Category Archives: Antitrust

Review of Michael Munger, The Sharing Economy: Its Pitfalls and Promises (Institute of Economic Affairs, 2021)

Transaction costs are one of the most overlooked ideas in economics. They are also one of the most important. The lowering of transaction costs is an engine of modernity itself and key to understanding where future progress might take us. That is Duke University economist Michael Munger’s argument in his new book, The Sharing Economy: Its Pitfalls and Promises (free download from the Institute of Economic Affairs). It follows up his 2018 book, Tomorrow 3.0.

What are transaction costs? As the name implies, they are things that get in the way of making transactions. Think of them as economic friction. Things like waiting in line, searching for a product, comparing prices, driving to and from a store, or resetting another forgotten website password. Transaction costs often cannot be measured in money, but they are still part of the price of everything we buy. A good economist knows, money is not everything.

Countless beneficial transactions never happen because the time and hassle required outweigh the benefits. Successful entrepreneurs can make these lost transactions come to life just by lowering their attendant transaction costs. In a way, they succeed by making the invisible visible. Along the way, they can create new industries, revolutionize existing industries, and topple old ones. Transaction costs are the hidden engine of Joseph Schumpeter’s creative destruction.

Munger’s dissertation advisor was the Nobel laureate Douglass North, one of the pioneers of transaction cost economics, along with other laureates such as Ronald Coase and Oliver Williamson. Munger likes to tell a story about North explaining that, while there are endless questions to ask in economics, many of them have the same answer: transaction costs. Over the years, North’s advice has proved useful to countless graduate students in search of thesis topics. As The Sharing Economy shows, there remains plenty of uncharted territory. Today’s graduate students should take note—as should experienced scholars.

How do transaction costs apply to the new sharing economy? Broken down to fundamentals, Uber doesn’t sell taxi rides or food delivery. It sells access to a platform that drastically lowers transaction costs for some services. The product is the platform. Yes, people use it to buy and sell taxi rides and food delivery, but they could use that type of platform for almost anything.

This is why a lot of sharing economy startups describe themselves as the Uber or the Airbnb for this or that service. They’re selling transaction cost savings, not whatever product or service appears in their marketing materials.

Every transaction requires what Munger calls the three Ts: triangulation, transfer, and trust. Sharing platforms can solve the three Ts quickly and cheaply:

  • Triangulation means coordinating everyone involved in the transaction. In a food delivery transaction, those are the customer, the restaurant, and the delivery driver. Until recently, solving this coordination problem was so difficult that most restaurants did not offer delivery at all. And the ones that did had to hire their own drivers to work exclusively for them. Unless business was both brisk and consistent, this was a risky proposition. Today, sharing platforms can solve triangulation problems in seconds. As a result, restaurants that might not be able to afford full-time delivery staff can now share drivers with other businesses and earn additional sales, while customers gain additional choices.
  • Transfer means making sure everyone gets paid. Uber, for example, has all parties’ payment info stored in the app. It automatically charges customers the right amount, pays restaurants and drivers, and handles tips. That is far easier than in the old days of cash, checks, or reading out your credit card number over the phone.
  • Trust is all parties having confidence that everything will go as it should. This is what ratings systems contribute. Riders can avoid drivers with low ratings and drivers can avoid problem customers. They can do this in seconds just by glancing at their ratings. On the other side of the coin, high ratings can be lucrative for vendors, giving them a greater incentive to keep customers happy than a traditional cab driver. And keeping that five-star rating can encourage more civil behavior from customers. It doesn’t pay to be a Karen.

Sharing economy platforms solve the three Ts so quickly and easily that millions of transactions that would never have happened a decade ago are now routine. This, for Munger, is a reason for optimism. Similar platforms could emerge for all kinds of goods. In fact, they probably are doing so right now in a dorm room or a garage somewhere.

Tools that spend nearly all of their time in storage could be rented out, for example. Other possibilities include office equipment, professional-grade audio and video equipment, and designer clothing. Some of these ideas might be successful. Others might be duds. People will likely find out soon enough.

