Categories
Antitrust Monopolization

More on the Warren Platform Fallacy

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

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

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

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

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

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

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

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

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

Categories
Antitrust Monopolization

When the Food Section Gets Bigness, but the Business Section Doesn’t

It’s a good thing that The New York Times’ Food department hasn’t gotten the small-is-beautiful memo.

On the same day that the paper ran another flawed installment in its crusade against bigness, this time targeting Google for bringing competition to wireless-speaker-maker Sonos, the Times’ food section ran a paean to behemoths of the restaurant business–chains like IHOP and Applebee’s–that highlights many of the reasons why size is often a good thing, both for workers and consumers.

Sonos

Let’s start with the Times’s wrongheaded defense of Sonos.

As the paper did in an earlier defense of cloud-computing startup Elastic, the Times here continues to confuse harm to competitors with harm to competition. Google, the paper suggests, is competing unfairly with Sonos, by “flooding the market with cheap speakers that [Google] subsidize[s] because [the speakers] are not merely conduits for music, like Sonos’s devices, but rather another way to sell goods, show ads and collect data.”

The Times is talking about Home, Google’s answer to Amazon’s Echo, which includes a high-definition speaker that plays music, but also provides access to Assistant, Google’s AI-powered virtual assistant, which allows users to run internet searches, buy products, order food, and do much more by conversing with the speaker system.

The Times weeps that Sonos can’t turn a profit selling its speakers–which only play music–for less than $200, whereas Google sells Home for $50. The implication is that Google is engaged in predatory pricing–sales of products below their cost of production–for purposes of driving competitors from the market. That’s always possible in an abstract sense, and would be an antitrust violation if some other criteria were also met.

But there’s an obvious alternative explanation staring the Times in the face, one that doesn’t involve anticompetitive conduct: that Google isn’t in the market to sell speakers, Google is in the market to sell virtual assistants that also happen to play music.

And when you count up all the different ways Google is able to generate revenue from its product, including commissions Google earns on goods purchased through Home, revenues Google generates from selling ad-targeting services using the data generated by Home, and, of course the $50 purchase price of a Home unit itself, those revenues probably cover Google’s costs, including the cost of making the speakers that go into Home.

We don’t say that a hotel that offers guests free breakfast is engaged in predatory pricing designed to drive the local Starbucks out of business, even though a breakfast price of $0 is definitely below the cost of making the breakfast. Because the hotel is not selling breakfasts. The hotel is selling a package, and the hotel includes the cost of the breakfast in the price the hotel charges for the room. If the local Starbucks wants to compete, then either Howard Schultz needs to get into the hospitality business, or Starbucks needs to offer better coffee than the hotel. (Have you ever skipped out on a free breakfast to go somewhere better? I have.)

The same goes for Sonos. To beat Google, Sonos can try to field its own virtual assistant. Admittedly unlikely, but not a reason to condemn Google, for reasons to be discussed in a moment. Or Sonos can build better speakers than the ones Google bundles with Home, speakers that are enough better to make music lovers willing to choose them over, or in addition to, Home.

The Times makes much of the fact that Google may have used information Google collected from its partnership with Sonos to copy Sonos’s speakers. But as I have emphasized in relation to other reporting by the Times, copying is good for competition, not bad, and is certainly no antitrust violation. If Google copies Sonos’s speakers, making Google’s own as good as Sonos’s, that will have the competitive result of preventing Sonos from leveraging the superiority of its products to charge monopoly prices for them.

Of course, we want innovators to reap some rewards for innovating, which is why the patent laws prevent copying for a limited period of time. Sonos is suing Google for patent infringement, and if Google has infringed, then the court will award Sonos lost profits, as it should. But such patent litigation is about enabling firms to preserve the legislatively-sanctioned monopoly that is a patent on a desirable product. Patent litigation is not about preserving competition.

The Times also makes much of the fact that Sonos’s CEO confessed to being frightened about suing Google, because Google might respond by terminating a partnership with Sonos that allows Sonos owners to use their Sonos speakers, in lieu of Home, to communicate with Google’s Assistant.

But that’s just business. If Sonos postponed suing Google for patent infringement because Sonos wanted to continue to be able to have access to consumers wishing to buy virtual assistants, rather than just speakers, then Sonos was effectively licensing its speaker patents to Google at a price equal to the extra profits that Sonos was generating from the virtual assistant business. If Sonos is asserting its patents now, that means that Sonos thinks it can make more from court-ordered licensing than from the informal exchange of access to its technologies for access to Google’s Assistant.

Standing behind the Times’s article is the unspoken assumption that without the ability to offer access to virtual assistants through its speakers, Sonos is doomed, regardless how good its speakers may be, because consumers don’t care enough about great speakers to be willing to buy them in lieu of, or in addition to, speakers bundled with a virtual assistant, such as Google Home. That may be true, and sad for Sonos, but the ultimate cause must be that Sonos is simply less technically savvy than Google.

