In a much anticipated move, the Federal Trade Commission has started a formal monopolization investigation of Google . Because of its dominance in the search market, Google has been in the antitrust crosshairs for some time now, both in the U.S. and in Europe. U.S. antitrust enforcers blocked a proposed joint venture with Yahoo in 2008, and more recently barely cleared the acquisition of travel site software company ITA. The E.U. is already investigating Google over allegations it has abused its dominant position in online search.

I did not intend for this to become a series (Part I), but I underestimated the supply of analysis simultaneously invoking “search bias” as an antitrust concept while waving it about untethered from antitrust’s institutional commitment to protecting consumer welfare.  Harvard Business School Professor Ben Edelman offers the latest iteration in this genre.  We’ve criticized his claims regarding search bias and antitrust on precisely these grounds.

For those who have not been following the Google antitrust saga, Google’s critics allege Google’s algorithmic search results “favor” its own services and products over those of rivals in some indefinite, often unspecified, improper manner.  In particular, Professor Edelman and others — including Google’s business rivals — have argued that Google’s “bias” discriminates most harshly against vertical search engine rivals, i.e. rivals offering search specialized search services.   In framing the theory that “search bias” can be a form of anticompetitive exclusion, Edelman writes:

Search bias is a mechanism whereby Google can leverage its dominance in search, in order to achieve dominance in other sectors.  So for example, if Google wants to be dominant in restaurant reviews, Google can adjust search results, so whenever you search for restaurants, you get a Google reviews page, instead of a Chowhound or Yelp page. That’s good for Google, but it might not be in users’ best interests, particularly if the other services have better information, since they’ve specialized in exactly this area and have been doing it for years.

I’ve wondered what model of antitrust-relevant conduct Professor Edelman, an economist, has in mind.  It is certainly well known in both the theoretical and empirical antitrust economics literature that “bias” is neither necessary nor sufficient for a theory of consumer harm; further, it is fairly obvious as a matter of economics that vertical integration can be, and typically is, both efficient and pro-consumer.  Still further, the bulk of economic theory and evidence on these contracts suggest that they are generally efficient and a normal part of the competitive process generating consumer benefits.  Vertically integrated firms may “bias” their own content in ways that increase output; the relevant point is that self-promoting incentives in a vertical relationship can be either efficient or anticompetitive depending on the circumstances of the situation.  The empirical literature suggests that such relationships are mostly pro-competitive and that restrictions upon firms’ ability to enter them generally reduce consumer welfare.  Edelman is an economist, with a Ph.D. from Harvard no less, and so I find it a bit odd that he has framed the “bias” debate outside of this framework, without regard to consumer welfare, and without reference to any of this literature or perhaps even an awareness of it.  Edelman’s approach appears to be a declaration that a search engine’s placement of its own content, algorithmically or otherwise, constitutes an antitrust harm because it may harm rivals — regardless of the consequences for consumers.  Antitrust observers might parallel this view to the antiquated “harm to competitors is harm to competition” approach of antitrust dating back to the 1960s and prior.  These parallels would be accurate.  Edelman’s view is flatly inconsistent with conventional theories of anticompetitive exclusion presently enforced in modern competition agencies or antitrust courts.

But does Edelman present anything more than just a pre-New Learning-era bias against vertical integration?  I’m beginning to have my doubts.  In an interview in Politico (login required), Professor Edelman offers two quotes that illuminate the search-bias antitrust theory — unfavorably.  Professor Edelman begins with what he describes as a “simple” solution to the search bias problem:

I don’t think it’s out of the question given the complexity of what Google has built and its persistence in entering adjacent, ancillary markets. A much simpler approach, if you like things that are simple, would be to disallow Google from entering these adjacent markets. OK, you want to be dominant in search? Stay out of the vertical business, stay out of content.