Munger believes the low-transaction cost sharing economy could transform manufacturing as we know it. Factories would make far fewer goods, and what they do make would tend to be professional grade and more durable. A drill that spends 30 years in someone’s garage might get a couple hours of use over its entire lifespan, but if it’s shared, it will get far more use on a wider variety of tasks. It will need to be more solidly built and easily repaired.

That is one reason why the sharing economy has costs, as well as benefits. Both words in the phrase “creative destruction” are important. Just because the benefits outweigh the costs doesn’t mean costs do not exist. Manufacturing jobs have already declined by about a third since their 1979 peak, from about 18 million workers to about 12 million. If sharing platforms become popular for a lot of goods, that decline will be deeper and steeper. At the same time, the higher-grade goods still being made might require more skills or more automation to make, displacing less skilled workers.

Other jobs would open up in warehousing and delivery, and likely in other sectors. Munger doesn’t know what these might be, and neither does anyone else. Some of these jobs might not be appealing, might not pay as well, or may not work with some workers’ family responsibilities or other personal situations.

On the other hand, the size of the labor force has stayed remarkably consistent relative to population  throughout America’s transition from agriculture to industry, and from industry to services. While the inability to predict the future is scary, that’s no reason to keep things as they are. As Munger says on page 89, “Platforms are disruptive, but outlawing disruption has never worked.”

Transaction Costs and a Policy Revolution

As transaction cost reductions transform the economy, they also transform public policy. The problem is that public policy usually takes long to catch up. Regulations classify many workers as either employees or contractors, and treat them differently. Employee status comes with certain rules for minimum wages, benefits, and working conditions, while the rules for contractors are generally looser. It is also a false dichotomy that poorly fits workers’ needs.

If an accountant uses a platform like Taskrabbit to work for several clients, is she an employee of any of them? Does she count as Taskrabbit’s employee because it handles her payments or is she a customer who pays to access its platform? Does it matter if she commutes to an office or works from home? What if she’d rather choose her own health insurance or retirement plan? My colleague Iain Murray explored this question in his 2016 CEI paper “Punching the Clock on a Smartphone App.”

Current regulations don’t have good answers to these questions. And laws like California’s AB5 gig worker law and the proposed PRO Act at the federal level would entrench the legacy labor law model even further. All this is because some entrepreneurs thought of a way to use smartphone apps to reduce transaction costs.

In the age of COVID, sharing platforms have made it easier for workers to avoid public transportation and crowded offices. When COVID subsides, many workers will still prefer to avoid commutes and offices in favor of more pleasant surroundings like home offices, coffee shops, or smaller shared offices—which some sharing platforms offer. Regulators should think carefully before they take those options away.

Antitrust policy is in the middle of its own revolution, thanks in part to transaction costs. Sharing platforms are just another version of the old make-or-buy decision. If a company needs legal help, does it use in-house counsel or hire an outside attorney? Should a firm employ its own custodian or hire a cleaning service? The answer depends on transaction costs. If it’s cheaper to do something yourself, do that. If transacting with someone else costs less, do that. The answer is different for every company—and can change over time within a company. Sharing platforms and their lower transaction costs provide new possible answers to this age-old problem.

As of this writing, the leading food delivery platforms are DoorDash, UberEats, and GrubHub. They could buy out smaller competitors or merge with each other in the coming years, which might result in antitrust action. It shouldn’t, and transaction costs explain why.

A restaurant that wants to offer delivery has a make-or-buy decision to make. Does it hire its own driver or outsource to a sharing platform? It will go with whichever has lower transaction costs. This provides a built-in competitive check on sharing platforms that will never go away—even if one sharing platform monopolizes the entire market. If its fees cost more than the restaurant hiring its own drivers, then restaurants will opt for the latter. Several restaurants in the same city could even band together and jointly hire a driver—if regulations allow them.

The reason people use sharing platforms in the first place is because their transaction costs are lower than the alternatives. And the alternative of doing something in-house will never go away. Sharing platforms do not have market power, and never will.

Sharing platforms also do not restrain trade, which is another threshold for antitrust enforcement. They enable new trades that would never have happened otherwise, because they lower transaction costs. Before sharing apps, food delivery options in most places were limited to pizza and Chinese. Now, everyone from McDonald’s to mom-and-pop diners offer delivery. Some restaurants, such as Panda Express, are even attempting to undercut sharing platforms by creating their own app-based ordering services to avoid platforms’ fees.

