The wave of populist antitrust that has been embraced by regulators and legislators in the United States, United Kingdom, European Union, and other jurisdictions rests on the assumption that currently dominant platforms occupy entrenched positions that only government intervention can dislodge. Following this view, Facebook will forever dominate social networking, Amazon will forever dominate cloud computing, Uber and Lyft will forever dominate ridesharing, and Amazon and Netflix will forever dominate streaming. This assumption of platform invincibility is so well-established that some policymakers advocate significant interventions without making any meaningful inquiry into whether a seemingly dominant platform actually exercises market power.
Yet this assumption is not supported by historical patterns in platform markets. It is true that network effects drive platform markets toward “winner-take-most” outcomes. But the winner is often toppled quickly and without much warning. There is no shortage of examples.
In 2007, a columnist in The Guardian observed that “it may already be too late for competitors to dislodge MySpace” and quoted an economist as authority for the proposition that “MySpace is well on the way to becoming … a natural monopoly.” About one year later, Facebook had overtaken MySpace “monopoly” in the social-networking market. Similarly, it was once thought that Blackberry would forever dominate the mobile-communications device market, eBay would always dominate the online e-commerce market, and AOL would always dominate the internet-service-portal market (a market that no longer even exists). The list of digital dinosaurs could go on.
All those tech leaders were challenged by entrants and descended into irrelevance (or reduced relevance, in eBay’s case). This occurred through the force of competition, not government intervention.
Why This Time is Probably Not Different
Given this long line of market precedents, current legislative and regulatory efforts to “restore” competition through extensive intervention in digital-platform markets require that we assume that “this time is different.” Just as that slogan has been repeatedly rebutted in the financial markets, so too is it likely to be rebutted in platform markets.
There is already supporting evidence.
In the cloud market, Amazon’s AWS now faces vigorous competition from Microsoft Azure and Google Cloud. In the streaming market, Amazon and Netflix face stiff competition from Disney+ and Apple TV+, just to name a few well-resourced rivals. In the social-networking market, Facebook now competes head-to-head with TikTok and seems to be losing. The market power once commonly attributed to leading food-delivery platforms such as Grubhub, UberEats, and DoorDash is implausible after persistent losses in most cases, and the continuous entry of new services into a rich variety of local and product-market niches.
Those who have advocated antitrust intervention on a fast-track schedule may remain unconvinced by these inconvenient facts. But the market is not.
Investors have already recognized Netflix’s vulnerability to competition, as reflected by a 35% fall in its stock price on April 20 and a decline of more than 60% over the past 12 months. Meta, Facebook’s parent, also experienced a reappraisal, falling more than 26% on Feb. 3 and more than 35% in the past 12 months. Uber, the pioneer of the ridesharing market, has declined by almost 50% over the past 12 months, while Lyft, its principal rival, has lost more than 60% of its value. These price freefalls suggest that antitrust populists may be pursuing solutions to a problem that market forces are already starting to address.
The Forgotten Curse of the Incumbent
For some commentators, the sharp downturn in the fortunes of the so-called “Big Tech” firms would not come as a surprise.
It has long been observed by some scholars and courts that a dominant firm “carries the seeds of its own destruction”—a phrase used by then-professor and later-Judge Richard Posner, writing in the University of Chicago Law Review in 1971. The reason: a dominant firm is liable to exhibit high prices, mediocre quality, or lackluster innovation, which then invites entry by more adept challengers. However, this view has been dismissed as outdated in digital-platform markets, where incumbents are purportedly protected by network effects and switching costs that make it difficult for entrants to attract users. Depending on the set of assumptions selected by an economic modeler, each contingency is equally plausible in theory.
The plunging values of leading platforms supplies real-world evidence that favors the self-correction hypothesis. It is often overlooked that network effects can work in both directions, resulting in a precipitous fall from market leader to laggard. Once users start abandoning a dominant platform for a new competitor, network effects operating in reverse can cause a “run for the exits” that leaves the leader with little time to recover. Just ask Nokia, the world’s leading (and seemingly unbeatable) smartphone brand until the Apple iPhone came along.
Market self-correction inherently outperforms regulatory correction: it operates far more rapidly and relies on consumer preferences to reallocate market leadership—a result perfectly consistent with antitrust’s mission to preserve “competition on the merits.” In contrast, policymakers can misdiagnose the competitive effects of business practices; are susceptible to the influence of private interests (especially those that are unable to compete on the merits); and often mispredict the market’s future trajectory. For Exhibit A, see the protracted antitrust litigation by the U.S. Department against IBM, which started in 1975 and ended in withdrawal of the suit in 1982. Given the launch of the Apple II in 1977, the IBM PC in 1981, and the entry of multiple “PC clones,” the forces of creative destruction swiftly displaced IBM from market leadership in the computing industry.
Regulators and legislators around the world have emphasized the urgency of taking dramatic action to correct claimed market failures in digital environments, casting aside prudential concerns over the consequences if any such failure proves to be illusory or temporary.
But the costs of regulatory failure can be significant and long-lasting. Markets must operate under unnecessary compliance burdens that are difficult to modify. Regulators’ enforcement resources are diverted, and businesses are barred from adopting practices that would benefit consumers. In particular, proposed breakup remedies advocated by some policymakers would undermine the scale economies that have enabled platforms to push down prices, an important consideration in a time of accelerating inflation.
Conclusion
The high concentration levels and certain business practices in digital-platform markets certainly raise important concerns as a matter of antitrust (as well as privacy, intellectual property, and other bodies of) law. These concerns merit scrutiny and may necessitate appropriately targeted interventions. Yet, any policy steps should be anchored in the factually grounded analysis that has characterized decades of regulatory and judicial action to implement the antitrust laws with appropriate care. Abandoning this nuanced framework for a blunt approach based on reflexive assumptions of market power is likely to undermine, rather than promote, the public interest in competitive markets.
Sens. Amy Klobuchar (D-Minn.) and Chuck Grassley (R-Iowa)—cosponsors of the American Innovation Online and Choice Act, which seeks to “rein in” tech companies like Apple, Google, Meta, and Amazon—contend that “everyone acknowledges the problems posed by dominant online platforms.”
In their framing, it is simply an acknowledged fact that U.S. antitrust law has not kept pace with developments in the digital sector, allowing a handful of Big Tech firms to exploit consumers and foreclose competitors from the market. To address the issue, the senators’ bill would bar “covered platforms” from engaging in a raft of conduct, including self-preferencing, tying, and limiting interoperability with competitors’ products.
That’s what makes the open letter to Congress published late last month by the usually staid American Bar Association’s (ABA) Antitrust Law Section so eye-opening. The letter is nothing short of a searing critique of the legislation, which the section finds to be poorly written, vague, and departing from established antitrust-law principles.
The ABA, of course, has a reputation as an independent, highly professional, and heterogenous group. The antitrust section’s membership includes not only in-house corporate counsel, but lawyers from nonprofits, consulting firms, federal and state agencies, judges, and legal academics. Given this context, the comments must be read as a high-level judgment that recent legislative and regulatory efforts to “discipline” tech fall outside the legal mainstream and would come at the cost of established antitrust principles, legal precedent, transparency, sound economic analysis, and ultimately consumer welfare.
The Antitrust Section’s Comments
As the ABA Antitrust Law Section observes:
The Section has long supported the evolution of antitrust law to keep pace with evolving circumstances, economic theory, and empirical evidence. Here, however, the Section is concerned that the Bill, as written, departs in some respects from accepted principles of competition law and in so doing risks causing unpredicted and unintended consequences.
Broadly speaking, the section’s criticisms fall into two interrelated categories. The first relates to deviations from antitrust orthodoxy and the principles that guide enforcement. The second is a critique of the AICOA’s overly broad language and ambiguous terminology.
Departing from established antitrust-law principles
Substantively, the overarching concern expressed by the ABA Antitrust Law Section is that AICOA departs from the traditional role of antitrust law, which is to protect the competitive process, rather than choosing to favor some competitors at the expense of others. Indeed, the section’s open letter observes that, out of the 10 categories of prohibited conduct spelled out in the legislation, only three require a “material harm to competition.”
Take, for instance, the prohibition on “discriminatory” conduct. As it stands, the bill’s language does not require a showing of harm to the competitive process. It instead appears to enshrine a freestanding prohibition of discrimination. The bill targets tying practices that are already prohibited by U.S. antitrust law, but while similarly eschewing the traditional required showings of market power and harm to the competitive process. The same can be said, mutatis mutandis, for “self-preferencing” and the “unfair” treatment of competitors.
The problem, the section’s letter to Congress argues, is not only that this increases the teleological chasm between AICOA and the overarching goals and principles of antitrust law, but that it can also easily lead to harmful unintended consequences. For instance, as the ABA Antitrust Law Section previously observed in comments to the Australian Competition and Consumer Commission, a prohibition of pricing discrimination can limit the extent of discounting generally. Similarly, self-preferencing conduct on a platform can be welfare-enhancing, while forced interoperability—which is also contemplated by AICOA—can increase prices for consumers and dampen incentives to innovate. Furthermore, some of these blanket prohibitions are arguably at loggerheads with established antitrust doctrine, such as in, e.g., Trinko, which established that even monopolists are generally free to decide with whom they will deal.
In response to the above, the ABA Antitrust Law Section (reasonably) urges Congress explicitly to require an effects-based showing of harm to the competitive process as a prerequisite for all 10 of the infringements contemplated in the AICOA. This also means disclaiming generalized prohibitions of “discrimination” and of “unfairness” and replacing blanket prohibitions (such as the one for self-preferencing) with measured case-by-case analysis.
Arguably, the reason why the Klobuchar-Grassley bill can so seamlessly exclude or redraw such a central element of antitrust law as competitive harm is because it deliberately chooses to ignore another, preceding one. Namely, the bill omits market power as a requirement for a finding of infringement or for the legislation’s equally crucial designation as a “covered platform.” It instead prescribes size metrics—number of users, market capitalization—to define which platforms are subject to intervention. Such definitions cast an overly wide net that can potentially capture consumer-facing conduct that doesn’t have the potential to harm competition at all.
It is precisely for this reason that existing antitrust laws are tethered to market power—i.e., because it long has been recognized that only companies with market power can harm competition. As John B. Kirkwood of Seattle University School of Law has written:
Market power’s pivotal role is clear…This concept is central to antitrust because it distinguishes firms that can harm competition and consumers from those that cannot.
In response to the above, the ABA Antitrust Law Section (reasonably) urges Congress explicitly to require an effects-based showing of harm to the competitive process as a prerequisite for all 10 of the infringements contemplated in the AICOA. This also means disclaiming generalized prohibitions of “discrimination” and of “unfairness” and replacing blanket prohibitions (such as the one for self-preferencing) with measured case-by-case analysis.
Opaque language for opaque ideas
Another underlying issue is that the Klobuchar-Grassley bill is shot through with indeterminate language and fuzzy concepts that have no clear limiting principles. For instance, in order either to establish liability or to mount a successful defense to an alleged violation, the bill relies heavily on inherently amorphous terms such as “fairness,” “preferencing,” and “materiality,” or the “intrinsic” value of a product. But as the ABA Antitrust Law Section letter rightly observes, these concepts are not defined in the bill, nor by existing antitrust case law. As such, they inject variability and indeterminacy into how the legislation would be administered.
Moreover, it is also unclear how some incommensurable concepts will be weighed against each other. For example, how would concerns about safety and security be weighed against prohibitions on self-preferencing or requirements for interoperability? What is a “core function” and when would the law determine it has been sufficiently “enhanced” or “maintained”—requirements the law sets out to exempt certain otherwise prohibited behavior? The lack of linguistic and conceptual clarity not only explodes legal certainty, but also invites judicial second-guessing into the operation of business decisions, something against which the U.S. Supreme Court has long warned.
Finally, the bill’s choice of language and recent amendments to its terminology seem to confirm the dynamic discussed in the previous section. Most notably, the latest version of AICOA replaces earlier language invoking “harm to the competitive process” with “material harm to competition.” As the ABA Antitrust Law Section observes, this “suggests a shift away from protecting the competitive process towards protecting individual competitors.” Indeed, “material harm to competition” deviates from established categories such as “undue restraint of trade” or “substantial lessening of competition,” which have a clear focus on the competitive process. As a result, it is not unreasonable to expect that the new terminology might be interpreted as meaning that the actionable standard is material harm to competitors.
In its letter, the antitrust section urges Congress not only to define more clearly the novel terminology used in the bill, but also to do so in a manner consistent with existing antitrust law. Indeed:
The Section further recommends that these definitions direct attention to analysis consistent with antitrust principles: effects-based inquiries concerned with harm to the competitive process, not merely harm to particular competitors
Conclusion
The AICOA is a poorly written, misguided, and rushed piece of regulation that contravenes both basic antitrust-law principles and mainstream economic insights in the pursuit of a pre-established populist political goal: punishing the success of tech companies. If left uncorrected by Congress, these mistakes could have potentially far-reaching consequences for innovation in digital markets and for consumer welfare. They could also set antitrust law on a regressive course back toward a policy of picking winners and losers.
As I’ve written previously, the First Amendment (bolstered by Section 230 of the Communications Decency Act) protects not only speech itself, but also the private ordering of speech. “Congress shall make no law… abridging the freedom of speech” means that state actors can’t infringe speech, but it also (in most cases) protects private actors’ ability to make such rules free from government regulation. As the Supreme Court has repeatedly held, private actors can make their own rules about speech on their own property.
[W]hen a private entity provides a forum for speech, the private entity is not ordinarily constrained by the First Amendment because the private entity is not a state actor. The private entity may thus exercise editorial discretion over the speech and speakers in the forum…
In short, merely hosting speech by others is not a traditional, exclusive public function and does not alone transform private entities into state actors subject to First Amendment constraints.
If the rule were otherwise, all private property owners and private lessees who open their property for speech would be subject to First Amendment constraints and would lose the ability to exercise what they deem to be appropriate editorial discretion within that open forum. Private property owners and private lessees would face the unappetizing choice of allowing all comers or closing the platform altogether.
In other words, as much as it protects “the marketplace of ideas,” the First Amendment also protects “the market for speech governance.” Musk’s idea that Twitter should be subject to the First Amendment is simply incoherent, but his vision for Twitter to have less politically biased content moderation could work.
