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ICLE Issue Brief Amazon has largely avoided the crosshairs of antitrust enforcers to date (leaving aside the embarrassing dangerous threats of arbitrary enforcement by some US presidential candidates). The reasons seem obvious: in the US it handles a mere 5% of all retail sales (with lower shares in the EU), and it consistently provides access to a wide array of affordable goods.
Amazon has largely avoided the crosshairs of antitrust enforcers to date (leaving aside the embarrassing dangerous threats of arbitrary enforcement by some US presidential candidates). The reasons seem obvious: in the US it handles a mere 5% of all retail sales (with lower shares in the EU), and it consistently provides access to a wide array of affordable goods. Yet even with Amazon’s obvious lack of dominance in the general retail market, the EU and some of its member states are opening investigations.
This isn’t new: the EU and its member states have pursued many competition claims against the big tech platforms. In the last two years alone, the EU imposed over $9B USD in fines on Google for “harms” that were highly speculative and hard to square with concern for consumers.
The theories of harm in the pending investigations of Amazon demonstrate some of the same confused antitrust theories that cropped up in the EU Google Shopping case. Platforms like Amazon and Google are criticized for allegedly discriminating against certain platform users who are also competitors or potential competitors of one or more of the platform’s services (or, in some cases, the platform itself).
Commissioner Margarethe Vestager’s probe into Amazon came to light in September, and centers on whether Amazon is illegally using its dominant position vis-á-vis third party merchants on its platforms in order to obtain data that it then uses either to promote its own direct sales, or else to develop competing products under its private label brands. More recently, Austria and Germany have launched separate investigations of Amazon rooted in much the same concerns as those of the European Commission.
The Austrian investigation will examine “whether Amazon abused its dominant position against retailers, that are active on the Amazon market place.” According to Andreas Mundt, president of the German competition authority, “Amazon functions as a kind of ‘gatekeeper’ [for sellers’ access] to customers. Its double role as the largest retailer and largest marketplace has the potential to hinder other sellers on its platform.” The German investigation also focuses on whether the terms of the contractual relationships that third-party sellers enter into with Amazon are unfair because these sellers are “dependent” on it.
Claims of competitive harm arising from this so-called vertical discrimination or bias are light on both theory and empirics. One of the fundamental, erroneous assumptions upon which they are built is the alleged “essentiality” of the underlying platform or input. But these cases are more often based on stories of firms that, unfortunately, chose to build their businesses to rely on a specific platform. In other words, their own decisions — from which they substantially benefited — made their investments highly “asset specific” and thus vulnerable to otherwise avoidable risks. When a platform on which these businesses rely makes a disruptive move, the third parties cry foul, even though the platform was not — nor should have been — under any obligation to preserve the status quo on behalf of third parties.
This issue brief explores the flaws in designating Amazon as something like an “essential facility,” as well as the attendant errors of treating the distribution mechanism of Internet-based commerce as though it were a market definition, and the problems with failing to learn the innovation-damaging effects of the Microsoft case.
Click here to read the full issue brief.
Scholarship Abstract The Supreme Court’s decision in Ohio, et al v Am Express Co, et al (‘Amex’)[1] is uniquely important for the antitrust analysis of firms . . .
The Supreme Court’s decision in Ohio, et al v Am Express Co, et al (‘Amex’)[1] is uniquely important for the antitrust analysis of firms in the modern platform economy. Although it is undoubtedly not the last word on the subject, the case represents the Court’s first comprehensive effort to address the thorny and previously indeterminate question of how courts should define the relevant market and assess competitive effects in antitrust cases involving two-sided or multi-sided platforms (‘two-sided markets’). In this article, I evaluate the Supreme Court’s approach to this question, discuss the economic and legal underpinnings of how it approached market definition and effects analysis, and demonstrate why the primary criticisms of the Court’s decision are misguided. While the Court’s approach has been roundly decried by some, its conclusion—that both sides of a two-sided market must be considered in defining the relevant market and evaluating the existence and consequences of a firm’s exercise of market power—is, indeed, the proper one.
[1] (2018) 138 S Ct 2274 (Slip Opinion) [hereinafter, ‘Amex’ and ‘Amex Slip Op.’].
