Archives For platforms

Big Tech and the Parable of the Broken Window

Corbin K. Barthold — 4 August 2020 — Leave a comment

This guest post is by Corbin K. Barthold, Senior Litigation Counsel at Washington Legal Foundation.

A boy throws a brick through a bakeshop window. He flees and is never identified. The townspeople gather around the broken glass. “Well,” one of them says to the furious baker, “at least this will generate some business for the windowmaker!”

A reasonable statement? Not really. Although it is indeed a good day for the windowmaker, the money for the new window comes from the baker. Perhaps the baker was planning to use that money to buy a new suit. Now, instead of owning a window and a suit, he owns only a window. The windowmaker’s gain, meanwhile, is simply the tailor’s loss.

This parable of the broken window was conceived by Frédéric Bastiat, a nineteenth-century French economist. He wanted to alert the reader to the importance of opportunity costs—in his words, “that which is not seen.” Time and money spent on one activity cannot be spent on another.

Today Bastiat might tell the parable of the harassed technology company. A tech firm creates a revolutionary new product or service and grows very large. Rivals, lawyers, activists, and politicians call for an antitrust probe. Eventually they get their way. Millions of documents are produced, dozens of depositions are taken, and several hearings are held. In the end no concrete action is taken. “Well,” the critics say, “at least other companies could grow while the firm was sidetracked by the investigation!”

Consider the antitrust case against Microsoft twenty years ago. The case ultimately settled, and Microsoft agreed merely to modify minor aspects of how it sold its products. “It’s worth wondering,” writes Brian McCullough, a generally astute historian of the internet, “how much the flowering of the dot-com era was enabled by the fact that the most dominant, rapacious player in the industry was distracted while the new era was taking shape.” “It’s easy to see,” McCullough says, “that the antitrust trial hobbled Microsoft strategically, and maybe even creatively.”

Should we really be glad that an antitrust dispute “distracted” and “hobbled” Microsoft? What would a focused and unfettered Microsoft have achieved? Maybe nothing; incumbents often grow complacent. Then again, Microsoft might have developed a great search engine or social-media platform. Or it might have invented something that, thanks to the lawsuit, remains absent to this day. What Microsoft would have created in the early 2000s, had it not had to fight the government, is that which is not seen.

But doesn’t obstructing the most successful companies create “room” for new competitors? David Cicilline, the chairman of the House’s antitrust subcommittee, argues that “just pursuing the [Microsoft] enforcement action itself” made “space for an enormous amount of additional innovation and competition.” He contends that the large tech firms seek to buy promising startups before they become full-grown threats, and that such purchases must be blocked.

It’s easy stuff to say. It’s not at all clear that it’s true or that it makes sense. Hindsight bias is rampant. In 2012, for example, Facebook bought Instagram for $1 billion, a purchase that is now cited as a quintessential “killer acquisition.” At the time of the sale, however, Instagram had 27 million users and $0 in revenue. Today it has around a billion users, it is estimated to generate $7 billion in revenue each quarter, and it is worth perhaps $100 billion. It is presumptuous to declare that Instagram, which had only 13 employees in 2012, could have achieved this success on its own.

If distraction is an end in itself, last week’s Big Tech hearing before Cicilline and his subcommittee was a smashing success. Presumably Jeff Bezos, Tim Cook, Sundar Pichai, and Mark Zuckerberg would like to spend the balance of their time developing the next big innovations and staying ahead of smart, capable, ruthless competitors, starting with each other and including foreign firms such as ByteDance and Huawei. Last week they had to put their aspirations aside to prepare for and attend five hours of political theater.

The most common form of exchange at the hearing ran as follows. A representative asks a slanted question. The witness begins to articulate a response. The representative cuts the witness off. The representative gives a prepared speech about how the witness’s answer proved her point.

Lucy Kay McBath, a first-term congresswoman from Georgia, began one such drill with the claim that Facebook’s privacy policy from 2004, when Zuckerberg was 20 and Facebook had under a million users, applies in perpetuity. “We do not and will not use cookies to collect private information from any users,” it said. Has Facebook broken its “promise,” McBath asked, not to use cookies to collect private information? No, Zuckerberg explained (letting the question’s shaky premise slide), Facebook uses only standard log-in cookies.

“So once again, you do not use cookies? Yes or no?” McBath interjected. Having now asked a completely different question, and gotten a response resembling what she wanted—“Yes, we use cookies [on log-in features]”—McBath could launch into her canned condemnation. “The bottom line here,” she said, reading from her page, “is that you broke a commitment to your users. And who can say whether you may or may not do that again in the future?” The representative pressed on with her performance, not noticing or not caring that the person she was pretending to engage with had upset her script.

Many of the antitrust subcommittee’s queries had nothing to do with antitrust. One representative fixated on Amazon’s ties with the Southern Poverty Law Center. Another seemed to want Facebook to interrogate job applicants about their political beliefs. A third asked Zuckerberg to answer for the conduct of Twitter. One representative demanded that social-media posts about unproven Covid-19 treatments be left up, another that they be taken down. Most of the questions that were at least vaguely on topic, meanwhile, were exceedingly weak. The representatives often mistook emails showing that tech CEOs play to win, that they seek to outcompete challengers and rivals, for evidence of anticompetitive harm to consumers. And the panel was often treated like a customer-service hotline. This app developer ran into a difficulty; what say you, Mr. Cook? That third-party seller has a gripe; why won’t you listen to her, Mr. Bezos?

In his opening remarks, Bezos cited a survey that ranked Amazon one of the country’s most trusted institutions. No surprise there. In many places one could have ordered a grocery delivery from Amazon as the hearing started and had the goods put away before it ended. Was Bezos taking a muted dig at Congress? He had every right to—it is one of America’s least trusted institutions. Pichai, for his part, noted that many users would be willing to pay thousands of dollars a year for Google’s free products. Is Congress providing people that kind of value?

The advance of technology will never be an unalloyed blessing. There are legitimate concerns, for instance, about how social-media platforms affect public discourse. “Human beings evolved to gossip, preen, manipulate, and ostracize,” psychologist Jonathan Haidt and technologist Tobias Rose-Stockwell observe. Social media exploits these tendencies, they contend, by rewarding those who trade in the glib put-down, the smug pronouncement, the theatrical smear. Speakers become “cruel and shallow”; “nuance and truth” become “casualties in [a] competition to gain the approval of [an] audience.”

Three things are true at once. First, Haidt and Rose-Stockwell have a point. Second, their point goes only so far. Social media does not force people to behave badly. Assuming otherwise lets individual humans off too easy. Indeed, it deprives them of agency. If you think it is within your power to display grace, love, and transcendence, you owe it to others to think it is within their power as well.

Third, if you really want to see adults act like children, watch a high-profile congressional hearing. A hearing for Attorney General William Barr, held the day before the Big Tech hearing and attended by many of the same representatives, was a classic of the format.

The tech hearing was not as shambolic as the Barr hearing. And the representatives act like sanctimonious halfwits in part to concoct the sick burns that attract clicks on the very platforms built, facilitated, and delivered by the tech companies. For these and other obvious reasons, no one should feel sorry for the four men who spent a Wednesday afternoon serving as props for demagogues. But that doesn’t mean the charade was a productive use of time. There is always that which is not seen.

In antitrust, constitutional political economy, economics, political economy, politics, truth on the market big tech, platforms, political economy, politics, United States House Committee on the Judiciary

The Furman Report is a Flimsy Basis for a New UK Competition Policy

Sam Bowman — 27 July 2020 — 1 Comment

Earlier this year the UK government announced it was adopting the main recommendations of the Furman Report into competition in digital markets and setting up a “Digital Markets Taskforce” to oversee those recommendations being put into practice. The Competition and Markets Authority’s digital advertising market study largely came to similar conclusions (indeed, in places it reads as if the CMA worked backwards from those conclusions).

The Furman Report recommended that the UK should overhaul its competition regime with some quite significant changes to regulate the conduct of large digital platforms and make it harder for them to acquire other companies. But, while the Report’s panel is accomplished and its tone is sober and even-handed, the evidence on which it is based does not justify the recommendations it makes.

Most of the citations in the Report are of news reports or simple reporting of data with no analysis, and there is very little discussion of the relevant academic literature in each area, even to give a summary of it. In some cases, evidence and logic are misused to justify intuitions that are just not supported by the facts.

Killer acquisitions

One particularly bad example is the report’s discussion of mergers in digital markets. The Report provides a single citation to support its proposals on the question of so-called “killer acquisitions” — acquisitions where incumbent firms acquire innovative startups to kill their rival product and avoid competing on the merits. The concern is that these mergers slip under the radar of current merger control either because the transaction is too small, or because the purchased firm is not yet in competition with the incumbent. But the paper the Report cites, by Colleen Cunningham, Florian Ederer and Song Ma, looks only at the pharmaceutical industry.

The Furman Report says that “in the absence of any detailed analysis of the digital sector, these results can be roughly informative”. But there are several important differences between the drug markets the paper considers and the digital markets the Furman Report is focused on.

The scenario described in the Cunningham, et al. paper is of a patent holder buying a direct competitor that has come up with a drug that emulates the patent holder’s drug without infringing on the patent. As the Cunningham, et al. paper demonstrates, decreases in development rates are a feature of acquisitions where the acquiring company holds a patent for a similar product that is far from expiry. The closer a patent is to expiry, the less likely an associated “killer” acquisition is.

But tech typically doesn’t have the clear and predictable IP protections that would make such strategies reliable. The long and uncertain development and approval process involved in bringing a drug to market may also be a factor.

There are many more differences between tech acquisitions and the “killer acquisitions” in pharma that the Cunningham, et al. paper describes. SO-called “acqui-hires,” where a company is acquired in order to hire its workforce en masse, are common in tech and explicitly ruled out of being “killers” by this paper, for example: it is not harmful to overall innovation or output overall if a team is moved to a more productive project after an acquisition. And network effects, although sometimes troubling from a competition perspective, can also make mergers of platforms beneficial for users by growing the size of that platform (because, of course, one of the points of a network is its size).

The Cunningham, et al. paper estimates that 5.3% of pharma acquisitions are “killers”. While that may seem low, some might say it’s still 5.3% too much. However, it’s not obvious that a merger review authority could bring that number closer to zero without also rejecting more mergers that are good for consumers, making people worse off overall. Given the number of factors that are specific to pharma and that do not apply to tech, it is dubious whether the findings of this paper are useful to the Furman Report’s subject at all. Given how few acquisitions are found to be “killers” in pharma with all of these conditions present, it seems reasonable to assume that, even if this phenomenon does apply in some tech mergers, it is significantly rarer than the ~5.3% of mergers Cunningham, et al. find in pharma. As a result, the likelihood of erroneous condemnation of procompetitive mergers is significantly higher.

In any case, there’s a fundamental disconnect between the “killer acquisitions” in the Cunningham, et al. paper and the tech acquisitions described as “killers” in the popular media. Neither Facebook’s acquisition of Instagram nor Google’s acquisition of Youtube, which FTC Commissioner Rohit Chopra recently highlighted, would count, because in neither case was the acquired company “killed.” Nor were any of the other commonly derided tech acquisitions — e.g., Facebook/Whatsapp, Google/Waze, Microsoft.LinkedIn, or Amazon/Whole Foods — “killers,” either.

In all these high-profile cases the acquiring companies expanded the service and invested more in them. One may object that these services would have competed with their acquirers had they remained independent, but this is a totally different argument to the scenarios described in the Cunningham, et al. paper, where development of a new drug is shut down by the acquirer ostensibly to protect their existing product. It is thus extremely difficult to see how the Cunningham, et al. paper is even relevant to the digital platform context, let alone how it could justify a wholesale revision of the merger regime as applied to digital platforms.

