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The Bitter Fruits of Federal Antitrust ‘Reform’ Legislation

TOTM Much ink has been spilled regarding the potential harm to the economy and to the rule of law that could stem from enactment of the . . .

Much ink has been spilled regarding the potential harm to the economy and to the rule of law that could stem from enactment of the primary federal antitrust legislative proposal, the American Innovation and Choice Online Act (AICOA) (see here). AICOA proponents, of course, would beg to differ, emphasizing the purported procompetitive benefits of limiting the business freedom of “Big Tech monopolists.”

Read the full piece here.

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Antitrust & Consumer Protection

The Catch-22 of AICOA’s Guidelines

TOTM If S.2992—the American Innovation and Choice Online Act or AICOA—were to become law, it would be, at the very least, an incomplete law. By design—and not for . . .

If S.2992—the American Innovation and Choice Online Act or AICOA—were to become law, it would be, at the very least, an incomplete law. By design—and not for good reason, but for political expediency—AICOA is riddled with intentional uncertainty. In theory, the law’s glaring definitional deficiencies are meant to be rectified by “expert” agencies (i.e., the DOJ and FTC) after passage. But in actuality, no such certainty would ever emerge, and the law would stand as a testament to the crass political machinations and absence of rigor that undergird it. Among many other troubling outcomes, this is what the future under AICOA would hold.

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Antitrust & Consumer Protection

The Cracked Mirror of Monopoly-Monopsony Symmetry

TOTM Conventional wisdom is that monopsony power is simply the flip slide of monopoly power. The truth is much more complicated.

Slow wage growth and rising inequality over the past few decades have pushed economists more and more toward the study of monopsony power—particularly firms’ monopsony power over workers. Antitrust policy has taken notice. For example, when the Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) initiated the process of updating their merger guidelines, their request for information included questions about how they should respond to monopsony concerns, as distinct from monopoly concerns. ?

Read the full piece here.

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Antitrust & Consumer Protection

Relevant Market in the Google AdTech Case

ICLE Issue Brief Digital advertising is the economic backbone of much of the Internet. But complaints have recently emerged from a number of quarters alleging the digital advertising market is monopolized by its largest participant: Google.

Executive Summary

Digital advertising is the economic backbone of much of the Internet. But complaints have recently emerged from a number of quarters alleging the digital advertising market is monopolized by its largest participant: Google. Most significantly, a lawsuit first filed by the State of Texas and 17 other U.S. states in 2020 alleges anticompetitive conduct related to Google’s online display advertising business. The U.S. Justice Department (DOJ) reportedly may bring a lawsuit similarly focused on Google’s online display advertising business sometime in 2022. Meanwhile, the United Kingdom’s Competition and Markets Authority undertook a lengthy investigation of digital advertising, ultimately recommending implementation of a code of conduct and “pro-competitive interventions” into the market, as well as a new regulatory body to oversee these measures. Most recently, a group of U.S. senators introduced a bill that would break up Google’s advertising business (as well as that of other large display advertising intermediaries such as Facebook and Amazon).

All of these actions rely on a crucial underlying assumption: that Google’s display advertising business enjoys market power in one or more competitively relevant markets. To understand what market power a company has within the market for a given type of digital advertising, it is crucial to evaluate what constitutes the relevant market in which it operates. If the market is defined broadly to include many kinds of online and/or offline advertising, then even complete dominance of a single segment may not be enough to confer market power. On the other hand, if the relevant market is defined narrowly, it may be easier to reach the legal conclusion that market power exists, even in the absence of economic power over price.

Determining the economically appropriate market turns importantly on whether advertisers and publishers can switch to other forms of advertising, either online or offline. This includes the specific ad-buying and placement tools that the Texas Complaint alleges exist within distinct antitrust markets—each of which, it claims, is monopolized by Google. The Texas Complaint identifies at least five relevant markets that it alleges Google is monopolizing or attempting to monopolize: publisher ad servers for web display; ad-buying tools for web display; ad exchanges for web display; mediation of in-app ads; and in-app ad networks.

