Categories
Antitrust

Is Go the Ultimate Antitrust Boardgame?

Scsc, Gofin, (Ramsi Woodcock added arrows and text to the image.) CC BY-SA 3.0

In the ancient game of Go, players compete by placing stones on a grid board with the goal of enclosing the greatest amount of territory with their stones. Think of the board as a two-dimension product space. For breakfast cereals, for example, one axis might be sweetness and the other crunchiness. The goal of a firm is to field a product that has few close substitutes, that faces competition from products that are quite unlike it, and therefore unlikely to lure away consumers of the firm’s product, allowing the firm to raise prices without worrying about triggering a reduction in demand. The goal of a firm, therefore, is to reserve the largest possible extent of product space to itself. But that’s just what a Go player seeks to do: to exclude his opponent from the largest possible expanse of the Go board.

We can think of the stones that a Go player places on the board as differentiated products. A stone’s location on the board corresponds to a particular combination of the two product attributes represented by the Go board as two-dimensional product space. In the cereal example, a stone placed at the center of the board would represent a breakfast cereal that is half sweet and half crunchy. A stone in one corner might represent a cereal that is very sweet and not crunchy at all.

At the start of a game of Go, players place their stones in separate areas, trying to stake out control of whole quadrants of the board, just as firms strive to introduce products that have no close substitutes, ensuring that consumers will be forced to buy the firm’s product at high prices (an animated picture of how a game of Go develops may be found here). We can think of each node in the Go board grid as representing a consumer with a preference for a product with attributes that correspond to that node. If no product has precisely those attributes, the consumer will purchase the product with the closest set of attributes, meaning the product represented by the Go stone on the nearest node to the consumer’s. Placing a stone in an empty quadrant of the board means that the player will get the business of all of the consumers in that quadrant. (Those familiar with the Hotelling location model of differentiated product competition will recognize that this account of Go is just the Hotelling model expanded from one dimension to two. We’re not talking about pizza places along the line that is the Coney Island boardwalk, but pizza places on the grid that is midtown Manhattan.)

Now, firms pioneering a new technology may decide to stop innovating, stop introducing new product flavors, and just coexist in oligopolistic harmony. One of the extraordinary things about Go is that, like firms, the players can stop the game at any time. Whenever both players agree to stop, they count up the territory enclosed by each and the player with the largest territory wins. Just so, when firms collude, the firm with the most desirable product–the product that controls the greatest share of consumer demand–will profit most from the oligopoly.

When to keep fighting and contesting competitors’ markets, and when instead to try to respect competitors’ markets and seek accommodation, is an important question in business strategy. Just as it is in Go. At the start of the game, both players usually believe they can achieve advantage through continued play, and so the game goes on. Competition at the inception of an innovative technology, when a new product space opens up, is often fierce. Think of the competition in streaming video today.

Firms take the battle to each other by striving to make very close substitutes of their competitors’ offerings, cutting into demand for competitors’ products and increasing demand for their own. So it is in Go, too. The players invade each others’ quadrants by placing stones right next to their opponents’, just like firms trying to siphon off rivals’ demand. At the extreme, a firm may create a set of products that so well captures all of the attributes that consumers value in a competitor’s product that demand for the competitor’s product eventually withers and the product is driven from the market. In Go, that happens when one player has placed stones that fully encircle a stone belonging to his opponent. When that happens, the opponent’s stone is removed from the board and the player gains a point. We can think of that point as representing profits enjoyed from having permanently locked up the demand of the consumer represented by the strangled node.

Firms sometimes succeed by driving competing products from the market. But they also often succeed by building up a wall of differentiated products that competitors cannot penetrate. Indeed, the FTC famously alleged in the 1970s that Kellogg did precisely that with breakfast cereals by proliferating the number of cereal flavors that the firm offered. In Go, this is reflected in prolonged struggles between the players to wall off territory (text in Wikipedia accompanying the featured image of this post provides a nice overview of how players control space through these struggles).