A recent paper (published after the Furman Report) does attempt to survey acquisitions by Google, Amazon, Facebook, Microsoft, and Apple. Out of 175 acquisitions in the 2015-17 period the paper surveys, only one satisfies the Cunningham, et al. paper’s criteria for being a potentially “killer” acquisition — Facebook’s acquisition of a photo sharing app called Masquerade, which had raised just $1 million in funding before being acquired.

In lieu of any actual analysis of mergers in digital markets, the Report falls back on a puzzling logic:

To date, there have been no false positives in mergers involving the major digital platforms, for the simple reason that all of them have been permitted. Meanwhile, it is likely that some false negatives will have occurred during this time. This suggests that there has been underenforcement of digital mergers, both in the UK and globally. Remedying this underenforcement is not just a matter of greater focus by the enforcer, as it will also need to be assisted by legislative change.

This is very poor reasoning. It does not logically follow that the (presumed) existence of false negatives implies that there has been underenforcement, because overenforcement carries costs as well. Moreover, there are strong reasons to think that false positives in these markets are more costly than false negatives. A well-run court system might still fail to convict a few criminals because the cost of accidentally convicting an innocent person was so high.

The UK’s competition authority did commission an ex post review of six historical mergers in digital markets, including Facebook/Instagram and Google/Waze, two of the most controversial in the UK. Although it did suggest that the review process could have been done differently, it also highlighted efficiencies that arose from each, and did not conclude that any has led to consumer detriment.

Recommendations

The Report is vague about which mergers it considers to have been uncompetitive, and apart from the aforementioned text it does not really attempt to justify its recommendations around merger control.

Despite this, the Report recommends a shift to a ‘balance of harms’ approach. Under the current regime, merger review focuses on the likelihood that a merger would reduce competition which, at least, gives clarity about the factors to be considered. A ‘balance of harms’ approach would require the potential scale (size) of the merged company to be considered as well.

This could give basis for blocking any merger at all on ‘scale’ grounds. After all, if a photo editing app with a sharing timeline can grow into the world’s second largest social network, how could a competition authority say with any confidence that some other acquisition might not prevent the emergence of a new platform on a similar scale, however unlikely? This could provide a basis for blocking almost any acquisition by an incumbent firm, and make merger review an even more opaque and uncertain process than it currently is, potentially deterring efficiency-raising mergers or leading startups that would like to be acquired to set up and operate overseas instead (or not to be started up in the first place).

The treatment of mergers is just one example of the shallowness of the Report. In many other cases — the discussions of concentration and barriers to entry in digital markets, for example — big changes are recommended on the basis of a handful of papers or less. Intuition repeatedly trumps evidence and academic research.

The Report’s subject is incredibly broad, of course, and one might argue that such a limited, casual approach is inevitable. In this sense the Report may function perfectly well as an opening brief introducing the potential range of problems in the digital economy that a rational competition authority might consider addressing. But the complexity and uncertainty of the issues is no reason to eschew rigorous, detailed analysis before determining that a compelling case has been made. Adopting the Report’s assumptions — and in many cases that is the very most one can say of them — of harm and remedial recommendations on the limited bases it offers is sure to lead to erroneous enforcement of competition law in a way that would reduce, rather than enhance, consumer welfare.

In antitrust, international competition, truth on the market antitrust and platforms, Competition law, Furman report, platforms, UK CMA

On the Origin of Platforms: An Evolutionary Perspective

Dirk Auer — 7 July 2020 — 1 Comment

Hardly a day goes by without news of further competition-related intervention in the digital economy. The past couple of weeks alone have seen the European Commission announce various investigations into Apple’s App Store (here and here), as well as reaffirming its desire to regulate so-called “gatekeeper” platforms. Not to mention the CMA issuing its final report regarding online platforms and digital advertising.

While the limits of these initiatives have already been thoroughly dissected (e.g. here, here, here), a fundamental question seems to have eluded discussions: What are authorities trying to achieve here?

At first sight, the answer might appear to be extremely simple. Authorities want to “bring more competition” to digital markets. Furthermore, they believe that this competition will not arise spontaneously because of the underlying characteristics of digital markets (network effects, economies of scale, tipping, etc). But while it may have some intuitive appeal, this answer misses the forest for the trees.

Let us take a step back. Digital markets could have taken a vast number of shapes, so why have they systematically gravitated towards those very characteristics that authorities condemn? For instance, if market tipping and consumer lock-in are so problematic, why is it that new corners of the digital economy continue to emerge via closed platforms, as opposed to collaborative ones? Indeed, if recent commentary is to be believed, it is the latter that should succeed because they purportedly produce greater gains from trade. And if consumers and platforms cannot realize these gains by themselves, then we should see intermediaries step into the breach – i.e. arbitrage. This does not seem to be happening in the digital economy. The naïve answer is to say that this is precisely the problem, the harder one is to actually understand why.

To draw a parallel with evolution, in the late 18th century, botanists discovered an orchid with an unusually long spur (above). This made its nectar incredibly hard to reach for insects. Rational observers at the time could be forgiven for thinking that this plant made no sense, that its design was suboptimal. And yet, decades later, Darwin conjectured that the plant could be explained by a (yet to be discovered) species of moth with a proboscis that was long enough to reach the orchid’s nectar. Decades after his death, the discovery of the xanthopan moth proved him right.

Returning to the digital economy, we thus need to ask why the platform business models that authorities desire are not the ones that emerge organically. Unfortunately, this complex question is mostly overlooked by policymakers and commentators alike.

Competition law on a spectrum

To understand the above point, let me start with an assumption: the digital platforms that have been subject to recent competition cases and investigations can all be classified along two (overlapping) dimensions: the extent to which they are open (or closed) to “rivals” and the extent to which their assets are propertized (as opposed to them being shared). This distinction borrows heavily from Jonathan Barnett’s work on the topic. I believe that by applying such a classification, we would obtain a graph that looks something like this:

While these classifications are certainly not airtight, this would be my reasoning:

In the top-left quadrant, Apple and Microsoft, both operate closed platforms that are highly propertized (Apple’s platform is likely even more closed than Microsoft’s Windows ever was). Both firms notably control who is allowed on their platform and how they can interact with users. Apple notably vets the apps that are available on its App Store and influences how payments can take place. Microsoft famously restricted OEMs freedom to distribute Windows PCs as they saw fit (notably by “imposing” certain default apps and, arguably, limiting the compatibility of Microsoft systems with servers running other OSs).

In the top right quadrant, the business models of Amazon and Qualcomm are much more “open”, yet they remain highly propertized. Almost anyone is free to implement Qualcomm’s IP – so long as they conclude a license agreement to do so. Likewise, there are very few limits on the goods that can be sold on Amazon’s platform, but Amazon does, almost by definition, exert a significant control on the way in which the platform is monetized. Retailers can notably pay Amazon for product placement, fulfilment services, etc.

Finally, Google Search and Android sit in the bottom left corner. Both of these services are weakly propertized. The Android source code is shared freely via an open source license, and Google’s apps can be preloaded by OEMs free of charge. The only limit is that Google partially closes its platform, notably by requiring that its own apps (if they are pre-installed) receive favorable placement. Likewise, Google’s search engine is only partially “open”. While any website can be listed on the search engine, Google selects a number of specialized results that are presented more prominently than organic search results (weather information, maps, etc). There is also some amount of propertization, namely that Google sells the best “real estate” via ad placement.

Enforcement

Readers might ask what is the point of this classification? The answer is that in each of the above cases, competition intervention attempted (or is attempting) to move firms/platforms towards more openness and less propertization – the opposite of their original design.

The Microsoft cases and the Apple investigation, both sought/seek to bring more openness and less propetization to these respective platforms. Microsoft was made to share proprietary data with third parties (less propertization) and open up its platform to rival media players and web browsers (more openness). The same applies to Apple. Available information suggests that the Commission is seeking to limit the fees that Apple can extract from downstream rivals (less propertization), as well as ensuring that it cannot exclude rival mobile payment solutions from its platform (more openness).

The various cases that were brought by EU and US authorities against Qualcomm broadly sought to limit the extent to which it was monetizing its intellectual property. The European Amazon investigation centers on the way in which the company uses data from third-party sellers (and ultimately the distribution of revenue between them and Amazon). In both of these cases, authorities are ultimately trying to limit the extent to which these firms propertize their assets.

Finally, both of the Google cases, in the EU, sought to bring more openness to the company’s main platform. The Google Shopping decision sanctioned Google for purportedly placing its services more favorably than those of its rivals. And the Android decision notably sought to facilitate rival search engines’ and browsers’ access to the Android ecosystem. The same appears to be true of ongoing investigations in the US.

What is striking about these decisions/investigations is that authorities are pushing back against the distinguishing features of the platforms they are investigating. Closed -or relatively closed- platforms are being opened-up, and firms with highly propertized assets are made to share them (or, at the very least, monetize them less aggressively).

The empty quadrant

All of this would not be very interesting if it weren’t for a final piece of the puzzle: the model of open and shared platforms that authorities apparently favor has traditionally struggled to gain traction with consumers. Indeed, there seem to be very few successful consumer-oriented products and services in this space.

There have been numerous attempts to introduce truly open consumer-oriented operating systems – both in the mobile and desktop segments. For the most part, these have ended in failure. Ubuntu and other Linux distributions remain fringe products. There have been attempts to create open-source search engines, again they have not been met with success. The picture is similar in the online retail space. Amazon appears to have beaten eBay despite the latter being more open and less propertized – Amazon has historically charged higher fees than eBay and offers sellers much less freedom in the way they sell their goods. This theme is repeated in the standardization space. There have been innumerable attempts to impose open royalty-free standards. At least in the mobile internet industry, few if any of these have taken off (5G and WiFi are the best examples of this trend). That pattern is repeated in other highly-standardized industries, like digital video formats. Most recently, the proprietary Dolby Vision format seems to be winning the war against the open HDR10+ format.

This is not to say there haven’t been any successful ventures in this space – the internet, blockchain and Wikipedia all spring to mind – or that we will not see more decentralized goods in the future. But by and large firms and consumers have not yet taken to the idea of open and shared platforms. And while some “open” projects have achieved tremendous scale, the consumer-facing side of these platforms is often dominated by intermediaries that opt for much more traditional business models (think of Coinbase and Blockchain, or Android and Linux).

An evolutionary explanation?

The preceding paragraphs have posited a recurring reality: the digital platforms that competition authorities are trying to to bring about are fundamentally different from those that emerge organically. This begs the question: why have authorities’ ideal platforms, so far, failed to achieve truly meaningful success at consumers’ end of the market?

I can see at least three potential explanations:

Closed/propertized platforms have systematically -and perhaps anticompetitively- thwarted their open/shared rivals;
Shared platforms have failed to emerge because they are much harder to monetize (and there is thus less incentive to invest in them);
Consumers have opted for closed systems precisely because they are closed.

I will not go into details over the merits of the first conjecture. Current antitrust debates have endlessly rehashed this proposition. However, it is worth mentioning that many of today’s dominant platforms overcame open/shared rivals well before they achieved their current size (Unix is older than Windows, Linux is older than iOs, eBay and Amazon are basically the same age, etc). It is thus difficult to make the case that the early success of their business models was down to anticompetitive behavior.

Much more interesting is the fact that options (2) and (3) are almost systematically overlooked – especially by antitrust authorities. And yet, if true, both of them would strongly cut against current efforts to regulate digital platforms and ramp-up antitrust enforcement against them.

For a start, it is not unreasonable to suggest that highly propertized platforms are generally easier to monetize than shared ones (2). For example, open-source platforms often rely on complementarities for monetization, but this tends to be vulnerable to outside competition and free-riding. If this is true, then there is a natural incentive for firms to invest and innovate in more propertized environments. In turn, competition enforcement that limits a platforms’ ability to propertize their assets may harm innovation.

