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.
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.
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.
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 reportedextensively 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 twoOp-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.
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 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.
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.
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.
The elimination of MFNs, argue antitrust experts, will promote competition between Amazon and other ecommerce platforms, by allowing third-party sellers to pass on savings to consumers from doing business on lower-fee platforms. If Barnes & Noble, for example, charges a bookseller less to sell books on the Barnes & Noble website, the bookseller will now be free to charge a lower price for its books on the Barnes & Noble website than the seller charges for the same books on Amazon. That in turn will drive business to the Barnes & Noble website, giving Barnes & Noble a reward for lowering its fees and innovating in cost reduction.
That would be the right way to think about MFNs, if the choice were only between laissez faire and antitrust. But there is in fact a third option, which strictly dominates both of the others. Namely, to regulate Amazon’s fees. If Amazon were required to obtain federal government approval of the fees it charges third-party sellers for use of its platform, then regulators could insist on low fees, and even force Amazon to innovate in cost reduction by mandating fees that are below current costs (preventing Amazon from turning a profit unless it innovates). That would unleash all of the benefits that greater competition between platforms promises to provide.
But it would also preserve advantages that platform competition simply cannot offer. Consumers, after all, like knowing that the price they get on Amazon is the best price available anywhere for the product. Anyone who has wasted hours on one travel website after another trying to find the best airfare knows how much time and effort is required to get the best price when such guarantees do not exist.
Indeed, through MFNs, Amazon effectively leveraged its size to impose a law of one price for consumer products across the internet, and that had huge consumer benefits. Amazon is so big that virtually all products of any interest to consumers are sold through its website. By imposing MFNs, Amazon ensured that consumers wouldn’t need to engage in wasteful and time-consuming searches for the best internet prices when they went to buy online. By going to Amazon, consumers could be sure to find any product available on the internet at the best possible price. Amazon used its size to make life easy for consumers, by turning the internet into a one-stop shop.
We must think of Amazon’s MFNs as accomplishing something that we might ideally want a government regulator to accomplish: making it impossible for anyone, anywhere on the internet, to get ripped off by being charged a higher price for a product than a price available for the same product somewhere else. The MFNs, in other words, were an internet-wide guarantee against price discrimination, that nemesis of all consumer welfare.
While the MFNs did prevent third-party sellers from passing the gains from buying on cheaper platforms on to consumers, the MFNs’ elimination of price discrimination was also valuable to consumers. To give but one example, consider that price discriminating firms frequently use search costs to distinguish between high and low willingness to pay buyers: they offer lower prices only to those who signal their inability to pay more by engaging in wasteful searches for better prices. The poor must clip coupons to get lower prices — or waste time searching for better prices on seller websites or obscure platforms — whereas the rich sail through checkout lines. The MFNs spared consumers such indignities.
Their demise undermines the public benefit of one internet price that Amazon was able to provide to consumers thanks to the firm’s size. And that’s why government regulation of Amazon’s fees is better than either laissez faire or the antitrust solution of simply eliminating the MFNs.
A fee-regulated Amazon would be unable to take advantage of the MFNs to charge higher fees, or to fail to continue to invest in innovations that would reduce the cost of providing platform services, thus the concerns about MFNs that antitrust and competition policy are intended to address would also be addressed by fee regulation. But fee regulation would not require elimination of the MFNs, and would therefore preserve the huge benefits to consumers that come from the guarantee of always being able to find the lowest internet price in one place: Amazon.
Thus fee regulation would realize all of the benefits of competition, while inflicting none of the costs on consumers. As in so many areas, we must therefore understand the antitrust victory here to be only relative at best. Society might be better off as a result of the demise of Amazon’s MFNs, but only if the gains to consumers in the form of more platform competition happen to outweigh the losses to consumers from the demise of the guarantee of one internet price and the associated return of price discrimination. But even if society is rendered better off by the demise of the MFNs, it certainly is not rendered as much better off as it would be were policymakers simply to step in to regulate Amazon’s fees and allow MFNs, and the Internet of one price, to prevail.