Differentiated product competition is the only kind of competition that we have in the real world. If Go is a game of differentiated product competition, does it tell us anything about how to regulate real world competition through antitrust?

Play it and find out.

Categories
World

Ethno-Nationalist When We Want to Be

John Broich’s explainer on the Kurdish question is a good example of the contradictions of contemporary American Kurdophilia. He seems to lament the failure of the Kurds to construct what he admits would be an ethno-nationalist homeland out of the ashes of the Ottoman Empire, even though America today is built upon a rejection of ethno-nationalism of all kinds. As I have observed before, it’s easy to advocate self-determination for peoples abroad, but a lot harder to do it at home, because self-determination weakens and fragments. That makes it good foreign policy and bad domestic policy, at least in the short run, but that also means that advocates of Kurdish statehood don’t have principle on their side.

Broich seems to think that it follows naturally from the fact that the Kurds are “a group of around 40 million who identify with a regional homeland and common historical background, but are now divided between four countries,” that they ought to have their own country.

But I rather doubt that he would support calls by white nationalists to carve an independent white homeland out of the northwestern United States, calls by black nationalists to carve an independent black homeland out of the United States, or calls by Native Americans to carve an independent Native American homeland out of the United States. Or indeed calls by blue staters to secede. Carving up the United States would surely eliminate the region’s current global military and economic dominance.

The fact is that if we believe in democratic pluralism at home, then we can’t try to protect oppressed groups abroad by supporting their calls for statehood, either diplomatically or militarily. The best we can do is support their calls for democracy and equal treatment within whatever countries they happen already to belong. At least, that’s the best we can do if we want to act toward them in a way that is consistent with the way we treat ethno-nationalist aspirations here at home. (Of course, we might not want to run our foreign policy based on consistency and principle, but that’s not how America’s advocates of Kurdish statehood have been making their case.)

Broich observes that the failure of the allies actually to create an independent Kurdistan after World War I resulted largely from European self interest. The British and French were themselves worried that hacking Arabia into too many pieces would make it difficult for both to maintain their spheres of influence in the region, so they scrapped plans for Kurdish self-determination. But the fact that the Kurds lost their chance at statehood because of European self interest doesn’t mean giving them a state would have been good for the region, or consistent with the principles according to which we organize our own country today.

Broich’s unreflective observation that Woodrow Wilson “himself was explicit in calling for a new, broadly encompassing Kurdistan,” sums up the contradictions in contemporary American advocacy of Kurdish statehood. For Wilson, of course, surely believed in white ethno-nationalism for America, and famously segregated the federal government.

At least he was consistent.

Categories
World

Rewards Not Ours to Give

What I do not understand about all the criticism of President Trump’s abandonment of the Kurds is why, exactly, the Kurds should be entitled to a state in northern Syria. I had always thought that carving up sovereigns and doling out territory to favored groups was by general agreement consigned to the dustbin of imperialist history after World War Two. Especially by us Americans, with our relatively anti-colonial past.

But that’s exactly what anyone lamenting President Trump’s withdrawal from Syria seems to be calling for: that we back, militarily, the attempt of a particular group to carve its own ethnic homeland out of an existing UN-recognized country.

In other words, while other Syrians were fighting the Assad regime to create a more democratic, tolerant Syria, the Kurds were fighting the Assad regime to grab land for themselves. That’s hardly the sort of democratic behavior we normally think of ourselves as supporting. Yes, the Kurds helped us fight the Islamic State, but Syria isn’t ours to carve up and dole out to our allies like so many slices of reward cake. Yes, the socialist Kurdistan Workers’ Party has a women’s movement, but again, Syria isn’t ours to carve up and dole out to socialist women’s movements like so many slices of reward cake, especially when we’re not (yet) voting socialist here at home.