Similarly, authorities should at the very least reflect on whether consumers really want the more “competitive” ecosystems that they are trying to design (3).

For instance, it is striking that the European Commission has a long track record of seeking to open-up digital platforms (the Microsoft decisions are perhaps the most salient example). And yet, even after these interventions, new firms have kept on using the very business model that the Commission reprimanded. Apple tied the Safari browser to its iPhones, Google went to some length to ensure that Chrome was preloaded on devices, Samsung phones come with Samsung Internet as default. But this has not deterred consumers. A sizable share of them notably opted for Apple’s iPhone, which is even more centrally curated than Microsoft Windows ever was (and the same is true of Apple’s MacOS).

Finally, it is worth noting that the remedies imposed by competition authorities are anything but unmitigated successes. Windows XP N (the version of Windows that came without Windows Media Player) was an unprecedented flop – it sold a paltry 1,787 copies. Likewise, the internet browser ballot box imposed by the Commission was so irrelevant to consumers that it took months for authorities to notice that Microsoft had removed it, in violation of the Commission’s decision.

There are many reasons why consumers might prefer “closed” systems – even when they have to pay a premium for them. Take the example of app stores. Maintaining some control over the apps that can access the store notably enables platforms to easily weed out bad players. Similarly, controlling the hardware resources that each app can use may greatly improve device performance. In other words, centralized platforms can eliminate negative externalities that “bad” apps impose on rival apps and consumers. This is especially true when consumers struggle to attribute dips in performance to an individual app, rather than the overall platform.

It is also conceivable that consumers prefer to make many of their decisions at the inter-platform level, rather than within each platform. In simple terms, users arguably make their most important decision when they choose between an Apple or Android smartphone (or a Mac and a PC, etc.). In doing so, they can select their preferred app suite with one simple decision. They might thus purchase an iPhone because they like the secure App Store, or an Android smartphone because they like the Chrome Browser and Google Search. Furthermore, forcing too many “within-platform” choices upon users may undermine a product’s attractiveness. Indeed, it is difficult to create a high-quality reputation if each user’s experience is fundamentally different. In short, contrary to what antitrust authorities seem to believe, closed platforms might be giving most users exactly what they desire.

To conclude, consumers and firms appear to gravitate towards both closed and highly propertized platforms, the opposite of what the Commission and many other competition authorities favor. The reasons for this trend are still misunderstood, and mostly ignored. Too often, it is simply assumed that consumers benefit from more openness, and that shared/open platforms are the natural order of things. This post certainly does not purport to answer the complex question of “the origin of platforms”, but it does suggest that what some refer to as “market failures” may in fact be features that explain the rapid emergence of the digital economy. Ronald Coase said this best when he quipped that economists always find a monopoly explanation for things that they fail to understand. The digital economy might just be the latest in this unfortunate trend.

In antitrust, business, doj, economics, federal trade commission, Justice Department, law and economics, regulation, truth on the market antitrust and platforms, business models, open source, platforms, walled garden

Senator Hawley’s Unconstitutional, Unconservative Attack on the Internet

Ben Sperry — 26 June 2020

Twitter’s decision to begin fact-checking the President’s tweets caused a long-simmering distrust between conservatives and online platforms to boil over late last month. This has led some conservatives to ask whether Section 230, the ‘safe harbour’ law that protects online platforms from certain liability stemming from content posted on their websites by users, is allowing online platforms to unfairly target conservative speech.

In response to Twitter’s decision, along with an Executive Order released by the President that attacked Section 230, Senator Josh Hawley (R – MO) offered a new bill targeting online platforms, the “Limiting Section 230 Immunity to Good Samaritans Act”. This would require online platforms to engage in “good faith” moderation according to clearly stated terms of service – in effect, restricting Section 230’s protections to online platforms deemed to have done enough to moderate content ‘fairly’.

While seemingly a sensible standard, if enacted, this approach would violate the First Amendment as an unconstitutional condition to a government benefit, thereby undermining long-standing conservative principles and the ability of conservatives to be treated fairly online.

There is established legal precedent that Congress may not grant benefits on conditions that violate Constitutionally-protected rights. In Rumsfeld v. FAIR, the Supreme Court stated that a law that withheld funds from universities that did not allow military recruiters on campus would be unconstitutional if it constrained those universities’ First Amendment rights to free speech. Since the First Amendment protects the right to editorial discretion, including the right of online platforms to make their own decisions on moderation, Congress may not condition Section 230 immunity on platforms taking a certain editorial stance it has dictated.

Aware of this precedent, the bill attempts to circumvent the obstacle by taking away Section 230 immunity for issues unrelated to anti-conservative bias in moderation. Specifically, Senator Hawley’s bill attempts to condition immunity for platforms on having terms of service for content moderation, and making them subject to lawsuits if they do not act in “good faith” in policing them.

It’s not even clear that the bill would do what Senator Hawley wants it to. The “good faith” standard only appears to apply to the enforcement of an online platform’s terms of service. It can’t, under the First Amendment, actually dictate what those terms of service say. So an online platform could, in theory, explicitly state in their terms of service that they believe some forms of conservative speech are “hate speech” they will not allow.

Mandating terms of service on content moderation is arguably akin to disclosures like labelling requirements, because it makes clear to platforms’ customers what they’re getting. There are, however, some limitations under the commercial speech doctrine as to what government can require. Under National Institute of Family & Life Advocates v. Becerra, a requirement for terms of service outlining content moderation policies would be upheld unless “unjustified or unduly burdensome.” A disclosure mandate alone would not be unconstitutional.

But it is clear from the statutory definition of “good faith” that Senator Hawley is trying to overwhelm online platforms with lawsuits on the grounds that they have enforced these rules selectively and therefore not in “good faith”.

These “selective enforcement” lawsuits would make it practically impossible for platforms to moderate content at all, because they would open them up to being sued for any moderation, including moderation completely unrelated to any purported anti-conservative bias. Any time a YouTuber was aggrieved about a video being pulled down as too sexually explicit, for example, they could file suit and demand that Youtube release information on whether all other similarly situated users were treated the same way. Any time a post was flagged on Facebook, for example for engaging in online bullying or for spreading false information, it could similarly lead to the same situation.

This would end up requiring courts to act as the arbiter of decency and truth in order to even determine whether online platforms are “selectively enforcing” their terms of service.

Threatening liability for all third-party content is designed to force online platforms to give up moderating content on a perceived political basis. The result will be far less content moderation on a whole range of other areas. It is precisely this scenario that Section 230 was designed to prevent, in order to encourage platforms to moderate things like pornography that would otherwise proliferate on their sites, without exposing themselves to endless legal challenge.

It is likely that this would be unconstitutional as well. Forcing online platforms to choose between exercising their First Amendment rights to editorial discretion and retaining the benefits of Section 230 is exactly what the “unconstitutional conditions” jurisprudence is about.

This is why conservatives have long argued the government has no business compelling speech. They opposed the “fairness doctrine” which required that radio stations provide a “balanced discussion”, and in practice allowed courts or federal agencies to determine content until President Reagan overturned it. Later, President Bush appointee and then-FTC Chairman Tim Muris rejected a complaint against Fox News for its “Fair and Balanced” slogan, stating:

I am not aware of any instance in which the Federal Trade Commission has investigated the slogan of a news organization. There is no way to evaluate this petition without evaluating the content of the news at issue. That is a task the First Amendment leaves to the American people, not a government agency.

And recently conservatives were arguing businesses like Masterpiece Cakeshop should not be compelled to exercise their First Amendment rights against their will. All of these cases demonstrate once the state starts to try to stipulate what views can and cannot be broadcast by private organisations, conservatives will be the ones who suffer.

Senator Hawley’s bill fails to acknowledge this. Worse, it fails to live up to the Constitution, and would trample over the rights to freedom of speech that it gives. Conservatives should reject it.

In constitutional law, First amendment, internet, technology, truth on the market Communications Decency Act. Section 230, First Amendment, Free Expression, free speech, platforms, section 230, Twitter, United States Constitution

Uber/Grubhub: Pandemic Profiteering, Merger Moratoriums, and Rising Concentration … Or Not

Eric Fruits — 15 May 2020

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Eric Fruits, (Chief Economist, International Center for Law & Economics).]

Earlier this week, merger talks between Uber and food delivery service Grubhub surfaced. House Antitrust Subcommittee Chairman David N. Cicilline quickly reacted to the news:

Americans are struggling to put food on the table, and locally owned businesses are doing everything possible to keep serving people in our communities, even under great duress. Uber is a notoriously predatory company that has long denied its drivers a living wage. Its attempt to acquire Grubhub—which has a history of exploiting local restaurants through deceptive tactics and extortionate fees—marks a new low in pandemic profiteering. We cannot allow these corporations to monopolize food delivery, especially amid a crisis that is rendering American families and local restaurants more dependent than ever on these very services. This deal underscores the urgency for a merger moratorium, which I and several of my colleagues have been urging our caucus to support.

Pandemic profiteering rolls nicely off the tongue, and we’re sure to see that phrase much more over the next year or so.

Grubhub shares jumped 29% Tuesday, the day the merger talks came to light, shown in the figure below. The Wall Street Journal reports companies are considering a deal that would value Grubhub stock at around 1.9 Uber shares, or $60-65 dollars a share, based on Thursday’s price.

But is that “pandemic profiteering?”

After Amazon announced its intended acquisition of Whole Foods, the grocer’s stock price soared by 27%. Rep. Cicilline voiced some convoluted concerns about that merger, but said nothing about profiteering at the time. Different times, different messaging.

Rep. Cicilline and others have been calling for a merger moratorium during the pandemic and used the Uber/Grubhub announcement as Exhibit A in his indictment of merger activity.

A moratorium would make things much easier for regulators. No more fighting over relevant markets, no HHI calculations, no experts debating SSNIPs or GUPPIs, no worries over consumer welfare, no failing firm defenses. Just a clear, brightline “NO!”

Even before the pandemic, it was well known that the food delivery industry was due for a shakeout. NPR reports, even as the business is growing, none of the top food-delivery apps are turning a profit, with one analyst concluding consolidation was “inevitable.” Thus, even if a moratorium slowed or stopped the Uber/Grubhub merger, at some point a merger in the industry will happen and the U.S. antitrust authorities will have to evaluate it.

First, we have to ask, “What’s the relevant market?” The government has a history of defining relevant markets so narrowly that just about any merger can be challenged. For example, for the scuttled Whole Foods/Wild Oats merger, the FTC famously narrowed the market to “premium natural and organic supermarkets.” Surely, similar mental gymnastics will be used for any merger involving food delivery services.

While food delivery has grown in popularity over the past few years, delivery represents less than 10% of U.S. food service sales. While Rep. Cicilline may be correct that families and local restaurants are “more dependent than ever” on food delivery, delivery is only a small fraction of a large market. Even a monopoly of food delivery service would not confer market power on the restaurant and food service industry.

No reasonable person would claim an Uber/Grubhub merger would increase market power in the restaurant and food service industry. But, it might convey market power in the food delivery market. Much attention is paid to the “Big Four”–DoorDash, Grubhub, Uber Eats, and Postmates. But, these platform delivery services are part of the larger food service delivery market, of which platforms account for about half of the industry’s revenues. Pizza accounts for the largest share of restaurant-to-consumer delivery.

This raises the big question of what is the relevant market: Is it the entire food delivery sector, or just the platform-to-consumer sector?

Based on the information in the figure below, defining the market narrowly would place an Uber/Grubhub merger squarely in the “presumed to be likely to enhance market power” category.

