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.

Last month in an interview with Global Competition Review, FTC Chairman Jon Leibowitz was asked whether the agency was “investigating the online search market” and he made this startling revelation:

“What I can say is that one of the commission’s priorities is to find a pure Section Five case under unfair methods of competition. Everyone acknowledges that Congress gave us much more jurisdiction than just antitrust. And I go back to this because at some point if and when, say, a large technology company acknowledges an investigation by the FTC, we can use both our unfair or deceptive acts or practice authority and our unfair methods of competition authority to investigate the same or similar unfair competitive behavior . . . . ”

“Section Five” refers to Section Five of the Federal Trade Commission Act. Exercising its antitrust authority, the FTC can directly enforce the Clayton Act but can enforce the Sherman Act only via the FTC Act, challenging as “unfair methods of competition” conduct that would otherwise violate the Sherman Act. Following Sherman Act jurisprudence, traditionally the FTC has interpreted Section Five to require demonstrable consumer harm to apply.

But more recently the commission—and especially Commissioners Rosch and Leibowitz—has been pursuing an interpretation of Section Five that would give the agency unprecedented and largely-unchecked authority. In particular, the definition of “unfair” competition wouldn’t be confined to the traditional measures–reduction in output or increase in price–but could expand to, well, just about whatever the agency deems improper.

Commissioner Rosch has claimed that Section Five could address conduct that has the effect of “reducing consumer choice”—an effect that a very few commentators support without requiring any evidence that the conduct actually reduces consumer welfare. Troublingly, “reducing consumer choice” seems to be a euphemism for “harm to competitors, not competition,” where the reduction in choice is the reduction of choice of competitors who may be put out of business by competitive behavior.

The U.S. has a long tradition of resisting enforcement based on harm to competitors without requiring a commensurate, strong showing of harm to consumers–an economically-sensible tradition aimed squarely at minimizing the likelihood of erroneous enforcement. The FTC’s invigorated interest in Section Five contemplates just such wrong-headed enforcement, however, to the inevitable detriment of the very consumers the agency is tasked with protecting.

In fact, the theoretical case against Google depends entirely on the ways it may have harmed certain competitors rather than on any evidence of actual harm to consumers (and in the face of ample evidence of significant consumer benefits).

Google has faced these claims at a number of levels. Many of the complaints against Google originate from Microsoft (Bing), Google’s largest competitor. Other sites have argued that that Google impairs the placement in its search results of certain competing websites, thereby reducing these sites’ ability easily to access Google’s users to advertise their competing products. Other sites that offer content like maps and videos complain that Google’s integration of these products into its search results has impaired their attractiveness to users.

In each of these cases, the problem is that the claimed harm to competitors does not demonstrably translate into harm to consumers.

For example, Google’s integration of maps into its search results unquestionably offers users an extremely helpful presentation of these results, particularly for users of mobile phones. That this integration might be harmful to MapQuest’s bottom line is not surprising—but nor is it a cause for concern if the harm flows from a strong consumer preference for Google’s improved, innovative product. The same is true of the other claims; harm to competitors is at least as consistent with pro-competitive as with anti-competitive conduct, and simply counting the number of firms offering competing choices to consumers is no way to infer actual consumer harm.

In the absence of evidence of Google’s harm to consumers, then, Leibowitz appears more interested in using Google as a tool in his and Rosch’s efforts to expand the FTC’s footprint. Advancing the commission’s “priority” to “find a pure Section Five case” seems to be more important than the question of whether Google is actually doing anything harmful.

When economic sense takes a back seat to political aggrandizement, we should worry about the effect on markets, innovation and the overall health of the economy.

Cross-posted from MainJustice

Summary

The regulation of innovation and the optimal design of legal institutions in an environment of uncertainty are two of the most important policy challenges of the twenty-first century. Innovation is critical to economic growth. Regulatory design decisions, and, in particular, competition policy and intellectual property regimes, can have profound consequences for economic growth. However, remarkably little is known about the relationship between innovation, competition, and regulatory policy.

Any legal regime must attempt to assess the tradeoffs associated with rules that will affect incentives to innovate, allocative efficiency, competition, and freedom of economic actors to commercialize the fruits of their innovative labors. The essays in this book approach this critical set of problems from an economic perspective, relying on the tools of microeconomics, quantitative analysis, and comparative institutional analysis to explore and begin to provide answers to the myriad challenges facing policymakers.

Available from Cambridge University Press

 

 

Our book, Competition Policy and Patent Law Under Uncertainty: Regulating Innovation will be published by Cambridge University Press in July.  The book’s page on the CUP website is here.

