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TOTM TOTM: The following is the eighth in a series of posts by TOTM guests and authors on the FTC v. Qualcomm case recently decided by Judge Lucy Koh in the Northern District of California. The blog post is based on a forthcoming paper regarding patent holdup, co-authored by Dirk Auer and Julian Morris.
In his latest book, Tyler Cowen calls big business an “American anti-hero”. Cowen argues that the growing animosity towards successful technology firms is to a large extent unwarranted. After all, these companies have generated tremendous prosperity and jobs.
Read the full piece here.
ICLE White Paper We suggest that antitrust authorities and courts should draw inspiration from acclaimed scholarship regarding both the evolution of cooperation and the management of common-pool resources.
Thousands of patents underpin the technologies that power the digital economy. Coordination among firms developing and implementing these novel technologies has notably been facilitated in large part by Standards Developing Organizations (SDOs). Despite the evident benefits of standardization in general and SDOs in particular, certain aspects of these processes have come under severe scrutiny from scholars, antitrust authorities and courts. These critics argue that the standardization space suffers from two crippling market failures, namely “patent holdup” and “royalty stacking”. They thus conclude that opportunistic firms will squeeze their rivals’ profits, harming consumers and stifling innovation in the process. However, recent empirical scholarship strongly suggests that patent holdup and royalty stacking rarely, if ever, occur in the standardization space.
Against this checkered backdrop, our paper argues that standardization is an emergent phenomenon, where parties have strong incentives to design institutions and contractual relationships that mitigate the scope for opportunistic behavior (including patent holdup and royalty stacking). The paper explores how these incentives have likely enabled firms to avoid severe market failures. We argue that ignoring these complex market dynamics may cause antitrust authorities and courts to do more harm than good (notably by exacerbating patent holdout behavior). The paper then reviews recent regulatory interventions and questions whether this has indeed been the case. Finally, we suggest that antitrust authorities and courts should draw inspiration from acclaimed scholarship regarding both the evolution of cooperation and the management of common-pool resources.
“The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effect of the division of labour.”
Adam Smith
Click here to read the full paper.
Written Testimonies & Filings FTC Hearings on Competition & Consumer Protection in the 21st Century. Comments of the International Center for Law & Economics: Summing Up the FTC Hearings: Advocates for Increased Antitrust Intervention Failed to Make Their Case. Submitted Jun 30, 2019.
These comments represent ICLE’s review and commentary of the detailed record set forth during the FTC’s Hearings on Competition and Consumer Protection in the 21st Century. The hearings — and these comments — covered a wide range of topics from data security and privacy, to horizontal and vertical merger policy, anticompetitive unilateral behavior, and a host of contemporary issues that have arisen around the question of whether antitrust law is capable of dealing with potential harms to competition from modern firms.
Specifically, the summary comments deal with the following topics.
Opponents of the consumer welfare standard seek to return antitrust to the bygone era of courts arbitrarily punishing firms for successfully outcompeting their rivals or simply growing “too large.” The Commission should tread carefully before incorporating these ideas, which, during the course of its evolution in the 20th century, antitrust law carefully and correctly selected out.
Based on the testimony heard during the hearings, there is no need to change the non-horizontal merger guidelines. If anything, vertical merger review should be pared back out of a recognition that the failure to account for dynamic effects (and the inherent difficulty of doing so) means it is likely that pro-competitive mergers are being deterred.
Concerns regarding vertical discrimination are predicated on the erroneous assumption that big tech platforms might be harming competition by favoring their content over that of their complementors. Not only is this fear overblown, but even the harms alleged are frequently ambiguous and provide benefits to some consumers.
Much of the analysis of popular technology companies is predicated on traditional market definition analysis, which infers future substitution possibilities from existing or past market conditions. This leads to overly-narrow market definitions and erroneous market power determinations. Thus, Amazon, Facebook, and Google are assumed — erroneously — to be unassailable monopolies.
Data is a valuable input for companies competing in the digital economy. It is not, however, a magic bullet or holy grail, as some commenters suggested. As with other assets, companies can use data in both pro-competitive and anti-competitive ways. “Big data” may be a new term, but it does not pose unique problems for competition policy.