As we discuss, however, these market definitions put forth by the Texas Complaint and other critics of Google’s adtech business appear to be overly narrow, and risk finding market dominance where it doesn’t exist.

Digital advertising takes numerous forms, such as ads presented along with search results, static and video display ads, in-game ads, and ads presented in music streams and podcasts. Within digital advertising of all kinds, Google accounted for a little less than one-third of spending in 2020; Facebook accounted for about one-quarter, Amazon for 10%, and other ad services like Microsoft and Verizon accounted for the remaining third. Open-display advertising on third-party websites—the type of advertising at issue in the Texas Complaint and the primary critiques of Google’s adtech business—is a smaller subset of total digital advertising, with one estimate finding that it accounts for about 18% of U.S. digital advertising spending.

U.S. digital advertising grew from $26 billion in 2010 to $152 billion in 2020, an average annual increase of 19%, even as the Producer Price Index for Internet advertising sales declined by an annual average of 5% over the same period. The rise in spending in the face of falling prices indicates that the number of ads bought and sold increased by approximately 26% a year. The combination of increasing quantity, decreasing cost, and increasing total revenues is consistent with a growing and increasingly competitive market, rather than one of rising concentration and reduced competition.

But digital advertising is just one kind of advertising, and advertising more generally is just one piece of a much larger group of marketing activities. According to the market research company eMarketer, about $130 billion was spent on digital advertising in the United States in 2019, comprising half of the total U.S. media advertising market. Advertising occurs across a wide range of media, including television, radio, newspapers, magazines, trade publications, billboards, and the Internet.

An organization considering running ads has numerous choices about where and how to run them, including whether to advertise online or via other “offline” media, such as on television or radio or in newspapers or magazines, among many other options. If it chooses online advertising, it faces another range of alternatives, including search ads, in which the ad is displayed as a search-engine result; display ads on a site owned and operated by the firm that sells the ad space; “open” display ads on a third-party’s site; or display ads served on mobile apps.

Although advertising technology and both supplier and consumer preferences continue to evolve, the weight of evidence suggests a far more unified and integrated economically relevant market be-tween offline and online advertising than their common semantic separation would suggest. What publishers sell to advertisers is access to consumers’ attention. While there is no dearth of advertising space, consumer attention is a finite and limited resource. If the same or similar consumers are variously to be found in each channel, all else being equal, there is every reason to expect advertisers to substitute between them, as well.

The fact that offline and online advertising employ distinct processes does not consign them to separate markets. The economic question is whether one set of products or services acts as a competitive constraint on another; not whether they appear to be descriptively similar. Indeed, online advertising has manifestly drawn advertisers from offline markets, as previous technological innovations drew advertisers from other channels before them. Moreover, while there is evidence that, in some cases, offline and online advertising may be complements (as well as substitutes), the dis-tinction between these is becoming less and less meaningful as the revolution in measurability has changed how marketers approach different levels of what is known as the “marketing funnel.”

The classic marketing funnel begins with brand-building-type advertising at the top, aimed at a wide audience and intended to promote awareness of a product or brand. This is followed by increasingly targeted advertising that aims to give would-be customers a more and more favorable view of the product. At the bottom of this funnel is an advertisement that leads the customer to purchase the item. In this conception, for example, display advertising (to promote brand aware-ness) and search advertising (to facilitate a purchase) are entirely distinct from one another.

But the longstanding notion of the “marketing funnel” is rapidly becoming outdated. As the ability to measure ad effectiveness has increased, distinctions among types of advertising that were once dictated by where the ad would fall in the marketing funnel have blurred. This raises the question whether online display advertising constitutes a distinct, economically relevant market from online search advertising, as the Federal Trade Commission, for example, claimed in its 2017 review of the Google/DoubleClick merger.

The Texas Complaint adopts a non-economic approach to market definition, defining the relevant market according to similarity between product functions, not by economic substitutability. It thus ignores the potential substitutability between different kinds of advertising, both online and offline, and hence the constraint these other forms of advertising impose on the display advertising market.

