Recently the Wall Street Journal had an article about medical billing errors.  These can be very costly because they can impact your credit rating.  But there is one billing practice they missed.  Some health care providers (we have found this with two and it is probably more common) begin the billing date as of the date of service but don’t send a bill until insurance has paid their part.  Then when they do send a bill for the coinsurance  it is “late” and they threaten to turn it over to a collection agency.  In other words, the very FIRST bill you may get already has your account as delinquent.

Filed under: consumer protection, personal finance

Recently, I’ve been blogging about the difference between so-called “bias” in vertically integrated economic relationships and consumer harm (e.g., here and here).  The two are different.  Indeed, vertical integration and contractual arrangements are generally pro-consumer and efficient.   Many of the same arguments surrounded the net neutrality debate with critics largely skeptical that the legislation was not needed (antitrust could be used when such contractual arrangements actually generated competitive harm) and would chill pro-competitive behavior.

In January, the Federal Communications Commission has now received its first complaint under the Order against MetroPCS.  So, is the complaint about a monopolist Internet Service Provider (ISP) employing vertical contracts to exclude rivals and harm consumers?  You be the judge.  My colleague Tom Hazlett describes the situation in his (always) excellent Financial Times column:

MetroPCS, hit with its first formal complaint, is an upstart wireless network offering low prices and short-term contracts. As part of their $40 a month “all you can eat” voice, text and data plan, they slipped in a bonus: free, unlimited YouTube videos, customised to run fast and clear.  Activist groups, led by Free Press, went ballistic. Their petition to the FCC declared that the mobile provider was favouring YouTube over other video sites, creating just the sort of “walled garden” that would destroy the internet. “The new service plans offered by MetroPCS give a preview of the future in a world without adequate protections for mobile broadband users,” they wrote.

The complaint performs a great public service, revealing just how net neutrality would “adequately protect mobile broadband users”. In fact, MetroPCS advances the interests of consumers by supporting enhanced access to the applications most popular with users.  Such arrangements do not sabotage internet development, but drive it.

But what about the possibility of consumer harm so prominent in the Net Neutrality Order? As Hazlett explains, not only is such a competitive threat unlikely, but the regulatory restrictions imposed by the Order will impede competition and hurt consumers (in this case, especially targeting the price sensitive customers).  Indeed, the crux of the complaint surrounds an effort by MetroPCS and Google to offer consumers additional choices.  Read on:

MetroPCS possesses no market power. With 8m customers, it is the country’s fifth largest mobile operator, less than one-tenth the size of Verizon. Under no theory could it force customers to patronise certain websites. It couldn’t extract monopoly cash if it tried to.

Indeed, low-cost prepaid plans of MetroPCS are popular with users who want to avoid long-term contracts and are price sensitive. Half its customers are ‘cord cutters’, subscribers whose only phone is wireless and usage is intense. Voice minutes per month average about 2,000, more than double that of larger carriers.
The $40 plan is cheap because it’s inexpensively delivered using 2G technology. It is not broadband (topping out, in third party reviews, at just 100 kbps), and has software and capacity issues. In general, voice over internet is not supported by the handsets and video streaming is not available on the network. The carrier deals with those limitations in three ways.

First, the $40 per month price tag extends a fat discount. Unlimited everything can cost $120 on faster networks. Second, it has also deployed new 4G technology, offering both a $40 tier similar to the 2G product (no video streaming), but also a pumped up version with video streaming, VoIP and everything else – without data caps – for $60 a month. Of course, this network has far larger capacity and is much zippier (reliable at 700 kbps).  PC World rated the full-blown 4G service “dirt cheap”.
Third, to upgrade the cheaper-than-dirt 2G experience, MetroPCS got Google – owner of YouTube – to compress their videos for delivery over the older network. This allowed the mobile carrier to extend unlimited wildly popular YouTube content to its lowest tier subscribers.  Busted! Favouring YouTube is said to violate neutrality. …

The FCC has already erred. Innovators such as MetroPCS and Google should need no
defence in supplying customers’ superior choices. Neither consumers nor the internet are “protected” by rules hostile to co-operative efforts – even if money were to pass between firms – that expand outputs and lower prices. If the FCC is to take such ill-targeted attacks on competitive rivalry seriously, it will do far more to deter the open internet than to preserve it.

