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Scholarship "Platform competition is more complicated than simple theories of vertical discrimination would have it, and there is certainly no basis for a presumption of harm."
Over the past several years, a growing number of critics have argued that big tech platforms harm competition by favoring their own content over that of their complementors. Over time, this “vertical discrimination presumption” has become the go-to argument for big tech’s staunchest critics seeking to level novel charges of anticompetitive conduct against these platforms. Indeed, judging by the grandiose claim made by one critic at a recent Senate hearing—“Digital platform self-preferencing threatens the American Dream”—the argument may be the very apotheosis of “populist antitrust.”
According to this line of argument, complementors are “at the mercy” of tech platforms. By discriminating in favor of their own content and against independent “edge providers,” tech platforms cause “the rewards for edge innovation [to be] dampened by runaway appropriation,” leading to “dismal” prospects “for independents in the internet economy—and edge innovation generally.”
The problem, however, is that the claims of presumptive harm from vertical discrimination are based neither on sound economics nor evidence.
Scholarship When Congress expands executive power for purposes of protecting the nation against an emergency—whether real or imagined—that power is often turned against vulnerable, marginalized populations that are easily scapegoated as threats to the state.
On February 15, 2019, President Donald Trump issued Proclamation 9844 pursuant to the National Emergencies Act of 19761 (NEA), declaring a “National Emergency Concerning the Southern Border of the United States.” On February 27, the House of Representatives voted 245–182 to overturn the declaration of national emergency; on March 14, the Senate agreed with the House in a 59–41 vote. The following day, the President vetoed the joint resolution. Neither house of Congress was able to override the veto and so, more than a year later, the emergency remains in place.
The border wall emergency declared by President Trump has awakened strident opposition in Congress, which is a historical anomaly. And yet, although virtually none of the previous declarations engendered the vehement outcry that accompanied the border wall emergency declaration, they were substantially different only in scope, not in kind. Including Trump’s border wall emergency declaration and four subsequent emergency declarations, Presidents going back to Jimmy Carter have declared a total of 57 emergencies under the NEA. Thirty-four of these are still active. And all but four of them could hardly be called emergencies. Even without the partisan political context of the border wall dispute, any of these should have been sufficient to raise the question of whether and how to rein in presidential power.
Regulatory Comments In order to maximize the benefits of broadband to society, including through the provision of public safety communications and services, public policy must promote the . . .
In order to maximize the benefits of broadband to society, including through the provision of public safety communications and services, public policy must promote the proper incentives for broadband buildout. Both the 2015 Title II Open Internet Order (the “OIO”) and the 2017 Restoring Internet Freedom Order (the “RIFO”) were premised on this. But each adopted a different approach to accomplishing this objective.
The OIO premised its rules on the theory that ISPs are “gatekeepers,” poised to kill the golden goose of demand for broadband by adopting business practices that could reduce edge innovation.
The key insight of the virtuous cycle is that broadband providers have both the incentive and the ability to act as gatekeepers standing between edge providers and consumers. As gatekeepers, they can block access altogether; they can target competitors, including competitors to their own video services; and they can extract unfair tolls. Such conductwould, as the Commission concluded in 2010, “reduce the rate of innovation at the edge and, in turn, the likely rate of improvements to network infrastructure.” In other words, when a broadband provider acts as a gatekeeper, it actually chokes consumer demand for the very broadband product it can supply.
The RIFO, on the other hand, properly conceives of ISPs as intermediaries in a two-sided market that aim to maximize the value of the market by adopting practices, like pricing structures and infrastructure investment, that increase the value for both sides of the market.
We find it essential to take a holistic view of the market(s) supplied by ISPs. ISPs, as well as edge providers, are important drivers of the virtuous cycle, and regulation must be evaluated accounting for its impact on ISPs’ capacity to drive that cycle, as well as that of edge providers. The underlying economic model of the virtuous cycle is that of a two- sided market. In a two-sided market, intermediaries—ISPs in our case—act as platforms facilitating interactions between two different customer groups, or sides of the market— edge providers and end users. . . . The key characteristic of a two-sided market, however, is that participants on each side of the market value a platform service more as the number and/or quality of participants on the platform’s other side increases. (The benefits subscribers on one side of the market bring to the subscribers on the other, and vice versa, are called positive externalities.) Thus, rather than a single side driving the market, both sides generate network externalities, and the platform provider profits by inducing both sides of the market to use its platform. In maximizing profit, a platform provider sets prices and invests in network extension and innovation, subject to costs and competitive conditions, to maximize the gain both sides of the market obtain from interacting across the platform. The more competitive the market, the larger the net gains to subscribers and edge providers. Any analysis of such a market must account for each side of the market and the platform provider.
