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Scholarship In recent months a veritable legal and policy frenzy has erupted around Google generally, and more specifically concerning how its search activities should be regulated by government authorities throughout the world in the name of ensuring “search neutrality.”
In recent months a veritable legal and policy frenzy has erupted around Google generally, and more specifically concerning how its search activities should be regulated by government authorities throughout the world in the name of ensuring “search neutrality.” Concerns with search engine bias have led to a menu of proposed regulatory reactions. Although the debate has focused upon possible remedies to the “problem” presented by a range of Google’s business decisions, it has largely missed the predicate question of whether search engine bias is the product of market failure or otherwise generates significant economic or social harms meriting regulatory intervention in the first place. “Search neutrality” by its very name presupposes that mandatory neutrality or some imposition of restrictions on search engine bias is desirable, but it is an open question whether advocates of search neutrality have demonstrated that there is a problem necessitating any of the various prescribed remedies. This paper attempts to answer that question, and we evaluate both the economic and non-economic costs and benefits of search bias, as well as the solutions proposed to remedy perceived costs. We demonstrate that search bias is the product of the competitive process and link the search bias debate to the economic and empirical literature on vertical integration and the generally-efficient and pro-competitive incentives for a vertically integrated firm to favor its own content. We conclude that neither an ex ante regulatory restriction on search engine bias nor the imposition of an antitrust duty to deal upon Google would benefit consumers. Moreover, in considering the proposed remedies, we find that by they substitute away from the traditional antitrust consumer welfare standard, and would impose costs exceeding any potential benefits.
Popular Media In the last post, I discussed possible characterizations of Google’s conduct for purposes of antitrust analysis. A firm grasp of the economic implications of the . . .
In the last post, I discussed possible characterizations of Google’s conduct for purposes of antitrust analysis. A firm grasp of the economic implications of the different conceptualizations of Google’s conduct is a necessary – but not sufficient – precondition for appreciating the inconsistencies underlying the proposed remedies for Google’s alleged competitive harms. In this post, I want to turn to a different question: assuming arguendo a competitive problem associated with Google’s algorithmic rankings – an assumption I do not think is warranted, supported by the evidence, or even consistent with the relevant literature on vertical contractual relationships – how might antitrust enforcers conceive of an appropriate and consumer-welfare-conscious remedy? Antitrust agencies, economists, and competition policy scholars have all appropriately stressed the importance of considering a potential remedy prior to, rather than following, an antitrust investigation; this is good advice not only because of the benefits of thinking rigorously and realistically about remedial design, but also because clear thinking about remedies upfront might illuminate something about the competitive nature of the conduct at issue.
Somewhat ironically, former DOJ Antitrust Division Assistant Attorney General Tom Barnett – now counsel for Expedia, one of the most prominent would-be antitrust plaintiffs against Google – warned (in his prior, rather than his present, role) that “[i]mplementing a remedy that is too broad runs the risk of distorting markets, impairing competition, and prohibiting perfectly legal and efficient conduct,” and that “forcing a firm to share the benefits of its investments and relieving its rivals of the incentive to develop comparable assets of their own, access remedies can reduce the competitive vitality of an industry.” Barnett also noted that “[t]here seems to be consensus that we should prohibit unilateral conduct only where it is demonstrated through rigorous economic analysis to harm competition and thereby harm consumer welfare.” Well said. With these warnings well in-hand, we must turn to two inter-related concerns necessary to appreciating the potential consequences of a remedy for Google’s conduct: (1) the menu of potential remedies available for an antitrust suit against Google, and (2) the efficacy of these potential remedies from a consumer-welfare, rather than firm-welfare, perspective.
What are the potential remedies?
The burgeoning search neutrality crowd presents no lack of proposed remedies; indeed, if there is one segment in which Google’s critics have proven themselves prolific, it is in their constant ingenuity conceiving ways to bring governmental intervention to bear upon Google. Professor Ben Edelman has usefully aggregated and discussed several of the alternatives, four of which bear mention: (1) a la Frank Pasquale and Oren Bracha, the creation of a “Federal Search Commission,” (2) a la the regulations surrounding the Customer Reservation Systems (CRS) in the 1990s, a prohibition on rankings that order listings “us[ing] any factors directly or indirectly relating to” whether the search engine is affiliated with the link, (3) mandatory disclosure of all manual adjustments to algorithmic search, and (4) transfer of the “browser choice” menu of the EC Microsoft litigation to the Google search context, requiring Google to offer users a choice of five or so rivals whenever a user enters particular queries.
