The elimination of MFNs, argue antitrust experts, will promote competition between Amazon and other ecommerce platforms, by allowing third-party sellers to pass on savings to consumers from doing business on lower-fee platforms. If Barnes & Noble, for example, charges a bookseller less to sell books on the Barnes & Noble website, the bookseller will now be free to charge a lower price for its books on the Barnes & Noble website than the seller charges for the same books on Amazon. That in turn will drive business to the Barnes & Noble website, giving Barnes & Noble a reward for lowering its fees and innovating in cost reduction.
That would be the right way to think about MFNs, if the choice were only between laissez faire and antitrust. But there is in fact a third option, which strictly dominates both of the others. Namely, to regulate Amazon’s fees. If Amazon were required to obtain federal government approval of the fees it charges third-party sellers for use of its platform, then regulators could insist on low fees, and even force Amazon to innovate in cost reduction by mandating fees that are below current costs (preventing Amazon from turning a profit unless it innovates). That would unleash all of the benefits that greater competition between platforms promises to provide.
But it would also preserve advantages that platform competition simply cannot offer. Consumers, after all, like knowing that the price they get on Amazon is the best price available anywhere for the product. Anyone who has wasted hours on one travel website after another trying to find the best airfare knows how much time and effort is required to get the best price when such guarantees do not exist.
Indeed, through MFNs, Amazon effectively leveraged its size to impose a law of one price for consumer products across the internet, and that had huge consumer benefits. Amazon is so big that virtually all products of any interest to consumers are sold through its website. By imposing MFNs, Amazon ensured that consumers wouldn’t need to engage in wasteful and time-consuming searches for the best internet prices when they went to buy online. By going to Amazon, consumers could be sure to find any product available on the internet at the best possible price. Amazon used its size to make life easy for consumers, by turning the internet into a one-stop shop.
We must think of Amazon’s MFNs as accomplishing something that we might ideally want a government regulator to accomplish: making it impossible for anyone, anywhere on the internet, to get ripped off by being charged a higher price for a product than a price available for the same product somewhere else. The MFNs, in other words, were an internet-wide guarantee against price discrimination, that nemesis of all consumer welfare.
While the MFNs did prevent third-party sellers from passing the gains from buying on cheaper platforms on to consumers, the MFNs’ elimination of price discrimination was also valuable to consumers. To give but one example, consider that price discriminating firms frequently use search costs to distinguish between high and low willingness to pay buyers: they offer lower prices only to those who signal their inability to pay more by engaging in wasteful searches for better prices. The poor must clip coupons to get lower prices — or waste time searching for better prices on seller websites or obscure platforms — whereas the rich sail through checkout lines. The MFNs spared consumers such indignities.
Their demise undermines the public benefit of one internet price that Amazon was able to provide to consumers thanks to the firm’s size. And that’s why government regulation of Amazon’s fees is better than either laissez faire or the antitrust solution of simply eliminating the MFNs.
A fee-regulated Amazon would be unable to take advantage of the MFNs to charge higher fees, or to fail to continue to invest in innovations that would reduce the cost of providing platform services, thus the concerns about MFNs that antitrust and competition policy are intended to address would also be addressed by fee regulation. But fee regulation would not require elimination of the MFNs, and would therefore preserve the huge benefits to consumers that come from the guarantee of always being able to find the lowest internet price in one place: Amazon.
Thus fee regulation would realize all of the benefits of competition, while inflicting none of the costs on consumers. As in so many areas, we must therefore understand the antitrust victory here to be only relative at best. Society might be better off as a result of the demise of Amazon’s MFNs, but only if the gains to consumers in the form of more platform competition happen to outweigh the losses to consumers from the demise of the guarantee of one internet price and the associated return of price discrimination. But even if society is rendered better off by the demise of the MFNs, it certainly is not rendered as much better off as it would be were policymakers simply to step in to regulate Amazon’s fees and allow MFNs, and the Internet of one price, to prevail.