Transaction Costs and the Moral Economy

Contrary to popular belief, morals are an integral part of economics. One of the discipline’s founding works, after all, is Adam Smith’s Theory of Moral Sentiments. Man is an animal that trades, to paraphrase from Smith’s other great work, The Wealth of Nations. People want to exchange, cooperate, and compete. It is our nature. But transaction costs get in the way of our nature, because they get in the way of trade.

Economists Virgil Storr and Ginni Choi, of the Mercatus Center at George Mason University, argue in their book Do Markets Corrupt Our Morals? that markets are moral playgrounds. When people enter those playgrounds, they learn how to trust and earn trust. They learn to keep their word and be polite—the late, great Steve Horwitz delighted in the “double thank you” that accompanies most transactions. People on the playground learn that the best way to get something you value is to give others things they value even more.

These are skills that take practice and repetition to develop. Transaction costs raise the cost of this moral practice. And when something costs more, people consume less of it.

If the goal is an open, civil society, then transaction cost reduction should be an important priority. Sharing economy platforms have the potential to do exactly that on a massive scale. At the same time, they are just another chapter in a long story, and hardly the final one.

Munger, by taking Douglass North’s advice, has used an old and overlooked tool to better understand new technologies and emerging economic changes. Sharing platforms have already changed the way people take cab rides, order food, and go on vacation. In the coming years, they could reshape the manufacturing sector, office culture, and even urban design, if traditional offices and downtowns continue to fall out of favor.

Transaction costs can also lead to fresh insights about labor regulations, antitrust, and other areas of public policy, as well as the overlooked symbiosis of markets and morality. Though The Sharing Economy is geared to a British audience, American readers will still get far more value from this freely downloadable book than they spend in transaction costs. While this admittedly sets a low bar, I intend it as high praise. I could not recommend this book more highly.

Download The Sharing Economy for free from IEA’s website here.

Sen. Klobuchar’s Half-Baked Antitrust Bill

famous scene in the 1990s comedy movie Half Baked has a young Jon Stewart musing about how different everyday activities can be while one is high on cannabis. “I love Al Pacino, man. You ever see Scent of a Woman?” “Yup,” his dealer says. “You ever seen Scent of a Woman—ON WEED? That’s the way to see it, man!” Stewart continues: “You ever see the back of a $20 bill, man?” “No, I don’t know you,” says the now-wary dealer. “You ever see the back of a $20 bill—ON WEED?! There’s some weird shit in there, man!”

This scene may well have inspired Sen. Amy Klobuchar’s (D-MN) new antitrust bill, the American Innovation and Choice Online Act. The Senate version, to be introduced next week, joins an already-introduced House version (H.R. 3816), which would ban online retailers from giving preferential treatment to their private brand products.

Sure, you buy store brand products all the time at the grocery store and from Costco, but have you ever bought store brand products—ONLINE?! The distinction between in-person commerce and online commerce is silly. It’s 2021. Nearly every business, big or small, has at least some online presence, and they have for a while.

Sellers sell and buyers buy. Whether in person, by phone, by mail, or online, all are just different means to the same end. People tend to use whichever method has the lowest transaction costs to get together and make transactions. That’s it. The rest is details, like the man in the bushes on the back of Jon Stewart’s $20 bill, who may or may not have a gun.

Klobuchar and her eight Senate cosponsors have an average age of 66, so most of them may not get even my own dated cultural reference to Half Baked. In fact, the only two sponsors under age 60 are Josh Hawley (R-MO), 41, and Cory Booker (D-NJ), 52. No wonder nearly every congressional hearing on tech issues has at least one “series of tubes” or “Senator, we run ads” moment. Whatever one’s feelings about the tech industry, one should think carefully before giving politicians the power to regulate what they do not understand.

For more tech-savvy members, maybe they are grasping at straws for reasons to regulate companies they dislike, and this was the best they could find.