Geoff and I discuss several of these potential remedies in our paper, If Search Neutrality is the Answer, What’s the Question? It suffices to say that we find significant consumer welfare threats from the creation of a new regulatory agency designed to impose “neutral” search results. For now, I prefer to focus on the second of these remedies – analogized to CRS technology in the 1990s – here; Professor Edelman not only explains proposed CRS-inspired regulation, but does so in effusive terms:
A first insight comes from recognizing that regulators have already – successfully! – addressed the problem of bias in information services. One key area of intervention was customer reservation systems (CRS’s), the computer networks that let travel agents see flight availability and pricing for various major airlines. Three decades ago, when CRS’s were largely owned by the various airlines, some airlines favored their own flights. For example, when a travel agent searched for flights through Apollo, a CRS then owned by United Airlines, United flights would come up first – even if other carriers offered lower prices or nonstop service. The Department of Justice intervened, culminating in rules prohibiting any CRS owned by an airline from ordering listings “us[ing] any factors directly or indirectly relating to carrier identity” (14 CFR 255.4). Certainly one could argue that these rules were an undue intrusion: A travel agent was always free to find a different CRS, and further additional searches could have uncovered alternative flights. Yet most travel agents hesitated to switch CRS’s, and extra searches would be both time-consuming and error-prone. Prohibiting biased listings was the better approach. The same principle applies in the context of web search. On this theory, Google ought not rank results by any metric that distinctively favors Google. I credit that web search considers myriad web sites – far more than the number of airlines, flights, or fares. And I credit that web search considers more attributes of each web page – not just airfare price, transit time, and number of stops. But these differences only grant a search engine more room to innovate. These differences don’t change the underlying reasoning, so compelling in the CRS context, that a system provider must not design its rules to systematically put itself first.
A first insight comes from recognizing that regulators have already – successfully! – addressed the problem of bias in information services. One key area of intervention was customer reservation systems (CRS’s), the computer networks that let travel agents see flight availability and pricing for various major airlines. Three decades ago, when CRS’s were largely owned by the various airlines, some airlines favored their own flights. For example, when a travel agent searched for flights through Apollo, a CRS then owned by United Airlines, United flights would come up first – even if other carriers offered lower prices or nonstop service. The Department of Justice intervened, culminating in rules prohibiting any CRS owned by an airline from ordering listings “us[ing] any factors directly or indirectly relating to carrier identity” (14 CFR 255.4). Certainly one could argue that these rules were an undue intrusion: A travel agent was always free to find a different CRS, and further additional searches could have uncovered alternative flights. Yet most travel agents hesitated to switch CRS’s, and extra searches would be both time-consuming and error-prone. Prohibiting biased listings was the better approach.
The same principle applies in the context of web search. On this theory, Google ought not rank results by any metric that distinctively favors Google. I credit that web search considers myriad web sites – far more than the number of airlines, flights, or fares. And I credit that web search considers more attributes of each web page – not just airfare price, transit time, and number of stops. But these differences only grant a search engine more room to innovate. These differences don’t change the underlying reasoning, so compelling in the CRS context, that a system provider must not design its rules to systematically put itself first.
The analogy is a superficially attractive one, and we’re tempted to entertain it, so far as it goes. Organizational questions inhere in both settings, and similarly so: both flights and search results must be ordinally ranked, and before CRS regulation, a host airline’s flights often appeared before those of rival airlines. Indeed, we will take Edelman’s analogy at face value. Problematically for Professor Edelman and others pushing the CRS-style remedy, a fuller exploration of CRS regulation reveals this market intervention – well, put simply, wasn’t so successful after all. Not for consumers anyway. It did, however, generate (economically) predictable consequences: reduced consumer welfare through reduced innovation. Let’s explore the consequences of Edelman’s analogy further below the fold.
History of CRS Antitrust Suits and Regulation
Early air travel primarily consisted of “interline” flights – flights on more than one carrier to reach a final destination. CRSs arose to enable airlines to coordinate these trips for their customers across multiple airlines, which necessitated compiling information about rival airlines, their routes, fares, and other price- and quality-relevant information. Major airlines predominantly owned CRSs at this time, which served both competitive and cooperative ends; this combination of economic forces naturally drew antitrust advocates’ attention.
