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Antitrust Monopolization World

Does It or Doesn’t It?

An important part of the Chicago Revolution in antitrust was the argument that no monopoly is forever. Eventually, someone will innovate and offer a superior product that the monopolist cannot match. And, just like that, the monopolist will be history.

Microsoft’s lock on operating systems looked assured in 1998 when the Justice Department tried to break the company up. But that remedy was never ultimately imposed. And in the end it didn’t matter. For, less than ten years later, smartphones arrived, and now most people do most of their computing on operating systems not made by Microsoft.

It seems to follow that antitrust action is a waste of time.

So interesting, then, to hear all the talk of late about how, despite its best efforts, China won’t be able to catch up with the West in chip production.

Not for decades.

Maybe never.

We are told that chip production relies upon an entire ecosystem of designers and suppliers. That experience matters. And so on.

But if that’s right, then the view that no monopoly is forever must be wrong—or at least not absolutely true in all cases. If the Western chip fabs have a near-permanent lock on the market, then it can’t be the case that we can always rely on markets to erode monopoly power. It can’t both be true that China can never catch up with the West on chips and that no position of market dominance is forever.

So which is it?

I suspect that those who think China can never catch up are wrong.

It may well be the case that the learning curve on chip production is such that a latecomer will never be able to catch up with a first mover absent technology transfer. But the argument about the impermanence of monopoly power has never been that newcomers will one day master the incumbent’s technology. It has always been that newcomers will one day introduce a completely different technology that carries out the same tasks as the old technology, only ten times better.

To this day, Microsoft continues to dominate the market for PC operating systems. What eroded Microsoft’s power was the introduction of a different technology—smartphones—that required a different kind of operating system. Microsoft didn’t start out with a lead in mobile operating systems, and, in the event, Microsoft lost the race.

So the question about whether China can overcome her lack of cutting edge chip supply and find a way to go head to head with the West as computing revolutionizes everything from military equipment to passenger vehicles is really the question whether China can come up with different technologies that do computing better—not just more semiconductors.

I don’t know the answer to that question. But it is perhaps useful to note that while China is not a leader in the design and production of conventional chips, China is a leader in quantum computing—which promises vastly greater processing speeds—and in artificial intelligence.

Indeed, it is worth asking whether TikTok’s success at challenging both Google’s dominance in search and Facebook’s dominance in social media doesn’t contain a lesson. At the same time that at least some Americans were quaking in their boots regarding these American tech giants’ size—and calling for antitrust enforcement—TikTok was quietly applying superior artificial intelligence to revolutionize the core functionality of both companies. TikTok is a Chinese company.

The view that technological advance always ultimately erodes dominant positions is perhaps most closely associated with Joseph Schumpeter, who called this process “creative destruction.”

The question, then, is whether the West should worry that creative destruction will erode its dominant positions.

If the Chicago School of antitrust is right, the answer is “yes.”

Categories
Antitrust Monopolization

Antitrust Preemption

The best way to regulate the tech giants is to tax the immense scarcity rents they generate. Instead of doing that, the Biden Administration has gone all-in on antitrust action, which can’t touch those scarcity rents, even if antitrust action does succeed at making tech markets more competitive, which is unlikely.

When I make this point, people tell me: “don’t worry! Taxation and antitrust action aren’t mutually exclusive. The Biden Administration is also pro-tax.”

Well, is it?

The Canadians are planning on taxing the tech giants, and instead of rushing to complement this sound policy, by imposing our own tax, the Biden Administration is threatening to retaliate if they don’t scupper their plans.

An administration, like everything else, has a budget constraint, denominated in attention as well as dollars. If it is going all-in on one thing, it’s not going all-in on another.

And to go all-in on one policy, an administration may need to reject others in order to maintain the coherence of the one it favors, which seems to be happening here. The Biden Administration is complaining that it’s unfair for Canada to single out American tech companies for taxation, something that would have less bite if America were singling them out itself.

So, please don’t tell me that yes, you agree that antitrust probably can move the needle only very slightly, if at all, but why not try it anyway?

If you’re trying it, you’re not trying the stuff that actually works.

Categories
Antitrust Monopolization

Some Goliath

I do not understand Paul Krugman here:

Yes, there’s a profit-maximizing price, but the cost to a business of charging somewhat less than its profit-maximizing price is small, because lower margins would be offset by increased sales. (To be formal about it, the losses caused by deviating from the optimal price are second-order.) This wiggle room means that corporate pricing may be strongly influenced by intangible considerations, like fear of alienating buyers. . . . Given this reality, it’s not foolish to suggest that some corporations have seen widespread inflation as an opportunity to jack up prices by more than their costs have increased without experiencing the usual backlash.

Paul Krugman, Do Democrats Have a Technocrat Problem?, N.Y. Times (Feb. 22, 2022).

I agree that corporations don’t have to worry about experiencing the usual backlash. Because they are experiencing way, way more than the usual backlash, and not just from consumers, as shown in the poll to which Krugman cites, but also from, you know, The White House.

I mean, if you asked me what the worst time ever would be to jack up prices, I would say that it’s in the middle of a global pandemic in which any price increase is going to be viewed by a surly public as price gouging.

But I guess that’s just me.

There’s something else I don’t get about this argument.

Monopoly power is the power over price that comes from artificial scarcity; it comes from firms voluntarily holding something back. But firms are producing and selling more than ever before, at least if the amount of stuff transiting through ports is any measure. Savannah, for example, was recently operating 50% above pre-pandemic levels.

How can firms be holding something back while increasing their output by anywhere near that order of magnitude?

It’s possible that they could go even further but purposefully aren’t. But we have almost no true monopolies in this country in the sense of single firms alone serving entire markets. The meatpacking market that is so concerning the Biden Administration is concentrated, but it still has four large players.

How does a group of three or four firms ramping up output to meet surging demand still manage to hold something back, especially when the true extent of demand is unknown (as it always is) and holding back by too much while other firms continue to increase supply is a recipe for a catastrophic loss of market share?

The answer is: by actually coordinating output directly with each other—forming a cartel—just as we often see firms that are trying to reduce output in response to declining demand meet to try to manage the reductions in a mutually profitable way.

But no one seems to be alleging that American industry is cartelizing. Antimonopolists want to break up large firms, not bust cartels.