If advertisers faced with higher advertising costs for open-display ads would shift to owned-and-operated display ads or to search ads or to other media altogether—rendering small but significant advertising price increases unprofitable—then these alternatives must be included in the relevant antitrust market. Similarly, if publishers faced with declining open-display ad revenues would quickly shift to alternative such as direct placement of ads or sponsorships, then these alternatives must be included in the relevant market, as well.

If advertisers and publishers are faced with a wide range of viable alternatives and the market is broadly defined to include these alternatives, then it is not clear that any single firm can profitably exercise monopoly power—no matter what its market share is in one piece of the broader market. Similarly, it is not clear whether “consumers” (e.g., advertisers, publishers, or users) have suffered any economic harm.

With a narrow focus on “open display,” it is quite possible that Google’s dominance can be technically demonstrated. But if, as suggested here, “open display” is really just a small piece of larger relevant market, then any fines and remedies resulting from an erroneously narrow market definition are as likely to raise the cost of business for advertisers, publishers, and intermediaries as they would be to increase competition that benefits market participants.

Read the full issue brief here.

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Antitrust & Consumer Protection

ICLE Comments on FTC/DOJ Merger Enforcement RFI

Regulatory Comments The FTC and DOJ's RFI on whether and how to update the antitrust agencies’ merger-enforcement guidelines is based on several faulty premises and appears to presuppose a preferred outcome.

Executive Summary

Our comments in response to the agencies’ merger guidelines RFI are broken into two parts. The first raises concerns regarding the agencies’ ultimate intentions as reflected in the RFI, the authority of the assumptions undergirding it, and the agencies’ (mis)understanding of the role of merger guidelines. The second part responds to several of the most pressing and problematic substantive questions raised in the RFI.

With respect to the (for lack of a better term) “process” elements of the agencies’ apparent intended course of action, we argue that the RFI is based on several faulty premises which, if left unchecked, will taint any subsequent soft law proposals based thereon:

First, the RFI seems to presuppose a particular, preferred outcome and does not generally read like an objective request for the best information necessary to reach optimal results. Although some of the language is superficially neutral, the overarching tone is (as Doug Melamed put it) “very tendentious”: the RFI seeks information to support a broad invigoration of merger enforcement. While some certainly contend that strengthening merger-enforcement standards is appropriate, merger guidelines that start from that position can hardly be relied upon by courts as a source of information to differentiate in difficult cases, if and when that may be warranted.

Indeed, the RFI misconstrues the role of merger guidelines, which is to reflect the state of the art in a certain area of antitrust and not to artificially push the accepted scope of knowledge and practice toward a politically preferred and tenuous frontier. The RFI telegraphs an attempt by the agencies to pronounce as settled what are hotly disputed, sometimes stubbornly unresolved issues among experts, all to fit a preconceived political agenda. This not only overreaches the FTC’s and DOJ’s powers, but it also risks galvanizing opposition from the courts, thereby undermining the utility of adopting guidelines in the first place.

Second, underlying the RFI and the agencies’ apparently intended course of action is the uncritical acceptance of a popular, but highly contentious, narrative positing that there is an inexorable trend toward increased concentration, caused by lax antitrust enforcement, that has caused significant harm to the economy. As we explain, however, every element of this narrative withers under closer scrutiny. Rather, the root causes of increased concentration (if it is happening in the first place) are decidedly uncertain; concentration is decreasing in the local markets in which consumers actually make consumption decisions; and there is evidence that, because much increased concentration has been caused by productivity advances rather than anticompetitive conduct, consumers likely benefit from it.

Lastly, the RFI assumes that the current merger-control laws and tools are no longer fit for purpose. Specifically, the agencies imply that current enforcement thresholds and longstanding presumptions, such as the HHI levels that trigger enforcement, allow too many anticompetitive mergers to slip through the cracks. We contend that this kind of myopic thinking fails to apply the relevant error-cost framework. In merger enforcement, as in antitrust law, it is not appropriate to focus narrowly on one set of errors in guiding legal and policy reform.  Instead, general-purpose tools and presumptions should be assessed with an eye toward reducing the totality of errors, rather than those arising in one segment at the expense of another.