CRS regulation proponents proffered numerous arguments as to the potentially anticompetitive nature and behavior of CRS-owning airlines. For example, they claimed that CRS-owning airlines engaged in “dirty tricks,” such as using their CRSs to terminate passengers’ reservations on smaller, rival airlines and to rebook customers on their own flights, and refusing to allow smaller airlines to become CRS co-hosts, thereby preventing these smaller airlines from being listed in search results. CRS-owning airlines faced further allegations of excluding rivals through contractual provisions, such as long-term commitments from travel agents. Proponents of antitrust enforcement alleged that the nature of the CRS market created significant barriers to entry and provided CRS-owning airlines with significant cost advantages to selling their own flights. These cost advantages purportedly derived from two main sources: (1) quality advantages that airline-owned CRSs enjoyed, as they could commit to providing comprehensive and accurate information about the owner airline’s flight schedule, and (2) joint ownership of CRSs, which facilitated coordination between airlines and CRSs, thereby decreasing the distribution and information costs.
These claims suffered from serious shortcomings including both a failure to demonstrate harm to competition rather than injury to specific rivals as well as insufficient appreciation for the value of dynamic efficiency and innovation to consumer welfare. These latter concerns were especially pertinent in the CRS context, as CRSs arose at a time of incredible change – the deregulated airline industry, joined with novel computer technology, necessitated significant and constant innovation. Courts accordingly generally denied antitrust remedies in these cases – rejecting claims that CRSs imposed unreasonable restraints on competition, denied access to an essential facility, or facilitated monopoly leverage.
Yet, particularly relevant for present purposes, one of the most popular anticompetitive stories was that CRSs practiced “display bias,” defined as ranking the owner airline’s flights above those of all other airlines. Proponents claimed display bias was particularly harmful in the CRS setting, because only the travel agent, and not the customer, could see the search results, and travel agents might have incentives to book passengers on more expensive flights for which they receive more commission. Fred Smith describes the investigations surrounding this claim:
These initial CRS services were used mostly by sophisticated travel agents, who could quickly scroll down to a customer’s preferred airline. But this extra “effort” was considered discriminatory by some at the DOJ and the DOT, and hearings were held to investigate this threat to competition. Great attention was paid to the “time” required to execute only a few keystrokes, to the “complexity” of re-designing first screens by computer-proficient travel agents, and to the “barriers” placed on such practices by the host CRS provider.
CRS Rules
While courts declined to intervene in the CRS market, the Department of Transportation (DOT) eagerly crafted rules to govern CRS operations. The DOT’s two primary goals in enacting the 1984 CRS regulations were (1) to incentivize entry into the CRS market and (2) to prevent airline ownership of CRSs from decreasing competition in the downstream passenger air travel market. One of the most notable rules introduced in the 1984 CRS regulations prohibited display bias. The DOT changed both this rule and CRS rules as a whole significantly, and by 1997, the DOT required each CRS “(i) to offer at least one integrated display that uses the same criteria for both online and interline connections and (ii) to use elapsed time or non-stop itinerary as a significant factor in selecting the flight options from the database” (Alexander, 2004). However, the DOT did not categorically forbid display bias; rather, it created several exceptions to this rule – and even allowed airlines to disseminate software that introduced bias into displays. Additionally, the DOT expressly refused to enforce its anti-bias rules against travel agent displays.
Other CRS rules attempted to reinforce these two goals of additional market entry and preservation of downstream competition. CRS rules specifically focused on mitigating travel agent switching costs between CRS vendors and reducing any quality advantage incumbent CRSs allegedly had. Rules prohibited discriminatory booking fees and the tying of travel agent commissions to CRS use, limited contract lengths, prohibited minimum uses and rollover clauses, and required CRSs to give all participating carriers equal service upgrades.
Evidence of CRS Regulation “Success”?
The CRS regulatory experiment had years to run its course; despite the extent and commitment of its regulatory sweep, these rules failed to improve consumer outcomes in any meaningful way. CRS regulations precipitated neither innovation nor entry, and likely incurred serious allocative efficiency and consumer welfare losses by attempting to prohibit display bias.
First, CRS regulations unambiguously failed in their goal of increasing ease of entry:
Only six CRS vendors offered their services to domestic airlines and travel agents in the mid-1980s. . . If the rules had actually facilitated entry, the number of CRS vendors should have grown or some new entrants should have been seen during the past twenty years. The evidence, however, is to the contrary. It remains that ‘[s]ince the [CAB] first adopted CRS rules, no firm has entered the CRS business.’ Meanwhile, there has been a series of mergers coupled with introduction of multinational CRS; the cumulative effect was to reduce the number of CRSs. . . Even if a regulation could successfully facilitate entry by a supplier of CRS services, the gain from such entry would at this point be relatively small, and possibly negative. (Alexander and Lee, 2004) (emphasis added).
As such, CRS regulations did not achieve one of their primary objectives – a fact which stands in stark contrast to Edelman’s declaration that CRS rules represent an unequivocal regulatory success.