Not an auspicious beginning for the Net Neutrality regime — or consumers.

Filed under: antitrust, economics, error costs, exclusionary conduct, google, net neutrality, regulation, technology Tagged: antitrust, economics, FCC, google, Hazlett, net neutrality

I’ve read with interest over the last few days the commentary on Microsoft’s filing of a formal complaint with the EU, Microsoft’s defense of its actions, and the various stories around the web.  Geoff and Paul appropriately focus on the error-cost concerns associated with intervention in high-tech markets; Paul also emphasizes the ironies associated with Microsoft’s new status as antitrust complainant.  There will be ample time to discuss the substantive merits of these complaints as they develop.  But I wanted to make two points in this post that I think haven’t received much attention.

The first combines Geoff and Paul’s concerns.  I do not find it particularly interesting that Microsoft has taken this role.  In fact, these developments have been a long time coming.  Competitors frequently attempt to induce regulators to intervene against rivals.  The fact that Microsoft is the competitor certainly is ironic, but it is also expected.  The real lesson about Microsoft’s involvement in this suit is what inferences we should make about antitrust policy in high-tech markets given Microsoft’s quick decline from the alleged dominant and entrenched monopolist that was the focus of the DOJ enforcement action to its current status as rival seeking to employ the antitrust agencies to weaken its rival.  How quickly things change.  Indeed, that is precisely the point.  Dynamic competition, innovation, and quick moving industries do not mean that antitrust rules should never apply; however, these conditions should warrant caution in intervening in the name of consumers without firm evidence of consumer harm.

The second point is that the discussions I’ve read recently focus almost entirely on the question of whether Google favors its own content over that of rivals.  This is not the first time this type of argument has been made in antitrust.  Indeed, the argument is commonly made that whether in search or otherwise (e.g. vertical integration with YouTube), so-called “bias” or “discrimination” in favor of one’s own content is prima facie evidence of a competitive problem that will lead to consumer harm.  That is not so.  Neither economic theory nor empirical evidence support the assertion that, without more, vertical integration is a competitive.  Quite the contrary, the evidence suggests these arrangements are generally pro-consumer and efficient.  On a case-by-case analysis, the facts might suggest a competitive problem in any given case.  The facts, of course, matter.

Unfortunately, most of the discussion of “search bias” and other forms of vertical integration at issue here has focused on whether these arrangements are good or bad for Google’s rivals, not consumers.  First principles tell us that the competitive effects are what matters.  And there is indeed a reason to be skeptical of competitive harm here.  While some commentary in recent days has offered principles of antitrust analysis that are flat out wrong (see, e.g. here, the observation that the antitrust laws require “Microsoft, as a competitor, to have equal access”), we can rely on Professor Hovenkamp to re-focus the discussion on first principles:

“You do need to show consumer harm,” said Herbert Hovenkamp, an antitrust expert at the University of Iowa College of Law. “That becomes more difficult with search engines, where it is easy for consumers to switch to another search engine. That is different than in PC operating systems in the Microsoft case, where the technological lock-in was more obvious.”

Indeed.  It is important to note that this is case is in the EU, not the US.  While both jurisdictions emphasize the need to show consumer harm, the EU appears to be significantly more willing than US courts to infer harm to competition from harm to competitors.  I will leave more substantive analysis of the allegations here for another day as more facts develop.  But I suspect that the ultimate outcome here will turn on, in large part, precisely how faithful the EU analysis is to antitrust’s “first”-first principle: intervention requires evidence of consumer harm.