Much of the popular discussion of the trust question has proceeded upon the assumption that trusts are the result of some sort of immoral conduct which should be made illegal. But the same facts which led to the grant of exclusive franchises (legal monopolies) in the case of local public utilities, have led also to a belief that many of the monopolies which have grown without formal legal grant may likewise be beneficial if subjected to proper public control. The courts in this country, as well as many economists who specialize on “trusts,” have long since come to the conclusion that the anti-trust laws, even if desirable, do not in all cases furnish a sufficient solution of the monopoly problem, and that accordingly governmental price-fixing may be a desirable supplement. But neither the courts nor the teachers of “trusts” seem fully to realize that the determination of a “fair price” is not a search for some objective fact, but that it involves the adoption of a policy; and that the policy cannot be adopted intelligently without a drastic revision of accepted economic theory as well as the accepted theory of private ownership; and that the officials charged with the formation of the policy must perforce resort to some theory as to the proper distribution of income and as to the channels into which industry should flow.
Robert Lee Hale, Economic Theory and the Statesman, in The Trend of Economics 189, 193 (Rexford Guy Tugwell, ed., 1924).
Commentators regard the [Alcoa] case as one of the most powerful statements in antitrust jurisprudence for the robust efforts to constrain dominant firms. Discussions of the case often place [eminent progressive jurist] Learned Hand at the center of attention and ascribe to Hand the views espoused in the court’s decision. Hand believed otherwise. He disliked the antitrust laws from his earliest days in public life. In a representative statement of his views, Hand wrote to a friend in 1914:
“I do not agree by any means that the Sherman Act is of value or that the progressive party should take its position against monopoly. . . . I have always suspected that there are monopolies possible which depend for their maintenance wholly upon economic efficiency and which it would be an economic blunder to destroy.”
. . .
In a separate memorandum [in the Alcoa case], Learned Hand noted: “There are two possible ways of dealing with [monopolies]: to regulate, or to forbid, them. Since we have no way of regulating them [because regulatory legislation has not been put into place], we forbid them. I don’t think much of that way, but I didn’t set it up; and now the ordinary run of our fellow-citizens — some, even of the ‘rugged individualists’ — regard the Sherman Act as the palladium of their liberties.”
Andrew I. Gavil et al., Antitrust Law in Perspective 475, 477 (3d ed. 2017).
It shall be the duty of the General Assembly from time to time, as necessity may require, to enact such laws as may be necessary to prevent all trusts, pools, combinations or other organizations, from combining to depreciate below its real value any article, or to enhance the cost of any article above its real value.
The Constitution of the Commonwealth of Kentucky. Adopted September 28, 1891. Frankfort, Ky.: E. Polk Johnson, Public Printer and Binder. 1892.
Lest we forget that deregulation was a project of the left, not just the right, here is Marxist legal historian Morton Horwitz in 1984:
Almost nothing in the antitrust debates supports what would soon become Theodore Roosevelt’s new conservative distinction between “good trusts” and “bad.” Roosevelt was operating under a newly emerging view that corporate concentration could be justified by economic efficiency-increasing returns to scale. Only corporations that achieved dominance through illicit means-financial manipulation or unfair competition-were “bad” trusts. By contrast, the old conservatives who passed the Sherman Act did not believe that the neoclassical economic law of diminishing returns had been repealed. [B]igness was per se bad. From their perspective, large-scale economic concentration was inherently illicit because, according to economic laws, there was no way corporations could legitimately achieve overwhelming economic dominance. Almost nothing in the Sherman Act debates suggests that economic concentration could be justified on efficiency grounds. That was for a later day.
. . .
The regulatory state, originally conceived as a means of checking corporate power, has gradually become discredited. In most cases deregulation now means that corporate power will simply be left unchecked. The original Progressive conception of the state as the means to our salvation must be fundamentally reconsidered. Without the sort of decentralized institutions that the old conservatives (and Progressives like Brandeis) supported, we seem destined to fluctuate between deregulation and its somewhat less overtly rapacious and more noble sounding sibling, regulation. Deregulation generally means unrestrained corporate control. Regulation frequently means more subtle, more disguised, and often more effective forms of corporate control.
Morton J. Horwitz, Progressive Legal Historiography, 63 Or. L. Rev. 679, 686 (1984).
Curiously, Horwitz’s position is today fast becoming the mainstream, bipartisan position on markets. Thus, to borrow Horwitz’s schema, we have come full circle, from the old conservative vision of antitrust-defended, laissez-faire markets of atomized sellers, to the new conservative/Progressive consensus on the importance of size, to the triumph of the Progressive accommodation with size in the form of New Deal rate regulation, to the triumph of the new conservative accommodation with size in the form of deregulation and Chicago School antitrust, to today’s gathering return to the old conservative rejection of size and embrace of an antitrust-defended atomized laissez faire. Ah me.