Most relevant to the search engine bias analogy, the CRS regulations prohibiting bias did not positively affect consumer welfare. To the contrary, by ignoring the reality that most travel agents took consumer interests into account in their initial choice of CRS operator (even if they do so to a lesser extent in each individual search they conduct for consumers), and that even if residual bias remained, consumers were “informed and repeat players who have their own preferences,” CRS regulations imposed unjustified costs. As Alexander and Lee describe it
[T]he social value of prohibiting display . . . bias solely to improve the quality of information that consumers receive about travel options appears to be low and may be negative. Travel agents have strong incentives to protect consumers from poor information, through how they customize their internal display screens, and in their choices of CRS vendors.
Moreover, and predictably, CRS regulations appear to have caused serious harm to the competitive process:
The major competitive advantage of the pre-regulation CRS was that it permitted the leading airlines to slightly disadvantage their leading competitors by placing them a bit farther down on the list of available flights. United would place American slightly farther down the list, and American would return the favor for United flights. The result, of course, was that the other airlines received slightly higher ranks than they would have otherwise. When “bias” was eliminated, United moved up on the American system and vice versa, while all other airlines moved down somewhat. The antitrust restriction on competitive use of the CRS, then, actually reduced competition. Moreover, the rules ensured that the United/American market leadership would endure fewer challenges from creative newcomers, since any changes to the system would have to undergo DOT oversight, thus making “sneak attacks” impossible. The resulting slowdown of CRS technology damaged the competitiveness of these systems. Much of the innovative lead that these systems had enjoyed slowly eroded as the internet evolved. Today, much of the air travel business has moved to the internet (as have the airlines themselves) (Smith, 1999).
These competitive losses occurred despite evidence suggesting that CRSs themselves enhanced competition and thus had the predictable positive impact for consumers. For example, one study found that CRS usage increased travel agents’ productivity by an average of 41% and that in the early 1990s over 95% of travel agents used a CRS – indicating that travel agents were able to assist consumers far more effectively once CRSs became available (Ellig, 1991). The rules governing contractual terms fared no better; indeed, these also likely reduced consumer welfare:
The prohibited contract practices–long-term contracting and exclusive dealing–that had been regarded as exclusionary might not have proved to be such a critical barrier to entry: entry did not occur, independently of those practices. Evidence on the dealings between travel agents and CRS vendors, post-regulation, suggests that these practices may have enhanced overall allocative efficiency. Travel agents appear to have agreed to some, if not all, restrictive contracts with CRS vendors as a means of providing those vendors with assurance that they would be repaid gradually, over time, for their up-front investments in the travel agent, such as investments in equipment or training (Alexander and Lee, 2004).
Accordingly, CRS regulations seem to have threatened innovation by decreasing the likelihood that CRS vendors would recover research and development expenditures without providing a commensurate consumer benefit.
Termination of Rules
The DOT terminated CRS regulations in 2004 in light of their failure to improve competitive outcomes in the CRS market and a growing sense that they were making things worse, not better – which Edelman fails to acknowledge and which certainly undermines his claim that regulators addressed this problem “successfully.” From the time CRS regulations were first adopted in 1984 until 2004, the CRS market and the associated technology changed significantly, rapidly becoming more complex. As the market increased in complexity, it became increasingly more difficult for the DOT to effectively regulate. Two occurrences in particular precipitated de-regulation: (1) the major airlines divested themselves of CRS ownership (despite the absence of any CRS regulations requiring or encouraging divestiture!), and (2) the commercialization of the internet introduced novel forms of substitutes to the CRS system that the CRS regulations did not govern. Online direct-to-traveler services, such as Travelocity, Expedia and Orbitz provide consumers with a method to choose their own flights, entirely absent travel agent assistance. More importantly, Expedia and Orbitz each developed direct connection technologies that allow them to make reservations directly with an airline’s internal reservation system – bypassing CRS systems almost completely. Moreover, Travelocity, Expedia, and Orbitz were never forced to comply with CRS regulations, which allowed them to adopt more consumer-friendly products and innovate in meaningful ways, obsoleting traditional CRSs. It is unsurprising that Expedia has warned against overly broad regulations in the search engine bias debate – it has first-hand knowledge of how crucial the ability to innovate is.)
These developments, taken in harmony, mean that in order to cause any antitrust harm in the first instance, a hypothetical CRS monopolist must have been interacting with (1) airlines, (2) travel agents, and (3) consumers who all had an insufficient incentive to switch to another alternative in the face of a significant price increase. Given this nearly insurmountable burden, and the failure of CRS regulations to improve consumer welfare in even the earlier and simpler state of the world, Alexander and Lee find that, by the time CRS regulations were terminated in 2004, they failed to pass a cost-benefit analysis.