It’s much more likely that the price increases are what they appear to be: driven by scarcity.

I’m also a bit confused about this:

And perhaps an even more important point, cracking down on excessive industrial concentration and market power would help reduce inflation, regardless of the role market power played in causing inflation in the first place. As an old line puts it, you don’t have to refill a flat tire through the hole.

Antitrust cases last a long time. The Department of Justice sued AT&T in 1974. The company was broken up in 1982. If inflation is still 7% in 2030, it will have become structural, and only another Saturday Night Massacre will save us.

There are plenty of good reasons to want to eliminate monopoly pricing, and industrial deconcentration is one way to do that. But reducing inflation isn’t one of those reasons. I’m all for faster antitrust enforcement, but the reality is that the courts and inflation move at very different speeds.

And that’s before we even consider that antitrust action is a one-time fix. You can only deconcentrate the economy once. But inflation is a perennial problem. Once all those antitrust cases have gotten prices down ten years from now, antitrust won’t have anything to offer in combating the next inflation, either.

Even if Krugman is right about market power and the current inflation, what being right here gets progressives is almost nothing. Here’s how Krugman puts it:

Nobody sensible would argue that opportunistic exploitation of market power is the main factor behind recent inflation. But contrary to what some people might want you to believe, economic theory by no means rules out the possibility that it may be a factor.

It cannot be ruled out that monopoly is a factor in inflation? The progressive movement I signed up for pursues policies that it knows make a difference. Like taxing the rich. Not stuff that “can’t be ruled out as being a factor.”

And Krugman is usually all about the big stuff. So why not one, but two columns now trying to defend the possibility that monopoly might matter albeit not as much as other things?

Sadly, I think that’s because antimonopolism has eaten the progressive mind over the past few years.

It’s no longer mere policy serving as a means to an end.

It’s now ideology. An end in itself.

Progressives know that Goliath must be slain, and they are going to insist on it, no matter what, even if the most that can be proven about Goliath is that he can’t be ruled out as a secondary cause of the economic problems we care about.

Some Goliath.

Categories
Antitrust Monopolization

Progressive Cologne

So here’s my suggestion: Give Biden and his people a break on their antitrust crusade. It won’t do any harm. It won’t get in the way of the big stuff, which is mostly outside Biden’s control in any case. At worst, administration officials will be using inflation as an excuse to do things they should be doing in any case. And they might even have a marginal impact on inflation itself.

Paul Krugman, Why Are Progressives Hating on Antitrust?, N.Y. Times (Jan. 18, 2022).

It probably won’t work, so let’s do it?

We need to do it for other reasons, so let’s do it for the wrong reason?

There’s a word for this: Obsession.

Meanwhile, elsewhere in the piece, Krugman dismisses price controls, which are one remedy that would actually solve a few problems in the highly efficient (and hence unwise-to-break-up) industries, like meatpacking, to which he’d like to take the antitrust axe. (Not even price controls would, however, help with inflation.)

Krugman did write the introduction for a recent edition of the General Theory, but he diverges from his teacher on antitrust.

Keynes famously thought inflation, or the lack thereof, had nothing to do with competition, monopoly or any other microeconomic phenomenon, which is why he disdained both the N.R.A. and Thurman Arnold. Instead, he invented a whole new branch of economics—macroeconomics—to explain it.

But if there’s no intellectual foundation for progressive antimonopolism, why does it so appeal? As Krugman’s evocation, elsewhere in the piece, of J.F.K. talking tough to the steel industry suggests, it’s a macho thing—progressives thumping their chests at corporate America.

If that sounds a bit savage, there’s a cologne for that, too.

Categories
Antitrust Monopolization

Victor Hugo: Pro-Trust

[T]he prosperity of [the town] M. sur M. vanished with [its mayor and leading business owner] M. Madeleine; . . . lacking him, there actually was a soul lacking. After this fall, there took place at M. sur M. that egotistical division of great existences which have fallen, that fatal dismemberment of flourishing things which is accomplished every day, obscurely, in the human community, and which history has noted only once, because it occurred after the death of Alexander. Lieutenants are crowned kings; superintendents improvise manufacturers out of themselves. Envious rivalries arose. M. Madeleine’s vast workshops were shut; his buildings fell to ruin, his workmen were scattered. Some of them quitted the country, others abandoned the trade. Thenceforth, everything was done on a small scale, instead of on a grand scale; for lucre instead of the general good. There was no longer a centre; everywhere there was competition and animosity. M. Madeleine had reigned over all and directed all. No sooner had he fallen, than each pulled things to himself; the spirit of combat succeeded to the spirit of organization, bitterness to cordiality, hatred of one another to the benevolence of the founder towards all; the threads which M. Madeleine had set were tangled and broken, the methods were adulterated, the products were debased, confidence was killed; the market diminished, for lack of orders; salaries were reduced, the workshops stood still, bankruptcy arrived. And then there was nothing more for the poor. All had vanished.

Les Miserables
Categories
Antitrust Monopolization

Yet Another Amazon Antitrust Paradox

Amazon paradoxes are proliferating. Here’s another: to the extent that Amazon is engaged in anticompetitive conduct, it is the conduct of opening its website to third-party sellers, not, as Amazon critics hold, the conduct of failing to be even more welcoming to those third-party sellers.

As the Times’ David Streitfeld, who has perhaps done more than anyone else to advance the notion that Amazon is unreasonably severe with third-party sellers, seems slowly to be realizing, Amazon’s third-party sellers are, well, a problem. They sell junk. They sell defective products. They fool their customers. And then they disappear.

As the Wall Street Journal alerted us more than two years ago now: Amazon’s open door policy with respect to third-party sellers, which sellers constitute more than 50% of sales on Amazon.com, has caused Amazon effectively to “cede control of its site,” badly degrading the shopping experience.

Which begs the question: why? Why would Amazon let this happen? The answers is: “dreams of monopoly.”

Every other retailer in the world seems to understand that one of the biggest pieces of value retail can deliver to consumers is: curation. The retailer does the hard work of sifting through the junk and the fakes and the defectives to find the good stuff, so that consumers don’t have to do that themselves. Why do you shop at Trader Joe’s instead of your local supermarket? Because you know that if Trader Joe’s is selling it, it’s probably not only of reasonable quality, but likely tastes great too. That’s the value of curation.