And while I’m on the subject of the beatification of the Kurds, I wish to note the irony of the House’s recent rebuke of Turkey for attacking the Kurds in Syria by voting to recognize the Armenian mass killing as genocide. For, as any Armenian will tell you, the Kurds played an important role in carrying out that genocide a century ago.

President Trump made the right call on Syria.

Categories
Antitrust

The Antitrust Laws Give Chicago Cabbies a Remedy

The New York Times is reporting that New York taxi companies bought hundreds of Chicago taxi medallions–enough to jack up medallion prices–and then turned around and sold them to cabbies, earning monopoly profits. Many cabbies borrowed to buy the medallions and have gone bankrupt.

If the New York companies’ purchase of large numbers of medallions really did give them the power to raise prices, then those companies achieved monopoly power for purposes of the antitrust laws, which define it as the power profitably to raise prices.

It’s not illegal to charge monopoly prices. But it is a violation of Section 7 of the Clayton Act to assemble a monopoly through asset acquisitions, such as the purchase of taxi medallions.

The U.S. Department of Justice and the U.S. Federal Trade Commission have the power to challenge anticompetitive acquisitions after the fact. And they can seek disgorgement of profits, which here would mean an order requiring the New York companies to compensate cabbies for the inflated prices that they paid. The article suggests that in some cases those prices may have been eight times the competitive prices, or $350,000 in monopoly excess per medallion.

The Times suggests that much of the alleged conduct took place six or more years ago. But for civil antitrust actions brought by the government, there is no statute of limitations.

It may also be possible to challenge this conduct as fraud, or market manipulation. But this is a case of the raw acquisition of monopoly power, without any semblance of an efficiency justification, placing it squarely within the core of the antitrust laws. It would be nice to see those laws earn their keep here.

And to see antitrust enforcers return to policing local and regional monopoly power.

Categories
Antitrust

Google’s DNS-Over-TLS Is Good Because Competition in Advertising Is Bad

AT&T and Comcast are complaining to House antitrust investigators that Google’s plan to encrypt DNS, the internet’s addressing system, will prevent AT&T and Comcast from snooping on web traffic that will remain transparent to Google, giving Google a competitive advantage in targeting advertising to consumers.

AT&T and Comcast may be right that DNS-Over-TLS will give Google a competitive advantage, but that’s good for consumers, not bad. Because advertising undermines consumer sovereignty, and more competition in the targeting of advertisements means more targeted advertising.

That is the irony of antitrust scrutiny of Google’s power in the advertising market more generally. Advocates of greater antitrust enforcement seem to think that smashing Google’s advertising monopoly will somehow increase privacy and benefit the public. They’re wrong.

It is a staple of antitrust economics that more competition means more output, and in the market to use consumer data to target advertisements, that means more targeted advertising. Google, Comcast, and AT&T will race to hoover up every last bit of consumer information, subject it to the most sophisticated data analysis methods known to science, and use the insights generated thereby to induce consumers to buy their clients’ brands. (Of course, Google, Comcast, and AT&T may compete with each other to offer privacy protections to users, but that can go only so far, because they also compete with each other for advertising dollars based on the amount of data on consumers they can leverage to target ads.)

Competition is great in markets that produce products that benefit consumers. But it is terrible in markets that produce products that harm consumers, because it makes those markets more productive. That’s why the tobacco oligopoly was a good thing. And that’s why the 21st Amendment, which repealed Prohibition, gave the states the power to promote monopolization of the distribution of alcohol.

And targeted advertising really is bad for consumers. As I pointed out not long ago (summary here), the information age has eliminated the sole economic justification for advertising–that it provides consumers with useful product information that they cannot find anywhere else–leaving advertising with a single functional use for firms: to manipulate consumers into buying products that they do not really prefer (otherwise the advertising wouldn’t be needed to induce them to buy the products). Targeted advertising magnifies this manipulative power.

As recently as the late 1970s, antitrust enforcers in the United States understood that advertising’s manipulative function harms competition, by putting firms that produce products that consumers do in fact prefer at a competitive disadvantage. In that period, the FTC brought, and sometimes won, a series of cases against large advertisers, arguing that their attempts to promote their products were anticompetitive.