Google invested in the search and AI it needed to produce a virtual assistant. Sonos didn’t. True, Sonos may have pioneered wireless speaker technology that Google was not able to match without licensing that technology (informally so far, perhaps formally, under court order, in future) from Sonos. But Sonos could have taken the same tack against Google, reverse-engineering Google’s search algorithms and Assistant AI to create its own virtual assistant. If Sonos wasn’t able to do that, because it would have required too much time and money, then that’s evidence that what Google has achieved in search and AI is much more of a technological advance than are Sonos’s speakers.

Which takes us back to the basic point that to the extent that Sonos is failing to compete effectively against Google it’s because Google is doing a better job than Sonos at giving consumers what they want, not because Google is restraining competition. Once again, the Times has mistaken a textbook case of effective competition for an example of monopoly.

It’s also worth noting that Google has not actually yet retaliated by cutting Sonos off from access to Assistant, no doubt because Google recognizes that Sonos is better at making speakers than is Google, and Google can build its virtual assistant market share by reaching consumers who care about getting great speakers through Sonos.

That, too, is how markets are supposed to work. If Google can make its product better by combining it with rival technology, Google will do that. The fact that Sonos might not be able to survive without Google but Google can survive without Sonos means that Google can drive a hard bargain with Sonos and absorb most of the gains from trade. But Google can’t drive such a hard bargain as to make Sonos unwilling to go on, because then Google will lose the customers it can only get through Sonos.

That means that Sonos will not turn into the next tech giant. But with 1,500 employees and a billion dollars in annual sales (which the Times rather humorously tries to downplay as “a nice little business”), Sonos is doing just fine, even with the short end of the stick. We don’t all get to be the next tech fairy tale. (And if Google does pull the plug on its partnership with Sonos, the company can always compete to supply its speaker technology to Google for incorporation into Home. Indeed, Sonos’s patent suit may be a prelude to a transition into that new business model.)

The Times’ piece on Sonos is also a sobering reminder of the extent to which the paper’s business pages have become a mouthpiece for writers’ self-interested war on Google, Facebook, and Amazon, three companies that writers see as having tanked their earnings in recent years, as I have argued in depth elsewhere.

It’s not just the rhetoric that belongs more comfortably in a polemic than a news feature (Sonos is “under the thumb of Big Tech,” according to the Times). It’s also the sourcing.

The Times tells us that “congressional staff members have discussed [Sonos CEO Patrick Spence’s] testifying to the House antitrust subcommittee soon about his company’s issues with them,” but fails to mention that those hearings have been convened by a Congressman who is simultaneously sponsoring legislation pushed by the News Media Alliance, an industry trade group, that would give newspapers an exemption from the antitrust laws. The Times also quotes an employee of the Open Markets Institute describing Sonos’s fear of Google as “real,” without revealing that Open Markets is run by a journalist with ties to an organization that advocates on behalf of writers. More on both connections here.

But do you think that the Times would care to ask an actual antitrust law scholar whether Google’s conduct is anticompetitive? Nuh-uh. The article couldn’t have been written more critically of Google if Open Markets, or the House antitrust subcommittee, had authored the article itself and issued it as a press release.

IHOP

Thank goodness neither Google, Facebook, nor Amazon is in the restaurant business. Because in that case it would be hard to imagine the Times publishing Priya Krishna’s recent love letter to massive chain restaurants, “Current Job: Award-Winning Chef. Education: University of IHOP.”

According to Krishna’s piece in the Times:

Chain restaurants are often accused of a sterile uniformity and a lack of attention to quality ingredients, nutrition and the environment. But for anyone trying to enter the restaurant business, they have particular attractions: formalized training, efficient operations, predictable schedules and corporate policies that claim to discourage the kind of abuses that have come to light in the #MeToo era. The pay is sometimes better than at independent restaurants, and the Affordable Care Act requires companies with 50 or more full-time employees to provide health insurance.

The article highlights several “acclaimed chefs [at independent restaurants] who prize the lessons they learned . . . in the scaled-up, streamlined world of chain restaurants,” from the influential chef who eats at Waffle House to Jacques Pepin, who spent ten years working at Howard Johnson’s.

Chain restaurants provide workplaces that are, it turns out, less heirarchical than independent restaurants. Because egalitarianism is more efficient. At Applebee’s, for example, there isn’t “a strict heirarchy . . . because the kitchen [isn’t] centered on a chef, as in many independent restaurants. ‘There is this understanding that every person is important to making the restaurant run smoothly . . . Nobody thought the dishwasher was a lower status than them.'”

According to the article, “[s]everal chefs point to rigorous customer-service standards of the chains where they worked. ‘It was pretty much that the customer is always right,'” said one chef, who observed to the Times that “[i]t’s a level of hospitality he doesn’t always see in fine-dining restaurants.”