I just looked at the site to check on the publication date and I was delighted to see the advance reviews of the book.  They are pretty incredible, and we’re honored to have such impressive scholars, among the very top in our field and among our most significant influences, saying such nice things about the book:

After a century of exponential growth in innovation, we have reached an era of serious doubts about the sustainability of the trend. Manne and Wright have put together a first-rate collection of essays addressing two of the important policy levers – competition law and patent law – that society can pull to stimulate or retard technological progress. Anyone interested in the future of innovation should read it.

Daniel A. Crane, University of Michigan

Here, in one volume, is a collection of papers by outstanding scholars who offer readers insightful new discussions of a wide variety of patent policy problems and puzzles. If you seek fresh, bright thoughts on these matters, this is your source.

Harold Demsetz, University of California, Los Angeles

This volume is an essential compendium of the best current thinking on a range of intersecting subjects – antitrust and patent law, dynamic versus static competition analysis, incentives for innovation, and the importance of humility in the formulation of policies concerning these subjects, about which all but first principles are uncertain and disputed. The essays originate in two conferences organized by the editors, who attracted the leading scholars in their respective fields to make contributions; the result is that rara avis, a contributed volume more valuable even than the sum of its considerable parts.

Douglas H. Ginsburg, Judge, US Court of Appeals, Washington, DC

Competition Policy and Patent Law under Uncertainty is a splendid collection of essays edited by two top scholars of competition policy and intellectual property. The contributions come from many of the world’s leading experts in patent law, competition policy, and industrial economics. This anthology takes on a broad range of topics in a comprehensive and even-handed way, including the political economy of patents, the patent process, and patent law as a system of property rights. It also includes excellent essays on post-issuance patent practices, the types of practices that might be deemed anticompetitive, the appropriate role of antitrust law, and even network effects and some legal history. This volume is a must-read for every serious scholar of patent and antitrust law. I cannot think of another book that offers this broad and rich a view of its subject.

Herbert Hovenkamp, University of Iowa

With these contributors:

Robert Cooter, Richard A. Epstein, Stan J. Liebowitz, Stephen E. Margolis, Daniel F. Spulber, Marco Iansiti, Greg Richards, David Teece, Joshua D. Wright, Keith N. Hylton, Haizhen Lee, Vincenzo Denicolò, Luigi Alberto Franzoni, Mark Lemley, Douglas G. Lichtman, Michael Meurer, Adam Mossoff, Henry Smith, F. Scott Kieff, Anne Layne-Farrar, Gerard Llobet, Jorge Padilla, Damien Geradin and Bruce H. Kobayashi

I would have said the book was self-recommending.  But I’ll take these recommendations any day.

Filed under: announcements, antitrust, economics, law and economics, patent, scholarship

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:

If Search Neutrality Is the Answer, What’s the Question?

 

Geoffrey A. Manne

(Lewis & Clark Law School and ICLE)

and

Joshua D. Wright

(George Mason Law School & Department of Economics and ICLE)

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.

CLICK HERE TO DOWNLOAD THE PAPER

 

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

The press release is here. Notably, the settlement obligates Google to continue product development and to license ITA software on commercially-reasonable terms, seemingly for 5 years.  Frankly, I can’t imagine Google wouldn’t have done this anyway, so the settlement is not likely much of a binding constraint.

Also notable is what the settlement doesn’t seem to do: Impose any remedies intended to “correct” (or even acknowledge) so-called search neutrality issues.  This has to be considered a huge victory for Google and for common sense.  I’m sure Josh and I will have more to say once the pleadings and settlement are available.  Later today or tomorrow we will post a paper we have just completed on the issue of search neutrality.

Unfortunately, this settlement doesn’t put the matter to rest, and we still have to see what the FTC has in store now.  But for now, this is, as I said, a huge victory for Google . . . and for all of us who travel!

Filed under: antitrust, google, mergers & acquisitions Tagged: Federal Trade Commission, google, ITA Software, mergers, search, Search Engines, United States Department of Justice

Does anyone really still believe that the threat of antitrust enforcement doesn’t lead to undesirable caution on the part of potential defendants?

Whatever you may think of the merits of the Google/ITA merger (and obviously I suspect the merits cut in favor of the merger), there can be no doubt that restraining Google’s (and other large companies’) ability to acquire other firms will hurt those other firms (in ITA’s case, for example, they stand to lose $700 million).  There should also be no doubt that this restraint will exceed whatever efficient level is supposed by supporters of aggressive antitrust enforcement.  And the follow-on effect from that will be less venture funding and thus less innovation.  Perhaps we have too much innovation in the economy right now?