The key point Brandeis missed, says McCraw, was that while in all fields tighter forms of combination were attempted, their potential success ultimately depended on the technological and managerial limitations and possibilities uniquely inherent in each particular industry. In some industries, large, tight combinations had tremendous potential; in others, they were bound to fail under the pressure of competition. Appalled by “bigness” and witnessing the failures among the trusts, Brandeis “too simply” inferred that bigness was inefficient as a general matter and failed to undertake a deeper, empirical investigation of the specific conditions and developments in various particular industries. Positing a single “bigness”-based explanatory model for problems throughout the economy as a whole led Brandeis into serious policy misjudgments because it “doomed to superficiality both his diagnosis and his prescription.”
James May, Antitrust Practice and Procedure In the Formative Era: The Constitutional and Conceptual Reach of State Antitrust Law, 1880-1918, 135 U. Pa. L. Rev. 495, 559 (1987).
Frank Lorenzo, head of Texas International Airlines:
[I]f the Aviation Act of 1975[, which deregulated the airlines,] goes into effect, we will, over a period of years, end up with a couple of very large airlines. There will be many small airlines that will start up here and there, but they will never amount to a very significant amount of the transportation market. The smaller certificated airlines like Texas International[, which was acquired in 1982 by Continental Airlines, which itself merged with United in 2010,] will shortly become history. The operating and financial advantages will go to the large carriers with substantial resources, and to very small carriers that temporarily have lower labor costs, primarily because they are non-unionized.
Quoted in Richard H.K. Vietor, Contrived Competition: Regulation and Deregulation in America 54 (1994).
In 1978, when Congress deregulated the airline industry, there were 10 airlines that provided scheduled national and international service, and those 10 accounted for 90 percent of the domestic marketplace. Today, [in 2016,] there are four major airlines and a few smaller ones providing comparable service, and the four major airlines provide 80 percent of U.S. domestic flights.
Smith rightly concludes that breaking up big firms is not a perfect solution to the monopoly problem. (He thinks, incorrectly, in my view, that breakup is too hard; the real reason not to break up big firms is that they are often more efficient than small ones.) And he rightly gives a list of alternatives to breaking big firms up, including unions, minimum wage laws, putting workers on corporate boards, and imposing tougher labor standards on large firms than small. But he doesn’t seem to see where all of these alternatives point.
Where do minimum wage laws and applying tougher labor standards to large firms point?
To rate regulation, of course. To that approach to governing the market that once — in the decades following World War Two — stretched from securities brokerage to railroads to telephones to airlines.
In a regulated industry, a government administrative agency dictates prices and performance standards to the privately-owned firms that compete in the market. Applying tougher labor standards to firms with monopoly power, a proposal that Smith attributes to Nick Hanauer, is a shade of the old rate regulation, which was often imposed on monopolized industries, such as telephone service, to restrain the power of large firms.
Minimum wage laws are themselves a form of blunt price regulation, blunt because they are imposed on a one-off basis by legislatures instead of by expert administrative agencies with authority to revise the prices dynamically in response to changing circumstances. And both unionization and putting workers on corporate boards are even blunter forms of rate regulation, in that they hope that by increasing the bargaining power of workers, workers will succeed at negotiating the higher wages and better working conditions that a regulator would be empowered to impose by fiat.
True, most of Smith’s proposals are aimed at softening the consequences of labor market monopsony, whereas rate regulation was generally aimed at softening the consequences of consumer market monopoly. But there’s no reason why the Department of Labor couldn’t apply the tenets of rate regulation to labor markets.
Rate regulation is the most developed form of intervention in markets, one that encompasses all the other forms, but also goes beyond them, so it’s the natural choice for achieving just market-level distributions of wealth where unregulated markets fail to do so. A rate regulator can unionize an industry if the regulator wishes, just as the ICC effectively cartelized long-haul railroads to stabilize their prices: the regulator simply insists on approving only a wage tariff that is uniform for all workers, effectively forcing workers to bargain collectively with their employers. But a rate regulator can do more than that, regulating market entry to strike a balance between job security and competitiveness, insisting that workers offer certain bundles of skills, and even imposing workplace safety and benefits standards.
