Geoff Manne’s blog on the FCC’s Staff Analysis and Findings (“Staff Report”) has inspired me to come up with a top ten list. The Staff Report relies heavily on concentration indices to make inferences about a carrier’s pricing power, even though direct evidence of pricing power is available (and points in the opposite direction). In this post, I have chosen ten lines from the Staff Report that reveal the weakness of the economic analysis and suggest a potential regulatory agenda. It is clear that the staff want T-Mobile’s spectrum to land in the hands of a suitor other than AT&T—the government apparently can allocate scare resources better than the market—and that the report’s authors define the public interest as locking AT&T’s spectrum holdings in place.

Read the full piece here.

As everyone knows by now, AT&T’s proposed merger with T-Mobile has hit a bureaucratic snag at the FCC.  The remarkable decision to refer the merger to the Commission’s Administrative Law Judge (in an effort to derail the deal) and the public release of the FCC staff’s internal, draft report are problematic and poorly considered.  But far worse is the content of the report on which the decision to attempt to kill the deal was based.

With this report the FCC staff joins the exalted company of AT&T’s complaining competitors (surely the least reliable judges of the desirability of the proposed merger if ever there were any) and the antitrust policy scolds and consumer “advocates” who, quite literally, have never met a merger of which they approved.

In this post I’m going to hit a few of the most glaring problems in the staff’s report, and I hope to return again soon with further analysis.

As it happens, AT&T’s own response to the report is actually very good and it effectively highlights many of the key problems with the staff’s report.  While it might make sense to take AT&T’s own reply with a grain of salt, in this case the reply is, if anything, too tame.  No doubt the company wants to keep in the Commission’s good graces (it is the very definition of a repeat player at the agency, after all).  But I am not so constrained.  Using the company’s reply as a jumping off point, let me discuss a few of the problems with the staff report.

First, as the blog post (written by Jim Cicconi, Senior Vice President of External & Legislative Affairs) notes,

We expected that the AT&T-T-Mobile transaction would receive careful, considered, and fair analysis.   Unfortunately, the preliminary FCC Staff Analysis offers none of that.  The document is so obviously one-sided that any fair-minded person reading it is left with the clear impression that it is an advocacy piece, and not a considered analysis.

In our view, the report raises questions as to whether its authors were predisposed.  The report cherry-picks facts to support its views, and ignores facts that don’t.  Where facts were lacking, the report speculates, with no basis, and then treats its own speculations as if they were fact.  This is clearly not the fair and objective analysis to which any party is entitled, and which we have every right to expect.

OK, maybe they aren’t pulling punches.  The fact that this reply was written with such scathing language despite AT&T’s expectation to have to go right back to the FCC to get approval for this deal in some form or another itself speaks volumes about the undeniable shoddiness of the report.

Cicconi goes on to detail five areas where AT&T thinks the report went seriously awry:  “Expanding LTE to 97% of the U.S. Population,” “Job Gains Versus Losses,” “Deutsche Telekom, T-Mobile’s Parent, Has Serious Investment Constraints,” “Spectrum” and “Competition.”  I have dealt with a few of these issues at some length elsewhere, including most notably here (noting how the FCC’s own wireless competition report “supports what everyone already knows: falling prices, improved quality, dynamic competition and unflagging innovation have led to a golden age of mobile services”), and here (“It is troubling that critics–particularly those with little if any business experience–are so certain that even with no obvious source of additional spectrum suitable for LTE coming from the government any time soon, and even with exponential growth in broadband (including mobile) data use, AT&T’s current spectrum holdings are sufficient to satisfy its business plans”).

What is really galling about the staff report—and, frankly, the basic posture of the agency—is that its criticisms really boil down to one thing:  “We believe there is another way to accomplish (something like) what AT&T wants to do here, and we’d just prefer they do it that way.”  This is central planning at its most repugnant.  What is both assumed and what is lacking in this basic posture is beyond the pale for an allegedly independent government agency—and as Larry Downes notes in the linked article, the agency’s hubris and its politics may have real, costly consequences for all of us.

Competition

But procedure must be followed, and the staff thus musters a technical defense to support its basic position, starting with the claim that the merger will result in too much concentration.  Blinded by its new-found love for HHIs, the staff commits a few blunders.  First, it claims that concentration levels like those in this case “trigger a presumption of harm” to competition, citing the DOJ/FTC Merger Guidelines.  Alas, as even the report’s own footnotes reveal, the Merger Guidelines actually say that highly concentrated markets with HHI increases of 200 or more trigger a presumption that the merger will “enhance market power.”  This is not, in fact, the same thing as harm to competition.  Elsewhere the staff calls this—a merger that increases concentration and gives one firm an “undue” share of the market—“presumptively illegal.”  Perhaps the staff could use an antitrust refresher course.  I’d be happy to come teach it.

Not only is there no actual evidence of consumer harm resulting from the sort of increases in concentration that might result from the merger, but the staff seems to derive its negative conclusions despite the damning fact that the data shows that wireless markets have seen considerable increases in concentration along with considerable decreases in prices, rather than harm to competition, over the last decade.  While high and increasing HHIs might indicate a need for further investigation, when actual evidence refutes the connection between concentration and price, they simply lose their relevance.  Someone should tell the FCC staff.