Musk’s Plan for Twitter
There has been much commentary on what Musk intends to do, and whether it is a realistic way to maximize the platform’s value. As a multi-sided platform, Twitter’s revenue is driven by advertisers, who want to reach a mass audience. This means Twitter, much like other social-media platforms, must consider the costs and benefits of speech to its users, and strike a balance that maximizes the value of the platform. The history of social-media content moderation suggests that these platforms have found that rules against harassment, abuse, spam, bots, pornography, and certain hate speech and misinformation are necessary.
For rules pertaining to harassment and abuse, in particular, it is easy to understand how they are necessary to prevent losing users. There seems to be a wide societal consensus that such speech is intolerable. Similarly, spam, bots, and pornographic content, even if legal speech, are largely not what social media users want to see.
But for hate speech and misinformation, however much one agrees in the abstract about their undesirableness, there is significant debate on the margins about what is acceptable or unacceptable discourse, just as there is over what is true or false when it comes to touchpoint social and political issues. It is one thing to ban Nazis due to hate speech; it is arguably quite another to remove a prominent feminist author due to “misgendering” people. It is also one thing to say crazy conspiracy theories like QAnon should be moderated, but quite another to fact-check good-faith questioning of the efficacy of masks or vaccines. It is likely in these areas that Musk will offer an alternative to what is largely seen as biased content moderation from Big Tech companies.
Musk appears to be making a bet that the market for speech governance is currently not well-served by the major competitors in the social-media space. If Twitter could thread the needle by offering a more politically neutral moderation policy that still manages to keep off the site enough of the types of content that repel users, then it could conceivably succeed and even influence the moderation policies of other social-media companies.
Let the Market Decide
The crux of the issue is this: Conservatives who have backed antitrust and regulatory action against Big Tech because of political bias concerns should be willing to back off and allow the market to work. And liberals who have defended the right of private companies to make rules for their platforms should continue to defend that principle. Let the market decide.
The International Center for Law & Economics (ICLE) filed an amicus brief on behalf of itself and 26 distinguished law & economics scholars with the 9th U.S. Circuit Court of Appeals in the hotly anticipated and intensely important Epic Games v Apple case.
A fantastic group of attorneys from White & Case generously assisted us with the writing and filing of the brief, including George Paul, Jack Pace, Gina Chiapetta, and Nicholas McGuire. The scholars who signed the brief are listed at the end of this post. A summary of the brief’s arguments follows. For some of our previous writings on the case, see here, here, here, and here.
Introduction
In Epic Games v. Apple, Epic challenged Apple’s prohibition of third-party app stores and in-app payments (IAP) systems from operating on its proprietary iOS platform as a violation of antitrust law. The U.S. District Court for the Northern District of California ruled against Epic, finding that Epic’s real concern is its own business interests in the face of Apple’s business model—in particular, the commission Apple charges for use of its IAP system—rather than harm to consumers and to competition more broadly.
Epic appealed to the 9th Circuit on several grounds. Our brief primarily addresses two of Epic’s arguments:
First, Epic takes issue with the district court’s proper finding that Apple’s procompetitive justifications outweigh the anticompetitive effects of Apple’s business model. But Epic’s case fails at step one of the rule-of-reason analysis, as it didn’t demonstrate that Apple’s app distribution and IAP practices caused the significant, market-wide, anticompetitive effects that the Supreme Court, in 2018’sOhio v. American Express (“Amex”), deemed necessary to show anticompetitive harm in cases involving two-sided transaction markets (like Apple’s App Store).
Second, Epic argues that the theoretical existence of less restrictive alternatives (“LRA”) to Apple’s business model is sufficient to meet its burden under the rule of reason. But the reliance on LRA in this case is misplaced. Forcing Apple to adopt the “open” platform that Epic champions would reduce interbrand competition and improperly permit antitrust plaintiffs to commandeer the judiciary to modify routine business conduct any time a plaintiff’s attorney or district court can imagine a less restrictive version of a challenged practice—irrespective of whether the practice promotes consumer welfare. This is especially true in the context of two-sided platform businesses, where such an approach would sacrifice interbrand, systems-level competition for the sake of a superficial increase in competition among a small subset of platform users.
Competitive Effects in Two-Sided Markets
Two-sided markets connect distinct sets of users whose demands for the platform are interdependent—i.e., consumers’ demand for a platform increases as more products are available, and conversely, product developers’ demand for a platform increases as additional consumers use the platform, increasing the overall potential for transactions. As a result of these complex dynamics, conduct that may appear anticompetitive when considering the effects on only one set of customers may be entirely consistent with—and actually promote—healthy competition when examining the effects on both sides.
That’s why the Supreme Court recognized in Amex that it was improper to focus on only one side of a two-sided platform. And this holding doesn’t require adherence to the Court’s contentious finding of a two-sided relevant market in Amex. Indeed, even scholars highly critical of the Amex decision recognize the importance of considering effects on both sides of a two-sided platform.
While the district court did find that Epic demonstrated some anticompetitive effects, Epic’s evidence focused only on the effects that Apple’s conduct had on certain app developers; it failed to appropriately examine whether consumers were harmed overall. As Geoffrey Manne has observed, in two-sided markets, “some harm” is not the same thing as “competitively relevant harm.” Supracompetitive prices on one side do not tell us much about the existence or exercise of (harmful) market power in two-sided markets. As the Supreme Court held in Amex:
The fact that two-sided platforms charge one side a price that is below or above cost reflects differences in the two sides’ demand elasticity, not market power or anticompetitive pricing. Price increases on one side of the platform likewise do not suggest anticompetitive effects without some evidence that they have increased the overall cost of the platform’s services.
Without further evidence of the effect of Apple’s practices on consumers, no conclusions can be drawn about the competitive effects of Apple’s conduct.
Nor can an appropriate examination of anticompetitive effects ignore output. The ability to restrict output, after all, is what allows a monopolist to increase prices. Whereas price effects alone might appear predatory on one side of the market and supra-competitive on the other, output reflects what is happening in the market as a whole. It is therefore the most appropriate measure for antitrust law generally, and it is especially useful in two-sided markets, where asymmetrical price changes are of little use in determining anticompetitive effects.
Ultimately, the question before the court must be whether Apple’s overall pricing structure and business model reduces output, either by deterring app developers from participating in the market or by deterring users from purchasing apps (or iOS devices) as a consequence of the app-developer commission. The district court here noted that it could not ascertain whether Apple’s alleged restrictions had a “positive or negative impact on game transaction volume.”
Thus, Epic’s case fails at step one of the rule of reason analysis because it simply hasn’t demonstrated the requisite harm to competition.
Less Restrictive Alternatives and the Rule of Reason
But even if that weren’t the case, Epic’s claims also don’t make it past step three of the rule of reason analysis.
Epic’s appeal relies on theoretical “less restrictive alternatives” (LRA) to Apple’s business model, which highlights longstanding questions about the role and limits of LRA analysis under the rule of reason.
According to Epic, because the district court identified some anticompetitive effects on one side of the market, and because alternative business models could, in theory, be implemented to achieve the same procompetitive benefits as Apple’s current business model, the court should have ruled in Epic’s favor at step three.
There are several problems with this.
First, the existence of an LRA is irrelevant if anticompetitive harm has not been established, of course (as is the case here).
Nor does the fact that some hypothetically less restrictive alternative exists automatically render the conduct under consideration anticompetitive. As the Court held in Trinko, antitrust laws do not “give judges carte blanche to insist that a monopolist alter its way of doing business whenever some other approach might yield greater competition.”
While, following the Supreme Court’s recent Alston decision, LRA analysis may well be appropriate in some contexts to identify anticompetitive conduct in the face of procompetitive justifications, there is no holding (in either the 9th Circuit or the Supreme Court) requiring it in the context of two-sided markets. (Amex refers to LRA analysis as constituting step three, but because that case was resolved at step one, it must be viewed as mere dictum).And for good reason. In the context of two-sided platforms, an LRA approach would inevitably require courts to second guess the particular allocation of costs, prices, and product attributes across platform users. As Tom Nachbar writes:
Platform defendants, even if they are able to establish the general procompetitive justifications for charging above and below cost prices on the two sides of their platforms, will have to defend the precise combination of prices they have chosen [under an LRA approach] . . . . The relative difficulty of defending any particular allocation of costs will present considerable risk of destabilizing platform markets.
Moreover, LRAs—like the ones proposed by Epic—that are based on maximizing competitor effectiveness by “opening” an incumbent’s platform would convert the rule of reason into a regulatory tool that may not promote competition at all. As Alan Devlin deftly puts it:
This construction of antitrust law—that dominant companies must affirmatively support their fringe rivals’ ability to compete effectively—adopts a perspective of antitrust that is regulatory in nature. . . . [I]f one adopts the increasingly prevalent view that antitrust must facilitate unfettered access to markets, thus spurring free entry and expansion by incumbent rivals, the Sherman Act goes from being a prophylactic device aimed at protecting consumers against welfare-reducing acts to being a misplaced regulatory tool that potentially sacrifices both consumer welfare and efficiency in a misguided pursuit of more of both.
Open Platforms Are not Necessarily Less Restrictive Platforms
It is also important to note that Epic’s claimed LRAs are neither viable alternatives nor actually “less restrictive.” Epic’s proposal would essentially turn Apple’s iOS into an open platform more similar to Google’s Android, its largest market competitor.
“Open” and “closed” platforms both have distinct benefits and drawbacks; one is not inherently superior to the other. Closed proprietary platforms like Apple’s iOS create incentives for companies to internalize positive indirect network effects, which can lead to higher levels of product variety, user adoption, and total social welfare. As Andrei Hagiu has written:
A proprietary platform may in fact induce more developer entry (i.e., product variety), user adoption and higher total social welfare than an open platform.
For example, by filtering which apps can access the App Store and precluding some transactions from taking place on it, a closed or semi-closed platform like Apple’s may ultimately increase the number of apps and transactions on its platform, where doing so makes the iOS ecosystem more attractive to both consumers and developers.
Any analysis of a supposedly less restrictive alternative to Apple’s “walled garden” model thus needs to account for the tradeoffs between open and closed platforms, and not merely assume that “open” equates to “good,” and “closed” to “bad.”
Further, such analysis also must consider tradeoffs among consumers and among developers. More vigilant users might be better served by an “open” platform because they find it easier to avoid harmful content; less vigilant ones may want more active assistance in screening for malware, spyware, or software that simply isn’t optimized for the user’s device. There are similar tradeoffs on the developer side: Apple’s model lowers the cost to join the App store, which particularly benefits smaller developers and those whose apps fall outside the popular gaming sector. In a nutshell, the IAP fee cross-subsidizes the delivery of services to the approximately 80% of apps on the App Store that are free and pay no IAP fees.
In fact, the overwhelming irony of Epic’s proposed approach is that Apple could avoid condemnation if it made its overall platform more restrictive. If, for example, Apple had not adopted an App Store model and offered a completely closed and fully integrated device, there would be no question of relative costs and benefits imposed on independent app developers; there would be no independent developers on the iOS platform at all.
Thus, Epic’s proposed LRA approach, which amounts to converting iOS to an open platform, proves too much. It would enable any contractual or employment relationship for a complementary product or service to be challenged because it could be offered through a “less restrictive” open market mechanism—in other words, that any integrated firm should be converted into an open platform.
At least since the Supreme Court’s seminal 1977 Sylvania ruling, U.S. antitrust law has been unequivocal in its preference for interbrand over intrabrand competition. Paradoxically, turning a closed platform into an open one (as Epic intends) would, under the guise of protecting competition, actually destroy competition where it matters most: at the interbrand, systems level.
Conclusion
Forcing Apple to adopt the “open” platform that Epic champions would reduce interbrand competition among platform providers. It would also more broadly allow antitrust plaintiffs to insist the courts modify routine business conduct any time a plaintiff’s attorney or district court can imagine a less restrictive version of a challenged practice, regardless of whether that practice nevertheless promotes consumer welfare. In the context of two-sided platform businesses, this would mean sacrificing systems-level competition for the sake of a superficial increase in competition among a small subset of platform users.
The bottom line is that an order compelling Apple to allow competing app stores would require the company to change the way in which it monetizes the App Store. This might have far-reaching distributional consequences for both groups— consumers and distributors. Courts (and, obviously, competitors) are ill-suited to act as social planners and to balance out such complex tradeoffs, especially in the absence of clear anticompetitive harm and the presence of plausible procompetitive benefits.
Amici Scholars Signing on to the Brief
(The ICLE brief presents the views of the individual signers listed below. Institutions are listed for identification purposes only.)
Alden Abbott Senior Research Fellow, Mercatus Center, George Mason University Former General Counsel, U.S. Federal Trade Commission
Ben Klein Professor of Economics Emeritus, University of California Los Angeles
Thomas C. Arthur L. Q. C. Lamar Professor of Law, Emory University School of Law
Peter Klein Professor of Entrepreneurship and Corporate Innovation, Baylor University, Hankamer School of Business
Dirk Auer Director of Competition Policy, International Center for Law & Economics Adjunct Professor, University of Liège (Belgium)
Jonathan Klick Charles A. Heimbold, Jr. Professor of Law, University of Pennsylvania Carey Law School
Jonathan M. Barnett Torrey H. Webb Professor of Law, University of Southern California, Gould School of Law
Daniel Lyons Professor of Law, Boston College Law School
Donald J. Boudreaux Professor of Economics, former Economics Department Chair, George Mason University
Geoffrey A. Manne President and Founder, International Center for Law & Economics Distinguished Fellow, Northwestern University Center on Law, Business & Economics
Giuseppe Colangelo Jean Monnet Chair in European Innovation Policy and Associate Professor of Competition Law and Economics, University of Basilicata and Libera Università Internazionale degli Studi Sociali
Francisco Marcos Associate Professor of Law, IE University Law School (Spain)
Anthony Dukes Chair and Professor of Marketing, University of Southern California, Marshall School of Business
Scott E. Masten Professor of Business Economics and Public Policy, University of Michigan, Ross Business School
Richard A. Epstein Laurence A. Tisch Professor of Law, New York University, School of Law James Parker Hall Distinguished Service Professor of Law Emeritus, University of Chicago Law School
Alan J. Meese Ball Professor of Law, College of William & Mary Law School
Vivek Ghosal Economics Department Chair and Virginia and Lloyd W. Rittenhouse Professor of Economics, Rensselaer Polytechnic Institute
Igor Nikolic Research Fellow, Robert Schuman Centre for Advanced Studies, European University Institute (Italy)
Janice Hauge Professor of Economics, University of North Texas
Paul H. Rubin Samuel Candler Dobbs Professor of Economics Emeritus, Emory University
Justin (Gus) Hurwitz Professor of Law, University of Nebraska College of Law
Vernon L. Smith George L. Argyros Endowed Chair in Finance and Economics and Professor of Economics and Law, Chapman University Nobel Laureate in Economics (2002)
Michael S. Jacobs Distinguished Research Professor of Law Emeritus, DePaul University College of Law
Michael Sykuta Associate Professor of Economics, University of Missouri
Mark A. Jamison Gerald Gunter Professor of the Public Utility Research Center, University of Florida, Warrington College of Business
Alexander “Sasha” Volokh Associate Professor of Law, Emory University School of Law
After years of debate and negotiations, European Lawmakers have agreed upon what will most likely be the final iteration of the Digital Markets Act (“DMA”), following the March 24 final round of “trilogue” talks.