ICLE Issue Brief Last month, the European Commission slapped another fine upon Google for infringing European competition rules (€1.49 billion this time). This brings Google’s contribution to the EU budget to a dizzying total of €8.25 billion (to put this into perspective, the total EU budget for 2019 is €165.8 billion).
“I told you so! The European Union just slapped a Five Billion Dollar fine on one of our great companies, Google. They truly have taken advantage of the U.S., but not for long!”
Donald Trump
“When I look into merger control, antitrust control, state aid control, I find no U.S. bias.”
Margrethe Vestager
Last month, the European Commission slapped another fine upon Google for infringing European competition rules (€1.49 billion this time). This brings Google’s contribution to the EU budget to a dizzying total of €8.25 billion (to put this into perspective, the total EU budget for 2019 is €165.8 billion). Given this massive number, and the geographic location of Google’s headquarters, it is perhaps not surprising that some commentators have raised concerns about potential protectionism on the Commission’s part.
This is nothing new. Critics have long argued that European competition law has been used to shield European industries from their large American rivals. From the notorious decision to block the GE/Honeywell merger in 2001, to more recent enforcement activities in the tech sector, every European intervention against a US company tends to usher in a fresh wave of accusations.
This criticism has come from both sides of the US political aisle, and both Donald Trump (quoted above) and Barack Obama have led the charge during their respective Administrations. Referring to European investigations against US tech companies such as Facebook and Google, then President Obama famously decried that:
Sometimes their vendors—their service providers—who can’t compete with ours, are essentially trying to set up some roadblocks for our companies to operate effectively there. We have owned the Internet. Our companies have created it, expanded it, perfected it, in ways they can’t compete. And oftentimes what is portrayed as high-minded positions on issues sometimes is designed to carve out their commercial interests.
But is there any merit to these claims of protectionism? A quick look at the monetary penalties assessed by recent decisions of the European Commission reveals that its enforcement activities (under article 101 and 102 TFEU, excluding cartels) have disproportionately affected US companies. Since the entry into force of Regulation 1/2003 (the main piece of legislation that implements the competition provisions of the EU treaties), US companies have been fined a total of €10.91 billion by the European Commission, compared to €1.17 billion for their European counterparts. On its face, this seems to stand in stark contrast to the findings of a recent study by Anu Bradford, Robert Jackson, and Jonathon Zytnick, which rejects claims that EU merger control is biased against US firms (findings that are certainly bolstered by the Commission’s condemnation of the contemplated merger between Siemens and Alstom).
As we explain, the harsh fines inflicted upon US firms are not necessarily evidence of protectionism.
Instead, they are likely a result of the Commission’s decision to focus significant attention on the tech sector. Because the vast majority of large tech firms are US-based, all else equal, it is to be expected that the majority of investigations and enforcement actions would involve US firms. At the same time, for reasons also discussed below, the Commission’s tech-industry focus may tend to lead to larger fines when infringements are found.
Nevertheless, some caution is warranted with this conclusion. It bears noting that the Commission is a political body, and, as we discuss below, it is hardly structured to be immune to domestic political influences that may tend toward protectionism. The decision to prioritize enforcement in the tech sector is not taken in a vacuum. Whether this policy preference is down to legitimate concerns about high-tech markets or to (potentially unconscious) protectionism is almost impossible to tell. Similarly, neither a finding of infringement nor the magnitude of the fine imposed is mechanical: Even if its outcomes generally correspond with the expected outcomes from a country-neutral, tech-sector focus, the specific decisions the Commission makes, as well as the magnitude of the fines it imposes, may show a protectionist bias. Without a more robust statistical analysis it is impossible to rule out entirely the possibility that these decisions are influenced by a protectionist impulse, as well.
Scholarship In this article, Geoffrey Manne evaluates the Supreme Court’s approach, discusses the economic and legal underpinnings of how it approached market definition and effects analysis, and demonstrates why the primary criticisms of the Court’s Ohio v American Express decision are misguided.
In his commentary, Geoffrey A. Manne supports the Supreme Court’s decision, and offers insightful analysis of why, to his mind, the decision properly identifies the competitive process of platforms.