Substantively, our comments address the following issues:

First, the RFI is concerned with the state of merger enforcement in labor markets (and “monopsony” markets more broadly). While some discussion may be welcome regarding new guidelines for how agencies and courts might begin to approach mergers that affect labor markets, the paucity of past actions in this area (the vast bulk of which have been in a single industry: hospitals); the significant dearth of scholarly analysis of relevant market definition in labor markets; and, above all, the fundamental complexities it raises for the proper metrics of harm in mergers that affect multiple markets, all raise the specter that aiming for specific outcomes in labor markets may undermine the standards that support proper merger enforcement overall. If the agencies are to apply merger-control rules to monopsony markets, they must make clear that the relevant market to analyze is the output market, and not (only) the input market. Ultimately, this is the only way to separate mergers that generate efficiencies from those that create monopsony power, since both have the effect of depressing input prices. If antitrust law is to stay grounded in the consumer welfare standard, as it should, it must avoid blocking mergers that are consumer-facing simply because they decrease the price of an input. The issue of monopsony is further complicated by the fact that many inputs are highly substitutable across a wide range of industries, rendering the relevant market even more difficult to pin down than in traditional product markets.

Second, there is not enough evidence to create the presumption of a negative relationship between market concentration and innovation, or between market concentration and investment. In fact, as we show, it may often be the case that the opposite is true. The agencies should thus be wary of drawing any premature conclusions—let alone establishing any legal presumptions—on the connection between market structure and non-price effects, such as innovation and investment.

Third, the RFI blurs what has hitherto been a clear demarcation—and rightly so—between vertical and horizontal mergers by stretching the meaning of “potential competition” beyond any reasonable limits.  In doing, it ascribes stringent theories of harm based on far-fetched hypotheticals to otherwise neutral or benign business conduct. This “horizontalization” of vertical mergers, if allowed to translate into policy, is likely to have chilling effects on procompetitive merger activity to the detriment of consumers and, ultimately, society as a whole.  As we show, there is no legal or empirical justification to abandon the time-honed differentiation between horizontal and vertical mergers, or to impose a heightened burden of proof on the latter. The 2018 AT&T merger illustrates this.

Fourth, and despite some facially attractive rhetoric, data should not receive any special treatment under the merger rules. Instead, it should be treated as any other intangible asset, such as reputation, IP, know-how, etc.

Finally, the notion of “attention markets” is not ready to be applied in a merger-control context, as the attention-market scholarship fails to offer objective, let alone quantifiable, criteria that might enable authorities to identify firms that are unique competitors for user attention.

Read the full comments here.

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Antitrust & Consumer Protection

Application of the Proper ‘Outer Boundary’ of Antitrust Liability for Alleged Refusals to Deal in New York v Facebook

TOTM The States brought an antitrust complaint against Facebook alleging that various conduct violated Section 2 of the Sherman Act. The ICLE brief addresses the States’ . . .

The States brought an antitrust complaint against Facebook alleging that various conduct violated Section 2 of the Sherman Act. The ICLE brief addresses the States’ allegations that Facebook refused to provide access to an input, a set of application-programming interfaces that developers use in order to access Facebook’s network of social-media users (Facebook’s Platform), in order to prevent those third parties from using that access to export Facebook data to competitors or to compete directly with Facebook.

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Antitrust & Consumer Protection

Attention Markets: They Know Them When they See Them

TOTM A raft of progressive scholars in recent years have argued that antitrust law remains blind to the emergence of so-called “attention markets,” in which firms compete by . . .

A raft of progressive scholars in recent years have argued that antitrust law remains blind to the emergence of so-called “attention markets,” in which firms compete by converting user attention into advertising revenue. This blindness, the scholars argue, has caused antitrust enforcers to clear harmful mergers in these industries.

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Antitrust & Consumer Protection

ICLE Brief for 9th Circuit in Epic Games v Apple

Amicus Brief In this brief for the 9th U.S. Circuit Court of Appeals, ICLE and 26 distinguished scholars of law & economics argue that the district court in a suit brought by Epic Games rightly found that Apple’s procompetitive justifications outweigh any purported anticompetitive effects in the market for mobile-gaming transactions.