Click here to read the full concluding comments.
TOTM In a new ICLE Issue Brief, we question whether there is any merit to these claims of protectionism. We show that, since the entry into force of Regulation 1/2003, US firms have borne the lion’s share of monetary penalties imposed by the Commission for breaches of competition law.
Last month, the European Commission slapped another fine upon Google for infringing European competition rules (€1.49 billion this time). This brings Google’s contribution to the EU budget to a dizzying total of €8.25 billion (to put this into perspective, the total EU budget for 2019 is €165.8 billion). Given this massive number, and the geographic location of Google’s headquarters, it is perhaps not surprising that some high-profile commentators, including former President Obama and President Trump, have raised concerns about potential protectionism on the Commission’s part.
ICLE Issue Brief Last month, the European Commission slapped another fine upon Google for infringing European competition rules (€1.49 billion this time). This brings Google’s contribution to the EU budget to a dizzying total of €8.25 billion (to put this into perspective, the total EU budget for 2019 is €165.8 billion).
“I told you so! The European Union just slapped a Five Billion Dollar fine on one of our great companies, Google. They truly have taken advantage of the U.S., but not for long!”
Donald Trump
“When I look into merger control, antitrust control, state aid control, I find no U.S. bias.”
Margrethe Vestager
Last month, the European Commission slapped another fine upon Google for infringing European competition rules (€1.49 billion this time). This brings Google’s contribution to the EU budget to a dizzying total of €8.25 billion (to put this into perspective, the total EU budget for 2019 is €165.8 billion). Given this massive number, and the geographic location of Google’s headquarters, it is perhaps not surprising that some commentators have raised concerns about potential protectionism on the Commission’s part.
This is nothing new. Critics have long argued that European competition law has been used to shield European industries from their large American rivals. From the notorious decision to block the GE/Honeywell merger in 2001, to more recent enforcement activities in the tech sector, every European intervention against a US company tends to usher in a fresh wave of accusations.
This criticism has come from both sides of the US political aisle, and both Donald Trump (quoted above) and Barack Obama have led the charge during their respective Administrations. Referring to European investigations against US tech companies such as Facebook and Google, then President Obama famously decried that:
Sometimes their vendors—their service providers—who can’t compete with ours, are essentially trying to set up some roadblocks for our companies to operate effectively there. We have owned the Internet. Our companies have created it, expanded it, perfected it, in ways they can’t compete. And oftentimes what is portrayed as high-minded positions on issues sometimes is designed to carve out their commercial interests.
But is there any merit to these claims of protectionism? A quick look at the monetary penalties assessed by recent decisions of the European Commission reveals that its enforcement activities (under article 101 and 102 TFEU, excluding cartels) have disproportionately affected US companies. Since the entry into force of Regulation 1/2003 (the main piece of legislation that implements the competition provisions of the EU treaties), US companies have been fined a total of €10.91 billion by the European Commission, compared to €1.17 billion for their European counterparts. On its face, this seems to stand in stark contrast to the findings of a recent study by Anu Bradford, Robert Jackson, and Jonathon Zytnick, which rejects claims that EU merger control is biased against US firms (findings that are certainly bolstered by the Commission’s condemnation of the contemplated merger between Siemens and Alstom).
As we explain, the harsh fines inflicted upon US firms are not necessarily evidence of protectionism.
Instead, they are likely a result of the Commission’s decision to focus significant attention on the tech sector. Because the vast majority of large tech firms are US-based, all else equal, it is to be expected that the majority of investigations and enforcement actions would involve US firms. At the same time, for reasons also discussed below, the Commission’s tech-industry focus may tend to lead to larger fines when infringements are found.
Nevertheless, some caution is warranted with this conclusion. It bears noting that the Commission is a political body, and, as we discuss below, it is hardly structured to be immune to domestic political influences that may tend toward protectionism. The decision to prioritize enforcement in the tech sector is not taken in a vacuum. Whether this policy preference is down to legitimate concerns about high-tech markets or to (potentially unconscious) protectionism is almost impossible to tell. Similarly, neither a finding of infringement nor the magnitude of the fine imposed is mechanical: Even if its outcomes generally correspond with the expected outcomes from a country-neutral, tech-sector focus, the specific decisions the Commission makes, as well as the magnitude of the fines it imposes, may show a protectionist bias. Without a more robust statistical analysis it is impossible to rule out entirely the possibility that these decisions are influenced by a protectionist impulse, as well.