This is a different Wireless Bureau than the one that wrote so much sensible material in the 15^th Annual Wireless Competition Report.  That Bureau described a complex, dynamic, robust mobile “ecosystem” driven not by carrier market power and industrial structure, but by rapid evolution and technological disruptors.  The analysis here wishes away every important factor that every consumer knows to be the real drivers of price and innovation in the mobile marketplace, including, among other things:

1. Local markets, where there are five, six, or more carriers to choose from;
2. Non-contract/pre-paid providers, whose strength is rapidly growing;
3. Technology that is making more bands of available spectrum useful for competitive offerings;
4. The reality that LTE will make inter-modal competition a reality; and
5. The reality that churn is rampant and consumer decision-making is driven today by devices, operating systems, applications and content – not networks.

The resulting analysis is stilted and stale, and describes a wireless industry that exists only in the agency’s collective imagination.

There is considerably more to say about the report’s tortured unilateral effects analysis, but it will have to wait for my next post.  Here I want to quickly touch on a two of the other issues called out by Cicconi’s blog post.

Jobs

First, although it’s not really in my bailiwick to comment on the job claims that have been such an important aspect of the public conversations surrounding this merger, some things are simple logic, and the staff’s contrary claims here are inscrutable.  As Cicconi suggests, it is hard to understand how the $8 billion investment and build-out required to capitalize on AT&T’s T-Mobile purchase will fail to produce a host of jobs, how the creation of a more-robust, faster broadband network will fail to ignite even further growth in this growing sector of the economy, and, finally, how all this can fail to happen while the FCC’s own (relatively) paltry $4.5 billion broadband fund will somehow nevertheless create approximately 500,000 (!!!) jobs.  Even Paul Krugman knows that private investment is better than government investment in generating stimulus – the claim is that there’s not enough of it, not that it doesn’t work as well.  Here, however, the fiscal experts on the FCC’s staff have determined that massive private funding won’t create even 96,000 jobs, although the same agency claims that government funding only one half as large will create five times that many jobs.  Um, really?

Meanwhile the agency simply dismisses AT&T’s job preservation commitments.  Now, I would also normally disregard such unenforceable pronouncements as cheap talk – except given the frequency and the volume with which AT&T has made them, they would suffer pretty mightily for failing to follow through on them now.  Even more important perhaps, I have to believe (again, given the vehemence with which they have made the statements and the reality of de facto, reputational enforcement) they are willing to agree to whatever is in their control in a consent decree, thus making them, in fact, legally enforceable.  For the staff to so blithely disregard AT&T’s claims on jobs is unintelligible except as farce—or venality.

Spectrum

Although the report rarely misses an opportunity to fail to mention the spectrum crisis that has been at the center of the Administration’s telecom agenda and the focus of the National Broadband Plan, coincidentally authored by the FCC’s staff, the crux of the report seems to come down to a stark denial that such a spectrum crunch even exists.  As I noted, much of the staff report amounts to an extended meditation on why the parties can and should run their businesses as the staff say they can and should.  The report’s section assessing the parties’ claims regarding the transition to LTE (para 210, ff.) is remarkable.  It begins thus:

One of the Applicants’ primary justifications for the necessity of this transaction is that, as standalone firms, AT&T and T-Mobile are, and will continue to be, spectrum and capacity constrained. Due to these constraints, we find it more plausible that a spectrum constrained firm would maximize deployment of more spectrally efficient LTE, rather than limit it. Transitioning to LTE is primarily a function of only two factors: (1) the extent of LTE capable equipment deployed on the network and (2) the penetration of LTE compatible devices in the subscriber base. Although it may make it more economical, the transition does not require “spectrum headroom” as the Applicants claim. Increased deployment could be achieved by both of the Applicants on a standalone basis by adding the more spectrally efficient LTE-capable radios and equipment to the network and then providing customers with dual mode HSPAILTE devices. . . .

Forget the spectrum crunch!  It is the very absence of spectrum that will give firms the incentive and the ability to transition to more-efficient technology.  And all they have to do is run duplicate equipment on their networks and give all their customers new devices overnight.  And, well, the whole business model fits in a few paragraphs, entails no new spectrum, actually creates spectrum, and meets all foreseeable demand (as long as demand never increases which, of course, the report conveniently fails to assess).

Moreover, claims the report, AT&T’s transition to LTE flows inevitably from its competition with Verizon.  But, as Cicconi points out, the staff is unprincipled in its disparate treatment of the industry’s competitive conditions.  Somehow, without T-Mobile in the mix, prices will skyrocket and quality will be degraded—let’s say, just for example, by not upgrading to LTE (my interpretation, not the staff’s).  But 100 pages later, it turns out that AT&T doesn’t need to merge with T-Mobile to expand its LTE network because it will have to do so in response to competition from Verizon anyway.  It would appear, however, that Verizon’s power over AT&T operates only if T-Mobile exists separately and AT&T has a harder time competing.  Remove T-Mobile and expand AT&T’s ability to compete and, apparently, the market collapses.  Such is the logic of the report.

There is much more to criticize in the report, and I hope to have a chance to do so in the next few days.