Reuters fleshes out the point in an article titled, “Google’s M&A Machine Stuck in Antitrust Limbo.”  That about sums it up.

Here are the most salient bits:

Not long ago, selling to Google offered one of the best alternatives to an initial public offering for up-and-coming technology startups. . . . But Google’s M&A machine looks to be gumming up.

* * *

The problem is antitrust limbo.

* * *

Ironically that may make it less appealing to sell to Google. The company has announced just $200 million of acquisitions in 2011 — the smallest sum since the panic of 2008.

* * *

The ITA acquisition has sent a warning signal to the venture capital and startup communities. Patents may still be available. But no fast-moving entrepreneur wants to get stuck the way ITA has since agreeing to be sold last July 1.

* * *

For a small, growing business the risks are huge.

* * *

That doesn’t exclude Google as an exit option. But the regulatory risk needs to be hedged with a huge breakup fee. . . . With Google’s rising antitrust issues, however, the fee needs to be as big as the purchase price.

Filed under: antitrust, business, cost-benefit analysis, google, law and economics, merger guidelines, mergers & acquisitions, technology Tagged: error costs, google, ITA, Venture capital

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

I am disappointed but not surprised to see that my former employer filed an official antitrust complaint against Google in the EU.  The blog post by Microsoft’s GC, Brad Smith, summarizing its complaint is here.

Most obviously, there is a tragic irony to the most antitrust-beleaguered company ever filing an antitrust complaint against its successful competitor.  Of course the specifics are not identical, but all of the atmospheric and general points that Microsoft itself made in response to the claims against it are applicable here.  It smacks of competitors competing not in the marketplace but in the regulators’ offices.  It promotes a kind of weird protectionism, directing the EU’s enforcement powers against a successful US company . . . at the behest of another US competitor.  Regulators will always be fighting last year’s battles to the great detriment of the industry.  Competition and potential competition abound, even where it may not be obvious (Linux for Microsoft; Facebook for Google, for example).  Etc.  Microsoft was once the world’s most powerful advocate for more sensible, restrained, error-cost-based competition policy.  That it now finds itself on the opposite side of this debate is unfortunate for all of us.

Brad’s blog post is eloquent (as he always is) and forceful.  And he acknowledges the irony.  And of course he may be right on the facts.  Unfortunately we’ll have to resort to a terribly-costly, irretrievably-flawed and error-prone process to find out–not that the process is likely to result in a very reliable answer anyway.  Where I think he is most off base is where he draws–and asks regulators to draw–conclusions about the competitive effects of the actions he describes.  It is certain that Google has another story and will dispute most or all of the facts.  But even without that information we can dispute the conclusions that Google’s actions, if true, are necessarily anticompetitive.  In fact, as Josh and I have detailed at length here and here, these sorts of actions–necessitated by the realities of complex, innovative and vulnerable markets and in many cases undertaken by the largest and the smallest competitors alike–are more likely pro-competitive.  More important, efforts to ferret out the anti-competitive among them will almost certainly harm welfare rather than help it–particularly when competitors are welcomed in to the regulators’ and politicians’ offices in the process.

As I said, disappointing.  It is not inherently inappropriate for Microsoft to resort to this simply because it has been the victim of such unfortunate “competition” in the past, nor is Microsoft obligated or expected to demonstrate intellectual or any other sort of consistency.  But knowing what it does about the irretrievable defects of the process and the inevitable costliness of its consequences, it is disingenuous or naive (the Nirvana fallacy) for it to claim that it is simply engaging in a reliable effort to smooth over a bumpy competitive landscape.  That may be the ideal of antitrust enforcement, but no one knows as well as Microsoft that the reality is far from that ideal.  To claim implicitly that, in this case, things will be different is, as I said, disingenuous.  And likely really costly in the end for all of us.

Filed under: antitrust, business, exclusionary conduct, law and economics, markets, monopolization, politics, regulation, technology Tagged: Brad Smith, Competition law, European Commission, google, microsoft, politics, regulation

[UPDATE:  Josh links to a WSJ article telling us that EU antitrust enforcers raided several (unnamed) e-book publishers as part of an apparent antitrust investigation into the agency model and whether it is “improperly restrictive.”  Whatever that means.  Key grafs:

At issue for antitrust regulators is whether agency models are improperly restrictive. Europe, in particular, has strong anticollusion laws that limit the extent to which companies can agree on the prices consumers will eventually be charged.

Amazon, in particular, has vociferously opposed the agency practice, saying it would like to set prices as it sees fit. Publishers, by contrast, resist the notion of online retailers’ deep discounting.

