and to police. [EMPHASIS ADDED]

Of course, we now know that this turned out to be a huge issue with the EU’s competition cases against Google. The remedies in both the EU’s Google Shopping and Android decisions were severely criticized by rival firms and consumer-defense organizations (here and here), but were ultimately upheld, in part because even the European Commission likely saw more forceful alternatives as disproportionate.

And in the few places where the legal staff concluded that Google’s conduct may have caused harm, there is good reason to think that their analysis was flawed.

Google’s ‘revenue-sharing’ agreements

It should be noted that neither the lawyers nor the economists at the FTC were particularly bullish on bringing suit against Google. In most areas of the investigation, neither recommended that the commission pursue a case. But one of the most interesting revelations from the recent leaks is that FTC lawyers did advise the commission’s leadership to sue Google over revenue-sharing agreements that called for it to pay Apple and other carriers and manufacturers to pre-install its search bar on mobile devices:

FTC staff urged the agency’s five commissioners to sue Google for signing exclusive contracts with Apple and the major wireless carriers that made sure the company’s search engine came pre-installed on smartphones.

The lawyers’ stance is surprising, and, despite actions subsequently brought by the EU and DOJ on similar claims, a difficult one to countenance. 

To a first approximation, this behavior is precisely what antitrust law seeks to promote: we want companies to compete aggressively to attract consumers. This conclusion is in no way altered when competition is “for the market” (in this case, firms bidding for exclusive placement of their search engines) rather than “in the market” (i.e., equally placed search engines competing for eyeballs).

Competition for exclusive placement has several important benefits. For a start, revenue-sharing agreements effectively subsidize consumers’ mobile device purchases. As Brian Albrecht aptly puts it:

This payment from Google means that Apple can lower its price to better compete for consumers. This is standard; some of the payment from Google to Apple will be passed through to consumers in the form of lower prices.

This finding is not new. For instance, Ronald Coase famously argued that the Federal Communications Commission (FCC) was wrong to ban the broadcasting industry’s equivalent of revenue-sharing agreements, so-called payola:

[I]f the playing of a record by a radio station increases the sales of that record, it is both natural and desirable that there should be a charge for this. If this is not done by the station and payola is not allowed, it is inevitable that more resources will be employed in the production and distribution of records, without any gain to consumers, with the result that the real income of the community will tend to decline. In addition, the prohibition of payola may result in worse record programs, will tend to lessen competition, and will involve additional expenditures for regulation. The gain which the ban is thought to bring is to make the purchasing decisions of record buyers more efficient by eliminating “deception.” It seems improbable to me that this problematical gain will offset the undoubted losses which flow from the ban on Payola.

Applying this logic to Google Search, it is clear that a ban on revenue-sharing agreements would merely lead both Google and its competitors to attract consumers via alternative means. For Google, this might involve “complete” vertical integration into the mobile phone market, rather than the open-licensing model that underpins the Android ecosystem. Valuable specialization may be lost in the process.

Moreover, from Apple’s standpoint, Google’s revenue-sharing agreements are profitable only to the extent that consumers actually like Google’s products. If it turns out they don’t, Google’s payments to Apple may be outweighed by lower iPhone sales. It is thus unlikely that these agreements significantly undermined users’ experience. To the contrary, Apple’s testimony before the European Commission suggests that “exclusive” placement of Google’s search engine was mostly driven by consumer preferences (as the FTC economists’ memo points out):

Apple would not offer simultaneous installation of competing search or mapping applications. Apple’s focus is offering its customers the best products out of the box while allowing them to make choices after purchase. In many countries, Google offers the best product or service … Apple believes that offering additional search boxes on its web browsing software would confuse users and detract from Safari’s aesthetic. Too many choices lead to consumer confusion and greatly affect the ‘out of the box’ experience of Apple products.

Similarly, Kevin Murphy and Benjamin Klein have shown that exclusive contracts intensify competition for distribution. In other words, absent theories of platform envelopment that are arguably inapplicable here, competition for exclusive placement would lead competing search engines to up their bids, ultimately lowering the price of mobile devices for consumers.

Indeed, this revenue-sharing model was likely essential to spur the development of Android in the first place. Without this prominent placement of Google Search on Android devices (notably thanks to revenue-sharing agreements with original equipment manufacturers), Google would likely have been unable to monetize the investment it made in the open source—and thus freely distributed—Android operating system. 

In short, Politico and the FTC legal staff do little to show that Google’s revenue-sharing payments excluded rivals that were, in fact, as efficient. In other words, Bing and Yahoo’s failure to gain traction may simply be the result of inferior products and cost structures. Critics thus fail to show that Google’s behavior harmed consumers, which is the touchstone of antitrust enforcement.

Self-preferencing

Another finding critics claim as important is that FTC leadership declined to bring suit against Google for preferencing its own vertical search services (this information had already been partially leaked by the Wall Street Journal in 2015). Politico’s framing implies this was a mistake:

When Google adopted one algorithm change in 2011, rival sites saw significant drops in traffic. Amazon told the FTC that it saw a 35 percent drop in traffic from the comparison-shopping sites that used to send it customers

The focus on this claim is somewhat surprising. Even the leaked FTC legal staff memo found this theory of harm had little chance of standing up in court:

Staff has investigated whether Google has unlawfully preferenced its own content over that of rivals, while simultaneously demoting rival websites…. 