But, as Streitfeld correctly notes, Amazon has all but given up on it. Anyone can list products on Amazon. And the company makes almost no effort to flag the best products for you. Ever since that Journal article, the public has known that “Amazon’s Choice” is just an empty label slapped on a piece of third-party seller junk by an algorithm parsing sales trends. No one at Amazon can vouch for the underlying product’s quality, usefulness, or safety.

You might have hoped, as I once did, that at least the products Amazon itself sells under its own brand names, like Amazon Basics, are competently curated. But those, too, have turned out to be no more than the outputs of sloppy and stupid algorithms. The programs troll Amazon’s site for popular third-party products and flag them to Amazon product teams, which then contact the original equipment manufacturer in China, slap on an Amazon Basics logo, and bring the rebranded product back to market. The result is that the Amazon-branded products can blow up in your face, just like the stuff sold by third-party sellers.

What would cause Amazon intentionally to forego delivering curation value to its customers and so risk alienating them from its website? The answer must be that Amazon gets something that it thinks is even more valuable in return for running this risk.

That thing is scale.

By opening its doors to third-party sellers, Amazon was able to bring much of the commercial internet onto its website, ensuring that if a consumer wanted to find something, he didn’t need to search the Internet, he just needed to search Amazon.com. And that in turn ensured that most consumers would do their online shopping on Amazon. And that in turn ensured that if you wanted to sell something online, you wanted to do it as a third-party seller on Amazon. And so on. In econ speak, opening the door to third-party sellers created massive “network effects” for Amazon, effects that make Amazon.com essential for both buyers and sellers.

Curation would destroy that because curation is costly. Algorithms aren’t good enough to curate effectively, as the piles of fakes, defectives, and junk on Amazon.com today shows. So if Amazon were to take curation seriously the company would need to pay people to do it. And even Amazon can only afford so many people. So Amazon would only be able to curate so many products. Which means that Amazon would not be able to offer everything on its website anymore. Which would mean that everyone would no longer shop on Amazon. Which would mean that fewer third parties would need to list their products on Amazon. And so on. Amazon would be better. But it would also be smaller.

And Amazon would face more competition, because now Amazon’s advantage wouldn’t be its network—the fact that Amazon carries everything and so everyone shops there—but rather the quality of its curation. There can only be one retailer that carries everything and at which everyone shops. But there are lots of retailers that curate—and compete on curation.

So, Amazon’s open-door policy toward third-party sellers, and the danger and frustration to which that exposes its customers, is anticompetitive. At least in the sense that it is meant to extract Amazon from the fierce competition based on curation that confronts most retailers, and to put Amazon instead in the unique position of being flea market to the Internet.

Amazon clearly believes that the benefits it gets from avoiding having to compete on curation outweigh the costs to the company of forcing its customers to wade through oceans of junky, fake, or defective products on its website. How could Amazon not, when imposing those costs on consumers makes Amazon indispensable, and hence immune to any consequences associated with alienating those consumers?

Well, not completely immune. There are still other retailers out there. And the more toxic Amazon’s site becomes—the more it really does come to resemble a flea market—the more willing consumers will be to put up with the cost and inconvenience of shopping elsewhere. I personally no longer buy books from Amazon because I hate dodging fakes on its site—buying elsewhere costs more, and sometimes I have to wait weeks longer for my books to arrive. But I’m happier.

The key for Amazon is finding a way to engage in just enough curation to prevent consumers from leaving in droves, but not so much that sellers abandon the platform and it ceases to become indispensable to consumers.

The irony here is that the anti-Amazon zealots, in fighting, under the banner of “self-preferencing,” every attempt by Amazon to impose order on third-party sellers or to curate by promoting its own brands, are effectively pushing Amazon to retain its monopoly position by continuing to welcome the entire commercial Internet onto its website.

Amazon critics: If you really want to make Amazon small, and quickly, help Amazon to engage in more self-preferencing. Ask Amazon to sell only its own branded products on the site, kicking all third-party sellers off. Or ask it to discriminate more heavily against some third-party sellers in favor of others, until Amazon.com becomes like every other retailer: offering a relatively small selection of products that Amazon believes consumers will like the most.

It should be clear that Amazon’s policy of being a flea market, instead of a normal, curating, retailer, is anticompetitive. But just because something is anticompetitive—in the sense that it harms competitors and hence competition—doesn’t make it bad, or an antitrust violation, unless the conduct also harms consumers. So, does it?

The answer must be no. Because, as I have said, Amazon is not completely immune to consumer dissatisfaction. You can find almost everything sold on Amazon elsewhere; it just takes more time and expense to get it. So Amazon today presents the following choice to consumers, who can shop elsewhere: Speed or safety; A low price or the genuine article; One stop shopping or purchases free from defects. And consumers so far have chosen the former, which suggests that they prefer it.

Antitrust cannot eliminate the tradeoff that seems to exist here between scale and quality. But consumers can decide which they prefer. If Amazon doesn’t do something about its site, if it doesn’t strike a better balance between scale and quality, if the junk and the fakes and the defectives continue, consumers will rebel. They will learn that the extra time and expense required to secure curation is worth it. And Amazon will go down; or change to save itself.

I for one don’t plan on buying any more books from Amazon anytime soon.

Categories
Antitrust Monopolization

When You Can Win with Advertising, Why Win in Fact?

By the end of last year, 150 million Chinese were using 5G mobile phones with average speeds of 300 megabits a second, while only six million Americans had access to 5G with speeds of 60 megabits a second. America’s 5G service providers have put more focus on advertising their capabilities than on building infrastructure.

Graham Allison and Eric Schmidt, Opinion: China Will Soon Lead the U.S. in Tech, Wall St. J. (Dec. 7, 2021), https://www.wsj.com/articles/china-will-soon-lead-the-us-in-tech-global-leader-semiconductors-5g-wireless-green-energy-11638915759.

Of course, it’s a bit rich to be reading this in the opinion pages of the Journal, which can usually be found defending laissez-faire commercialism.

The American telecom industry is a marketing-driven oligopoly that colludes tacitly to minimize expensive investment in infrastructure and competes instead for market share via worthless, unproductive advertising.