Filed under: antitrust, business, law and economics, merger guidelines, regulation, technology, telecommunications Tagged: at&t, FCC, merger, t-mobile

FTC Chairman Leibowitz recently gave a speech in which he took on a number of issues, but one in particular caught my eye.  In a portion of the speech describing how antitrust has updated its procedures in order to become more efficient and avoid the problem of having decade-long cases focused upon technologies that are obsolete by the time the case is resolved, Leibowitz offers the following example of Commission success:

The best, recent example of the need to move quickly in the high-tech area is our recent Intel case.11 Our investigation of Intel started out very slowly and went on for quite some time, but once the Commission issued process and then a complaint, the litigation proceeded with alacrity and ended with a consent less than a year later.

We think the remedies in the consent do much to protect consumers while still allowing Intel to innovate, develop, and sell new products. And I am proud of the relationship that we have been able to maintain with Intel since then. Still, we might have gained more for consumers: much was lost in the years between the start of the investigation and the litigation’s conclusion, and competition for CPUs and other components in personal computers might have been different had we moved faster initially. And moving quickly might have been fairer to Intel too.

As a result of what we have learned from Intel and other cases, the Commission is no longer bogged down in outmoded procedures. Much of what we’ve done at the Commission in recent years has been to make us better at getting to the bottom of investigations and resolving them faster to ensure that businesses get certainty and consumers get protection quickly. That was at the heart of the changes to our Part 3 rules, you get an antitrust trial, and it is implicit in every effort we make to learn more about industries and develop our internal expertise. We have also pushed to make “go/no go” decisions on investigations earlier so that they don’t linger on. All this reduces expenses and, I believe, allows us to act with a lighter hand.

There is a lot about this strikes me as misguided.

First, lets start broadly.  Striking quickly and striking accurately are two different things.  As John Wooden famously says “never mistake activity for achievement.”  Bill Kovacic has emphasized that case counts alone (nor win rates alone) are not very informative regarding agency performance.   Claims of agency success based upon activity levels in extracting settlements and such should be viewed skeptically without evidence that the activity prevented anticompetitive activity and improved consumer welfare.  Doing things faster doesn’t mean doing them any better.

Second, so what about accuracy?  If Intel is the “best example” the Chairman can come up with of antitrust enforcement in high-tech industries, this is not a good sign for the Commission.  I’ve written quite a bit about the Intel complaint and settlement — and so won’t belabor the point here — but suffice it to say that the evidence does not support the claim that the settlement improved consumer outcomes.  In fact, consumers are probably worse off in my view.  Reasonable minds may differ on these points but it is difficult to evaluate the evidence and come away confident that the settlement is as successful as claimed.  And that’s not even counting the peculiar endorsement it gives Lepage’s, which has been overwhelming condemned a standard which threatens pro-consumer conduct.

Third, the Chairman writes: “And I am proud of the relationship that we have been able to maintain with Intel since then.”  Ugh.  Developing longstanding relationships with Intel and other companies is not something for the Commission to be proud of.  Its just not.  In this case, the relationship derives from the product design elements of the Intel settlement.  Remember this language?

Respondent shall not make any engineering or design change to a Relevant Product if that change (1) degrades the performance of a Relevant Product sold by a competitor of Respondent and (2) does not provide an actual benefit to the Relevant Product sold by Respondent, including without limitation any improvement in performance, operation, cost, manufacturability, reliability, compatibility, or ability to operate or enhance the operation of another product; provided, however, that any degradation of the performance of a competing product shall not itself be deemed to be a benefit to the Relevant Product sold by Respondent. Respondent shall have the burden of demonstrating that any engineering or design change at issue complies with Section V. of this Order.

I’m sure Intel’s lawyers and engineers have a fine relationship with the FTC.  But lets not mistake that with agency success or something that consumers should celebrate.

Never mistake activity with achievement.

Filed under: antitrust, federal trade commission, technology

TOTM readers know that I’ve long been skeptical of claims that expansive use of Section 5 of the FTC Act will prove productive for consumers.  I’ve been critical of recent applications of Section 5 such as Intel and N-Data.  Now comes yet another FTC consent decree in PoolCorp.  I’m still skeptical.  Indeed, PoolCorp appears to provide ammunition for those (like me) who have criticized the Commission’s stance on expansive use of Section 5 precisely upon the grounds that it can and will be applied to conduct that is either competitively neutral or even procompetitive.

Commissioner Rosch’s dissent makes many of the key points.  Indeed his opening line gets straight to the point: “This case presents the novel situation of a company willing to enter into a consent decree notwithstanding a lack of evidence indicating that a violation has occurred.”

Before getting to specifics, the sharp disagreement between the majority and Commissioner Rosch on both the most basic of facts and economic principles is hard to miss, and gives the entire exchange a rather peculiar feel.  Here’s an example.  The majority describes the case as a standard application of a “Raising Rivals’ Costs” theory, citing Krattenmaker & Salop.  The allegation is that:

Specifically, the Complaint alleges that PoolCorp, which possesses monopoly power in many local distribution markets, threatened its suppliers (i.e., pool product manufacturers) that it would no longer distribute a manufacturer’s products on a nationwide basis if that manufacturer sold its products to a new distributor that was attempting to enter a local market.

The conditions that must be satisfied for an exclusionary theory are well known.  Substantial foreclosure of a critical input is one such necessary, but not sufficient, condition for the possibility of competitive harm.  The majority argues that PoolCorp “foreclosed new entrants from obtaining pool products from manufacturers representing more than 70 percent of sales.”  But standard antitrust analysis tells us that such foreclosure is not enough to support an inference of harm to competition.  First, we must ask whether the threatened refusals to deal actually had any impact on the allegedly impaired rivals or whether they were able to easily realign supply contracts?  Second, and most fundamentally, we must ask whether the conduct at issue had any impact on competition itself, or upon consumers in the form of higher prices, reduced output, lower quality, etc.?