…Although it is a close call, we do not recommend that the Commission proceed on this cause of action because the case law is not favorable to our theory, which is premised on anticompetitive product design, and in any event, Google’s efficiency justifications are strong. Most importantly, Google can legitimately claim that at least part of the conduct at issue improves its product and benefits users. [EMPHASIS ADDED]

More importantly, as one of us has argued elsewhere, the underlying problem lies not with Google, but with a standard asset-specificity trap:

A content provider that makes itself dependent upon another company for distribution (or vice versa, of course) takes a significant risk. Although it may benefit from greater access to users, it places itself at the mercy of the other — or at least faces great difficulty (and great cost) adapting to unanticipated, crucial changes in distribution over which it has no control…. 

…It was entirely predictable, and should have been expected, that Google’s algorithm would evolve. It was also entirely predictable that it would evolve in ways that could diminish or even tank Foundem’s traffic. As one online marketing/SEO expert puts it: On average, Google makes about 500 algorithm changes per year. 500!….

…In the absence of an explicit agreement, should Google be required to make decisions that protect a dependent company’s “asset-specific” investments, thus encouraging others to take the same, excessive risk? 

Even if consumers happily visited rival websites when they were higher-ranked and traffic subsequently plummeted when Google updated its algorithm, that drop in traffic does not amount to evidence of misconduct. To hold otherwise would be to grant these rivals a virtual entitlement to the state of affairs that exists at any given point in time. 

Indeed, there is good reason to believe Google’s decision to favor its own content over that of other sites is procompetitive. Beyond determining and ensuring relevance, Google surely has the prerogative to compete vigorously and decide how to design its products to keep up with a changing market. In this case, that means designing, developing, and offering its own content in ways that partially displace the original “ten blue links” design of its search results page and instead offer its own answers to users’ queries.

Competitor Harm Is Not an Indicator of the Need for Intervention

Some of the other information revealed by the leak is even more tangential, such as that the FTC ignored complaints from Google’s rivals:

Amazon and Facebook privately complained to the FTC about Google’s conduct, saying their business suffered because of the company’s search bias, scraping of content from rival sites and restrictions on advertisers’ use of competing search engines. 

Amazon said it was so concerned about the prospect of Google monopolizing the search advertising business that it willingly sacrificed revenue by making ad deals aimed at keeping Microsoft’s Bing and Yahoo’s search engine afloat.

But complaints from rivals are at least as likely to stem from vigorous competition as from anticompetitive exclusion. This goes to a core principle of antitrust enforcement: antitrust law seeks to protect competition and consumer welfare, not rivals. Competition will always lead to winners and losers. Antitrust law protects this process and (at least theoretically) ensures that rivals cannot manipulate enforcers to safeguard their economic rents. 

This explains why Frank Easterbrook—in his seminal work on “The Limits of Antitrust”—argued that enforcers should be highly suspicious of complaints lodged by rivals:

Antitrust litigation is attractive as a method of raising rivals’ costs because of the asymmetrical structure of incentives…. 

…One line worth drawing is between suits by rivals and suits by consumers. Business rivals have an interest in higher prices, while consumers seek lower prices. Business rivals seek to raise the costs of production, while consumers have the opposite interest…. 

…They [antitrust enforcers] therefore should treat suits by horizontal competitors with the utmost suspicion. They should dismiss outright some categories of litigation between rivals and subject all such suits to additional scrutiny.

Google’s competitors spent millions pressuring the FTC to bring a case against the company. But why should it be a failing for the FTC to resist such pressure? Indeed, as then-commissioner Tom Rosch admonished in an interview following the closing of the case:

They [Google’s competitors] can darn well bring [a case] as a private antitrust action if they think their ox is being gored instead of free-riding on the government to achieve the same result.

Not that they would likely win such a case. Google’s introduction of specialized shopping results (via the Google Shopping box) likely enabled several retailers to bypass the Amazon platform, thus increasing competition in the retail industry. Although this may have temporarily reduced Amazon’s traffic and revenue (Amazon’s sales have grown dramatically since then), it is exactly the outcome that antitrust laws are designed to protect.

Conclusion

When all is said and done, Politico’s revelations provide a rarely glimpsed look into the complex dynamics within the FTC, which many wrongly imagine to be a monolithic agency. Put simply, the FTC’s commissioners, lawyers, and economists often disagree vehemently about the appropriate course of conduct. This is a good thing. As in many other walks of life, having a market for ideas is a sure way to foster sound decision making.

But in the final analysis, what the revelations do not show is that the FTC’s market for ideas failed consumers a decade ago when it declined to bring an antitrust suit against Google. They thus do little to cement the case for antitrust intervention—whether a decade ago, or today.