The problems here should be obvious.  Yes, a per se prohibition on vertical integration by Google into other economic activities would be quite simple; simple and thoroughly destructive.  The mildly more interesting inquiry is what Edelman proposes Google ought provide.  May, under Edelman’s view of a proper regulatory regime, Google answer address search queries by providing a map?  May Google answer product queries with shopping results?  Is the answer to those questions “yes” if and only if Google serves up some one else’s shopping results or map?  What if consumers prefer Google’s shopping result or map because it is more responsive to the query.  Note once again that Edelman’s answers do not turn on consumer welfare.  His answers are a function of the anticipated impact of Google’s choices to engage in those activities upon rival vertical search engines.  Consumer welfare is not the center of Edelman’s analysis; indeed, it is unclear what role consumer welfare plays in Edelman’s analysis at all.  Edelman simply applies his prior presumption that Google’s conduct, even if it produces real gains for consumers, is or should be actionable as an antitrust claim upon a demonstration that Google’s own services are ranked highly on its own search engine — even if Google-affiliated content is ranked highly by other search engines!  (See Danny Sullivan making that point nicely in this post).  Edelman’s proscription ignores the efficiencies of vertical integration and the benefits to consumers entirely.  It may be possible to articulate a coherent anticompetitive theory involving so-called search bias that could then be tested against the real world evidence.  Edelman has not.

Professor Edelman’s other quotation from the profile of the “academic wunderkind” that drew my attention was the following answer in response to the question “which search engine do you use?”  After explaining that he probably uses Google and Bing in proportion to their market shares, Professor Edelman is quoted as saying:

If your house is on fire and you forgot the number for the fire department, I’d encourage you to use Google. When it counts, if Google is one percent better for one percent of searches and both options are free, you’d be crazy not to use it. But if everyone makes that decision, we head towards a monopoly and all the problems experience reveals when a company controls too much.

By my lights, there is no clearer example of the sacrifice of consumer welfare in Edelman’s approach to analyzing whether and how search engines and their results should be regulated.  Note the core of Professor Edelman’s position: if Google offers a superior product favored by all consumers, and if Google gains substantial market share because of this success as determined by consumers, we are collectively headed for serious problems redressable by regulation.  In these circumstances, given the (1) lack of consumer lock-in for search engine use, (2) the overwhelming evidence that vertical integration is generally pro-competitive, and (3) the fact that consumers are generally enjoying the use of free services — one might think that any consumer-minded regulatory approach would carefully attempt to identify and distinguish potentially anticompetitive conduct so as to minimize the burden to consumers from inevitable false positives.  With credit to antitrust and its hard-earned economic discipline, this is the approach suggested by modern antitrust doctrine.  U.S. antitrust law requires a demonstration that consumers will be harmed by a challenged practice — not merely rivals.  It is odd and troubling when an economist abandons the consumer welfare approach; it is yet more peculiar that an economist not only abandons the consumer welfare lodestar but also argues for (or at least presents an unequivocal willingness to accept) an ex ante prohibition on vertical integration altogether in this space.

I’ve no doubt that there are more sophisticated theories of which creative antitrust economists can conceive that come closer to satisfying the requirements of modern antitrust economics by focusing upon consumer welfare.  Certainly, the economists who identify those theories will have their shot at convincing the FTC.  Indeed, Section 5 might even open the door to theories ever-so slightly more creative and more open-ended that those that would be taken seriously in a Sherman Act inquiry.  However, antitrust economists can and should remain intensely focused upon the impact of the conduct at issue — in this case, prominent algorithmic placement of Google’s own affiliated content its rankings — on consumer welfare.  Because Professor Edelman’s views harken to the infamous days of antitrust that cast a pall over any business practice unpleasant for rivals — even if the practice delivered what consumers wanted.  Edelman’s theory is an offer to jeopardize consumers and protect rivals, and to brush the dust off antiquated antitrust theories and standards and apply them to today’s innovative online markets.  Modern antitrust has come a long way in its thinking over the past 50 years — too far to accept these competitor-centric theories of harm.

Filed under: antitrust, economics, federal trade commission, google, technology

No surprise here.  The WSJ announced it was coming yesterday, and today Google publicly acknowledged that it has received subpoenas related to the Commission’s investigation.  Amit Singhal of Google acknowledged the FTC subpoenas at the Google Public Policy Blog…

Read the full piece here.