It is unclear whether the animating question is whether the publishers might have agreed to a particular pricing model, or to particular prices within that model.  As a legal matter that distinction probably doesn’t matter at all; as an economic matter it would seem to be more complicated–to be explored further another day . . . .]

A year ago I wrote about the economics of the e-book publishing market in the context of the dispute between Amazon and some publishers (notably Macmillan) over pricing.  At the time I suggested a few things about how the future might pan out (never a god good idea . . . ):

And that’s really the twist.  Amazon is not ready to be a platform in this business.  The economic conditions are not yet right and it is clearly making a lot of money selling physical books directly to its users.  The Kindle is not ubiquitous and demand for electronic versions of books is not very significant–and thus Amazon does not want to take on the full platform development and distribution risk.  Where seller control over price usually entails a distribution of inventory risk away from suppliers and toward sellers, supplier control over price correspondingly distributes platform development risk toward sellers.  Under the old system Amazon was able to encourage the distribution of the platform (the Kindle) through loss-leader pricing on e-books, ensuring that publishers shared somewhat in the costs of platform distribution (from selling correspondingly fewer physical books) and allowing Amazon to subsidize Kindle sales in a way that helped to encourage consumer familiarity with e-books.  Under the new system it does not have that ability and can only subsidize Kindle use by reducing the price of Kindles–which impedes Amazon from engaging in effective price discrimination for the Kindle, does not tie the subsidy to increased use, and will make widespread distribution of the device more expensive and more risky for Amazon.

This “agency model,” if you recall, is one where, essentially, publishers, rather than Amazon, determine the price for electronic versions of their books sold via Amazon and pay Amazon a percentage.  The problem from Amazon’s point of view, as I mention in the quote above, is that without the ability to control the price of the books it sells, Amazon is limited essentially to fiddling with the price of the reader–the platform–itself in order to encourage more participation on the reader side of the market.  But I surmised (again in the quote above), that fiddling with the price of the platform would be far more blunt and potentially costly than controlling the price of the books themselves, mainly because the latter correlates almost perfectly with usage, and the former does not–and in the end Amazon may end up subsidizing lots of Kindle purchases from which it is then never able to recoup its losses because it accidentally subsidized lots of Kindle purchases by people who had no interest in actually using the devices very much (either because they’re sticking with paper or because Apple has leapfrogged the competition).

It appears, nevertheless, that Amazon has indeed been pursuing this pricing strategy.  According to this post from Kevin Kelly,

In October 2009 John Walkenbach noticed that the price of the Kindle was falling at a consistent rate, lowering almost on a schedule. By June 2010, the rate was so unwavering that he could easily forecast the date at which the Kindle would be free: November 2011.

There’s even a nice graph to go along with it:

So what about the recoupment risk?  Here’s my new theory:  Amazon, having already begun offering free streaming videos for Prime customers, will also begin offering heavily-discounted Kindles and even e-book subsidies–but will also begin rescinding its shipping subsidy and otherwise make the purchase of dead tree books relatively more costly (including by maintaining less inventory–another way to recoup).  It will still face a substantial threat from competing platforms like the iPad but Amazon is at least in a position to affect a good deal of consumer demand for Kindle’s dead tree competitors.

For a take on what’s at stake (here relating to newspapers rather than books, but I’m sure the dynamic is similar), this tidbit linked from one of the comments to Kevin Kelly’s post is eye-opening:

If newspapers switched over to being all online, the cost base would be instantly and permanently transformed. The OECD report puts the cost of printing a typical paper at 28 per cent and the cost of sales and distribution at 24 per cent: so the physical being of the paper absorbs 52 per cent of all costs. (Administration costs another 8 per cent and advertising another 16.) That figure may well be conservative. A persuasive looking analysis in the Business Insider put the cost of printing and distributing the New York Times at $644 million, and then added this: ‘a source with knowledge of the real numbers tells us we’re so low in our estimate of the Times’s printing costs that we’re not even in the ballpark.’ Taking the lower figure, that means that New York Times, if it stopped printing a physical edition of the paper, could afford to give every subscriber a free Kindle. Not the bog-standard Kindle, but the one with free global data access. And not just one Kindle, but four Kindles. And not just once, but every year. And that’s using the low estimate for the costs of printing.

Filed under: antitrust, business, cartels, contracts, doj, e-books, economics, error costs, law and economics, litigation, MFNs, monopolization, resale price maintenance, technology, vertical restraints Tagged: agency model, Amazon, Amazon Kindle, antitrust, Apple, doj, e-book, e-books, iBookstore, Kindle, major publishers, MFN, most favored nations clause, per se, price-fixing, publishing industry, Rule of reason, two-sided markets, vertical restraints