For the uninitiated, the DMA is one in a string of legislative proposals around the globe intended to “rein in” tech companies like Google, Amazon, Facebook, and Apple through mandated interoperability requirements and other regulatory tools, such as bans on self-preferencing. Other important bills from across the pond include the American Innovation and Choice Online Act, the ACCESS Act, and the Open App Markets Act.
In many ways, the final version of the DMA represents the worst possible outcome, given the items that were still up for debate. The Commission caved to some of the Parliament’s more excessive demands—such as sweeping interoperability provisions that would extend not only to “ancillary” services, such as payments, but also to messaging services’ basic functionalities. Other important developments include the addition of voice assistants and web browsers to the list of Core Platform Services (“CPS”), and symbolically higher “designation” thresholds that further ensure the act will apply overwhelmingly to just U.S. companies. On a brighter note, lawmakers agreed that companies could rebut their designation as “gatekeepers,” though it remains to be seen how feasible that will be in practice.
We offer here an overview of the key provisions included in the final version of the DMA and a reminder of the shaky foundations it rests on.
Interoperability
Among the most important of the DMA’s new rules concerns mandatory interoperability among online platforms. In a nutshell, digital platforms that are designated as “gatekeepers” will be forced to make their services “interoperable” (i.e., compatible) with those of rivals. It is argued that this will make online markets more contestable and thus boost consumer choice. But as ICLE scholars have been explaining for some time, this is unlikely to be the case (here, here, and here). Interoperability is not the panacea EU legislators claim it to be. As former ICLE Director of Competition Policy Sam Bowman has written, there are many things that could be interoperable, but aren’t. The reason is that interoperability comes with costs as well as benefits. For instance, it may be worth letting different earbuds have different designs because, while it means we sacrifice easy interoperability, we gain the ability for better designs to be brought to the market and for consumers to be able to choose among them. Economists Michael L. Katz and Carl Shapiro concur:
Although compatibility has obvious benefits, obtaining and maintaining compatibility often involves a sacrifice in terms of product variety or restraints on innovation.
There are other potential downsides to interoperability. For instance, a given set of interoperable standards might be too costly to implement and/or maintain; it might preclude certain pricing models that increase output; or it might compromise some element of a product or service that offers benefits specifically because it is not interoperable (such as, e.g., security features). Consumers may also genuinely prefer closed (i.e., non-interoperable) platforms. Indeed: “open” and “closed” are not synonyms for “good” and “bad.” Instead, as Boston University’s Andrei Hagiu has shown, there are fundamental welfare tradeoffs at play that belie simplistic characterizations of one being inherently superior to the other.
Further, as Sam Bowman observed, narrowing choice through a more curated experience can also be valuable for users, as it frees them from having to research every possible option every time they buy or use some product (if you’re unconvinced, try turning off your spam filter for a couple of days). Instead, the relevant choice consumers exercise might be in choosing among brands. In sum, where interoperability is a desirable feature, consumer preferences will tend to push for more of it. However, it is fundamentally misguided to treat mandatory interoperability as a cure-all elixir or a “super tool” of “digital platform governance.” In a free-market economy, it is not—or, it should not—be up to courts and legislators to substitute for businesses’ product-design decisions and consumers’ revealed preferences with their own, based on diffuse notions of “fairness.” After all, if we could entrust such decisions to regulators, we wouldn’t need markets or competition in the first place.
Of course, it was always clear that the DMA would contemplate some degree of mandatory interoperability – indeed, this was arguably the new law’s biggest selling point. What was up in the air until now was the scope of such obligations. The Commission had initially pushed for a comparatively restrained approach, requiring interoperability “only” in ancillary services, such as payment systems (“vertical interoperability”). By contrast, the European Parliament called for more expansive requirements that would also encompass social-media platforms and other messaging services (“horizontal interoperability”).
The problem with such far-reaching interoperability requirements is that they are fundamentally out of pace with current privacy and security capabilities. As ICLE Senior Scholar Mikolaj Barczentewicz has repeatedly argued, the Parliament’s insistence on going significantly beyond the original DMA’s proposal and mandating interoperability of messaging services is overly broad and irresponsible. Indeed, as Mikolaj notes, the “likely result is less security and privacy, more expenses, and less innovation.”The DMA’s defensers would retort that the law allows gatekeepers to do what is “strictly necessary” (Council) or “indispensable” (Parliament) to protect safety and privacy (it is not yet clear which wording the final version has adopted). Either way, however, the standard may be too high and companies may very well offer lower security to avoid liability for adopting measures that would be judged by the Commission and the courts as going beyond what is “strictly necessary” or “indispensable.” These safeguards will inevitably be all the more indeterminate (and thus ineffectual) if weighed against other vague concepts at the heart of the DMA, such as “fairness.”
Gatekeeper Thresholds and the Designation Process
Another important issue in the DMA’s construction concerns the designation of what the law deems “gatekeepers.” Indeed, the DMA will only apply to such market gatekeepers—so-designated because they meet certain requirements and thresholds. Unfortunately, the factors that the European Commission will consider in conducting this designation process—revenues, market capitalization, and user base—are poor proxies for firms’ actual competitive position. This is not surprising, however, as the procedure is mainly designed to ensure certain high-profile (and overwhelmingly American) platforms are caught by the DMA.
From this perspective, the last-minute increase in revenue and market-capitalization thresholds—from 6.5 billion euros to 7.5 billion euros, and from 65 billion euros to 75 billion euros, respectively—won’t change the scope of the companies covered by the DMA very much. But it will serve to confirm what we already suspected: that the DMA’s thresholds are mostly tailored to catch certain U.S. companies, deliberately leaving out EU and possibly Chinese competitors (see here and here). Indeed, what would have made a difference here would have been lowering the thresholds, but this was never really on the table. Ultimately, tilting the European Union’s playing field against its top trading partner, in terms of exports and trade balance, is economically, politically, and strategically unwise.
As a consolation of sorts, it seems that the Commission managed to squeeze in a rebuttal mechanism for designated gatekeepers. Imposing far-reaching obligations on companies with no (or very limited) recourse to escape the onerous requirements of the DMA would be contrary to the basic principles of procedural fairness. Still, it remains to be seen how this mechanism will be articulated and whether it will actually be viable in practice.
Double (and Triple?) Jeopardy
Two recent judgments from the European Court of Justice (ECJ)—Nordzucker and bpost—are likely to underscore the unintended effects of cumulative application of both the DMA and EU and/or national competition laws. The bpost decision is particularly relevant, because it lays down the conditions under which cases that evaluate the same persons and the same facts in two separate fields of law (sectoral regulation and competition law) do not violate the principle of ne bis in idem, also known as “double jeopardy.” As paragraph 51 of the judgment establishes:
There must be precise rules to determine which acts or omissions are liable to be subject to duplicate proceedings;
The two sets of proceedings must have been conducted in a sufficiently coordinated manner and within a similar timeframe; and
The overall penalties must match the seriousness of the offense.
It is doubtful whether the DMA fulfills these conditions. This is especially unfortunate considering the overlapping rules, features, and goals among the DMA and national-level competition laws, which are bound to lead to parallel procedures. In a word: expect double and triple jeopardy to be hotly litigated in the aftermath of the DMA.
Of course, other relevant questions have been settled which, for reasons of scope, we will have to leave for another time. These include the level of fines(up to 10% worldwide revenue, or 20% in the case of repeat offenses); the definition and consequences of systemic noncompliance (it seems that the Parliament’s draconian push for a general ban on acquisitions in case of systemic noncompliance has been dropped); and the addition of more core platform services (web browsers and voice assistants).
The DMA’s Dubious Underlying Assumptions
The fuss and exhilaration surrounding the impending adoption of the EU’s most ambitious competition-related proposal in decades should not obscure some of the more dubious assumptions which underpin it, such as that:
It is still unclear that intervention in digital markets is necessary, let alone urgent.
Even if it were clear, there is scant evidence to suggest that tried and tested ex post instruments, such as those envisioned in EU competition law, are not up to the task.
Even if the prior two points had been established beyond any reasonable doubt (which they haven’t), it is still far from clear that DMA-style ex ante regulation is the right tool to address potential harms to competition and to consumers that arise in digital markets.
It is unclear that intervention is necessary
Despite a mounting moral panic around and zealous political crusading against Big Tech (an epithet meant to conjure antipathy and distrust), it is still unclear that intervention in digital markets is necessary. Much of the behavior the DMA assumes to be anti-competitive has plausible pro-competitive justifications. Self-preferencing, for instance, is a normal part of how platforms operate, both to improve the value of their core products and to earn returns to reinvest in their development. As ICLE’s Dirk Auer points out, since platforms’ incentives are to maximize the value of their entire product ecosystem, those that preference their own products frequently end up increasing the total market’s value by growing the share of users of a particular product (the example of Facebook’s integration of Instagram is a case in point). Thus, while self-preferencing may, in some cases,be harmful, a blanket presumption of harm is thoroughly unwarranted.
Similarly, the argument that switching costs and data-related increasing returns to scale (in fact, data generally entails diminishing returns) have led to consumer lock-in and thereby raised entry barriers has also been exaggerated to epic proportions (pun intended). As we have discussed previously, there are plenty of counterexamples where firms have easily overcome seemingly “insurmountable” barriers to entry, switching costs, and network effects to disrupt incumbents.
To pick a recent case: how many of us had heard of Zoom before the pandemic? Where was TikTok three years ago? (see here for a multitude of other classic examples, including Yahoo and Myspace).
Can you really say, with a straight face, that switching costs between messaging apps are prohibitive? I’m not even that active and I use at least six such apps on a daily basis: Facebook Messenger, Whatsapp, Instagram, Twitter, Viber, Telegram, and Slack (it took me all of three minutes to download and start using Slack—my newest addition). In fact, chances are that, like me, you have always multihomed nonchalantly and had never even considered that switching costs were impossibly high (or that they were a thing) until the idea that you were “locked-in” by Big Tech was drilled into your head by politicians and other busybodies looking for trophies to adorn their walls.
What about the “unprecedented,” quasi-fascistic levels of economic concentration? First, measures of market concentration are sometimes anchored in flawed methodology and market definitions (see, e.g., Epic’s insistence that Apple is a monopolist in the market for operating systems, conveniently ignoring that competition occurs at the smartphone level, where Apple has a worldwide market share of 15%—see pages 45-46 here). But even if such measurements were accurate, high levels of concentration don’t necessarily mean that firms do not face strong competition. In fact, as Nicolas Petit has shown, tech companies compete vigorously against each other across markets.
But perhaps the DMA’s raison d’etre rests less on market failure, but rather on a legal or enforcement failure? This, too, is misguided.
EU competition law is already up to the task
As Giuseppe Colangelo has argued persuasively (here and here), it is not at all clear that ex post competition regulation is insufficient to tackle anti-competitive behavior in the digital sector:
Ongoing antitrust investigations demonstrate that standard competition law still provides a flexible framework to scrutinize several practices described as new and peculiar to app stores.
The recent Google Shopping decision, in which the Commission found that Google had abused its dominant position by preferencing its own online-shopping service in Google Search results, is a case in point (the decision was confirmed by the General Court and is now pending review before the European Court of Justice). The “self-preferencing” category has since been applied by other EU competition authorities. The Italian competition authority, for instance, fined Amazon 1 billion euros for preferencing its own distribution service, Fulfilled by Amazon, on the Amazon marketplace (i.e., Amazon.it). Thus, Article 102, which includes prohibitions on “applying dissimilar conditions to similar transactions,” appears sufficiently flexible to cover self-preferencing, as well as other potentially anti-competitive offenses relevant to digital markets (e.g., essential facilities).
For better or for worse, EU competition law has historically been sufficiently pliable to serve a range of goals and values. It has also allowed for experimentation and incorporated novel theories of harm and economic insights. Here, the advantage of competition law is that it allows for a more refined, individualized approach that can avoid some of the pitfalls of applying a one-size fits all model across all digital platforms. Those pitfalls include: harming consumers, jeopardizing the business models of some of the most successful and pro-consumer companies in existence, and ignoring the differences among platforms, such as between Google and Apple’s app stores. I turn to these issues next.
Ex ante regulation probably isn’t the right tool
Even if it were clear that intervention is necessary and that existing competition law was insufficient, it is not clear that the DMA is the right regulatory tool to address any potential harms to competition and consumers that may arise in the digital markets. Here, legislators need to be wary of unintended consequences, trade-offs, and regulatory fallibility. For one, It is possible that the DMA will essentially consolidate the power of tech platforms, turning them into de facto public utilities. This will not foster competition, but rather will make smaller competitors systematically dependent on so-called gatekeepers. Indeed, why become the next Google if you can just free ride off of the current Google? Why download an emerging messaging app if you can already interact with its users through your current one? In a way, then, the DMA may become a self-fulfilling prophecy.
Moreover, turning closed or semi-closed platforms such as the iOS into open platforms more akin to Android blurs the distinctions among products and dampens interbrand competition. It is a supreme paradox that interoperability and sideloading requirements purportedly give users more choice by taking away the option of choosing a “walled garden” model. As discussed above, overriding the revealed preferences of millions of users is neither pro-competitive nor pro-consumer (but it probably favors some competitors at the expense of those two things).