Allegations of “search bias” have led to increased scrutiny of Google, including active investigations in the European Union and Texas, a possible FTC investigation, and sharply-worded inquiries from members of Congress. But what does “search bias” really mean? Does it demand preemptive “search neutrality” regulation, requiring government oversight of how search results are ranked? Is antitrust intervention required to protect competition? Or can market forces deal with these concerns?

Panelists:
* Declan McCullagh (Moderator), Chief Political Correspondent for CNET, part of CBS Corporation
* Prof. Frank Pasquale, Seton Hall University School of Law, author of “Federal Search Commission? Access, Fairness and Accountability in the Law of Search”
* Prof. Geoffrey Manne, Lewis & Clark Law School, TechFreedom Adjunct Fellow, and Director of the International Center for Law & Economics, author of “If Search Neutrality Is the Answer, What’s the Question?”
* Prof. James Grimmelman, New York Law School, author of “The Structure of Search Engine Law”
* Prof. Eric Goldman, Santa Clara University School of Law, author of “Search Engine Bias and the Demise of Search Engine Utopianism”

More information on this event can be found at http://techfreedom.org/event/search-engine-regulation-solution-search-problem

View the conference

In the Huffington Post, Marcus Baram warns against those who claim to be concerned about over-regulation on Wall Street and in the consumer protection sphere.  Baram writes:

Today, Wall Street is again on the attack against a regulatory overhaul that includes more stringent investor and consumer protections. Though the financial landscape is far different and the details of the proposals have changed since 1912, the industry is using much of the same alarmist rhetoric to oppose new regulations and rules.

JPMorgan chairman Jamie Dimon recently complained that proposed rules on derivatives, capital buffers and too-big-to-fail banks are bad for America. Wall Street could lose customers to European banks, he said.

Baram includes economist, and my co-author, David S. Evans in his list of those “crying wolf” over over-regulation:

At a congressional hearing on the Consumer Financial Protection Bureau, banking consultant David S. Evans attacked the “hard paternalism” of its interim director Elizabeth Warren. He cautioned that the bureau “could make it harder and more expensive for consumers to borrow money.”

Such Cassandra-like warnings are common in the history of financial regulation.

I think Baram might want to have this one back if given the chance.  His point is that the Dimon and David Evans and others are concerned about imposing an enormous regulatory burden are wrong.  Of course, I am no scholar of Greek mythology, but I seem to recall that Cassandra was right!  Her curse was that nobody believed her accurate predictions about the future.  Baram may have stumbled upon something here.

But more seriously, at a time when the unemployment rate is over 9%, when the intellectual architects of the CFPB were quite frank about favoring a regulatory approach that would restrict access to consumer credit (see here), and when the flow of credit is critical to economic growth and recovery, one has to be pretty deeply committed to the cause to so brazenly ignore predictions that massive regulatory structure just might hold the economy back.

Evans’ testimony at the House Hearing on the CFPB is available here.

Filed under: consumer financial protection bureau, consumer protection, economics, regulation

Daniel Kahnemann and co-authors discuss, in the most recent issue of the Harvard Business Review (HT: Brian McCann), various strategies for debiasing individual decisions that impact firm performance.  Much of the advice boils down to more conscious deliberation about decisions, incorporating awareness that individuals can be biased into firm-level decisions, and subjecting decisions to more rigorous cost-benefit analysis.  The authors discuss a handful of examples with executives contemplating this or that decision (a pricing change, a large capital outlay, and a major acquisition) and walk through how thinking harder about recognizing biases of individuals responsible for these decisions or recommendations might be identified and nipped in the bud before a costly error occurs.

Luckily for our HBS heroes they are able to catch these potential decision-making errors in time and correct them:

But in the end, Bob, Lisa, and Devesh all did, and averted serious problems as a result. Bob resisted the temptation to implement the price cut his team was clamoring for at the risk of destroying profitability and triggering a price war. Instead, he challenged the team to propose an alternative, and eventually successful, marketing plan. Lisa refused to approve an investment that, as she discovered, aimed to justify and prop up earlier sunk-cost investments in the same business. Her team later proposed an investment in a new technology that would leapfrog the competition. Finally, Devesh signed off on the deal his team was proposing, but not before additional due diligence had uncovered issues that led to a significant reduction in the acquisition price.