The FTC did not bring those cases against firms that distribute advertising, which at that time were mostly newspaper and television companies. The FTC brought those cases against the firms that paid those newspaper and television companies to distribute their advertising. Because the FTC understood that the competitive threat posed by advertising is not that the platforms that distribute ads tend toward monopoly, but that the advertising those platforms distribute itself undermines competition in the markets in which advertised products are sold.

In other words, in the 1970s, antitrust enforcers understood which level of the advertising distribution chain to target in order to benefit consumers. Today, the House seems fixated on the wrong level, on the platforms that distribute advertising rather than the markets in which advertising is deployed to harm competition.

That fixation may be due to the influence exerted by the newspaper industry on the House investigation. The market to distribute advertising tends toward monopoly because size is an advantage: the more eyeballs you can reach, the more valuable is your platform to advertisers. For most of the 20th century, newspapers ran the advertising distribution monopolies. But Google beat them–and took over as advertising monopolist–by offering a better product to advertisers. The newspapers look to have turned to antitrust enforcers to try to get back into the game.

That should make consumers, and anyone worried about privacy, very concerned. Because it means that the new antitrust movement isn’t about consumer welfare, or privacy, but about ensuring that newspapers and telecoms get their fair share of consumer data and consumer exploitation.

And that brings me back to DNS-Over-TLS. Today, the non-encryption of DNS lets any firm on the internet, including Google, AT&T, and Comcast, snoop on your internet usage. DNS-Over-TLS would limit the snoopers to Google. That’s a net gain for consumers, and anyone concerned about privacy, which is why it is supported by the non-profit Mozilla Foundation, which makes the Firefox web browser, as well as the Electronic Frontier Foundation. To the extent that DNS-Over-TLS helps Google protect its advertising distribution monopoly against new entrants like AT&T, the technology harms competitors, and will allow Google to continue to extract high fees from firms that buy advertising. But higher fees mean fewer ads, which is good for consumers.

If we see the House move against this technology, we’ll know for sure whose side it is on.

Categories
Antitrust Inframarginalism 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 Inframarginalism

John Bates Clark’s Peculiar Case for the Distributive Justice of the Perfectly Competitive Market

The argument for the efficiency of the perfectly competitive market is familiar: large numbers of firms selling an undifferentiated product will compete price to marginal cost, ensuring that everyone who can afford to pay the cost of production gets access to the product.

But is the distribution of wealth between buyers and sellers that is created by marginal cost pricing fair?

Today, economists agree that the distribution of wealth created by marginal cost pricing is entirely arbitrary. For the distribution of wealth is determined by inframarginal units of production, not marginal units. The benefit to me of the tenth unit of production of a particular good might be $10, and that might be just equal to the marginal cost of producing the tenth unit, making the market price under perfect competition in turn $10. But the gain I get from buying all ten units is determined by the value to me of each of the first nine units I purchase, not the marginal tenth, and the value I get from the first nine may be very much higher than $10. If I get $20 of enjoyment from each of the first nine units, then my gain from my purchase of ten units, net of the price of $10 that I pay for each unit, is $90. If the marginal cost of production is a constant $10 over all units, the gain to the producer is $0. That’s hardly fair to the producer. All of the gains from trade, defined as the difference between the value conferred on consumers by production and the costs of that production, go to me. Even though price is set equal to marginal cost.

It is for this reason that a century ago economists rejected the promotion of competition as a means of guaranteeing a fair distribution of wealth. They embraced competition because it is efficient–I am able to purchase every unit for which I am willing to pay the cost of production, so the economy produces all of the gains from trade of which it is capable–but they recognized that some other means was needed to achieve a fair distribution of wealth. That other means was the tax system. Raise my taxes by $45 and reduce the producer’s by $45 and now the gains from trade are distributed equally between us.