2016 HHI: <3,175
2018 HHI: <1,474
2020 HHI: <2,249 pre-merger; <4,153 post-merger

Alternatively, defining the market to encompass all food delivery would cut the platforms’ shares roughly in half and the merger would be unlikely to harm competition, based on HHI. Choosing the relevant market is, well, relevant.

The Second Measure data suggests that concentration in the platform delivery sector decreased with the entry of Uber Eats, but subsequently increased with DoorDash’s rising share–which included the acquisition of Caviar from Square.

(NB: There seems to be a significant mismatch in the delivery revenue data. Statista reports platform delivery revenues increased by about 40% from 2018 to 2020, but Second Measure indicates revenues have more than doubled.)

Geoffrey Manne, in an earlier post points out “while national concentration does appear to be increasing in some sectors of the economy, it’s not actually so clear that the same is true for local concentration — which is often the relevant antitrust market.” That may be the case here.

The figure below is a sample of platform delivery shares by city. I added data from an earlier study of 2017 shares. In all but two metro areas, Uber and Grubhub’s combined market share declined from 2017 to 2020. In Boston, the combined shares did not change and in Los Angeles, the combined shares increased by 1%.

(NB: There are some serious problems with this data, notably that it leaves out the restaurant-to-consumer sector and assumes the entire platform-to-consumer sector is comprised of only the “Big Four.”)

Platform-to-consumer delivery is a complex two-sided market in which the platforms link, and compete for, both restaurants and consumers. Platforms compete for restaurants, drivers, and consumers. Restaurants have a choice of using multiple platforms or entering into exclusive arrangements. Many drivers work for multiple platforms, and many consumers use multiple platforms.

Fundamentally, the rise of platform-to-consumer is an evolution in vertical integration. Restaurants can choose to offer no delivery, use their own in-house delivery drivers, or use a third party delivery service. Every platform faces competition from in-house delivery, placing a limit on their ability to raise prices to restaurants and consumers.

The choice of delivery is not an either-or decision. For example, many pizza restaurants who have their own delivery drivers also use platform delivery service. Their own drivers may serve a limited geographic area, but the platforms allow the restaurant to expand its geographic reach, thereby increasing its sales. Even so, the platforms face competition from in-house delivery.

Mergers or other forms of shake out in the food delivery industry are inevitable. Mergers will raise important questions about relevant product and geographic markets as well as competition in two-sided markets. While there is a real risk of harm to restaurants, drivers, and consumers, there is also a real possibility of welfare enhancing efficiencies. These questions will never be addressed with an across-the-board merger moratorium.

In antitrust, COVID-19-Response-Series, mergers & acquisitions, truth on the market Concentration, coronavirus, COVID, covid-19, economics, HHI, mergers, platforms

First Amendment Conflict of Visions Redux: The Case of Facebook’s Oversight Board and the Threat of Antitrust Action

Ben Sperry — 12 May 2020

In the wake of the launch of Facebook’s content oversight board, Republican Senator Josh Hawley and FCC Commissioner Brendan Carr, among others, have taken to Twitter to levy criticisms at the firm and, in the process, demonstrate just how far the Right has strayed from its first principles around free speech and private property. For his part, Commissioner Carr’s thread makes the case that the members of the board are highly partisan and mostly left-wing and can’t be trusted with the responsibility of oversight. While Senator Hawley took the approach that the Board’s very existence is just further evidence of the need to break Facebook up.

Both Hawley and Carr have been lauded in rightwing circles, but in reality their positions contradict conservative notions of the free speech and private property protections given by the First Amendment.

This blog post serves as a sequel to a post I wrote last year here at TOTM explaining how There’s nothing “conservative” about Trump’s views on free speech and the regulation of social media. As I wrote there:

I have noted in several places before that there is a conflict of visions when it comes to whether the First Amendment protects a negative or positive conception of free speech. For those unfamiliar with the distinction: it comes from philosopher Isaiah Berlin, who identified negative liberty as freedom from external interference, and positive liberty as freedom to do something, including having the power and resources necessary to do that thing. Discussions of the First Amendment’s protection of free speech often elide over this distinction.
With respect to speech, the negative conception of liberty recognizes that individual property owners can control what is said on their property, for example. To force property owners to allow speakers/speech on their property that they don’t desire would actually be a violation of their liberty — what the Supreme Court calls “compelled speech.” The First Amendment, consistent with this view, generally protects speech from government interference (with very few, narrow exceptions), while allowing private regulation of speech (again, with very few, narrow exceptions).

Commissioner Carr’s complaint and Senator Hawley’s antitrust approach of breaking up Facebook has much more in common with the views traditionally held by left-wing Democrats on the need for the government to regulate private actors in order to promote speech interests. Originalists and law & economics scholars, on the other hand, have consistently taken the opposite point of view that the First Amendment protects against government infringement of speech interests, including protecting the right to editorial discretion. While there is clearly a conflict of visions in First Amendment jurisprudence, the conservative (and, in my view, correct) point of view should not be jettisoned by Republicans to achieve short-term political gains.

The First Amendment restricts government action, not private action

The First Amendment, by its very text, only applies to government action: “Congress shall make no law . . . abridging the freedom of speech.” This applies to the “State[s]” through the Fourteenth Amendment. There is extreme difficulty in finding any textual hook to say the First Amendment protects against private action, like that of Facebook.

Originalists have consistently agreed. Most recently, in Manhattan Community Access Corp. v. Halleck, Justice Kavanaugh—on behalf of the conservative bloc and the Court—wrote:

Ratified in 1791, the First Amendment provides in relevant part that “Congress shall make no law . . . abridging the freedom of speech.” Ratified in 1868, the Fourteenth Amendment makes the First Amendment’s Free Speech Clause applicable against the States: “No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law . . . .” §1. The text and original meaning of those Amendments, as well as this Court’s longstanding precedents, establish that the Free Speech Clause prohibits only governmental abridgment of speech. The Free Speech Clause does not prohibit private abridgment of speech… In accord with the text and structure of the Constitution, this Court’s state-action doctrine distinguishes the government from individuals and private entities. By enforcing that constitutional boundary between the governmental and the private, the state-action doctrine protects a robust sphere of individual liberty. (Emphasis added).

This was true at the adoption of the First Amendment and remains true today in a high-tech world. Federal district courts have consistently dismissed First Amendment lawsuits against Facebook on the grounds there is no state action.

For instance, in Nyawba v. Facebook, the plaintiff initiated a civil rights lawsuit against Facebook for restricting his use of the platform. The U.S. District Court for the Southern District of Texas dismissed the case, noting

Because the First Amendment governs only governmental restrictions on speech, Nyabwa has not stated a cause of action against FaceBook… Like his free speech claims, Nyabwa’s claims for violation of his right of association and violation of his due process rights are claims that may be vindicated against governmental actors pursuant to § 1983, but not a private entity such as FaceBook.

Similarly, in Young v. Facebook, the U.S. District Court for the Northern District of California rejected a claim that Facebook violated the First Amendment by deactivating the plaintiff’s Facebook page. The court declined to subject Facebook to the First Amendment analysis, stating that “because Young has not alleged any action under color of state law, she fails to state a claim under § 1983.”

The First Amendment restricts antitrust actions against Facebook, not Facebook’s editorial discretion over its platform

Far from restricting Facebook, the First Amendment actually restricts government actions aimed at platforms like Facebook when they engage in editorial discretion by moderating content. If an antitrust plaintiff was to act on the impulse to “break up” Facebook because of alleged political bias in its editorial discretion, the lawsuit would be running headlong into the First Amendment’s protections.

There is no basis for concluding online platforms do not have editorial discretion under the law. In fact, the position of Facebook here is very similar to the newspaper in Miami Herald Publishing Co. v. Tornillo, in which the Supreme Court considered a state law giving candidates for public office a right to reply in newspapers to editorials written about them. The Florida Supreme Court upheld the statute, finding it furthered the “broad societal interest in the free flow of information to the public.” The U.S. Supreme Court, despite noting the level of concentration in the newspaper industry, nonetheless reversed. The Court explicitly found the newspaper had a First Amendment right to editorial discretion:

The choice of material to go into a newspaper, and the decisions made as to limitations on the size and content of the paper, and treatment of public issues and public officials — whether fair or unfair — constitute the exercise of editorial control and judgment. It has yet to be demonstrated how governmental regulation of this crucial process can be exercised consistent with First Amendment guarantees of a free press as they have evolved to this time.

Online platforms have the same First Amendment protections for editorial discretion. For instance, in both Search King v. Google and Langdon v. Google, two different federal district courts ruled Google’s search results are subject to First Amendment protections, both citing Tornillo.

In Zhang v. Baidu.com, another district court went so far as to grant a Chinese search engine the right to editorial discretion in limiting access to democracy movements in China. The court found that the search engine “inevitably make[s] editorial judgments about what information (or kinds of information) to include in the results and how and where to display that information.” Much like the search engine in Zhang, Facebook is clearly making editorial judgments about what information shows up in newsfeed and where to display it.

None of this changes because the generally applicable law is antitrust rather than some other form of regulation. For instance, in Tornillo, the Supreme Court took pains to distinguish the case from an earlier antitrust case against newspapers, Associated Press v. United States, which found that there was no broad exemption from antitrust under the First Amendment.

The Court foresaw the problems relating to government-enforced access as early as its decision in Associated Press v. United States, supra. There it carefully contrasted the private “compulsion to print” called for by the Association’s bylaws with the provisions of the District Court decree against appellants which “does not compel AP or its members to permit publication of anything which their `reason’ tells them should not be published.”

In other words, the Tornillo and Associated Press establish the government may not compel speech through regulation, including an antitrust remedy.

Once it is conceded that there is a speech interest here, the government must justify the use of antitrust law to compel Facebook to display the speech of users in the newsfeeds of others under the strict scrutiny test of the First Amendment. In other words, the use of antitrust law must be narrowly tailored to a compelling government interest. Even taking for granted that there may be a compelling government interest in facilitating a free and open platform (which is by no means certain), it is clear that this would not be narrowly tailored action.

First, “breaking up” Facebook is clearly overbroad as compared to the goal of promoting free speech on the platform. There is no need to break it up just because it has an Oversight Board that engages in editorial responsibilities. There are many less restrictive means, including market competition, which has greatly expanded consumer choice for communications and connections. Second, antitrust does not even really have a remedy for free speech issues complained of here, as it would require courts to engage in long-term oversight and engage in compelled speech foreclosed by Associated Press.

Note that this makes good sense from a law & economics perspective. Platforms like Facebook should be free to regulate the speech on their platforms as they see fit and consumers are free to decide which platforms they wish to use based upon that information. While there are certainly network effects to social media, the plethora of options currently available with low switching costs suggests that there is no basis for antitrust action against Facebook because consumers are unable to speak. In other words, the least restrictive means test of the First Amendment is best fulfilled by market competition in this case.

If there were a basis for antitrust intervention against Facebook, either through merger review or as a standalone monopoly claim, the underlying issue would be harm to competition. While this would have implications for speech concerns (which may be incorporated into an analysis through quality-adjusted price), it is inconceivable how an antitrust remedy could be formed on speech issues consistent with the First Amendment.

Conclusion

Despite now well-worn complaints by so-called conservatives in and out of the government about the baneful influence of Facebook and other Big Tech companies, the First Amendment forecloses government actions to violate the editorial discretion of these companies. Even if Commissioner Carr is right, this latest call for antitrust enforcement against Facebook by Senator Hawley should be rejected for principled conservative reasons.