Filed under: antitrust, economics, error costs, exclusionary conduct, google, monopolization, technology

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

Two stories about Google indicate the dangers of antitrust in fast moving tech industries.  Microsoft is urging the EU antitrust authorities to sue Google.   (Microsoft was itself the victim of a massive antitrust action. I guess it is true that abusers are likely to have been themselves abused.)  At the same time Google is rolling out a new social tweak to its search function because it is losing business to Facebook.  Let’s hope Google doesn’t sue Facebook.  The Web was better when it was the Wild West.

Filed under: antitrust, technology

As Harold Demsetz notes, “the problem of defining ownership is precisely that of creating properly scaled legal barriers to entry.”   Taxi medallions, meet food cart permits.  From the WSJ:

The city’s competitive street food culture has created a thriving black market for mobile food vending permits issued by the Department of Health and Mental Hygiene. The city charges a mere $200 for most food-cart permits, which must be paid every two years when they are renewed. But it only issues 3,100 year-round permits plus an additional 1,000 seasonal permits—not enough to satisfy demand. Transferring or renting these permits to another vendor is illegal but everyone, including the city’s Health Department, acknowledges, that it happens.

…

Meanwhile, demand for permits and their black-market prices continue to climb as street food’s popularity soars with blogs like Midtown Lunch chronicling vendors’ moves and some gourmet food trucks developing cult-like followings. Some permits fetch as much as $20,000 for two years, vendors say. In the case of Ms. Sultana, the Bronx food vendor, she says the permit holder told her someone else was willing to pay $15,000 for the permit she previously paid $7,000 for two years ago.

Mohammed Rahman, who has operated the popular Kwik Meal cart in midtown for 11 years, says he pays $15,000 every two years for his permit. “The city charges only $200, why should I have to pay $15,000? All the profits go to someone else.”

Obtaining a food cart or truck permit in one’s own name can take a decade or more, according to vendors. There are 2,080 people currently on the citywide waiting list for a two-year permit. The list is compiled of license holders and it’s not uncommon for families to get licenses for every member of their family—even if they don’t work at a cart—to increase their chances of obtaining a permit.

In a related story, the food carts in New York City now have a trade association (website here).

Even more closely related is the battle over green cart permits in NYC, and the competitive response from supermarkets:

The city started the green cart program almost three years ago to bring more fruits and vegetables to “underserved” neighborhoods with high rates of diet-related illnesses. Today, the city has issued about 450 permits to operate green carts in large swaths of the Bronx and upper Manhattan, as well as parts of Brooklyn, Queens and Staten Island. While most normal food carts can operate anywhere and tend to congregate in high-traffic neighborhoods like midtown Manhattan, green carts can sell only in designated zones.

…

Some lawmakers like Peter Koo, a City Council member who represents Flushing, thinks green carts shouldn’t be allowed within a certain distance from supermarkets.

The green carts have their fans in the community. George Wright recently walked up to the two carts a block from Ms. Kim’s store. “It’s cheaper than other stores,” he said, “and the fruit is very good.”

Ms. Kim says the monthly revenue in her store has dropped to $5,000 a month from $10,000 a month because of the carts, the tough economy and nearby construction. That’s before she shells out $3,500 for rent, buys the produce and pays an employee. The result is that she’s losing money each month.

She figures it’s going to get worse. Most of her customers pay with electronic food stamps and recently some green carts got portable devices so they can accept them as well.

“I have to go bankrupt,” she says.

Here is Yglesias on DC food cart deregulation.

Filed under: business, economics, food, markets, regulation

I’ve been in a blue funk since last Tuesday, when my home institution, the University of Missouri Law School, fell into the third tier in the U.S. News & World Report annual ranking of law schools. Since the rankings began, Missouri has pretty consistently ranked in the 50s and 60s. Last year, we fell to 93. This year, to 107. That’s pretty demoralizing.