Things would have been different if we had not broken up the old Ma Bell, an engineering-focused organization that took national defense very seriously. As a monopoly, it knew that it had to serve a public purpose or the pitchforks would come out.

Unfortunately, they came out anyway, and antitrust got it, and we are left with the miserable, middling shards that we have today—shards that quickly replaced their engineering culture with a marketing culture, because once they were small they didn’t need to worry about public scrutiny and were free to work exclusively for themselves.

Categories
Antitrust Monopolization

To Produce Is to Self-Preference

When you first enter antitrust from the left, you are struck by what appears to be a travesty: that a firm that monopolizes an input can get away with denying that input to downstream competitors.

One thinks to oneself: A monopoly using its power to smash a competitor. How is that not an antitrust violation? An antitrust that fails to prohibit that is a perverse, hollowed-out thing captured by the evil it was constituted to destroy. It is the equivalent of the criminal law not prohibiting killing with malice aforethought. Or the contract law not enforcing promises.

And then you get over it, because actually prohibiting monopolists from denying essential inputs to their competitors makes no sense. (I will explain momentarily.)

The trouble with antitrust today is that those setting the agenda from the left haven’t been in the field long enough to get over it.

And so we are left with the embarrassing legislation against “self-preferencing” that is currently making its way through Congress.

Self-preferencing as a concept is nothing new. It is denial of an essential input to a competitor, something that antitrust has, at various times, called a “refusal to deal,” “denial of an essential facility”, and “monopoly leveraging.”

The tech giant that “self-preferences” owns an essential input—its platform—that it denies to firms that compete with it in selling things on the platform. When Amazon uses its control over its website to prioritize advertisements for Amazon-branded products over those of third-party sellers, it denies full access to the platform input to those third-party-seller competitors.

The reason you cannot ban all denials of access to essential inputs—can’t ban self-preferencing—is that every single product produced and sold in the United States is a vast agglomeration of denials of access to essential inputs, as I point out in a recent paper. To ban all denials of essential inputs is, therefore, to ban production. Full stop.

And so the proposed legislation, which would ban self-preferencing by all firms that have websites with more than 50 million users and a market capitalization in excess of $600 billion, would simply make it illegal to have more than 50 million users and a market capitalization in excess of $600 billion.

The Make or Buy or Market Decision and Input Denial

To understand why all products are agglomerations of denials of essential inputs, it is useful to reflect that a company can go about adding a component to a product in only three possible ways.

The firm can make the product itself. The firm can buy the product. And the firm can let consumers buy the component on their own and attach it themselves. I call this the firm’s “make or buy or market” decision.

The first two options—to make or to buy—are what we conventionally mean when we say that a particular component has been incorporated into a product, and the decision whether to “make or buy” has long been a famous one in law and economics.

What has not been properly understood about these two options is that both always involve the denial of an essential input to competitors. Only the market option is consistent with an antitrust that would prohibit input denial as a blanket matter.

It follows immediately that production—the process of making or buying components and adding them together to generate a product—is impossible without input denial, and that a blanket antitrust ban on input denial would make production impossible.

Consider, for example, the act of adding an eraser tip component to a pencil.

The pencil maker can add this component in three basic ways. First, the pencil maker can manufacture the eraser itself from its basic components. It can buy the chemicals needed to make the eraser dough and then bake the dough in molds to produce the erasers. Of course, the firm would then need to solve the problem of how to acquire the precursors (and the oven, molds, and labor services required to run the operation), so making is in the end always buying. But for purposes of showing that making or buying both involve input denial, that doesn’t matter.

The second way the pencil company can add eraser tips to its pencils would be for it to buy them from an eraser supplier. The company would go out into the eraser tip supply market, find the supplier that offers the best quality at the lowest price, and do a deal.

The third and final way the pencil company can add eraser tips to its pencils—or, better put, can ensure that eraser tips are added to its pencils—would be for the company simply to sell eraser tips to consumers and leave it to consumers to affix them to pencils. The firm might sell eraser-less pencils and also separate eraser caps that consumers can buy and affix to the pencils. Or the firm might put a special ferrule on each of its pencils, perhaps like the one currently included with Palomino Blackwings, that would allow consumers to snap in a properly-shaped eraser that they could purchase separately from the pencil company.

Now, when a firm makes its own eraser tips to place on its pencils, the firm denies access to an input—its pencils—to outside manufacturers of eraser tips who would like their own eraser tips to be included on the firm’s pencils. The firm is in effect competing against those other eraser manufacturers in the market to supply eraser tips for the firm’s pencils, and in choosing to make its own eraser tips, the firm uses its control over pencils—an essential input from the perspective of eraser tip makers who have no way to get their products into the hands of consumers other than attached to pencils—to favor its own homemade product in the eraser tip market relative to those of competitors.

In the language of platforms and self-preferencing, the firm’s pencils are the platform that eraser tip manufacturers need in order to reach consumers, and in choosing to use only its own homemade eraser tips on its pencils, the firm engages in self-preferencing in the eraser tip market.

This is equally true when a firm chooses to buy rather than to make.

When the firm chooses a particular third-party supplier of eraser tips, the firm denies the pencil input to all of the other eraser-tip makers in the market. Once the firm has placed its order, none of the others can reach consumers, at least until the firm places a new order for more eraser tips.

Is Buying Really Input Denial?

There seem at first to be two problems with this argument that buying components is input denial. The first is that the third party supplier whose erasers are not picked by the pencil company at least had a chance to have them picked when the pencil company was still deciding which supplier to use. The supplier presumably lost out in some potentially competitive bidding process, which cannot necessarily be said for the case in which the firm chooses to make erasers in-house.

Be that as it may, it has nothing to do with the basic concept of input denial. A firm is no less forced from a market by denial of an essential input when the input holder thought it would not be profitable to supply the input than when the input holder thought that it would be profitable to supply the input. Indeed, one would expect that the underlying motive for input denial would always be the determination that supplying the input would be less profitable than denying it.

Where Is the Downstream Competition When You Refuse to Buy?

The second problem is that the pencil company does not seem to be competing against the eraser suppliers at all. Unlike in the first case, the pencil company does not actually manufacture any erasers of its own, much less sell them. But if the pencil company is no longer competing with eraser suppliers—just buying from them—then the pencil company cannot be said to be denying essential inputs to competitors.