Here is where things get, well, weird.

Did PoolCorp’s actions actually disadvantage any rivals?  The majority concedes that “Some of PoolCorp’s targets were able to survive by purchasing pool products from other distributors rather than directly from the
manufacturers.” Well, that doesn’t sound too bad for the Commission.  If a few firms survived but others were excluded (surely the implication of the sentence), we should continue our analysis.  But was there actually any foreclosure?

Here’s Commissioner Rosch in dissent:

“The investigation revealed that PoolCorp’s demands were not honored by manufacturers.”

What about those potential entrants that were excluded — the ones that were not so lucky as the surviving targets the majority mentions?

“Another problem with this case is that no entrants were actually excluded.”

Yikes.  One gets the impression that the Commissioners are not talking about the same case.  The majority is full of broad generalizations and assertions but no real discussion of facts.  Commissioner Rosch’s dissent offers a bit more on the exclusion claim:

“The only claim to the contrary is in Paragraph 28 of the complaint, which alleges that in Baton Rouge, “the new entrant’s business ultimately failed in 2005” because of the lack of “direct access to the manufacturers’ pool products.” The complaint neglects to mention that this entrant was able to secure supplies from other sources and later sold itself to an established out-of-state distributor. Since then, that distributor, which has had full access to supplies, has been a highly effective rival to PoolCorp. Thus, to the extent PoolCorp’s threats had an effect in Baton Rouge, they may have led to more, not less, competition.”

Not good for the Commission majority.  But injury to rivals isn’t our primary concern.  What about injury to competition?  Here, things get even murkier.  The majority plainly asserts “the harm to consumers that occurred as a result was substantial” and “consumers had fewer choices and were forced to pay higher prices for pool products.”  Sounds relatively straightforward.  Once again, Commissioner Rosch’s dissent exposes disagreement over the most basic of antitrust-relevant facts (emphasis added):

“A third problem with this case is that there was no consumer injury. The investigation did not uncover price increases, service degradation, or other anticompetitive effects in any local markets.”

Rosch goes on:

The basis for the majority statement’s claim that there was “substantial” consumer harm resulting from the alleged conduct of Respondent is a mystery. The complaint contains no factual allegations of any harm to consumers, much less “substantial” harm. Likewise, there are no factual allegations in the complaint corroborating the majority’s claim that consumers “had fewer choices and were forced to pay higher prices for pool products.”

This is a real mess.  Proponents of an expanded application of Section 5 (including Commissioner Rosch) frequently argue that it is capable of being applied with certain limiting principles, including demonstration of consumer injury.  To his credit, Commissioner Rosch is sticking to his guns on consumer injury as a limiting principle here.  But the evidence that the Section 5 is too enticing a tool for the Commission in cases lacking consumer injury is mounting.  The public disagreement over basic facts — is there harm to consumers or not?  was there foreclosure or not?  if so, how much? — also does not inspire confidence that the Commission’s discretion in applying Section 5 in cases where the conduct lies outside the scope of the Sherman Act for technical reasons will be applied in a manner consistent with the consumer welfare goals of antitrust.

Those are general problems with Section 5.  As applied here, the majority opinion is also analytically incoherent.   The Commission majority must deal with the fact that there appears to be no real foreclosure as a result of PoolCorp’s conduct — recall that what the majority described as a few successful surviving firms turns out to be no actual exclusion whatsoever.  Despite the fact that absence of foreclosure or injury to rivals in a case like this is typically the end of the line for the plaintiff, the Commission doesn’t appear to be bothered at all by the lack of evidence of harm to rivals or consumers.  Responding to the fact of no foreclosure, the Commission writes:

“However, we assess consumer harm relative to market conditions that would have existed but for the respondent’s allegedly unlawful conduct. Here, PoolCorp’s strategy significantly increased a new entrant’s costs of obtaining pool products. Conduct by a monopolist that raises rivals’ costs can harm competition by creating an artificial price floor or deterring investments in quality, service and innovation.”

This doesn’t make any sense.  If there is no foreclosure, there is no risk of consumer harm.  Period.  Indeed, while the majority asserts it, there appears to be no actual evidence of consumer harm.  At a minimum, its up for serious debate.  If it were true that PoolCorp’s strategy “increased a few entrant’s cost of obtaining pool products” in practice, and that there were sufficient exclusion to create additional market power, two things would be true: (1) one would observe harm to the rival, and (2) there would be harm to competition in the form of higher prices or reduced output.  Apparently, the Commission could must neither — even when challenged by Commissioner Rosch’s dissent to do so.

One last observation.  Commissioner Rosch’s dissent hints that economic analysis in the case demonstrated that “even if” PoolCorp fully foreclosed its rivals the harm to consumers would be minimal and a waste of Commission resources.   Query: what role are agency economists playing in the Commission’s Section5 agenda?  Unfortunately, it does not appear to be a significant one.