Whatever the case, the online-offline distinction does not matter for consumers, and it gets blurrier every year. Amazon is opening more brick-and-mortar stores, while Walmart and Target are expanding their online offerings. Sen. Klobuchar’s bill would freeze in time a false dichotomy, and cause consumer harm right in the middle of a difficult economic recovery.

How would the bill work in practice? It would not ban online companies from selling their private brand products, but it would ban them from giving their own products special treatment. Google, for example, would probably not be able to show Google Maps in its search engine, or at least not as a leading search result, which could lead to a lot of frustrated drivers. Amazon’s Prime program might go away entirely. At the very least, Amazon’s house brands would become harder to find and might not qualify for free shipping. There would be plenty of consumer aggravation, and no consumer benefits.

Meanwhile, house brands at physical stores would remain untouched. For decades, store brands such as Costco’s Kirkland have benefited from discounted prices, preferential marketing, and prominent shelf space. Those markets have remained highly competitive, but now that this same business practice is happening online, it is somehow different?

Nobody has yet offered a convincing explanation of why that is the case, let alone why commerce at a physical store is fundamentally different from commerce on a website or app, and therefore should be regulated differently.

The American Innovation and Choice Online Act is clearly not about consumer protection. For progressives, it allows them to express an ideological distaste for big businesses and pursue antitrust-unrelated issues like income inequality. For conservatives, it gives them a way to express their culture war grievances against tech companies—which is about as antitrust-unrelated as it gets.

The bill is also a golden opportunity for rent-seekers. For traditional retailers, it is a way for government to hobble their competitors. That might not be what antitrust advocates intend, but that is how antitrust works in in the real world. The American Innovation and Choice Online Act is only the latest instance of a long tradition of regulatory capture in antitrust policy.

For antitrust policy ideas that are more than half-baked, see CEI’s dedicated antitrust website and Wayne Crews’ and my paper “The Case against Antitrust Law.”

Senate Judiciary Antitrust Hearing on Big Data Based on Flawed Premises

This press release was originally posted at cei.org.

WASHINGTON – The Senate Judiciary Committee’s Subcommittee on Antitrust will hold a hearing today on the implications of data on competition. Subcommittee Chair Senator Amy Klobuchar (D-MN) told POLITICO, “Big data is at the core of our modern economy, powering targeted advertising, driving artificial intelligence. It’s a really intense competition issue at its core.”

Competitive Enterprise Institute Senior Fellow Ryan Young said:

“Sen. Klobuchar and her colleagues are arguing that the sheer scale of Big Data makes it difficult for smaller companies to compete in areas such as targeted advertising and algorithm development. There are several problems with this argument.

“One is that new companies are still entering the market and succeeding. TikTok is now garnering more viewing time than Google’s YouTube, and was the most-downloaded app of 2020, surpassing established giants such as Facebook. Zoom, which nobody had heard of two years ago, almost instantly overtook established competitors from Microsoft and other tech giants, and its brand has even become a verb.

“Two, simply having data and established networks of users did not stop Amazon from failing with its Fire phone, Google failing with its social Network Google+, or the anemic performance of Facebook’s Portal devices.

“Three, if the ad market was anti-competitive, the big companies would be able to get away with raising their prices. Instead, ad prices fell by half over the period 2009-2019, even as print ad prices doubled in some cases. Google, Facebook, Apple, and other incumbents spend billions of dollars on research and development. Companies that feel safe from competition do not do this.

“Sens. Klobuchar, Hawley, and others want to write new, expanded antitrust laws. All this would accomplish is give incumbent companies another set of regulations they can game in their own favor; regulatory capture is real. A greater threat of being sued would also have a chilling effect on innovations that regulators might not understand or approve of. The economy needs room to recover, not more central direction from Washington.”

Read more:

Not Always an Antitrust Issue: Airline Edition

The Justice Department is gearing up to file an antitrust case against JetBlue and American Airlines over an alliance they recently formed. The Wall Street Journal reports:

The lawsuit, which could come as soon as Tuesday, is expected to argue that the recently forged alliance threatens competition and higher fares, the people said.

American and JetBlue announced their alliance in July 2020, saying boosting their offerings in the Northeast by marketing one another’s flights on certain routes would allow them to become more formidable competitors at the three New York area airports and in Boston.