It’s completely ridiculous, of course. On the metrics that really matter (academic reputation, student quality, bar passage, etc.), we do pretty well — near the top of tier 2 (schools 50-100). With respect to scholarly productivity, our faculty ranks sixth among law schools outside the top fifty. We do less well with employment, but that’s largely because (1) we don’t manipulate the numbers, as many schools do, and (2) many of our graduates go into prosecution and public defense, where hiring decisions are not made until after the bar examination. Where we really get beat up is on expenditures per “full-time equivalent” student. Last year, we ranked 173 out of 190 on that measure. In my view, that means we’re efficient — we get a heck of a lot out of our financial resources. According to U.S. News, though, the fact that we spend less money educating our students means that the quality of our educational offering must be sub-par. Non sequitur, anyone?

Despite the stupidity of the U.S. News rankings, they matter. We will have a harder time attracting top students next year. In the past, we’ve been able to attract sharp students that were accepted at, say, Iowa, Illinois, or Washington University because our tuition (especially in-state tuition) is much, much lower. Given all this talk of higher education bubbles and the widespread questioning of whether law school is really worth the steep price, this should be an ideal time for Missouri to exploit its low tuition. Unfortunately, that’s tougher to do when you’ve fallen into the U.S. News third tier and prospective students, who don’t yet realize the insanity of the rankings metrics, wrongly perceive that you’re selling a shoddy product. We may also have a harder time attracting high-quality faculty, though this fall’s outstanding class of entrants (two John Roberts clerks, a Jose Cabranes clerk, and an outstanding Virginia J.D./Ph.D) will surely help on that front. We Missouri professors may even have a harder time placing our scholarship, given that the third-year law students who select articles for publication tend to evaluate scholarship, in part, on the basis of the author’s “prestige” as measured by the ranking of her home institution.

So what should we do? If I were dean, I believe I would simply opt out of U.S. News. I’m serious. We know the rankings are a joke, and they’re actually hurting us. I would simply refuse to fill out the magazine’s survey form and then take out explanatory ads, on the day the 2012 rankings were released, in the New York Times and Wall Street Journal. Reed College has taken this sort of principled stand in the U.S. News college rankings and has gotten loads of favorable media attention.  I believe its stance has actually boosted its excellent reputation.

Of course, if a school fails to fill out the U.S. News form, the magazine will simply incorporate a somewhat punitive “estimate” of the uncooperative school’s data, so its ranking may be artificially depressed. But at this point, what do we at Missouri have to lose?  We’re already down to 107!  Anyone who does the slightest bit of investigation will see that Missouri Law — one of the oldest law schools west of the Mississippi River, the flagship public law school in a fairly populous state with two significant legal markets, the home of a productive faculty that also cares deeply about teaching — is not what participants on the Princeton Review’s old message board used to call a “Third Tier Toilet.” If we opt out of the rankings (a decision U.S. News will have to note), readers will surmise that our low ranking results from our decision not to play with U.S. News. Right now, they think there’s something wrong with Missouri, not with the screwy rankings system. Our opt-out would at least draw attention to the stupidity of the ranking metrics.

Of course, this move would entail significant risk. As it did with Reed College, U.S. News would likely adopt punitive estimates of the data we refused to provide, causing us to fall further in the rankings. Readers might not notice the disclaimer that we refused to return our survey and that our ranking is therefore based on estimated data. The media (mainstream and other) might not draw as much attention to our bold stand as I expect they would. While I think it would take a perfect storm for an opt-out strategy to tarnish our reputation even further, such storms do occasionally occur.

We could reduce the riskiness of our strategy if we could persuade some other law schools — perhaps other low-tuition, efficient schools that find themselves similarly disadvantaged by the rankings’ inapposite focus on expenditures per student — to withhold data from U.S. News. This would require U.S. News to include more “based on estimated data” asterisks, which would reveal the punitive nature of the magazine’s estimates and undermine confidence in the flawed ranking system.

But would this sort of concerted strategy run afoul of the antitrust laws? Initially, I thought it might. After all, what I’m contemplating is essentially an agreement among competitors to withhold information from a publication that tends to enhance competition among those very rivals. Moreover, the cooperating rivals would be withholding this information precisely because they think the competition stimulated by the publication is, to use the old fashioned term, “ruinous.”  It smells pretty fishy.

