Archives For Shane Greenstein

Antitrust Statutorification

Nicolas Petit —  15 July 2021

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In Amazon, Antitrust & Competition, Apple, Data Privacy & Security, Economic Theory, European Union, Facebook, Federal Trade Commission, Google, International, Market Definition, Mergers & Acquisitions, Platforms, Symposia, Symposium on Big Tech and the Digital Economy: The Moligopoly Scenario, Truth on the Market, Twitter , , , , , , , , , , , , , , , , , , , , , , , , , , ,
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The Fox and Shepherd Problem

Shane Greenstein —  18 October 2020
[TOTM: The following is part of a symposium by TOTM guests and authors marking the release of Nicolas Petit’s “Big Tech and the Digital Economy: The Moligopoly Scenario.” The entire series of posts is available here.

This post is authored by Shane Greenstein (Professor of Business Administration, Harvard Business School).]

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

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

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

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

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

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

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

Gaps and analysis

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

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

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

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

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

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

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

Origins

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

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

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

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

Lessons from prior experience

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

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

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

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

Policy

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

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

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

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

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

In Amazon, Apple, Economic Theory, Facebook, Federal Trade Commission, Google, Platforms, Symposia, Symposium on Big Tech and the Digital Economy: The Moligopoly Scenario, Truth on the Market , , , , , , , , , ,
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Symposium on Big Tech and the Digital Economy: The Moligopoly Scenario

Sam Bowman —  12 October 2020
[TOTM: The following is part of a symposium by TOTM guests and authors marking the release of Nicolas Petit’s “Big Tech and the Digital Economy: The Moligopoly Scenario.” The entire series of posts is available here.]

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

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

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

Confirmed Participants

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

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

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

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

In Amazon, Antitrust & Competition, Economic Theory, International, International Center for Law & Economics, Platforms, Symposia, Symposium on Big Tech and the Digital Economy: The Moligopoly Scenario, Truth on the Market , , , , , , , , ,
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Welcome Digitopoly!

Josh Wright —  28 September 2011

This looks like a great new blog on economics and technology from a top notch group of economists:  Erik Brynjolfsson, Joshua Gans and Shane Greenstein.  Welcome Digitopoly.  Now added to the blogroll.  Here’s their description of the blog:

This blog was established by Professors Erik Brynjolfsson, Joshua Gans and Shane Greenstein. They noticed that there were many blogs devoted to digital developments and consumer products but the selection focussing on economic and business aspects of the digital world was very limited. Digitopoly’s mission is to provide an economic and strategic management perspective on digital opportunities, trends, limits, trade-offs and platforms; expanding commentary in this important space.

The blog’s name — Digitopoly — reflects our broad interests in the impact of digital technology on competition. While, in some cases, our concern is the preservation of competition in the face of pressures toward monopoly, in others we see opportunities for greater competition and welfare benefits.

Our logo is deliberately iconic. The heavy set line in the graph could represent Moore’s Law (for processing power as time progresses) or Metcalfe’s Law (for the value of networks as more join).  It overtakes the simple linear trend represented by thin, broken line. This reflects the idea that linear ways of thinking rarely serve us well in the digital economy.

Check it out.

In Economic Theory, Platforms ,
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My blackberry’s not working and other extended puns

Geoffrey Manne —  9 February 2011

Having just discovered Kellogg economist Shane Greenstein’s blog, I have also now just discovered on his blog this super-hilarious video.  Well worth a watch through to the end:

In Economic Theory, Truth on the Market
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On the ethical dimension of l’affair hiybbprqag

Geoffrey Manne —  9 February 2011

Former TOTM blog symposium participant Joshua Gans (visiting Microsoft Research) has a post at TAP on l’affair hiybbprqag, about which I blogged previously here.

Gans notes, as I did, that Microsoft is not engaged in wholesale copying of Google’s search results, even though doing so would be technologically feasible.  But Gans goes on to draw a normative conclusion:

Let’s start with “imitation,” “copying” and its stronger variants of “plagiarism” and “cheating.” Had Bing wanted to do this and directly map Google’s search results onto its own, it could have done it. It could have set up programs to enter terms in Google and skimmed off the results and then used them directly. And I think we can all agree that that is wrong. Why? Two reasons. First, if Google has invested to produce those results, if others can just hang off them and copy it, Google’s may not earn the return on its efforts it should do. Second, if Bing were doing this and representing itself as a different kind of search, then that misrepresentation would be misleading. Thus, imitation reduces Google’s reward for innovation while adding no value in terms of diversity.