United States Court of Appeals
For the
Ninth Circuit

EPIC GAMES, INC.,
Plaintiff/Counter-Defendant, Appellant/Cross-Appellee,
v.
APPLE, INC.,
Defendant/Counter-Claimant, Appellee/Cross-Appellant

Appeal from a Decision of the United States District Court
for the Northern District of California,
No. 4:20-cv-05640-YGR ? Honorable Yvonne Gonzalez Rogers

BRIEF OF AMICI CURIAE INTERNATIONAL CENTER FOR LAW & ECONOMICS
AND SCHOLARS OF LAW AND ECONOMICS
IN SUPPORT OF APPELLEE/CROSS-APPELLANT

 

INTEREST OF AMICI CURIAE

 

The International Center for Law & Economics (“ICLE”) is a nonprofit, non- partisan global research and policy center aimed at building the intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law & economics methodologies to inform public policy debates and has longstanding expertise in the evaluation of antitrust law and policy.

Amici also include 26 scholars of antitrust, law, and economics at leading universities and research institutions around the world. Their names, titles, and academic affiliations are listed in Addendum A. All have longstanding expertise in, and copious research on, antitrust law and economics.

Amici have an interest in ensuring that antitrust promotes the public interest by remaining grounded in sensible legal rules informed by sound economic analysis. Amici believe that Epic’s arguments deviate from that standard and promote the private interests of slighted competitors at the expense of the public welfare.

INTRODUCTION

Epic challenges Apple’s prohibition of third-party app stores and in-app payments (“IAP”) systems from operating on its proprietary, iOS platform as a violation of the antitrust laws. But, as the district court concluded, Epic’s real concern is its own business interests in the face of Apple’s business model—in particular, the commission charged for the use of Apple’s IAP system. See Order at 1-ER22, Epic Games, Inc. v. Apple Inc., No. 4:20-CV-05640 (N.D. Cal. Sept. 10, 2021), ECF No. 812 (1-ER3–183). In essence, Epic is trying to recast its objection to Apple’s 30% commission for use of Apple’s optional IAP system as a harm to consumers and competition more broadly.

Epic takes issue with the district court’s proper consideration of Apple’s procompetitive justifications and its finding that those justifications outweigh any anticompetitive effects of Apple’s business model. But Epic’s case fails at step one of the rule of reason analysis. Indeed, Epic did not demonstrate that Apple’s app distribution and IAP practices caused the significant market-wide effects that the Supreme Court in Ohio v. Am. Express Co. (“Amex”) deemed necessary to show anticompetitive harm in cases involving two-sided transaction markets. 138 S. Ct. 2274, 2285–86 (2018). While the district court found that Epic demonstrated some anticompetitive effects, Epic’s arguments below focused only on the effects that Apple’s conduct had on certain app developers and failed to appropriately examine whether consumers were harmed overall. This is fatal. Without further evidence of the effect of Apple’s app distribution and IAP practices on consumers, no conclusions can be reached about the competitive effects of Apple’s conduct.

Nor can an appropriate examination of anticompetitive effects ignore output. It is critical to consider whether the challenged app distribution and IAP practices reduce output of market-wide app transactions. Yet Epic did not seriously challenge that output increased by every measure, and Epic’s Amici ignore output altogether.

Moreover, the district court examined the one-sided anticompetitive harms presented by Epic, but rightly found that Apple’s procompetitive justifications outweigh any purported anticompetitive effects in the market for mobile gaming transactions. The court recognized that the development and maintenance of a closed iOS system and Apple’s control over IAP confers enormous benefits on users and app developers.

Finally, Epic’s reliance on the theoretical existence of less restrictive alternatives (“LRA”) to Apple’s business model is misplaced. Forcing Apple to adopt the “open” platform that Epic champions would reduce interbrand competition, and improperly permit antitrust plaintiffs to commandeer the judiciary to modify routine business conduct any time a plaintiff’s attorney or district court can imagine a less restrictive version of a challenged practice, irrespective of whether the practice promotes consumer welfare. See NCAA v. Alston, 141 S. Ct. 2141, 2161 (2021) (“[C]ourts should not second-guess ‘degrees of reasonable necessity’ so that ‘the lawfulness of conduct turn[s] upon judgments of degrees of e?ciency.’”). Particularly in the context of two-sided platform businesses, such an approach would sacrifice interbrand, systems-level competition for the sake of a superficial increase in competition among a small subset of platform users.