Overall, CRS regulations incurred significant consumer welfare losses and rendered the entire CRS system nearly obsolete by stifling its ability to compete with dynamic and innovative online services. As Ellig notes, “[t]he legal and economic debate over CRS. . . frequently overlooked the peculiar economics of innovation and entrepreneurship.” Those who claim search engine bias exists (as distinct from valuable product differentiation between engines) and can be meaningfully regulated rely upon this same flawed analysis and expect the same flawed regulatory approach to “fix” whatever issues they perceive as ailing the search engine market. Search engine regulation will make consumers worse off. In the meantime, proponents of so-called search neutrality and heavy-handed regulation of organic search results battle over which of a menu of cumbersome and costly regulatory schemes should be adopted in the face of evidence that the approaches are more likely to harm consumers than help them, and even stronger evidence that there is no competitive problem with search in the first place.
Indeed, one benefit of thinking hard about remedies in the first instance is that it may illuminate something about the competitive nature of the conduct one seeks to regulate. I defer to former AAG Barnett in explaining this point:
Put another way, a bad section 2 remedy risks hurting consumers and competition and thus is worse than no remedy at all. That is why it is important to consider remedies at the outset, before deciding whether a tiger needs catching. Doing so has a number of benefits. … Furthermore, contemplation of the remedy may reveal that there is no competitive harm in the first place. Judge Posner has noted that “[t]he nature of the remedy sought in an antitrust case is often . . . an important clue to the soundness of the antitrust claim.”(4) The classic non-section 2 example is Pueblo Bowl-O-Mat, where plaintiffs claimed that the antitrust laws prohibited a firm from buying and reinvigorating failing bowling alleys and prayed for an award of the “profits that would have been earned had the acquired centers closed.”(5) The Supreme Court correctly noted that condemning conduct that increased competition “is inimical to the purposes of [the antitrust] laws”(6)–more competition is not a competitive harm to be remedied. In the section 2 context, one might wish that the Supreme Court had focused on the injunctive relief issued in Aspen Skiing–a compelled joint venture whose ability to enhance competition among ski resorts was not discussed(7)–in assessing whether discontinuing a similar joint venture harmed competition in the first place.(8)
Put another way, a bad section 2 remedy risks hurting consumers and competition and thus is worse than no remedy at all. That is why it is important to consider remedies at the outset, before deciding whether a tiger needs catching. Doing so has a number of benefits. …
Furthermore, contemplation of the remedy may reveal that there is no competitive harm in the first place. Judge Posner has noted that “[t]he nature of the remedy sought in an antitrust case is often . . . an important clue to the soundness of the antitrust claim.”(4) The classic non-section 2 example is Pueblo Bowl-O-Mat, where plaintiffs claimed that the antitrust laws prohibited a firm from buying and reinvigorating failing bowling alleys and prayed for an award of the “profits that would have been earned had the acquired centers closed.”(5) The Supreme Court correctly noted that condemning conduct that increased competition “is inimical to the purposes of [the antitrust] laws”(6)–more competition is not a competitive harm to be remedied. In the section 2 context, one might wish that the Supreme Court had focused on the injunctive relief issued in Aspen Skiing–a compelled joint venture whose ability to enhance competition among ski resorts was not discussed(7)–in assessing whether discontinuing a similar joint venture harmed competition in the first place.(8)
A review of my paper with Geoff reveals several common themes among proposed remedies intimated by the above discussion of CRS regulations. The proposed remedies consistently: (1) disadvantage Google, (2) advantage its rivals, and (3) have little if anything to do with consumers. Neither economics nor antitrust history supports such a regulatory scheme; unfortunately, it is consumers that might again ultimately pay the inevitable tax for clumsy regulatory tinkering with product design and competition.
Filed under: antitrust, economics, federal trade commission, google, international center for law & economics, monopolization, technology Tagged: antitrust, Federal Trade Commission, google, search
Popular Media Today at 12:30 at the Capitol Visitor Center, TechFreedom is hosting a discussion on the regulation of search engines: “Search Engine Regulation: A Solution in . . .
Today at 12:30 at the Capitol Visitor Center, TechFreedom is hosting a discussion on the regulation of search engines: “Search Engine Regulation: A Solution in Search of a Problem?”
The basics:
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? A panel of leading thinkers on Internet law will explore these questions at a luncheon hosted by TechFreedom, a new digital policy think tank. The event will take place at the Capitol Visitor Center room SVC-210/212 onTuesday, June 14 from 12:30 to 2:30pm, and include a complimentary lunch. CNET’s Declan McCullagh, a veteran tech policy journalist, will moderate a panel of four legal experts: 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
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?
