More on the Warren Platform Fallacy

I have argued elsewhere that Elizabeth Warren’s proposed rule that firms not be allowed to compete on their own platforms makes no sense because a platform is just a production input, and all firms must own at least some of their inputs in order to exist. Does your company own its own office computers? Then it competes on its own platform.

But even when a company doesn’t compete on its own platform, the company will often have exactly the same incentive to favor some platform users over others that Warren seems to want to eliminate through her proposed rule.

Consider a shopping mall. The owner of the mall will not typically own any of the stores that lease space in the mall. So the mall owner doesn’t compete on its own platform. (At least not on the mall platform, but certainly on others. The mall owner doubtless owns a few computers.)

But even so, the mall owner does still have an incentive to favor some of its lessees over others, just as the owner would have an incentive to favor its own stores over those of competitors if the owner were to integrate downstream into retail and compete on its own platform. Suppose, for example, that the mall owner has a history of being able to negotiate more favorable lease terms from one restaurant in the mall than from another. The mall owner might then have an incentive not to renew the lease of the other restaurant, in order to make way for expansion of the first.

The lesson here is that whether a platform owner competes on its own platform or not, the owner will have a financial interest in all of the firms that do compete on the owner’s platform (because they all must pay the owner for access), and that interest is unlikely to be equal across all competitors on the platform. Indeed, a platform owner’s financial interest in a particularly profitable client is no different in effect than a platform owner’s financial interest in a business that the owner owns.

If we are not troubled by the fact that a platform owner that does not compete on its own platform will regularly use its power to pick winners–which is just was a mall owner does when it refuses to renew the lease of one shop, but continues that of another–then we should not be troubled by the fact that a platform owner that does compete on its own platform will sometimes favor its own businesses over those of competitors.

It seems fairly clear that what really bothers Warren is not that as a general matter platforms have an incentive to pick winners, whether themselves or others, on their own platforms, but rather that some specific platforms, like Amazon, may not be wielding that power wisely, or perhaps have so much power that government oversight of their decisionmaking is appropriate.

But the solution to that problem is not to gin up a broad general principle, like the one that no firm should be able to compete on its own platform, and then let that principle loose to wreak havoc across the economy. The solution is to empower a regulatory agency to supervise the platform in question, and decide, in light of the specifics of that particular business, whether intervention to supervise the platform’s choices is warranted.

That’s what the FCC did forever with respect to AT&T, back when AT&T was the nation’s only telecommunications platform. And that’s what can be done with Amazon, or other tech giants, to address concerns about possible arbitrary use of platform power.