TESTIMONY OF GEOFFREY A. MANNE ON COMMERCIALIZING INNOVATION Before the Subcommittee on Courts and Competition Policy Committee on the Judiciary United States House of Representatives Hearing on Competition in the Evolving Digital Marketplace - International Center for Law & Economics
Focus Areas:    Competition

TESTIMONY OF GEOFFREY A. MANNE ON COMMERCIALIZING INNOVATION Before the Subcommittee on Courts and Competition Policy Committee on the Judiciary United States House of Representatives Hearing on Competition in the Evolving Digital Marketplace

Summary

I would like to thank Chairman Conyers, Ranking Member Smith, Chairman Johnson and Ranking Member Coble for inviting me to testify. Members of the Committee: My name is Geoffrey A. Manne. I am the founder and executive director of the International Center for Law and Economics (or “ICLE”)—a global think tank devoted to bringing academic rigor to policy debates in the areas of antitrust, intellectual property, and financial regulation. I also teach Law and Economics at Lewis and Clark Law School in Portland, Oregon, where I am a Lecturer. I’ve written widely on competition policy and innovation. I’m the co-editor of a forthcoming volume on the topic from Cambridge University Press, Competition Policy and Intellectual Property Law Under Uncertainty: Regulating Innovation (with Joshua D. Wright) and the co-author (also with Joshua Wright) of two articles on the limits of antitrust in the digital economy: Innovation and the Limits of Antitrust (published in the Journal of Competition Law and Economics) and The Case Against the Case Against Google (forthcoming in the Harvard Journal of Law and Public Policy). In the interest of transparency, Google, among several other companies, has in the past supported ICLE’s work.

Economists have been studying antitrust since the very beginnings of the study of economics itself—Adam Smith even has a discussion on the subject in The Wealth of Nations. But economics—and by extension legal scholarship—has only come into its own and developed rigorous, sound and evidence-based analysis of the topic since about the 1970s. There is an enormous amount about the economic implications of business conduct that we still don’t understand (and some that we do seem to have a handle on), but our antitrust laws nevertheless obligate us to soldier on, developing sound expectations about the anti- or pro-competitive implications of various forms of business conduct nonetheless.

And while antitrust is not unique in operating under conditions of fundamental uncertainty, antitrust may be unique in foisting the burden of this uncertainty onto essentially economic conclusions: The touchstone of antitrust enforcement is the speculative economic implications of scrutinized conduct rather than its adherence to specific rules or legal tenets. As a result, we are forced to assess possible antitrust interventions within a sometimes-unsatisfying “decision-theoretic” framework—weighing the likelihood and the costs of erroneous enforcement against the likelihood and costs of erroneous nonenforcement.

For reasons I will discuss briefly below, this essential analysis tends to counsel against, rather than for, enforcement in many circumstances, and this is particularly true in nascent, evolving and technologically-innovative markets where ignorance about market structure, competition, technology and consumer demand is legion. Following my general remarks, I will spend some time discussing the implications of this reality for assessing the competitive implications of the pending Google/ITA merger. At the end of my prepared remarks I have a brief discussion of the role of privacy concerns in antitrust analysis.

The antitrust landscape has changed dramatically in the last decade. Within the last two years alone, the United States Department of Justice has held hearings on the appropriate scope of Section 2, issued a comprehensive Report, and then repudiated it; and the European Commission has risen as an aggressive leader in single firm conduct enforcement by bringing abuse of dominance actions and assessing heavy fines against firms including Qualcomm, Intel, and Microsoft. In the United States, two of the most significant characteristics of the “new” antitrust approach have been a more intense focus on innovative companies in high-tech industries and a weakening of longstanding concerns that erroneous antitrust interventions will hinder economic growth. But this focus is dangerous, and these concerns should not be dismissed so lightly.