The real challenge for executives who want to implement decision quality control is not time or cost. It is the need to build awareness that even highly experienced, superbly competent, and well intentioned managers are fallible. Organizations need to realize that a disciplined decision-making process, not individual genius, is the key to a sound strategy. And they will have to create a culture of open debate in which such processes can flourish.

But what if they didn’t?  Of course, the result would be a costly mistake.  The sanction from the marketplace would provide a significant incentive for firms to act “as-if” rational over time.  As Judd Stone and I have written (forthcoming in the Cardozo Law Review), the firm itself can be expected to play a critical role in this debiasing:

Economic theory provides another reason for skepticism concerning predictable firm irrationality. As Armen Alchian, Ronald Coase, Harold Demsetz, Benjamin Klein, and Oliver Williamson (amongst others) have reiterated for decades, the firm is not merely a heterogeneous hodgepodge of individuals, but an institution constructed to lower transaction costs relative to making use of the price system (the make or buy decision). Firms thereby facilitate specialization, production, and exchange. Firms must react to the full panoply of economic forces and pressures, responding through innovation and competition. To the extent that cognitive biases operate to deprive individuals of the ability to choose rationally, the firm and the market provide effective mechanisms to at least mitigate these biases when they reduce profits.

A critical battleground for behaviorally-based regulatory intervention, including antitrust but not limited to it, is the question of whether agencies and courts on the one hand, or firms on the other, are the least cost avoiders of social costs associated with cognitive bias.  Stone & Wright argue in the antitrust context — contrary to the claims of Commissioner Rosch and other proponents of the behavioral approach — that the claim that individuals are behaviorally biased, and that because firms are made up of individuals, they too must be biased, simply does not provide intellectual support for behavioral regulation.  The most obvious failure is that it lacks the comparative institutional perspective described above.  Most accounts favoring greater implementation of behavioral regulation at the agency level glide over this question.  Not all, of course.

For example, Commissioner Rosch has offered the following response to the “regulators are irrational-too” critique:

My problem with this criticism is that it ignores the fact that, unlike human beings who make decisions in a vacuum, government regulators have the ability to study over time how individuals behave in certain settings (i.e., whether certain default rules provide adequate disclosure to help them make the most informed decision). Thus, if and to the extent that government regulators are mindful of the human failings discussed above, and their rules are preceded by rigorous and objective tests, it is arguable that they are less likely to get things wrong than one would predict. Of course, it may be the case that the concern with behavioral economics is less that regulators are imperfect and more than they are subject to political biases and that behavioral economics is simply liberalism masquerading as economic thinking.24 My response to that is that political capture is everywhere in Washington and that to the extent behavioral economics supports “hands on” regulation it is no more political than neoclassical economics which generally supports “hands off” regulation. On a more serious note, perhaps the best way behavioral economics could counter this critique over the long run would be to identify ways in which the insights from behavioral economics suggest regulation that one would not expect from a “left-wing” legal theory.

For my money, I find this reply altogether unconvincing.  It amounts to the claim that government agencies can be expected to have a comparative advantage over firms in ameliorating the social costs of errors.  The fact that government regulators might “get things wrong” less often than one might predict is besides the point.  The question is, again, comparing the two relevant institutions: firms in the marketplace and government agencies.  “We’re the government and we’re here to help” isn’t much of an answer to the appropriate question here.  There are further problems with this answer.  As I’ve written in response to the Commissioner’s claims:

But seriously, human beings making decisions “in a vacuum?”  It is individuals and firms who are making decisions insulated from market forces that create profit-motive and other incentives to learn about irrationality and get decisions right — not regulators?   The response to the argument that behavioral economics is simply liberalism masquerading as economic thinking (by the way, the argument is not that, it is that antitrust policy based on behavioral economics has not yet proven to be any more than simply interventionism masquerading as economic thinking — but I quibble) is weak.