In constitutional law, corporate speech, economics, First amendment, internet, law and economics, technology, truth on the market Commercial speech regulation, economics, First Amendment, free speech, Law and economics, platforms

Amazon’s tightrope: Balancing Innovation and competition on Amazon’s Marketplace

Sam Bowman — 27 April 2020

The Wall Street Journal reports that Amazon employees have been using data from individual sellers to identify products to compete with with its own ‘private label’ (or own-brand) products, such as AmazonBasics, Presto!, and Pinzon.

It’s implausible that this is an antitrust problem, as some have suggested. It’s extremely common for retailers to sell their own private label products and use data on how other products in their stores have sold to help development and marketing. They account for about 14–17% of overall US retail sales, and for an estimated 19% of Walmart’s and Kroger’s sales and 29% of Costco’s sales of consumer packaged goods.

And Amazon accounts for 39% of US e-commerce spending, and about 6% of all US retail spending. Any antitrust-based argument against Amazon doing this should also apply to Walmart, Kroger and Costco as well. In other words, the case against Amazon proves too much. Alec Stapp has a good discussion of these and related facts here.

However, it is interesting to think about the underlying incentives facing Amazon here, and in particular why Amazon’s company policy is not to use individual seller data to develop products (rogue employees violating this policy, notwithstanding). One possibility is that it is a way for Amazon to balance its competition with some third parties with protections for others that it sees as valuable to its platform overall.

Amazon does use aggregated seller data to develop and market its products. If two or more merchants are selling a product, Amazon’s employees can see how popular it is. This might seem like a trivial distinction, but it might exist for good reason. It could be because sellers of unique products actually do have the bargaining power to demand that Amazon does not use their data to compete with them, or for public relations reasons, although it’s not clear how successful that has been.

But another possibility is that it may be a self-imposed restraint. Amazon sells its own private label products partially because doing so is profitable (even when undercutting rivals), partially to fill holes in product lines (like clothing, where 11% of listings were Amazon private label as of November 2018), and partially because it increases users’ likelihood to use Amazon if they expect to find a reliable product from a brand they trust. According to the Journal, they account for less than 1% of Amazon’s product sales, in contrast to the 19% of revenues ($54 billion) Amazon makes from third party seller services, which includes Marketplace commissions. Any analysis that ignores that Amazon has to balance those sources of revenue, and so has to tread carefully, is deficient.

With “commodity” products (like, say, batteries and USB cables), where multiple sellers are offering very similar or identical versions of the same thing, private label competition works well for both Amazon and consumers. By Amazon’s own rules it can enter this market using aggregated data, but this doesn’t give it a significant advantage, since that data is easily obtainable from multiple sources, including Amazon itself, which makes detailed aggregated sales data freely available to third-party retailers.

But to the extent that Amazon competes against innovative third-party sellers (typically manufacturers doing direct sales, as opposed to pure retailers simply re-selling others’ products), there is a possibility that the prospect of having to compete with Amazon may diminish their incentive to develop new products and sell them on Amazon’s platform.

This is the strongest argument that is made against private label offerings in general. When they involve some level of copying an innovative product, where the innovator has been collecting above-normal profits and those profits are what spur the innovation in the first place, a private label product that comes along and copies the product effectively free rides on the innovation and captures some of its return. That may get us less innovation than society—or a platform trying to host as many innovative products as possible—would like.

While the Journal conflates these two kinds of products, Amazon’s own policies may be tailored specifically to take account of the distinction, and maximise the total value of its marketplace to consumers.

This is nominally the focus of the Journal story: a car trunk organiser company with an (apparently) innovative product says that Amazon moving in to compete with its own AmazonBasics version competed away many of its sales. In this sort of situation, the free-rider problem described above might apply where future innovation is discouraged. Why bother to invent things like this if you’re just going to have your invention ripped off?

Of course, many such innovations are protected by patents. But there may be valuable innovations that are not, and even patented innovations are not perfectly protected given the costs of enforcement. But a platform like Amazon can adopt rules that fine-tune the protections offered by the legal system in an effort to increase the value of the platform for both innovators and consumers alike.

And that may be why Amazon has its rule against using individual seller data to compete: to allow creators of new products to collect more rents from their inventions, with a promise that, unless and until their product is commodified by other means (as indicated by the product being available from multiple other sellers), Amazon won’t compete against such sellers using any special insights it might have from that seller using Amazon’s Marketplace.

This doesn’t mean Amazon refuses to compete (or refuses to allow others to compete); it has other rules that sometimes determine that boundary, as when it enters into agreements with certain brands to permit sales of the brand on the platform only by sellers authorized by the brand owner. Rather, this rule is a more limited—but perhaps no less important—one that should entice innovators to use Amazon’s platform to sell their products without concern that doing so will create a special risk that Amazon can compete away their returns using information uniquely available to it. In effect, it’s a promise that innovators won’t lose more by choosing to sell on Amazon rather than through other retail channels..

Like other platforms, to maximise its profits Amazon needs to strike a balance between being an attractive place for third party merchants to sell their goods, and being attractive to consumers by offering as many inexpensive, innovative, and reliable products as possible. Striking that balance is challenging, but a rule that restrains the platform from using its unique position to expropriate value from innovative sellers helps to protect the income of genuinely innovative third parties, and induces them to sell products consumers want on Amazon, while still allowing Amazon (and third-party sellers) to compete with commodity products.

The fact that Amazon has strong competition online and offline certainly acts as an important constraint here, too: if Amazon behaved too badly, third parties might not sell on it at all, and Amazon would have none of the seller data that is allegedly so valuable to it.

But even in a world where Amazon had a huge, sticky customer base that meant it was not an option to sell elsewhere—which the Journal article somewhat improbably implies—Amazon would still need third parties to innovate and sell things on its platform.

What the Journal story really seems to demonstrate is the sort of genuine principal-agent problem that all large businesses face: the company as a whole needs to restrain its private label section in various respects but its agents in the private label section want to break those rules to maximise their personal performance (in this case, by launching a successful new AmazonBasics product). It’s like a rogue trader at a bank who breaks the rules to make herself look good by, she hopes, getting good results.This is just one of many rules that a platform like Amazon has to preserve the value of its platform. It’s probably not the most important one. But understanding why it exists may help us to understand why simple stories of platform predation don’t add up, and help to demonstrate the mechanisms that companies like Amazon use to maximise the total value of their platform, not just one part of it.

In antitrust, economics, truth on the market Amazon, Competition law, data, platforms, private label goods, third party sellers

More Corona Testing Is Necessary, But Not Sufficient, To Get Us Back on Our Feet. Verification of Good Health Is Also Required

Hal Singer — 27 March 2020

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Hal Singer, (Managing Director, econONE; Adjunct Professor, Georgeown University, McDonough School of Business).]

In these harrowing times, it is a natural to fixate on the problem of testing—and how the United States got so far behind South Korea on this front—as a means to arrest the spread of Coronavirus. Under this remedy, once testing becomes ubiquitous, the government could track and isolate everyone who has been in recent contact with someone who has been diagnosed with Covid-19.

A good start, but there are several pitfalls from “contact tracing” or what I call “standalone testing.” First, it creates an outsized role for government and raises privacy concerns relating to how data on our movements and in-person contacts are shared. Second, unless the test results were instantaneously available and continuously updated, data from the tests would not be actionable. A subject could be clear of the virus on Tuesday, get tested on Wednesday, and be exposed to the virus on Friday.

Third, and one easily recognizable to economists, is that standalone testing does not provide any means by which healthy subjects of the test can credibly signal to their peers that they are now safe to be around. Given the skewed nature of economy towards services—from restaurants to gyms and yoga studios to coffee bars—it is vital that we interact physically. To return to work or to enter a restaurant or any other high-density environment, both the healthy subject must convey to her peers that she is healthy, and other co-workers or patrons in a high-density environment must signal their health to the subject. Without this mutual trust, healthy workers will be reluctant to return to the workplace or to integrate back into society. It is not enough for complete strangers to say “I’m safe.” How do I know you are safe?

As law professor Thom Lambert tweeted, this information problem is related to the famous lemons problem identified by Nobel laureate George Akerlof: We “can’t tell ‘quality’ so we assume everyone’s a lemon and act accordingly. We once had that problem with rides from strangers, but entrepreneurship and technology solved the problem.”

Akerlof recognized that markets were prone to failure in the face of “asymmetric information,” or when a seller knows a material fact that the buyer does not. He showed a market for used cars could degenerate into a market exclusively for lemons, because buyers rationally are not willing to pay the full value of a good car and the discount they would impose on all sellers would drive good cars away.

To solve this related problem, we need a way to verify our good health. Borrowing Lambert’s analogy, most Americans (barring hitchhikers) would never jump in a random car without knowledge that the driver worked for a reputable ride-hailing service or licensed taxi. When an Uber driver pulls up to the curb, the rider can feel confident that the driver has been verified (and vice versa) by a third party—in this case, Uber—and if there’s any doubt of the driver’s credentials, the driver typically speaks the passenger’s name when the door is still ajar. Uber also mitigated the lemons problem by allowing passengers and drivers to engage in reciprocal rating.

Similarly, when a passenger shows up at the airport, he presents a ticket, typically in electronic form on his phone, to a TSA officer. The phone is scanned by security, and verification of ticket and TSA PreCheck status is confirmed via rapid communication with the airline. The same verification is repeated at stadium venues across America, thanks in part to technology developed by StubHub.

A similar verification technology could be deployed to solve the trust problem relating to Coronavirus. It is meant to complement standalone testing. Here’s how it might work:

Each household would have a designated testing center in their community and potentially a test kit in their own homes. Testing would done routinely and free of charge, so as to ensure that test results are up to date. (Given the positive externalities associated with mass testing and verification, the optimal price is not positive.) Just as an airline sends confirmation of a ticket purchase, the company responsible for administering the test would report the results within an hour to the subject and it would store for 24 hours in the vendor’s app. In contrast to the invasive role of government in contact tracing, the only role for government here would be to approve of qualified vendors of the testing equipment.

Armed with third-party verification of her health status on her phone, the subject could present these results to a gatekeeper at any facility. Suppose the subject typically takes the metro to work, and stops at her gym before going home. Under this regime, she would present her phone to three gatekeepers (metro, work, gym) to obtain access. Of course, subjects who test positive for Coronavirus would not gain access to these secure sites until the virus left their system and they subsequently test negative. Seems harsh for them, but imposing this restriction isn’t really a degradation in mobility relative to the status quo, under which access is denied to everyone.

When I floated this idea on Twitter a few days ago, it was generally well received, but even supporters spotted potential shortcomings. For example, users could have a fraudulent app on their phones, or otherwise fake a negative result. Yet government sanctioning of a select groups of test vendors should prevent this type of fraud. Private gatekeepers such as restaurants presumably would not have to operate under any mandate; they have a clear incentive not only to restrict access to verified patrons, but also to advertise that they have strict rules on admission. By the same token, if they did, for some reason, allowed people to enter without verification, they could do so. But patrons’ concern for their own health likely would undermine such a permissive policy.

Other skeptics raised privacy concerns. But if a user voluntarily conveys her health status to a gatekeeper, so long as the information stops there, it’s hard to conceive a privacy violation. Another potential violation would be an equipment vendor’s sharing information of a user’s health status with third parties. Of course, the government could impose restrictions on a vendor’s data sharing as a condition of granting a license to test and verify. But given the circumstances, such sharing could support contact tracing, or allow supplies to be mobilized to certain areas where there are outbreaks.

Still others noted that some Americans lack phones. For these Americans, I’d suggest paper verification would suffice, or even better yet, subsidized phones.

No solution is flawless. And it’s incredible that we even have to think this way. But who could have imagined, even a few weeks ago, that we would be pinned in our basements, afraid to interact with the world in close quarters? Desperate times call for creative and economically sound measures.