In other words, the fundamental difference of approach between the two Orders turns on whether it is edge innovation, pushing against ISP incentives to expropriate value from edge providers, that primarily drives network demand and thus encourages investment, or whether optimization decisions by both ISPs and the edge are drivers of network value. The RIFO rightly understands that ISPs have sharp incentives both to innovate as platforms (and thus continue to attract and retain end users), as well as to continue to make their services useful to edge providers (and, by extension, the consumers of those edge providers’ services).
The D.C. Circuit upheld RIFO’s fundamental rationale as a supportable basis for the FCC’s rules in Mozilla v. FCC. But it also accepted that three specific concerns were insufficiently examined in the RIFO, and remanded the case to the FCC to address them. Among these was the question of the RIFO’s implications for public safety. In its Public Notice seeking to refresh the record on the remanded issues, the Wireline Competition Bureau asks (among other things):
These are the questions to which this comment is primarily addressed.
In Part I, we discuss how the RIFO fosters investment in broadband buildout, in particular by enabling prioritization and by reducing the effects of policy uncertainty. In Part II, we describe how that network investment benefits public safety both in both direct and indirect ways. In Part III, we highlight the benefits to public safety from prioritization, in particular, which is facilitated by the RIFO.
Read the full comments here.
Written Testimonies & Filings On Friday, April 17, 2020, ICLE President and Founder, Geoffrey A. Manne, submitted written testimony to the U.S. House of Representatives Committee on the Judiciary, Subcommittee on Antitrust, Commercial, and Administrative Law.
On Friday, April 17, 2020, ICLE President and Founder, Geoffrey A. Manne, submitted written testimony to the U.S. House of Representatives Committee on the Judiciary, Subcommittee on Antitrust, Commercial, and Administrative Law. Mr. Manne contends that underlying much of the contemporary antitrust debate are two visions of how an economy should work.
One vision, which tends to favor more intervention and regulation than the status quo, sees the economy and society as being constructed from above by laws and courts. In this view, suspect business behavior must be justified to be permitted, and . . . the optimal composition of markets can be known and can be designed by well-intentioned judges and legislators. On the other hand, there is the view of individual and company behavior as emerging from each person’s actions within a framework of property rights and the rule of law. This view sees the economy as a messy discovery process, with business behavior often being experimental in nature. This second conception often sees government intervention as risky, because it assumes a level of knowledge about the dynamics of markets that is impossible to obtain.
One vision, which tends to favor more intervention and regulation than the status quo, sees the economy and society as being constructed from above by laws and courts. In this view, suspect business behavior must be justified to be permitted, and . . . the optimal composition of markets can be known and can be designed by well-intentioned judges and legislators.
On the other hand, there is the view of individual and company behavior as emerging from each person’s actions within a framework of property rights and the rule of law. This view sees the economy as a messy discovery process, with business behavior often being experimental in nature. This second conception often sees government intervention as risky, because it assumes a level of knowledge about the dynamics of markets that is impossible to obtain.
In Manne’s view,
Antitrust law and enforcement policy should, above all, continue to adhere to the error-cost framework, which informs antitrust decision-making by considering the relative costs of mistaken intervention compared with mistaken non-intervention. Specific cases should be addressed as they come, with an implicit understanding that, especially in digital markets, precious few generalizable presumptions can be inferred from the previous case. The overall stance should be one of restraint, reflecting the state of our knowledge. We may well be able to identify anticompetitive harm in certain cases, and when we do, we should enforce the current laws. But dramatic new statutes that undo decades of antitrust jurisprudence or reallocate burdens of proof with the stroke of a pen are unjustified.
Manne goes on to address several of the most important and common misperceptions that seem to be fueling the current drive for new and invigorated antitrust laws. These misperceptions are that:
See his full testimony, here.