Filed under: antitrust, economics, exclusionary conduct, federal trade commission, monopolization

My last two posts on search bias (here and here) have analyzed and critiqued Edelman & Lockwood’s small study on search bias.  This post extends this same methodology and analysis to a random sample of 1,000 Google queries (released by AOL in 2006), to develop a more comprehensive understanding of own-content bias.  As I’ve stressed, these analyses provide useful—but importantly limited—glimpses into the nature of the search engine environment.  While these studies are descriptively helpful, actual harm to consumer welfare must always be demonstrated before cognizable antitrust injuries arise.  And naked identifications of own-content bias simply do not inherently translate to negative effects on consumers (see, e.g., here and here for more comprehensive discussion).

Now that’s settled, let’s jump into the results of the 1,000 random search query study.

How Do Search Engines Rank Their Own Content?

Consistent with our earlier analysis, a starting off point for thinking about measuring differentiation among search engines with respect to placing their own content is to compare how a search engine ranks its own content relative to how other engines place that same content (e.g. to compare how Google ranks “Google Maps” relative to how Bing or Blekko rank it).   Restricting attention exclusively to the first or “top” position, I find that Google simply does not refer to its own content in over 90% of queries.  Similarly, Bing does not reference Microsoft content in 85.4% of queries.  Google refers to its own content in the first position when other search engines do not in only 6.7% of queries; while Bing does so over twice as often, referencing Microsoft content that no other engine references in the first position in 14.3% of queries.  The following two charts illustrate the percentage of Google or Bing first position results, respectively, dedicated to own content across search engines.

The most striking aspect of these results is the small fraction of queries for which placement of own-content is relevant.  The results are similar when I expand consideration to the entire first page of results; interestingly, however, while the levels of own-content bias are similar considering the entire first page of results, Bing is far more likely than Google to reference its own content in its very first results position.

Examining Search Engine “Bias” on Google

Two distinct differences between the results of this larger study and my replication of Edelman & Lockwood emerge: (1) Google and Bing refer to their own content in a significantly smaller percentage of cases here than in the non-random sample; and (2) in general, when Google or Bing does rank its own content highly, rival engines are unlikely to similarly rank that same content.

The following table reports the percentages of queries for which Google’s ranking of its own content and its rivals’ rankings of that same content differ significantly. When Google refers to its own content within its Top 5 results, at least one other engine similarly ranks this content for only about 5% of queries.

The following table presents the likelihood that Google content will appear in a Google search, relative to searches conducted on rival engines (reported in odds ratios).

The first and third columns report results indicating that Google affiliated content is more likely to appear in a search executed on Google rather than rival engines.  Google is approximately 16 times more likely to refer to its own content on its first page as is any other engine.  Bing and Blekko are both significantly less likely to refer to Google content in their first result or on their first page than Google is to refer to Google content within these same parameters.  In each iteration, Bing is more likely to refer to Google content than is Blekko, and in the case of the first result, Bing is much more likely to do so.  Again, to be clear, the fact that Bing is more likely to rank its own content is not suggestive that the practice is problematic.  Quite the contrary, the demonstration that firms both with and without market power in search (to the extent that is a relevant antitrust market) engage in similar conduct the correct inference is that there must be efficiency explanations for the practice.  The standard response, of course, is that the competitive implications of a practice are different when a firm with market power does it.  That’s not exactly right.  It is true that firms with market power can engage in conduct that gives rise to potential antitrust problems when the same conduct from a firm without market power would not; however, when firms without market power engage in the same business practice it demands that antitrust analysts seriously consider the efficiency implications of the practice.  In other words, there is nothing in the mantra that things are “different” when larger firms do them that undercut potential efficiency explanations.

Examining Search Engine “Bias” on Bing

For queries within the larger sample, Bing refers to Microsoft content within its Top 1 and 3 results when no other engine similarly references this content for a slightly smaller percentage of queries than in my Edelman & Lockwood replication.  Yet Bing continues to exhibit a strong tendency to rank Microsoft content more prominently than rival engines.  For example, when Bing refers to Microsoft content within its Top 5 results, other engines agree with this ranking for less than 2% of queries; and Bing refers to Microsoft content that no other engine does within its Top 3 results for 99.2% of queries:

Regression analysis further illustrates Bing’s propensity to reference Microsoft content that rivals do not.  The following table reports the likelihood that Microsoft content is referred to in a Bing search as compared to searches on rival engines (again reported in odds ratios).

Bing refers to Microsoft content in its first results position about 56 times more often than rival engines refer to Microsoft content in this same position.  Across the entire first page, Microsoft content appears on a Bing search about 25 times more often than it does on any other engine.  Both Google and Blekko are accordingly significantly less likely to reference Microsoft content.  Notice further that, contrary to the findings in the smaller study, Google is slightly less likely to return Microsoft content than is Blekko, both in its first results position and across its entire first page.

A Closer Look at Google v. Bing

 Consistent with the smaller sample, I find again that Bing is more biased than Google using these metrics.  In other words, Bing ranks its own content significantly more highly than its rivals do more frequently then Google does, although the discrepancy between the two engines is smaller here than in the study of Edelman & Lockwood’s queries.  As noted above, Bing is over twice as likely to refer to own content in first results position than is Google.

Figures 7 and 8 present the same data reported above, but with Blekko removed, to allow for a direct visual comparison of own-content bias between Google and Bing.

Consistent with my earlier results, Bing appears to consistently rank Microsoft content higher than Google ranks the same (Microsoft) content more frequently than Google ranks Google content more prominently than Bing ranks the same (Google) content.

