Introduction

Real-time payments (RTP) are an increasingly popular means by which individuals can send credits from one account to another. Many banks have established internal RTP systems and, in some countries, these have been extended to other banks through private consortia such as The Clearing House in the United States. Such consortia enable someone with an account at Chase, for example, to send money to someone with an account at Wells Fargo, and vice versa, using their RTP apps.[1]

In other countries, central banks have inhibited the establishment of private RTP networks and have developed their own systems. One such example is Brazil, where the Banco Central do Brasil (“BCB”) has operated the Pix instant-payment system since 2020.

The Bank for International Settlements (BIS), the Basel-based organization that sets regulatory standards for central banks, recently published a paper examining Pix that was co-authored by two researchers from the BCB and three from the BIS.[2] This brief offers some initial thoughts on that BIS paper and on the Pix system more generally.

We begin with a discussion of the economics of payment networks, with an emphasis on the optimal distribution of costs and benefits. Section II addresses cost transparency and apportionment in payment systems run by central banks. Section III critiques several mistaken notions regarding the role of rewards in payment-card networks. Section IV illustrates the conflicts of interest that can arise when a governmental entity such as a central bank competes with the private sector. Section V discusses the inter-related problems of data breaches, inadequate know-your-customer procedures among some Pix-implementing entities, and the phenomenon of “lightning kidnappings.” Section VI compares the operational rules governing the BCB with international good governance. Section VII concludes with a discussion of the wider lessons for governments considering the implementation of RTP systems.

Read the full issue brief here.

[1] RTP Network Participating Financial Institutions, The Clearing House, https://www.theclearinghouse.org/payment-systems/rtp/rtp-participating-financial-institutions (last visited May 18, 2022).

[2] Angelo Duarte et al., Central Banks, the Monetary System and Public Payment Infrastructures: Lessons from Brazil’s Pix, BIS Bulletin no. 52 (Mar. 23, 2022), at 1.

We are in a new era for antitrust. There’s an attempt being made to throw the old rules out, and unfortunately, their replacements are being written by two bureaucratic government agencies at the forefront of “progressive” change in antitrust enforcement. Together, the Federal Trade Commission, under Lina Khan, and the Department of Justice Antitrust Division, under Jonathan Kanter, are updating their agencies’ merger guidelines to push a political agenda against mergers. Luckily, their attempts to discourage mergers in the marketplace are unlikely to go far. Hubris within the antitrust agencies will ultimately backfire when the courts reject their attempts to overhaul merger enforcement.

Read the full piece here.

Abstract

If a company misbehaves, lawsuits are one way of providing a remedy and encouraging that company and others to behave in the future. If the misbehavior is securities fraud, there are two potential plaintiffs—traders allegedly injured by the fraud may bring a private suit, and the government (through the SEC or DOJ) may sue to enforce the public interest in truthful disclosures of corporate information. If the misbehavior is violations of corporate governance rules, however, only private suits are available. Despite the parallel rationales for marrying private and public attorneys general, the toolkit for protecting the public interest in corporate governance is not as well stocked. This essay imagines what a government cause of action might look like for alleged corporate governance wrongdoing. Many of the pathologies of current corporate governance litigation may be ameliorated by a state-based, public cause of action for breaches of fiduciary duty. Although not without downsides, putting Delaware’s Corporate Governance Police on the beat may improve the governance of American companies, while reducing the amount of vexatious litigation.

Executive Summary

Digital advertising is the economic backbone of much of the Internet. But complaints have recently emerged from a number of quarters alleging the digital advertising market is monopolized by its largest participant: Google. Most significantly, a lawsuit first filed by the State of Texas and 17 other U.S. states in 2020 alleges anticompetitive conduct related to Google’s online display advertising business. The U.S. Justice Department (DOJ) reportedly may bring a lawsuit similarly focused on Google’s online display advertising business sometime in 2022. Meanwhile, the United Kingdom’s Competition and Markets Authority undertook a lengthy investigation of digital advertising, ultimately recommending implementation of a code of conduct and “pro-competitive interventions” into the market, as well as a new regulatory body to oversee these measures. Most recently, a group of U.S. senators introduced a bill that would break up Google’s advertising business (as well as that of other large display advertising intermediaries such as Facebook and Amazon).