Once we start to believe that markets are failing, and that just breaking up big firms won’t achieve distributively fair market outcomes, as economists seem to be concluding, the door is open to market intervention, and at that point it makes sense to use the best tool for the job. The one-off ad hockery of minimum wages won’t do. Nor will strengthening unions — if you make them strong enough to really succeed, you make them strong enough to oppress investors and consumers. What you need is a politically accountable agency empowered to make markets work for all market participants.
That’s what rate regulation was, and could be again. Let’s stride to it, not slouch.
In a market economy in which dominance often rests on intellectual property, rather than on an installed base of industrial equipment, breaking up a large firm is as easy as ordering compulsory licensing, and letting markets do the hard work of pulling the rest of the firm apart. Breaking up large firms isn’t hard — it’s easy.
Noah Smith repeats the old fallacy that breaking up big firms, or reversing consummated mergers, is difficult, putting the divider in the position of creating two new companies from scratch. He writes:
It would be great if big companies could simply be divided into the competing rivals that existed before a merger took place. But once two competitors join, they tend to merge their sales departments, their engineering departments, their management structure and almost every other facet of their business. Antitrust regulators can’t easily order the merged company to split itself back into its constituent parts, because those parts no longer really exist.
Economists should know better than to make this mistake, because it involves ignoring markets. To break a firm up, all you have to do is to seize and divide up the asset that is the source of the firm’s advantage over competitors — force the licensing of key intellectual property to a new entity, for example — and the market will take care of the rest of the breakup.
The owners of the pieces of the divided asset will access markets on their own to assemble their own sales departments, engineering departments, management structures, supply chains, and so on — often, but not necessarily, by hiring away staff from the original firm that is the target of the breakup. Antitrust enforcers don’t have to worry about getting their hands dirty figuring out whether Bonnie in sales should go to the new firm, or Mark in accounting should stay with the old one. So long as antitrust enforcers divide the valuable asset properly, to ensure that the new companies are both financially viable, markets will take care of the rest. Bonnie may get a job offer from the new firm, and Mark may choose to stay put.
This messy breakup fallacy got a lot of air time twenty years ago, when a district court ordered the breakup of Microsoft. But Microsoft actually presents an excellent example of why breaking up should be easy to do in a market economy such as our own. The heart of Microsoft’s business wasn’t (and isn’t) its sales department, or even Microsoft Windows, but rather Microsoft Office, a program that had, and continues to have, a lock on virtually the entire word processing market thanks to a combination of consumer familiarity and the difficulty of exporting documents into competing systems. To break Microsoft up, all the court had to do back in 1999 — or, for that matter, would need to do today — was issue an order forcing Microsoft to release the full Microsoft Office source code and all future iterations. The court could then have just sat back and watched the company be devoured by a million startups, each offering a new flavor improving on the code.
Indeed, the easiest way to break up a big firm is to force licensing of its most valuable intellectual property assets. Because intellectual property doesn’t have a geographic location — ideas live in the ether — the problems of continued regional concentration that Smith also worries about don’t arise from licensing-driven breakups. And the beauty of it all is that in the Data Economy, intellectual property is the key to the dominance of most large firms. The age of behemoths deriving their power from vast installed bases of industrial equipment — the Standard Oils and the AT&T local loops — is gone. And so too any messiness associated with industrial deconcentration.
It’s time to recognize antitrust’s messy breakup fallacy for what it is.
Once upon a time, Chicago to New York was a cheap rail fare, whereas the much shorter trip from Chicago to Peoria was expensive, because in a dense rail network there were lots of ways to get from Chicago to New York, and therefore lots of competition on that route, whereas there were only a few ways to get from Chicago to Peoria, and therefore much less competition. The big city people who rode Chicago to New York had more money than the small city people who rode Peoria to Chicago, but the big city people paid lower fares, because the big city people benefited from competition.
Competition gave the big city folk alternatives, and that strengthened their bargaining power vis a vis the railroads. The lack of competition denied the small city folk alternatives, and that reduced their bargaining power vis a vis the railroads. But the changing of alternatives is taxation.
Suppose instead that rail competition were somehow equal in both markets, but the government were to tax small city riders by a certain amount and redistribute that amount of money to the big city riders. The tax would effectively drive up the fare paid by the small city riders and drive down the fare paid by the big city riders, achieving the same result as did the unequal levels of competition on the big and small city routes. Inequality in competition is tantamount to inequality in pricing, which is tantamount to tax and transfer.
