Abstract

It is common to characterize patents as monopolies. This assumption, which underlies the standard dichotomy between intellectual property and antitrust law, is challenged by evidence that large companies in technology markets (outside biopharmaceuticals) tend to advocate for weaker patent protection or, in some cases, no patent protection at all. This revealed preference for weaker patent protection reflects the fact that large integrated firms can often capture returns on innovation through economies of scale and scope and other non-patent-dependent capacities that few other firms can match. Relatedly, a weak-patent environment can confer a competitive advantage on integrated firms against smaller and more innovative firms that rely on patents to capture value on innovation through licensing and other contract-based monetization strategies.

Executive Summary

Intermediaries may not be the consumer welfare hero we want, but more often than not, they are one that we need. Policymakers often assume that intermediaries and centralization serve as a cost to society, and that consumers are better off when provided with “more choice.” Concrete expression of this view can be found in regulatory initiatives that aim to turn “closed” platforms into “open” ones (see, in Europe, the Digital Markets Act; and in the United States, the Open App Markets Act and the American Innovation and Choice Online Act). Against this backdrop, we explain that, as with all economic goods, intermediation involves tradeoffs. Intermediaries emerge when it would otherwise be too difficult (or too costly) for groups of users to meet and interact. There is thus no guarantee that government-mandated disintermediation — such as that contemplated in the European DMA and the U.S. AICOA bill — will generate net benefits in a given case. The ongoing Epic v Apple proceedings are a good example of why it is important to respect the role of intermediaries in digital markets, and the unique benefits intermediation can bring to consumers. The upshot is that intermediaries are far more valuable than they are usually given credit for.

Read the full issue brief here.

Abstract

In the first quarter of 2022, the Stanford Computational Antitrust project team invited the partnering antitrust agencies to share their advances in implementing computational tools. Here are the results of the survey.

Abstract

For over three centuries, Anglo-American courts have assessed employee noncompete agreements under a Rule of Reason. Despite longstanding precedent, some now advocate banning all such agreements. These advocates contend that employers use superior bargaining power to impose such “contracts of adhesion,” preventing employees from selling their labor to the highest bidder and reducing wages. Abolitionists also contend that such agreements cannot produce cognizable benefits and that employers could achieve any benefits via less restrictive alternatives, without limiting employee autonomy.

This article critiques the Abolitionist position. Arguments for banning noncompete agreements echo hostile critiques of other nonstandard contracts during Antitrust Law’s “inhospitality era.” These critiques induced courts and agencies to condemn various nonstandard agreements. Employee noncompete agreements escaped such condemnation because they were governed by state contract law.

The article recounts how Transaction Cost Economics (“TCE”), undermined these critiques. TCE demonstrated that nonstandard agreements, such as exclusive territories, could overcome market failures by preventing dealers from free riding on each other’s promotional efforts. TCE also concluded that such agreements were voluntary integration, unrelated to market power. These scientific developments induced courts to abandon their hostility to nonstandard contracts, and nearly all such agreements properly withstand rule of reason scrutiny.

TCE also undermines the case against employee noncompete agreements. Most notably, TCE predicts that most such agreements are voluntary methods of ensuring that employers capture the benefits of investments in employee training and trade secrets, by deterring rival firms from free riding on such investments and bidding away employees. Application of TCE also rebuts claims that less restrictive alternatives will achieve the same objectives as noncompete agreements.

Finally, TCE undermines contentions that such agreements injure employees by preventing them from receiving lucrative bids from competing employers. This account of harm treats hypothesized bids and resulting imagined (higher) wages as an exogenous baseline against which to measure the impact of such agreements. According to TCE, however, such bids are not exogenous, but instead often occur because noncompete agreements incentivize employers to make investments that increase employee productivity. Banning such agreements will thus reduce employee productivity, eliminating the incentive for rivals to bid for employees. In such cases, claims that noncompete agreements reduce wages invoke an illusory baseline of bids that would not occur but for the enforcement of such agreements.

Empirical evidence confirms TCE’s predictions. Many such agreements apparently arise in unconcentrated markets. Most are disclosed in advance, and robust enforcement induces additional employee training. Finally, employees who receive pre-employment notice of such provisions earn higher wages than similarly situated employees not bound by such agreements. Thus, many such agreements appear to be voluntary means of protecting investments in employee training, improving employee productivity, and increasing GDP.

This is not to say that all employee noncompete agreements produce significant benefits. Some employers decline to disclose such contracts until after employees join the firm. Such agreements apparently depress wages without producing benefits. Moreover, some such agreements could raise rivals’ costs and enhance employers’ market power.

Neither potential impact justifies abolition. States or the FTC could encourage or require pre-contractual disclosure, leaving employers and employees free to adopt provisions that increase their joint welfare. Moreover, even the inventors of raising rivals’ costs theory opined that most markets are not susceptible to such a strategy. Abolitionists have made no effort to establish that employee non-compete agreements usually arise in markets where such a strategy is possible. The rare prospect that parties may employ fully disclosed agreements to pursue such a strategy does not justify abolishing all such agreements.