In COVID-19-Response-Series, health care, regulation, truth on the market COVID, health care, information asymmetry, market failure, Markets, medical testing, platforms

The State AGs’ Investigation Against Google Needs to Put Consumers First

William Eric Rinehart — 14 January 2020

In mid-November, the 50 state attorneys general (AGs) investigating Google’s advertising practices expanded their antitrust probe to include the company’s search and Android businesses. Texas Attorney General Ken Paxton, the lead on the case, was supportive of the development, but made clear that other states would manage the investigations of search and Android separately. While attorneys might see the benefit in splitting up search and advertising investigations, platforms like Google need to be understood as a coherent whole. If the state AGs case is truly concerned with the overall impact on the welfare of consumers, it will need to be firmly grounded in the unique economics of this platform.

Back in September, 50 state AGs, including those in Washington, DC and Puerto Rico, announced an investigation into Google. In opening the case, Paxton said that, “There is nothing wrong with a business becoming the biggest game in town if it does so through free market competition, but we have seen evidence that Google’s business practices may have undermined consumer choice, stifled innovation, violated users’ privacy, and put Google in control of the flow and dissemination of online information.” While the original document demands focused on Google’s “overarching control of online advertising markets and search traffic,” reports since then suggest that the primary investigation centers on online advertising.

Defining the market

Since the market definition is the first and arguably the most important step in an antitrust case, Paxton has tipped his hand and shown that the investigation is converging on the online ad market. Yet, he faltered when he wrote in The Wall Street Journal that, “Each year more than 90% of Google’s $117 billion in revenue comes from online advertising. For reference, the entire market for online advertising is around $130 billion annually.” As Patrick Hedger of the Competitive Enterprise Institute was quick to note, Paxton cited global revenue numbers and domestic advertising statistics. In reality, Google’s share of the online advertising market in the United States is 37 percent and is widely expected to fall.

When Google faced scrutiny by the Federal Trade Commission in 2013, the leaked staff report explained that “the Commission and the Department of Justice have previously found online ‘search advertising’ to be a distinct product market.” This finding, which dates from 2007, simply wouldn’t stand today. Facebook’s ad platform was launched in 2007 and has grown to become a major competitor to Google. Even more recently, Amazon has jumped into the space and independent platforms like Telaria, Rubicon Project, and The Trade Desk have all made inroads. In contrast to the late 2000s, advertisers now use about four different online ad platforms.

Moreover, the relationship between ad prices and industry concentration is complicated. In traditional economic analysis, fewer suppliers of a product generally translates into higher prices. In the online ad market, however, fewer advertisers means that ad buyers can efficiently target people through keywords. Because advertisers have access to superior information, research finds that more concentration tends to lead to lower search engine revenues.

The addition of new fronts in the state AGs’ investigation could spell disaster for consumers. While search and advertising are distinct markets, it is the act of tying the two together that makes platforms like Google valuable to users and advertisers alike. Demand is tightly integrated between the two sides of the platform. Changes in user and advertiser preferences have far outsized effects on the overall platform value because each side responds to the other. If users experience an increase in price or a reduction in quality, then they will use the platform less or just log off completely. Advertisers see this change in users and react by reducing their demand for ad placements as well. When advertisers drop out, the total amount of content also recedes and users react once again. Economists call these relationships demand interdependencies. The demand on one side of the market is interdependent with demand on the other. Research on magazines, newspapers, and social media sites all support the existence of demand interdependencies.

Economists David Evans and Richard Schmalensee, who were cited extensively in the Supreme Court case Ohio v. American Express, explained the importance of their integration into competition analysis, “The key point is that it is wrong as a matter of economics to ignore significant demand interdependencies among the multiple platform sides” when defining markets. If they are ignored, then the typical analytical tools will yield incorrect assessments. Understanding these relationships makes the investigation all that more difficult.

The limits of remedies

Most likely, this current investigation will follow the trajectory of Microsoft in the 1990s when states did the legwork for a larger case brought by the Department of Justice (DoJ). The DoJ already has its own investigation into Google and will probably pull together all of the parties for one large suit. Google is also subject to a probe by the House of Representatives Judiciary Committee as well. What is certain is that Google will be saddled with years of regulatory scrutiny, but what remains unclear is what kind of changes the AGs are after.

The investigation might aim to secure behavioral changes, but these often come with a cost in platform industries. The European Commission, for example, got Google to change its practices with its Android operating system for mobile phones. Much like search and advertising, the Android ecosystem is a platform with cross subsidization and demand interdependencies between the various sides of the market. Because the company was ordered to stop tying the Android operating system to apps, manufacturers of phones and tablets now have to pay a licensing fee in Europe if they want Google’s apps and the Play Store. Remedies meant to change one side of the platform resulted in those relationships being unbundled. When regulators force cross subsidization to become explicit prices, consumers are the one who pay.

The absolute worst case scenario would be a break up of Google, which has been a centerpiece of Senator Elizabeth Warren’s presidential platform. As I explained last year, that would be a death warrant for the company:

[T]he value of both Facebook and Google comes in creating the platform, which combines users with advertisers. Before the integration of ad networks, the search engine industry was struggling and it was simply not a major player in the Internet ecosystem. In short, the search engines, while convenient, had no economic value. As Michael Moritz, a major investor of Google, said of those early years, “We really couldn’t figure out the business model. There was a period where things were looking pretty bleak.” But Google didn’t pave the way. Rather, Bill Gross at GoTo.com succeeded in showing everyone how advertising could work to build a business. Google founders Larry Page and Sergey Brin merely adopted the model in 2002 and by the end of the year, the company was profitable for the first time. Marrying the two sides of the platform created value. Tearing them apart will also destroy value.

The state AGs need to resist making this investigation into a political showcase. As Pew noted in documenting the rise of North Carolina Attorney General Josh Stein to national prominence, “What used to be a relatively high-profile position within a state’s boundaries has become a springboard for publicity across the country.” While some might cheer the opening of this investigation, consumer welfare needs to be front and center. To properly understand how consumer welfare might be impacted by an investigation, the state AGs need to take seriously the path already laid out by platform economics. For the sake of consumers, let’s hope they are up to the task.

In antitrust, economics, market definition, markets, truth on the market Advertising, antitrust and platforms, google, Google Search, online advertising, platforms, two-sided markets

The Real Story about Amazon, Counterfeit Listings, and Minimum Advertised Price (MAP) Policies

Manne, Stout & Stapp — 13 September 2019

These days, lacking a coherent legal theory presents no challenge to the would-be antitrust crusader. In a previous post, we noted how Shaoul Sussman’s predatory pricing claims against Amazon lacked a serious legal foundation. Sussman has returned with a new post, trying to build out his fledgling theory, but fares little better under even casual scrutiny.

According to Sussman, Amazon’s allegedly anticompetitive

conduct not only cemented its role as the primary destination for consumers that shop online but also helped it solidify its power over brands.

Further, the company

was willing to go to great lengths to ensure brand availability and inventory, including turning to the grey market, recruiting unauthorized sellers, and even selling diverted goods and counterfeits to its customers.

Sussman is trying to make out a fairly convoluted predatory pricing case, but once again without ever truly connecting the dots in a way that develops a cognizable antitrust claim. According to Sussman:

Amazon sold products as a first-party to consumers on its platform at below average variable cost and [] Amazon recently began to recoup its losses by shifting the bulk of the transactions that occur on the website to its marketplace, where millions of third-party sellers pay hefty fees that enable Amazon to take a deep cut of every transaction.

Sussman now bases this claim on an allegation that Amazon relied on “grey market” sellers on its platform, the presence of which forces legitimate brands onto the Amazon Marketplace. Moreover, Sussman claims that — somehow — these brands coming on board on Amazon’s terms forces those brands raise prices elsewhere, and the net effect of this process at scale is that prices across the economy have risen.

As we detail below, Sussman’s chimerical argument depends on conflating unrelated concepts and relies on non-public anecdotal accounts to piece together an argument that, even if you squint at it, doesn’t make out a viable theory of harm.

Conflating legal reselling and illegal counterfeit selling as the “grey market”

The biggest problem with Sussman’s new theory is that he conflates pro-consumer unauthorized reselling and anti-consumer illegal counterfeiting, erroneously labeling both the “grey market”:

Amazon had an ace up its sleeve. My sources indicate that the company deliberately turned to and empowered the “grey market“ — where both genuine, authentic goods and knockoffs are purchased and resold outside of brands’ intended distribution pipes — to dominate certain brands.

By definition, grey market goods are — as the link provided by Sussman states — “goods sold outside the authorized distribution channels by entities which may have no relationship with the producer of the goods.” Yet Sussman suggests this also encompasses counterfeit goods. This conflation is no minor problem for his argument. In general, the grey market is legal and beneficial for consumers. Brands such as Nike may try to limit the distribution of their products to channels the company controls, but they cannot legally prevent third parties from purchasing Nike products and reselling them on Amazon (or anywhere else).

This legal activity can increase consumer choice and can lead to lower prices, even though Sussman’s framing omits these key possibilities:

In the course of my conversations with former Amazon employees, some reported that Amazon actively sought out and recruited unauthorized sellers as both third-party sellers and first-party suppliers. Being unauthorized, these sellers were not bound by the brands’ policies and therefore outside the scope of their supervision.

In other words, Amazon actively courted third-party sellers who could bring legitimate goods, priced competitively, onto its platform. Perhaps this gives Amazon “leverage” over brands that would otherwise like to control the activities of legal resellers, but it’s exceedingly strange to try to frame this as nefarious or anticompetitive behavior.

Of course, we shouldn’t ignore the fact that there are also potential consumer gains when Amazon tries to restrict grey market activity by partnering with brands. But it is up to Amazon and the brands to determine through a contracting process when it makes the most sense to partner and control the grey market, or when consumers are better served by allowing unauthorized resellers. The point is: there is simply no reason to assume that either of these approaches is inherently problematic.

Yet, even when Amazon tries to restrict its platform to authorized resellers, it exposes itself to a whole different set of complaints. In 2018, the company made a deal with Apple to bring the iPhone maker onto its marketplace platform. In exchange for Apple selling its products directly on Amazon, the latter agreed to remove unauthorized Apple resellers from the platform. Sussman portrays this as a welcome development in line with the policy changes he recommends.

But news reports last month indicate the FTC is reviewing this deal for potential antitrust violations. One is reminded of Ronald Coase’s famous lament that he “had gotten tired of antitrust because when the prices went up the judges said it was monopoly, when the prices went down they said it was predatory pricing, and when they stayed the same they said it was tacit collusion.” It seems the same is true for Amazon and its relationship with the grey market.

Amazon’s incentive to remove counterfeits

What is illegal — and explicitly against Amazon’s marketplace rules — is selling counterfeit goods. Counterfeit goods destroy consumer trust in the Amazon ecosystem, which is why the company actively polices its listings for abuses. And as Sussman himself notes, when there is an illegal counterfeit listing, “Brands can then file a trademark infringement lawsuit against the unauthorized seller in order to force Amazon to suspend it.”

Sussman’s attempt to hang counterfeiting problems around Amazon’s neck belies the actual truth about counterfeiting: probably the most cost-effective way to stop counterfeiting is simply to prohibit all third-party sellers. Yet, a serious cost-benefit analysis of Amazon’s platforms could hardly support such an action (and would harm the small sellers that antitrust activists seem most concerned about).

But, more to the point, if Amazon’s strategy is to encourage piracy, it’s doing a terrible job. It engages in litigation against known pirates, and earlier this year it rolled out a suite of tools (called Project Zero) meant to help brand owners report and remove known counterfeits. As part of this program, according to Amazon, “brands provide key data points about themselves (e.g., trademarks, logos, etc.) and we scan over 5 billion daily listing update attempts, looking for suspected counterfeits.” And when a brand identifies a counterfeit listing, they can remove it using a self-service tool (without needing approval from Amazon).