But that is to miss what really bothers us about input denial. What we dislike about it is not that a product that is manufactured in-house by the denier benefits from the denial, but rather that competitors are harmed and the denier somehow benefits from that harm.

And here we can be sure that the denier does benefit.

For the denier would not choose a particular third-party supplier over others unless the denier stood to benefit from buying from that supplier rather than others. This benefit might come in the form of a discount on the price of erasers. Or it might come in the form of willingness of the supplier more faithfully to execute the instructions of the pencil company with respect to the specifications of the erasers. It might even involve a profit-sharing agreement without the pencil company formally owning the operations of the third-party supplier.

Whatever it may be, the pencil company benefits, and as a result of that benefit it is possible to say that, through the third-party supplier chosen by the pencil company the pencil company does in fact compete in the eraser market, and indeed favors its avatar at the expense of competing eraser suppliers.

In the language of platforms and self preferencing, the firm’s pencils are again the platform, and in choosing to buy from one supplier only—a supplier that necessarily offers some special benefit to the firm otherwise the firm would not buy from it—the platform self-preferences, in the sense that it puts the interests of a favored supplier above those of competitors.

Thus the only two ways in which a firm can incorporate a component into a product—making the component itself or buying the component—are both instances of input denial.

Only Selling Components Directly to Consumers Avoids Input Denial

Only the third means of adding a component to a product—that of selling the component directly to consumers and allowing them to add the component on themselves—manages not to be input denial. Indeed, only this “market” case corresponds to what we mean when we speak of the sort of freely competitive market that antitrust is meant to promote.

Only when the pencil company chooses neither to make the component itself nor purchase it and incorporate it into the pencil, but instead merely makes its pencils available for any consumer to use to affix erasers, does the pencil company make its input—its pencils—freely available for any and all eraser manufacturers to use as a vehicle for delivering their erasers to consumers. For now the question which eraser manufacturer’s erasers should appear on the pencil company’s pencils is no longer answered by the pencil company at all. It is answered only by downstream consumers, who have complete freedom to decide which erasers win out in the eraser market.

That is precisely the world antitrust seeks to create: a world in which firms that control inputs do not decide who wins in the market but rather consumers themselves decide.

But Selling Directly to Consumers Is Not Production

The trouble is: that is not a world that is consistent with the production of products that incorporate multiple components. And because all products incorporate an infinite number of components—it all depends on how you define component; if each molecule is a component of a pencil, then how many components does a pencil have?—it is therefore not consistent with the production of anything at all.

It is a world in which everything is pulled apart and atomized, and the atoms are presented to consumers in a vast menu from which no sane consumer would ever be able to choose because choice would require infinite knowledge regarding how to assemble every single product that we have today from individual atoms on up.

What those setting the antitrust agenda today miss is that banning self-preferencing by, for example, Amazon, does not merely prevent Amazon from favoring its own Amazon-branded products over those of third parties.

It also prevents Amazon from choosing the look and feel of its own website, for Amazon.com is a platform upon which web designers notionally compete in selling web design services for Amazon, and when Amazon designs its own website in-house it necessarily denies access to that input to competitors.

A rule against self-preferencing would require that Amazon enable Amazon users to buy Amazon site design from third party software developers and apply it to the Amazon website, so that every Amazon customer could, in theory, choose his preferred look and feel for the Amazon website.

It doesn’t stop there.

Amazon would also be required to allow customers to choose each and every employee who works at the company, for each of these employees is, in a sense, a labor component of Amazon, and in making hiring decisions on its own, Amazon necessarily prevents other competing workers from using the Amazon platform to supply their labor services to Amazon’s customers.

If this seems absurd, that is because it is.

The market approach to adding components cannot work as a blanket matter, and so antitrust, which is tasked with insisting upon the market approach, cannot be applied in blanket fashion to everything, or even just to everything that has more than 50 million users and $600 billion in assets. It can work only if applied sparingly, severing a component of one product here, a component of another product there, when doing so is thought to be in the best interests of consumers, whose preferences are the ultimate measure of the value of production.

That is why the actual rule antitrust applies, the rule of reason, can be summarized as the rule that input denial is illegal when it fails to improve the product that is ultimately sold to consumers.

Self-preferencing is not, in other words, something that can become the subject of a right, as in: “consumers have a right against self preferencing.” It is instead fundamentally about the best way to organize production in individual markets. The question it poses is whether the input denier can be relied upon to choose the component supplier that will make the product as good as possible for consumers, or whether consumers can instead be relied upon to make that decision.

Because consumers do not want to have to decide how everything they purchase is made, it follows that in almost every case the best answer is to let the input denier make that decision—by denying its input to downstream competitors that the denier believes will do a poor job.

Is Every Input Really Essential?

One might object that while every make-or-buy decision might well involve input denial, it does not involve denial of an essential input—it is not denial of an input by a monopolist of that input, not self-preferencing by a platform monopolist as opposed to any old platform—and so is not the sort of behavior that outrages the antitrust neophyte’s intuition that antitrust should ban input denial.

The pencil company’s effective denial of its pencil to third party eraser tip makers when the company makes its own erasers in-house is not input denial, the argument would go, unless there is only one manufacturer of pencils in the pencil market. Only then would eraser tip makers have no way of getting their wares to consumers other than through the medium of supplying eraser tips to that particular pencil company.

This argument would be good enough were all pencil companies to make the exact same pencil—same size, same wood, same graphite, same barrel color, same name, and so on. Only then would it be a matter of complete indifference to eraser tip makers whether they were to supply tips to our pencil company or another.

But, in fact, save for a few standardized commodities, like Class C crude oil, every company’s product is different from every other, even if only in brand name. The result is that every firm will prefer some inputs to others—find some more profitable to use relative to others—and so input denial will always deprive a firm of something that it cannot get anywhere else. In that sense, all input denials deny essential inputs and every maker of an input monopolizes that input.