All of these actions rely on a crucial underlying assumption: that Google’s display advertising business enjoys market power in one or more competitively relevant markets. To understand what market power a company has within the market for a given type of digital advertising, it is crucial to evaluate what constitutes the relevant market in which it operates. If the market is defined broadly to include many kinds of online and/or offline advertising, then even complete dominance of a single segment may not be enough to confer market power. On the other hand, if the relevant market is defined narrowly, it may be easier to reach the legal conclusion that market power exists, even in the absence of economic power over price.

Determining the economically appropriate market turns importantly on whether advertisers and publishers can switch to other forms of advertising, either online or offline. This includes the specific ad-buying and placement tools that the Texas Complaint alleges exist within distinct antitrust markets—each of which, it claims, is monopolized by Google. The Texas Complaint identifies at least five relevant markets that it alleges Google is monopolizing or attempting to monopolize: publisher ad servers for web display; ad-buying tools for web display; ad exchanges for web display; mediation of in-app ads; and in-app ad networks.

As we discuss, however, these market definitions put forth by the Texas Complaint and other critics of Google’s adtech business appear to be overly narrow, and risk finding market dominance where it doesn’t exist.

Digital advertising takes numerous forms, such as ads presented along with search results, static and video display ads, in-game ads, and ads presented in music streams and podcasts. Within digital advertising of all kinds, Google accounted for a little less than one-third of spending in 2020; Facebook accounted for about one-quarter, Amazon for 10%, and other ad services like Microsoft and Verizon accounted for the remaining third. Open-display advertising on third-party websites—the type of advertising at issue in the Texas Complaint and the primary critiques of Google’s adtech business—is a smaller subset of total digital advertising, with one estimate finding that it accounts for about 18% of U.S. digital advertising spending.

U.S. digital advertising grew from $26 billion in 2010 to $152 billion in 2020, an average annual increase of 19%, even as the Producer Price Index for Internet advertising sales declined by an annual average of 5% over the same period. The rise in spending in the face of falling prices indicates that the number of ads bought and sold increased by approximately 26% a year. The combination of increasing quantity, decreasing cost, and increasing total revenues is consistent with a growing and increasingly competitive market, rather than one of rising concentration and reduced competition.

But digital advertising is just one kind of advertising, and advertising more generally is just one piece of a much larger group of marketing activities. According to the market research company eMarketer, about $130 billion was spent on digital advertising in the United States in 2019, comprising half of the total U.S. media advertising market. Advertising occurs across a wide range of media, including television, radio, newspapers, magazines, trade publications, billboards, and the Internet.

An organization considering running ads has numerous choices about where and how to run them, including whether to advertise online or via other “offline” media, such as on television or radio or in newspapers or magazines, among many other options. If it chooses online advertising, it faces another range of alternatives, including search ads, in which the ad is displayed as a search-engine result; display ads on a site owned and operated by the firm that sells the ad space; “open” display ads on a third-party’s site; or display ads served on mobile apps.

Although advertising technology and both supplier and consumer preferences continue to evolve, the weight of evidence suggests a far more unified and integrated economically relevant market be-tween offline and online advertising than their common semantic separation would suggest. What publishers sell to advertisers is access to consumers’ attention. While there is no dearth of advertising space, consumer attention is a finite and limited resource. If the same or similar consumers are variously to be found in each channel, all else being equal, there is every reason to expect advertisers to substitute between them, as well.

The fact that offline and online advertising employ distinct processes does not consign them to separate markets. The economic question is whether one set of products or services acts as a competitive constraint on another; not whether they appear to be descriptively similar. Indeed, online advertising has manifestly drawn advertisers from offline markets, as previous technological innovations drew advertisers from other channels before them. Moreover, while there is evidence that, in some cases, offline and online advertising may be complements (as well as substitutes), the dis-tinction between these is becoming less and less meaningful as the revolution in measurability has changed how marketers approach different levels of what is known as the “marketing funnel.”

The classic marketing funnel begins with brand-building-type advertising at the top, aimed at a wide audience and intended to promote awareness of a product or brand. This is followed by increasingly targeted advertising that aims to give would-be customers a more and more favorable view of the product. At the bottom of this funnel is an advertisement that leads the customer to purchase the item. In this conception, for example, display advertising (to promote brand aware-ness) and search advertising (to facilitate a purchase) are entirely distinct from one another.