Nor are many of the other obligations contemplated in the DMA necessarily beneficial to consumers. Do users really not want to have default apps come preloaded on their devices and instead have to download and install them manually? Ditto for operating systems. What is the point of an operating system if it doesn’t come with certain functionalities, such as a web browser? What else should we unbundle—keyboard on iOS? Flashlight? Do consumers really want to choose from dozens of app stores when turning on their new phone for the first time? Do they really want to have their devices cluttered with pointless split-screens? Do users really want to find all their contacts (and be found by all their contacts) across all messaging services? (I switched to Viber because I emphatically didn’t.) Do they really want to have their privacy and security compromised because of interoperability requirements?Then there is the question of regulatory fallibility. As Alden Abott has written on the DMA and other ex ante regulatory proposals aimed at “reining in” tech companies:
Sorely missing from these regulatory proposals is any sense of the fallibility of regulation. Indeed, proponents of new regulatory proposals seem to implicitly assume that government regulation of platforms will enhance welfare, ignoring real-life regulatory costs and regulatory failures (see here, for example).
This brings us back to the second point: without evidence that antitrust law is “not up to the task,” far-reaching and untested regulatory initiatives with potentially high error costs are put forth as superior to long-established, consumer-based antitrust enforcement. Yes, antitrust may have downsides (e.g., relative indeterminacy and slowness), but these pale in comparison to the DMA’s (e.g., large error costs resulting from high information requirements, rent-seeking, agency capture).
Conclusion
The DMA is an ambitious piece of regulation purportedly aimed at ensuring “fair and open digital markets.” This implies that markets are not fair and open; or that they risk becoming unfair and closed absent far-reaching regulatory intervention at EU level. However, it is unclear to what extent such assumptions are borne out by the reality of markets. Are digital markets really closed? Are they really unfair? If so, is it really certain that regulation is necessary? Has antitrust truly proven insufficient? It also implies that DMA-style ex ante regulation is necessary to tackle it, and that the costs won’t outweigh the benefits. These are heroic assumptions that have never truly been seriously put to the test.
Considering such brittle empirical foundations, the DMA was always going to be a contentious piece of legislation. However, there was always the hope that EU legislators would show restraint in the face of little empirical evidence and high error costs. Today, these hopes have been dashed. With the adoption of the DMA, the Commission, Council, and the Parliament have arguably taken a bad piece of legislation and made it worse. The interoperability requirements in messaging services, which are bound to be a bane for user privacy and security, are a case in point.
After years trying to anticipate the whims of EU legislators, we finally know where we’re going, but it’s still not entirely sure why we’re going there.
The Senate Judiciary Committee is set to debate S. 2992, the American Innovation and Choice Online Act (or AICOA) during a markup session Thursday. If passed into law, the bill would force online platforms to treat rivals’ services as they would their own, while ensuring their platforms interoperate seamlessly.
The bill marks the culmination of misguided efforts to bring Big Tech to heel, regardless of the negative costs imposed upon consumers in the process. ICLE scholars have written about these developments in detail since the bill was introduced in October.
Below are 10 significant misconceptions that underpin the legislation.
1. There Is No Evidence that Self-Preferencing Is Generally Harmful
Self-preferencing is a normal part of how platforms operate, both to improve the value of their core products and to earn returns so that they have reason to continue investing in their development.
Platforms’ incentives are to maximize the value of their entire product ecosystem, which includes both the core platform and the services attached to it. Platforms that preference their own products frequently end up increasing the total market’s value by growing the share of users of a particular product. Those that preference inferior products end up hurting their attractiveness to users of their “core” product, exposing themselves to competition from rivals.
As Geoff Manne concludes, the notion that it is harmful (notably to innovation) when platforms enter into competition with edge providers is entirely speculative. Indeed, a range of studies show that the opposite is likely true. Platform competition is more complicated than simple theories of vertical discrimination would have it, and there is certainly no basis for a presumption of harm.
Consider a few examples from the empirical literature:
Li and Agarwal (2017) find that Facebook’s integration of Instagram led to a significant increase in user demand both for Instagram itself and for the entire category of photography apps. Instagram’s integration with Facebook increased consumer awareness of photography apps, which benefited independent developers, as well as Facebook.
Foerderer, et al. (2018) find that Google’s 2015 entry into the market for photography apps on Android created additional user attention and demand for such apps generally.
Cennamo, et al. (2018) find that video games offered by console firms often become blockbusters and expand the consoles’ installed base. As a result, these games increase the potential for all independent game developers to profit from their games, even in the face of competition from first-party games.
Finally, while Zhu and Liu (2018) is often held up as demonstrating harm from Amazon’s competition with third-party sellers on its platform, its findings are actually far from clear-cut. As co-author Feng Zhu noted in the Journal of Economics & Management Strategy: “[I]f Amazon’s entries attract more consumers, the expanded customer base could incentivize more third‐ party sellers to join the platform. As a result, the long-term effects for consumers of Amazon’s entry are not clear.”
2. Interoperability Is Not Costless
There are many things that could be interoperable, but aren’t. The reason not everything is interoperable is because interoperability comes with costs, as well as benefits. It may be worth letting different earbuds have different designs because, while it means we sacrifice easy interoperability, we gain the ability for better designs to be brought to market and for consumers to have choice among different kinds.
As Sam Bowman has observed, there are often costs that prevent interoperability from being worth the tradeoff, such as that:
It might be too costly to implement and/or maintain.
It might prescribe a certain product design and prevent experimentation and innovation.
It might add too much complexity and/or confusion for users, who may prefer not to have certain choices.
It might increase the risk of something not working, or of security breaches.
It might prevent certain pricing models that increase output.
It might compromise some element of the product or service that benefits specifically from not being interoperable.
In a market that is functioning reasonably well, we should be able to assume that competition and consumer choice will discover the desirable degree of interoperability among different products. If there are benefits to making your product interoperable that outweigh the costs of doing so, that should give you an advantage over competitors and allow you to compete them away. If the costs outweigh the benefits, the opposite will happen: consumers will choose products that are not interoperable.
In short, we cannot infer from the mere absence of interoperability that something is wrong, since we frequently observe that the costs of interoperability outweigh the benefits.
3. Consumers Often Prefer Closed Ecosystems
Digital markets could have taken a vast number of shapes. So why have they gravitated toward the 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 that breach. But this does not seem to be happening in the digital economy.
The naïve answer is to say that the absence of “open” systems is precisely the problem. What’s harder is to try to actually understand why. As I have written, there are many reasons that 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 on 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. 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.
Too often, it is simply assumed that consumers benefit from more openness, and that shared/open platforms are the natural order of things. What some refer to as “market failures” may in fact be features that explain the rapid emergence of the digital economy. Ronald Coase said it best when he quipped that economists always find a monopoly explanation for things that they simply fail to understand.
4. Data Portability Can Undermine Security and Privacy
As explained above, platforms that are more tightly controlled can be regulated by the platform owner to avoid some of the risks present in more open platforms. Apple’s App Store, for example, is a relatively closed and curated platform, which gives users assurance that apps will meet a certain standard of security and trustworthiness.
Along similar lines, there are privacy issues that arise from data portability. Even a relatively simple requirement to make photos available for download can implicate third-party interests. Making a user’s photos more broadly available may tread upon the privacy interests of friends whose faces appear in those photos. Importing those photos to a new service potentially subjects those individuals to increased and un-bargained-for security risks.
As Sam Bowman and Geoff Manne observe, this is exactly what happened with Facebook and its Social Graph API v1.0, ultimately culminating in the Cambridge Analytica scandal. Because v1.0 of Facebook’s Social Graph API permitted developers to access information about a user’s friends without consent, it enabled third-party access to data about exponentially more users. It appears that some 270,000 users granted data access to Cambridge Analytica, from which the company was able to obtain information on 50 million Facebook users.
In short, there is often no simple solution to implement interoperability and data portability. Any such program—whether legally mandated or voluntarily adopted—will need to grapple with these and other tradeoffs.
5. Network Effects Are Rarely Insurmountable
Several scholars in recent years have called for more muscular antitrust intervention in networked industries on grounds that network externalities, switching costs, and data-related increasing returns to scale lead to inefficient consumer lock-in and raise entry barriers for potential rivals (see here, here, and here). But there are countless counterexamples where firms have easily overcome potential barriers to entry and network externalities, ultimately disrupting incumbents.
Zoom is one of the most salient instances. As I wrote in April 2019 (a year before the COVID-19 pandemic):
To get to where it is today, Zoom had to compete against long-established firms with vast client bases and far deeper pockets. These include the likes of Microsoft, Cisco, and Google. Further complicating matters, the video communications market exhibits some prima facie traits that are typically associated with the existence of network effects.
Geoff Manne and Alec Stapp have put forward a multitude of other examples, including: the demise of Yahoo; the disruption of early instant-messaging applications and websites; and MySpace’s rapid decline. In all of these cases, outcomes did not match the predictions of theoretical models.
More recently, TikTok’s rapid rise offers perhaps the greatest example of a potentially superior social-networking platform taking significant market share away from incumbents. According to the Financial Times, TikTok’s video-sharing capabilities and powerful algorithm are the most likely explanations for its success.
While these developments certainly do not disprove network-effects theory, they eviscerate the belief, common in antitrust circles, that superior rivals are unable to overthrow incumbents in digital markets. Of course, this will not always be the case. The question is ultimately one of comparing institutions—i.e., do markets lead to more or fewer error costs than government intervention? Yet, this question is systematically omitted from most policy discussions.
6. Profits Facilitate New and Exciting Platforms
As I wrote in August 2020, the relatively closed model employed by several successful platforms (notably Apple’s App Store, Google’s Play Store, and the Amazon Retail Platform) allows previously unknown developers/retailers to rapidly expand because (i) users do not have to fear their apps contain some form of malware and (ii) they greatly reduce payments frictions, most notably security-related ones.
While these are, indeed, tremendous benefits, another important upside seems to have gone relatively unnoticed. The “closed” business model also gives firms significant incentives to develop new distribution mediums (smart TVs spring to mind) and to improve existing ones. In turn, this greatly expands the audience that software developers can reach. In short, developers get a smaller share of a much larger pie.
The economics of two-sided markets are enlightening here. For example, Apple and Google’s app stores are what Armstrong and Wright (here and here) refer to as “competitive bottlenecks.” That is, they compete aggressively (among themselves, and with other gaming platforms) to attract exclusive users. They can then charge developers a premium to access those users.
This dynamic gives firms significant incentive to continue to attract and retain new users. For instance, if Steve Jobs is to be believed, giving consumers better access to media such as eBooks, video, and games was one of the driving forces behind the launch of the iPad.
This model of innovation would be seriously undermined if developers and consumers could easily bypass platforms, as would likely be the case under the American Innovation and Choice Online Act.
7. Large Market Share Does Not Mean Anticompetitive Outcomes
Scholars routinely cite the putatively strong concentration of digital markets to argue that Big Tech firms do not face strong competition. But this is a non sequitur. Indeed, as economists like Joseph Bertrand and William Baumol have shown, what matters is not whether markets are concentrated, but whether they are contestable. If a superior rival could rapidly gain user traction, that alone will discipline incumbents’ behavior.
Markets where incumbents do not face significant entry from competitors are just as consistent with vigorous competition as they are with barriers to entry. Rivals could decline to enter either because incumbents have aggressively improved their product offerings or because they are shielded by barriers to entry (as critics suppose). The former is consistent with competition, the latter with monopoly slack.
Similarly, it would be wrong to presume, as many do, that concentration in online markets is necessarily driven by network effects and other scale-related economies. As ICLE scholars have argued elsewhere (here, here and here), these forces are not nearly as decisive as critics assume (and it is debatable that they constitute barriers to entry).
Finally, and perhaps most importantly, many factors could explain the relatively concentrated market structures that we see in digital industries. The absence of switching costs and capacity constraints are two such examples. These explanations, overlooked by many observers, suggest digital markets are more contestable than is commonly perceived.
Unfortunately, critics’ failure to meaningfully grapple with these issues serves to shape the “conventional wisdom” in tech-policy debates.
8. Vertical Integration Generally Benefits Consumers
Vertical behavior of digital firms—whether through mergers or through contract and unilateral action—frequently arouses the ire of critics of the current antitrust regime. Many such critics point to a few recent studies that cast doubt on the ubiquity of benefits from vertical integration. But the findings of these few studies are regularly overstated and, even if taken at face value, represent a just minuscule fraction of the collected evidence, which overwhelmingly supports vertical integration.
There is strong and longstanding empirical evidence that vertical integration is competitively benign. This includes widely acclaimed work by economists Francine Lafontaine (former director of the Federal Trade Commission’s Bureau of Economics under President Barack Obama) and Margaret Slade, whose meta-analysis led them to conclude:
[U]nder most circumstances, profit-maximizing vertical integration decisions are efficient, not just from the firms’ but also from the consumers’ points of view. Although there are isolated studies that contradict this claim, the vast majority support it. Moreover, even in industries that are highly concentrated so that horizontal considerations assume substantial importance, the net effect of vertical integration appears to be positive in many instances. We therefore conclude that, faced with a vertical arrangement, the burden of evidence should be placed on competition authorities to demonstrate that that arrangement is harmful before the practice is attacked.
In short, there is a substantial body of both empirical and theoretical research showing that vertical integration (and the potential vertical discrimination and exclusion to which it might give rise) is generally beneficial to consumers. While it is possible that vertical mergers or discrimination could sometimes cause harm, the onus is on the critics to demonstrate empirically where this occurs. No legitimate interpretation of the available literature would offer a basis for imposing a presumption against such behavior.
9. There Is No Such Thing as Data Network Effects
Although data does not have the self-reinforcing characteristics of network effects, there is a sense that acquiring a certain amount of data and expertise is necessary to compete in data-heavy industries. It is (or should be) equally apparent, however, that this “learning by doing” advantage rapidly reaches a point of diminishing returns.
This is supported by significant empirical evidence. As was shown by the survey pf the empirical literature that Geoff Manne and I performed (published in the George Mason Law Review), data generally entails diminishing marginal returns:
Critics who argue that firms such as Amazon, Google, and Facebook are successful because of their superior access to data might, in fact, have the causality in reverse. Arguably, it is because these firms have come up with successful industry-defining paradigms that they have amassed so much data, and not the other way around. Indeed, Facebook managed to build a highly successful platform despite a large data disadvantage when compared to rivals like MySpace.