Much of the popular discussion of the trust question has proceeded upon the assumption that trusts are the result of some sort of immoral conduct which should be made illegal. But the same facts which led to the grant of exclusive franchises (legal monopolies) in the case of local public utilities, have led also to a belief that many of the monopolies which have grown without formal legal grant may likewise be beneficial if subjected to proper public control. The courts in this country, as well as many economists who specialize on “trusts,” have long since come to the conclusion that the anti-trust laws, even if desirable, do not in all cases furnish a sufficient solution of the monopoly problem, and that accordingly governmental price-fixing may be a desirable supplement. But neither the courts nor the teachers of “trusts” seem fully to realize that the determination of a “fair price” is not a search for some objective fact, but that it involves the adoption of a policy; and that the policy cannot be adopted intelligently without a drastic revision of accepted economic theory as well as the accepted theory of private ownership; and that the officials charged with the formation of the policy must perforce resort to some theory as to the proper distribution of income and as to the channels into which industry should flow.
Robert Lee Hale, Economic Theory and the Statesman, in The Trend of Economics 189, 193 (Rexford Guy Tugwell, ed., 1924).
Commentators regard the [Alcoa] case as one of the most powerful statements in antitrust jurisprudence for the robust efforts to constrain dominant firms. Discussions of the case often place [eminent progressive jurist] Learned Hand at the center of attention and ascribe to Hand the views espoused in the court’s decision. Hand believed otherwise. He disliked the antitrust laws from his earliest days in public life. In a representative statement of his views, Hand wrote to a friend in 1914:
“I do not agree by any means that the Sherman Act is of value or that the progressive party should take its position against monopoly. . . . I have always suspected that there are monopolies possible which depend for their maintenance wholly upon economic efficiency and which it would be an economic blunder to destroy.”
. . .
In a separate memorandum [in the Alcoa case], Learned Hand noted: “There are two possible ways of dealing with [monopolies]: to regulate, or to forbid, them. Since we have no way of regulating them [because regulatory legislation has not been put into place], we forbid them. I don’t think much of that way, but I didn’t set it up; and now the ordinary run of our fellow-citizens — some, even of the ‘rugged individualists’ — regard the Sherman Act as the palladium of their liberties.”
Andrew I. Gavil et al., Antitrust Law in Perspective 475, 477 (3d ed. 2017).
The emails show that in 2013 Facebook cut off Twitter’s access to its users’ Facebook friend lists to cripple the growth of Twitter’s once-popular short-form video sharing service, Vine, which Twitter shuttered in 2016. The emails also show that Facebook used acquisition of the startup Onavo to spy on users, identifying WhatsApp as a serious threat in the process, and later acquiring that company, presumably to eliminate it as a competitor.
Both of these actions harmed competition, by eliminating what antitrust lawyers call “nascent competitors,” firms that could have matured into serious competitive threats to Facebook. Vine might have helped Twitter develop out of its microblogging niche into a full-fledged social media platform in direct competition with Facebook. And the same might have been true for WhatsApp, which could have leveraged its huge user base and privacy commitment to expand beyond chat into Facebook’s social media heartland.
But most antitrust policymakers today are unlikely to see either Facebook’s calculated crippling of Vine, or the company’s snooping on nascent competitor WhatsApp, as problematic. For antitrust policymakers today, refusing to share and espionage are examples of the kind of no-holds-barred striving to win that ensures that competition yields results for consumers. As the greatest living antitrust scholar today, Herbert Hovenkamp, put it in a recent treatise, making firms share with competitors — which is what Facebook refused to do when it cut Vine’s access to friend lists —
is manifestly hostile toward the general goal of the antitrust laws. It serves to undermine rather than encourage rivals to develop alternative[s] . . . of their own.
Fortunately, there is actually a strong case to be made that Facebook’s treatment of Vine, at least, violated existing antitrust laws. But before getting to that case, let’s look more closely at exactly what Facebook did to Vine and what’s wrong with antitrust’s prevailing approach to that kind of conduct.
It’s clear that access to Facebook friend lists was key to Vine’s growth, because that allowed users in effect to port part of their existing social network from Facebook over to Vine, and then to use it to do something — post short-form videos — that Facebook at the time did not yet allow users to do.
By in effect preventing users from porting their network to Vine, Facebook denied Vine an essential input — the infrastructure to port the Facebook network into Vine — that was key to allowing Vine to break into the social media market.
Two Minds About Sharing
Refusals to deal have long vexed antitrust enforcers because they appear to be at once good and bad for competition.
They are bad for competition because if the input is truly essential, then the refusal to supply it to a competitor is fatal to the competitor. Indeed, if “input” is defined broadly enough, all anticompetitive behavior amounts to a denial of access to an essential input of one kind or another. You cannot harm competition any other way.