Given our current understanding of the distributive importance of inframarginal units of production, it is startling to discover that a century ago John Bates Clark, a giant of conservative economics, made a vigorous case not just for the efficiency but also for the distributive justice of perfectly competitive markets. His distributive case was rejected almost as soon as it was made, and has since sunk into obscurity. But that leaves me wondering: How could Clark have been unaware of the fact that the distribution of wealth is determined by inframarginal units, not marginal units? Did he just not understand marginalist economics? The few contemporary scholarly discussions of Clark’s work that I have encountered fail to explain.

The answer, it turns out, is that Clark understood marginalism, and the argument that inframarginal units determine the distribution of wealth. But he thought he had a convincing rejoinder. Here he is in his magnum opus, The Distribution of Wealth:

The man that we are studying is a society in himself: he makes things and he alone uses them. [The value to him of the last unit that he produces] measures the effective utility of everything that he makes. Though [the value to him of the first unit that he produces] may measure the absolute benefit conferred by the loaf that satisfies hunger, the real importance of having that loaf is far less. If this necessary article were taken away, the man would devote a final hour to bread-making, and would go without the article otherwise secured by that final increment of work. Destroy his day’s supply of food, and what he goes without will be luxuries naturally secured by the terminal period of labor. [The value to him of the last unit that he produces] measures the utility of those luxuires, and it measures therefore the effective service rendered by the supply of necessaries that are produced in an equal period of work. Any [inframarginal unit] will have a true importance measured by [the value to him of the last unit that he produces]; since, if it were lost, there would be diverted to the replacing of it some work that would otherwise secure an article having an importance measured by [the value to him of the last unit that he produces]. As it is of no more real consequence to the man to keep one of these articles than it is to keep any other, [the value to him of the last unit that he produces] measures the subjective value of each of them. . . . Bread and the other necessaries of life are absolutely more important than jewelry and other luxuries; but in effective utility the complements are all on a par, since, if any one of them were destroyed, the result would be to make the community go without the last.

John Bates Clark, The Distribution of Wealth: A Theory of Wages, Interest, and Profits 385, 388 (1914).

Clark’s argument is that if any one of the inframarginal units (Clark calls this bread, or another necessity, to illustrate that it is valued more highly than the marginal unit) is destroyed, the only actual unit that disappears from production is the marginal unit (Clark calls the marginal unit a luxury good to illustrate the fact that the consumer values it less than inframarginal units), because one unit is subtracted from output. Because consumers lose the value of the marginal unit when the inframarginal unit is destroyed, it follows, according to Clark, that the true value of the inframarginal unit is actually the value to the consumers of the marginal unit.

That allows Clark to treat all inframarginal units as having no value to the consumer that is separate from the value of the marginal unit, which is to say that it allows him to ignore entirely the value of inframarginal units and to treat the value to the consumer of the marginal unit as the entire value of production. It then follows that because the competitive price equals both the value of the marginal unit to the consumer and the marginal cost of producing that additional unit, there is in fact no surplus generated by any transaction, and the consumer pays a price exactly equal to the value the consumer receives from production and the producer is paid a price exactly equal to the producer’s cost of production. Thus the problem of distributive justice is not so much resolved in a fair way by competitive markets as it is eliminated entirely, because under competition there are, according to Clark, no gains from trade at all, just a buyer and a seller who both subsist on a knife’s edge, buying and selling at a competitive price that leaves both just as well off as each would be had neither entered the market at all.

But is Clark right to argue that inframarginal units have no real value to consumers, because their disappearance would, individually, deprive the consumer only of the marginal unit?

Of course not. The enjoyment you get from eating your first scoop of ice cream is real, whether you eat a second scoop or not. And the enjoyment you get from eating your first scoop of ice cream really is greater than the enjoyment you get from eating your second scoop of ice cream, notwithstanding the fact that if your first scoop is somehow clawed back, you won’t be able to eat that second scoop and get the lesser enjoyment from it. Indeed, once that first scoop is clawed back, your second scoop becomes your first scoop, and your enjoyment of it goes up. That’s why monopolies restrict output. They know consumers place a higher value on the first few units they consume, allowing monopolies to charge them higher prices.