Click here to read the full issue brief.
ICLE Issue Brief How does a market’s structure affect innovation? This crucial question has occupied the world’s brightest economists for almost a century, from Schumpeter who found that monopoly was optimal, through Arrow who concluded that competitive market structures were key, to the endogenous growth scholars who empirically derived an inverted-U relationship between market concentration and innovation.
How does a market’s structure affect innovation? This crucial question has occupied the world’s brightest economists for almost a century, from Schumpeter who found that monopoly was optimal, through Arrow who concluded that competitive market structures were key, to the endogenous growth scholars who empirically derived an inverted-U relationship between market concentration and innovation. Despite these pioneering contributions to our understanding of competition and innovation, if the past century of innovation economics has taught us anything it is that no market structure is strictly superior at generating innovation. Just as the SCP paradigm ultimately faltered because structural presumptions were a weak predictor of market outcomes, so too have dreams of divining the optimal market structure for innovation. Instead, in any given case, the right market structure likely depends on a plethora of sector- and firm-specific characteristics that range from the size and riskiness of innovation-related investments to the appropriability mechanisms used by firms, regulatory compliance costs, and the rate of technological change, among many others.
Against this backdrop, it may come as a surprise that the European Commission believes it has cracked the innovation market structure conundrum. Throughout its recent competition decisions, the Commission has almost systematically concluded that more firms in any given market will produce greater choice and more innovation for consumers. I call this the “Structuralist Innovation Presumption.” Notably, this presumption seems to have played a pivotal role in the recent Google Android decision (although the text of the Commission’s decision is not yet publicly available).
In what follows I argue that the Structuralist Innovation Presumption is a misguided heuristic that antitrust authorities around the globe would do well to avoid. Although it has been almost unequivocally endorsed by the European Commission, the presumption is at odds with the mainstream economics of innovation. To make matters worse, structuralist innovation also ignores the complex second-order effects that may arise when antitrust intervention tampers with rapidly evolving markets.
TOTM The dust has barely settled on the European Commission’s record-breaking €4.3 Billion Google Android fine, but already the European Commission is gearing up for its next high-profile case.
The dust has barely settled on the European Commission’s record-breaking €4.3 Billion Google Android fine, but already the European Commission is gearing up for its next high-profile case. Last month, Margrethe Vestager dropped a competition bombshell: the European watchdog is looking into the behavior of Amazon. Should the Commission decide to move further with the investigation, Amazon will likely join other US tech firms such as Microsoft, Intel, Qualcomm and, of course, Google, who have all been on the receiving end of European competition enforcement.
Written Testimonies & Filings FTC Hearings on Competition & Consumer Protection in the 21 st Century. Comments of the International Center for Law & Economics: Antitrust Principles and Evidence-Based Antitrust Under the Consumer Welfare Standard. Hearing #1 (Sep. 13, 2018). Submitted October 14, 2018.
Since the original Pitofsky hearings at the dawn of the Internet era, much has fundamentally changed in the way the firms do businesses. Yet, despite these rapid and fundamental shifts in technology and behavior, we still face many of the same policy challenges as existed twenty-plus years ago. Innovation always yields both costs and benefits, meaning that some firms will face adverse effects as the environment in which they developed their business changes. Unfortunately, some antitrust observers use this reality as an opportunity to advocate for problematic changes in the underlying law.
Yet, in the face of these changes, time-tested antitrust principles become even more important, and the focus of enforcers and lawmakers should be in favor or maintaining and strengthening the existing consumer welfare standard. It is a standard rooted in testable, empirical realities, and is designed to lead to reproducible outcomes that redound to the benefit of consumers. These comments explore a number of important areas, including:
By combining lessons from the history of antitrust policy and contemporary economics, this analysis elucidates the key issues faced by the antitrust enforcers as they consider the future of antitrust policy. To date, no better alternative has been proposed, and enforcement agencies should tread lightly when considering alterations that would undermine the solid foundations of antitrust law. The unfortunate outcome of many calls to reform would be to return antitrust law to an era of politicized enforcement, lower consumer welfare, and greater uncertainty for firms operating in the economy.