Another chef reported having had to “make sacrifices: lower pay, or forgoing pay while training” when she moved to working at independent restaurants.

She also had to put up with abuse. The article quotes her as recalling that when it took her too long to run food to a table at an independent restaurant, “‘the chef threw a potato and it hit me in the head. . . . That kind of stuff doesn’t happen in a chain restaurants [sic] because of corporate structure. You tend to be treated more fairly.'”

Shortly after reading this article, I went to a small family-run butcher’s shop to get a thinly-sliced cut of meat that my wife needed for a dish she was preparing. The slicing machine was in a back room into which a small internal window had been cut. I could just make out through the glare that the butcher was handling the meat with his bare hands.

I didn’t complain, but I did make my next stop a Kroger’s, the largest grocery store chain in the world. Economics teaches that if this firm were a monopoly, it should have lower quality standards than firms on the competitive fringe, like the family-owned butcher shop I had just left. I went to the meat section and asked for the same cut. The slicing machines were all directly behind the counter, in full view of customers. And the first thing the butcher did was to put on some gloves. True, he wasn’t as friendly as the folks in the family store. But when I got home, I gave only the cuts from Kroger’s to my wife. Big is not always bad.

Small businesses are a good thing, in my view, but only when they are actually better than big businesses. Thousands of independent restaurants survive, particularly in the luxury space, despite treating their labor less well than do the chains, because they provide a shot at top-chef fame for employees and a unique dining experience for customers that chains haven’t yet been able to match. The success of independent coffee shops in resisting Starbucks by taking coffee connoisseurship to another level is also a great example.

But when a smaller firm fields a product that isn’t better than what its rival has to offer, when a firm tries to sell speakers to consumers who would rather buy speakers-plus-virtual-assistants, the solution is not to try to use the antitrust laws to shelter the smaller firm.

The solution is to let the company up its game, or clear out.

Categories
Antitrust Monopolization Regulation

Cost Discrimination

One hears constantly about the power of technology to enable the consumer-harmful practice of price discrimination, which is the charging, to each consumer of a given product, of a price equal to the maximum that the consumer is willing to pay for that product. But one hears very little about the power of technology to enable the consumer-beneficial practice of cost discrimination, which is the foisting upon each firm of a price equal to the minimum that firm is willing to accept in exchange for selling a given product.

That’s not because the technology isn’t there. In fact, because big business invested in supply chain automation long before the tech giants made possible the snooping needed to identify consumer willingness to pay, the technology needed for cost discrimination is more developed than the technology needed for price discrimination. The reason we don’t hear about cost discrimination is that the technology needed to implement it is in the hands of firms, rather than the consumers who would benefit from cost discrimination.

This state of affairs isn’t surprising, since firms are few relative to consumers, and therefore more likely to have the pooled resources and capacity for unified action needed to invest in and implement a discrimination scheme. Yes, consumers have review websites, and price aggregators, but that’s a far cry from the centralized acquisition and analysis of data, and the ability to bargain as a unit based upon it, that firms enjoy.

One way for consumers to implement cost discrimination would be by organizing themselves into data-savvy cooperatives for purposes of negotiating prices with firms. Another would be for startups to step in as middlemen, taking a cut from consumers in exchange for engaging in data-based bargaining on their behalf.

But another solution is for the government to create an administrative agency with the power to regulate consumer prices. It turns out that there is ample precedent for government price regulators to dictate cost-discriminatory prices.

Here, for example, is an account of the Federal Power Commission doing just that for wellhead natural gas rates in 1965:

Pricing designed to encourage supply could also create “economic rents” (profits above a normal return) for gas producers with old, inexpensive reserves. Neither the producers’ brief for fair field prices nor the staff’s preference for rates based on average historical costs seemed acceptable or sufficient. It was the young economist Alfred Kahn, serving as an expert witness, who suggested a two-tied pricing structure: separate prices for old gas and new gas. Here, from the commission’s perspective, was an ideal political, and perhaps economic, solution. “The two-price system,” wrote the commission, “thus holds out a reward to encourage producers to engage in further exploration and development while preventing excess and unnecessary revenues from the sale of gar developed at a period when there was no special exploratory activity directed to gas discovery.”

Richard H.K. Vietor, Contrived Competition: Regulation and Deregulation in America 113-14 (1994).

The old gas here corresponds to inframarginal units of production and the new gas corresponds to marginal units of production. Economists were once acutely aware of the problem that even under perfect competition the inframarginal units can enjoy a windfall at the competitive price, so long as the cost to their owners of producing those units happens to be below the cost of the marginal units, which determine the competitive price.