As calls for behavioral regulation become more common, administrative agencies are built upon its teachings, or even more aggressive claims that behavioral law and economics can claim intellectual victory over rational choice approaches, it is critical to keep the right question in mind so that we do not fall victim to the Nirvana Fallacy.  The right comparative institutional question is whether courts and agencies or the market is better suited to mitigate the social costs of errors.   The external discipline imposed by the market in mitigating decision-making errors is well documented in the economic literature.  The claim that such discipline can replicated, or exceeded, in agencies is an assertion that remains, thus far, in search of empirical support.

Filed under: antitrust, behavioral economics, behavioral economics, consumer financial protection bureau, consumer protection, doj, economics, federal trade commission

The conventional predation claim involves a monopolist reducing price and increasing output.  Here’s a creative theory involving a claim that a decision to close down factories injures competition:

A federal judge in Texas is hearing testimony from farmers who contend that poultry producer Pilgrim’s Pride closed plants and ran them out of business to manipulate commodity chicken prices.

Their lawsuit alleges violations of a Depression-era antitrust law enacted to limit big meatpackers’ power over farmers and ranchers.

Bob Depper is one of the attorneys for the 275 farmers from several states. He says the trial in East Texas could last weeks or months. Friday was the second day of testimony.

The lawsuit is being tried before a judge rather than a jury in Marshall, about 175 miles east of Fort Worth.

Pilgrim’s Pride declined to comment on the lawsuit. It has said it closed some plants to save costs before emerging from Chapter 11 bankruptcy protection in 2009.

HT: Businessweek.  More background on the plant closings here.

Filed under: antitrust

Thom‘s excellent post highlights the Ninth Circuit’s recent decision in Brantley and describes its implications both in terms of rejecting Professor Elhauge’s claim that metering ties and mere surplus extraction amount to competitive harm for the purposes of antitrust and also for the future of the quasi-per se rule of tying.   Thom, in my view correctly, observes:

Given this procedural posture, the Ninth Circuit starkly confronted whether, as Elhauge maintains, the price discrimination/surplus extraction inherent in Stigler-type bundling is an “anticompetitive” effect that warrants liability.  In affirming the district court and holding that plaintiffs’ claims of higher prices were not enough to establish anticompetitive harm, it effectively held, as I and a number of others have urged, that there should be no tying liability absent substantial tied market foreclosure.

I want to highlight another very interesting aspect of the decision, i.e. Brantley appears to reject the so-called “Consumer Choice” standard that has been gaining significant traction in the antitrust literature both in the U.S. and Europe.  Averitt & Lande describe the consumer choice antitrust standard as follows:

It suggests that the role of antitrust should be broadly conceived to protect all the types of options that are significantly important to consumers. An antitrust violation can, therefore, be understood as an activity that unreasonably restricts the totality of price and nonprice choices that would otherwise have been available.

The central idea is that the efficiency perspective is hampered by “only” looking at things like prices and output (including quality-adjusted prices), and occasionally innovation.  The fundamental observation of the “consumer choice” framework is that a reduction of “choice” (however defined, but lets come back to that), even if coupled with a reduction in price or increase in output, is a cognizable antitrust injury.

This approach is getting some traction.  For example, Commissioner Rosch has argued both that the consumer choice standard is desirable and that, after the Supreme Court’s decision in Leegin, is the law (“injury to consumer choice (as well as an increase in price) is now recognized as injury to consumer welfare in the United States.”).

I’ve criticized the consumer choice standard, largely because it was likely to lead to systematic error in predicting the impact on consumer welfare.  Indeed, in cases involving tradeoffs like reduced product variety at lower prices, the standard would systematically condemn conduct that is likely to improve consumer outcomes (e.g. competition for exclusives with retail shelf space).    The bottom line is that I do not think there is any basis in either economic theory or empirical evidence to support the view that the consumer choice standard would be a better predictor of consumer outcomes than current tools allow.   Thus, its application is likely to make consumers worse off.