In Amazon, Antitrust & Competition, Apple, Barriers to Entry, Economic Theory, European Union, Facebook, Federal Communications Commission, Federal Trade Commission, Google, International, Justice Department, Law & Economics, Market Definition, Monopolization, Platforms, Telecommunications, Truth on the Market, Twitter, Tying, Wireless , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,
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That startup investors’ letter on net neutrality is a revealing look at what the debate is really about

Geoffrey Manne —  14 May 2014

Last week a group of startup investors wrote a letter to protest what they assume FCC Chairman Tom Wheeler’s proposed, revised Open Internet NPRM will say.

Bear in mind that an NPRM is a proposal, not a final rule, and its issuance starts a public comment period. Bear in mind, as well, that the proposal isn’t public yet, presumably none of the signatories to this letter has seen it, and the devil is usually in the details. That said, the letter has been getting a lot of press.

I found the letter seriously wanting, and seriously disappointing. But it’s a perfect example of what’s so wrong with this interminable debate on net neutrality.

Below I reproduce the letter in full, in quotes, with my comments interspersed. The key take-away: Neutrality (or non-discrimination) isn’t what’s at stake here. What’s at stake is zero-cost access by content providers to broadband networks. One can surely understand why content providers and those who fund them want their costs of doing business to be lower. But the rhetoric of net neutrality is mismatched with this goal. It’s no wonder they don’t just come out and say it – it’s quite a remarkable claim.

Open Internet Investors Letter

The Honorable Tom Wheeler, Chairman
Federal Communications Commission
445 12th Street, SW
Washington D.C. 20554

May 8, 2014

Dear Chairman Wheeler:

We write to express our support for a free and open Internet.

We invest in entrepreneurs, investing our own funds and those of our investors (who are individuals, pension funds, endowments, and financial institutions).  We often invest at the earliest stages, when companies include just a handful of founders with largely unproven ideas. But, without lawyers, large teams or major revenues, these small startups have had the opportunity to experiment, adapt, and grow, thanks to equal access to the global market.

“Equal” access has nothing to do with it. No startup is inherently benefitted by being “equal” to others. Maybe this is just careless drafting. But frankly, as I’ll discuss, there are good reasons to think (contra the pro-net neutrality narrative) that startups will be helped by inequality (just like contra the (totally wrong) accepted narrative, payola helps new artists). It says more than they would like about what these investors really want that they advocate “equality” despite the harm it may impose on startups (more on this later).

Presumably what “equal” really means here is “zero cost”: “As long as my startup pays nothing for access to ISPs’ subscribers, it’s fine that we’re all on equal footing.” Wheeler has stated his intent that his proposal would require any prioritization to be available to any who want it, on equivalent, commercially reasonable terms. That’s “equal,” too, so what’s to complain about? But it isn’t really inequality that’s gotten everyone so upset.

Of course, access is never really “zero cost;” start-ups wouldn’t need investors if their costs were zero. In that sense, why is equality of ISP access any more important than other forms of potential equality? Why not mandate price controls on rent? Why not mandate equal rent? A cost is a cost. What’s really going on here is that, like Netflix, these investors want to lower their costs and raise their returns as much as possible, and they want the government to do it for them.

As a result, some of the startups we have invested in have managed to become among the most admired, successful, and influential companies in the world.

No startup became successful as a result of “equality” or even zero-cost access to broadband. No doubt some of their business models were predicated on that assumption. But it didn’t cause their success.

We have made our investment decisions based on the certainty of a level playing field and of assurances against discrimination and access fees from Internet access providers.

And they would make investment decisions based on the possibility of an un-level playing field if that were the status quo. More importantly, the businesses vying for investment dollars might be different ones if they built their business models in a different legal/economic environment. So what? This says nothing about the amount of investment, the types of businesses, the quality of businesses that would arise under a different set of rules. It says only that past specific investments might not have been made.

Unless the contention is that businesses would be systematically worse under a different rule, this is irrelevant. I have seen that claim made, and it’s implicit here, of course, but I’ve seen no evidence to actually support it. Businesses thrive in unequal, cost-ladened environments all the time. It costs about $4 million/30 seconds to advertise during the Super Bowl. Budweiser and PepsiCo paid multiple millions this year to do so; many of their competitors didn’t. With inequality like that, it’s a wonder Sierra Nevada and Dr. Pepper haven’t gone bankrupt.

Indeed, our investment decisions in Internet companies are dependent upon the certainty of an equal-opportunity marketplace.

Again, no they’re not. Equal opportunity is a euphemism for zero cost, or else this is simply absurd on its face. Are these investors so lacking in creativity and ability that they can invest only when there is certainty of equal opportunity? Don’t investors thrive – aren’t they most needed – in environments where arbitrage is possible, where a creative entrepreneur can come up with a risky, novel way to take advantage of differential conditions better than his competitors? Moreover, the implicit equating of “equal-opportunity marketplace” with net neutrality rules is far-fetched. Is that really all that matters?

This is a good time to make a point that is so often missed: The loudest voices for net neutrality are the biggest companies – Google, Netflix, Amazon, etc. That fact should give these investors and everyone else serious pause. Their claim rests on the idea that “equality” is needed, so big companies can’t use an Internet “fast lane” to squash them. Google is decidedly a big company. So why do the big boys want this so much?