Put another way, the presence of competition on the big city route and absence on the small city route caused the railroads to collect a large share of their revenues from small city riders. Small city riders subsidized big city riders, in a sense. The railroad acted as a kind of taxing authority, redistributing from small city riders to big city riders, but the railroad’s tax policy was determined by the competitive environment, not the railroad itself, by the presence of competition on the big city route and the absence of competition on the small city route.
Flip the competitive configuration — make the small city route less competitive than the big city route (perhaps by allowing cartelization of service providers on the big city route) — and now the big city riders will contribute a larger share of the railroad’s revenues. Now the big city riders might be said to pay the subsidy and the railroad to be taxing the big city riders for the benefit of the small city riders.
Depending on how antitrust divides up markets and goes about promoting competition in them — as I discuss briefly in another post — the competitive terrain created by antitrust represents a tax system and a specific set of distributive results.
From this perspective, if your goal is to redistribute wealth, you want more competition in some markets — the ones inhabited by the poor — and less competition in other markets — the ones inhabited by the rich. That’s just the kind of policy that progressives advocate: antitrust for big firms, cartelization for workers and small businesses.
Note that this is not an argument about the ability of competition to force a particular distribution of surplus within a market, between buyers and sellers. This is about the ability of antitrust to alter relative outcomes in different markets by altering relative levels of competition. This is about how antitrust makes price discrimination possible, and how that price discrimination redistributes, even when the different prices charged are charged by different firms in different markets.
The emails show that in 2013 Facebook cut off Twitter’s access to its users’ Facebook friend lists to cripple the growth of Twitter’s once-popular short-form video sharing service, Vine, which Twitter shuttered in 2016. The emails also show that Facebook used acquisition of the startup Onavo to spy on users, identifying WhatsApp as a serious threat in the process, and later acquiring that company, presumably to eliminate it as a competitor.
Both of these actions harmed competition, by eliminating what antitrust lawyers call “nascent competitors,” firms that could have matured into serious competitive threats to Facebook. Vine might have helped Twitter develop out of its microblogging niche into a full-fledged social media platform in direct competition with Facebook. And the same might have been true for WhatsApp, which could have leveraged its huge user base and privacy commitment to expand beyond chat into Facebook’s social media heartland.
But most antitrust policymakers today are unlikely to see either Facebook’s calculated crippling of Vine, or the company’s snooping on nascent competitor WhatsApp, as problematic. For antitrust policymakers today, refusing to share and espionage are examples of the kind of no-holds-barred striving to win that ensures that competition yields results for consumers. As the greatest living antitrust scholar today, Herbert Hovenkamp, put it in a recent treatise, making firms share with competitors — which is what Facebook refused to do when it cut Vine’s access to friend lists —
is manifestly hostile toward the general goal of the antitrust laws. It serves to undermine rather than encourage rivals to develop alternative[s] . . . of their own.
Fortunately, there is actually a strong case to be made that Facebook’s treatment of Vine, at least, violated existing antitrust laws. But before getting to that case, let’s look more closely at exactly what Facebook did to Vine and what’s wrong with antitrust’s prevailing approach to that kind of conduct.
It’s clear that access to Facebook friend lists was key to Vine’s growth, because that allowed users in effect to port part of their existing social network from Facebook over to Vine, and then to use it to do something — post short-form videos — that Facebook at the time did not yet allow users to do.
By in effect preventing users from porting their network to Vine, Facebook denied Vine an essential input — the infrastructure to port the Facebook network into Vine — that was key to allowing Vine to break into the social media market.
Two Minds About Sharing
Refusals to deal have long vexed antitrust enforcers because they appear to be at once good and bad for competition.
They are bad for competition because if the input is truly essential, then the refusal to supply it to a competitor is fatal to the competitor. Indeed, if “input” is defined broadly enough, all anticompetitive behavior amounts to a denial of access to an essential input of one kind or another. You cannot harm competition any other way.
At the same time that refusals to deal appear bad for competition, however, they also appear to be good for competition, albeit competition of the bare-knuckle sort.
The toughest races are those in which you can expect no help from the other participants. The refusal of a firm to deal with competitors just creates an incentive for those competitors to go beyond the withheld input in question to find a new way to survive, to innovate, to create, to surpass.