The more I think about it, though, the less troubling I find this strategy. The fact is, the methodology underlying the U.S. News rankings is so unsound that the rankings themselves are misleading.  And the misrepresentations they convey actually hurt a number of schools like Missouri.  I believe we who are unfairly disadvantaged by the U.S. News methodology could, without impunity, bind together in an attempt to undermine the flawed rankings.  Indeed, it is in our individual competitive interests to do so.

So how would a court evaluate a boycott of U.S. News by a group of law schools that perceive themselves to be disadvantaged by the magazine’s ranking methodology (say, less expensive, more efficient law schools with low per-student expenditures)?

First, the court would likely determine that the agreement not to participate in the ranking survey is ancillary, not naked.  As Herb Hovenkamp has explained, “[a] serviceable definition of a naked restraint is one whose profitability depends on the exercise of market power” (i.e., on a constriction of output aimed at artificially raising prices so as to enhance profits).  The agreement I’m contemplating makes perfect business sense apart from any exercise of market power. Each law school that would participate in the agreement is personally injured by the screwy rankings scheme, and each has an independent incentive — regardless of what other schools do — to refrain from participation. The participating law schools, it is true, would prefer to have others join them, but that is not because they are seeking to exercise market power; rather, they realize that the message their non-participation will convey (i.e., that U.S. News’s rankings methodology is nonsense) will be stronger if more schools join the boycott.

Since the restraint I contemplate is ancillary, not naked, it would be evaluated under the rule of reason. Indeed, any court that sought to utilize a less probing analysis (per se or quick look) would have to confront the Supreme Court’s California Dental decision, which held that a pretty doggone naked restraint among competing dentists was entitled to a full rule of reason analysis because it could enhance competition by reducing fraudulent advertising.

Under the rule of reason, the arrangement I’m contemplating would likely pass muster. Because widespread misinformation among consumers reduces the competitiveness of a market, an effort to reduce such misinformation, even a concerted effort, is pro-, not anti-, competitive.  Because the “agreement” aspect of my contemplated restraint increases the degree to which the arrangement undermines the misleading, competition-impairing U.S. News rankings, it enhances the restraint’s procompetitive effect. 

So what do others think?  Am I underestimating the antitrust risk of this strategy?  The business risk?  My TOTM colleagues from Illinois and George Mason, both of which do quite well under the U.S. News formula, probably have little personal interest in these musings.  But I suspect others do.  What do you think?

Filed under: antitrust, cartels, Education, law school, universities

Google’s efforts to make out of print books available online has run into a major stumbling block. Judge Chin ordered that books can only be digitized by Google if the author opts in; the agreement which he through out called for opt out.  This is an shame and a highly inefficient result.  As reported, the intricacies of copyright law and the unavailability of many rights holders means that opt in is not feasible in many cases.  As a result, thousands of books will not be digitized at all.  Instead of transferring rights to authors (which was apparently Judge Chin’s intent) he has simply destroyed valuable property rights.  This case was argued as an issue of the distribution of rights, but it is really about the creation of  rights — or, as it turns out, their non-creation.

Filed under: copyright, google, litigation Tagged: property rights

There is an antitrust debate brewing concerning Google and “search bias,” a term used to describe search engine results that preference the content of the search provider.  For example, Google might list Google Maps prominently if one searches “maps” or Microsoft’s Bing might prominently place Microsoft affiliated content or products.

Apparently both antitrust investigations and Congressional hearings are in the works; regulators and commentators appear poised to attempt to impose “search neutrality” through antitrust or other regulatory means to limit or prohibit the ability of search engines (or perhaps just Google) to favor their own content.  At least one proposal goes so far as to advocate a new government agency to regulate search.  Of course, when I read proposals like this, I wonder where Google’s share of the “search market” will be by the time the new agency is built.