Any large platform that tries to make it easy for independent retailers to reach customers is going to run into a counterfeit problem eventually. In his rush to discover some theory of predatory pricing to stick on Amazon, Sussman ignores the tradeoffs implicit in running a large platform that essentially democratizes retail:

Indeed, the democratizing effect of online platforms (and of technology writ large) should not be underestimated. While many are quick to disparage Amazon’s effect on local communities, these arguments fail to recognize that by reducing the costs associated with physical distance between sellers and consumers, e-commerce enables even the smallest merchant on Main Street, and the entrepreneur in her garage, to compete in the global marketplace.

In short, Amazon Marketplace is designed to make it as easy as possible for anyone to sell their products to Amazon customers. As the WSJ reported:

Counterfeiters, though, have been able to exploit Amazon’s drive to increase the site’s selection and offer lower prices. The company has made the process to list products on its website simple—sellers can register with little more than a business name, email and address, phone number, credit card, ID and bank account—but that also has allowed impostors to create ersatz versions of hot-selling items, according to small brands and seller consultants.

The existence of counterfeits is a direct result of policies designed to lower prices and increase consumer choice. Thus, we would expect some number of counterfeits to exist as a result of running a relatively open platform. The question is not whether counterfeits exist, but — at least in terms of Sussman’s attempt to use antitrust law — whether there is any reason to think that Amazon’s conduct with respect to counterfeits is actually anticompetitive. But, even if we assume for the moment that there is some plausible way to draw a competition claim out of the existence of counterfeit goods on the platform, his theory still falls apart.

There is both theoretical and empirical evidence for why Amazon is likely not engaged in the conduct Sussman describes. As a platform owner involved in a repeated game with customers, sellers, and developers, Amazon has an incentive to increase trust within the ecosystem. Counterfeit goods directly destroy that trust and likely decrease sales in the long run. If individuals can’t depend on the quality of goods on Amazon, they can easily defect to Walmart, eBay, or any number of smaller independent sellers. That’s why Amazon enters into agreements with companies like Apple to ensure there are only legitimate products offered. That’s also why Amazon actively sues counterfeiters in partnership with its sellers and brands, and also why Project Zero is a priority for the company.

Sussman relies on private, anecdotal claims while engaging in speculation that is entirely unsupported by public data

Much of Sussman’s evidence is “[b]ased on conversations [he] held with former employees, sellers, and brands following the publication of [his] paper”, which — to put it mildly — makes it difficult for anyone to take seriously, let alone address head on. Here’s one example:

One third-party seller, who asked to remain anonymous, was willing to turn over his books for inspection in order to illustrate the magnitude of the increase in consumer prices. Together, we analyzed a single product, of which tens of thousands of units have been sold since 2015. The minimum advertised price for this single product, at any and all outlets, has increased more than 30 percent in the past four years. Despite this fact, this seller’s margins on this product are tighter than ever due to Amazon’s fee increases.

Needless to say, sales data showing the minimum advertised price for a single product “has increased more than 30 percent in the past four years” is not sufficient to prove, well, anything. At minimum, showing an increase in prices above costs would require data from a large and representative sample of sellers. All we have to go on from the article is a vague anecdote representing — maybe — one data point.

Not only is Sussman’s own data impossible to evaluate, but he bases his allegations on speculation that is demonstrably false. For instance, he asserts that Amazon used its leverage over brands in a way that caused retail prices to rise throughout the economy. But his starting point assumption is flatly contradicted by reality:

To remedy this, Amazon once again exploited brands’ MAP policies. As mentioned, MAP policies effectively dictate the minimum advertised price of a given product across the entire retail industry. Traditionally, this meant that the price of a typical product in a brick and mortar store would be lower than the price online, where consumers are charged an additional shipping fee at checkout.

Sussman presents no evidence for the claim that “the price of a typical product in a brick and mortar store would be lower than the price online.” The widespread phenomenon of showrooming — when a customer examines a product at a brick-and-mortar store but then buys it for a lower price online — belies the notion that prices are higher online. One recent study by Nielsen found that “nearly 75% of grocery shoppers have used a physical store to ‘showroom’ before purchasing online.”

In fact, the company’s downward pressure on prices is so large that researchers now speculate that Amazon and other internet retailers are partially responsible for the low and stagnant inflation in the US over the last decade (dubbing this the “Amazon effect”). It is also curious that Sussman cites shipping fees as the reason prices are higher online while ignoring all the overhead costs of running a brick-and-mortar store which online retailers don’t incur. The assumption that prices are lower in brick-and-mortar stores doesn’t pass the laugh test.

Conclusion

Sussman can keep trying to tell a predatory pricing story about Amazon, but the more convoluted his theories get — and the less based in empirical reality they are — the less convincing they become. There is a predatory pricing law on the books, but it’s hard to bring a case because, as it turns out, it’s actually really hard to profitably operate as a predatory pricer. Speculating over complicated new theories might be entertaining, but it would be dangerous and irresponsible if these sorts of poorly supported theories were incorporated into public policy.

In antitrust, truth on the market Amazon, antitrust, antitrust populism, platforms, predatory pricing

Breaking up Amazon? Platforms, Private Labels and Entry

Randal C. Picker — 17 July 2019

[This post is the first in an ongoing symposium on “Should We Break Up Big Tech?” that will feature analysis and opinion from various perspectives.]

[This post is authored by Randal C. Picker, James Parker Hall Distinguished Service Professor of Law at The University of Chicago Law School]

The European Commission just announced that it is investigating Amazon. The Commission’s concern is that Amazon is simultaneously acting as a ref and player: Amazon sells goods directly as a first party but also operates a platform on which it hosts goods sold by third parties (resellers) and those goods sometimes compete. And, next step, Amazon is said to choose which markets to enter as a private-label seller at least in part by utilizing information it gleans from the third-party sales it hosts.

Assuming there is a problem …

Were Amazon’s activities thought to be a problem, the natural remedies, whether through antitrust or more direct sector, industry-specific regulation, might be to bar Amazon from both being a direct seller and a platform. India has already passed a statute that effectuates some of those results, though it seems targeted at non-domestic companies.

A broad regulation that barred Amazon from being simultaneously a seller of first-party inventory and of third-party inventory presumably would lead to a dissolution of the company into separate companies in each of those businesses. A different remedy—a classic that goes back at least as far in the United States as the 1887 Commerce Act—would be to impose some sort of nondiscrimination obligation on Amazon and perhaps to couple that with some sort of business-line restriction—a quarantine—that would bar Amazon from entering markets though private labels.

But is there a problem?

Private labels have been around a long time and large retailers have faced buy-vs.-build decisions along the way. Large, sophisticated retailers like A&P in a different era and Walmart and Costco today, just to choose two examples, are constantly rebalancing their inventory between that which they buy from third parties and that which they produce for themselves. As I discuss below, being a platform matters for the buy-vs.-build decision, but it is far from clear that being both a store and a platform simultaneously matters importantly for how we should look at these issues.

Of course, when Amazon opened for business in July 1995 it didn’t quite face these issues immediately. Amazon sold books—it billed itself as “Earth’s Biggest Bookstore”—but there is no private label possibility for books, no effort to substitute into just selling say “The Wit and Wisdom of Jeff Bezos.” You could of course build an ebooks platform—call that a Kindle—but that would be a decade or so down the road. But as Amazon expanded into more pedestrian goods, it would, like other retailers, naturally make decisions about which inventory to source internally and which to buy from third parties.

In September 1999, Amazon opened up what was being described as an online mall. Amazon called it zShops and the idea was clear: many customers came to Amazon to buy things that Amazon wasn’t offering and Amazon would bring that audience and a variety of transaction services to third parties. Third parties would in turn pay Amazon a monthly fee and a variety of transaction fees. Amazon CEO Jeff Bezos noted (as reported in The Wall Street Journal) that those prices had been set in a way to make Amazon generally “neutral” in choosing whether to enter a market through first-party inventory or through third-party inventory.

Note that a traditional retailer and the original Amazon faced a natural question which was which goods to carry in inventory? When Amazon opened its platform, Amazon changed powerfully the question of which goods to stock. Even a Walmart Supercenter has limited physical shelf space and has to take something off of the shelves to stock a new product. By becoming a platform, Amazon largely outsourced the product selection and shelf space allocation question to third parties. The new Amazon resellers would get access to Amazon’s substantial customer base—its audience—and to a variety of transactional services that Amazon would provide them.

An online retailer has some real informational advantages over physical stores, as the online retailer sees every product that customers search for. It is much harder, though not impossible, for a physical store to capture that information. But as Amazon became a platform it would no longer just observe search queries for goods but it would see actual sales by the resellers. And a physical store isn’t a platform in the way that Amazon is as the physical store is constrained by limited shelf space. But the real target here is the marginal information Amazon gets from third-party sales relative to what it would see from product searches at Amazon, its own first-party sales and from clicks on the growing amount of advertising it sells on its website.

All of that might matter for running product and inventory experiments and the corresponding pace of learning what goods customers want at what price. A physical store has to remove some item from its shelves to experiment with a new item and has to buy the item to stock it, though how much of a risk it is taking there will depend on whether the retailer can return unsold goods to the inventory supplier. A platform retailer like Amazon doesn’t have to make those tradeoffs and an online mall could offer almost an infinite inventory of items. A store or product ready for every possible search.

A possible strategy

All of this suggests a possible business strategy for a platform: let third parties run inventory experiments where the platform gets to see the results. Products that don’t sell are failed experiments and the platform doesn’t enter those markets. But when a third-party sells a product in real numbers, start selling that product as first-party inventory. Amazon then would face buy vs. build on that and that should make clear that the private brands question is distinct from the question of whether Amazon can leverage third-party reseller information to their detriment. It can certainly do just that by buying competing goods from a wholesaler and stocking that item as first-party Amazon inventory.

If Amazon is playing this strategy, it seems to be playing it slowly and poorly. Amazon CEO Jeff Bezos includes a letter each year to open Amazon’s annual report to shareholders. In the 2018 letter, Bezos opened by noting that “[s]omething strange and remarkable has happened over the last 20 years.” What was that? In 1999, the relevant number was 3%; five years later, in 2004, it was 25%, then 31% in 2009, 49% in 2014 and 58% in 2018. These were the percentage of physical gross merchandise sales by third-party sellers through Amazon. In 1993, 97% of Amazon’s sales were of its own first-party inventory but the percentage of third-party sales had steadily risen over 20 years and over the last four years of that period, third-party inventory sales exceeded Amazon’s own internal sales. As Bezos noted, Amazon’s first-party sales had grown dramatically—a 25% annual compound growth rate over that period—but in 2018, total third-party sales revenues were $160 billion while Amazon’s own first-party sales were at $117 billion. Bezos had a perspective on all of that—“Third-party sellers are kicking our first party butt. Badly.”—but if you believed the original vision behind creating the Amazon platform, Amazon should be indifferent between first-party sales and third-party sales, as long as all of that happens at Amazon.

This isn’t new

Given all of that, it isn’t crystal clear to me why Amazon gets as much attention as it does. The heart of this dynamic isn’t new. Sears started its catalogue business in 1888 and then started using the Craftsman and Kenmore brands as in-house brands in 1927. Sears was acquiring inventory from third parties and obviously knew exactly which ones were selling well and presumably made decisions about which markets to enter and which to stay out of based on that information. Walmart, the nation’s largest retailer, has a number of well-known private brands and firms negotiating with Walmart know full well that Walmart can enter their markets, subject of course to otherwise applicable restraints on entry such as intellectual property laws.