Companies need to innovate to attract consumer data or else consumers will switch to competitors, including both new entrants and established incumbents. As a result, the desire to make use of more and better data drives competitive innovation, with manifestly impressive results. The continued explosion of new products, services, and apps is evidence that data is not a bottleneck to competition, but a spur to drive it.
10. Antitrust Enforcement Has Not Been Lax
The popular narrative has it that lax antitrust enforcement has led to substantially increased concentration, strangling the economy, harming workers, and expanding dominant firms’ profit margins at the expense of consumers. Much of the contemporary dissatisfaction with antitrust arises from a suspicion that overly lax enforcement of existing laws has led to record levels of concentration and a concomitant decline in competition. But both beliefs—lax enforcement and increased anticompetitive concentration—wither under more than cursory scrutiny.
The number of Sherman Act cases brought by the federal antitrust agencies, meanwhile, has been relatively stable in recent years, but several recent blockbuster cases have been brought by the agencies and private litigants, and there has been no shortage of federal and state investigations. The vast majority of Section 2 cases dismissed on the basis of the plaintiff’s failure to show anticompetitive effect were brought by private plaintiffs pursuing treble damages; given the incentives to bring weak cases, it cannot be inferred from such outcomes that antitrust law is ineffective. But, in any case, it is highly misleading to count the number of antitrust cases and, using that number alone, to make conclusions about how effective antitrust law is. Firms act in the shadow of the law, and deploy significant legal resources to make sure they avoid activity that would lead to enforcement actions. Thus, any given number of cases brought could be just as consistent with a well-functioning enforcement regime as with an ill-functioning one.
The upshot is that naïvely counting antitrust cases (or the purported lack thereof), with little regard for the behavior that is deterred or the merits of the cases that are dismissed does not tell us whether or not antitrust enforcement levels are optimal.
Early last month, the Italian competition authority issued a record 1.128 billion euro fine against Amazon for abuse of dominance under Article 102 of the Treaty on the Functioning of the European Union (TFEU). In its order, the Agenzia Garante della Concorrenza e del Mercato (AGCM) essentially argues that Amazon has combined its Amazon.it marketplace and Fulfillment by Amazon (FBA) services to exclude logistics rivals such as FedEx, DHL, UPS, and Poste Italiane.
The sanctions came exactly one month after the European General Court seconded the European Commission’s “discovery” in the Google Shopping case of a new antitrust infringement known as “self-preferencing,” which also cited Article 102 TFEU. Perhaps not entirely coincidentally, legislation was introduced in the United States earlier this year to prohibit the practice. Meanwhile, the EU’s legislative bodies have been busy taking steps to approve the Digital Markets Act (DMA), which would regulate so-called digital “gatekeepers.”
Italy thus joins a wave of policymakers that have either imposed heavy-handed decisions to “rein in” online platforms, or are seeking to implement ex ante regulations toward that end. Ultimately, the decision is reminiscent of the self-preferencing prohibition contained in Article 6a of the current draft of the DMA and reflects much of what is wrong with the current approach to regulating tech. It presages some of the potential problems with punishing efficient behavior for the sake of protecting competitors through “common carrier antitrust.” However, if this decision is anything to go by, these efforts will end up hurting the very consumers authorities purport to protect and lending color to more general fears over the DMA.
In this post, we discuss how the AGCM’s reasoning departs from sound legal and economic thinking to reach a conclusion at odds with the traditional goal of competition law—i.e., the protection of consumer welfare. Neo-Brandeisians and other competition scholars who dispute the centrality of the consumer welfare standard and would use antitrust to curb “bigness” may find this result acceptable, in principle. But even they must admit that the AGCM decision ultimately serves to benefit large (if less successful) competitors, and not the “small dealers and worthy men” of progressive lore.
Relevant Market Definition
Market definition constitutes a preliminary step in any finding of abuse under Article 102 TFEU. An excessively narrow market definition can result in false positives by treating neutral or efficient conduct as anticompetitive, while an overly broad market definition might allow anticompetitive conduct to slip through the cracks, leading to false negatives.
Amazon Italy may be an example of the former. Here, the AGCM identified two relevant markets: the leveraging market, which it identified as the Italian market for online marketplace intermediation, and the leveraged market, which it identified as the market for e-commerce logistics. The AGCM charges that Amazon is dominant in the former and that it gained an illegal advantage in the latter. It found, in this sense, that online marketplaces constitute a uniquely relevant market that is not substitutable for other offline or online sales channels, such as brick-and-mortar shops, price-comparison websites (e.g., Google Shopping), or dedicated sales websites (e.g., Nike.com/it). Similarly, it concluded that e-commerce logistics are sufficiently different from other forms of logistics as to comprise a separate market.
The AGCM’s findings combine qualitative and quantitative evidence, including retailer surveys and “small but significant and non-transitory increase in price” (SSNIP) tests. They also include a large dose of speculative reasoning.
For instance, the AGCM asserts that online marketplaces are fundamentally different from price-comparison sites because, in the latter case, purchase transactions do not take place on the platform. It asserts that e-commerce logistics are different from traditional logistics because the former require a higher degree of automation for transportation and storage. And in what can only be seen as a normative claim, rather than an objective assessment of substitutability, the Italian watchdog found that marketplaces are simply better than dedicated websites because, e.g., they offer greater visibility and allow retailers to save on marketing costs. While it is unclear what weights the AGCM assigned to each of these considerations when defining the relevant markets, it is reasonable to assume they played some part in defining the nature and scope of Amazon’s market presence in Italy.
In all of these instances, however, while the AGCM carefully delineated superficial distinctions between these markets, it did not actually establish that those differences are relevant to competition. Fetishizing granular but ultimately irrelevant differences between products and services—such as between marketplaces and shopping comparison sites—is a sure way to incur false positives, a misstep tantamount to punishing innocuous or efficient business conduct.
Dominance
The AGCM found that Amazon was “hyper-dominant” in the online marketplace intermediation market. Dominance was established by looking at revenue from marketplace sales, where Amazon’s share had risen from about 65% in 2016 to 75% in 2019. Taken in isolation, this figure might suggest that Amazon’s competitors cannot thrive in the market. A broader look at the data, however, paints a picture of more generalized growth, with some segments greatly benefiting newcomers and small, innovative marketplaces.
For instance, virtually all companies active in the online marketplace intermediation market have experienced significant growth in terms of monthly visitors. It is true that Amazon’s visitors grew significantly, up 150%, but established competitors like Aliexpress and eBay also saw growth rates of 90% and 25%, respectively. Meanwhile, Wish grew a massive 10,000% from 2016 to 2019; while ManoMano and Zalando grew 450% and 100%, respectively.
In terms of active users (i.e., visits that result in a purchase), relative numbers seem to have stayed roughly the same, although the AGCM claims that eBay saw a 20-30% drop. The number of third-party products Amazon offered through Marketplace grew from between 100 and 500 million to between 500 million and 1 billion, while other marketplaces appear to have remained fairly constant, with some expanding and others contracting.
In sum, while Amazon has undeniably improved its position in practically all of the parameters considered by the AGCM, indicators show that the market as a whole has experienced and is experiencing growth. The improvement in Amazon’s position relative to some competitors—notably eBay, which AGCM asserts is Amazon’s biggest competitor—should therefore not obscure the fact that there is entry and expansion both at the fringes (ManoMano, Wish), and in the center of the market for online marketplace intermediation (Aliexpress).
Amazon’s Allegedly Abusive Conduct
According to the AGCM, Amazon has taken advantage of vertical integration to engage in self-preferencing. Specifically, the charge is that the company offers exclusive and purportedly crucial advantages on the Amazon.it marketplace to sellers who use Amazon’s own e-commerce logistics service, FBA. The purported advantages of this arrangement include, to name a few, the coveted Prime badge, the elimination of negative user feedback on sale or delivery, preferential algorithmic treatment, and exclusive participation in Amazon’s sales promotions (e.g., Black Friday, Cyber Monday). As a result, according to the AGCM, products sold through FBA enjoy more visibility and a better chance to win the “Buy Box.”
The AGCM claims this puts competing logistics operators like FedEx, Poste Italiane, and DHL at a disadvantage, because non-FBA products have less chance to be sold than FBA products, regardless of any efficiency or quality criteria. In the AGCM’s words, “Amazon has stolen demand for other e-commerce logistics operators.”
Indirectly, Amazon’s “self-preferencing” purportedly also harms competing marketplaces like eBay by creating incentives for sellers to single-home—i.e., to sell only through Amazon Marketplace. The argument here is that retailers will not multi-home to avoid duplicative costs associated with FBA, e.g., storing goods in several warehouses.
Although it is not necessary to demonstrate anticompetitive effects under Article 102 TFEU, the AGCM claims that Amazon’s behavior has caused drastic worsening in other marketplaces’ competitive position by constraining their ability to reach the minimum scale needed to enjoy direct and indirect network effects. The Italian authorities summarily assert that this results in consumer harm, although the gargantuan 250-page decision spends scarcely one paragraph on this point.
Intuitively, however, Amazon’s behavior should, in principle, benefit consumers by offering something that most find tremendously valuable: a guarantee of quick delivery for a wide range of goods. Indeed, this is precisely why it is so misguided to condemn self-preferencing by online platforms.
As some have already argued, we cannot assume that something is bad for competition just because it is bad for certain competitors. For instance, a lot of unambiguously procompetitive behavior, like cutting prices, puts competitors at a disadvantage. The same might be true for a digital platform that preferences its own service because it is generally better than the alternatives provided by third-party sellers. In the case at hand, for example, Amazon’s granting marketplace privileges to FBA products may help users to select the products that Amazon can guarantee will best satisfy their needs. This is perfectly plausible, as customers have repeatedly shown that they often prefer less open, less neutral options.
The key question, therefore, should be whether the behavior in question excludes equally efficient rivals in such a way as to harm consumer welfare. Otherwise, we would essentially be asking companies to refrain from offering services that benefit their users in order to make competing products comparatively more attractive. This is antithetical to the nature of competition, which is based on the principle that what is good for consumers is frequently bad for competitors.
AGCM’s Theory of Harm Rests on Four Weak Pillars
Building on the logic that Amazon enjoys “hyper-dominance” in marketplace intermediation; that most online sales are marketplace sales; and that most marketplace sales are, in turn, Amazon.it sales, the AGCM decision finds that succeeding on Amazon.it is indispensable for any online retailer in Italy. This argument hinges largely on whether online and offline retailers are thought of as distinct relevant markets—i.e., whether, from the perspective of the retailer, online and offline sales channels are substitutable (see also the relevant market definition section above).
Ultimately, the AGCM finds that they are not, as online sales enjoy such advantages as lower fixed costs, increased sale flexibility, and better geographical reach. To an outsider, the distinction between the two markets may seem artificial—and it largely is—but such theoretical market segmentation is the bread-and-butter of antitrust analysis. Still, even by EU competition law standards, the relevant market definitions on which the AGCM relies to conclude that selling on Amazon is indispensable appear excessively narrow.
This market distinction also serves to set up the AGCM’s second, more controversial argument: that the benefits extended to products sold through the FBA channel are also indispensable for retailers’ success on the Amazon.it marketplace. Here, the AGCM seeks a middle ground between competitive advantage and indispensability, finally settling on the notion that a sufficiently large competitive advantage itself translates into indispensability.
But how big is too big? The facts that 40-45% of Amazon’s third-party retailers do not use FBA (p. 57 of the decision) and that roughly 40 of the top 100 products sold on Amazon.it are not fulfilled through Amazon’s logistics service (p. 58) would appear to suggest that FBA is more of a convenience than an obligation. At the least, it does not appear that the advantage conferred is so big as to amount to indispensability. This may be because sellers that choose not to use Amazon’s logistics service (including offline, of course) can and do cut prices to compete with FBA-sold products. If anything, this should be counted as a good thing from the perspective of consumer welfare.
Instead, and signaling the decision’s overarching preoccupation with protecting some businesses at the expense of others (and, ultimately, at the expense of consumers), the AGCM has expanded the already bloated notion of a self-preferencing offense to conclude that expecting sellers to compete on pricing parameters would unfairly slash profit margins for non-FBA sellers.
The third pillar of the AGCM’s theory of harm is the claim that the benefits conferred on products sold through FBA are not awarded based on any objective quality criteria, but purely on whether the seller has chosen FBA or third-party logistics. Thus, even if a logistics operator were, in principle, capable of offering a service as efficient as FBA’s, it would not qualify for the same benefits.
But this is a disingenuous line of reasoning. One legitimate reason why Amazon could choose to confer exclusive advantages on products fulfilled by its own logistics operation is because no other service is, in fact, routinely as reliable. This does not necessarily mean that FBA is always superior to the alternatives, but rather that it makes sense for Amazon to adopt this presumption a general rule based on past experience, without spending the resources to constantly evaluate it. In other words, granting exclusive benefits is based on quality criteria, just on a prior measurement of quality rather than an ongoing assessment. This is presumably what a customer-obsessed business that does not want to take chances with consumer satisfaction would do.
Fourth, the AGCM posits that Prime and FBA constitute two separate products that have been artificially tied by Amazon, thereby unfairly excluding third-party logistics operators. Co-opting Amazon’s own terminology, the AGCM claims that the company has created a flywheel of artificial interdependence, wherein Prime benefits increase the number of Prime users, which drives demand for Prime products, which creates demand for Prime-eligible FBA products, and so on.
To support its case, the AGCM repeatedly adduces a 2015 letter in which Jeff Bezos told shareholders that Amazon Marketplace and Prime are “happily and deeply intertwined,” and that FBA is the “glue” that links them together. Instead of taking this for what it likely is—i.e., a case of legitimate, efficiency-enhancing vertical integration—the AGCM has preferred to read into it a case of illicit tying, an established offense under Article 102 TFEU whereby a dominant firm makes the purchase of one product conditional on the purchase of another, unrelated one.
The problem with this narrative is that it is perfectly plausible that Prime and FBA are, in fact, meant to be one product that is more than the sum of its parts. For one, the inventory of sellers who use FBA is stowed in fulfillment centers, meaning that Amazon takes care of all logistics, customer service, and product returns. As Bezos put it in the same 2015 letter, this is a huge efficiency gain. It thus makes sense to nudge consumers towards products that use FBA.
In sum, the AGCM’s case rests on a series of questionable assumptions that build on each other: a narrow relevant market definition; a finding of “hyper-dominance” that downplays competitors’ growth and expansion, as well as competition from outside the narrowly defined market; a contrived notion of indispensability at two levels (Marketplace and FBA); and a refusal to contemplate the possibility that Amazon integrates its marketplace and logistics services in orders to enhance efficiency, rather than to exclude competitors.