As with the net neutrality debate, I understand some of the push for search neutrality involves an intense push to discard traditional economically-grounded antitrust framework.  The logic for this push is simple.  The economic literature on vertical restraints and vertical integration provides no support for ex ante regulation arising out of the concern that a vertically integrating firm will harm competition through favoring its own content and discriminating against rivals.  Economic theory suggests that such arrangements may be anticompetitive in some instances, but also provides a plethora of pro-competitive explanations.  Lafontaine & Slade explain the state of the evidence in their recent survey paper in the Journal of Economic Literature:

We are therefore somewhat surprised at what the weight of the evidence is telling us. It says that, under most circumstances, profit-maximizing vertical-integration decisions are efficient, not just from the firms’ but also from the consumers’ points of view. Although there are isolated studies that contradict this claim, the vast majority support it. Moreover, even in industries that are highly concentrated so that horizontal considerations assume substantial importance, the net effect of vertical integration appears to be positive in many instances. We therefore conclude that, faced with a vertical arrangement, the burden of evidence should be placed on competition authorities to demonstrate that that arrangement is harmful before the practice is attacked. Furthermore, we have found clear evidence that restrictions on vertical integration that are imposed, often by local authorities, on owners of retail networks are usually detrimental to consumers. Given the weight of the evidence, it behooves government agencies to reconsider the validity of such restrictions.

Of course, this does not bless all instances of vertical contracts or integration as pro-competitive.  The antitrust approach appropriately eschews ex ante regulation in favor of a fact-specific rule of reason analysis that requires plaintiffs to demonstrate competitive harm in a particular instance. Again, given the strength of the empirical evidence, it is no surprise that advocates of search neutrality, as net neutrality before it, either do not rely on consumer welfare arguments or are willing to sacrifice consumer welfare for other objectives.

I wish to focus on the antitrust arguments for a moment.  In an interview with the San Francisco Gate, Harvard’s Ben Edelman sketches out an antitrust claim against Google based upon search bias; and to his credit, Edelman provides some evidence in support of his claim.

I’m not convinced.  Edelman’s interpretation of evidence of search bias is detached from antitrust economics.  The evidence is all about identifying whether or not there is bias.  That, however, is not the relevant antitrust inquiry; instead, the question is whether such vertical arrangements, including preferential treatment of one’s own downstream products, are generally procompetitive or anticompetitive.  Examples from other contexts illustrate this point.

Grocery product manufacturers contract for “bias” with supermarkets through slotting contracts and other shelf space payments.  The bulk of economic theory and evidence on these contracts suggest that they are generally efficient and a normal part of the competitive process.   Vertically integrated firms may “bias” their own content in ways that increase output.  Whether bias occurs within the firm (as is the case with Google favoring its own products) or by contract (the shelf space example) should be of no concern for Edelman and those making search bias antitrust arguments.  Economists have known since Coase — and have been reminded by Klein, Alchian, Williamson and others — that firms may achieve by contract anything they could do within the boundaries of the firm.  The point is that, in the economics literature, it is well known that content self-promoting incentives in a vertical relationship can be either efficient or anticompetitive depending on the circumstances of the situation.  The empirical literature suggests that such relationships are mostly pro-competitive and that restrictions upon the abilities of firms to enter them generally reduce consumer welfare.

Edelman is an economist, and so I find it a bit odd that he has framed the “bias” debate without reference to any of this literature.  Instead, his approach appears to be that bias generates harm to rivals and that this harm is a serious antitrust problem.  (Or in other places, that the problem is that Google exhibits bias but its employees may have claimed otherwise at various points; this is also antitrust-irrelevant.)  For example, Edelman writes:

Search bias is a mechanism whereby Google can leverage its dominance in search, in order to achieve dominance in other sectors.  So for example, if Google wants to be dominant in restaurant reviews, Google can adjust search results, so whenever you search for restaurants, you get a Google reviews page, instead of a Chowhound or Yelp page. That’s good for Google, but it might not be in users’ best interests, particularly if the other services have better information, since they’ve specialized in exactly this area and have been doing it for years.