Tim Wu’s critique, on the other hand, raises concerns as to the treatment of evidence and theory in this case and the legacy of the ruling, which may undermine the efficacy of future antitrust enforcement.
The Supreme Court’s decision in Ohio, et al v Am Express Co, et al (‘Amex’) is uniquely important for the antitrust analysis of firms in the modern platform economy. Although it is undoubtedly not the last word on the subject, the case represents the Court’s first comprehensive effort to address the thorny and previously indeterminate question of how courts should define the relevant market and assess competitive effects in antitrust cases involving two-sided or multi-sided platforms (‘two-sided markets’). In this article, I evaluate the Supreme Court’s approach to this question, discuss the economic and legal underpinnings of how it approached market definition and effects analysis, and demonstrate why the primary criticisms of the Court’s decision are misguided. While the Court’s approach has been roundly decried by some, its conclusion—that both sides of a two-sided market must be considered in defining the relevant market and evaluating the existence and consequences of a firm’s exercise of market power—is, indeed, the proper one.
Click here to read the full paper.
ICLE Issue Brief How does a market’s structure affect innovation? This crucial question has occupied the world’s brightest economists for almost a century, from Schumpeter who found that monopoly was optimal, through Arrow who concluded that competitive market structures were key, to the endogenous growth scholars who empirically derived an inverted-U relationship between market concentration and innovation.
How does a market’s structure affect innovation? This crucial question has occupied the world’s brightest economists for almost a century, from Schumpeter who found that monopoly was optimal, through Arrow who concluded that competitive market structures were key, to the endogenous growth scholars who empirically derived an inverted-U relationship between market concentration and innovation. Despite these pioneering contributions to our understanding of competition and innovation, if the past century of innovation economics has taught us anything it is that no market structure is strictly superior at generating innovation. Just as the SCP paradigm ultimately faltered because structural presumptions were a weak predictor of market outcomes, so too have dreams of divining the optimal market structure for innovation. Instead, in any given case, the right market structure likely depends on a plethora of sector- and firm-specific characteristics that range from the size and riskiness of innovation-related investments to the appropriability mechanisms used by firms, regulatory compliance costs, and the rate of technological change, among many others.
Against this backdrop, it may come as a surprise that the European Commission believes it has cracked the innovation market structure conundrum. Throughout its recent competition decisions, the Commission has almost systematically concluded that more firms in any given market will produce greater choice and more innovation for consumers. I call this the “Structuralist Innovation Presumption.” Notably, this presumption seems to have played a pivotal role in the recent Google Android decision (although the text of the Commission’s decision is not yet publicly available).
In what follows I argue that the Structuralist Innovation Presumption is a misguided heuristic that antitrust authorities around the globe would do well to avoid. Although it has been almost unequivocally endorsed by the European Commission, the presumption is at odds with the mainstream economics of innovation. To make matters worse, structuralist innovation also ignores the complex second-order effects that may arise when antitrust intervention tampers with rapidly evolving markets.
Scholarship Abstract Pharmacy benefit managers (PBMs) manage the drug benefits for over 95 percent of Americans with prescription drug coverage. However, conflicts of interest inherent in . . .
Pharmacy benefit managers (PBMs) manage the drug benefits for over 95 percent of Americans with prescription drug coverage. However, conflicts of interest inherent in the PBM business model create perverse incentives for drug price increases. The most significant conflict of interest arises from manufacturer rebates paid to PBMs. PBMs negotiate rebates from drug manufacturers in exchange for giving the manufacturers’ drugs preferred status on a health plan’s formulary. Because the rebates paid to PBMs are typically a percentage of a drug’s list price, drug makers are pressured to increase list prices in order to satisfy PBMs’ demands for higher rebates. Although a portion of the increasing rebate dollars may eventually find its way to patients in the form of lower co-pays, many patients still suffer from the list prices increases. This Article analyzes various proposals to rein in PBM rebates and asserts that, compared to the other proposals, a point-of-sale rebate system maintains many of the benefits of selective contracting while minimizing incentives to increase drug list prices.