Indeed, banning all such agreements may have a disparate impact on small, labor-intensive firms, by discouraging optimal investments in employee training. This potential impact may help explain labor union support for abolishing such agreements. Unionized firms predictably adopt capital-intensive production processes in response to collective bargaining and resulting noncompetitive wages. Laws that disadvantage non-union, labor-intensive firms will enhance the demand for the output of unionized firms, increasing the demand for unionized labor. Banning noncompete agreements will thus sometimes boost unionized workers at the expense of their nonunion counterparts.

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

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.

Abstract

There is a raging debate within antitrust to determine how to best assess the conduct of digital platforms and tailor the enforcement of antitrust laws to the modern economy. The distinguishing features of digital platforms can make their analysis quite different from conventional, single-sided markets. The Supreme Court’s ruling in Ohio v. American Express (“Amex”) was the first decision to explicitly incorporate features of multisided platforms into antitrust analyses. However, the decision has divided academics and practitioners as to whether the Court properly incorporated platform features into antitrust’s rule of reason framework, which seeks to divide the burden of production between plaintiffs and defendants. Adding fuel to the fire are the lower courts’ interpretation of Amex, including in U.S. v. Sabre, where the district court ruled that only “transactional” platforms compete with other transactional platforms, which effectively short-circuited the competitive analysis. This Article argues that antitrust has forgotten the lessons from Ronald Coase’s work on the nature of the firm. Specifically, categorizing business organizations as “platforms” is insufficient to properly inform the actual competitive effects analysis. Firms organize in various ways to ultimately turn inputs into outputs. Precisely how this process is achieved is relevant to understand a firm’s conduct and incentives, but firm organization alone should not lead to competitive effects conclusions. In light of Coase, this Article reexamines the Court’s Amex decision to put suitable bounds on its precedential value. Additionally, this Article examines several key antitrust cases before and after Amex to assess their fidelity to a Coasian interpretation of platforms.

Abstract

Between 2016 and 2019, two proposed mergers captured much of the attention and resources of the Department of Justice, Antitrust Division (DOJ). The first was the vertical merger of AT&T Inc. and Time Warner Inc.—a merger of a communications, media, and content distribution company (AT&T) with a content provider (Time Warner). The second was the horizontal merger of Sprint and T-Mobile—a merger of two mobile telephone companies. In general, vertical mergers are reviewed with greater leniency than horizontal mergers because the latter, by definition, eliminate a competitor in the relevant marketplace, which is not a concern with the former. Moreover, merger-specific efficiencies may be easier to demonstrate when a company merges with another company in its own supply chain. Even so, the DOJ challenged the vertical merger of AT&T and Time Warner but permitted (with conditions) the horizontal merger of Sprint and T-Mobile. As this Article sets forth, these seemingly distinct mergers were destined to be linked.

Even though the DOJ unsuccessfully blocked the AT&T-Time Warner merger, the companies are separating again only a few short years after finalizing their merger. The stated reason for the unwinding is arguably linked to the DOJ’s decision to permit the Sprint-T-Mobile merger. The competitive pressure created by the joined mobile telephone company—T-Mobile—has pressured AT&T to invest further in its own mobile telephone business. In other words, the DOJ’s initial fear, that the merged AT&T could use theoretical market power to anticompetitively charge higher consumer prices and raise rivals’ costs in content distribution, was never realized. In contrast, the DOJ’s humility in assessing potential efficiencies for a merged T-Mobile in the growing 5G mobile telephone market is already paying competitive dividends. The tale of these two mergers, therefore, provides interesting insights into modern merger review policies.

Abstract

Competition policy generally prohibits coordination among buyers or sellers, especially coordination on price, price-related inputs, and output. In licensing markets for standard-essential patents (“SEPs”), it has been periodically proposed that this rule should be relaxed to permit the formation of licensing negotiation groups (“LNGs”), which is expected to reduce transaction costs and the purportedly “excessive” royalties paid to SEP licensors. Based on the economic structure of wireless technology markets, and empirical evidence from over three decades of SEP licensing, this policy intervention is likely to degrade, rather than enhance, competitive conditions in wireless communications and other 5G-enabled markets encompassed by the “Internet of Things.” In the short term, LNGs would most likely result in a redistributive (not an efficiency) effect that shifts economic value from innovators to implementers in the wireless technology supply chain without necessarily passing on cost-savings to consumers. In the medium to longer term, LNGs are liable to impose significant efficiency losses by endangering the viability of licensing-based monetization models that have funded continuous R&D investment, promoted broad dissemination of technology inputs, facilitated robust entry in device production, and enabled transformative business models across a wide range of industries. While LNGs may reduce the transaction costs of SEP licensing, pooling structures have a demonstrated record of having achieved the same objective in patent-intensive information technology markets at a substantially lower risk of competitive harm.