This result is particularly interesting given the strength of the accusations condemning Google for behaving in precisely this way.  That Bing references Microsoft content just as often as—and frequently even more often than!—Google references its own content strongly suggests that this behavior is a function of procompetitive product differentiation, and not abuse of market power.  But I’ll save an in-depth analysis of this issue for my next post, where I’ll also discuss whether any of the results reported in this series of posts support anticompetitive foreclosure theories or otherwise suggest antitrust intervention is warranted.

Filed under: antitrust, economics, google, Internet search, law and economics, technology Tagged: Bias, Bing, Blekko, google, microsoft, Web search engine

Herb Hovenkamp has posted his new casebook on Innovation and Competition Policy to SSRN, where one can download the chapters individually.  This is a very nice development for students; and the book seems perfectly fit for a course on Innovation and Competition Policy — for which it was designed — but also appropriate for a variety of similarly-themed seminar courses.

Professor Hovenkamp describes the aims of the book here:

This is not an “IP/antitrust” casebook.  There are already excellent books in that field.  Only about half of the principal cases printed in this book are antitrust decisions.  I use this book to present issues of innovation and competition policy to students in a broader context, examining not only antitrust but also the intellectual property laws and including shorter examination of several other topics, such as telecommunications, net neutrality, and competition issues raised by the DMCA.  Brief attention is also given to the industrial organization literature on innovation.

This casebook begins with a chapter on patent scope and its implications for innovation, with brief coverage of the Schumpeter-Arrow literature and the problem of sequential innovation.  Then it looks in some detail at the problem of complementary relationships, addressed in antitrust mainly through the law of tying arrangements.  After that is a chapter on remedies issues, followed by chapters on the patent system, copyright, practices that restrain innovation, and intellectual property misuse.  Another chapter covers exclusionary practices and another a wide variety of collaborative arrangements, including pooling, standard setting, blanket licenses, and the like.  The final chapter focuses on vertical restraints and the post-sale (exhaustion) doctrine.

I hope to keep this book up to date on a regular basis and welcome any suggestions for revision or inclusion.  My overall goal, however, is to hold the book somewhere in the range of its current length.

 

Filed under: antitrust

Here’s the link to the conference, and the program, which covers all angles of social media and the law.  Predictably, my interest here is competition policy — I’ll be on the 10:45 panel discussing those issues along with: Michael Altschul (CTIA), Nicolas Economides (NYU), Adam Thierer (GMU), and Moderator Steve Wildman (MSU).

The link to the webcast is here.  If you’re there, please come and say hello after the panel.

Filed under: antitrust, technology

In my last post, I discussed Edelman & Lockwood’s (E&L’s) attempt to catch search engines in the act of biasing their results—as well as their failure to actually do so.  In this post, I present my own results from replicating their study.  Unlike E&L, I find that Bing is consistently more biased than Google, for reasons discussed further below, although neither engine references its own content as frequently as E&L suggest.

I ran searches for E&L’s original 32 non-random queries using three different search engines—Google, Bing, and Blekko—between June 23 and July 5 of this year.  This replication is useful, as search technology has changed dramatically since E&L recorded their results in August 2010.  Bing now powers Yahoo, and Blekko has had more time to mature and enhance its results.  Blekko serves as a helpful “control” engine in my study, as it is totally independent of Google and Microsoft, and so has no incentive to refer to Google or Microsoft content unless it is actually relevant to users.  In addition, because Blekko’s model is significantly different than Google and Microsoft’s, if results on all three engines agree that specific content is highly relevant to the user query, it lends significant credibility to the notion that the content places well on the merits rather than being attributable to bias or other factors.

How Do Search Engines Rank Their Own Content?

Focusing solely upon the first position, Google refers to its own products or services when no other search engine does in 21.9% of queries; in another 21.9% of queries, both Google and at least one other search engine rival (i.e. Bing or Blekko) refer to the same Google content with their first links.

But restricting focus upon the first position is too narrow.  Assuming that all instances in which Google or Bing rank their own content first and rivals do not amounts to bias would be a mistake; such a restrictive definition would include cases in which all three search engines rank the same content prominently—agreeing that it is highly relevant—although not all in the first position. 

The entire first page of results provides a more informative comparison.  I find that Google and at least one other engine return Google content on the first page of results in 7% of the queries.  Google refers to its own content on the first page of results without agreement from either rival search engine in only 7.9% of the queries.  Meanwhile, Bing and at least one other engine refer to Microsoft content in 3.2% of the queries.  Bing references Microsoft content without agreement from either Google or Blekko in 13.2% of the queries:

This evidence indicates that Google’s ranking of its own content differs significantly from its rivals in only 7.9% of queries, and that when Google ranks its own content prominently it is generally perceived as relevant.  Further, these results suggest that Bing’s organic search results are significantly more biased in favor of Microsoft content than Google’s search results are in favor of Google’s content.

Examining Search Engine “Bias” on Google

The following table presents the percentages of queries for which Google’s ranking of its own content differs significantly from its rivals’ ranking of that same content.

Note that percentages below 50 in this table indicate that rival search engines generally see the referenced Google content as relevant and independently believe that it should be ranked similarly.