Scholarship Although the FTC is well-staffed with highly skilled economists, its approach to data security is disappointingly light on economic analysis. The unfortunate result of this lacuna is an approach to these complex issues lacking in analytical rigor and the humility borne of analysis grounded in sound economics.
Although the FTC is well-staffed with highly skilled economists, its approach to data security is disappointingly light on economic analysis. The unfortunate result of this lacuna is an approach to these complex issues lacking in analytical rigor and the humility borne of analysis grounded in sound economics. In particular, the Commission’s “reasonableness” approach to assessing whether data security practices are unfair under Section 5 of the FTC Act lacks all but the most superficial trappings of the well-established law and economics of torts, from which the concept is borrowed.
In actuality, however, the Commission’s manufactured “reasonableness” standard — which, as its name suggests, purports to evaluate data security practices under a negligence-like framework — actually amounts in effect to a rule of strict liability for any company that collects personally identifiable data. This is manifestly not what Section 5 intends.
In its recent LabMD opinion, the Commission describes its approach as “cost-benefit analysis.” But simply listing out (some) costs and benefits is not the same thing as analyzing them. Recognizing that tradeoffs exist is a good start, but it is not a sufficient end, and “reasonableness” — if it is to be anything other than the mercurial preferences of three FTC commissioners — must contain analytical content.
Persistent and unyielding uncertainty over the contours of the FTC’s data security standard means that companies may be required to accept the reality that, no matter what they do short of the extremes, liability is possible. Worse, there is no way reliably to judge whether conduct (short of obvious fringe cases) is even likely to increase liability risk.
The FTC’s recent LabMD case highlights the scope of the problem and the lack of economic analytical rigor endemic to the FTC’s purported data security standard. To be sure, other factors also contribute to the lack of certainty and sufficient rigor, (i.e., matters of process at the agency), but at root sits a “standardless” standard, masquerading as an economic framework.
This paper explores these defects, paying particular attention to the FTC’s decision in LabMD and subsequent district court proceedings in the case.
Scholarship On November 14, 2018, the Federal Trade Commission (“Commission”) issued an opinion condemning as an antitrust violation trademark settlement agreements between 1-800 Contacts (“1-800”) and fourteen online sellers of contact lenses.
On November 14, 2018, the Federal Trade Commission (“Commission”) issued an opinion condemning as an antitrust violation trademark settlement agreements between 1-800 Contacts (“1-800”) and fourteen online sellers of contact lenses. The settlement agreements arise from trademark infringement claims brought by 1-800 against these online rivals. FTC Chairman Joseph Simons authored the Commission’s opinion, joined by the two Democratic Commissioners, Rohit Chopra and Rebecca Slaughter. In finding that the settlement agreements violated Section 1 of the Sherman Act, Chairman Simons and the majority commit two critical errors—one legal, the other economic—that render the Commission’s opinion, in our view, highly vulnerable to reversal upon its inevitable appeal. With respect to the legal infirmity, the Commission incorrectly concludes the challenged agreements are “inherently suspect,” and applies a truncated rule of reason analysis to assess whether the agreements harmed competition. As explained in Commissioner Noah Phillips’ dissent, a truncated analysis is not supported in this case either by judicial experience or economic learning, and was thus inappropriately applied. The second error is application of an economic analysis to claim the agreements have caused anticompetitive effects that falls woefully short of evidence of consumer injury. We predict reversal by an appellate court.
Scholarship Abstract We develop a model of inter-temporal and intra-temporal price discrimination by monopoly airlines to study the ability of different discriminatory pricing mechanisms to increase . . .
We develop a model of inter-temporal and intra-temporal price discrimination by monopoly airlines to study the ability of different discriminatory pricing mechanisms to increase e?iciency and the associated distributional implications. To estimate the model, we use unique data from international airline markets with flight-level variation in prices across time, cabins, and markets and information on passengers’ reasons for travel and time of purchase. The current pricing practice yields approximately 77% of the first-best welfare. The source of this ine?iciency arises primarily from private information about passenger valuations, not dynamic uncertainty about demand. We also find that if airlines could discriminate between business and leisure passengers, total welfare would improve at the expense of business passenger surplus. Also, replacing the current pricing that involves screening passengers across cabin classes with offering a single cabin class has minimal effect on total welfare.