Dixon Ticonderoga pencils are different from Palomino Blackwings are different from Faber-Castells, and so putting Acme Eraser Tips on each produces a slightly different finished eraser-tipped pencil, one that may be more or less desirable to consumers and indeed more or less profitable for Acme Eraser Tips. If Acme’s preferred pencil company—let’s say it’s Dixon—stops sourcing from Acme, Acme will end up worse off, even if Acme is able to supply Palomino or Faber-Castell instead. In this sense, Dixon is essential to Acme.

Of course, if there were only Dixon, then the consequences of rejection for Acme would be more severe—not just a hit to the bottom line but perhaps bankruptcy—but is it the magnitude of the harm that bothers us about input denial, or is it that a particular business opportunity has been put off limits?

Product differentiation makes of every input, in other words, a mini monopoly. In the “market definition” analysis that antitrust undertakes in merger and monopolization cases, antitrust has traditionally dealt with this by defining a company as a monopoly only if its products are very different from others’—in the lingo, only if they are not “close substitutes”—choosing an arbitrary cutoff between “too different” and “not different enough”.

But here’s the interesting thing: antitrust does not take this approach in deciding whether an input is essential or not. It does not do this in deciding whether a firm monopolizes an input. Instead, antitrust does this only in considering whether the input denier has a monopoly in the downstream market to which the firm is denying the input (another quirk of antitrust law that will not be considered further here because blanket bans on self-preferencing would not require such a downstream inquiry into monopoly power).

With respect to the question whether an input is monopolized, antitrust instead takes a holistic approach, sometimes asking whether the input is an “essential facility,” for example. Indeed, the proposed self-preferencing legislation eschews the market definition approach, instead prohibiting self-preferencing by those who are a “critical trading partner,” defined to mean those who have “the ability to restrict or impede . . . the access of a business user to a tool or service that it needs to effectively serve its users or customers.”

That’s pretty broad language.

The reason antitrust has always been so vague about what constitutes an essential input is that antitrust recognizes that because every input is unique, every input has a downstream firm for which it is essential.

Must an Input Be Something that You Buy?

One might also object that I have been using “input” in rather a peculiar way here, because I have called the buyer the input supplier whereas an input ought to be something that is sold, not bought. The eraser tip suppliers in my example do not buy the pencil company’s pencils. They sell eraser tips to the pencil company and are paid for doing so. In what sense does a pencil company’s refusal to buy eraser tips from some suppliers count as denial of the pencil input to those suppliers?

The answer is that the proper definition of input—the one that corresponds best to our intuition regarding the injustice of input denial—is not “a thing you buy to use in production” but rather “a thing that is necessary for you to do business.”

This broader definition is necessary to prevent clever changes in the locus of product assembly from undermining the antitrust laws. Consider eraser tips again.

I could equally have told the story of an eraser-tip company that purchases pencils, adds eraser tips to them, and then sells the bundle to consumers. In this case, it would be crystal clear that the pencil is the input and the pencil company’s decision not to supply pencils to the eraser tip company would be input denial. In this telling, the eraser tip company would be injured, just as before, by the fact that the pencil company decided either to make eraser tips in-house or to supply pencils to other eraser tip companies seeking to sell eraser-tipped pencils downstream to consumers.

Why should the pencil company be considered any less of an input denier if it were instead to decide to assemble eraser-tipped pencils itself and to start buying eraser tips from eraser tip manufacturers, though not from the eraser tip manufacturer that it targeted before for input denial? The harm to the eraser tip maker is the same, because either way that company is prevented from getting its eraser tips to consumers on the ends of pencils manufactured by that pencil company.

What matters to antitrust here is not how the eraser-tipped pencil makes it to consumers—whether by being assembled by the pencil company or the eraser tip company—but only that a decision of the pencil company not to do business with a particular eraser tip manufacturer harms the eraser tip manufacturer.

The Inevitability of Power and Suffering in Production and Life

And harm the eraser tip manufacturer it does.

But, as I have explained, that does not matter—indeed, cannot matter—unless it makes for a worse end product served up to consumers, because every act of combining two components to make a new product involves a choice regarding which components to join and which not, and so involves a decision to exclude some component makers from the business and not others. Thus the process of product design, production, and creation is always an exercise of power and the infliction of harm.

This, I think, is why it is so difficult to come to antitrust from the left.

Because progressives are uncomfortable with power and the infliction of harm. Progressives want that to go away. But it turns out that everything—everything—they have is inescapably a product of the exercise of power and the infliction of harm.

You cannot build, you cannot create, you cannot make, without choosing—rejecting some additions and embracing others—and each such decision destroys someone’s business (at least to a small extent) and leaves someone out in the cold, if not physically, then socially and mentally.

It would be nice to be able to avoid this ugly scene in which private firms make private decisions about how to make things, hurting each other along the way, and instead to commit all such decisions to the public—here the market, meaning consumers. This is the market option—to just sell all the components directly to consumers and let them decide which should be used and which not.

But the public has trouble enough selecting a President every four years. It does not want, nor does it have the intellectual capacity, to decide how everything is to be made.

And even then harm and the exercise of power could not be avoided, for the public would still have to decide. Consumers might not like Acme Eraser’s eraser tips and so not buy them to put on their pencils. And so Acme would be denied an essential input—a market—and wither as a result. We might, for the moment, think it more just that the public carry out these executions, as opposed to private firms.

But if you really are concerned about the wielding of power and the infliction of harm, then you should not much care who is doing the wielding and the inflicting, but abjure it all.

Thus input denial forces on the progressive the need to come to terms with the inevitability and pervasiveness of power and suffering in business, and, indeed, once one comes to think of it, in life. For all human behaviors involve choices regarding what to prefer and what to reject, with whom to spend time and with whom not, and so all involve input denial and the infliction of pain to a greater or lesser degree.

The really important question then appears to be not whether to condemn power and suffering but rather how to regulate their deployment and infliction. The question is: who should have the power and who should suffer?

In antitrust, the answer the law currently gives is that firms that make inferior products should suffer, and private firms should decide what combinations of components (i.e., what products) are inferior and what not, except in a relatively small set of cases in which consumers, despite their limited cognitive bandwidth, would do a better job of designing their products.

That, it seems to me, is the right approach, and one that leaves progressives plenty of scope to do good by taking authority from firms and giving it to consumers in cases in which firms produce junk.

