ICLE Director of Competition Policy, Dirk Auer, joined TechFreedom’s Tech Policy Podcast to discuss why Europe has been pursuing aggressive antitrust enforcement against American tech companies. The full episode is embedded below.

Background…

California Attorney General Rob Bonta recently filed a state-law antitrust suit against Amazon, alleging that it imposes most-favored-nation clauses (MFNs) on its retailers and wholesalers, and that these dampen competition between Amazon and those firms.

But…

The California suit argues that Amazon’s MFNs are tantamount to a cartel. This is symptomatic of broader misunderstandings about the competitive effects of MFNs, as well as the legal standards to which they should be subjected.

MFNs are vertical restraints. Barring exceptional circumstances—such as evidence of horizontal collusion—they should thus be analyzed under the rule of reason. This approach is consistent with economic research surrounding these clauses, the U.S. Supreme Court’s case law on retail-price maintenance (a close analogue), and the stance taken by competition authorities around the globe, notably the European Commission. 

Read the full explainer here.

Philip K Dick’s novella “The Minority Report” describes a futuristic world without crime. This state of the world is achieved thanks to the visions of three mutants—so-called “precogs”—who predict crimes before they occur, thereby enabling law enforcement to incarcerate people for crimes they were going to commit.

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May 2007, Palo Alto

The California sun shone warmly on Eric Schmidt’s face as he stepped out of his car and made his way to have dinner at Madera, a chic Palo Alto restaurant.

Read the full piece here.

Executive Summary

Intermediaries may not be the consumer welfare hero we want, but more often than not, they are one that we need. Policymakers often assume that intermediaries and centralization serve as a cost to society, and that consumers are better off when provided with “more choice.” Concrete expression of this view can be found in regulatory initiatives that aim to turn “closed” platforms into “open” ones (see, in Europe, the Digital Markets Act; and in the United States, the Open App Markets Act and the American Innovation and Choice Online Act). Against this backdrop, we explain that, as with all economic goods, intermediation involves tradeoffs. Intermediaries emerge when it would otherwise be too difficult (or too costly) for groups of users to meet and interact. There is thus no guarantee that government-mandated disintermediation — such as that contemplated in the European DMA and the U.S. AICOA bill — will generate net benefits in a given case. The ongoing Epic v Apple proceedings are a good example of why it is important to respect the role of intermediaries in digital markets, and the unique benefits intermediation can bring to consumers. The upshot is that intermediaries are far more valuable than they are usually given credit for.

Read the full issue brief here.

Executive Summary

Our response to the National Telecommunications and Information Administration’s (“NTIA”) request for comments (“RFC”) is broken into two parts. The first part raises concerns regarding what we see as the NTIA’s uncritical acceptance of certain contentious assumptions, as well as the RFC’s pre-commitment to a particular political viewpoint. The second part responds to several of the most pressing and problematic substantive questions raised in the RFC.

The RFC appears intended to invite comments that conform to a pre-established commitment to interventionist policy. The heuristics and assumptions on which it relies anticipate the desired policy outcome, rather than setting a baseline for genuine input and debate. Unfortunately, these biases also appear to carry over to the substantive questions. These comments offer four substantive observations:

First, that interoperability is not a panacea for mobile-apps ecosystems. There are risks and benefits that attend interoperability and these risks and benefits manifest differently for different groups of end-users and distributors. Specifically, some users may prefer “closed” platforms that offer a more curated experience with enhanced security features.

Second, considerations of security are intrinsic to determining whether interoperability is feasible or desirable. Centralized app distribution is what allows platforms like the App Store to filter harmful content through a two-tiered process of both human and automated app review. Such control over the ecosystem’s content would necessarily be relinquished if third-party app distribution and payment systems were allowed on “closed” platforms.

Third, determinations of “user benefit” in the mobile-app ecosystem must account for both end-users and developers. Where the interests of the two sides of the market conflict, total output—rather than price—should be the relevant benchmark.

Fourth, there is no objective “correct balance” between security and access. Some end-users and developers prefer more curated and ostensibly safer ecosystems, while others are most concerned with the sheer quantity of options. The NTIA should not substitute its own preferences for the revealed preferences of millions of users and distributors.

Read the full comments here.

Introduction

The International Center for Law & Economics (ICLE) is grateful for the opportunity to submit these comments in support of FTX’s application to amend its DCO registration to allow it to clear margined products directly for retail participants.