David Ricardo famously explained all of English aristocratic wealth in these terms. The aristocrats take the best land by force, he observed, and cultivation of that land is relatively inexpensive, because it is the best land. The rest take land that is more expensive to cultivate. Because the competitive price for agricultural goods must be high enough to pay the higher cost of cultivating the poorer-quality, hence marginal, land, the price must then be above the cost to the aristocracy of cultivating the best land, leaving the aristocracy with great profits.

Just so, the FPC worried that the producers of the old gas, who had come upon the gas only as an accident as part of explorations for oil, and therefore had incurred a gas exploration cost of zero, would enjoy a windfall if prices were set to cover the costs of bringing new gas from the ground through dedicated and costly explorations. So the FPC approved prices that discriminated against the old gas producers based on their lower exploration costs.

Consumers don’t know enough about the costs incurred by the firms that sell to them to insist on low prices when buying from firms with low costs. Which is why I suspect that government price regulation will be the only way for consumers eventually to enjoy some of the pricing-based fruits of the information age.

Categories
Antitrust Monopolization Regulation

It’s about Price, not Competition

One thing we are going to encounter a lot as the anti-big-tech crusade gets under way is the confusion of pricing problems with competition problems. Consider the attack on Apple’s promotion of its own apps on its App Store. This looks like a competition problem: Apple is using its proprietary App Store infrastructure unfairly to promote its own products over those of rivals. Get a court applying the antitrust laws to order Apple to stop doing that, and, it appears, the problem is solved.

Only it’s not solved, because the heart of the problem is not Apple’s creation of an unlevel playing field in app competition. The heart of the problem is that Apple owns the App Store itself.

And for that problem, there is no competitive solution. As Chicago School scholars pointed out long ago, if a company has a monopoly on upstream infrastructure, the company can use that monopoly to extract all of the profits from downstream businesses that rely on the infrastructure, by charging high fees for access.

So long as Apple retains the power to set the fees that it charges software developers for selling apps through the app store, Apple will be able to suck all the value out of those downstream businesses. Forcing Apple to let those businesses compete with Apple’s own apps on a level playing field will not solve the problem because app developers will still need to pay Apple a fee for access that Apple has discretion to set.

Indeed, it is a mistake to think that Apple’s promotion of its own apps on the app store reflects anticompetitive intent. Because Apple could extract all of the profits from competing developers through fees, even without selling any apps of its own, Apple’s reasons for selling its own apps in the App store, and indeed for promoting them over rival apps, can only have other purposes. Most likely, for a firm that has repeatedly demonstrated the desirability to consumers of tight integration of product components, Apple sells its own apps, and promotes them preferentially, because Apple believes that its own apps are actually better, and that when consumers search for new apps, consumers want to know if Apple has a relevant offering. (I know I do.)

What should trouble us about the App Store is not that Apple manages competition on that platform–the company has every reason to do that with a view to making consumers happy–but rather that Apple’s control of the platform allows the company to extract all of the gains created by the platform for itself through fees, leaving relatively little for other app developers, or for consumers themselves.

The only way to solve that problem using competition would be to lessen Apple’s control over the App Store itself. But doing that would destroy the closed app ecosystem that has differentiated the iPhone positively in the minds of consumers from the mayhem and unreliability of Android phones. Letting iPhone owners install apps from anywhere is a recipe for trouble.

In the App Store, as in most tech platforms, we have an efficient market structure. But a monopolistic one. That means that complaints about fairness ultimately must amount to complaints about price, not competition. The solution can therefore only be price regulation, not antitrust.

Categories
Antitrust Monopolization World

The Lord Grand Secretary on Regulated Monopoly

The present plan for unifying the salt and iron monopoly is not alone that profit may accrue to the state, but that in the future the fundamental of agriculture may be established and the non-essential repressed, cliques dispersed, extravagance prohibited, and plurality of offices stopped. In ancient times the famous mountains and great marshes were not given as fiefs to be the monopolized profit of inferiors, because the profit of the mountains and the sea and the produce of the broad marshes are the stored up wealth of the Empire and by rights ought to belong to the privy coffers of the Crown; but Your Majesty has unselfishly assigned them to the State Treasurer to assist and succor the people. Ne’er-do-wells and upstarts desiring to appropriate the produce of the mountains and the seas as their own rich inheritance, exploit the common people. Therefore many are those who advise to put a stop to these practices.

Iron implements and soldiers’ weapons are important in the service of the Empire and should not be made the gainful business of everybody. Formerly the great families, aggressive and powerful, obtained control of the profit of the mountains and sea, mined iron at Shih-ku and smelted it, and manufactured salt. One family would collect a host of over a thousand men, mostly exiles who had gone far from their native hamlets, abandoning the tombs of their ancestors. Attaching themselves to a great house and collecting in the midst of mountain fastnesses and barren marshes, they made wickedness and counterfeiting their business, seeking to build up the power of their clique. Their readiness to do evil was also great. Now since the road of recommending capable men has been opened wide, by careful selection of the supervising officers, restoring peace to the people does not wait on the abolition of the salt and iron monopoly.