The battle is often pitched as one of ISPs vs. (small) content providers. But content providers have far less to worry about and face far less competition from broadband providers than from big, incumbent competitors. It is often claimed that “Netflix was able to pay Comcast’s toll, but a small startup won’t have that luxury.” But Comcast won’t even notice or care about a small startup; its traffic demands will be inconsequential. Netflix can afford to pay for Internet access for precisely the same reason it came to Comcast’s attention: It’s hugely successful, and thus creates a huge amount of traffic.

Based on news reports and your own statements, we are worried that your proposed rules will not provide the necessary certainty that we need to make investment decisions and that these rules will stifle innovation in the Internet sector.

Now, there’s little doubt that legal certainty aids investment decisions. But “certainty” is not in danger here. The rules have to change because the court said so – with pretty clear certainty. And a new rule is not inherently any more or less likely to offer certainty than the previous Open Internet Order, which itself was subject to intense litigation (obviously) and would have been subject to interpretation and inconsistent enforcement (and would have allowed all kinds of paid prioritization, too!). Certainty would be good, but Wheeler’s proposed rule won’t likely do anything about the amount of certainty one way or the other.

If established companies are able to pay for better access speeds or lower latency, the Internet will no longer be a level playing field. Start-ups with applications that are advantaged by speed (such as games, video, or payment systems) will be unlikely to overcome that deficit no matter how innovative their service.

Again, it’s notable that some of the strongest advocates for net neutrality are established companies. Another letter sent out last week included signatures from a bunch of startups, but also Google, Microsoft, Facebook and Yahoo!, among others.

In truth it’s hard to see why startup investors would think this helps them. Non-neutrality offers the prospect that a startup might be able to buy priority access to overcome the inherent disadvantage of newness, and to better compete with an established company. Neutrality means that that competitive advantage is impossible, and the baseline relative advantages and disadvantages remain – which helps incumbents, not startups. With a neutral Internet – well, the advantages of the incumbent competitor can’t be dissipated by a startup buying a favorable leg-up in speed and the Netflix’s of the world will be more likely to continue to dominate.

Of course the claim is that incumbents will use their huge resources to gain even more advantage with prioritized access. Implicit in this must be the assumption that the advantage that could be gained by a startup buying priority offers less return for the startup than the cost imposed on it by the inherent disadvantages of reputation, brand awareness, customer base, etc. But that’s not plausible for all or even most startups. And investors exist precisely because they are able to provide funds for which there is a likelihood of a good return – so if paying for priority would help overcome inherent disadvantages, there would be money for it.

Also implicit is the claim that the benefits to incumbents (over and above their natural advantages) from paying for priority, in terms of hamstringing new entrants, will outweigh the cost. This is unlikely generally to be true, as well. They already have advantages. Sure, sometimes they might want to pay for more, but in precisely the cases where it would be worth it to do so, the new entrant would also be most benefited by doing so itself – ensuring, again, that investment funds will be available.

Of course if both incumbents and startups decide paying for priority is better, we’re back to a world of “equality,” so what’s to complain about, based on this letter? This puts into stark relief that what these investors really want is government-mandated, subsidized broadband access, not “equality.”

Now, it’s conceivable that that is the optimal state of affairs, but if it is, it isn’t for the reasons given here, nor has anyone actually demonstrated that it is the case.

Entrepreneurs will need to raise money to buy fast lane services before they have proven that consumers want their product. Investors will extract more equity from entrepreneurs to compensate for the risk.

Internet applications will not be able to afford to create a relationship with millions of consumers by making their service freely available and then build a business over time as they better understand the value consumers find in their service (which is what Facebook, Twitter, Tumblr, Pinterest, Reddit, Dropbox and virtually other consumer Internet service did to achieve scale).

In other words: “Subsidize us. We’re worth it.” Maybe. But this is probably more revealing than intended. The Internet cost something to someone to build. (Actually, it cost more than a trillion dollars to broadband providers). This just says “we shouldn’t have to pay them for it now.” Fine, but who, then, and how do you know that forcing someone else to subsidize these startup companies will actually lead to better results? Mightn’t we get less broadband investment such that there is little Internet available for these companies to take advantage of in the first place? If broadband consumers instead of content consumers foot the bill, is that clearly preferable, either from a social welfare perspective, or even the self interest of these investors who, after all, do ultimately rely on consumer spending to earn their return?

Moreover, why is this “build for free, then learn how to monetize over time” business model necessarily better than any other? These startup investors know better than anyone that enshrining existing business models just because they exist is the antithesis of innovation and progress. But that’s exactly what they’re saying – “the successful companies of the past did it this way, so we should get a government guarantee to preserve our ability to do it, too!”

This is the most depressing implication of this letter. These investors and others like them have been responsible for financing enormously valuable innovations. If even they can’t see the hypocrisy of these claims for net neutrality – and worse, choose to propagate it further – then we really have come to a sad place. When innovators argue passionately for stagnation, we’re in trouble.