The vast majority (some 96%[1]) of global crypto derivatives trading takes place outside the U.S., much of it on platforms operating non-intermediated retail models similar to that proposed in FTX’s application—but with one crucial difference: these offshore exchanges are largely unregulated. The reason for the disparity in domestic vs. foreign trading volumes is clear: regulatory constraints and costs in the U.S. make the operation of such platforms impossible or unviable. FTX’s proposal would pave the way to bring the technology and business models currently employed to facilitate virtually the entirety of the world’s crypto derivatives trading into the regulated structure of U.S. derivatives markets. The only thing standing in the way is the possible inflexibility of that regulatory structure in the face of disruptive competition.

The obvious market benefits of FTX’s proposal are that:

1. It would free capital that would otherwise be pledged as collateral, which could greatly expand liquidity in crypto markets or could be deployed elsewhere in the financial system;
2. It would introduce a competitive alternative to the current exchanges, thus providing investors savings on what they would otherwise pay in commissions, account origination fees, etc.; and
3. It would offer clear product differentiation: e.g., by introducing a new mechanism for counterparty risk mitigation and by offering direct access to retail investors (with inherently lower costs of participation, more and cheaper information, and technological enhancements like a direct-access mobile interface).

The latter two of these benefits (and to some extent even the first) go particularly to the enhancement of competition in U.S. derivatives markets.

Concerns that markets lack sufficient competition are at the forefront of current policy debates. Legislators are currently working on draft bills that seek to promote competition in digital markets, and President Biden recently issued an executive order advocating for a “whole of government” approach to competition.[2]

Unfortunately, the renewed focus on how governments may boost competition has a significant blindside when it comes to government-created barriers to competition. Rather than offering a solution, government regulations are all too often the cause of reduced competition. This is notably the case when regulation artificially narrows a market by preventing new and innovative firms from disrupting entrenched incumbents.

In other words, if the “whole-of-government” approach to promoting competition means anything, it means that regulatory agencies should work to remove state-created, artificial barriers to market entry that are not absolutely required to accomplish core regulatory functions. The CFTC has precisely that opportunity with FTX’s application.

The market for crypto (and many other) derivatives is currently a lucrative duopoly, dominated by the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE). Both firms have long been shielded from robust competition by a protective, if well-intentioned, moat of government regulation. The CFTC now has a unique opportunity to open this duopoly to disruptive competition.

FTX’s application would bring both technological and business-model innovation to the derivatives market, carrying with them the promise of increased competition, reduced risk, more efficient pricing, and lower costs for investors. There is always reluctance to embrace the new, particularly in areas that deal so intrinsically with risk. But a sensible measure of caution must not be allowed to morph into costly intransigence.

FTX’s application, while ambitious in its aims, is, in fact, quite modest in its mechanisms. It is respectful of the existing, overarching regulatory paradigm implemented to protect consumers, investors, and the financial system as a whole; it contemplates significant protections and backstops to shore up any increased risk it might introduce; and it ensures that ongoing oversight by the CFTC is readily facilitated.

Indeed, approval of FTX’s application would not entail the abandonment of the CFTC’s core principles, but merely a recognition that the specific implementation of those principles may not be optimal for certain novel business models and technology. As Chairman Benham recently remarked:

[T]he digital asset market would benefit from uniform imposition of requirements focused on ensuring certain core principles, including market integrity, customer protection, and market stability. At the CFTC, we have seen that a regulatory regime focused on core principles can be successful in overseeing a wide variety of markets, and have no reason to think those same principles cannot be applied to digital asset markets.[3]

In short, the CFTC should jump at this opportunity to introduce some well-regulated experimentation into the derivatives market: the likely social benefits of this effort significantly outweigh the potential harms.

Read the full comments here.

[1] See, e.g., Philip Stafford, Crypto industry makes push into regulated derivatives markets, FINANCIAL TIMES (Feb. 21, 2022), https://www.ft.com/content/364dee59-fb51-400b-acd2-808d4ec41ab3.

[2] Executive Order 14036 on Promoting Competition in the American Economy, § 2(g) (Jul. 9, 2021) https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition- inthe-american-economy (“This order recognizes that a whole-of-government approach is necessary to address overconcentration, monopolization, and unfair competition in the American economy.”).

[3] CFTC Chairman Rostin Behnam, Letter to the U.S. Senate Committee on Agriculture, Nutrition, and Forestry and House Committee on Agriculture (Feb. 8, 2022) at 4, available at https://www.agriculture.senate.gov/imo/media/doc/2022%2002%2008%20Ag%20committees%20digital%20asset%20res ponse%20letter.pdf.

Introduction

We thank the European Commission for this opportunity to comment on its call for evidence concerning a new framework for standard-essential patents. The International Center for Law and Economics (ICLE) is a nonprofit, nonpartisan research center whose work promotes the use of law & economics methodologies to inform public-policy debates. We believe that intellectually rigorous, data-driven analysis will lead to efficient policy solutions that promote consumer welfare and global economic growth. ICLE’s scholars have written extensively on competition, intellectual property, and consumer-protection policy.