At the same time that refusals to deal appear bad for competition, however, they also appear to be good for competition, albeit competition of the bare-knuckle sort.
The toughest races are those in which you can expect no help from the other participants. The refusal of a firm to deal with competitors just creates an incentive for those competitors to go beyond the withheld input in question to find a new way to survive, to innovate, to create, to surpass.
This view of the virtues of no-holds-barred competition serves as the basis for the current ascendancy of the “Colgate Doctrine,” the antitrust rule that a firm has no general duty to deal with competitors. The doctrine takes its name from a 1919 case in which the U.S. Supreme Court permitted Colgate, charmingly described by Justice McReynolds as “a corporation engaged in manufacturing soap and toilet articles and selling them throughout the Union,” to refuse to sell its products to discounters.
[i]n the absence of any purpose to create or maintain a monopoly, the [antitrust laws do] not restrict the long recognized right of trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.
For most of the century during which this language has been on the books, antitrust enforcers quite reasonably read the paean to business freedom in the second clause in conjunction with the first — “[i]n the absence of any purpose to create or maintain a monopoly” — to mean that the right to refuse to deal, whatever its extent, has no purchase whatsoever on the antitrust laws, which are dedicated to preventing the creation and maintenance of monopoly.
But in recent decades, the courts have preferred to drop the qualification contained in the first clause altogether, and to recognize a general right to refuse to deal even when the creation and maintenance of monopoly are rather baldly at stake. As Justice Scalia put it in an infamous 2007 opinion,
Firms may acquire monopoly power by establishing an infrastructure that renders them uniquely suited to serve their customers. Compelling such firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities.
This notion that triumph of any kind in the free market is a necessary incentive for progress filters our understanding of competition through the fearsome metaphor of natural selection, survival of the fittest, the war of all against all, the Origin of Species.
According to this view, the lion did not need antitrust restrictions on refusals to deal to evolve out of the primordial soup, and if the lion goes extinct because humans fail to share habitat, that represents a triumph of competition, because the lion will then be replaced with a creature that obviously represents an evolutionary advance: us. Moreover, the argument goes, if the lion had been forced to share with the ape back when the lion was the king of beasts, the ape likely would never have needed to learn to walk upright, to heave javelins at passing herds, and eventually to invent the computer.
Unnatural Selection
The natural selection metaphor is a big mistake, because the apparent virtues of natural selection are subject to severe survivorship bias. We’re here, and living and thinking, so our evolution must have been a success. But all those creatures who never came to exist — imagine whatever god or fairy you wish, so long as the creature is better than us according to whatever metric you prefer — aren’t here to observe the failure of their natural selection, because they never came to be.
The only thing we can say for sure about natural selection is that it selects; we cannot say that it selects well, for the criteria according to which it selects are unregulated. Natural selection is undirected, and therefore unreliable, selection. The rumpled paper airplane that is natural selection spirals off in whatever random direction the environment happens to impose upon it, with no guarantee that the direction is good, let alone the best, according to any metric we as human beings might hope to use as measure. Climate change, and the very real prospect of the imminent termination of life on earth, is a convenient reminder that the direction of evolution — evolution that has led to us — may be very bad indeed.
It follows that to consign our markets to the same law of the jungle that has produced us is a big mistake. Indeed, it is the sort of mistake that would scandalize our forebears, who, living closer to that state of nature themselves, understood our human advantage to be our capacity to choose the criteria according to which selection proceeds, rather than to submit to the random criteria of the jungle. Our talent for directing our own selection, not to mention the selection of other creatures (think of your dog) is our great advantage. (Indeed, our forebears understood this perhaps too well, leading to an excessive affection for absolute monarchy and planned economies. Ancient Egypt springs to mind, with its conscious glorying in divine kingship as antidote to the chaos of the natural world.)
To continue to escape nature, we must continue to choose the criteria according to which we select ourselves, and that is as true when we structure our markets as when we design our education system. Markets are themselves just machines for the selection of the things we want the economy to produce, with profitability determining winners and bankruptcy determining losers. These machines are useful to us only to the extent that they select for the characteristics that are most helpful to us. A market that selects for sloth, or for behavior designed to take wealth from others without providing a quality product in exchange, is not a useful market. The way to make markets select for desirable characteristics is to ensure that the undesirable characteristics provide no advantage.
Thus we must build our markets in the same way that the artificial intelligence researcher builds a learning algorithm, calibrating it to ensure that once the algorithm is unleashed it will select for the desired traits. Markets are machine learning, with the software antitrust, and the hardware human life. Genes evolve, but genetic algorithms solve. And markets exist to solve our economic problems.