Remedies
The AGCM sees “only one way to restore a level-playing field in e-commerce logistics”: Amazon must redesign its existing Self-Fulfilled Prime (SFP) program in such a way as to grant all logistics operators—FBA or non-FBA—equal treatment on Amazon.it, based on a set of objective, transparent, standard, uniform, and non-discriminatory criteria. Any logistics operator that demonstrates the ability to fulfill such criteria must be awarded SFP status and the accompanying Prime badge, along with all the perks associated with it. Further, SFP- and FBA-sold products must be subject to the same monitoring mechanism with regard to the observance of Prime standards, as well as to the same evaluation standards.
In sum, Amazon Italy now has a duty to treat Marketplace sales fulfilled by third-party operators the same as those fulfilled by its own logistics service. This is a significant step toward “common carrier antitrust.” in which vertically integrated firms are expected to comply with perfect neutrality obligations with respect to customers, suppliers, and competitors.
Beyond the philosophical question of whether successful private companies should be obliged by law to treat competitors analogously to its affiliates (they shouldn’t), the pitfalls of this approach are plain to see. Nearly all consumer-facing services use choice architectures as a means to highlight products that rank favorably in terms of price and quality, and ensuring consumers enjoy a seamless user experience: Supermarkets offer house brands that signal a product has certain desirable features; operating system developers pre-install certain applications to streamline users’ “out of the box “experience; app stores curate the apps that users will view; search engines use specialized boxes that anticipate the motives underlying users’ search queries, etc. Suppressing these practices through heavy-handed neutrality mandates is liable to harm consumers.
Second, monitoring third-party logistics operators’ compliance with the requisite standards is going to come at a cost for Amazon (and, presumably, its customers)—a cost likely much higher than that of monitoring its own operations—while awarding the Prime badge liberally may deteriorate the consumer experience on Amazon Marketplace.
Thus, one way for Amazon to comply with AGCM’s remedies while also minimizing monitoring costs is simply to dilute or even remove the criteria for Prime, thereby allowing sellers using any logistics provider to be eligible for Prime. While this would presumably insulate Amazon from any future claims against exclusionary self-preferencing, it would almost certainly also harm consumer welfare.
A final point worth noting is that vertical integration may well be subsidizing Amazon’s own first-party products. In other words, even if FBA is not fully better than other logistics operators, the revenue that it derives from FBA enables Amazon to offer low prices, as well as a range of other benefits from Prime, such as, e.g., free video. Take that source of revenue away, and those subsidized prices go up and the benefits disappear. This is another reason why it may be legitimate to consider FBA and Prime as a single product.
Of course, this argument is moot if all one cares about is how Amazon’s vertical integration affects competitors, not consumers. But consumers care about the whole package. The rationale at play in the AGCM decision ultimately ends up imposing a narrow, boring business model on all sellers, precluding them from offering interesting consumer benefits to bolster their overall product.
Conclusion
Some have openly applauded AGCM’s use of EU competition law to protect traditional logistics operators like FedEx, Poste Italiane, DHL, and UPS. Others lament the competition authority’s apparent abandonment of the consumer welfare standard in favor of a renewed interest in punishing efficiency to favor laggard competitors under the guise of safekeeping “competition.” Both sides ultimately agree on one thing, however: Amazon Italy is about favoring Amazon’s competitors. If competition authorities insist on continuing down this populist rabbit hole, the best they can hope for is a series of Pyrrhic victories against the businesses that are most bent on customer satisfaction, i.e., the successful ones.
Some may intuitively think that this is fair; that Amazon is just too big and that it strangles small competitors. But Amazon’s “small” competitors are hardly the “worthy men” of Brandeisian mythology. They are FedEx, DHL, UPS, and the state-backed goliath Poste Italiane; they are undeniably successful companies like eBay, Alibaba – or Walmart in the United States. It is, conversely, the smallest retailers and consumers who benefit the most from Amazon’s integrated logistics and marketplace services, as the company’s meteoric rise in popularity in Italy since 2016 attests. But it seems that, in the brave new world of antitrust, such stakeholders are now too small to matter.
On both sides of the Atlantic, 2021 has seen legislative and regulatory proposals to mandate that various digital services be made interoperable with others. Several bills to do so have been proposed in Congress; the EU’s proposed Digital Markets Act would mandate interoperability in certain contexts for “gatekeeper” platforms; and the UK’s competition regulator will be given powers to require interoperability as part of a suite of “pro-competitive interventions” that are hoped to increase competition in digital markets.
What is meant by the term “interoperability” varies widely. It can refer to relatively narrow interventions in which user data from one service is made directly portable to other services, rather than the user having to download and later re-upload it. At the other end of the spectrum, it could mean regulations to require virtually any vertical integration be unwound. (Should a Tesla’s engine be “interoperable” with the chassis of a Land Rover?) And in between are various proposals for specific applications of interoperability—some product working with another made by another company.
Why Isn’t Everything Interoperable?
The world is filled with examples of interoperability that arose through the (often voluntary) adoption of standards. Credit card companies oversee massive interoperable payments networks; screwdrivers are interoperable with screws made by other manufacturers, although different standards exist; many U.S. colleges accept credits earned at other accredited institutions. The containerization revolution in shipping is an example of interoperability leading to enormous efficiency gains, with a government subsidy to encourage the adoption of a single standard.
And interoperability can emerge over time. Microsoft Word used to be maddeningly non-interoperable with other word processors. Once OpenOffice entered the market, Microsoft patched its product to support OpenOffice files; Word documents now work slightly better with products like Google Docs, as well.
But there are also lots of things that could be interoperable but aren’t, like the Tesla motors that can’t easily be removed and added to other vehicles. The charging cases for Apple’s AirPods and Sony’s wireless earbuds could, in principle, be shaped to be interoperable. Medical records could, in principle, be standardized and made interoperable among healthcare providers, and it’s easy to imagine some of the benefits that could come from being able to plug your medical history into apps like MyFitnessPal and Apple Health. Keurig pods could, in principle, be interoperable with Nespresso machines. Your front door keys could, in principle, be made interoperable with my front door lock.
The reason not everything is interoperable like this is because interoperability comes with costs as well as benefits. It may be worth letting different earbuds have different designs because, while it means we sacrifice easy interoperability, we gain the ability for better designs to be brought to market and for consumers to have choice among different kinds. We may find that, while digital health records are wonderful in theory, the compliance costs of a standardized format might outweigh those benefits.
Manufacturers may choose to sell an expensive device with a relatively cheap upfront price tag, relying on consumer “lock in” for a stream of supplies and updates to finance the “full” price over time, provided the consumer likes it enough to keep using it.
Interoperability can remove a layer of security. I don’t want my bank account to be interoperable with any payments app, because it increases the risk of getting scammed. What I like about my front door lock is precisely that it isn’t interoperable with anyone else’s key. Lots of people complain about popular Twitter accounts being obnoxious, rabble-rousing, and stupid; it’s not difficult to imagine the benefits of a new, similar service that wanted everyone to start from the same level and so did not allow users to carry their old Twitter following with them.
There thus may be particular costs that prevent interoperability from being worth the tradeoff, such as that:
It might be too costly to implement and/or maintain.
It might prescribe a certain product design and prevent experimentation and innovation.
It might add too much complexity and/or confusion for users, who may prefer not to have certain choices.
It might increase the risk of something not working, or of security breaches.
It might prevent certain pricing models that increase output.
It might compromise some element of the product or service that benefits specifically from not being interoperable.
In a market that is functioning reasonably well, we should be able to assume that competition and consumer choice will discover the desirable degree of interoperability among different products. If there are benefits to making your product interoperable with others that outweigh the costs of doing so, that should give you an advantage over competitors and allow you to compete them away. If the costs outweigh the benefits, the opposite will happen—consumers will choose products that are not interoperable with each other.
In short, we cannot infer from the absence of interoperability that something is wrong, since we frequently observe that the costs of interoperability outweigh the benefits.
Of course, markets do not always lead to optimal outcomes. In cases where a market is “failing”—e.g., because competition is obstructed, or because there are important externalities that are not accounted for by the market’s prices—certain goods may be under-provided. In the case of interoperability, this can happen if firms struggle to coordinate upon a single standard, or because firms’ incentives to establish a standard are not aligned with the social optimum (i.e., interoperability might be optimal and fail to emerge, or vice versa).
But the analysis cannot stop here: just because a market might not be functioning well and does not currently provide some form of interoperability, we cannot assume that if it was functioning well that it would provide interoperability.
Interoperability for Digital Platforms
Since we know that many clearly functional markets and products do not provide all forms of interoperability that we could imagine them providing, it is perfectly possible that many badly functioning markets and products would still not provide interoperability, even if they did not suffer from whatever has obstructed competition or effective coordination in that market. In these cases, imposing interoperability would destroy value.
It would therefore be a mistake to assume that more interoperability in digital markets would be better, even if you believe that those digital markets suffer from too little competition. Let’s say, for the sake of argument, that Facebook/Meta has market power that allows it to keep its subsidiary WhatsApp from being interoperable with other competing services. Even then, we still would not know if WhatsApp users would want that interoperability, given the trade-offs.
A look at smaller competitors like Telegram and Signal, which we have no reason to believe have market power, demonstrates that they also are not interoperable with other messaging services. Signal is run by a nonprofit, and thus has little incentive to obstruct users for the sake of market power. Why does it not provide interoperability? I don’t know, but I would speculate that the security risks and technical costs of doing so outweigh the expected benefit to Signal’s users. If that is true, it seems strange to assume away the potential costs of making WhatsApp interoperable, especially if those costs may relate to things like security or product design.
Interoperability and Contact-Tracing Apps
A full consideration of the trade-offs is also necessary to evaluate the lawsuit that Coronavirus Reporter filed against Apple. Coronavirus Reporter was a COVID-19 contact-tracing app that Apple rejected from the App Store in March 2020. Its makers are now suing Apple for, they say, stifling competition in the contact-tracing market. Apple’s defense is that it only allowed COVID-19 apps from “recognised entities such as government organisations, health-focused NGOs, companies deeply credentialed in health issues, and medical or educational institutions.” In effect, by barring it from the App Store, and offering no other way to install the app, Apple denied Coronavirus Reporter interoperability with the iPhone. Coronavirus Reporter argues it should be punished for doing so.
No doubt, Apple’s decision did reduce competition among COVID-19 contact tracing apps. But increasing competition among COVID-19 contact-tracing apps via mandatory interoperability might have costs in other parts of the market. It might, for instance, confuse users who would like a very straightforward way to download their country’s official contact-tracing app. Or it might require access to certain data that users might not want to share, preferring to let an intermediary like Apple decide for them. Narrowing choice like this can be valuable, since it means individual users don’t have to research every single possible option every time they buy or use some product. If you don’t believe me, turn off your spam filter for a few days and see how you feel.
In this case, the potential costs of the access that Coronavirus Reporter wants are obvious: while it may have had the best contact-tracing service in the world, sorting it from other less reliable and/or scrupulous apps may have been difficult and the risk to users may have outweighed the benefits. As Apple and Facebook/Meta constantly point out, the security risks involved in making their services more interoperable are not trivial.
It isn’t competition among COVID-19 apps that is important, per se. As ever, competition is a means to an end, and maximizing it in one context—via, say, mandatory interoperability—cannot be judged without knowing the trade-offs that maximization requires. Even if we thought of Apple as a monopolist over iPhone users—ignoring the fact that Apple’s iPhones obviously are substitutable with Android devices to a significant degree—it wouldn’t follow that the more interoperability, the better.
A ‘Super Tool’ for Digital Market Intervention?
The Coronavirus Reporter example may feel like an “easy” case for opponents of mandatory interoperability. Of course we don’t want anything calling itself a COVID-19 app to have totally open access to people’s iPhones! But what’s vexing about mandatory interoperability is that it’s very hard to sort the sensible applications from the silly ones, and most proposals don’t even try. The leading U.S. House proposal for mandatory interoperability, the ACCESS Act, would require that platforms “maintain a set of transparent, third-party-accessible interfaces (including application programming interfaces) to facilitate and maintain interoperability with a competing business or a potential competing business,” based on APIs designed by the Federal Trade Commission.
The only nod to the costs of this requirement are provisions that further require platforms to set “reasonably necessary” security standards, and a provision to allow the removal of third-party apps that don’t “reasonably secure” user data. No other costs of mandatory interoperability are acknowledged at all.
The same goes for the even more substantive proposals for mandatory interoperability. Released in July 2021, “Equitable Interoperability: The ‘Super Tool’ of Digital Platform Governance” is co-authored by some of the most esteemed competition economists in the business. While it details obscure points about matters like how chat groups might work across interoperable chat services, it is virtually silent on any of the costs or trade-offs of its proposals. Indeed, the first “risk” the report identifies is that regulators might be too slow to impose interoperability in certain cases! It reads like interoperability has been asked what its biggest weaknesses are in a job interview.
Where the report does acknowledge trade-offs—for example, interoperability making it harder for a service to monetize its user base, who can just bypass ads on the service by using a third-party app that blocks them—it just says that the overseeing “technical committee or regulator may wish to create conduct rules” to decide.
Ditto with the objection that mandatory interoperability might limit differentiation among competitors – like, for example, how imposing the old micro-USB standard on Apple might have stopped us from getting the Lightning port. Again, they punt: “We recommend that the regulator or the technical committee consult regularly with market participants and allow the regulated interface to evolve in response to market needs.”
But if we could entrust this degree of product design to regulators, weighing the costs of a feature against its benefits, we wouldn’t need markets or competition at all. And the report just assumes away many other obvious costs: “the working hypothesis we use in this paper is that the governance issues are more of a challenge than the technical issues.” Despite its illustrious panel of co-authors, the report fails to grapple with the most basic counterargument possible: its proposals have costs as well as benefits, and it’s not straightforward to decide which is bigger than which.
Strangely, the report includes a section that “looks ahead” to “Google’s Dominance Over the Internet of Things.” This, the report says, stems from the company’s “market power in device OS’s [that] allows Google to set licensing conditions that position Google to maintain its monopoly and extract rents from these industries in future.” The report claims this inevitability can only be avoided by imposing interoperability requirements.