Read the full brief here.

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Antitrust & Consumer Protection

ICLE Brief for D.C. Circuit in State of New York v Facebook

Amicus Brief In this amicus brief for the U.S. Court of Appeals for the D.C. Circuit, ICLE and a dozen scholars of law & economics address the broad consensus disfavoring how New York and other states seek to apply the “unilateral refusal to deal” doctrine in an antitrust case against Facebook.

United States Court of Appeals
for the District of Columbia Circuit

STATE OF NEW YORK, et al.,
Plaintiffs-Appellants,
v.
FACEBOOK, INC.,
Defendant-Appellee.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
No. 1:20-cv-03589-JEB (Hon. James E. Boasberg)

BRIEF OF INTERNATIONAL CENTER FOR
LAW AND ECONOMICS AND SCHOLARS OF LAW
AND ECONOMICS AS AMICUS CURIAE SUPPORTING
DEFENDANT-APPELLEE FACEBOOK, INC. AND AFFIRMANCE

 

STATEMENT OF THE AMICUS CURIAE

Amici are leading scholars of economics, telecommunications, and/or antitrust. Their scholarship reflects years of experience and publications in these fields.

Amici’s expertise and academic perspectives will aid the Court in deciding whether to affirm in three respects. First, amici provide an explanation of key economic concepts underpinning how economists understand the welfare effects of a monopolist’s refusal to deal voluntarily with a competitor and why that supports affirmance here. Second, amici offer their perspective on the limited circumstances that might justify penalizing a monopolist’s unilateral refusal to deal—and why this case is not one of them. Third, amici explain why the District Court’s legal framework was correct and why a clear standard is necessary when analyzing alleged refusals to deal.

SUMMARY OF ARGUMENT

This brief addresses the broad consensus in the academic literature disfavoring a theory underlying plaintiff’s case—“unilateral refusal to deal” doctrine. The States allege that Facebook restricted access to an input (Facebook’s Platform) in order to prevent third parties from using that access to export Facebook data to competitors or compete directly with Facebook. But a unilateral refusal to deal involves more than an allegation that a monopolist refuses to enter into a business relationship with a rival.

Mainstream economists and competition law scholars are skeptical of imposing liability, even on a monopolist, based solely on its choice of business partners. The freedom of firms to choose their business partners is a fundamental tenet of the free market economy, and the mechanism by which markets produce the greatest welfare gains. Thus, cases compelling business dealings should be confined to particularly delineated circumstances.

In Part I below, amici describe why it is generally inefficient for courts to compel economic actors to deal with one another. Such “solutions” are generally unsound in theory and unworkable in practice, in that they ask judges to operate as regulators over the defendant’s business.

In Part II, amici explain why Aspen Skiing—the Supreme Court’s most prominent precedent permitting liability for a monopolist’s unilateral refusal to deal—went too far and should not be expanded as the States’ and some of their amici propose.

In Part III, amici explain that the District Court correctly held that the conduct at issue here does not constitute a refusal to deal under Aspen Skiing. A unilateral refusal to deal should trigger antitrust liability only where a monopolist turns down more profitable dealings with a competitor in an effort to drive that competitor’s exit or to disable its ability to compete, thereby allowing the monopolist to recoup its losses by increasing prices in the future. But the States’ allegations do not describe that scenario.

In Part IV, amici address that the District Court properly considered and dismissed the States’ “conditional dealing” argument. The States’ allegations are correctly addressed under the rubric of a refusal to deal—not exclusive dealing or otherwise. The States’ desire to mold their allegations into different legal theories highlights why courts should use a strict, clear standard to analyze refusals to deal.

Read the full brief here.

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Antitrust & Consumer Protection