Instead, creators will have to ask permission of an investor or corporate hierarchy before they can launch. Ideas will be vetted by committees and quirky passion projects will not get a chance. An individual in dorm room or a design studio will not be able to experiment out loud on the Internet. The result will be greater conformity, fewer surprises, and less innovation.

This is just a little too much protest. Creators already have to ask “permission” – or are these investors just opening up their bank accounts to whomever wants their money? The ones that are able to do it on a shoestring, with money saved up from babysitting gigs, may find higher costs, and the need to do more babysitting. But again, there is nothing special about the Internet in this. Let’s mandate zero cost office space and office supplies and developer services and design services and . . . etc. for all – then we’ll have way more “permission-less” startups. If it’s just a handout they want, they should say so, instead of pretending there is a moral or economic welfare basis for their claims.

Further, investors like us will be wary of investing in anything that access providers might consider part of their future product plans for fear they will use the same technical infrastructure to advantage their own services or use network management as an excuse to disadvantage competitive offerings.

This is crazy. For the same reasons I mentioned above, the big access provider (and big incumbent competitor, for that matter) already has huge advantages. If these investors aren’t already wary of investing in anything that Google or Comcast or Apple or… might plan to compete with, they must be terrible at their jobs.

What’s more, Wheeler’s much-reviled proposal (what we know about it, that is), to say nothing of antitrust law, clearly contemplates exactly this sort of foreclosure and addresses it. “Pure” net neutrality doesn’t add much, if anything, to the limits those laws already do or would provide.

Policing this will be almost impossible (even using a standard of “commercial reasonableness”) and access providers do not need to successfully disadvantage their competition; they just need to create a credible threat so that investors like us will be less inclined to back those companies.

You think policing the world of non-neutrality is hard – try policing neutrality. It’s not as easy as proponents make it out to be. It’s simply never been the case that all bits at all times have been treated “neutrally” on the Internet. Any version of an Open Internet Order (just like the last one, for example) will have to recognize this.

Larry Downes compiled a list of the exceptions included in the last Open Internet Order when he testified before the House Judiciary Committee on the rules in 2011. There are 16 categories of exemption, covering a wide range of fundamental components of broadband connectivity, from CDNs to free Wi-Fi at Starbucks. His testimony is a tour de force, and should be required reading for everyone involved in this debate.

But think about how the manifest advantages of these non-neutral aspects of broadband networks would be squared with “real” neutrality. On their face, if these investors are to be taken at their word, these arguments would preclude all of the Open Internet Order’s exemptions, too. And if any sort of inequality is going to be deemed ok, how accurately would regulators distinguish between “illegitimate” inequality and the acceptable kind that lets coffee shops subsidize broadband? How does the simplistic logic of net equality distinguish between, say, Netflix’s colocated servers and a startup like Uber being integrated into Google Maps? The simple answer is that it doesn’t, and the claims and arguments of this letter are woefully inadequate to the task.

We need simple, strong, enforceable rules against discrimination and access fees, not merely against blocking.

No, we don’t. Or, at least, no one has made that case. These investors want a handout; that is the only case this letter makes.

We encourage the Commission to consider all available jurisdictional tools at its disposal in ensuring a free and open Internet that rewards, not disadvantages, investment and entrepreneurship.

… But not investment in broadband, and not entrepreneurship that breaks with the business models of the past. In reality, this letter is simple rent-seeking: “We want to invest in what we know, in what’s been done before, and we don’t want you to do anything to make that any more costly for us. If that entails impairing broadband investment or imposing costs on others, so be it – we’ll still make our outsized returns, and they can write their own letter complaining about ‘inequality.’”

A final point I have to make. Although the investors don’t come right out and say it, many others have, and it’s implicit in the investors’ letter: “Content providers shouldn’t have to pay for broadband. Users already pay for the service, so making content providers pay would just let ISPs double dip.” The claim is deeply problematic.

For starters, it’s another form of the status quo mentality: “Users have always paid and content hasn’t, so we object to any deviation from that.” But it needn’t be that way. And of course models frequently coexist where different parties pay for the same or similar services. Some periodicals are paid for by readers and offer little or no advertising; others charge a subscription and offer paid ads; and still others are offered for free, funded entirely by ads. All of these models work. None is “better” than the other. There is no reason the same isn’t true for broadband and content.

Net neutrality claims that the only proper price to charge on the content side of the market is zero. (Congratulations: You’re in the same club as that cutting-edge, innovative technology, the check, which is cleared at par by government fiat. A subsidy that no doubt explains why checks have managed to last this long). As an economic matter, that’s possible; it could be that zero is the right price. But it most certainly needn’t be, and issues revolving around Netflix’s traffic and the ability of ISPs and Netflix cost-effectively to handle it are evidence that zero may well not be the right price.

The reality is that these sorts of claims are devoid of economic logic — which is presumably why they, like the whole net neutrality “movement” generally, appeal so gratuitously to emotion rather than reason. But it doesn’t seem unreasonable to hope for more from a bunch of savvy financiers.