Categories
Antitrust Inframarginalism Monopolization Regulation

Competition Trumps Information

Scholarly interest in personalized pricing is growing, and with it confusion about what, exactly, empowers a firm to personalize prices to its customers. You might think that the key is information. So long as you know enough about your customers, you can tailor prices to each. That is, however, incorrect.

No matter how much you happen to know about your customers—indeed, even were you to have a god’s total information awareness regarding each of them—you would not be able to charge personalized prices if you were to operate in a perfectly competitive market. Competition trumps information.

That is because in a perfectly competitive market there are always other sellers available who are willing to charge a price just sufficient to make the marginal buyer in the market willing to stay in the market and make a purchase. If there weren’t, then there would be a chance that the marginal buyer would not be able to find a price that he is willing to pay, and so would not buy, and then the market would no longer be perfectly competitive. For the perfectly competitive market is one in which competition leads to a price at which the marginal buyer and seller are willing to transact.

And so any attempt you may make to personalize a higher price to your inframarginal customers—the ones who are in principle willing to pay a higher price than the marginal buyer—will be met with scorn. Your customers will find those other sellers offering prices keyed to the willingness to pay of the marginal buyer and will purchase from those sellers instead at that marginal-buyer-tailored price.

Thanks to this effect, all buyers will transact at the same, marginal-buyer-tailored price, and so we can conclude that in a perfectly competitive market, price will always be uniform—and uniformly equal to the price at which the marginal buyer and seller transact. (More here.)

It follows that while information is a necessary condition for the personalizing of prices, it is not a sufficient condition.

You also need a departure from perfect competition, which is to say, you need: monopoly. Or at least a hint thereof.

I have argued that personalized pricing is one way to break the iron link between redistribution and inefficiency. When you personalize prices, you can personalize one price to the marginal buyer, ensuring that he stays in the market and the market is efficient, and whatever other prices you wish (within limits) to inframarginal buyers, enabling the redistribution of wealth. But it is important to remember that information on buyers is not alone enough to make this possible. The seller must be a monopolist, too.

Thus the use of personalized pricing as a tool of social justice directly conflicts with the mindless “big is bad” rhetoric that one finds today in certain corners of the progressive movement.

To redistribute wealth at the market level you need to start with big.

And then discipline big’s pricing behavior.

Categories
Inframarginalism Miscellany Monopolization

Notes on the Frysian Theory of the NFT

My colleague Brian Frye has been busy reducing the non-fungible token to theory. Herein some thoughts inspired by Brian’s work.

But first, a definition. An NFT is a ledger entry in a blockchain that (1) indicates a purchase and (2) describes the subject of the purchase, often just with a url link to a picture of the subject. As an approximate matter, when someone posts a digital photo on the Internet and you purchase the NFT to that photo, you obtain a ledger entry in a blockchain that indicates that you made a purchase and describes that purchase using a url link to the photo.

Now for those thoughts.

  1. As a legal matter, the NFT is nothing special. It can be one of two things. It can either be a legally-valid transfer of title to the underlying subject. Or it can be a legally-valid purchase of the service of updating the blockchain ledger to reflect a “purchase” of the underlying subject (without that purchase being legally valid in any way with respect to the underlying subject).

    In other words, the buyer of an NFT clearly pays for the service of having the blockchain ledger updated to reflect a purchase. If the seller’s act of indicating a purchase can be considered a legally-valid expression of intention to transfer title to the subject, then the NFT buyer also gets title to the subject. Otherwise, the NFT buyer just gets a hollow incantation on the blockchain, and nothing more.

    The NFT is a digital version of Berry taking a piece of paper, going up to Apple, and saying to him: “I’ll indicate on this piece of paper that I’ve sold you my Y, if you pay me X”. Apple pays the money. Berry writes on the paper: “sold to you one Y.” Has Apple purchased Berry’s service of writing “sold to you one Y” on the piece of paper or has Apple purchased Y?

    As a general matter, a manifestation of a present intention to transfer title will transfer that title (which is why when someone says, “it’s for you,” you can legally keep the gift). But the law imposes all sorts of qualifications on this rule that are designed to make sure that the intention really was there.

    Does the blockchain-equivalent of shouting “sold” and tendering a url link manifest a present intention to transfer title to the link alone (which is generally not owned by the NFT seller, but rather the platform upon which the NFT is sold, in which case there can be no sale)? If the link leads to a digital photo, does shouting “sold” and tendering the link manifest a present intention to transfer title to the thing depicted in the photo? Or does it manifest a present intention to transfer the seller’s intellectual property rights in the photo itself? If so, which rights? Does the buyer get the right to make a copy of the photo, or does the buyer get the entire copyright?

    Judges will decide these questions.

    If the answer is “no” to all of them, then all that we can say is that purchase of an NFT gets you the service of having a ledger entry placed in the blockchain indicating that you have made a purchase and describing the subject of that purchase. But not title to the subject itself, whatever that may be.

    (Technical note: The foregoing considers the simplest possible form of an NFT transaction, one that is not complicated by any advance written agreement between the parties providing further detail about the character of the transaction. The seller simply makes a promise, expressly or implicitly, to indicate, on a blockchain, sale of some description of a subject if the buyer pays a certain price. This is a unilateral contract offer. The buyer then pays the price and the seller is legally bound to carry out his promise to make the ledger entry in the blockchain. The key question is whether the carrying out of that promise manifests a present intention to transfer title to something, or not.)
  2. If it turns out that the NFT does not transfer title to anything, and instead represents the purchase of the mere service of indicating a sale on a digital ledger, then the NFT is rather interesting as a social matter. Because in that case the market for these things—tens of millions have changed hands for individual NFTs—is a market to buy and sell ledger entries, nothing more. It is for this reason that Brian calls the NFT “the ownership of ownership.”

    In this case, we have in the NFT a further step in the familiar human chain by which a practice that starts out as necessary for survival is progressively abstracted until it persists only as ritual or play. First, men hunted to survive. Then they hunted for fun, though they did not need the meat. Then they played paintball, and took home no meat. First men bought and sold things they needed to survive. Then they bought and sold things that served no practical or spiritual purpose (contemporary art). Then they bought and sold NFTs.