Esson M. Gale, Discourses on Salt and Iron : A Debate on State Control of Commerce and Industry in Ancient China, Chapters I-XIX: Translated from the Chinese of Huan K’uan with Introduction and Notes 34-35 (1931).
Categories
Antitrust Monopolization

Amazon’s Problem Is Too Much Competition, Not Too Little

Amazon has come under assault in recent weeks for failing to keep “thousands of banned, unsafe, or mislabeled” products sold by third parties off of its site. The New York Times, which has been acting as a mouthpiece for the Authors Guild in its crusade against Amazon, has focused on the sale of knock-off books. But The Wall Street Journal has shown that the problem extends across multiple product categories, and concludes that “Amazon has ceded control of its site.”

The great irony here is that this is proof that Amazon is being too open to competition, not, as Elizabeth Warren, the Open Markets Institute, and the Times have been arguing, too closed to it.

Unlike, say, Apple, which designs virtually every component of its phones, Amazon chose early on to platformize its business. When it created a useful cloud service to support its ecommerce website, Amazon opened the platform, called Amazon Web Services, to the market, turning it into a successful business in its own right. Amazon is doing the same thing with package delivery, allowing anyone with a car and an app to deliver packages for the company. And of course Amazon platformized its own ecommerce website, allowing third party sellers to list and sell products through Amazon.com.

Of course, Amazon could have taken a more traditional route. It could have kept its cloud services to itself. It could have continued to contract out its package delivery business to a single vendor, like UPS. And it could have remained the only retailer on its own ecommerce website. If it had, it is hard to see how Amazon would have come in for criticism from the big tech breakup crowd. Just as nary a peep has been heard about the fact that Apple insists, for example, on designing its own iPhone CPUs.

But Amazon instead did what competition advocates are supposed to want: the company threw open virtually every component of its business to competition. As a result, however, it has been attacked by Elizabeth Warren and others for failing to go even further, and to stop using its own platforms entirely. Under their approach, it is not enough, for example, to allow others to use Amazon Web Services. Amazon must stop using those services itself, otherwise in operating them there is a danger that Amazon will favor its own downstream businesses. Amazon might, for example, tank Walmart’s cloud access in order to get competitive advantage in retail. Similarly, Amazon should stop retailing products for its own account on Amazon.com, argues this group, because Amazon can alter the website to give its own products competitive advantage (by, for example, displaying them more prominently in search results).

So it is bitterly ironic to find Amazon now coming under assault for failing to exercise more control over the third party sellers who use its ecommerce platform.

The lesson here is two-fold. First, competition is no panacea. As policymakers learned in the mid-19th century, when economic liberalism first came on the scene, excessive competition means fakery, fraud, low quality, and boom and bust cycles that sow economic instability.

Second, antitrust and competition policy are not progressive projects. Progressives seek regulated environments. The big firm dictating standards and stamping out the chaos that is competition across all levels of its supply chain is itself a regulated environment. If a firm does not regulate the way progressives want, the solution for progressives is not to rip the firm apart as a petulant child would rip apart a disappointing toy, but to change the way that the firm behaves. Calling upon Amazon to do more to control what books third party sellers can sell through the company’s sites is a demand for less competition. If that sounds progressive, it is.

One more thing: The Times’s attack on Amazon for selling knock-off books highlights the political opportunism of writers–understood as an interest group–in recent antitrust debates. For at the same time that writers have wrapped themselves in the small-is-beautiful flag, attacking Amazon for destroying main street retail, they have seemed not to think twice about then turning around and attacking Amazon for failing to cast off from its website the small independent publishers of knock-offs that are competing directly, and successfully, with writers. At the end of the day, writers’ fight against Amazon is about protecting writers, not about promoting competition.

Categories
Antitrust Monopolization

When Writers are a Special Interest: The Press and the Movement to Break Up Big Tech

When Uber and Lyft brought competition to the Seattle taxi market, drivers fought back, asking the city to let them form a cartel to demand higher wages from rideshare companies. If that sounds anticompetitive, it is. But petitioning the government for protection from competition is also completely legal, because the courts expect that informed voters will make the right call about whether the petitioners need a bailout.

That system works well enough for cabbies, but not for another group that has been seeking government protection from competition of late: writers. In their role as journalists, writers give voters the information they need to make the right call about bailouts, but writers cannot be expected to do that dispassionately when they are the ones seeking government protection.

Over the past fifteen years, writers’ earnings have nose-dived thanks to competition from Google, Facebook, and Amazon directed at two of the main industries that employ writers: newspapers, which have lost advertising revenue to Google and Facebook, and publishers, which have lost the ability to dictate book prices as Amazon’s bookselling business has grown.