Assume, for the sake of argument, that the American-JetBlue pact is anti-competitive (the airlines dispute this, and I have not yet reached a conclusion). Is antitrust enforcement the right tool for increasing competition? Probably not. Antitrust regulation has a number of built-in flaws that cannot be reformed.

Market conditions can change in a lot less time than it takes to conduct a trial, which is why the case over big IBM’s dominance in mainframe computing, filed in 1969, was eventually dropped—in 1982, when personal computers were taking over the market.

Competing in the courtroom takes resources away from competing in the market, and can have a chilling effect on efficiency-enhancing innovations and business practices.

And then there is regulatory capture, where businesses coopt regulators for their own purposes. It wouldn’t be surprising to see other airlines try to influence this case, just as rival software companies did during the Microsoft case in the late 1990s. Oracle went as far as attempting to bribe rivals’ office janitors to hand over trash that might have contained sensitive documents.

A better solution would be to repeal existing regulations that bar international airlines from operating domestic flights in the U.S.—which is essentially a Jones Act for airlines. That reform alone would expose American’s and JetBlue’s joint flights to hundreds of potential new competitors. It would require no new spending, no court costs, and no lawyer fees. The airlines could compete in the marketplace, not the courtroom, and those worried about increasing concentration in the airline industry would have far less to worry about.

Antitrust is trendy right now. Its high visibility is one reason why activists are calling for using antitrust enforcement everywhere from airlines to health care to live events—and not just against the Big Tech companies that garner most of the headlines.

When you have a hammer, everything looks like a nail. But sometimes the correct tool for the job is a screwdriver or a saw. This is one case where the right tool is regulatory reform, not an antitrust prosecution.

For more CEI research on antitrust, see our dedicated antitrust website, as well as Wayne Crews’s and my paper “The Case against Antitrust Law.”

Court Rules Apple App Store Rules Do Not Violate Antitrust Laws

This press release was originally posted on cei.org.

A federal district court today ruled that Apple’s rules regarding payments on its App Store do not violate antitrust laws. The case, brought by video game maker Epic Games, alleged Apple violated antitrust laws by requiring purchases be made on its own system.

Director of CEI’s Center for Technology and Innovation Jessica Melugin said:

“With a court finding it is not a monopoly, the decision is largely a victory for Apple. The company will mostly continue to operate their private property, the Apple App Store, by the rules it wishes. Apple will not be forced to allow outside payment systems from developers and the App Store can remain the exclusive app download method on iPhones and iPads. The finding that Apple is in violation of California state law under the software giant’s prohibition on developers telling users there are alternative and cheaper payment options is along the lines of concessions it has already started to make with internal policy changes and legal settlement offers. Consumers will continue to benefit from Apple’s intact security, convenience and reliability at the App Store.”    

Senior Fellow Ryan Young said:

“The wisdom of Apple’s business practices is constantly being put to the test by consumers. Their size does not protect them from flops like the Newton tablet, its failed Ping social network, or its forgotten Pippin gaming console. Same goes for the App Store’s payment and commission policies.

“The separate question of whether Apple’s App Store is a monopoly is less debatable. Making that case requires defining Apple’s market so narrowly that real-world consumers can escape its boundaries with a dozen keystrokes or less. Before Apple booted Epic’s Fortnite game from its App Store in August 2020, roughly 90 percent of Fortnite downloads came through non-App Store vendors. Epic tried to define Apple’s market this way; the court disagreed.

“Any market is a monopoly if you define it narrowly enough. But those types of language games don’t always hold up in court. Real-world considerations keep getting in the way.” 

In the News: Facebook’s Antitrust Case

I’m quoted, in French, in Paris’ Le Monde newpspaper about the FTC’s revised antitrust complaint against Facebook:

La FTC « joue sur les mots », abonde Ryan Young du think tank Competitive Enterprise Institute. Pour lui, l’autorité s’est juste « arrangée pour exclure TikTok, Twitter, Clubhouse, Discord, et d’autres de ce marché »« Tout marché est un monopole si vous le définissez de façon suffisamment étroite, et c’est la seule chose que la plainte de la FTC prouve réellement. »

An English-language version of the same story in Techxplore says:

But Ryan Young of the Competitive Enterprise Institute countered that the FTC complaint “relies heavily on wordplay” to define Facebook as a monopoly.