So when Google ranks its own content highly, at least one rival engine typically agrees with this ranking; for example, when Google places its own content in its Top 3 results, at least one rival agrees with this ranking in over 70% of queries.  Bing especially agrees with Google’s rankings of Google content within its Top 3 and 5 results, failing to include Google content that Google ranks similarly in only a little more than a third of queries.

Examining Search Engine “Bias” on Bing

Bing refers to Microsoft content in its search results far more frequently than its rivals reference the same Microsoft content.  For example, Bing’s top result references Microsoft content for 5 queries, while neither Google nor Blekko ever rank Microsoft content in the first position:

This table illustrates the significant discrepancies between Bing’s treatment of its own Microsoft content relative to Google and Blekko.  Neither rival engine refers to Microsoft content Bing ranks within its Top 3 results; Google and Blekko do not include any Microsoft content Bing refers to on the first page of results in nearly 80% of queries.

Moreover, Bing frequently ranks Microsoft content highly even when rival engines do not refer to the same content at all in the first page of results.  For example, of the 5 queries for which Bing ranks Microsoft content in its top result, Google refers to only one of these 5 within its first page of results, while Blekko refers to none.  Even when comparing results across each engine’s full page of results, Google and Blekko only agree with Bing’s referral of Microsoft content in 20.4% of queries.

Although there are not enough Bing data to test results in the first position in E&L’s sample, Microsoft content appears as results on the first page of a Bing search about 7 times more often than Microsoft content appears on the first page of rival engines.  Also, Google is much more likely to refer to Microsoft content than Blekko, though both refer to significantly less Microsoft content than Bing.

A Closer Look at Google v. Bing

On E&L’s own terms, Bing results are more biased than Google results; rivals are more likely to agree with Google’s algorithmic assessment (than with Bing’s) that its own content is relevant to user queries.  Bing refers to Microsoft content other engines do not rank at all more often than Google refers its own content without any agreement from rivals.  Figures 1 and 2 display the same data presented above in order to facilitate direct comparisons between Google and Bing.

As Figures 1 and 2 illustrate, Bing search results for these 32 queries are more frequently “biased” in favor of its own content than are Google’s.  The bias is greatest for the Top 1 and Top 3 search results.

My study finds that Bing exhibits far more “bias” than E&L identify in their earlier analysis.  For example, in E&L’s study, Bing does not refer to Microsoft content at all in its Top 1 or Top 3 results; moreover, Bing refers to Microsoft content within its entire first page 11 times, while Google and Yahoo refer to Microsoft content 8 and 9 times, respectively.  Most likely, the significant increase in Bing’s “bias” differential is largely a function of Bing’s introduction of localized and personalized search results and represents serious competitive efforts on Bing’s behalf.

Again, it’s important to stress E&L’s limited and non-random sample, and to emphasize the danger of making strong inferences about the general nature or magnitude of search bias based upon these data alone.  However, the data indicate that Google’s own-content bias is relatively small even in a sample collected precisely to focus upon the queries most likely to generate it.  In fact—as I’ll discuss in my next post—own-content bias occurs even less often in a more representative sample of queries, strongly suggesting that such bias does not raise the competitive concerns attributed to it.

Filed under: antitrust, business, economics, google, Internet search, law and economics, monopolization, technology Tagged: antitrust, Bias, Bing, Blekko, google, microsoft, search, Web search engine, Yahoo

Last week I linked to my new study on “search bias.”  At the time I noted I would have a few blog posts in the coming days discussing the study.  This is the first of those posts.

A lot of the frenzy around Google turns on “search bias,” that is, instances when Google references its own links or its own content (such as Google Maps or YouTube) in its search results pages.  Some search engine critics condemn such references as inherently suspect and almost by their very nature harmful to consumers.  Yet these allegations suffer from several crucial shortcomings.  As I’ve noted (see, e.g., here and here), these naked assertions of discrimination are insufficient to state a cognizable antitrust claim, divorced as they are from consumer welfare analysis.  Indeed, such “discrimination” (some would call it “vertical integration”) has a well-recognized propensity to yield either pro-competitive or competitively neutral outcomes, rather than concrete consumer welfare losses.  Moreover, because search engines exist in an incredibly dynamic environment, marked by constant innovation and fierce competition, we would expect different engines, utilizing different algorithms and appealing to different consumer preferences, to emerge.  So when search engines engage in product differentiation of this sort, there is no reason to be immediately suspicious of these business decisions.

No reason to be immediately suspicious – but there could, conceivably, be a problem.  If there is, we would want to see empirical evidence of it—of both the existence of bias, as well as the consumer harm emanating from it.  But one of the most notable features of this debate is the striking lack of empirical data.  Surprisingly little research has been done in this area, despite frequent assertions that own-content bias is commonly practiced and poses a significant threat to consumers (see, e.g., here).

My paper is an attempt to rectify this.  In the paper, I investigate the available data to determine whether and to what extent own-content bias actually occurs, by analyzing and replicating a study by Ben Edelman and Ben Lockwood (E&L) and conducting my own study of a larger, randomized set of search queries.

In this post I discuss my analysis and critique of E&L; in future posts I’ll present my own replication of their study, as well as the results of my larger study of 1,000 random search queries.  Finally, I’ll analyze whether any of these findings support anticompetitive foreclosure theories or are otherwise sufficient to warrant antitrust intervention.

