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Antitrust Enforcement Needs to Evolve for the 21st Century

DEEPLINKS BLOG
February 27, 2019

Antitrust Enforcement Needs to Evolve for the 21st Century

Monopoly Board via Wikimedia Commons user fir0002

Yesterday, the Federal Trade Commission (FTC) announced the creation of a new task force to monitor competition in technology markets. Given the inadequacies of federal antitrust enforcement over the past generation, we welcome the new task force and reiterate our suggestions for how regulators can better protect technology markets and consumers.

Citing the 2002 creation of a task force that reinvigorated antitrust scrutiny of mergers, and ongoing hearings on Competition and Consumer Protection, FTC Chairman Joe Simons said, “[I]t makes sense for us to closely examine technology markets to ensure consumers benefit from free and fair competition.” Bureau Director Bruce Hoffman noted that “[t]echnology markets, which are rapidly evolving and touch so many other sectors of the economy, raise distinct challenges for antitrust enforcement.”

 We could not agree more. 

Unfortunately, antitrust enforcement in the U.S. has become strangled in an outmoded economic doctrine that fails to recognize the realities of today’s Internet. We recently submitted comments to the FTC explaining a few key ways to strengthen antitrust enforcement and enable it to better protect competition, the marketplace, and consumer welfare. 

Measures of Consumer Welfare Must Include Corporate Censorship Power

Increasingly, consumers “pay” for services that we use online not in dollars, but with our data, which the companies then use without compensation to enable targeted advertising. Given that these services are nominally “free” to consumers, it makes no sense to evaluate consumer welfare solely on the basis of price. 

The fetish with price among antitrust regulators originated with a group of economists known as the Chicago School. Their stated goal was to ground antitrust in empiricism. But the empirical measures they adopted have grown dramatically underinclusive, and their theories make little sense in the context of today’s corporate Internet. 

In particular, the most salient “cost” paid by consumers to tech companies is often not a price that we pay, but rather the data that we provide, as well as our agency and autonomy in the face of corporate advertising and platform censorship. 

In the advertising context, firms monetize user data by selling the privilege of reaching those users to third parties. Because the third parties—not the users themselves—are paying the price of advertising, a price-focused measure of consumer welfare essentially ignores crucial externalities that should inform antitrust analysis.

In addition, platform censorship harms users in a dimension unrelated to price. Arbitrary filters—sometimes driven by perceived national security concerns, and just as often by narrow corporate interests like extreme copyright enforcement—often remove speech from the Internet. Users dissatisfied with one service’s practices should be able to migrate to alternative platforms, but that presumes a competitive marketplace that is almost nonexistent on today’s internet.

Federal antitrust regulators should consider these very real costs to consumers when they evaluate proposed mergers, acquisitions, and anti-competitive behavior by companies leveraging longstanding and entrenched monopolies in particular digital markets.

Market Power Is Apparent in Various Online Sectors 

Several corporate behemoths dominate today’s Internet, each of which tends to wield monopoly power in at least one particular segment. Facebook’s share of advertising revenues among social networks in the United States is over 79%, while Google enjoys similar dominance over search tools, Amazon over cloud data infrastructure, Microsoft over operating systems, and Apple in device manufacturing. 

Among the features of the contemporary marketplace that entrench these monopolists are network effects. Put simply, their value corresponds to their number of established users, and the size of their user bases represents a barrier to entry among potential competitors.

One of the features that inhibit user choice is the refusal of corporate platforms to allow interoperability. In other contexts, consumers dissatisfied with a service can choose a competing one. But in the context of social media, the established content that a user has generated serves as inertia, increasing the transaction cost of migrating to alternative services, especially those that have not yet established comparable network effects.

Platforms do not benefit from this inertia merely passively. Rather, they actively prevent users from migrating—and prevent third parties from developing tools that would help empower users—in at least two ways. First, companies have enforced overbroad claims leveraging the Computer Fraud and Abuse Act. They have also expansively interpreted their authorities specified in user agreements, which are legally suspect under traditional contract law principles as contracts of adhesion lacking any opportunity for negotiation or modification.

To address the realities of today’s digital economy, regulators and courts must finally begin to consider harms to consumers beyond price, including corporate platform censorship. 

The Essential Facilities Doctrine Could Spark and Fuel Innovation

At the same time that antitrust regulators and courts developed an unsustainable, myopic interpretation of consumer harm, they also sharply limited one of the strongest levers in antitrust law for guarding competition: the “essential facilities” doctrine. It has been applied in cases ensuring that railroads could access bridges over rivers even when their competitors owned the bridges and that advertisers could run ads in newspapers even when the newspaper might prefer to exclude them in retaliation for those advertisers also buying ads in other advertising mediums.

When a firm wielding monopoly power leverages a resource that other firms cannot duplicate by refusing to allow access, courts can apply the essential facilities doctrine. On the one hand, leveraging a firm’s unique infrastructure might seem like a normal way of doing business. Seen from another perspective, this kind of activity preys on consumers—and competition—by preventing competition from emerging and forcing users to settle for the first mover.

Applications of essential facilities doctrine might appear aggressive, but applying the doctrine need not impose the kinds of obligations that constrain common carriers. Indeed, common carrier restrictions on social networks would risk imposing harms on speech. In contrast, recognizing essential facilities claims by competitors hampered by an anticompetitive denial of access would promote a diversity of approaches to content moderation, and other platform conduct (such as predatory uses of the Computer Fraud and Abuse Act) that harms users. Essential facilities claims would also encourage the development of new social media platforms and expand competition. 

We have argued that the FTC should consider harms to consumers beyond price manipulation, and the essential facilities doctrine, to inform and revive its enforcement of antitrust principles. We anticipate making similar arguments to the Department of Justice (DOJ), and before courts evaluating potential claims in the future. And we hope the new task force, through its work monitoring technology markets, helps focus federal regulators at both the FTC and DOJ on these opportunities.

Properly understood, and liberated from the constraints of an outmoded economic theory that defers to the abuses of corporate monopolies, antitrust laws can be a crucial tool to protect the Internet platform economy—and the billions of users who use it—from the dominance of companies wielding monopoly power.

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