 

In Amazon, Antitrust & Competition, Apple, Broadband, Exclusive Dealing, Exemptions, Facebook, Federal Communications Commission, Google, Net Neutrality, Platforms, Telecommunications, Twitter , , , , , , , , , , , ,
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Some Economics of Contractual Restrictions on Political Contributions by Cable Pundits

Josh Wright —  7 November 2010

Jonathan Adler and Orin Kerr chime in over at VC to make the point that MSNBC’s rules against contributions from television personalities is pointless, or perhaps counterproductive.  Here’s Adler:

I agree with Orin that strict application of rules against political activity by journalists to opinionated commentators and hosts is silly.  No one believes these figures are neutral or objective journalists.  They’re not reporters; they are commentators and entertainers.  They have strong — often quite partisan — political views, and that’s part of their appeal.  Whether or not Olbermann (or Hannity) gives a dime to a political campaign, we all know which candidates and causes they support.

And here’s Professor Kerr:

I find this exceedingly silly. Keith Olbermann is not shy about his personal views, and no one who has watched him has any doubt as to who he supports. Why he should be suspended for donating money to the candidates he supports is a mystery to me.

There appears to be some debate over whether Olbermann’s conduct violated provisions in his contract.  Assuming Olbermann did violate the contractual obligation to seek permission before donating, that seems like a pretty good reason to suspend someone.  I doubt that either Jonathan or Orin mean that flouting contractual obligations is a silly or exceedingly silly or mysterious reason to suspend someone — instead, they must mean that it is silly for those obligations to appear in the contract in the first place.

Maybe.  Maybe not.  But I suspect not.  Here’s why.

Continue Reading…

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The Costs of Product Placement, Maserati Edition

Josh Wright —  7 September 2010

In my academic research, I’ve studied contractual arrangements between manufacturers and retailers for premium shelf space, including slotting arrangements and category management contracts.  Typically, a shelf space arrangement in the retail sector will involve the supplier compensating the retailer for some specified promotional shelving arrangement, e.g. end-caps or eye level space, or a share of the total shelf space dedicated to a particular product category.  These arrangements have much in common with what is commonly referred to as product placement (see also the economics of celebrity endorsements).

As a form of advertising, it is not difficult to imagine why product placement would increase sales.  But the costs of such forms of advertising are not often discussed.  In today’s WSJ, however, there appears a bit of a backlash against Maserati for its product placement campaign in a review of the new 2011 Maserati GranTurismo Convertible.  Here’s a taste:

Maserati, founded in 1914 in Bologna, Italy, by the Maserati brothers, and relocated to Modena during World War II, is a grand old European sports-car name, the marque of Fangio and Moss, Birdcages and Boras. The company cratered in spectacular fashion in the 1970s under the ownership of Citroën and De Tomaso, and it’s certainly no stranger to indignity—you may recall the Chrysler TC by Maserati of the late 1980s, an opera-windowed calamity of a car, as traduced and contemptible as could be. But the company was revived early in the aughts by Fiat as a luxury adjunct of Ferrari, with a new factory and a significantly desirable new sedan, the Quattroporte.

Since then, brand-wise, Maserati has been drifting into the shoals of mere decadence, a bratty car that appears at all the worst parties and in all the worst hands. Last month, for instance, Maserati’s publicity hits include Mel Gibson auguring his Quattroporte into a Malibu Canyon ditch and Lindsay Lohan—Hollywood’s most indefatigable wench—tooting around Bel-Bev late nights in a Maserati GranTurismo S. Throw in the cars’ product-placement appearances on “Entourage,” “The Sopranos” and “The Real Housewives of New Jersey” and you paint a picture of a brand that is becoming synonymous with a kind of pitiable narcissism, a gum-smacking, Garden State idiocy.

The new GranTurismo Convertible—a chop-top version of the GranTurismo S—is a very nice car, but if I put myself in the place of a potential customer, I have to ask myself whether I want to be associated with these numbskulls. And the answer is, not really. … My advice to Maserati: Reassign the agency person in charge of product placement—perhaps to a shallow grave somewhere. Recalibrate the brand positioning. Move relentlessly upscale. Use a lot of words that end in vowels in your advertising. Make Maserati the Prada pumps of European luxury performance cars. Avoid becoming the clear stripper heels from out by the airport.

Its an interesting illustration of the complex set of tradeoffs involved in the firm’s advertising decision.   Product placement investments may draw some marginal consumers, and might also signal the presence of a Klein-Leffler quality assuring premium, i.e. an stream of rents the firm loses if it shirks on quality.  On the other hand, these types of contracts, at least in some markets (compare payola or grocery shelf space), might at least potentially reduce demand by changing the bundle of goods being sold to the consumer (car + image).

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Updated Drafts on SSRN

Josh Wright —  2 March 2007

I have just posted two revised drafts to SSRN:

  1. Slotting Contracts and Consumer Welfare (forthcoming in the Antitrust Law Journal and previously blogged about here).
  2. Antitrust Analysis of Category Management: Conwood v. U.S. Tobacco.

Both are pretty substantial revisions and so I hope that folks who have read previous drafts will check out the updated drafts.  I would particularly appreciate comments via email on the article on category management and Conwood, which was revised substantially for my testimony at the Section 2 hearings, as I have not yet decided exactly what to do with it and still have time to work on it.