So why does Brantley appear to reject the consumer choice standard?  If I may borrow from Thom’s description of the case:

Brantley, et al. v. NBC Universal, Inc., et al., involved a challenge by cable television subscribers to T.V. programmers’ practice of selling cable channels only in packages.  The plaintiffs, who preferred to purchase individual channels a la carte, maintained that the programmers’ policy violated Sherman Act Section 1.  As the Ninth Circuit correctly recognized, the arrangement really amounted to tying, for the programmers would sell their “must have” channels only if subscribers would also take other, less desirable channels.  (Indeed, the practice is closely analogous to the block booking at issue in Loew’s, where the distributor required that licensees of popular films also license flops.)

The district court dismissed plaintiffs’ first complaint without prejudice on the ground that plaintiffs failed to allege that their injuries (purportedly higher prices) were caused by an injury to competition.  Plaintiffs then amended their complaint to include an allegation “that Programmers’ practice of selling bundled cable channels foreclosed independent programmers from entering and competing in the upstream market for programming channels.”  In other words, plaintiffs alleged, the tying at issue occasioned substantial tied market foreclosure.

After conducting some discovery, plaintiffs decided to abandon that theory of harm.  They prepared a new complaint that omitted all market foreclosure allegations and asked the court to rule “that plaintiffs did not have to allege that potential competitors were foreclosed from the market in order to defeat a motion to dismiss.”  Defendants again sought to dismiss the complaint.  The district court, reasoning that the plaintiffs had failed to allege any cognizable injury to competition, granted defendants’ motion to dismiss, and plaintiffs appealed.

The crux of the complaint, of course, is a reduction in consumer choice.  The plaintiffs argue that a la carte programming would prevail in the absence of bundling and thus increase consumer choice.  The Ninth Circuit describes the plaintiffs’ claim as follows: “the challenged bundling practice limits Distributors’ method of doing business and reduces consumer choice, while raising prices.”  In the absence of allegations of market foreclosure or exclusion resulting in harm to competition, the complaint isolates the claim that a stand-alone reduction of consumer choice is actionable antitrust injury.  The Ninth Circuit ties the complaint to consumer choice directly:

They argue that the sale of multi-channel packages harms consumers by (1) limiting the manner in which Distributors are unable to offer a la carte programming, (2) reducing consumer choice, and (3) increasing prices.  These allegations do not state a Section 1 claim.

The Court is clear to note that “limitations on the manner in which Distributors compete with one another, without more, constitute a cognizable injury to competition,” citing Chicago Board of Trade.  Contrary to Commissioner Rosch’s claims, the Ninth Circuit finds that Leegin explicitly rejects the consumer choice standard, observing that “in Leegin, the Supreme Court made clear that even in the face of clear limitations on distributors’ ability to compete, proof of competitive harm is required to state a cognizable antitrust claim,” and also highlights the fact that “antitrust law recognizes the ability of businesses to choose the manner in which they do business absent an injury.”  Further, the Court points out the mere fact that a common business practice is adopted by many firms in an industry — thus reducing the diversity of business arrangements and consumer choice — is likely a signal that the practice is efficient, not that it reduces consumer welfare.

In addition the Brantley’s implications for tying (and with respect to Professor Elhauge’s claims about non-foreclosure related consumer harm), it is a rather straightforward rejection of the consumer choice standard.   I think this is all to the good for the reasons described above, and in Thom’s post.  A movement to a vague “consumer choice” standard threatens to take the focus off of consumer welfare — and in some cases, is in direct conflict with it.  The consumer choice movement runs counter to the modern trend (e.g. in the Horizontal Merger Guidelines) to directly measure the impact of business practices on consumer welfare instead of indirect proxies like market structure or “choice.”

Filed under: antitrust, business, economics

I have an op-ed up at Main Justice on FTC Chairman Leibowitz’ recent comment in response the a question about the FTC’s investigation of Google that the FTC is looking for a “pure Section Five case.”  With Main Justice’s permission, the op-ed is re-printed here:

 

There’s been a lot of chatter around Washington about federal antitrust regulators’ interest in investigating Google, including stories about an apparent tug of war between agencies. But this interest may be motivated by expanding the agencies’ authority, rather than by any legitimate concern about Google’s behavior.

Filed under: antitrust, error costs, federal trade commission, google, monopolization Tagged: Federal Trade Commission, google, Jon Leibowitz, Search Engines