As a result, writers have quite understandably come to view these companies as a threat to their livelihood. Through the Authors Guild and the News Media Alliance, writers are calling for government protection from competition in the form of antitrust enforcement against Google, Facebook, and Amazon, and an antitrust exemption for newspaper cartels.

But writers’ views on big tech have also carried over into their reporting, making it hard for the public to judge whether government aid is warranted. I will focus on reporting by The New York Times that appears to me—as an antitrust scholar—to be colored by writers’ sense of professional vulnerability to the tech giants. But examples can be found in many other sources.

A Bully Pulpit

One expression of the strength of anti-tech feeling at the Times is the sheer volume of Times reportage suggesting that Google, Facebook and Amazon should be broken up or otherwise prosecuted under the antitrust laws.

In the first seven months of 2019, the Times published more than 300 articles mentioning Google, Facebook, or Amazon and antitrust, including an Op-Ed by a Facebook founder calling for breakup, an article discussing legal changes required to “take down big tech,” and another musing on what Amazon will do once its “domination is complete.”

That’s a lot of ink to spill on an issue that lacks either public or scholarly support. Polls show that the public has little interest in breaking up companies that either employ them, or sell them products at low or zero prices. And although I have decried Facebook’s treatment of app developers, to my knowledge no antitrust specialist has argued for the breakup of Google, Facebook, or Amazon. To the contrary, probably the two most prominent scholars in the field, Herbert Hovenkamp and Carl Shapiro, have urged caution. (Tim Wu, who has written on antitrust, but has much broader interests, has made the limited suggestion that Facebook should unwind its acquisitions of WhatsApp and Instagram.)

Grasping for Scholarly Support

The absence of scholarly support for antitrust action was highlighted by the oddest episode to date in the Times’ reporting on the tech giants. In 2017, the paper reported extensively on academic work by a law student that sought to make a legal case for antitrust action against Amazon. What surprised antitrust scholars about the publicity wasn’t just that the Times had bypassed experts in the field in favor of promoting student work, but that the work itself broke no new ground.

Firms violate the antitrust laws by taking steps to disadvantage rivals. But the student, Lina Khan, offered no evidence of such conduct. Her closest attempt—the argument that Amazon had run diapers.com out of business by charging very low diaper prices—fell flat because charging low prices is anticompetitive only if the prices charged are below cost. Otherwise, low prices are a sign of healthy competition. Khan offered no evidence of below-cost pricing.

By reporting this work, however, the paper created the impression that there is an antitrust case to be made against Amazon, one that the paper reinforced by publishing two Op-Eds by Khan and then a profile by David Streitfeld that went so far as to call her a “legal prodigy.”

Khan’s association with Barry Lynn, a journalist and head of the pro-breakup Open Markets Institute, for which Khan worked both before and after law school, highlights the close relationship between the Times’s reporting and writers’ grievances against the tech giants. Lynn has written to the Justice Department on behalf of organized writers calling for antitrust action against Amazon.

Creating the Impression of Crisis

Equally troubling is the paper’s reporting on the ongoing House investigation into big tech. The Times ran a front page story on the investigation under the headline “Antitrust Troubles Snowball for Tech Giants,” suggesting a groundswell of interest in antitrust action.

What the story did not disclose is that the Congressman leading the investigation, David Cicilline—whom the Times quoted extensively in that article—is a sponsor of legislation pushed by the News Media Alliance that would allow newspapers to cartelize for purposes of fighting Google and Facebook. Cicilline has, incidentally, hired Khan to help with the investigation.

Similarly, the Times recently gave front page coverage to a preliminary step by antitrust enforcers to consider an investigation into big tech, and suggested that a case would have merit. But the paper did not mention that the only major antitrust action brought by the Trump Administration to date was the politically-motivated, and failed, attempt to block AT&T’s acquisition of TimeWarner, owner of Trump rival CNN. Given the President’s animus toward Google, Facebook, and Amazon, the opening of an investigation tells little about whether a case would have merit.

The Giant that Didn’t Bark

Further suggestion that writers’ professional concerns are coloring their coverage of the tech giants comes from the conspicuous absence of Apple from the paper’s crosshairs. Under the standard measure of monopoly power, the ability profitably to raise price, Apple has far more power than Google, Facebook, or Amazon, earning twice what runner-up Google earned last year.

But it has been hard to find a critical word about Apple in the Times’s pages.

That may be because Apple has played the role of hero to a beleaguered trade. In 2009, as the Kindle was sowing panic among publishing executives, Steve Jobs entered into a cartel agreement with the major publishers to sell ebooks via iTunes at fixed prices several dollars above the prices Amazon insisted upon for the Kindle. The Justice Department frustrated these plans, however, suing to break up the cartel, and winning at trial against Apple.