    Nietzsche saw this coming, in a way:

Commerce and Nobility.—Buying and selling is now regarded as something ordinary, like the art of reading and writing; everyone is now trained to it even when he is not a tradesman exercising himself daily in the art; precisely as formerly in the period of uncivilised humanity, everyone was a hunter and exercised himself day by day in the art of hunting. Hunting was then something common: but just as this finally became a privilege of the powerful and noble, and thereby lost the character of the commonplace and the ordinary—by ceasing to be necessary and by becoming an affair of fancy and luxury,—so it might become the same some day with buying and selling. Conditions of society are imaginable in which there will be no selling and buying, and in which the necessity for this art will become quite lost; perhaps it may then happen that individuals who are less subjected to the law of the prevailing condition of things will indulge in buying and selling as a luxury of sentiment. It is then only that commerce would acquire nobility, and the noble would then perhaps occupy themselves just as readily with commerce as they have done hitherto with war and politics . . . .

Friedrich Nietzsche, The Gay Science: With a Prelude in Rhymes and an Appendix of Songs (Walter Kaufmann trans., 2010).

The same information age powers that have given rise to the NFT—making possible a publicly-accessible and (mostly) immutable global ledger system—are also swiftly rendering markets—buying and selling—obsolete.

One day, perhaps sooner than we think, firms and governments will know enough about what we want in order for firms and governments to be able to make allocation decisions for us that are better than we could obtain by bidding for products in markets. And when that happens, we will enthusiastically embrace central planning and forsake markets.

Where today that last seat on the flight is allocated based on ability to pay—a very imperfect method of determining who places the highest value on the seat—tomorrow the airline (or the government agency regulating the airline) will know, based on reams of data about all those who want the seat and that for which they want to use it, that you (yes, you) actually value the seat the most, even though you wouldn’t be able to bid the highest price for it. And so you will get the seat.

In such a world, most of us will cease to buy and sell as a matter of daily life. But perhaps we will continue to play the buying and selling game, just as some of us continue to hunt.

The NFT will be that game.

(Nietzsche didn’t foresee that America would succeed at democratizing and commercializing all things noble, including the hunt, and so he didn’t foresee, either, that the NFT could be more than just the pastime of an aristocracy.)

  1. Brian argues that the NFT could be a solution to the inefficiency of copyright. It is not completely clear to me how this might be so. But there are some possibilities.

    The problem with copyright is that the only efficient way to sell intellectual property is through personalized pricing. That’s because the marginal cost of copying intellectual property is zero—it costs nothing to make a digital copy of an image, for example—and so there are gains from trade to be realized from distributing copies to everyone who places a non-zero value on the work. If you think it’s worth something, you should get access to it. That doesn’t mean that you should not have to pay for the work, or that the work has no cost of production. It means only that those costs are “overhead costs”—they’re the costs of making the work, not of distributing it—and each purchaser should be charged a price no higher than the purchaser’s willingness to pay, for a higher price would prevent the sale and so destroy potential gains from trade.

    Thus the pricing of intellectual property should always be personalized to ensure that it prices no one out of the market. Everyone who cares should be able to buy Steal This Book, but only those who can afford to pay should be charged a price for it, and that price should be no higher, for each, than what he can afford. But those who actually steal it should go to jail, for otherwise there would be no book to steal.

    The problem with copyright is that copyright holders often do not know what their customers are willing to pay and so they do not personalize the prices they charge to licensees. Instead, they impose one-size-fits all prices that prevent some people who place a non-zero value on the work from getting access to it. The price of the paperback is written on the cover. If you can’t afford it, you go home empty handed. Both you and the copyrightholder would be better off if the holder gave you a discount. But the holder thinks (mistakenly) that you’re lying when you claim you can’t afford the official price, so no deal gets done.

    How can NFTs solve this problem?

    Suppose that purchase of an NFT buys only the right to a ledger entry. The buyer does not obtain a general right to the work, or even a license to use a copy of it. If buyers nevertheless continue to love playing the buying and selling game, they may direct sufficient cash to artists to cover the overhead cost of production of their works, and in so doing eliminate the need for copyright protection. That is, if the NFT craze proves long-lived, and spreads enough cash across the creative industries, then we may no longer need to use copyright to fund the arts. Artists could give copies of their works away for free to anyone who wants them, and make a living selling NFTs to fans of the buying game.

    Of course, it might be the case that NFT buyers have less taste than copyright licensees, in which case this new approach to funding would push the arts in unfortunate directions. But the reverse might be equally true, and we might end up with better art. Or, most likely, there would be no change in quality.

    Suppose instead that the purchase of an NFT buys a license to a particular copy of the work. It buys you access to a copy of the Kaufman translation of Nietzsche’s The Gay Science, for example, though not the full copyright to that work. In this case, the NFT format of the sale doesn’t do anything special relative to any other form of digital sale of a copy of a work.

    But the fact that NFT sales are often structured as auctions—buyers bid for the NFT—pushes the pricing of copies in the right direction from the perspective of efficiency. For auction pricing means personalized pricing. If you require no minimum price in your auctions, and keep selling copies ad infinitum, then you will price no buyers out of the market and will end up selling copies at a range of prices personalized to the willingness to pay of buyers.

    Of course, savvy buyers will take advantage of this format to pay you little or nothing (if you know an infinite number of copies are going to be sold, why bid more than zero for any copy?), but we are at least on the right track. (Or not, if you end up getting paid so little that you give up on producing art in future.) The next step would be to use more complex auction structures designed to force buyers to reveal their willingness to pay, or to acquire data on buyers that would enable accurate dictation of personalized prices to them. But none of this, again, requires NFTs. Indeed, one can expect that, regardless whether NFTs persist or not, the information age is going to make it easier for copyright holders to personalize their prices and so much of the inefficiency of copyright will eventually disappear.

    Personalized pricing won’t solve all problems associated with copyright, however, for copyright also creates a distributive problem associated with excessive pricing, and personalized pricing enables owners to extract the maximum possible value from buyers—value that may be far in excess of the cost of producing art. In that case personalized pricing would exacerbate the wealth distributive problem associated with copyright even as it eliminates the efficiency problem. NFTs, in either their fee-for-service guise or their fee-for-license guise can’t solve the distributive problem of copyright, because there’s always a chance that buyers will pay prices for their NFTs that more than cover the cost of producing the arts.

    But that’s a story for another day.