“It argues that Facebook dominates the market for ‘personal social networking services,’ then defines that term in just such a way that excludes TikTok, Twitter, Clubhouse, Discord and others from that market,” Young said.

“Any market is a monopoly if you define it narrowly enough, and that is the only thing the FTC’s complaint successfully proves.”

The Progressive Playbook? Thoughts on a Slippery Slope

Is there a master plan behind the blunders of governments? Or are politicians just making it up as they go along? The cabal model is tempting. A lot of people tend to believe that it is not enough for their opponents to wrong; they must also have bad intentions. But usually, less sinister explanations, such as fallible politicians responding to incentives, are a better guide to fixing today’s political mess.

For example, President Biden recently announced that he is asking the Federal Trade Commission to consider using antitrust enforcement to fight rising gas prices. The economist Jeff Eisenach tweeted in response:

The Progressive Play Book: Step 1: Use regulations to restrict supply. Step 2: Blame the oil companies for rising prices. Step 3: Invoke antitrust. Step 4: See e.g., CITCO, Pemex. We are at Step 3.

One should not read too deeply into tweets. They lack enough space either to explain nuances or to define terms clearly enough to prevent misunderstandings. Sometimes, people are just making a snarky point, and they don’t have room for a disclaimer in a 280-character tweet.

Any or all of these situations could be the case here, but Eisenach’s playbook theory tweet has a clear—and common—slippery-slope logic that is worth a closer look. This is not to single out Eisenach, but to highlight a tendency among people of all political persuasions: to assume bad motives and master plans where there probably aren’t any.

Progressives often favor adding new economic regulation, and rarely favor rolling them back. So, it makes sense that progressives would respond to rising gas prices—largely caused by regulations—with more regulations. In Eisenach’s playbook model, this story presumably repeats until the energy sector is nationalized, as with Pemex, which is owned by the Mexican government, and Citgo, in which the Venezuelan government has a stake (though it cannot benefit from Citgo’s U.S. holdings because of sanctions).

This isn’t entirely drawn from thin air. Sen. Bernie Sanders (D-VT) really has proposed nationalizing the energy industry. The Green New Deal may not be a serious proposal, but it really was introduced as legislation.

But is the slippery slope really so deliberate? Just like the GOP’s own populist extremists, the Democratic party’s progressive wing has a high decibel level, but lower numbers and influence. Yes, progressivism touts lofty ideals, such as economic equality, democracy, and environmental protection, but in practice, progressive policies tend to be less lofty and more concrete.

If some people are having trouble making ends meet, pass a law raising the minimum wage. If other people have too much money, raise their taxes. If rents are too high, use price controls or impose a moratorium on evictions. President Biden’s antitrust threat against oil producers is similarly direct. Gas prices are going up, so do something about it. Such moves don’t involve much abstract thought about long-term competitive processes, tradeoffs, unintended consequences, or rent-seeking—what economist Thomas Sowell calls thinking beyond stage one.

If anything, President Biden’s proposal mixes a layman’s misunderstanding of the 1970s oil shock from early in his career with today’s hottest political trends, such as inflation and antitrust. Availability bias is a far likelier driver for his proposal than a playbook to eventually nationalize the energy industry.

Inflation and high gas prices were important issues in the 1970s. The two are linked together in a lot of peoples’ minds to this day. Today, inflation is back over 5 percent and gas prices going up again. In his speech, President Biden even singled out OPEC, which is long past its prime as a global economic villain.

Another factor that makes the current gas price increase appear even starker is that prices are rising from a low starting point. On April 23, 2020,  gas prices averaged $1.77 per gallon, the lowest since the 2008 financial crisis. Since then, gas prices haves been on an upward trajectory, rising to $3.17 per gallon by August 16, 2021. While that is a sharp increase, thanks in large part to that low starting point, gas is still cheaper than it was for almost all of the period between 2011 and 2014.