Much of the case for interoperability interventions rests on the presumption that the benefits will be substantial. It’s hard to know how powerful network effects really are in preventing new competitors from entering digital markets, and none of the more substantial reports cited by the “Super Tool” report really try.
In reality, the cost of switching among services or products is never zero. Simply pointing out that particular costs—such as network effect-created switching costs—happen to exist doesn’t tell us much. In practice, many users are happy to multi-home across different services. I use at least eight different messaging apps every day (Signal, WhatsApp, Twitter DMs, Slack, Discord, Instagram DMs, Google Chat, and iMessage/SMS). I don’t find it particularly costly to switch among them, and have been happy to adopt new services that seemed to offer something new. Discord has built a thriving 150-million-user business, despite these switching costs. What if people don’t actually care if their Instagram DMs are interoperable with Slack?
None of this is to argue that interoperability cannot be useful. But it is often overhyped, and it is difficult to do in practice (because of those annoying trade-offs). After nearly five years, Open Banking in the UK—cited by the “Super Tool” report as an example of what it wants for other markets—still isn’t really finished yet in terms of functionality. It has required an enormous amount of time and investment by all parties involved and has yet to deliver obvious benefits in terms of consumer outcomes, let alone greater competition among the current accounts that have been made interoperable with other services. (My analysis of the lessons of Open Banking for other services is here.) Phone number portability, which is also cited by the “Super Tool” report, is another example of how hard even simple interventions can be to get right.
The world is filled with cases where we could imagine some benefits from interoperability but choose not to have them, because the costs are greater still. None of this is to say that interoperability mandates can never work, but their benefits can be oversold, especially when their costs are ignored. Many of mandatory interoperability’s more enthusiastic advocates should remember that such trade-offs exist—even for policies they really, really like.
There has been a rapid proliferation of proposals in recent years to closely regulate competition among large digital platforms. The European Union’s Digital Markets Act (DMA, which will become effective in 2023) imposes a variety of data-use, interoperability, and non-self-preferencing obligations on digital “gatekeeper” firms. A host of other regulatory schemes are being considered in Australia, France, Germany, and Japan, among other countries (for example, see here). The United Kingdom has established a Digital Markets Unit “to operationalise the future pro-competition regime for digital markets.” Recently introduced U.S. Senate and House Bills—although touted as “antitrust reform” legislation—effectively amount to “regulation in disguise” of disfavored business activities by very large companies, including the major digital platforms (see here and here).
Sorely missing from these regulatory proposals is any sense of the fallibility of regulation. Indeed, proponents of new regulatory proposals seem to implicitly assume that government regulation of platforms will enhance welfare, ignoring real-life regulatory costs and regulatory failures (see here, for example). Without evidence, new regulatory initiatives are put forth as superior to long-established, consumer-based antitrust law enforcement.
The hope that new regulatory tools will somehow “solve” digital market competitive “problems” stems from the untested assumption that established consumer welfare-based antitrust enforcement is “not up to the task.” Untested assumptions, however, are an unsound guide to public policy decisions. Rather, in order to optimize welfare, all proposed government interventions in the economy, including regulation and antitrust, should be subject to decision-theoretic analysis that is designed to minimize the sum of error and decision costs (see here). What might such an analysis reveal?
Wonder no more. In a just-released Mercatus Center Working Paper, Professor Thom Lambert has conducted a decision-theoretic analysis that evaluates the relative merits of U.S. consumer welfare-based antitrust, ex ante regulation, and ongoing agency oversight in addressing the market power of large digital platforms. While explaining that antitrust and its alternatives have their respective costs and benefits, Lambert concludes that antitrust is the welfare-superior approach to dealing with platform competition issues. According to Lambert:
This paper provides a comparative institutional analysis of the leading approaches to addressing the market power of large digital platforms: (1) the traditional US antitrust approach; (2) imposition of ex ante conduct rules such as those in the EU’s Digital Markets Act and several bills recently advanced by the Judiciary Committee of the US House of Representatives; and (3) ongoing agency oversight, exemplified by the UK’s newly established “Digital Markets Unit.” After identifying the advantages and disadvantages of each approach, this paper examines how they might play out in the context of digital platforms. It first examines whether antitrust is too slow and indeterminate to tackle market power concerns arising from digital platforms. It next considers possible error costs resulting from the most prominent proposed conduct rules. It then shows how three features of the agency oversight model—its broad focus, political susceptibility, and perpetual control—render it particularly vulnerable to rent-seeking efforts and agency capture. The paper concludes that antitrust’s downsides (relative indeterminacy and slowness) are likely to be less significant than those of ex ante conduct rules (large error costs resulting from high informational requirements) and ongoing agency oversight (rent-seeking and agency capture).
Lambert’s analysis should be carefully consulted by American legislators and potential rule-makers (including at the Federal Trade Commission) before they institute digital platform regulation. One also hopes that enlightened foreign competition officials will also take note of Professor Lambert’s well-reasoned study.
Why do digital industries routinely lead to one company having a very large share of the market (at least if one defines markets narrowly)? To anyone familiar with competition policy discussions, the answer might seem obvious: network effects, scale-related economies, and other barriers to entry lead to winner-take-all dynamics in platform industries. Accordingly, it is that believed the first platform to successfully unlock a given online market enjoys a determining first-mover advantage.
This narrative has become ubiquitous in policymaking circles. Thinking of this sort notably underpins high-profile reports on competition in digital markets (here, here, and here), as well ensuing attempts to regulate digital platforms, such as the draft American Innovation and Choice Online Act and the EU’s Digital Markets Act.
But are network effects and the like the only ways to explain why these markets look like this? While there is no definitive answer, scholars routinely overlook an alternative explanation that tends to undercut the narrative that tech markets have become non-contestable.
The alternative model is simple: faced with zero prices and the almost complete absence of switching costs, users have every reason to join their preferred platform. If user preferences are relatively uniform and one platform has a meaningful quality advantage, then there is every reason to expect that most consumers will all join the same one—even though the market remains highly contestable. On the other side of the equation, because platforms face very few capacity constraints, there are few limits to a given platform’s growth. As will be explained throughout this piece, this intuition is as old as economics itself.
The Bertrand Paradox
In 1883, French mathematician Joseph Bertrand published a powerful critique of two of the most high-profile economic thinkers of his time: the late Antoine Augustin Cournot and Léon Walras (it would be another seven years before Alfred Marshall published his famous principles of economics).
Bertrand criticized several of Cournot and Walras’ widely accepted findings. This included Cournot’s conclusion that duopoly competition would lead to prices above marginal cost—or, in other words, that duopolies were imperfectly competitive.
By reformulating the problem slightly, Bertand arrived at the opposite conclusion. He argued that each firm’s incentive to undercut its rival would ultimately lead to marginal cost pricing, and one seller potentially capturing the entire market:
There is a decisive objection [to Cournot’s model]: According to his hypothesis, no [supracompetitive] equilibrium is possible. There is no limit to price decreases; whatever the joint price being charged by firms, a competitor could always undercut this price and, with few exceptions, attract all consumers. If the competitor is allowed to get away with this [i.e. the rival does not react], it will double its profits.
This result is mainly driven by the assumption that, unlike in Cournot’s model, firms can immediately respond to their rival’s chosen price/quantity. In other words, Bertrand implicitly framed the competitive process as price competition, rather than quantity competition (under price competition, firms do not face any capacity constraints and they cannot commit to producing given quantities of a good):
If Cournot’s calculations mask this result, it is because of a remarkable oversight. Referring to them as D and D’, Cournot deals with the quantities sold by each of the two competitors and treats them as independent variables. He assumes that if one were to change by the will of one of the two sellers, the other one could remain fixed. The opposite is evidently true.
This later came to be known as the “Bertrand paradox”—the notion that duopoly-market configurations can produce the same outcome as perfect competition (i.e., P=MC).
But while Bertrand’s critique was ostensibly directed at Cournot’s model of duopoly competition, his underlying point was much broader. Above all, Bertrand seemed preoccupied with the notion that expressing economic problems mathematically merely gives them a veneer of accuracy. In that sense, he was one of the first economists (at least to my knowledge) to argue that the choice of assumptions has a tremendous influence on the predictions of economic models, potentially rendering them unreliable:
On other occasions, Cournot introduces assumptions that shield his reasoning from criticism—scholars can always present problems in a way that suits their reasoning.
All of this is not to say that Bertrand’s predictions regarding duopoly competition necessarily hold in real-world settings; evidence from experimental settings is mixed. Instead, the point is epistemological. Bertrand’s reasoning was groundbreaking because he ventured that market structures are not the sole determinants of consumer outcomes. More broadly, he argued that assumptions regarding the competitive process hold significant sway over the results that a given model may produce (and, as a result, over normative judgements concerning the desirability of given market configurations).
The Theory of Contestable Markets
Bertrand is certainly not the only economist to have suggested market structures alone do not determine competitive outcomes. In the early 1980s, William Baumol (and various co-authors) went one step further. Baumol argued that, under certain conditions, even monopoly market structures could deliver perfectly competitive outcomes. This thesis thus rejected the Structure-Conduct-Performance (“SCP”) Paradigm that dominated policy discussions of the time.
Baumol’s main point was that industry structure is not the main driver of market “contestability,” which is the key determinant of consumer outcomes. In his words:
In the limit, when entry and exit are completely free, efficient incumbent monopolists and oligopolists may in fact be able to prevent entry. But they can do so only by behaving virtuously, that is, by offering to consumers the benefits which competition would otherwise bring. For every deviation from good behavior instantly makes them vulnerable to hit-and-run entry.
For instance, it is widely accepted that “perfect competition” leads to low prices because firms are price-takers; if one does not sell at marginal cost, it will be undercut by rivals. Observers often assume this is due to the number of independent firms on the market. Baumol suggests this is wrong. Instead, the result is driven by the sanction that firms face for deviating from competitive pricing.
In other words, numerous competitors are a sufficient, but not necessary condition for competitive pricing. Monopolies can produce the same outcome when there is a present threat of entry and an incumbent’s deviation from competitive pricing would be sanctioned. This is notably the case when there are extremely low barriers to entry.
Take this hypothetical example from the world of cryptocurrencies. It is largely irrelevant to a user whether there are few or many crypto exchanges on which to trade coins, nonfungible tokens (NFTs), etc. What does matter is that there is at least one exchange that meets one’s needs in terms of both price and quality of service. This could happen because there are many competing exchanges, or because a failure to meet my needs by the few (or even one) exchange that does exist would attract the entry of others to which I could readily switch—thus keeping the behavior of the existing exchanges in check.
This has far-reaching implications for antitrust policy, as Baumol was quick to point out:
This immediately offers what may be a new insight on antitrust policy. It tells us that a history of absence of entry in an industry and a high concentration index may be signs of virtue, not of vice. This will be true when entry costs in our sense are negligible.
Given what precedes, Baumol surmised that industry structure must be driven by endogenous factors—such as firms’ cost structures—rather than the intensity of competition that they face. For instance, scale economies might make monopoly (or another structure) the most efficient configuration in some industries. But so long as rivals can sanction incumbents for failing to compete, the market remains contestable. Accordingly, at least in some industries, both the most efficient and the most contestable market configuration may entail some level of concentration.
To put this last point in even more concrete terms, online platform markets may have features that make scale (and large market shares) efficient. If so, there is every reason to believe that competition could lead to more, not less, concentration.
How Contestable Are Digital Markets?
The insights of Bertrand and Baumol have important ramifications for contemporary antitrust debates surrounding digital platforms. Indeed, it is critical to ascertain whether the (relatively) concentrated market structures we see in these industries are a sign of superior efficiency (and are consistent with potentially intense competition), or whether they are merely caused by barriers to entry.
The barrier-to-entry explanation has been repeated ad nauseam in recent scholarly reports, competition decisions, and pronouncements by legislators. There is thus little need to restate that thesis here. On the other hand, the contestability argument is almost systematically ignored.
Several factors suggest that online platform markets are far more contestable than critics routinely make them out to be.
First and foremost, consumer switching costs are extremely low for most online platforms. To cite but a few examples: Changing your default search engine requires at most a couple of clicks; joining a new social network can be done by downloading an app and importing your contacts to the app; and buying from an alternative online retailer is almost entirely frictionless, thanks to intermediaries such as PayPal.
These zero or near-zero switching costs are compounded by consumers’ ability to “multi-home.” In simple terms, joining TikTok does not require users to close their Facebook account. And the same applies to other online services. As a result, there is almost no opportunity cost to join a new platform. This further reduces the already tiny cost of switching.
Decades of app development have greatly improved the quality of applications’ graphical user interfaces (GUIs), to such an extent that costs to learn how to use a new app are mostly insignificant. Nowhere is this more apparent than for social media and sharing-economy apps (it may be less true for productivity suites that enable more complex operations). For instance, remembering a couple of intuitive swipe motions is almost all that is required to use TikTok. Likewise, ridesharing and food-delivery apps merely require users to be familiar with the general features of other map-based applications. It is almost unheard of for users to complain about usability—something that would have seemed impossible in the early 21st century, when complicated interfaces still plagued most software.
A second important argument in favor of contestability is that, by and large, online platforms face only limited capacity constraints. In other words, platforms can expand output rapidly (though not necessarily costlessly).
Perhaps the clearest example of this is the sudden rise of the Zoom service in early 2020. As a result of the COVID pandemic, Zoom went from around 10 million daily active users in early 2020 to more than 300 million by late April 2020. Despite being a relatively data-intensive service, Zoom did not struggle to meet this new demand from a more than 30-fold increase in its user base. The service never had to turn down users, reduce call quality, or significantly increase its price. In short, capacity largely followed demand for its service. Online industries thus seem closer to the Bertrand model of competition, where the best platform can almost immediately serve any consumers that demand its services.
Conclusion
Of course, none of this should be construed to declare that online markets are perfectly contestable. The central point is, instead, that critics are too quick to assume they are not. Take the following examples.
Scholars routinely cite the putatively strong concentration of digital markets to argue that big tech firms do not face strong competition, but this is a non sequitur. As Bertrand and Baumol (and others) show, what matters is not whether digital markets are concentrated, but whether they are contestable. If a superior rival could rapidly gain user traction, this alone will discipline the behavior of incumbents.
Markets where incumbents do not face significant entry from competitors are just as consistent with vigorous competition as they are with barriers to entry. Rivals could decline to enter either because incumbents have aggressively improved their product offerings or because they are shielded by barriers to entry (as critics suppose). The former is consistent with competition, the latter with monopoly slack.