This view of the virtues of no-holds-barred competition serves as the basis for the current ascendancy of the “Colgate Doctrine,” the antitrust rule that a firm has no general duty to deal with competitors. The doctrine takes its name from a 1919 case in which the U.S. Supreme Court permitted Colgate, charmingly described by Justice McReynolds as “a corporation engaged in manufacturing soap and toilet articles and selling them throughout the Union,” to refuse to sell its products to discounters.
[i]n the absence of any purpose to create or maintain a monopoly, the [antitrust laws do] not restrict the long recognized right of trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.
For most of the century during which this language has been on the books, antitrust enforcers quite reasonably read the paean to business freedom in the second clause in conjunction with the first — “[i]n the absence of any purpose to create or maintain a monopoly” — to mean that the right to refuse to deal, whatever its extent, has no purchase whatsoever on the antitrust laws, which are dedicated to preventing the creation and maintenance of monopoly.
But in recent decades, the courts have preferred to drop the qualification contained in the first clause altogether, and to recognize a general right to refuse to deal even when the creation and maintenance of monopoly are rather baldly at stake. As Justice Scalia put it in an infamous 2007 opinion,
Firms may acquire monopoly power by establishing an infrastructure that renders them uniquely suited to serve their customers. Compelling such firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities.
This notion that triumph of any kind in the free market is a necessary incentive for progress filters our understanding of competition through the fearsome metaphor of natural selection, survival of the fittest, the war of all against all, the Origin of Species.
According to this view, the lion did not need antitrust restrictions on refusals to deal to evolve out of the primordial soup, and if the lion goes extinct because humans fail to share habitat, that represents a triumph of competition, because the lion will then be replaced with a creature that obviously represents an evolutionary advance: us. Moreover, the argument goes, if the lion had been forced to share with the ape back when the lion was the king of beasts, the ape likely would never have needed to learn to walk upright, to heave javelins at passing herds, and eventually to invent the computer.
Unnatural Selection
The natural selection metaphor is a big mistake, because the apparent virtues of natural selection are subject to severe survivorship bias. We’re here, and living and thinking, so our evolution must have been a success. But all those creatures who never came to exist — imagine whatever god or fairy you wish, so long as the creature is better than us according to whatever metric you prefer — aren’t here to observe the failure of their natural selection, because they never came to be.
The only thing we can say for sure about natural selection is that it selects; we cannot say that it selects well, for the criteria according to which it selects are unregulated. Natural selection is undirected, and therefore unreliable, selection. The rumpled paper airplane that is natural selection spirals off in whatever random direction the environment happens to impose upon it, with no guarantee that the direction is good, let alone the best, according to any metric we as human beings might hope to use as measure. Climate change, and the very real prospect of the imminent termination of life on earth, is a convenient reminder that the direction of evolution — evolution that has led to us — may be very bad indeed.
It follows that to consign our markets to the same law of the jungle that has produced us is a big mistake. Indeed, it is the sort of mistake that would scandalize our forebears, who, living closer to that state of nature themselves, understood our human advantage to be our capacity to choose the criteria according to which selection proceeds, rather than to submit to the random criteria of the jungle. Our talent for directing our own selection, not to mention the selection of other creatures (think of your dog) is our great advantage. (Indeed, our forebears understood this perhaps too well, leading to an excessive affection for absolute monarchy and planned economies. Ancient Egypt springs to mind, with its conscious glorying in divine kingship as antidote to the chaos of the natural world.)
To continue to escape nature, we must continue to choose the criteria according to which we select ourselves, and that is as true when we structure our markets as when we design our education system. Markets are themselves just machines for the selection of the things we want the economy to produce, with profitability determining winners and bankruptcy determining losers. These machines are useful to us only to the extent that they select for the characteristics that are most helpful to us. A market that selects for sloth, or for behavior designed to take wealth from others without providing a quality product in exchange, is not a useful market. The way to make markets select for desirable characteristics is to ensure that the undesirable characteristics provide no advantage.
Thus we must build our markets in the same way that the artificial intelligence researcher builds a learning algorithm, calibrating it to ensure that once the algorithm is unleashed it will select for the desired traits. Markets are machine learning, with the software antitrust, and the hardware human life. Genes evolve, but genetic algorithms solve. And markets exist to solve our economic problems.