Inflation is also not the main driver of rising gas prices. Inflation is what happens when the supply of money gets out of whack with the supply of goods and services. If it isn’t monetary, it isn’t inflation. Today’s inflation is likely responsible for about 10 cents per gallon of the price increase, out of roughly $1.40. Most of the rest comes from a mix of supply, demand, and bad regulations.

The Jones Act of 1920, which is essentially a Buy American bill for the maritime shipping industry, makes shipping domestic gas artificially expensive and increases reliance on imported oil. Both of these make gas prices higher and more volatile. The Biden administration’s decisions to deny drilling and pipeline permits and to raise some regulatory burdens are also raising prices and squeezing supply. These are not inflation, but they are raising prices.

Coincidentally, higher prices and restricted supply are the same indicators used in finding consumer harm in antitrust cases, adding potential confusion to any antitrust cases stemming from Biden’s proposal. His recently proposed carbon tariffs on imported oil would further worsen the problem.

Repealing existing regulations and walking back proposed burdens would do more to lower gas prices than adding new restrictions—but that would require admitting mistakes. Politicians generally prefer to shift the blame and then publicly punish some supposed bad guys. That is not a conspiracy; it is rational political behavior.

The state of politics is unhealthy. There are lot of changes needed at the cultural, institutional, and policy levels. While conspiratorial allegations of political playbooks and slippery slopes are tempting as explanations, a lot of bad policy simply involves politicians responding to the incentives they face with the limited knowledge they have—the same as everyone else does.

The economic recovery and the continuing long-run rise in living standards would be better served if reformers would focus their scarce resources on these, rather than on exposing sinister narratives that aren’t really there.

FTC Re-Files Facebook Antitrust Complaint

See also a CEI news release with statements from Jessica Melugin and me.

The Federal Trade Commission (FTC) submitted a revised antitrust complaint against Facebook today. In June, a judge threw out the initial complaint for not providing evidence that Facebook had a monopoly in anything. The FTC had until today to give it another try. The text of the amended complaint is here.

The new complaint has the same problem, and relies heavily on wordplay. The FTC argues that Facebook dominates the market for “personal social networking services,” which it defines in a way that excludes TikTok, Twitter, Clubhouse, Discord, YouTube, and others. By the FTC’s boutique market definition, Facebook’s biggest competitor is Snapchat.

Any market is a monopoly if you define it narrowly enough, and that is the only thing the FTC’s complaint successfully proves.

Real-world monopolies, as opposed to semantic monopolies, are characterized by rising prices, restricted supply, and slowed innovation. Facebook and its competitors show none of these characteristics. They are largely free to consumers. Advertisers pay to show their ads on Facebook and competing networks, but the prices they pay have fallen by half over the last decade—akin to a permanent 50 percent off sale compared to before Facebook got big.

Facebook is not able to restrict the supply of social networking services. New social networks are constantly rising, falling, and evolving, and Facebook cannot stop people from using them. Signing up for a competing service takes a minute or two and maybe a few dozen keystrokes. Many people also have multiple accounts on multiple social networks—how many people do you know who use both Facebook and Twitter, for example?

As for innovation, Facebook spent $21 billion on research and development over the past year. It is constantly experimenting with new features on its site in an ongoing trial-and-error process—because its competitors are, too. This is not monopoly behavior.

Nobody but lawyers are benefiting from the FTC’s ideologically charged word games. For example, a 2019 Inspector General report found that the FTC routinely pays outside experts as much as $750 per hour. In years-long antitrust cases, that can add up to millions of dollars, without creating any consumer value.

Another concern is regulatory capture. An antitrust settlement against Facebook would likely include expensive new policies involving privacy, content moderation, and more. Facebook can absorb these compliance costs; smaller startups cannot.

Facebook, with its aging user base, and seeing people under 25 moving to TikTok and other competitors, would likely be happy to negotiate such a settlement down the road. In the world of regulation, intentions and results are often very different things. Antitrust policy is no exception. The FTC’s ideological campaign is harming both consumers and the competitive process. At the very least, it should drop the Facebook case, if a judge doesn’t drop it first again.

Longer term, it is time to reconsider antitrust regulation altogether.