A panel of leading thinkers on Internet law will explore these questions at a luncheon hosted by TechFreedom, a new digital policy think tank. The event will take place at the Capitol Visitor Center room SVC-210/212 onTuesday, June 14 from 12:30 to 2:30pm, and include a complimentary lunch. CNET’s Declan McCullagh, a veteran tech policy journalist, will moderate a panel of four legal experts:
More details are here, and the event will be streaming live from that link as well. If all goes well, it will also be accessible right here:
http://www.ustream.tv/flash/viewer.swf
Live Broadcasting by Ustream
Filed under: administrative, announcements, essential facilities, google, law and economics, monopolization, regulation, technology Tagged: Declan McCullagh, Eric Goldman, frank pasquale, geoffrey manne, google, james grimmelmann, techfreedom, Web search engine
Popular Media Tom Barnett (Covington & Burling) represents Expedia in, among other things, its efforts to persuade a US antitrust agency to bring a case against Google . . .
Tom Barnett (Covington & Burling) represents Expedia in, among other things, its efforts to persuade a US antitrust agency to bring a case against Google involving the alleged use of its search engine results to harm competition. In that role, in a recent piece in Bloomberg, Barnett wrote the following things:
The themes are fairly straightforward: (1) Google is a dominant search engine, and its size and share of the search market warrants concern, (2) Google is becoming vertically integrated, which also warrants concern, (3) Google uses its search engine results in manner that harms rivals through actions that “warrant serious antitrust scrutiny,” and (4) Barnett appears to applaud judicial monitoring of Google’s contracts involving one of its “key assets.” Sigh.
The notion of firms “coming full circle” in antitrust, a la Microsoft’s journey from antitrust defendant to complainant, is nothing new. Neither is it too surprising or noteworthy when an antitrust lawyer, including very good ones like Barnett, say things when representing a client that are at tension with prior statements made when representing other clients. By itself, that is not really worth a post. What I think is interesting here is that the prior statements from Barnett about the appropriate scope of antitrust enforcement generally, and monopolization in the specific, were made as Assistant Attorney General for the Antitrust Division — and thus, I think are more likely to reflect Barnett’s actual views on the law, economics, and competition policy than the statements that appear in Bloomberg. The comments also expose some shortcomings in the current debate over competition policy and the search market.
But lets get to it. Here is a list of statements that Barnett made in a variety of contexts while at the Antitrust Division.
I’ll take Barnett (2006-08) over Barnett (2011) in a technical knockout. Concerns about administrable antitrust remedies, unintended consequences of those remedies, error costs, helping consumers and restoring competition rather than merely giving a handout to rivals, and maintaining the incentive to compete and innovate are all serious issues in the Section 2 context. Antitrust scholars from Epstein and Posner to Areeda and Hovenkamp and others have all recognized these issues — as did Barnett when he was at the DOJ (and no doubt still). I do not fault him for the inconsistency. But on the merits, the current claims about the role of Section 2 in altering competition in the search engine space, and the applause for judicially monitored business activities, runs afoul of the well grounded views on Section 2 and remedies that Barnett espoused while at the DOJ.
Let me end with one illustration that I think drives the point home. When one compares Barnett’s column in Bloomberg to his speeches at DOJ, there is one difference that jumps off the page and I think is illustrative of a real problem in the search engine antitrust debate. Barnett’s focus in the Bloomberg piece, as counsel for Expedia, is largely harm to rivals. Google is big. Google has engaged in practices that might harm various Internet businesses. The focus is not consumers, i.e. the users. They are mentioned here and there — but in the context of Google’s practices that might “steer” users toward their own sites. As Barnett (2006-08) well knew, and no doubt continues to know, is that vertical integration and vertical contracts with preferential placement of this sort can well be (and often are) pro-competitive. This is precisely why Barnett (2006-08) counseled requiring hard proof of harm to consumers before he would recommend much less applaud an antitrust remedy tinkering with the way search business is conducted and running the risk of violating the “do no harm” principle. By way of contrast, Barnett’s speeches at the DOJ frequently made clear that the notion that the antitrust laws “protection competition, not competitors,” was not just a mantra, but a serious core of sensible Section 2 enforcement.
The focus can and should remain upon consumers rather than rivals. The economic question is whether, when and if Google uses search results to favor its own content, that conduct is efficient and pro-consumer or can plausibly cause antitrust injury. Those leaping from “harm to rivals” to harm to consumers should proceed with caution. Neither economic theory nor empirical evidence indicate that the leap is an easy one. Quite the contrary, the evidence suggests these arrangements are generally pro-consumer and efficient. On a case-by-case analysis, the facts might suggest a competitive problem in any given case.