Clark’s argument implies that the more you eat, the less valuable your meal is to you, because the less valuable is your last bite. That’s highly counterintuitive. Few would prefer a cracker for dinner to a four course meal, even if the last bite of that four course meal is worth less to them than would the first bite of that cracker. So why did Clark come up with such a view?

It seems to me that the strangeness of Clark’s theory is a measure of the level of disappointment felt by those who believed in the justice of competitive markets at the implication of the marginalism that the distribution of wealth in competitive markets is arbitrary. True, marginalism validated the Adam Smithian faith in the efficiency of competitive markets. But what had always been at stake in economic debates was the morality of the market, and this marginalism could not prove.

Clark’s failure to prove the distributive justice of the competitive market is a warning to those today who would promote greater antitrust enforcement and competition more generally as a solution to economic inequality. Indeed, the progressives of Clark’s own day, who were profoundly concerned about economic inequality, tended to reject antitrust and competition as solutions.

Categories
Regulation

An Economic Philosophy

Better not to have at all than to conserve. There is in waste an infinite utility. And in scarcity an infinite disutility. There is in declining block rate electric utility pricing, in the all-you-can-eat buffet, in the inclusion of lump-sum gas and electric charges in apartment rental payments, in airlines with a chronic 50% load factor, and in the unlimited voice and data plan a nobility that only civilization can achieve. Just as a well-engineered car should allow us complete freedom of choice regarding how fast to drive, regardless the pressures on the engine under the hood, until it melts, so too should a well-regulated economy offer us complete freedom regarding how much to consume, regardless the demands placed on the markets under the hood, until they run dry. The job of an economy is not just to manage scarcity, but to create the illusion of having conquered it.

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
Despair World

More on the Chinese Nile

We ought to know that we’ve hit a new level of denial when we become convinced that our global dominance is secured by the superiority of . . . our pop culture:

Ten years ago, I joined a U.S. trade delegation for the chance to visit, as a journalist, a remote part of China that borders both North Korea and Russia. As we traveled around, local Chinese greeters proudly pointed out the contrasting vistas: rugged empty hills in North Korea and isolated clusters of Soviet-era buildings in Russia, whereas in China, commerce and construction abounded between booming border towns. In one such town, Hunchun, population 250,000, regional officials asked me if I planned to write anything. Perhaps something cultural, I suggested. I hoped for a window onto Chinese life in this far-flung zone.

The next night they laid on a manifestly ready-made, two-hour pageant of old Manchu ethnographic music and dance, with fluttering feather fans and colorful costumes. I explained to my conscientious hosts that I had hoped for something more contemporary—perhaps portraying current life on the frontier, something about real people and ideas. My request engendered a lot of brow-furrowing discomfort. I had asked for the one thing that their country’s authoritarian system has found it almost impossible to deliver at any level: a vibrant popular culture.

China has become globally competitive in many fields with blinding speed, from the economy and military to science, medicine, sports and even in cultural areas such as cuisine, classical music and contemporary art. But it can’t seem to compete with the West in crucial mainstream genres such as movies, popular music, fashion, novels and the like. I say “crucial” because, without universalizing its culture at a popular level, China cannot ultimately sell a lifestyle for the world to emulate, a set of aspirations that people elsewhere might embrace. Nor can it make its engagement with other cultures more palatable, less like an intrusion by outsiders.

Melik Kaylan, China Has a Soft-Power Problem, The Wall Street Journal (Sept. 5, 2019).

What the Chinese offered this author was the highbrow. But our tastes have eroded so badly over the last generation that we no longer even feel shame at disliking it. Indeed, we have even come to see the persistence of highbrow art in other cultures as a sign of weakness!