Relevant Markets, A Dozen Keystrokes, and the Google Play Store Antitrust Lawsuit

Yesterday, after markets closed, 36 state attorneys general announced another antitrust lawsuit against Google. This complaint centers around Google’s Play Store, in which it often charges developers a 30 percent commission. The text of the complaint is now available, and it has some problems. One of them involves yet another poorly defined relevant market, which excludes Apple’s iOS. Another problem is that it is easy for developers and consumers to avoid the Play Store and its commissions.

Regulators often say that a company dominates an unrealistically narrow market segment, then say this is proof of monopoly. This is the relevant market fallacy. For example, Sirius-XM has a monopoly on the satellite radio market. But this doesn’t matter because that narrow market competes in a far larger marketplace against traditional radio, podcasts, audio books, streaming services like Spotify, and more. Regulators allowed Sirius and XM to merge back in 2008.

More recently, two antitrust lawsuits against Facebook were dismissed in part because prosecutors intentionally excluded direct Facebook competitors such as Twitter and TikTok from their relevant market definition.

The relevant market fallacy also appears in the new Google Play Store case. Starting on page 19, the complaint argues that Google Android has a monopoly in the market for “Licensable Mobile Operating System[s].” A rule of thumb is that if a case refers to its relevant market using a boutique term that is not in common use, there is often some trickery involved.

On page 20, this turns out to be exactly what is happening. The complaint’s definition of “Licensable Mobile Operating System” specifically excludes Google’s main competitor, Apple’s iOS.

This is like arguing that a company has a monopoly, if only you ignore the competition.

The complaint is also vulnerable to the dozen keystrokes argument—alternatives are often just a dozen or so keystrokes away. On page 22, the complaint notes that consumers use the Google Play Store for “well over 90%” of Android app downloads. For the sake of argument, assume this is correct. If developers and consumers want to avoid the Google Play Store, they can:

  • Download an app directly from a developer’s website;
  • Use Amazon’s app store;
  • Use Samsung’s app store (preinstalled on Samsung phones); or
  • Buy video games from a different distributor, such as Steam.

Developers who want to avoid the Google Play Store should steer consumers to those options. If they take Google’s 30 percent commission and instead spend it on advertising, press outreach, and awareness campaigns—or build their own app store with lower commissions—they might end up with some combination of cost savings, lower prices, and boosted sales.

Even as things stand now, consumers do not have to go to much trouble to find alternatives or build new habits. If they take a chance, they just might succeed.

This happened before with Microsoft’s Internet Explorer, which went from an 85 percent market share to a 1 percent market share despite it being the default Windows option the whole time. Just as Firefox, Google Chrome, and other browsers take just a few keystrokes to find and install, app store alternatives are readily available. Prosecutors arguing that this cannot happen again are on weak ground.

Google’s Play Store does have some conveniences, for both developers and consumers. There is a centralized payment system and near-automatic installation for consumers. A ratings system helps consumers quickly figure out their best options, while boosting sales for developers who make quality apps. Having thousands of apps in one, searchable place also makes it easier for consumers to find what they want, and for developers to be found.

Maybe this is worth the 30 percent commissions, and maybe it isn’t. The answer is different for each developer and each consumer. But the ease of alternatives and the breadth of the relevant market make it difficult to prove consumer harm.

My colleagues and I will have more to say about this case later. For now, the complaint does not appear to be well argued, falling for both the relevant market fallacy and the dozen keystrokes argument.

In the News: DC’s Amazon Antitrust Case

Canada’s Les Affaires quotes me, in French, on the DC attorney general’s Amazon antitrust case that he filed yesterday Note that I am not sophisticated enough to speak French, and can barely read it well enough to get the gist of it. This is translated from an earlier statement:

Cela nuirait aussi aux PME, qui sont déjà suffisamment en difficulté en ce moment», a abondé Ryan Young, un analyste du centre de réflexion Competitive Enterprise Institute. 

Il estime en outre qu’Amazon fait déjà face à de la compétition de la part de Walmart, qui a sa propre plateforme de e-commerce ouverte aux tiers, ainsi que d’autres sites comme Ebay, Etsy ou Shopify.