Against this backdrop, other connections between the Times and advocates of breakup appear in a new light. Times writers have repeatedly appeared to cast Elizabeth Warren, who has called for breakup, as the Democratic frontrunner, even as she has lagged in the polls. And the Times endorsed Zephyr Teachout in her failed 2018 bid for New York Attorney General. Teachout, who made her name as a scholar of corruption, rather than antitrust, is, to my knowledge, the only current law scholar publicly to call for breakup of Google and Facebook.

I don’t think there is a writers’ conspiracy here. But just as you won’t hear a good word from a cabbie about Uber or Lyft—even if these companies have made life for the rest of us much easier—you won’t hear a good word from a writer about Google, Facebook, or Amazon. The difference is that when writers complain, America is forced to listen.

Categories
Antitrust Monopolization Regulation

The Big and the Bad

That firm size tells us little about propensity to innovate is nicely illustrated by contrasting AT&T and Verizon with Amazon. AT&T and Verizon have rightly been criticized for what looks like intentional underinvestment in broadband, made possible by their oligopoly power. Comes now Amazon, planning to invest billions to provide global broadband access via satellite, and Google, investing billions to build new undersea internet cables.

The big can do wrong, but they can also do right.

There is a Schumpeterian lesson here too. Schumpeter argued that market power is always in jeopardy from outside the market, and that is in evidence here. Who would have thought a few years ago that an online retailer would one day plan to use the profits generated from dominance in its own market to challenge the vicious telecom oligopoly?

It should also be clear that a broken up Amazon or Google, an Amazon or Google confined to one business, one market, and one level of the supply chain, would have neither the capital, nor the ambition, nor the legal right to attack the telecoms.

It is not size that is a problem, but the misuse of size, and the remedy for misuse is to encourage the good uses and suppress the bad. Which is to say: not to break up, but to regulate.

Categories
Antitrust Meta Monopolization Regulation

Chicxulubian Antitrust

There is a lot for industrial policy, including antitrust, to gain from reflecting upon evolution. Consider, for example, the theory that the demise of the dinosaurs in a catastrophic meteor impact at Chicxulub cleared the way for mammals to become the world’s dominant megafauna.

If we suppose that mammals are better creatures than dinosaurs — more advanced, more sophisticated, somehow — then the theory suggests that until the meteor impact the dinosaurs had short-circuited competition from mammals, preventing them from leveraging their superiority to overpower the dinosaurs.

Perhaps the short circuit was the mere fact of dinosaurs’ incumbency. Mammals couldn’t reach livestock size, for example, and compete with larger dinosaurs, simply because dinosaurs already occupied that niche, denying mammals the resources they would need to evolve into it. Similarly, antitrust and innovation economics have long recognized that there are first-mover advantages that can block competition. Indeed, the argument current today that Google and Facebook use their size to acquire startups before they can grow into serious competitors resembles the role dinosaurs’ incumbency may have played in obstructing the development of mammals.

But perhaps instead of confirming our fears about the anticompetitive character of incumbency, the story of dinosaurs and mammals undermines it. For there is no reason to assume that mammals really are the better — more advanced, more sophisticated, somehow — of the two groups. Perhaps if the advantages of incumbency could be eliminated, and dinosaurs and mammals, in fully-developed form, could be set against each other, dinosaurs would emerge victorious.

In that case the meteor impact did not operate the way some believe that using the antitrust laws to break up Big Tech would operate today. The cataclysm did not free up space for more innovative upstarts to develop and occupy the ecosystem, but rather wiped out a more advanced form, allowing less-developed upstarts to thrive, and then to turn around and use the advantages of incumbency to prevent the more advanced form from returning to its original position of dominance. The meteor laid low the dinosauric epitome of life, and mammals leapt into the space and prevented dinosaurs from coming back. It is hard, when looking at the dinosaurs’ descendants, the birds, with their obsession with beauty, long-term amorous relationships, and increasingly-well-documented intelligence, not to wonder what might have been.

In other words, there is no reason for industrial policymakers to suppose that periodically shaking up the business world using the industrial cataclysm of the deconcentration order must necessarily, through competition, lead to better firms. Some value judgment must be made by policymakers regarding whether what will come next promises to be better than what we have now. Competition is path dependent, a kind of roll of the dice, and there is no guarantee that a new roll will produce better forms than the last. The evolution of the mammals into man — an unmitigated disaster for the global ecosystem — stands as Exhibit One to that sorry fact.

Categories
Antitrust Monopolization Regulation

Boeing Shows Us Why Prices Are Too Important for Private Enterprise to Decide Alone

The sad tale of Boeing’s pricing of essential safety features for the 737 MAX 8 as product options is an object lesson in why pricing should always be a public-private project.

Many firms engage in price discrimination: charging different prices for the same product. The ideal way to do that is to generate reliable information on the willingness of each customer to pay, and then to charge higher prices to those willing to pay more and lower prices to those willing to pay less. But often firms can’t just discriminate in prices directly, either because discriminatory pricing would be politically sensitive, or because firms just don’t know how much buyers are willing to pay. So firms discriminate indirectly, by splitting the product into a base model and then selling optional additions.