The question that refusals to deal really pose is whether permitting firms to horde essential inputs selects for characteristics that are good for the economy. And here the answer must be no. If the input denied to competitors is truly essential, then there is no obvious way to invent around it, and so the characteristic that legalizing such refusals selects is talent for identifying and appropriating essential inputs that deliver the firm from having to compete hard on all the other characteristics that we really value, such as good management, incessant innovation, quality, distribution, and low costs. Allowing refusals to deal unlevels the field.
Selecting for skill at destroying competition may of course incidentally sweep in some characteristics that we care about — ambition, of course, and innovativeness aimed at finding or creating the essential inputs — but the presence of this anticompetitive selector pulls the market out of focus, sapping competitive energies away from the things we care about — low prices and high quality — and toward monopoly.
Sometimes the question is muddied by the need to ensure that innovative firms are able to cover the costs of research and development before competitors appropriate their innovations, pile into the market, and erode profit margins. In these cases, it is the refusal to deal that keeps the playing field level, instead of skewing it, by ensuring that innovators get the proper rewards. But true refusal to deal cases are different. True refusal to deal cases involve a refusal to supply an essential input when doing so facilitates supracompetitive profit taking, a dominance of markets that is not necessary to help firms cover their costs. Antitrust policymakers today would treat every refusal to deal as if it were necessary for firms to cover research and development costs, a conceit that is necessary only because the reality of almost never condemning a refusal to deal is so unjustifiable.
The Surprisingly Apt Sports Metaphor
Ensuring that undesirable characteristics provide no advantage is just what we do when we level a playing field in sports. Take a soccer game played on a hillside, for example. The inclined field gives one side — the side with the higher goal — an advantage based on luck, or the ability to strong arm the other team when sides are chosen before play, instead of based on characteristics that we want to promote, such as training, endurance, and the ability to bend a football into a net from twenty yards out.
To avoid this sort of adulteration of play, we insist on level playing fields in sports. It’s the reason we recoiled from steroids in baseball, for example, because all those home runs created an advantage that made for boring, uni-dimensional, play. Indeed, we feel the same way about all doping, because it leads to selection based on chemistry, rather than on the endurance and coordination that we value in sports. Only the level playing field produces the fittest players, just as it produces the fittest firms.
Just as we expect opposing players to help each other up off the ground when they have fallen — because losing a player makes for less satisfying play — we should expect firms to help each other to enter markets, when that would make for tougher, and therefore more productive, competition.
Success and Excellence
The individual firm must therefore be governed by an ethic of excellence, rather than an ethic of success. For only the pursuit of excellence causes firms to affirmatively seek to bring competition upon themselves, whereas an ethic of success causes firms to seek only to win, rather than to win by being the best. We want the great athlete, who wants to run the hardest race against the toughest competitors, not the slouch or the crook, who celebrates when the going gets easiest.
This distinction, between the pursuit of success and the pursuit of excellence, may be loosely, and probably unfairly, associated with the divergent outlooks of the two great civilizations of European antiquity, the Romans and the Greeks. Ancient Greek culture focused on the struggle with the self, the desire to go beyond mortal limits through exposure to competition of the highest order, a desire reflected in the tradition of the Olympic Games.
Rome represents something quite different: the urge to dominate at all costs, summed up by the city’s founding sin, in which the band of male outcasts who were the city’s founders obtained wives, and therefore a future for their polity, by inviting their neighbors to a feast and then carrying off their women.
Giambologna’s The Rape of the Sabine Women, on display in Florence. Michelangelo’s David, reflecting the pursuit of excellence, is conveniently pictured in the background. Photo credit: Arnold Paul, Florence Rape of the Sabine Women 3, CC BY-SA 3.0.
We must insist on Grecian firms.
The pursuit of success over excellence is a recipe for long-term failure of industry, and a threat to American national security in a world in which America is no longer clearly the most technologically advanced nationor the strongest economy, a world in which the failure to demand that our firms strive to be the best, even when they could succeed with less, could well mean the difference between victory and defeat in the next war. (True, Rome built a more enduring empire than did the Greeks, but that is only because internally, in their training and organization, the Romans were Greek.)
Which takes us back to what Facebook did to Vine. By killing Vine off via refusal to deal, Facebook prevented Vine, and Twitter, from morphing into genuine challenges to Facebook’s dominance as all-purpose social media platform.