But the longstanding notion of the “marketing funnel” is rapidly becoming outdated. As the ability to measure ad effectiveness has increased, distinctions among types of advertising that were once dictated by where the ad would fall in the marketing funnel have blurred. This raises the question whether online display advertising constitutes a distinct, economically relevant market from online search advertising, as the Federal Trade Commission, for example, claimed in its 2017 review of the Google/DoubleClick merger.

The Texas Complaint adopts a non-economic approach to market definition, defining the relevant market according to similarity between product functions, not by economic substitutability. It thus ignores the potential substitutability between different kinds of advertising, both online and offline, and hence the constraint these other forms of advertising impose on the display advertising market.

If advertisers faced with higher advertising costs for open-display ads would shift to owned-and-operated display ads or to search ads or to other media altogether—rendering small but significant advertising price increases unprofitable—then these alternatives must be included in the relevant antitrust market. Similarly, if publishers faced with declining open-display ad revenues would quickly shift to alternative such as direct placement of ads or sponsorships, then these alternatives must be included in the relevant market, as well.

If advertisers and publishers are faced with a wide range of viable alternatives and the market is broadly defined to include these alternatives, then it is not clear that any single firm can profitably exercise monopoly power—no matter what its market share is in one piece of the broader market. Similarly, it is not clear whether “consumers” (e.g., advertisers, publishers, or users) have suffered any economic harm.

With a narrow focus on “open display,” it is quite possible that Google’s dominance can be technically demonstrated. But if, as suggested here, “open display” is really just a small piece of larger relevant market, then any fines and remedies resulting from an erroneously narrow market definition are as likely to raise the cost of business for advertisers, publishers, and intermediaries as they would be to increase competition that benefits market participants.

Read the full issue brief here.

Abstract

The classical “law & technology” approach focuses on harms created by technology. This approach seems to be common sense; after all, why be interested—from a legal standpoint—in situations where technology does not cause damage? On close inspection, another approach dubbed “law + technology” can better increase the common good.

The “+” approach builds on complexity science to consider both the issues and positive contributions technology brings to society. The goal is to address the negative ramifications of technology while leveraging its positive regulatory power. Achieving this double objective requires policymakers and regulators to consider a range of intervention methods and choose the ones that are most suitable.

Executive Summary

In 2020, the Legislative Assembly of Costa Rica passed Legislative Decree 9831, which granted the Central Bank of Costa Rica (BCCR) authority to regulate payment-card fees. BCCR subsequently developed a regulation that set maximum fees for acquiring and issuing banks, which came into force Nov. 24, 2020. In BCCR’s November 2021 ordinary review of those price controls, the central bank set out a framework to limit further the fees charged on domestic cards and to introduce limits on fees charged on foreign cards.

This brief considers the international experience with interchange and acquisition fees, reviewing both theoretical and empirical evidence. It finds that international best practices require that payment networks be considered dynamic two-sided markets, and therefore, that assessments account for the effects of regulation on both sides of the market: merchants and consumers. In contrast, BCCR’s analysis focuses primarily on static costs that affect merchants, with little attention to the effects on consumers, let alone the dynamic effects. Consequently, BCCR’s proposed maximum interchange and acquisition fees would interfere with the efficient operation of the payment-card market in ways that are likely to harm consumers. Specifically, losses by issuing and acquiring banks are likely to be passed on to consumers in the form of higher banking and card fees, and less investment in improvements. Less wealthy consumers are likely to be hit hardest.

Based on the evidence available, international best practices entail:

• As far as possible, allowing the market to determine interchange fees and acquisition fees;
• Acknowledging that payment networks are two-sided markets in which one side (usually merchants) typically subsidizes the other side, thereby increasing system effectiveness;
• Not benchmarking fees, especially against countries that have price controls in place; and
• Not imposing price controls on fees on foreign cards.

Read the full issue brief here.

Executive Summary

Our response to the National Telecommunications and Information Administration’s (“NTIA”) request for comments (“RFC”) is broken into two parts. The first part raises concerns regarding what we see as the NTIA’s uncritical acceptance of certain contentious assumptions, as well as the RFC’s pre-commitment to a particular political viewpoint. The second part responds to several of the most pressing and problematic substantive questions raised in the RFC.