E&L “investigate . . . [w]hether search engines’ algorithmic results favor their own services, and if so, which search engines do most, to what extent, and in what substantive areas.”  Their approach is to measure the difference in how frequently search engines refer to their own content relative to how often their rivals do so.

One note at the outset:  While this approach provides useful descriptive facts about the differences between how search engines link to their own content, it does little to inform antitrust analysis because Edelman and Lockwood begin with the rather odd claim that competition among differentiated search engines for consumers is a puzzle that creates an air of suspicion around the practice—in fact, they claim that “it is hard to see why results would vary . . . across search engines.”  This assertion, of course, is simply absurd.  Indeed, Danny Sullivan provides a nice critique of this claim:

It’s not hard to see why search engine result differ at all.  Search engines each use their own “algorithm” to cull through the pages they’ve collected from across the web, to decide which pages to rank first . . . . Google has a different algorithm than Bing.  In short, Google will have a different opinion than Bing.  Opinions in the search world, as with the real world, don’t always agree.

Moreover, this assertion completely discounts both the vigorous competitive product differentiation that occurs in nearly all modern product markets as well as the obvious selection effects at work in own-content bias (Google users likely prefer Google content).  This combination detaches E&L’s analysis from the consumer welfare perspective, and thus antitrust policy relevance, despite their claims to the contrary (and the fact that their results actually exhibit very little bias).

Several methodological issues undermine the policy relevance of E&L’s analysis.  First, they hand select 32 search queries and execute searches on Google, Bing, Yahoo, AOL and Ask.  This hand-selected non-random sample of 32 search queries cannot generate reliable inferences regarding the frequency of bias—a critical ingredient to understanding its potential competitive effects.  Indeed, E&L acknowledge their queries are chosen precisely because they are likely to return results including Google content (e.g., email, images, maps, video, etc.).

E&L analyze the top three organic search results for each query on each engine.  They find that 19% of all results across all five search engines refer to content affiliated with one of them.  They focus upon the first three organic results and report that Google refers to its own content in the first (“top”) position about twice as often as Yahoo and Bing refer to Google content in this position.  Additionally, they note that Yahoo is more biased than Google when evaluating the first page rather than only the first organic search result.

E&L also offer a strained attempt to deal with the possibility of competitive product differentiation among search engines.  They examine differences among search engines’ references to their own content by “compar[ing] the frequency with which a search engine links to its own pages, relative to the frequency with which other search engines link to that search engine’s pages.”  However, their evidence undermines claims that Google’s own-content bias is significant and systematic relative to its rivals’.  In fact, almost zero evidence of statistically significant own-content bias by Google emerges.

E&L find, in general, Google is no more likely to refer to its own content than other search engines are to refer to that same content, and across the vast majority of their results, E&L find Google search results are not statistically more likely to refer to Google content than rivals’ search results.

The same data can be examined to test the likelihood that a search engine will refer to content affiliated with a rival search engine.  Rather than exhibiting bias in favor of an engine’s own content, a “biased” search engine might conceivably be less likely to refer to content affiliated with its rivals.  The table below reports the likelihood (in odds ratios) that a search engine’s content appears in a rival engine’s results.

The first two columns of the table demonstrate that both Google and Yahoo content are referred to in the first search result less frequently in rivals’ search results than in their own.  Although Bing does not have enough data for robust analysis of results in the first position in E&L’s original analysis, the next three columns in Table 1 illustrate that all three engines’ (Google, Yahoo, and Bing) content appears less often on the first page of rivals’ search results than on their own search engine.  However, only Yahoo’s results differ significantly from 1.  As between Google and Bing, the results are notably similar.

E&L also make a limited attempt to consider the possibility that favorable placement of a search engine’s own content is a response to user preferences rather than anticompetitive motives.  Using click-through data, they find, unsurprisingly, that the first search result tends to receive the most clicks (72%, on average).  They then identify one search term for which they believe bias plays an important role in driving user traffic.  For the search query “email,” Google ranks its own Gmail first and Yahoo Mail second; however, E&L also find that Gmail receives only 29% of clicks while Yahoo Mail receives 54%.  E&L claim that this finding strongly indicates that Google is engaging in conduct that harms users and undermines their search experience.

However, from a competition analysis perspective, that inference is not sound.  Indeed, the fact that the second-listed Yahoo Mail link received the majority of clicks demonstrates precisely that Yahoo was not competitively foreclosed from access to users.  Taken collectively, E&L are not able to muster evidence of potential competitive foreclosure.

While it’s important to have an evidence-based discussion surrounding search engine results and their competitive implications, it’s also critical to recognize that bias alone is not evidence of competitive harm.  Indeed, any identified bias must be evaluated in the appropriate antitrust economic context of competition and consumers, rather than individual competitors and websites.  E&L’s analysis provides a useful starting point for describing how search engines differ in their referrals to their own content.  But, taken at face value, their results actually demonstrate little or no evidence of bias—let alone that the little bias they do find is causing any consumer harm.

As I’ll discuss in coming posts, evidence gathered since E&L conducted their study further suggests their claims that bias is prevalent, inherently harmful, and sufficient to warrant antitrust intervention are overstated and misguided.

Filed under: antitrust, business, economics, google, Internet search, law and economics, monopolization, technology Tagged: antitrust, Bing, google, search, search bias, Search Engines, search neutrality, Web search engine, Yahoo