That means that today Facebook doesn’t face the kind of competition it needs to continually improve, the competition on everything from likes to privacy that can come only from doing battle with other firms on an equal playing field, the competition that affects characteristics that matter. Instead, Facebook competed on one characteristic alone — the ability to build the largest network first — and used that high ground to defeat a more tech-savvy competitor.
That’s a recipe for the long-term decline of American social media, and of American tech savvy more generally.
The Antitrust Case against Facebook’s Treatment of Vine
Facebook’s killing of Vine should be the easiest of antitrust violations to prove, but instead the case can be made only through the luckiest of coincidences. Luck is needed because of the current ascendancy of the Colgate Doctrine: the right of any business to refuse to deal, even if that would create a monopoly.
Under the influence of economists and lawyers associated with the Chicago School, the courts have all but eliminated any liability for refusal to deal, allowing it only when the refusal represents the termination of a prior profitable course of dealing. The idea behind narrowing liability to this unusual set of facts is that only when the refusal to deal amounts to a choice to forego a current profitable relationship can enforcers be absolutely certain that the motivation for the refusal is to earn even greater profits from the destruction of competition. As Justice Scalia put it in that 2007 case,
The unilateral termination of a voluntary (and thus presumably profitable) course of dealing suggest[s] a willingness to forsake short-term profits to achieve an anticompetitive end.
Motivation should have no place in the resolution of antitrust cases, because the antitrust laws are not about policing morality, but about guaranteeing the vigor of the economy. What matters in antitrust are outcomes, not whether businesspeople act with virtuous or heinous intent. But this perversion of the law is of no consequence in the case of Facebook’s treatment of Vine. Miraculously, the question of Facebook’s motivation is subject to no doubt here because the British have provided us with emails pregnant with anticompetitive intent:
Justin Osofsky — Twitter launched Vine today which lets you shoot multiple short video segments to make one single, 6-second video. As part of their NUX, you can find friends via FB. Unless anyone raises objections, we will shut down their friends API access today. We’ve prepared reactive PR, and I will let Jana know our decision.
MZ – “Yup, go for it.”
But even if there were no such evidence of intent, Facebook’s actions meet the prior profitable course of dealing standard imposed today by the courts.
Facebook’s sharing of friend lists with Vine allowed Facebook to collect valuable data about which Facebook users were using Vine. Facebook’s termination of that sharing therefore represented the termination of a prior profitable — in data-denominated terms — course of dealing, the unmistakable sign the court demands that the motivation was to earn even greater profits — here in the form of monopoly-level access to users’ social networking data — that come from squelching competition in the market.
So as luck would have it the case against Facebook fits squarely within the sliver of an exception to the Colgate Doctrine currently tolerated by the courts. But the fact that we need to fit the case into that sliver tells much about the extent to which antitrust has been failing in recent decades in its duty to ensure level competitive playing fields.
Integrating into Espionage
The situation is even worse when it comes to Facebook’s snooping on, and eventual gobbling up of, WhatsApp.
The story of global merger enforcers’ disastrous failure to block the WhatsApp acquisition due to a failure to appreciate that consumers pay for both Facebook and WhatsApp in data, making the two companies rivals, and the merger the brazen elimination of a nascent competitor, has already been told. But Onavo’s role in helping Facebook identify WhatsApp for acquisition points to another failure in contemporary antitrust: the death of vertical merger enforcement.
Onavo’s app is properly understood as a component of the social media product offered by Facebook , one that includes not just liking and photo sharing, but also privacy services. As such, Onavo and Facebook stood in what antitrust lawyers call a “vertical” or supply-chain relationship, producing components of a common end product — the social media experience — that is sold to consumers. And Facebook’s acquisition of Onavo was therefore a vertical merger.
But in the 1980s antitrust enforcers abandoned vertical merger enforcement entirely, on the assumption that innovation and efficiency always result when businesses in a vertical relationship work together to serve consumers. The district court’s stinging and misguided rebuke of the Justice Department’s recent attempt to revive vertical merger enforcement by challenging AT&T’s acquisition of TimeWarner shows how alien the old learning regarding the threat of vertical mergers has become to the courts in recent decades.
There might well have been some synergies between Onavo’s analytics services and Facebook’s social media platform, but the role the acquisition played in enabling anticompetitive snooping makes clear that the dogma that vertical mergers are always good for the economy must go.