The RFC appears intended to invite comments that conform to a pre-established commitment to interventionist policy. The heuristics and assumptions on which it relies anticipate the desired policy outcome, rather than setting a baseline for genuine input and debate. Unfortunately, these biases also appear to carry over to the substantive questions. These comments offer four substantive observations:

First, that interoperability is not a panacea for mobile-apps ecosystems. There are risks and benefits that attend interoperability and these risks and benefits manifest differently for different groups of end-users and distributors. Specifically, some users may prefer “closed” platforms that offer a more curated experience with enhanced security features.

Second, considerations of security are intrinsic to determining whether interoperability is feasible or desirable. Centralized app distribution is what allows platforms like the App Store to filter harmful content through a two-tiered process of both human and automated app review. Such control over the ecosystem’s content would necessarily be relinquished if third-party app distribution and payment systems were allowed on “closed” platforms.

Third, determinations of “user benefit” in the mobile-app ecosystem must account for both end-users and developers. Where the interests of the two sides of the market conflict, total output—rather than price—should be the relevant benchmark.

Fourth, there is no objective “correct balance” between security and access. Some end-users and developers prefer more curated and ostensibly safer ecosystems, while others are most concerned with the sheer quantity of options. The NTIA should not substitute its own preferences for the revealed preferences of millions of users and distributors.

Read the full comments here.

Abstract

Two-dimensional Hotelling models predict that firms choose to maximally differentiate on one dominant characteristic and minimally differentiate on the other dominated characteristic. When consumers have more choices, firms tend to improve all dimensions. This study uses lodging tax data from the Texas Comptroller of Public Accounts to examine the joint choices of geographic location and product positioning (or brand) by multi-unit hotel operators at different market boundary levels. First, our findings suggest that greater distance between own hotels is associated with less product differentiation, which implies a max-min equilibrium. Second, considering the coexistence of horizontal and vertical differentiation, we obtain a higher likelihood a hotel will be of the same quality tier as its nearest neighbor the nearer the neighbor; while a farther distance to nearest neighbor increases the degree of quality differentiation in the scenario of vertical differentiation. This implies both min-max and max-max equilibria are obtained. Third, owners with properties at different levels of quality are more likely to add new properties that are higher quality, while more geographically differentiated portfolios add lower quality properties at the margin. We obtain a max-min equilibrium. Therefore, our findings provide insights into the strategic motivations of multi-unit owners and, within their decisions, the relevant dominance of place versus market position.

Introduction

On behalf of the International Center for Law & Economics (ICLE), we thank the Commission for the opportunity to comment on this Notice of Inquiry in the Matter of Implementing the Infrastructure Investment and Jobs Act: Prevention and Elimination of Digital Discrimination (“NOI”). The NOI states that “one of the Commission’s foremost goals is to ensure that every person in the United States has equal access to high-quality, affordable broadband internet access service… Every person across our Nation deserves—and must have—equal access to this crucial technology in the increasingly digital world; a person’s zip code should not determine their destiny.”[1]

Despite this high-minded rhetoric, the NOI does not focus on extending broadband deployment to those who are actually unserved—i.e., to those who lack any broadband Internet options at all.[2] In fact, the word “unserved” does not appear in the NOI at all. The notice instead focuses on eliminating “digital discrimination of access based on income level, race, color, religion, or national origin.”[3] This group is deemed to be the “underserved,” a designation the NOI defines not by reference to their relative inability to access broadband Internet service, but by their membership in categories that “have been historically underserved, marginalized, or adversely affected by persistent poverty or inequality.”[4] Thus, the NOI includes in the ranks of the “underserved” individuals who do have the ability to access broadband service, although potentially at slower speeds than some of their neighbors.

Getting faster Internet to those who live where broadband service already exists—or assisting them in paying for access to that service which already exists—is a fundamentally different problem than that faced by Americans who lack Internet access because they live in geographic areas without broadband infrastructure. We thus caution the Commission that this rulemaking may distract from the pressing need, demonstrated by the FCC’s own broadband-deployment data, to build out broadband networks in those hardest-to-reach areas.

The Commission asks whether broadband-deployment decisions are being made based on impermissible “income discrimination.” But as we explain in greater detail below, differences in the levels of broadband service available to the richest and poorest census blocks are insignificant relative to the differences in availability between lowest population-density census blocks and even the next- lowest population-density census blocks.[5] Indeed, the issues raised in NOI largely do not speak to the need to alleviate the significant deficit of broadband infrastructure in the most rural areas of this country. While the NOI presumes that discrimination is to blame for differences in the availability of higher-speed tiers of broadband service, the data and the underlying economics tell a different tale.

