Background: The Advertising Middlemen Endangering Rigorous Internet Competition Accountability (AMERICA) Act, recently introduced by Sen. Mike Lee (R-Utah), would bar companies that own a digital-advertising exchange with more than $20 billion in annual ad revenue from also providing services to buyers and sellers of ads, or from selling advertising space themselves. The bill also would impose fiduciary-like duties on those who buy and sell online ads for others

However… While advocates of the legislation claim the changes they seek are based on analogous rules used in the regulation of securities markets, such analogies are based on fundamental misunderstandings of how securities regulation works and why it exists. The requirement for “physical separation,” which could force the breakup of vertically integrated digital-advertising platforms like Google, does not exist in securities law; many stockbrokers also own exchanges where stocks are traded. Moreover, rules that stock trades be executed at the best-available price are imposed precisely because vertical integration is common. Ultimately, stocks are regulated in the way that they are because of the central role they play in the savings and investments of everyday Americans. Advertising, while important, does not serve that role.

No ‘Physical Separation’ Rule in Stocks

In a press release announcing the introduction of the AMERICA Act, Matt Stoller of the American Economic Liberties Project expressed a sentiment common among proponents of the legislation, that just as “no one would accept Goldman Sachs running the New York Stock Exchange,” Congress should not “let corporations run all sides of a transaction in online ad markets.”

Sen. Lee likewise has said of his bill that its “restrictions and requirements mirror those imposed on electronic trading in the financial sector.”

The problem with these analogies is that there actually is no requirement in securities law that prohibits brokers from owning exchanges on which stocks are traded. Goldman Sachs does not own the NYSE, but it does own a different stock exchange (called SigmaX2) where the same stocks are bought and sold. In fact, about half of all stock trades are made on trading venues (i.e., exchanges by a different name) owned by brokers.

Thus, while the AMERICA Act would ban Google from acting as a broker on its own ad exchange, securities law—on which the law is purportedly founded—permits exactly this same conduct.

The Best-Interests Standard May Be Impossible to Enforce in Ad Tech

The AMERICA Act would also create a legal duty to act in a client’s best interest when helping them buy or sell ads. This is similar to rules in securities law, but one of the reasons such duties exist in stock markets is precisely because brokers may own exchanges and otherwise act on behalf of clients when there are real or potential conflicts of interest. 

While stockbrokers do have a duty to execute trades at the best price, there is some discretion baked into the system, especially since price is not the only factor customers care about. A recent empirical study found that only about 43% of trades were made at the “best” price, because of the impact of various discounts and other factors paid by exchanges.

As difficult as it is to enforce a best-interests rule in stock markets, establishing something akin to it in online display advertising would be a monumental task. While a stock has one price for every potential investor at any time, and it has some intrinsic value, online advertisements have many more degrees of interest. In online display-ad auctions, the price is set for a particular viewer at a particular location at a particular time. These multiple factors, and the lack of any objective valuation, makes determining the “best” price, or even a reasonable price, far more complex.

The AMERICA ACT proposes that the best-interests rule would be enforced by the U.S. Justice Department and state attorneys general, but this is a massive underestimate of the bureaucracy needed to establish and enforce such rules.

Ads Aren’t Stocks

Plenty of markets involve vertical integration with conflicts of interest, but do not require physical separation or impose fiduciary duties. For instance, auction houses provide a venue where buyers and sellers come together to bid on art and antiquities, while also providing services and advice to buyers and sellers, as well as sometimes bidding on items themselves.

The AMERICA Act takes a belt-and-suspenders approach that offers more supposed protection for advertisers and ad buyers than stock traders, even though the potential mischief and consequences are greater in the securities world. Ordinary Americans have their savings and their futures bet in the stock markets, not in ad markets, which are merely places where business-to-business services are bought and sold. There is no investment or speculation in ad markets.