His first reason why this would be wrong is . . . silly.  I mean, I don’t want to get into a moral debate, but since when is it wrong to engage in activity that “may” hamper another firm’s ability to earn the return on its effort that it “should” (whatever “should” means here)?  I always thought that was called “competition” and we encouraged it.  As I noted the other day, competition via imitation is an important part of Schumpeterian capitalism.  To claim that reducing another company’s profits via imitation is wrong, but doing so via innovation is good and noble, is to hang one’s hat on a distinction that does not really exist.

The second argument, that doing so would amount to misrepresentation, is possible, but I’m sure if Microsoft were actually just copying Google’s results their representations would look different than they do now and the problem would probably not exist, so this claim is speculative, at best.

Now, regardless, I doubt it would be profitable for Microsoft to copy Google wholesale, and this is basically just a red herring (as Gans understands–he goes on to discuss the more “innocuous” imitation at issue).  While I think Gans’ claims that it would be “wrong” are just hand waiving, I am confident it would be “wrong” from the point of view of Microsoft’s bottom line–or else they would already be doing it.  In this context, that would seem to be the only standard that matters, unless there were a legal basis for the claim.

On this score, Gans points us to Shane Greenstein (Kellogg).  Greenstein writes:

Let’s start with a weak standard, the law. Legally speaking, imitation is allowed so long as a firm does not violate laws governing patents, copyright, or trade secrets. Patents obviously do not apply to this situation, and neither does copyright  because Google does not get a copyright on a search result. It also does not appear as if Googles trade secrets were violated. So, generally speaking, it does not appear as if any law has been broken.

This is all well and good, but Greenstein goes on to engage in his own casual moralizing, and his comments are worth reproducing (imitating?) at some length:

The norms of rivalry

There is nothing wrong with one retailer walking through a rival’s shop and getting ideas for what to do. There is really nothing wrong with a designer of a piece of electronic equipment buying a rival’s product and studying it in order to get new ideas for a  better design. 

In the modern Internet, however, there is no longer any privacy for users. Providers want to know as much as they can, and generally the rich suppliers can learn quite a lot about user conduct and preferences.

That means that rivals can learn a great deal about how users conduct their business, even when they are at a rival’s site. It is as if one retailer had a camera in a rival’s store, or one designer could learn the names of the buyer’s of their rival’s products, and interview them right away.

In the offline world, such intimate familiarity with a rival’s users and their transactions would be uncomfortable. It would seem like an intrusion on the transaction between user and supplier. Why is it permissible in the online world? Why is there any confusion about this being an intrusion in the online world? Why isn’t Microsoft’s behavior seen — cut and dry — as an intrusion?

In other words, the transaction between supplier and user is between supplier and user, and nobody else should be able to observe it without permission of both supplier and user. The user alone does not have the right or ability to invite another party to observe all aspects of the transaction.

That is what bothers me about Bing’s behavior. There is nothing wrong with them observing users, but they are doing more than just that. They are observing their rival’s transaction with users. And learning from it. In other contexts that would not be allowed without explicit permission of both parties — both user and supplier.

Moreover, one party does not like it in this case, as they claim the transaction with users as something they have a right to govern and keep to themselves. There is some merit in that claim.

In most contexts it seems like the supplier’s wishes should be respected. Why not online? (emphasis mine)

Where on Earth do these moral standards come from?  In what way is it not “allowed” (whatever that means here) for a firm to observe and learn from a rival’s transactions with users?  I can see why the rival would prefer it to be otherwise, of course, but so what?  They would also prefer to eradicate their meddlesome rival entirely, if possible (hence Microsoft’s considerable engagement with antitrust authorities concerning Google’s business), but we hardly elevate such desires to the realm of the moral.

What I find most troublesome is the controlling, regulatory mindset implicit in these analyses.  Here’s Gans again:

Outright imitation of this type should be prohibited but what do we call some more innocuous types? Just look at how the look and feel of the iPhone has been adopted by some mobile software developers just as the consumer success of graphic based interfaces did in an earlier time. This certainly reduces Apple’s reward for its innovations but the hit on diversity is murkier because while some features are common, competitors have tried to differentiate themselves. So this is not imitation but it is something more common, leveraging without compensation and how you feel about it depends on just how much reward you think pioneers should receive.

It is usually politicians and not economists (other than politico-economists like Krugman) who think they have a handle on–and an obligation to do something about–things like “how much reward . . .pioneers should receive.”  I would have thought the obvious answer to the question would be either “the optimal amount, but good luck knowing what that is or expecting to find it in the real world,” or else, for the Second Best, “whatever the market gives them.”  The implication that there is some moral standard appreciable by human mortals, or even human economists, is a recipe for disaster.

In Apple, Copyright, Economic Theory, Google, Intellectual Property, Monopolization, Patent, Platforms , , , , , , ,
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