Underpinning the stark differences in broadband availability between urban and rural areas is the underlying cost of deployment. Population density serves as a supply-side constraint on buildout decisions because it is cost-prohibitive to build a network to serve only a very few potential subscribers. Similarly, those differences that can be observed in the deployment of the highest-speed tiers in urban centers—which are far less pronounced, in comparison to the urban-rural divide—are similarly the result of providers’ judgment about the likelihood to recoup their investments, not willful decisions to discriminate on the basis of income or protected racial or religious characteristics.

It is undoubtedly important to examine patterns of deployment to discover how best to connect underserved communities. But if we are to overcome those obstacles that have impeded reaching every potential broadband consumer, it is essential that the FCC carefully consider how and why investment decisions are made in broadband markets. ICLE has researched these questions extensively and we offer, in addition to these comments, that commissioners and FCC staff may wish to read the more fulsome analysis offered in our 2021 paper, “A Dynamic Analysis of Broadband Competition: What Concentration Numbers Fail to Capture.”[6]

In short, we question the NOI’s framing of broadband-connectivity issues as a matter of “discrimination.” We would assert that the project to eliminate “digital discrimination of access based on income level”[7] does not usefully forward efforts to connect the underserved. While there remains much work to be done to connect the underserved, the FCC is already well aware of the technical, economic, regulatory, and geographical issues that can impede deployment and has for years been doing important work on these issues. The Commission should continue this important work and should avoid the unhelpful framing of “discrimination.”

In Part II, we detail some of the important factors that guide broadband providers’ investment decisions and that drive competition in specific markets. There is no reasonable model (nor data) that would suggest broadband companies have engaged in discrimination against racial, ethnic, or religious minorities—or even against lower-income consumers—as that would imply that they have systematically sacrificed profits due to animus.

In Part III, we offer an approach to implement Section 60506 of the Infrastructure Investment and Jobs Act that applies insights from the law & economics of broadband buildout. It is not accurate to categorize the process firms undertake to evaluate the likelihood of recoupment as “discrimination” on the basis of “income level, race, ethnicity, color, religion, or national origin.”[8]

Thus, rules to proscribe “digital discrimination” ought to focus on cases where explicit and demonstrable discriminatory intent played a role in broadband providers’ investment decisions.

In Part IV, we counsel the FCC that it is economically infeasible to require equivalent broadband infrastructure across all territories irrespective of the likelihood that providers will be able to recoup their investment. Mandates that providers make unprofitable deployment decisions in some areas would necessarily require either that they raise prices in other areas or that they be subsidized directly by the government. The former (i.e., cross-subsidization) is generally infeasible, as higher-income territories tend to have more competitive markets. Thus, we recommend that the FCC and the federal government consider user subsidies (e.g., connectivity vouchers) to encourage more options for lower-income consumers.

Read the full comments here.

[1] Notice of Inquiry, In the Matter of Implementing the Infrastructure Investment and Jobs Act: Prevention and Elimination of Digital Discrimination, GN Docket No. 22-69 (Feb. 23, 2022), at para. 1 [hereinafter “NOI”].

[2] Currently defined by the FCC as 25/3 Mbps for terrestrial fixed broadband and 10/1 for mobile broadband. See Fourteenth Broadband Deployment Report, In the Matter of Inquiry Concerning Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, GN Docket No. 20-269 (Jan. 19, 2021), at para. 12 (defining terrestrial fixed broadband), para. 15 (defining mobile broadband) [hereinafter “Fourteenth Broadband Deployment Report”].

[3] NOI, supra note 1, at para. 2 (quoting 47 U.S.C. § 1754(b)(1).

[4] Id. at para. 3, n.5; para. 40 (both quoting Executive Order 13985).

[5] See Part II.B below.

[6] Geoffrey A. Manne, Kristian Stout, & Ben Sperry, A Dynamic Analysis of Broadband Competition: What Concentration Numbers Fail to Capture (ICLE White Paper, Jun. 2021), available at https://laweconcenter.org/wp-content/uploads/2021/06/A- Dynamic-Analysis-of-Broadband-Competition.pdf [hereinafter “ICLE Broadband Competition Paper”].

[7] NOI, supra note 1, at para. 2

[8] 47 U.S.C. § 1754.