By pricing the additions far above the actual incremental cost of adding the addition onto the product, the firm can seduce buyers into bringing price discrimination upon themselves. The buyer who is relatively price insensitive — and therefore has a high willingness to pay — will load up on options, and end up paying a far higher total price for the product than will the price-sensitive buyers, who will go with the base model. If this sounds like the business model of the car industry, that’s because car makers — particularly GM — pioneered this form of covert price discrimination in the mid-20th century.

Is covert price discrimination of this kind good for the economy? If a firm’s overhead is so high that the firm would not be able to cover costs, including overhead costs, at a competitive uniform price, then the answer may be yes. But if not, then price discrimination represents a pure redistribution of wealth from consumers to firms, by allowing firms to raise prices higher than necessary, to those consumers who happen to be willing to pay more.

Boeing’s decision to charge pilots extra to be able to read data from a key sensor used by an anti-stall system in the 737 MAX 8 is a classic example of covert price discrimination. The cost of enabling pilots to read data off the sensor was apprently near zero, but Boeing charged airlines thousands of dollars for that option in order to coax airlines with a higher willingness to pay to pay more for a 737 MAX 8. Predictably, budget airlines, like Lion Air, whose 737 MAX 8 crashed on takeoff, possibly because pilots could not read data off of the sensor, and therefore did not know that the plane’s anti-stall system was malfunctioning, did not choose that option.

If America had a general price regulator — an administrative agency responsible for approving the prices charged by large American businesses, including Boeing — then that regulator would be able to tell us today whether Boeing really needed to price discriminate in order to cover overhead, and therefore whether the high price Boeing charged for that safety option really was justified by its costs. Or whether Boeing’s price discrimination amounted to the charging of above-cost prices — prices that redistribute wealth from consumers to firms, not because the extra wealth is required to make the firm ready, willing, and able to produce, not because the extra wealth is necessary to give investors a reasonable return on their investment, but simply because Boeing, as a member of a two-firm global airplane production duopoly (along with Airbus), had the market power to raise price. And because Boeing thought it had more of a right to airline profits — and ultimately to the hard-earned cash of consumers — than do the airlines that buy planes from Boeing and the consumers that fly on them. If it turns out that the safety option was priced higher to extract monopoly profits from consumers, rather than to cover overhead, then we have in Boeing an example of how market power can inflict not just harm on the pocketbook, but actually take lives.

The existence of a general price regulator would have allowed us to pass judgment on Boeing, because what price regulators do is to extract information from big businesses about their costs, including overhead, and based on that to determine whether these firms need to engage in price discrimination to survive, and if so, how much price discrimination is required to cover costs. Regulators then approve price discrimination — called “demand-based pricing” in regulator-speak — if it is needed to cover costs, and reject it where it amounts to no more than an exercise of monopoly power.

Because we have no price regulation of airline production, we simply have no way of telling for sure what Boeing was doing when it decided to charge more for the safety option.

Indeed, the advantage of having a rate regulatory agency goes deeper than just ensuring that firms deploy price discrimination only when it is absolutely necessary to cover costs. Rate regulators have a long history of using their power to approve prices to insist that firms structure their covert price discrimination in a way that is maximally beneficial to consumers. That includes insisting that when firms break their products into base models and sets of options, they do so with a view to safety. Indeed, one of the great benefits of rate regulation is government say over what constitutes an acceptable product. When the airlines were regulated by the Civil Aeronautics Board, for example, the regulator insisted that the airlines maximize the number of direct flights they offer, with the result that today’s layover hell was largely unknown to mid-century fliers.

Boeing has an incentive to make safety features optional, because high willingness-to-pay airlines are more likely to cough up for safety options. But the extra profits that go to Boeing from being able to price discriminate against wealthy airlines come at the cost of delivery of unsafe planes to budget carriers. A rate regulator might well have insisted that that Boeing’s definition of a base aircraft model include far more safety features than it does today.

Of course, the Federal Aviation Administration, which has authority over flight safety, could have mandated that airlines purchase the optional safety features, but chose not to do so. But a rate regulator would have added an additional regulatory safety net, making it possible to stop dangerous pricing at the source — when the prices are chosen — rather than when airlines make decisions about which options to buy, as the FAA would have done.

Given that aircraft manufacturing prices are not regulated today, is our only option to throw up our hands in despair? No. We can still at least get to the bottom of the question whether Boeing priced that option as an exercise of monopoly power, or out of a need to cover costs, through the unlikely vehicle of the antitrust laws. I have argued that the Sherman Act should be read to provide a right of action to any buyer to sue for a judicial determination whether a firm is charging above-cost, and therefore unnecessarily high, prices.

Now would be the perfect time for the world’s airlines to bring that antitrust case.