Ultimately, the stock market is regulated as it is because of the profound social importance of accurate stock prices, not because of overriding concerns about conflicts of interests in general. Stocks are regulated as they are because they are stocks. Ads are not stocks, and thus, regulating them like stocks makes no sense.

For a more extensive treatment of this issue, see the ICLE white paper “Ads Aren’t Stocks, or How Bad Analogies Make Bad Law,” as well as other ICLE research on the law & economics of digital advertising here and here.

While it bills itself a “Digital Bill of Rights,” the Florida Senate Bill 262 could actually harm consumers and businesses online by substantially raising the costs of targeted advertising.

For consumers, this would mean less “free” stuff online, as publishers switch from advertising-based to subscription-based models. For businesses, it would mean having less ability to target advertisements to consumers who actually want their products, resulting in less revenue.

Read the full piece here.

Abstract

Fairness considerations are increasingly evoked in economic policy and have become part of the current conversation on the objectives of competition policy. Fairness is undoubtedly an acceptable objective by itself and has its place in the history of economic regulation. The approach in competition policy so far has been to attempt to anchor the concept of fairness in economics with disciplined attempts to characterize the processes that are conducive to fair or unfair outcomes. As fairness becomes a central element in recent EU digital regulatory interventions, there appears to be a possible evolution in the implementation of fairness in EU competition policy away from well-defined forms of abuse and towards a more assertive defense of equal opportunities in the competitive process as well as fair outcomes.

On Thursday, the day after World Intellectual Property Day, the European Commission—the self-proclaimed world regulatory superpower—officially proposed a massive regulatory regime of patents that will benefit China and undermine Western innovators in both Europe and the United States.

Led by the Gaullist technocrat Thierry Breton, head of the Internal Markets Ministry, the European Commission released a new regulatory program to impose rate-setting of patents on standardized technologies like Wi-Fi and 5G, called “standard essential patents” by policy wonks in the EU Intellectual Property Office.

Read the full piece here.

Four prominent horsemen of the Biden administration’s bureaucratic apocalypse—the Federal Trade Commission (FTC), U.S. Justice Department (DOJ) Civil Rights Division (DOJ), Consumer Financial Protection Bureau (CFPB), and the U.S. Equal Employment Opportunity Commission (EEOC)—came together April 25 to issue a joint statement pledging vigorous enforcement against illegal activity perpetrated through the use of artificial intelligence (AI) and automated systems.

Read the full piece here.

It appears that the emergence of ChatGPT and other artificial-intelligence systems has complicated the European Union’s efforts to implement its AI Act, mostly by challenging its underlying assumptions. The proposed regulation seeks to govern a diverse and rapidly growing AI landscape. In reality, however, there is no single thing that can be called “AI.” Instead, the category comprises various software tools that employ different methods to achieve different objectives. The EU’s attempt to cover such a disparate array of subjects under a common regulatory framework is likely to be ill-fitted to achieve its intended goals.

Read the full piece here.

It’s been a moribund decade for the British economy, but there are bright spots in the darkness. The gaming industry, building on the success of classic UK-developed games such as Rare’s GoldenEye 007, has generated blockbuster series like Rockstar North’s Grand Theft Auto and perennial sellers like Sports Interactive’s Football Manager.

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Since taking the reins of the Federal Trade Commission (FTC) almost two years ago, Chair Lina Khan has sketched an agenda that appears inevitably set for rebuke before the U.S. Supreme Court. And that eventual day of reckoning has drawn closer with the high court’s opinion in Axon Enterprise v. FTC earlier this month, which will allow litigants to bring constitutional challenges to the agency’s authority years earlier than would previously have been allowed.

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An unofficial version of the EU’s anticipated regulatory proposal on standard essential patents (SEPs), along with a related impact assessment, was leaked earlier this month, generating reactions that range from disquiet to disbelief (but mostly disbelief).

Our friend Igor Nikolic wrote about it here on Truth on the Market, and we share his his concern that…

Read the full piece here.