Regulatory Comments Although it is doubtless correct that the 1984 Nonhorizontal Merger Guidelines require updates in light of the last three decades of legal and economic developments, . . .
Although it is doubtless correct that the 1984 Nonhorizontal Merger Guidelines require updates in light of the last three decades of legal and economic developments, it is by no means clear that errors in judicial decisions or enforcement practices have led to widespread problems that are ad- dressed by the proposed changes. Indeed, harms could actually arise because there is ambiguity in the proposed guidelines that may lead either to uncertainty as to how the agencies will exercise their discretion, or, more troublingly, could lead courts to take seriously speculative theories of harm.
The purpose of this comment is to draw attention to an implicit underpinning of the draft guidelines that we believe the agencies should clearly disavow (or at least explain more clearly the complexity surrounding): the extent and implications of the presumed functional equivalence of vertical integration by contract and by merger.
Despite the fact that, among law and economics scholars, it has long been an essentially settled matter that vertical integration — whether partial integration by contract or full integration by merger — is typically procompetitive (or, at the very least, competitively ambiguous, and problematic in only very limited, stylized, and theoretical circumstances), vertical conduct of all sorts has come under increased scrutiny. Much of the new opprobrium for vertical conduct has come from the likes of presidential hopefuls, journalists, political pundits, and activists. But, more concerning, a fair amount of the resurgence in opposition to vertical restraints and mergers has come from academic economic quarters. Surprisingly, this criticism of vertical conduct also misunderstands or ignores fundamental economic concepts.
One prominent line of criticism of vertical mergers, for example, equates vertical mergers with vertical contracts, and proposes to prohibit or significantly deter vertical integration by merger because it inherently leads to competitive problems that either don’t exist or can more easily be corrected in vertical contracts. But the choice between merger and contract for firms is not so simple, especially in highly dynamic industries in which effective competition often demands both process and product innovation. In particular, the management of intangible, information assets — often the crucial in- puts in dynamic, high-tech firms — may not be as readily (or at all) accomplished by contract as by internal coordination. In the face of extreme informational uncertainties and the need for the inherently uncertain exercise of entrepreneurial judgment and dynamic capabilities (which reside in a firm’s individual decisionmakers, corporate culture, and collective ability to implement novel business processes), contracts cannot always replicate the competitive advantages of integration through merger.
This narrow view of vertical integration thus ignores and threatens to undermine dynamic competition and innovation. Indeed, if we take the organization theory and business strategy literature on the organization of firms in dynamic industries seriously, the status quo might even be over-enforcing, and leading to the deterrence of innovative, procompetitive mergers. It is insufficient merely to advert to potential price effects or innovation effects on foreclosed competitors or input providers, and there truncate the analysis. A proper evaluation of the competitive effects of vertical conduct requires an assessment of industrywide increases in innovation and of quality improvements that may accompany superficial price increases or localized constraints on innovation. Without this it is impossible to conclude that such conduct is anticompetitive.
We recently contributed two pieces to a symposium on Truth on the Market that explore the position set out above. We have attached these pieces to this comment for your convenience. We also explore all of these and related points more fully in a forthcoming article that will be published this spring by the Kansas Law Review. A draft of that article has likewise been attached.
We thank the agencies for the opportunity to comment on this important set of guidelines. We certainly advocate for clarity in the agencies’ enforcement practice with respect to vertical integration, but caution that the agencies carefully consider whether the status quo — as out of date as it may be — is truly inferior to updates that introduce more ambiguity.
TOTM An oft-repeated claim of conferences, media, and left-wing think tanks is that lax antitrust enforcement has led to a substantial increase in concentration in the . . .
An oft-repeated claim of conferences, media, and left-wing think tanks is that lax antitrust enforcement has led to a substantial increase in concentration in the US economy of late, strangling the economy, harming workers, and saddling consumers with greater markups in the process. But what if rising concentration (and the current level of antitrust enforcement) were an indication of more competition, not less?
Read the full piece here.
TOTM Amazon is again accused of being a predatory pricer, once again the evidence and theory to support this is nonexistent. Shaoul Sussman's complicated argument that the use of grey market sellers to force higher prices throughout the economy, doesn't add up.