The question that refusals to deal really pose is whether permitting firms to horde essential inputs selects for characteristics that are good for the economy. And here the answer must be no. If the input denied to competitors is truly essential, then there is no obvious way to invent around it, and so the characteristic that legalizing such refusals selects is talent for identifying and appropriating essential inputs that deliver the firm from having to compete hard on all the other characteristics that we really value, such as good management, incessant innovation, quality, distribution, and low costs. Allowing refusals to deal unlevels the field.
Selecting for skill at destroying competition may of course incidentally sweep in some characteristics that we care about — ambition, of course, and innovativeness aimed at finding or creating the essential inputs — but the presence of this anticompetitive selector pulls the market out of focus, sapping competitive energies away from the things we care about — low prices and high quality — and toward monopoly.
Sometimes the question is muddied by the need to ensure that innovative firms are able to cover the costs of research and development before competitors appropriate their innovations, pile into the market, and erode profit margins. In these cases, it is the refusal to deal that keeps the playing field level, instead of skewing it, by ensuring that innovators get the proper rewards. But true refusal to deal cases are different. True refusal to deal cases involve a refusal to supply an essential input when doing so facilitates supracompetitive profit taking, a dominance of markets that is not necessary to help firms cover their costs. Antitrust policymakers today would treat every refusal to deal as if it were necessary for firms to cover research and development costs, a conceit that is necessary only because the reality of almost never condemning a refusal to deal is so unjustifiable.
The Surprisingly Apt Sports Metaphor
Ensuring that undesirable characteristics provide no advantage is just what we do when we level a playing field in sports. Take a soccer game played on a hillside, for example. The inclined field gives one side — the side with the higher goal — an advantage based on luck, or the ability to strong arm the other team when sides are chosen before play, instead of based on characteristics that we want to promote, such as training, endurance, and the ability to bend a football into a net from twenty yards out.
To avoid this sort of adulteration of play, we insist on level playing fields in sports. It’s the reason we recoiled from steroids in baseball, for example, because all those home runs created an advantage that made for boring, uni-dimensional, play. Indeed, we feel the same way about all doping, because it leads to selection based on chemistry, rather than on the endurance and coordination that we value in sports. Only the level playing field produces the fittest players, just as it produces the fittest firms.
Just as we expect opposing players to help each other up off the ground when they have fallen — because losing a player makes for less satisfying play — we should expect firms to help each other to enter markets, when that would make for tougher, and therefore more productive, competition.
Success and Excellence
The individual firm must therefore be governed by an ethic of excellence, rather than an ethic of success. For only the pursuit of excellence causes firms to affirmatively seek to bring competition upon themselves, whereas an ethic of success causes firms to seek only to win, rather than to win by being the best. We want the great athlete, who wants to run the hardest race against the toughest competitors, not the slouch or the crook, who celebrates when the going gets easiest.
This distinction, between the pursuit of success and the pursuit of excellence, may be loosely, and probably unfairly, associated with the divergent outlooks of the two great civilizations of European antiquity, the Romans and the Greeks. Ancient Greek culture focused on the struggle with the self, the desire to go beyond mortal limits through exposure to competition of the highest order, a desire reflected in the tradition of the Olympic Games.
Rome represents something quite different: the urge to dominate at all costs, summed up by the city’s founding sin, in which the band of male outcasts who were the city’s founders obtained wives, and therefore a future for their polity, by inviting their neighbors to a feast and then carrying off their women.
Giambologna’s The Rape of the Sabine Women, on display in Florence. Michelangelo’s David, reflecting the pursuit of excellence, is conveniently pictured in the background. Photo credit: Arnold Paul, Florence Rape of the Sabine Women 3, CC BY-SA 3.0.
We must insist on Grecian firms.
The pursuit of success over excellence is a recipe for long-term failure of industry, and a threat to American national security in a world in which America is no longer clearly the most technologically advanced nationor the strongest economy, a world in which the failure to demand that our firms strive to be the best, even when they could succeed with less, could well mean the difference between victory and defeat in the next war. (True, Rome built a more enduring empire than did the Greeks, but that is only because internally, in their training and organization, the Romans were Greek.)
Which takes us back to what Facebook did to Vine. By killing Vine off via refusal to deal, Facebook prevented Vine, and Twitter, from morphing into genuine challenges to Facebook’s dominance as all-purpose social media platform.