Today’s high-tech bête noir is Google. Close scrutiny of the complex economics of Google’s technology, market and business practices reveals a range of real but subtle, pro-competitive explanations for features that have been held out instead as anticompetitive. Application of the relevant case law then reveals a set of concerns where economic complexity and ambiguity, coupled with an insufficiently-deferential approach to innovative technology and pricing practiced in the most relevant precedent (the D.C. Circuit’s decision in Microsoft), portend a potentially erroneous—and costly—result. A better analysis, by contrast, would embrace the cautious and evidence-based approach to uncertainty, complexity and dynamic innovation contained within the wellestablished “error cost framework.” And while there is an abundance of errorcost concern in the relevant Supreme Court precedent, there is a real risk that the current, aggressive approach to antitrust error, coupled with the uncertain economics of Google’s innovative conduct, will nevertheless yield costly interventions. The point is not that we know that Google—or any other high-tech company’s—conduct is pro-competitive, but rather that the very uncertainty surrounding it counsels caution, not aggression.

The error-cost framework in antitrust originates with Judge Frank Easterbrook’s analysis in his seminal paper, The Limits of Antitrust, itself built on twin premises: first, that false positives are more costly than false negatives because self-correction mechanisms mitigate the latter but not the former, and second, that errors of both types are inevitable because distinguishing procompetitive conduct from anti-competitive conduct is an inherently difficult task, especially in a single-firm context.

While economists have applied this framework fruitfully to several business practices that have attracted antitrust scrutiny, its application to antitrust intervention in markets where innovation is a critical part of the competitive landscape is less-well-developed. While much has been said about the relationship between innovation and antitrust, often in the way of broad pronouncements that innovation either renders antitrust essential to economic growth or entirely unnecessary, the error-cost framework allows for greater precision in policy prescriptions and a more nuanced approach. Some of the implications are well understood in the current body of literature and others have been frequently ignored or remain entirely unrecognized.

In brief, given the link between innovation and economic growth, the stakes of “getting it right” are high. Caution and humility are warranted in light of both the historical hostility towards innovative business practices by competition policy as well as the large gaps of empirically-validated theory in the economic literature on competition and innovation. The traditional problem of identifying and distinguishing pro-competitive from anticompetitive conduct faced by enforcers and courts in all antitrust cases is a difficult one. But those difficulties are exacerbated in innovative industries.

Both product and business innovations involve novel practices, and such practices generally result in monopoly explanations from the economics profession followed by hostility from the courts (though sometimes in reverse order) and then a subsequent, more nuanced economic understanding of the business practice usually recognizing its pro-competitive virtues. This sequence and outcome is exactly what one might expect in a world where economists’ career incentives skew in favor of generating models that demonstrate inefficiencies and debunk the economics status quo, while defendants engaged in business practices that have evolved over time through trial and error have a difficult time articulating a justification that fits one of a court’s checklist of acceptable answers. In the words of Nobel economist Ronald Coase,

[i]f an economist finds something—a business practice of one sort or another—that he does not understand, he looks for a monopoly explanation. And as in this field we are rather ignorant, the number of un-understandable practices tends to be rather large, and the reliance on monopoly explanations frequent.”

From an error-cost perspective, the critical point is that antitrust scrutiny of innovation and innovative business practices is likely to be biased in the direction of assigning higher likelihood that a given practice is anticompetitive than the subsequent literature and evidence will ultimately suggest is reasonable or accurate.

Thus while many business practices are criticized by competitors and others as anticompetitive—and sometimes they are, of course—I believe it would be prudent to consider and give greater weight to the pro-competitive explanations as well as the anti-competitive ones. The fundamental truth of antitrust analysis is that the very same conduct (aggressive competition) that could be anticompetitive could also be pro-competitive; there is no easy way to suss out the difference on the basis of simple (or even complex) legislative or judicial language. The cost of hasty intervention is the loss to consumers of the benefits of that aggressive competition, both directly and, perhaps more importantly, by deterring future actions that may likewise attract costly interventions and penalties. Intervention tends to be final, stopping (and deterring) potentially-valuable conduct in its tracks. On the other hand, nonintervention under uncertainty permits the possible pro-competitive bounty to materialize and allows both the competitive marketplace as well as future enforcers to mitigate anticompetitive outcomes that may arise.

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