As suggested above, I think that is possible to tease out advantages that a platform has regarding inventory experimentation. It can outsource some of those costs to third parties, though sophisticated third parties should understand where they can and cannot have a sustainable advantage given Amazon’s ability to move to build-or-bought first-party inventory. We have entire bodies of law— copyright, patent, trademark and more—that limit the ability of competitors to appropriate works, inventions and symbols. Those legal systems draw very carefully considered lines regarding permitted and forbidden uses. And antitrust law generally favors entry into markets and doesn’t look to create barriers that block firms, large or small, from entering new markets.

In conclusion

There is a great deal more to say about a company as complex as Amazon, but two thoughts in closing. One story here is that Amazon has built a superior business model in combining first-party and third-party inventory sales and that is exactly the kind of business model innovation that we should applaud. Amazon has enjoyed remarkable growth but Walmart is still vastly larger than Amazon (ballpark numbers for 2018 are roughly $510 billion in net sales for Walmart vs. roughly $233 billion for Amazon – including all 3^rd party sales, as well as Amazon Web Services). The second story is the remarkable growth of sales by resellers at Amazon.

If Amazon is creating private-label goods based on information it sees on its platform, nothing suggests that it is doing that particularly rapidly. And even if it is entering those markets, it still might do that were we to break up Amazon and separate the platform piece of Amazon (call it Amazon Platform) from the original first-party version of Amazon (say Amazon Classic) as traditional retailers have for a very, very long time been making buy-vs.-build decisions on their first-party inventory and using their internal information to make those decisions.

In break up big tech symposium, truth on the market Amazon, antitrust and platforms, entry barriers, platforms

There’s nothing “conservative” about Trump’s views on free speech and the regulation of social media

Ben Sperry — 12 July 2019

Yesterday was President Trump’s big “Social Media Summit” where he got together with a number of right-wing firebrands to decry the power of Big Tech to censor conservatives online. According to the Wall Street Journal:

Mr. Trump attacked social-media companies he says are trying to silence individuals and groups with right-leaning views, without presenting specific evidence. He said he was directing his administration to “explore all legislative and regulatory solutions to protect free speech and the free speech of all Americans.”
“Big Tech must not censor the voices of the American people,” Mr. Trump told a crowd of more than 100 allies who cheered him on. “This new technology is so important and it has to be used fairly.”

Despite the simplistic narrative tying President Trump’s vision of the world to conservatism, there is nothing conservative about his views on the First Amendment and how it applies to social media companies.

I have noted in several places before that there is a conflict of visions when it comes to whether the First Amendment protects a negative or positive conception of free speech. For those unfamiliar with the distinction: it comes from philosopher Isaiah Berlin, who identified negative liberty as freedom from external interference, and positive liberty as freedom to do something, including having the power and resources necessary to do that thing. Discussions of the First Amendment’s protection of free speech often elide over this distinction.

With respect to speech, the negative conception of liberty recognizes that individual property owners can control what is said on their property, for example. To force property owners to allow speakers/speech on their property that they don’t desire would actually be a violation of their liberty — what the Supreme Court calls “compelled speech.” The First Amendment, consistent with this view, generally protects speech from government interference (with very few, narrow exceptions), while allowing private regulation of speech (again, with very few, narrow exceptions).

Contrary to the original meaning of the First Amendment and the weight of Supreme Court precedent, President Trump’s view of the First Amendment is that it protects a positive conception of liberty — one under which the government, in order to facilitate its conception of “free speech,” has the right and even the duty to impose restrictions on how private actors regulate speech on their property (in this case, social media companies).

But if Trump’s view were adopted, discretion as to what is necessary to facilitate free speech would be left to future presidents and congresses, undermining the bedrock conservative principle of the Constitution as a shield against government regulation, all falsely in the name of protecting speech. This is counter to the general approach of modern conservatism (but not, of course, necessarily Republicanism) in the United States, including that of many of President Trump’s own judicial and agency appointees. Indeed, it is actually more consistent with the views of modern progressives — especially within the FCC.

For instance, the current conservative bloc on the Supreme Court (over the dissent of the four liberal Justices) recently reaffirmed the view that the First Amendment applies only to state action in Manhattan Community Access Corp. v. Halleck. The opinion, written by Trump-appointee, Justice Brett Kavanaugh, states plainly that:

Ratified in 1791, the First Amendment provides in relevant part that “Congress shall make no law . . . abridging the freedom of speech.” Ratified in 1868, the Fourteenth Amendment makes the First Amendment’s Free Speech Clause applicable against the States: “No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law . . . .” §1. The text and original meaning of those Amendments, as well as this Court’s longstanding precedents, establish that the Free Speech Clause prohibits only governmental abridgment of speech. The Free Speech Clause does not prohibit private abridgment of speech… In accord with the text and structure of the Constitution, this Court’s state-action doctrine distinguishes the government from individuals and private entities. By enforcing that constitutional boundary between the governmental and the private, the state-action doctrine protects a robust sphere of individual liberty. (Emphasis added).

Former Stanford Law dean and First Amendment scholar, Kathleen Sullivan, has summed up the very different approaches to free speech pursued by conservatives and progressives (insofar as they are represented by the “conservative” and “liberal” blocs on the Supreme Court):

In the first vision…, free speech rights serve an overarching interest in political equality. Free speech as equality embraces first an antidiscrimination principle: in upholding the speech rights of anarchists, syndicalists, communists, civil rights marchers, Maoist flag burners, and other marginal, dissident, or unorthodox speakers, the Court protects members of ideological minorities who are likely to be the target of the majority’s animus or selective indifference…. By invalidating conditions on speakers’ use of public land, facilities, and funds, a long line of speech cases in the free-speech-as-equality tradition ensures public subvention of speech expressing “the poorly financed causes of little people.” On the equality-based view of free speech, it follows that the well-financed causes of big people (or big corporations) do not merit special judicial protection from political regulation. And because, in this view, the value of equality is prior to the value of speech, politically disadvantaged speech prevails over regulation but regulation promoting political equality prevails over speech.
The second vision of free speech, by contrast, sees free speech as serving the interest of political liberty. On this view…, the First Amendment is a negative check on government tyranny, and treats with skepticism all government efforts at speech suppression that might skew the private ordering of ideas. And on this view, members of the public are trusted to make their own individual evaluations of speech, and government is forbidden to intervene for paternalistic or redistributive reasons. Government intervention might be warranted to correct certain allocative inefficiencies in the way that speech transactions take place, but otherwise, ideas are best left to a freely competitive ideological market.
The outcome of Citizens United is best explained as representing a triumph of the libertarian over the egalitarian vision of free speech. Justice Kennedy’s opinion for the Court, joined by Chief Justice Roberts and Justices Scalia, Thomas, and Alito, articulates a robust vision of free speech as serving political liberty; the dissenting opinion by Justice Stevens, joined by Justices Ginsburg, Breyer, and Sotomayor, sets forth in depth the countervailing egalitarian view. (Emphasis added).

President Trump’s views on the regulation of private speech are alarmingly consistent with those embraced by the Court’s progressives to “protect[] members of ideological minorities who are likely to be the target of the majority’s animus or selective indifference” — exactly the sort of conservative “victimhood” that Trump and his online supporters have somehow concocted to describe themselves.

Trump’s views are also consistent with those of progressives who, since the Reagan FCC abolished it in 1987, have consistently angled for a resurrection of some form of fairness doctrine, as well as other policies inconsistent with the “free-speech-as-liberty” view. Thus Democratic commissioner Jessica Rosenworcel takes a far more interventionist approach to private speech:

The First Amendment does more than protect the interests of corporations. As courts have long recognized, it is a force to support individual interest in self-expression and the right of the public to receive information and ideas. As Justice Black so eloquently put it, “the widest possible dissemination of information from diverse and antagonistic sources is essential to the welfare of the public.” Our leased access rules provide opportunity for civic participation. They enhance the marketplace of ideas by increasing the number of speakers and the variety of viewpoints. They help preserve the possibility of a diverse, pluralistic medium—just as Congress called for the Cable Communications Policy Act… The proper inquiry then, is not simply whether corporations providing channel capacity have First Amendment rights, but whether this law abridges expression that the First Amendment was meant to protect. Here, our leased access rules are not content-based and their purpose and effect is to promote free speech. Moreover, they accomplish this in a narrowly-tailored way that does not substantially burden more speech than is necessary to further important interests. In other words, they are not at odds with the First Amendment, but instead help effectuate its purpose for all of us. (Emphasis added).

Consistent with the progressive approach, this leaves discretion in the hands of “experts” (like Rosenworcel) to determine what needs to be done in order to protect the underlying value of free speech in the First Amendment through government regulation, even if it means compelling speech upon private actors.

Trump’s view of what the First Amendment’s free speech protections entail when it comes to social media companies is inconsistent with the conception of the Constitution-as-guarantor-of-negative-liberty that conservatives have long embraced.

Of course, this is not merely a “conservative” position; it is fundamental to the longstanding bipartisan approach to free speech generally and to the regulation of online platforms specifically. As a diverse group of 75 scholars and civil society groups (including ICLE) wrote yesterday in their “Principles for Lawmakers on Liability for User-Generated Content Online”:

Principle #2: Any new intermediary liability law must not target constitutionally protected speech.
The government shouldn’t require—or coerce—intermediaries to remove constitutionally protected speech that the government cannot prohibit directly. Such demands violate the First Amendment. Also, imposing broad liability for user speech incentivizes services to err on the side of taking down speech, resulting in overbroad censorship—or even avoid offering speech forums altogether.

As those principles suggest, the sort of platform regulation that Trump, et al. advocate — essentially a “fairness doctrine” for the Internet — is the opposite of free speech:

Principle #4: Section 230 does not, and should not, require “neutrality.”
Publishing third-party content online never can be “neutral.” Indeed, every publication decision will necessarily prioritize some content at the expense of other content. Even an “objective” approach, such as presenting content in reverse chronological order, isn’t neutral because it prioritizes recency over other values. By protecting the prioritization, de-prioritization, and removal of content, Section 230 provides Internet services with the legal certainty they need to do the socially beneficial work of minimizing harmful content.

The idea that social media should be subject to a nondiscrimination requirement — for which President Trump and others like Senator Josh Hawley have been arguing lately — is flatly contrary to Section 230 — as well as to the First Amendment.

Conservatives upset about “social media discrimination” need to think hard about whether they really want to adopt this sort of position out of convenience, when the tradition with which they align rejects it — rightly — in nearly all other venues. Even if you believe that Facebook, Google, and Twitter are trying to make it harder for conservative voices to be heard (despite all evidence to the contrary), it is imprudent to reject constitutional first principles for a temporary policy victory. In fact, there’s nothing at all “conservative” about an abdication of the traditional principle linking freedom to property for the sake of political expediency.

In constitutional political economy, corporate speech, google, internet, regulation, technology, truth on the market conservative, First Amendment, free speech, platforms, regulation, regulatory overreach, social media, social media summit, trump, United States Constitution

Archives For platforms

Share this:

Like this:

Killer acquisitions

Recommendations

Share this:

Like this:

Competition law on a spectrum

Enforcement

The empty quadrant

An evolutionary explanation?

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

The First Amendment restricts government action, not private action

The First Amendment restricts antitrust actions against Facebook, not Facebook’s editorial discretion over its platform

Conclusion

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Defining the market

The limits of remedies

Share this:

Like this:

Conflating legal reselling and illegal counterfeit selling as the “grey market”

Amazon’s incentive to remove counterfeits

Sussman relies on private, anecdotal claims while engaging in speculation that is entirely unsupported by public data

Conclusion

Share this:

Like this:

Assuming there is a problem …

But is there a problem?

A possible strategy

This isn’t new

In conclusion

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