“Leveraging” one’s dominance in search, of course, takes a bit more than bias.  But I was quite curious about Edelman’s evidence and so I went and looked at Edelman and Lockwood.  Here is how they characterize their research question: “Whether search engines’ algorithmic results favor their own services, and if so, which search engines do so most, to what extent, and in what substantive areas.”  Here is how the authors describe what they did to test the hypothesis that Google engages in more search bias than other search engines:

To formalize our analysis, we formed a list of 32 search terms for services commonly provided by search engines, such as “email”, “calendar”, and “maps”. We searched for each term using the top 5 search engines: Google, Yahoo, Bing, Ask, and AOL. We collected this data in August 2010.

We preserved and analyzed the first page of results from each search. Most results came from sources independent of search engines, such as blogs, private web sites, and Wikipedia. However, a significant fraction – 19% – came from pages that were obviously affiliated with one of the five search engines. (For example, we classified results from youtube.com and gmail.com as Google, while Microsoft results included msn.com, hotmail.com, live.com, and Bing.)

Here is the underlying data for all 32 terms; so far, so good.  A small pilot study examining whether and to what extent search engines favor their own content is an interesting project — though, again, I’m not sure it says anything about the antitrust issues.  No surprise: they find some evidence that search engines exhibit some bias in favor of affiliated sites.  You can see all of the evidence at Edelman’s site (again, to his credit).  Interpretations of these results vary dramatically.  Edelman sees a serious problem.  Danny Sullivan begs to differ (“Google only favors itself 19 percent of the time”), and also makes the important point that the study took place before Yahoo searches were powered by Bing.

In their study, Edelman and Lockwood appear at least somewhat aware that bias and vertical integration can be efficient although they do not frame it in those terms.  They concede, for example, that “in principle, a search engine might feature its own services because its users prefer these links.”  To distinguish between these two possibilities, they conceive of the following test:

To test the user preference and bias hypotheses, we use data from two different sources on click-through-rate (CTR) for searches at Google, Yahoo, and Bing. Using CTR data from comScore and another service that (with users’ permission) tracks users’ searches and clicks (a service which prefers not to be listed by name), we analyze the frequency with which users click on search results for selected terms. The data span a four-week period, centered around the time of our automated searches.  In click-through data, the most striking pattern is that the first few search results receive the vast majority of users’ clicks. Across all search engines and search terms, the first result received, on average, 72% of users’ clicks, while the second and third results received 13% and 8% of clicks, respectively.

So far, no surprises.  The first listing generates greater incremental click-through than the second or third listing.  Similarly, the eye-level shelf space generates more sales than less prominent shelf space.  The authors have a difficult time distinguishing user preference from bias:

This concentration of users’ clicks makes it difficult to disprove the user preference hypothesis. For example, as shown in Table 1, Google and Yahoo each list their own maps service as the first result for the query “maps”. Our CTR data indicates that Google Maps receives 86% of user clicks when the search is performed on Google, and Yahoo Maps receives 72% of clicks when the search is performed on Yahoo. One might think that this concentration is evidence of users’ preference for the service affiliated with their search engine. On the other hand, since clicks are usually highly concentrated on the first result, it is possible that users have no such preference, and that they are simply clicking on the first result because it appears first. Moreover, since the advantage conferred by a result’s rank likely differs across different search queries, we do not believe it is appropriate to try to control for ranking in a regression.

The interesting question from a consumer welfare perspective is not what happens to the users without a strong preference for Google Maps or Yahoo Maps.  Users without a strong preference are likely to click-through on whatever service is offered on their search engine of choice.  There is no significant welfare loss from a consumer who is indifferent between Google Maps and Yahoo Maps from choosing one over the other.

