Category Archives: Law

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.”

John Stuart Mill on Lawyers

The exorbitantly-paid profession of lawyers, so far as their work is not created by defects in the law, of their own contriving, are required and supported principally by the dishonesty of mankind.

-John Stuart Mill, Principles of Political Economy, Book 1, chapter VII.5, p. 110.

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.” 

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.

Facebook’s Content Moderation Decisions Preferable to One-Size-Fits-All Government Regulation

This news release was originally posted on cei.org.

Facebook announced today it suspended former President Donald Trump from the platform for two years retroactive to January 7, 2021. Responding to a ruling against the former president’s indefinite suspension from its own Oversight Board, the social network also laid out policies for how it would treat content moderation of posts by public officials.

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

“People who value freedom of speech should be encouraged a private entity like Facebook is attempting to deal with thorny issues about what is and is not permissible speech on their own, without heavy-handed and rigid government regulation. Facebook is under pressure from both sides of the ideological spectrum to enact very different policies toward content moderation and are faced with novel challenges presented by the billions of user-generated post shared on their platform daily. No decision will make everyone happy.

“While it is curious Facebook chose to respond to the Oversight Board’s decision five months early, dealing with these issues without government coercion will allow Facebook to institute policies in line with its own values while not imposing their own content moderation standards on other platforms, as would happen with a one-size-fits-all federal regulatory approach.

“The former president might be suspended from Facebook for two years, but that is not the same as being ‘censored’ or ‘silenced.’ He is still free to make public statements, appear on television and radio, hold rallies, or join other social networks. The government compelling Facebook to carry speech with which it disagrees would be the real threat to free speech.

“Facebook has every right to curate their product as they choose, just as consumers have every right to use a different social media platform with content moderation and community standards more in line with their own.”

CEI senior fellow Ryan Young said:

“What is the right way to deal with malicious, incendiary, or fake content? Nobody knows—and that’s the point. Facebook doesn’t know. President Trump doesn’t know. Nor do Republicans and Democrats in Congress. We are in the middle of a discovery process right now. Maybe Facebook made the right call to ban President Trump from its platforms for two years after his remarks about the January 6 Capitol riots. Maybe they didn’t. Not only does nobody have the correct answer, there likely isn’t a single correct answer.

“What we need is an ongoing process of trial and error, where individuals and companies discover which norms, institutions, and policies will help to slow the spread of misinformation on social media while giving people space to express themselves. Washington is not the place to look to for leadership here. People are already coming up with multiple competing approaches to content moderation. As people try them out, tinker with them, discard them, or improve them, the results will be far better than whatever uniform, politically motivated policy Congress would write down in stone.”

Next week, CEI is holding a book forum for Jonathan Rauch’s “The Constitution of Knowledge: A Defense of Truth.” Join us on Wednesday, June 9 at 12:00pm ET. RSVP here.

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.

Microsoft to Retire Internet Explorer: Lessons for Today’s Antitrust Cases

Microsoft just announced it will retire its Internet Explorer browser next year. This is the same program that was at the heart of an antitrust lawsuit against Microsoft in the late 1990s. There are two lessons here for today’s calls for expanding antitrust enforcement. One is that making something the default option does not guarantee that people will use it. The second is that the difference between a 90 percent market share and a laughing stock can be as small as a few years.

Internet Explorer was bundled into Microsoft’s Windows operating system, and Microsoft would not allow computer manufacturers to unbundle it. It was also set as Windows’ default browser in every new machine. It had a 90 percent market share in 2001, when the case was still active. The antitrust case argued that Microsoft’s inclusion of Internet Explorer with Windows was illegal tying—requiring consumers to buy two products together, even if they only want one of them.

The case more or less ended in a draw. The initial decision to break the company up was overturned on appeal. In the final settlement, Microsoft made some minor concessions to the government and paid about $3 billion to competitors who had sued it in separate private antitrust lawsuits.

Just a few years later, Internet Explorer’s 90 percent market share cratered. It turns out that making something the default option is not enough to make people actually use it. A succession of superior browsers, including Mozilla’s Firefox and Google Chrome, have taken turns as the leading browsers. Chrome is the current market leader with about a 65 percent market share.

As a response to the competition, Microsoft launched Edge, a new browser, and made it the default Windows browser. Its market share is currently about 3 percent. Internet Explorer is around 1 percent.

Microsoft’s real-world experience puts a damper on today’s antitrust claims that Google, Apple, and Amazon giving preferential treatment to their in-house offerings is an effective anti-competitive strategy. This is because of what I call the dozen keystrokes argument—that’s about how difficult it is to download a different browser, type in a different search engine’s URL, join a new social network, or find a different product in a search.

Internet Explorer’s journey to the pasture is not the only news story poking holes in populist antitrust arguments. AT&T is selling its WarnerMedia division for about half of what it paid for it just three years ago. The deal was nearly blocked, with critics arguing that combining network infrastructure and media content in the same company would devastate competition. Now AT&T is refocusing on networks, while WarnerMedia is attempting to compete with a raft of streaming services, many of which did not exist just a few years ago. Antitrust regulators’ cries of foul will never change, but markets always do. Just ask Microsof and AT&T.