That means that today Facebook doesn’t face the kind of competition it needs to continually improve, the competition on everything from likes to privacy that can come only from doing battle with other firms on an equal playing field, the competition that affects characteristics that matter. Instead, Facebook competed on one characteristic alone — the ability to build the largest network first — and used that high ground to defeat a more tech-savvy competitor.
That’s a recipe for the long-term decline of American social media, and of American tech savvy more generally.
The Antitrust Case against Facebook’s Treatment of Vine
Facebook’s killing of Vine should be the easiest of antitrust violations to prove, but instead the case can be made only through the luckiest of coincidences. Luck is needed because of the current ascendancy of the Colgate Doctrine: the right of any business to refuse to deal, even if that would create a monopoly.
Under the influence of economists and lawyers associated with the Chicago School, the courts have all but eliminated any liability for refusal to deal, allowing it only when the refusal represents the termination of a prior profitable course of dealing. The idea behind narrowing liability to this unusual set of facts is that only when the refusal to deal amounts to a choice to forego a current profitable relationship can enforcers be absolutely certain that the motivation for the refusal is to earn even greater profits from the destruction of competition. As Justice Scalia put it in that 2007 case,
The unilateral termination of a voluntary (and thus presumably profitable) course of dealing suggest[s] a willingness to forsake short-term profits to achieve an anticompetitive end.
Motivation should have no place in the resolution of antitrust cases, because the antitrust laws are not about policing morality, but about guaranteeing the vigor of the economy. What matters in antitrust are outcomes, not whether businesspeople act with virtuous or heinous intent. But this perversion of the law is of no consequence in the case of Facebook’s treatment of Vine. Miraculously, the question of Facebook’s motivation is subject to no doubt here because the British have provided us with emails pregnant with anticompetitive intent:
Justin Osofsky — Twitter launched Vine today which lets you shoot multiple short video segments to make one single, 6-second video. As part of their NUX, you can find friends via FB. Unless anyone raises objections, we will shut down their friends API access today. We’ve prepared reactive PR, and I will let Jana know our decision.
MZ – “Yup, go for it.”
But even if there were no such evidence of intent, Facebook’s actions meet the prior profitable course of dealing standard imposed today by the courts.
Facebook’s sharing of friend lists with Vine allowed Facebook to collect valuable data about which Facebook users were using Vine. Facebook’s termination of that sharing therefore represented the termination of a prior profitable — in data-denominated terms — course of dealing, the unmistakable sign the court demands that the motivation was to earn even greater profits — here in the form of monopoly-level access to users’ social networking data — that come from squelching competition in the market.
So as luck would have it the case against Facebook fits squarely within the sliver of an exception to the Colgate Doctrine currently tolerated by the courts. But the fact that we need to fit the case into that sliver tells much about the extent to which antitrust has been failing in recent decades in its duty to ensure level competitive playing fields.
Integrating into Espionage
The situation is even worse when it comes to Facebook’s snooping on, and eventual gobbling up of, WhatsApp.
The story of global merger enforcers’ disastrous failure to block the WhatsApp acquisition due to a failure to appreciate that consumers pay for both Facebook and WhatsApp in data, making the two companies rivals, and the merger the brazen elimination of a nascent competitor, has already been told. But Onavo’s role in helping Facebook identify WhatsApp for acquisition points to another failure in contemporary antitrust: the death of vertical merger enforcement.
Onavo’s app is properly understood as a component of the social media product offered by Facebook , one that includes not just liking and photo sharing, but also privacy services. As such, Onavo and Facebook stood in what antitrust lawyers call a “vertical” or supply-chain relationship, producing components of a common end product — the social media experience — that is sold to consumers. And Facebook’s acquisition of Onavo was therefore a vertical merger.
But in the 1980s antitrust enforcers abandoned vertical merger enforcement entirely, on the assumption that innovation and efficiency always result when businesses in a vertical relationship work together to serve consumers. The district court’s stinging and misguided rebuke of the Justice Department’s recent attempt to revive vertical merger enforcement by challenging AT&T’s acquisition of TimeWarner shows how alien the old learning regarding the threat of vertical mergers has become to the courts in recent decades.
There might well have been some synergies between Onavo’s analytics services and Facebook’s social media platform, but the role the acquisition played in enabling anticompetitive snooping makes clear that the dogma that vertical mergers are always good for the economy must go.