Barnett (2006-08) has got Expedia’s antitrust lawyer dead to rights on this one. Consumers would be better off if the antitrust agencies took the advice of the former and ignored the latter.
Filed under: antitrust, doj, economics, error costs, essential facilities, exclusionary conduct, federal trade commission, google, monopolization, technology
Popular Media Josh and I have just completed a white paper on search neutrality/search bias and the regulation of search engines. The paper is this year’s first . . .
Josh and I have just completed a white paper on search neutrality/search bias and the regulation of search engines. The paper is this year’s first in the ICLE Antitrust & Consumer Protection White Paper Series:
In this paper we evaluate both the economic and non-economic costs and benefits of search bias. In Part I we define search bias and search neutrality, terms that have taken on any number of meanings in the literature, and survey recent regulatory concerns surrounding search bias. In Part II we discuss the economics and technology of search. In Part III we evaluate the economic costs and benefits of search bias. We demonstrate that search bias is the product of the competitive process and link the search bias debate to the economic and empirical literature on vertical integration and the generally-efficient and pro-competitive incentives for a vertically integrated firm to discriminate in favor of its own content. Building upon this literature and its application to the search engine market, we conclude that neither an ex ante regulatory restriction on search engine bias nor the imposition of an antitrust duty to deal upon Google would benefit consumers. In Part V we evaluate the frequent claim that search engine bias causes other serious, though less tangible, social and cultural harms. As with the economic case for search neutrality, we find these non-economic justifications for restricting search engine bias unconvincing, and particularly susceptible to the well-known Nirvana Fallacy of comparing imperfect real world institutions with romanticized and unrealistic alternatives
Search bias is not a function of Google’s large share of overall searches. Rather, it is a feature of competition in the search engine market, as evidenced by the fact that its rivals also exercise editorial and algorithmic control over what information is provided to consumers and in what manner. Consumers rightly value competition between search engine providers on this margin; this fact alone suggests caution in regulating search bias at all, much less with an ex ante regulatory schema which defines the margins upon which search providers can compete. The strength of economic theory and evidence demonstrating that regulatory restrictions on vertical integration are costly to consumers, impede innovation, and discourage experimentation in a dynamic marketplace support the conclusion that neither regulation of search bias nor antitrust intervention can be justified on economic terms. Search neutrality advocates touting the non-economic virtues of their proposed regime should bear the burden of demonstrating that they exist beyond the Nirvana Fallacy of comparing an imperfect private actor to a perfect government decision-maker, and further, that any such benefits outweigh the economic costs.
Filed under: announcements, antitrust, economics, error costs, essential facilities, exclusionary conduct, google, law and economics, markets, monopolization, technology, truth on the market Tagged: antitrust, foundem, google, search, search bias, Search Engines, search neutrality, tradecomet, Vertical integration
Popular Media Commentators who see Trinko as an impediment to the claim that antitrust law can take care of harmful platform access problems (and thus that prospective rate . . .
Commentators who see Trinko as an impediment to the claim that antitrust law can take care of harmful platform access problems (and thus that prospective rate regulation (i.e., net neutrality) is not necessary), commit an important error in making their claim–and it is a similar error committed by those who advocate for search neutrality regulation, as well. In both cases, proponents are advocating for a particular remedy to an undemonstrated problem, rather than attempting to assess whether there is really a problem in the first place. In the net neutrality context, it may be true that Trinko would prevent the application of antitrust laws to mandate neutral access as envisioned by Free Press, et al. But that is not the same as saying Trinko precludes the application of antitrust laws. In fact, there is nothing in Trinko that would prevent regulators and courts from assessing the anticompetitive consequences of particular network management decisions undertaken by a dominant network provider. This is where the concerns do and should lie–not with an aesthetic preference for a particular form of regulation putatively justified as a response to this concern. Indeed, “net neutrality” as an antitrust remedy, to the extent that it emanates from essential facilities arguments, is and should be precluded by Trinko.
But the Court seems to me to be pretty clear in Trinko that an antitrust case can be made, even against a firm regulated under the Telecommunications Act:
Section 601(b)(1) of the 1996 Act is an antitrust-specific saving clause providing that “nothing in this Act or the amendments made by this Act shall be construed to modify, impair, or supersede the applicability of any of the antitrust laws.” This bars a finding of implied immunity. As the FCC has put the point, the saving clause preserves those “claims that satisfy established antitrust standards.” But just as the 1996 Act preserves claims that satisfy existing antitrust standards, it does not create new claims that go beyond existing antitrust standards; that would be equally inconsistent with the saving clause’s mandate that nothing in the Act “modify, impair, or supersede the applicability” of the antitrust laws.