Click here to read the full comments.
Written Testimonies & Filings FTC Hearings on Competition & Consumer Protection in the 21 st Century. Comments of the International Center for Law & Economics: Privacy, Antitrust, and the Economic Approach to the Regulation of Consumer Data. Hearing #1 (Sep. 13, 2018). Submitted October 14, 2018.
Increasingly, people use the Internet to connect with one another, access information, and purchase products and services. The growth in the online marketplace has brought with it numerous concerns, particularly regarding the privacy of personal information and competition issues surrounding this and other data.
While concerns about privacy are not unique to the Internet ecosystem, they are in some ways heightened due to the ubiquitous nature of information sharing online. Though much of the sharing is voluntary, a group of scholars and activists have argued that several powerful online companies have overstepped their bounds in gathering and using data from Internet users. These advocates have pushed the FTC and regulators in Europe to incorporate privacy and more general data collection concerns into antitrust analysis.
Although there are a number of unique dimensions to online data sharing that bear consideration, the necessary analysis is much more nuanced than reform advocates typically admit.
First, despite their best efforts, privacy advocates have yet to make a compelling case that quality-adjusted price may be affected by monopolization of data or a merger of entities with large quantities of data. Making such a case requires considerably more analysis than that offered by privacy advocates to date. Rather, the collection and use of relatively large amounts of information by a large firm actually serves as a tool to help such a firm improve the quality of its products. In the modern tech economy, large pools of data and their effective use frequently permit firms to offer services to consumers for zero price. Improving product quality (by offering more tailored products with collected data) while maintaining a constant zero price — i.e., decreasing quality-adjusted price — is not normally an antitrust injury.
Second, the potential, if any, for price discrimination practices to cause privacy harms to consumers is not subject to a simple analysis. One argument offered by critics of data collection is that price discrimination could become a harm when large tech platforms are able to collect a great deal of data about their users, and could thereby segment their users along certain private characteristics in order to offer tailored services. The resulting price discrimination could lead to many consumers paying more than they would in the absence of the data collection. Therefore, the data collection by these major online companies can be alleged to facilitate price discrimination that harms consumer welfare. This argument misses a large part of the story, however. The flip side is that price discrimination could have benefits to those who receive lower prices from the scheme than they would have in the absence of the data collection. While privacy advocates have focused on the possible negative effects of price discrimination to one subset of consumers, they generally ignore the positive effects of businesses being able to expand output by serving previously underserved consumers.
Finally, little evidence has been presented to bolster the claim that tech platforms can employ large pools of data as barriers to entry against competitors. The various theories of how this can arise all stem from an underlying assumption about the inability or difficulty of competitors to develop alternative products in the marketplace. The argument is that upstarts do not have sufficient data to compete with established players which in turn employ their data to attract online advertisers and to foreclose their competitors from this crucial source of revenue. This argument suffers from a number of deficiencies.
Superior competition, notably through data, is not a barrier to entry. It is a mistake to regard data as essential in many, if not all, cases, particularly in the complex ecosystem of online platforms, where that same data can be used by platforms to facilitate new entry. Further, data is useful to all industries — this is not a new phenomenon particular to online companies. Companies have historically employed a variety of measures to gather data on their customers. It is also a mistake to assume that simply having a large amount of data is worth anything at all. It is not in the possession of data that a firm finds success, but in how intelligently the firm uses that data to optimize its services or otherwise generate a revenue stream. Start-ups are not necessarily less capable of generating value from relatively smaller pools of data simply by virtue of having a small set of data.
And the possession of data provides no absolute advantage to a firm in a world in which competition is just a click or a swipe away. Users can and do defect from products easily. Moreover, access to data is not exclusive to any firm. If one platform collects certain useful data about a user it does not possess that data to the exclusion of all others. Other firms are free to make the same observations about the same sets of users.