These revisions essentially put to bed the part of my research agenda to do with slotting contracts and shelf space economics per se.  At least for now.  I am still working on some related questions on making sense of disclosure requirements and regulation of these and similar payments which we observe in supermarkets, mutual funds, search engines, and of course, the radio airwaves (payola).  Including that project, I’ve been off and running on the next part of my research agenda for the last year or so and should be posting the draft versions of a few new projects over the next few months.

In Antitrust & Competition, Financial Regulation, Truth on the Market , , , ,
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Why Spitzer's Payola Attacks Will Harm Consumers

Josh Wright —  12 May 2006

WSJ Law Blog and the WSJ report that Universal Music has now settled with the NY AG’s office for $12 million as a result of Spitzer’s continued attack on what he describes as “corrupt practices” in the music industry. (HT: Bill) The settlement also requires Universal, like Sony BMG and EMG before it, to cease and desist all payola-related activities. The WSJ story reports that EMG, the final major industry player, should settle within the month, making final Spitzer’s payola ban.

In the “Assurance of Discontinuance,” Spitzer explains the mechanism through which it is alleged that intense competition for radio airplay harms consumers:

“Intense competition among record labels for the relatively small number of valuable play list slots has caused a variety of aggressive pay for play mechanisms to emerge. All labels share the common objective of advancing the circulation of record labels’ products to the listening public, without regard to the artistic value of those products. In each case, music consumers remain unaware of the extent to which radio programming and record popularity statistics are being manipulated and compromised . . .. By engaging in such an elaborate scheme to purchase airplay, increase spins, and manipulate the charts, [Universal Music] and the other record labels present the public with a skewed picture of the country’s “best” and “most popular” recorded music.”

So, let me see if I understand the mechanics driving the consumer harm, here?

(1) Radio airplay is a scarce promotional input;

(2) Record labels pay radio stations for this scarce promotional input with various forms of compensation ranging from cash to vacations;

(3) These practices harm consumers, who otherwise believe that radio stations are playing the country’s “best” and “most popular” recorded music.

I have been fairly critical of attempts to ban payola (see, e.g., here, here and here) on several different grounds. Now seems like an appropriate time to reiterate two of those objections in greater detail below. Continue Reading…

In Antitrust & Competition, Law & Economics, Regulation, Truth on the Market , , , , ,
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The FCC Payola Probe Continues

Josh Wright —  21 April 2006

The Federal Communications Commission has announced that it is stepping up efforts in its investigation of payola practices at four radio conglomerates: Clear Channel, CBS Radio, Entercom, and Citadel, and has issued former letters of inquiry. Bill pointed me to an article in the LA Times which reports that settlement talks with the four radio firms broke down recently:

“The four broadcasters have been negotiating with the FCC for weeks to forestall a federal inquiry by offering to discontinue certain practices and pay limited fines. But those talks stalled last month over the issue of how much the broadcasters should pay. Clear Channel proposed a fine of about $1 million, according to people with knowledge of the negotiations. Some commissioners were pushing for as much as $10 million, those sources said. ‘We were in the process of trying to reach settlements, but when talks were inconclusive, we decided we needed more information,’ said an FCC official who spoke on the condition of anonymity because the investigation was continuing. ‘We will continue to speak with the parties and to hold those who have violated commission rules accountable.'”

The FCC could issue sanctions ranging anywhere from fines to a revocation of licenses. This is in addition to the penalties imposed by settlements with Eliot Spitzer and the NY Attorney General’s office pursuant to its own ongoing payola investigation which has already extracted significant penalties from Sony BMG and Warner. $10 million strikes me as a pretty hefty fine for violating a statute that has seen haphazard enforcement for the past several decades. The magnitude of the fine, along with those already paid in the Spitzer settlements ($10 and $5 million), leads me to wonder whether the magnitude of the sanction is appropriately proportional to the harm at issue?

I have opined elsewhere that I believe payola is likely to help rather than harm consumers (see e.g., here and here), so perhaps I have already tipped my hand. But my conclusion is consistent with evidence presented by Coase in his seminal payola analysis, as well as more recent history, that the industry has consistently failed to coordinate a “no payola” agreement, though not for lack of effort. In that sense, a fine of this magnitude seems unreasonably large relative to the alleged harm.

A useful benchmark might be fines for other forms of business conduct challenged on the grounds that the conduct harms consumers, i.e. price fixing conspiracies. Unlike payola, however, there exists strong theoretical and empirical support for the proposition that price fixing actually harms consumers. There have been only 51 Sherman Act fines greater than $10 million, most associated with international price fixing conspiracies (the largest is a whopping $500 million). The average fine imposed in the 324 price fixing cases brought by the DOJ from 1990-99 was just under $5 million. Does it make sense that sanctions for payola statute violations are greater than or equal to the penalties imposed on the average international cartel? I say no. Your thoughts?

In Federal Communications Commission, Justice Department, Regulation, Telecommunications, Truth on the Market , , ,
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Do Slotting Contracts Harm Consumers?