The more interesting question is whether users with a strong preference for a non-Google product are foreclosed from access to consumers by search bias.  When Google ranks its Maps above others, but a user with a strong preference for Yahoo Maps finds it listed second, is the user able to find his product of choice?  Probably if it is listed second.  Probably not if it is delisted or something more severe.  Edelman reports some data on this issues:

Nevertheless, there is one CTR pattern that would be highly suggestive of bias. Suppose we see a case in which a search engine ranks its affiliated result highly, yet that result receives fewer clicks than lower results. This would suggest that users strongly prefer the lower result — enough to overcome the effect of the affiliated result’s higher ranking.

Of course this is consistent with bias; however, to repeat the critical point, this bias does not inexorably lead to — or even suggest — an antitrust problem.  Let’s recall the shelf space analogy.  Consider a supermarket where Pepsi is able to gain access to the premium eye-level shelf space but consumers have a strong preference for Coke.  Whether or not the promotional efforts of Pepsi will have an impact on competition depend on whether Coke is able to get access to consumers.  In that case, it may involve reaching down to the second or third shelf.  There might be some incremental search costs involved.  And even if one could show that Coke sales declined dramatically in response to Pepsi’s successful execution of its contractual shelf-space bias strategy, that merely shows harm to rivals rather than harm to competition.  If Coke-loving consumers can access their desired product, Coke isn’t harmed, and there is certainly no competitive risk.

So what do we make of evidence that in the face of search engine bias, click-through data suggest consumers will still pick lower listings?  One inference is that consumers with strong preferences for content other than the biased result nonetheless access their preferred content.  It is difficult to see a competitive problem arising in such an environment.  Edelman anticipates this point somewhat when observes during his interview:

The thing about the effect I’ve just described is you don’t see it very often. Usually the No. 1 link gets twice as many clicks as the second result. So the bias takes some of the clicks that should have gone to the right result. It seems most users are influenced by the positioning.

This fails to justify Edelman’s position.  First off, in a limited sample of terms, its unclear what it means for these reversals not to happen “very often.”  More importantly, so what that the top link gets twice as many clicks as the second link?  The cases where the second link gets the dominant share of clicks-through might well be those where users have a strong preference for the second listed site.  Even if they are not, the antitrust question is whether search bias is efficient or poses a competitive threat.  Most users might be influenced by the positioning because they lack a strong preference or even any preference at all.  That search engines compete for the attention of those consumers, including through search bias, should not be surprising.  But it does not make out a coherent claim of consumer harm.

The ‘compared to what’ question looms large here.  One cannot begin to conceive of answering the search bias problem — if it is a problem at all — from a consumer welfare perspective until they pin down the appropriate counterfactual.  Edelman appears to assume  — when he observes that “bias takes some of the clicks that should have gone to the right result” — that the benchmark “right result” is that which would prevail if listings were correlated perfectly with aggregate consumer preference.   My point here is simple: that comparison is not the one that is relevant to antitrust.  An antitrust inquiry would distinguish harm to competitors from harm to competition; it would focus its inquiry on whether bias impaired the competitive process by foreclosing rivals from access to consumers and not merely whether various listings would be improved but for Google’s bias.  The answer to that question is clearly yes.  The relevant question, however, is whether that bias is efficient.   Evidence that other search engines with much smaller market shares, and certainly without any market power, exhibit similar bias would suggest to most economists that the practice certainly has some efficiency justifications.  Edelman ignores that possibility and by doing so, ignores decades of economic theory and empirical evidence.  This is a serious error, as the overwhelming lesson of that literature is that restrictions on vertical contracting and integration are a serious threat to consumer welfare.

I do not know what answer the appropriate empirical analysis would reveal.  As Geoff and I argue in this paper, however, I suspect a monopolization case against Google on these grounds would face substantial obstacles.  A deeper understanding of the competitive effects of search engine bias is a worthy project.  Edelman should also be applauded for providing some data that is interesting fodder for discussion.  But my sense of the economic arguments and existing data are that they do not provide the support for an antitrust attack against search bias against Google specifically, nor the basis for a consumer-welfare grounded search neutrality regime.

Filed under: advertising, antitrust, armen alchian, business, economics, exclusionary conduct, google, monopolization, net neutrality, technology