Similarly, it would be wrong to presume, as many do, that concentration in online markets is necessarily driven by network effects and other scale-related economies. As ICLE scholars have argued elsewhere (here, here and here), these forces are not nearly as decisive as critics assume (and it is debatable that they constitute barriers to entry).
Finally, and perhaps most importantly, this piece has argued that many factors could explain the relatively concentrated market structures that we see in digital industries. The absence of switching costs and capacity constraints are but two such examples. These explanations, overlooked by many observers, suggest digital markets are more contestable than is commonly perceived.
In short, critics’ failure to meaningfully grapple with these issues serves to shape the prevailing zeitgeist in tech-policy debates. Cournot and Bertrand’s intuitions about oligopoly competition may be more than a century old, but they continue to be tested empirically. It is about time those same standards were applied to tech-policy debates.
A bipartisan group of senators unveiled legislation today that would dramatically curtail the ability of online platforms to “self-preference” their own services—for example, when Apple pre-installs its own Weather or Podcasts apps on the iPhone, giving it an advantage that independent apps don’t have. The measure accompanies a House bill that included similar provisions, with some changes.
1. The Senate bill closely resembles the House version, and the small improvements will probably not amount to much in practice.
The major substantive changes we have seen between the House bill and the Senate version are:
Violations in Section 2(a) have been modified to refer only to conduct that “unfairly” preferences, limits, or discriminates between the platform’s products and others, and that “materially harm[s] competition on the covered platform,” rather than banning all preferencing, limits, or discrimination.
The evidentiary burden required throughout the bill has been changed from “clear and convincing” to a “preponderance of evidence” (in other words, greater than 50%).
An affirmative defense has been added to permit a platform to escape liability if it can establish that challenged conduct that “was narrowly tailored, was nonpretextual, and was necessary to… maintain or enhance the core functionality of the covered platform.”
The minimum market capitalization for “covered platforms” has been lowered from $600 billion to $550 billion.
The Senate bill would assess fines of 15% of revenues from the period during which the conduct occurred, in contrast with the House bill, which set fines equal to the greater of either 15% of prior-year revenues or 30% of revenues from the period during which the conduct occurred.
Unlike the House bill, the Senate bill does not create a private right of action. Only the U.S. Justice Department (DOJ), Federal Trade Commission (FTC), and state attorneys-generals could bring enforcement actions on the basis of the bill.
Item one here certainly mitigates the most extreme risks of the House bill, which was drafted, bizarrely, to ban all “preferencing” or “discrimination” by platforms. If that were made law, it could literally have broken much of the Internet. The softened language reduces that risk somewhat.
However, Section 2(b), which lists types of conduct that would presumptively establish a violation under Section 2(a), is largely unchanged. As outlined here, this would amount to a broad ban on a wide swath of beneficial conduct. And “unfair” and “material” are notoriously slippery concepts. As a practical matter, their inclusion here may not significantly alter the course of enforcement under the Senate legislation from what would ensue under the House version.
Item three, which allows challenged conduct to be defended if it is “necessary to… maintain or enhance the core functionality of the covered platform,” may also protect some conduct. But because the bill requires companies to prove that challenged conduct is not only beneficial, but necessary to realize those benefits, it effectively implements a “guilty until proven innocent” standard that is likely to prove impossible to meet. The threat of permanent injunctions and enormous fines will mean that, in many cases, companies simply won’t be able to justify the expense of endeavoring to improve even the “core functionality” of their platforms in any way that could trigger the bill’s liability provisions. Thus, again, as a practical matter, the difference between the Senate and House bills may be only superficial.
The effect of this will likely be to diminish product innovation in these areas, because companies could not know in advance whether the benefits of doing so would be worth the legal risk. We have previously highlighted existing conduct that may be lost if a bill like this passes, such as pre-installation of apps or embedding maps and other “rich” results in boxes on search engine results pages. But the biggest loss may be things we don’t even know about yet, that just never happen because the reward from experimentation is not worth the risk of being found to be “discriminating” against a competitor.
2. The prohibition on “unfair self-preferencing” is vague and expansive and will make Google, Amazon, Facebook, and Apple’s products worse. Consumers don’t want digital platforms to be dumb pipes, or to act like a telephone network or sewer system. The Internet is filled with a superabundance of information and options, as well as a host of malicious actors. Good digital platforms act as middlemen, sorting information in useful ways and taking on some of the risk that exists when, inevitably, we end up doing business with untrustworthy actors.
When users have the choice, they tend to prefer platforms that do quite a bit of “discrimination”—that is, favoring some sellers over others, or offering their own related products or services through the platform. Most people prefer Amazon to eBay because eBay is chaotic and riskier to use.
Competitors that decry self-preferencing by the largest platforms—integrating two different products with each other, like putting a maps box showing only the search engine’s own maps on a search engine results page—argue that the conduct is enabled only by a platform’s market dominance and does not benefit consumers.
Yet these companies often do exactly the same thing in their own products, regardless of whether they have market power. Yelp includes a map on its search results page, not just restaurant listings. DuckDuckGo does the same. If these companies offer these features, it is presumably because they think their users want such results. It seems perfectly plausible that Google does the same because it thinks its users—literally the same users, in most cases—also want them.
The notion that self-preferencing by platforms is harmful to innovation is entirely speculative. Moreover, it is flatly contrary to a range of studies showing that the opposite is likely true. In reality, platform competition is more complicated than simple theories of vertical discrimination would have it, and there is certainly no basis for a presumption of harm.
3. The bill massively empowers an FTC that seems intent to use antitrust to achieve political goals. The House bill would enable competitors to pepper covered platforms with frivolous lawsuits. The bill’s sponsors presumably hope that removing the private right of action will help to avoid that. But the bill still leaves intact a much more serious risk to the rule of law: the bill’s provisions are so broad that federal antitrust regulators will have enormous discretion over which cases they take.
This means that whoever is running the FTC and DOJ will be able to threaten covered platforms with a broad array of lawsuits, potentially to influence or control their conduct in other, unrelated areas. While some supporters of the bill regard this as a positive, most antitrust watchers would greet this power with much greater skepticism. Fundamentally, both bills grant antitrust enforcers wildly broad powers to pursue goals unrelated to competition. FTC Chair Lina Khan has, for example, argued that “the dispersion of political and economic control” ought to be antitrust’s goal. Commissioner Rebecca Kelly-Slaughter has argued that antitrust should be “antiracist”.
Whatever the desirability of these goals, the broad discretionary authority the bills confer on the antitrust agencies means that individual commissioners may have significantly greater scope to pursue the goals that they believe to be right, rather than Congress.
4. The bill adopts European principles of competition regulation. These are, to put it mildly, not obviously conducive to the sort of innovation and business growth that Americans may expect. Europe has no tech giants of its own, a condition that shows little sign of changing. Apple, alone, is worth as much as the top 30 companies in Germany’s DAX index, and the top 40 in France’s CAC index. Landmark European competition cases have seen Google fined for embedding Shopping results in the Search page—not because it hurt consumers, but because it hurt competing price–comparison websites.
A fundamental difference between American and European competition regimes is that the U.S. system is far more friendly to businesses that obtain dominant market positions because they have offered better products more cheaply. Under the American system, successful businesses are normally given broad scope to charge high prices and refuse to deal with competitors. This helps to increase the rewards and incentive to innovate and invest in order to obtain that strong market position. The European model is far more burdensome.
The Senate bill adopts a European approach to refusals to deal—the same approach that led the European Commission to fine Microsoft for including Windows Media Player with Windows—and applies it across Big Tech broadly. Adopting this kind of approach may end up undermining elements of U.S. law that support innovation and growth.
5. The proposals are based on a misunderstanding of the state of competition in the American economy, and of antitrust enforcement. It is widely believed that the U.S. economy has seen diminished competition. This is mistaken, particularly with respect to digital markets. Apparent rises in market concentration and profit margins disappear when we look more closely: local-level concentration is falling even as national-level concentration is rising, driven by more efficient chains setting up more stores in areas that were previously served by only one or two firms.
Nor have the number of antitrust cases brought by federal antitrust agencies fallen. The likelihood of a merger being challenged more than doubled between 1979 and 2017. And there is little reason to believe that the deterrent effect of antitrust has weakened. Many critics of Big Tech have decided that there must be a problem and have worked backwards from that conclusion, selecting whatever evidence supports it and ignoring the evidence that does not. The consequence of such motivated reasoning is bills like this.
See Geoff’s April 2020 written testimony to the House Judiciary Investigation Into Competition in Digital Marketshere.
Policymakers’ recent focus on how Big Tech should be treated under antitrust law has been accompanied by claims that companies like Facebook and Google hold dominant positions in various “markets.” Notwithstanding the tendency to conflate whether a firm is large with whether it hold a dominant position, we must first answer the question most of these claims tend to ignore: “dominant over what?”
For example, as set out in this earlier Truth on the Market post, a recent lawsuit filed by various states and the U.S. Justice Department outlined five areas related to online display advertising over which Google is alleged by the plaintiffs to hold a dominant position. But crucially, none appear to have been arrived at via the application of economic reasoning.
As that post explained, other forms of advertising (such as online search and offline advertising) might form part of a “relevant market” (i.e., the market in which a product actually competes) over which Google’s alleged dominance should be assessed. The post makes a strong case for the actual relevant market being much broader than that claimed in the lawsuit. Of course, some might disagree with that assessment, so it is useful to step back and examine the principles that underlie and motivate how a relevant market is defined.
In any antitrust case, defining the relevant market should be regarded as a means to an end, not an end in itself. While such definitions provide the basis to calculate market shares, the process of thinking about relevant markets also should provide a framework to consider and highlight important aspects of the case. The process enables one to think about how a particular firm and market operates, the constraints that it and rival firms face, and whether entry by other firms is feasible or likely.
Many naïve attempts to define the relevant market will limit their analysis to a particular industry. But an industry could include too few competitors, or it might even include too many—for example, if some firms in the industry generate products that do not constitute strong competitive constraints. If one were to define all cars as the “relevant” market, that would imply that a Dacia Sandero (a supermini model produced Renault’s Romanian subsidiary Dacia) constrains the price of Maserati’s Quattroporte luxury sports sedan as much as the Ferrari Portofino grand touring sports car does. This is very unlikely to hold in reality.[1]
The relevant market should be the smallest possible group of products and services that contains all such products and services that could provide a reasonable competitive constraint. But that, of course, merely raises the question of what is meant by a “reasonable competitive constraint.” Thankfully, by applying economic reasoning, we can answer that question.
More specifically, we have the “hypothetical monopolist test.” This test operates by considering whether a hypothetical monopolist (i.e., a single firm that controlled all the products considered part of the relevant market) could profitably undertake “a small but significant, non-transitory, increase in price” (typically shortened as the SSNIP test).[2]
If the hypothetical monopolist could profitably implement this increase in price, then the group of products under consideration is said to constitute a relevant market. On the other hand, if the hypothetical monopolist could not profitably increase the price of that group of products (due to demand-side or supply-side constraints on their ability to increase prices), then that group of products is not a relevant market, and more products need to be included in the candidate relevant market. The process of widening the group of products continues until the hypothetical monopolist could profitably increase prices over that group.
So how does this test work in practice? Let’s use an example to make things concrete. In particular, let’s focus on Google’s display advertising, as that has been a significant focus of attention. Starting from the narrowest possible market, Google’s own display advertising, the HM test would ask whether a hypothetical monopolist controlling these services (and just these services) could profitably increase prices of these services permanently by 5% to 10%.
At this initial stage, it is important to avoid the “cellophane fallacy,” in which a monopolist firm could not profitably increase its prices by 5% to 10% because it is already charging the monopoly price. This fallacy usually arises in situations where the product under consideration has very few (if any) substitutes. But as has been shown here, there are already plenty of alternatives to Google’s display-advertising services, so we can be reasonably confident that the fallacy does not apply here.
We would then consider what is likely to happen if Google were to increase the prices of its online display advertising services by 5% to 10%. Given the plethora of other options (such as Microsoft, Facebook, and Simpli.fi) customers have for obtaining online display ads, a sufficiently high number of Google’s customers are likely to switch away, such that the price increase would not be profitable. It is therefore necessary to expand the candidate relevant market to include those closest alternatives to which Google’s customers would switch.
We repeat the exercise, but now with the hypothetical monopolist also increasing the prices of those newly included products. It might be the case that alternatives such as online search ads (as opposed to display ads), print advertising, TV advertising and/or other forms of advertising would sufficiently constrain the hypothetical monopolist in this case that those other alternatives form part of the relevant market.
In determining whether an alternative sufficiently constrains our hypothetical monopolist, it is important to consider actual consumer/firm behavior, rather than relying on products having “similar” characteristics. Although constraints can come from either the demand side (i.e., customers switching to another provider) or the supply side (entry/switching by other providers to start producing the products offered by the HM), for market-definition purposes, it is almost always demand-side switching that matters most. Switching by consumers tends to happen much more quickly than does switching by providers, such that it can be a more effective constraint. (Note that supply-side switching is still important when assessing overall competitive constraints, but because such switching can take one or more years, it is usually considered in the overall competitive assessment, rather than at the market-definition stage.)
Identifying which alternatives consumers do and would switch to therefore highlights the rival products and services that constrain the candidate hypothetical monopolist. It is only once the hypothetical monopolist test has been completed and the relevant market has been found that market shares can be calculated.[3]
It is at that point than an assessment of a firm’s alleged market power (or of a proposed merger) can proceed. This is why claims that “Facebook is a monopolist” or that “Google has market power” often fail at the first hurdle (indeed, in the case of Facebook, they recently have.)
Indeed, I would go so far as to argue that any antitrust claim that does not first undertake a market-definition exercise with sound economic reasoning akin to that described above should be discounted and ignored.
[1] Some might argue that there is a “chain of substitution” from the Maserati to, for example, an Audi A4, to a Ford Focus, to a Mini, to a Dacia Sandero, such that the latter does, indeed, provide some constraint on the former. However, the size of that constraint is likely to be de minimis, given how many “links” there are in that chain.
[2] The “small but significant” price increase is usually taken to be between 5% and 10%.
[3] Even if a product or group of products ends up excluded from the definition of the relevant market, these products can still form a competitive constraint in the overall assessment and are still considered at that point.
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