Section 601(b)(1) of the 1996 Act is an antitrust-specific saving clause providing that “nothing in this Act or the amendments made by this Act shall be construed to modify, impair, or supersede the applicability of any of the antitrust laws.” This bars a finding of implied immunity. As the FCC has put the point, the saving clause preserves those “claims that satisfy established antitrust standards.”
But just as the 1996 Act preserves claims that satisfy existing antitrust standards, it does not create new claims that go beyond existing antitrust standards; that would be equally inconsistent with the saving clause’s mandate that nothing in the Act “modify, impair, or supersede the applicability” of the antitrust laws.
There is no problem assessing run of the mill anticompetitive conduct using “established antitrust standards.” But that doesn’t mean that a net neutrality remedy can be constructed from such a case, nor does it mean that precisely the same issues that proponents of net neutrality seek to resolve with net neutrality are necessarily cognizable anticompetitive concerns.
For example, as Josh noted the other day, quoting Tom Hazlett, proponents of net neutrality seem to think that it should apply indiscriminately against even firms with no monopoly power (and thus no ability to inflict consumer harm in the traditional antitrust sense). Trinko (along with a vast quantity of other antitrust precedent) would prevent the application of antitrust laws to reach this conduct–and thus, indeed, antitrust and net neutrality as imagined by its proponents are not coextensive. I think this is very much to the good. But, again, nothing in Trinko or elsewhere in the antitrust laws would prohibit an antitrust case against a dominant firm engaged in anticompetitive conduct just because it was also regulated by the FCC.
Critics point to language like this in Trinko to support their contrary claim:
One factor of particular importance is the existence of a regulatory structure designed to deter and remedy anticompetitive harm. Where such a structure exists, the additional benefit to competition provided by antitrust enforcement will tend to be small, and it will be less plausible that the antitrust laws contemplate such additional scrutiny.
But I don’t think that helps them at all. What the Court is saying is not that one regulatory scheme precludes the other, but rather that if a regulatory scheme mandates conduct that makes the actuality of anticompetitive harm less likely, then the application of necessarily-imperfect antitrust law is likely to do more harm than good. Thus the Court notes that
The regulatory framework that exists in this case demonstrates how, in certain circumstances, “regulation significantly diminishes the likelihood of major antitrust harm.”
But this does not say that regulation precludes the application of antitrust law. Nor does it preclude the possibility that antitrust harm can still exist; nor does it suggest that any given regulatory regime reduces the likelihood of any given anticompetitive harm–and if net neutrality proponents could show that the regulatory regime did not in fact diminish the likelihood of antitrust harm, nothing in Trinko would suggest that antitrust should not apply.
So let’s get out there and repeal that FCC net neutrality order and let antitrust deal with any problems that might arise.
Filed under: antitrust, essential facilities, exclusionary conduct, monopolization, net neutrality, technology Tagged: Competition law, FCC, Federal Communications Commission, Free Press, Monopoly, net neutrality, Network neutrality, regulation, Telecommunications Act
TOTM Here we go again. The European Commission is after Google more formally than a few months ago (but not yet having issued a Statement of . . .
Here we go again. The European Commission is after Google more formally than a few months ago (but not yet having issued a Statement of Objections).
Read the full piece here.
TOTM First of all, I would like to express my deepest gratitude to Josh Wright. Only because of Josh’s creativity and tireless, flawless execution did this blog symposium come about and run so smoothly.
First of all, I would like to express my deepest gratitude to Josh Wright. Only because of Josh’s creativity and tireless, flawless execution did this blog symposium come about and run so smoothly. I also would like to thank Dennis Crouch, who has generously cross-posted the symposium at PatentlyO. And I am grateful for the attention of the communities at TOTM and PatentlyO, which have patiently scrolled through countless pages and posts to learn about my book.
TOTM The opinion is available here. Yet another super-majority Roberts Court antitrust decision applying consensus economic theory. No more price squeeze claims. Alcoa is not overturned. . . .
The opinion is available here. Yet another super-majority Roberts Court antitrust decision applying consensus economic theory. No more price squeeze claims. Alcoa is not overturned. The Court declares that the price-squeeze claim in the absence of a duty to deal can be handled jointly by a straightforward application of Trinko and Brooke Group to the wholesale and retail prices at issue, respectively. There is also an extended discussion of the common pitfalls of the application of antitrust as price regulation.