Josh Wright —  18 April 2006

Warning: shameless plug of my own research to follow!

Slotting allowances, or payments for shelf space, have been a central part of my research agenda for the last several years. My work with Ben Klein, The Economics of Slotting Contracts, presents a procompetitive theoretical explanation (and some aggregate data in support of our theory) for slotting contracts which I have blogged about from time to time. One of the reasons that I enjoy this topic is because payments for distribution are pervasive. They dont just take place in supermarkets, but also in drug stores, bookstores, internet search engines, at radio stations (i.e., payola), and elsewhere. The most challenging problem associated distribution payment research such as slotting is that data are extremely difficult to come by. Manufacturers and retailers face significant antitrust exposure from government agencies and private plaintiffs for these contracts and are therefore understandably a bit hesitant to share micro-level data. But empirical evidence is precisely what is needed to resolve some first order antitrust policy debates regarding the competitive effects of slotting and other payments for distribution. Even without this evidence, states like California have proposed legislation that would force retailers to disclose competitors’ slotting payments to rivals and antitrust litigation thrives.

I recently posted my own attempt to add to the empirical literature, Slotting Contracts and Consumer Welfare,to SSRN (forthcoming in the Antitrust Law Journal in early 2007). I am especially proud of this paper because it took a good deal of time and effort, some creativity, and a little bit of luck to find what I think is a pretty special data set. Long story (relatively) short: I discovered that military commissaries operated by the Department of Defense Commissary Agency (DeCA) accepted slotting payments during 2000-01 before terminating this project in response to Congressional pressure. I was able to make use of the FOIA process to get my hands on all of the slotting contracts governing shelf space relationships (and sales data before and after the ban) and exploit the natural experiment to identify the competitive impact of slotting on prices, output, and variety. The data set also includes the precise location of the product on the shelf (i.e. eye level, bottom shelf, square inches of product space, adjacent products, etc.). While this paper addresses the first order antitrust question with respect to competitive effects, there are a ton of other interesting questions: Who is slotting? Who isn’t? What explains the variance in the contracts? What happens to “small” rivals when the slotting ban hits? Does their relative shelf space position improve? Wes Hartmann (Stanford GSB) and I are working on answering these questions in a couple of papers to follow. In any event, here is the abstract:

Slotting contracts involve manufacturer payments for retail shelf space. Slotting is an increasingly important part of the competitive process in many product markets, and has been the subject of congressional hearings, agency investigations, antitrust litigation, and scholarly debate. However, very little is known about the competitive consequences of slotting. This paper uses a unique data set consisting of slotting contracts at military commissaries prior to an exogenously imposed slotting ban to identify the impact of slotting on consumer welfare. This natural experiment provides a unique opportunity to directly answer the crucial policy counterfactual: would banning slotting contracts increase consumer welfare? The analysis measures the impact of slotting, at both the product and category levels, on prices, output, and product variety. I find no evidence that slotting is anticompetitive. To the contrary, the results suggest that slotting contracts provide substantial net benefits to consumers once one accounts for the unmeasured pass-through of slotting payments.

Comments are always welcome.

In Antitrust & Competition, Economic Theory, Platforms, Truth on the Market , , , ,
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Hello World!

Bill Sjostrom —  17 January 2006

earthWelcome to Truth on the Market. We have launched this blog to provide the metaphysical subjective truth on abstract, concrete and invisible markets throughout the civilized world (whatever that means). More specifically, as indicated by our current tagline (we know it’s unoriginal; we hope to come up with something better soon) our blog will provide academic commentary on law, business, economics and more. The “more” will include observations on law school, blogging, being a law prof, smoking bans, payola, legal valuation, football, processed cheese, and calorie counts, among other things.

We currently have a lineup of six young turks as regular bloggers and may add more. We all teach and write in the business law area, broadly defined. We had hoped to have some non-law profs (economics, finance, IO, sociology, etc.) and business law practitioners, but our recruitment efforts have so far been unsuccessful. Note though that Josh has a Ph.D. in economics. We also have an anonymous blogger, “pseudonym on the marketâ€? (he/she is rumored to be the love child of Article III Groupie and Jaun Non-Volokh). Unfortunately, contrary to rumors, neither Henry Manne nor Kate Litvak will be joining us out of the chute, but we’re hoping one or both will join us in the near future for at least a guest stint.

We are aware of recent statements that blogging should be avoided by junior faculty. We are all junior faculty here and thus obviously disagree. Or, more correctly, as elaborated by Prof. Barnett in this post, we applied our local knowledge of our faculties and personal knowledge of ourselves and determined that the benefits of blogging outweigh the risks (other than Pseudonym on the Market who does think it is too risky, hence the pseudonym).

If all goes well with this blog, look for the Truth on the Market hedge fund. If not, maybe we can get jobs at Tufts (does Tufts have a law school?).

Finally, we look forward to Dave Hoffman of Concurring Opinions disagreeing with us often.

Note that the phrase “truth on the market” is a term of art under federal securities laws, although we’re not using it here in that sense, at least not exclusively. See below the fold for the securities law meaning. Continue Reading…

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