In this comment, we express concerns about the commission’s plan to update the legal framework that underpins standard-essential patent licensing in Europe.

For obvious reasons, the way intellectual property disputes are resolved has tremendous ramifications for firms that operate in standard-reliant industries. Not only do many of the firms in this space derive a large share of their revenue from patents but, perhaps more importantly, the prospect of litigation dictates how firms structure the transfer of intellectual property assets. In simple terms, ineffectual judicial remedies for IP infringements and uncertainty concerning the resolution of IP disputes discourage firms from concluding license agreements in the first place.

The key role that IP plays in these industries should impel policymakers to proceed with caution. By virtually all available metrics, the current system works. The development of innovative technologies through standards development organizations (SDOs) has led to the emergence of some of the most groundbreaking technologies that consumers use today;[1] and recent empirical evidence suggests that many of the alleged ills that have been associated with the overenforcement of intellectual property rights simply fail to materialize in industries that rely on standard-essential patents.[2]

At the same time, “there is no empirical evidence of structural and systematic problems of holdup and royalty stacking affecting standard-essential patent (“SEP”) licensing.”[3] Indeed, “[t]he notion that implementers in such innovation–driven industries are being suffocated by an insurmountable patent royalty stack has turned out to be nothing more than horror fiction.”[4] Yet, without a sound basis, the anti-injunctions approach increasingly espoused by policymakers unnecessarily “adds a layer of additional legal complexity and alters bargaining processes, unduly favoring implementers.”[5]

Licensing negotiations involving complex technologies are legally intricate. It is simply not helpful for a regulatory body to impose a particular vision of licensing negotiations if the goal is more innovation and greater ultimate returns to consumers. Instead, where possible, policy should prefer allowing parties to negotiate at arm’s length and to resolve disputes through courts. In addition to maintaining the sometimes-necessary remedy of injunctive relief against bad-faith implementers, this approach allows courts to explore when injunctive relief is appropriate on a case-by-case basis. Thus, over the course of examining actual cases, courts can refine the standards that determine when an injunctive remedy is inappropriate. Indeed, the very exercise of designing ex ante rules and guidelines to inform F/RAND licensing is antagonistic to optimal policymaking, as judges are far better situated and equipped to make the necessary marginal adjustments to the system.

Against this backdrop, our comments highlight several factors that should counsel the commission to preserve the rules that currently govern SEP-licensing agreements:

For a start, the SEP space is far more complex than many recognize. Critics often assume that collaborative standard development creates significant scope for opportunistic behavior—notably patent holdup. However, the tremendous growth of SEP-reliant industries and market participants’ strong preference for this form of technological development suggest these problems are nowhere near as widespread as many believe.

Second, weakening the protections afforded to SEP holders would have second-order effects that are widely ignored in contemporary policy debates. Weaker SEP protection would notably encourage firms to integrate vertically, rather than to specialize. It would reduce startup companies’ access to capital markets by making it harder to collateralize IP. Curbing existing IP protections would also erode the West’s technological leadership over economies that are heavily reliant on manufacturing and whose policymakers routinely undermine the intellectual property rights of foreign firms.

Finally, critics often overlook the important benefits conferred by existing IP protections. This includes the comparative advantage of injunctions over damages awards, as well as firms’ ability to decide at what level of the value chain royalties will be calculated.

Read the full comments here.

[1] See, e.g., Dirk Auer & Julian Morris, Governing the Patent Commons, 38 CARDOZO ARTS & ENT. L.J. 294 (2020).

[2] See, e.g., Alexander Galetovic, Stephen Haber & Ross Levine, An Empirical Examination of Patent Holdup, 11 J. COMPETITION & ECON. 549 (2015). This is in keeping with general observations about the dynamic nature of intellectual property protections. See, e.g., RONALD A. CASS & KEITH N. HYLTON, LAWS OF CREATION: PROPERTY RIGHTS IN THE WORLD OF IDEAS 42-44 (2013).

[3] Oscar Borgogno & Giuseppe Colangelo, Disentangling the FRAND Conundrum, DEEP-IN Research Paper (Dec. 5, 2019) at 5, available at https://ssrn.com/abstract=3498995.

[4] Richard A. Epstein & Kayvan B. Noroozi, Why Incentives for “Patent Holdout” Threaten to Dismantle FRAND, and Why It Matters, 32 BERKELEY TECH. L.J. 1381, 1411 (2017).

[5] Borgogno & Colangelo, supra note 3, at 5.

 

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.