These days, lacking a coherent legal theory presents no challenge to the would-be antitrust crusader. In a previous post, we noted how Shaoul Sussman’s predatory pricing claims against Amazon lacked a serious legal foundation. Sussman has returned with a new post, trying to build out his fledgling theory, but fares little better under even casual scrutiny.
TOTM Contrary to established Supreme Court precedent, the district court’s decision relies on mere inferences to establish anticompetitive effect. The decision, if it stands, would render a wide range of potentially procompetitive conduct presumptively illegal and thus harm consumer welfare.
The ICLE amicus brief focuses on the ways that the district court exceeded the “error cost” guardrails erected by the Supreme Court to minimize the risk and cost of mistaken antitrust decisions, particularly those that wrongly condemn procompetitive behavior. As the brief notes at the outset…
Regulatory Comments In this ex parte letter, ICLE analyzes the law and economics of both the underlying statute and the FCC's proposed rulemaking that would affect the interpretation of cable franchise fees. For a variety of reasons set forth in the letter, we believe that the Commission is on firm legal and economic footing to adopt its proposed Order. Congress intentionally enacted the five percent revenue cap to prevent LFAs from relying on cable franchise fees as an unlimited general revenue source. In order to maintain the proper incentives for network buildout — which are ever more-critical as our economy increasingly relies on high-speed broadband networks — the Commission should adopt the proposed Order.
Congress passed the 1984 Cable Act in order to create a unified national framework for regulating networks for cable networks involving municipalities, cable operators, and the FCC. As described by its primary sponsor, Sen. Barry Goldwater of Arizona, the Cable Act was drafted in order to reduce barriers standing in the way of the adoption of cable technology.
The Act was passed and later amended in a way that carefully drew lines around the acceptable scope of local franchising authorities’ de facto monopoly power in granting cable franchises. The thrust of the Act was to encourage competition and build-out by discouraging franchising authorities from viewing cable providers as a captive source of unlimited revenue. It did this while also giving franchising authorities the tools necessary to support public, educational, and governmental (“PEG”) programming and enabling them to be fairly compensated for use of the public rights of way. Unfortunately, since the 1984 Cable Act was passed, an increasing number of local and state franchising authorities (collectively, “LFAs”) have attempted to work around the Act’s careful balance. In particular, these efforts have created two main problems:
First, LFAs frequently attempt to evade the Act’s limitation on franchise fees to five percent of cable revenues by seeking a variety of in-kind contributions from cable operators that impose costs over and above the five percent limit. LFAs do this despite the plain language of the statute defining franchise fees quite broadly as including any “tax, fee, or assessment of any kind imposed by a franchising authority or any other governmental entity.”
Although not nominally “fees,” such requirements are indisputably “assessments,” and the costs of such obligations are equivalent to the marginal cost of a cable operator providing those “free” services and facilities, as well as the opportunity cost (i.e., the foregone revenue) of using its fixed assets in the absence of a state or local franchise obligation. Any such costs will, to some extent, be passed on to customers as higher subscription prices, reduced quality, or both. By carefully limiting the ability of LFAs to abuse their bargaining position, Congress ensured that they could not extract disproportionate rents from cable operators (and, ultimately, their subscribers).
Second, LFAs also attempt to circumvent the franchise fee cap of five percent of gross cable revenues by seeking additional fees for non-cable services provided over mixed use networks (i.e. imposing additional franchise fees on the provision of broadband and other non-cable services over cable networks). But the statute is similarly clear that LFAs or other governmental entities cannot regulate non-cable services provided via franchised cable systems.
In this ex parte letter, ICLE analyzes the law and economics of both the underlying statute and the FCC’s proposed rulemaking that would affect the interpretation of cable franchise fees. For a variety of reasons set forth in the letter, we believe that the Commission is on firm legal and economic footing to adopt its proposed Order. It should be unavailing – and legally irrelevant – to argue, as many LFAs have, that declining cable franchise revenue leaves municipalities with an insufficient source of funds to finance their activities, and thus that recourse to these other sources is required. Congress intentionally enacted the five percent revenue cap to prevent LFAs from relying on cable franchise fees as an unlimited general revenue source. In order to maintain the proper incentives for network buildout — which are ever more-critical as our economy increasingly relies on high-speed broadband networks — the Commission should adopt the proposed Order.
Click here to read the full ex parte letter.
