Antitrust in zero-price markets: foundations.

• Author: Newman, John M.
• Position: Abstract through II. Zero-Price Markets and the Applicability of Antitrust Law, p. 149-174

"Zero-price markets," wherein firms set the price of their goods or services at $0, have exploded in quantity and variety. Creative content, software, search functions, social media platforms, mobile applications, travel booking, navigation and mapping systems, and myriad other goods and services are now widely distributed at zero prices. But despite the exponential increase in the volume of zero-price products being consumed, antitrust institutions and analysts have failed to provide an adequate response to markets without prices.

Modern antitrust law is firmly grounded in neoclassical economics, which is in turn centered on price theory. Steeped in price theory, preeminent antitrust theorists have urged that without prices there can be no markets, and consequently no market power. This heavy methodological dependence on positive prices has led antitrust courts and enforcement agencies to overlook potentially massive welfare harms. Unfortunately, recent empirical research confirms that such harms have already occurred.

These failures to conceive of zero-price markets as antitrust "markets" indicate how fundamentally zero prices challenge traditional theories and analytical frameworks.

This Article establishes a novel taxonomy of customer-facing costs, distinguishing "market-signaling" from "non-market-signaling" costs. Crucially, it demonstrates that market-signaling costs are present in many zero-price contexts. The absence of positive prices thus does not foreclose antitrust scrutiny; "trade," for purposes of the Sherman and Clayton Acts, encompasses zero-price transactions. To continue ignoring welfare harms in these markets would be both unjust and inefficient. The Article concludes by identifying antitrust law's proper role within--and stance toward--zero-price markets.

INTRODUCTION I. THE STRUCTURE OF ZERO-PRICE MARKETS A. Sustainable Models B. Nonsustainable Strategies II. ZERO-PRICE MARKETS AND THE APPLICABILITY OF ANTITRUST LAW A. The Statutory Standard: "Trade" or "Commerce" B. The Counterargument: No Prices, No Welfare Harms C. A Taxonomy of Costs 1. Non-Market-Signaling Costs 2. Market-Signaling Costs a. Exchanged Monetary Costs b. Exchanged Information and Attention Costs i. Information Costs ii. Attention Costs c. Zero-Price Products Are Not "Free" III. THE FUNCTION OF ZERO-PRICE MARKETS A. The Presence of Competition B. The Role and Efficacy of Competition 1. Structural Deviations from Perfect Competition 2. Behavioral Deviations a. Not "Just a Number": Demand and the Zero-Price Effect b. Systematic Overconsumption c. The Limits of Behavioral Antitrust 3. Conclusions C. Harm to Competition and Consumers D. Explaining the Failure of Antitrust Law and Economics IV. ANTITRUST LAW IN ZERO-PRICE MARKETS A. The Role and Efficacy of Antitrust B. The Zero-Price Effect and Consumer Welfare C. Antitrust and Privacy CONCLUSION INTRODUCTION

Despite its ubiquity and vital importance to the broad economy, antitrust law has failed to develop an adequate response to zero-price markets. Zero-price products--i.e., products for which firms set the price to customers at $0--have existed for decades. (1) Alongside the advent of the Internet, however, they exploded in number, variety, and popularity. (2) With a combined market capitalization that easily exceeds $1 trillion, (3) firms offering zero-price products account for a robust and growing portion of the national output.

In light of the critical importance of zero-price markets to the overall economy, antitrust law's nearly complete lack of attention to their functioning and implications is indefensible. What little precedent and commentary does exist tends to conclude summarily that antitrust law does not apply to "free" products. (4) Without prices, the argument runs, there can be no markets. (5) And without markets, there is no need for antitrust scrutiny. (6)

This Article seeks to fill the gap left by, and to refute, these scattered decisions and comments. The choice of title was deliberate: to call zero-price products "free" is to beg the question. (7) In common usage, "free" denotes zero cost. (8) If zero-price products were indeed "free," it would be impossible for consumer welfare to be harmed via the overcharges and output restrictions targeted by antitrust law. (9) Calling such products "free" without explaining how or why for-profit firms would offer them while getting nothing in return amounts to "the substitution of rhetoric for argument." (10)

After describing the basic structure of zero-price markets in Part I, the Article turns to one of its primary tasks: correcting the rhetoric noted above by demonstrating that "free" products are not free. Toward that end, Part II establishes a novel taxonomy of costs that customers may incur, separating these costs into "market-signaling" and "non-market-signaling." The first premise of the argument is descriptive--customers of zero-price products pay for those products, primarily by exchanging their attention, information, or both. Given the presence of these market-signaling costs, zero-price products can fall within the statutory scope of the Sherman and Clayton Acts. Further support for this claim is found in the common law of contracts: multiple courts have recognized that information and attention can serve as consideration, thus signaling the presence of an enforceable bargained-for exchange. (11) Part II concludes with a deontological claim: by failing to address zero-price markets, the antitrust enterprise (12) has incorrectly deviated from its statutory mandate.

Part III addresses the function and functioning of zero-price markets, demonstrating that they exhibit competition--albeit imperfect (and perhaps highly imperfect) competition. To illuminate further the competitive processes in zero-price markets, Part III draws on a body of behavioral economics research analyzing the effect of zero prices on consumer preferences. With these foundations in mind, Part III then turns to the question of antitrust harm, using a recent historical example as illustrative. In 1996, the Telecommunications Act deregulated ownership in broadcast radio markets. (13) A massive wave of industry consolidation followed, leaving many geographical markets highly concentrated or entirely monopolized. (14) Yet the Department of Justice (DOJ) Antitrust Division, which was responsible for reviewing hundreds of industry mergers and acquisitions, never once analyzed whether harm to listeners might result. (15) The intuitions set forth in this Article would contrarily predict the possibility of such harm--and, in fact, recent empirical research confirms that widespread monopoly overcharges of attention costs followed this zero-price-market concentration. (16) Part III concludes with a consequentialist appeal: the ongoing failure to apply antitrust in zero-price markets has already caused--and will continue to cause--substantial harm to society.

Finally, Part IV addresses the role of antitrust law in zero-price markets. The aim is to provide foundational, rather than exhaustive, insights. Many of the tools developed by antitrust and economics scholars are facially inapplicable absent prices, but can be made workable via surprisingly minor alterations. (17) Of immediate importance is recognizing that antitrust law does encompass zero-price markets. The collective failure to do so has already resulted in massive consumer welfare harms. As zero-price markets continue to expand at an exponential rate of growth, persisting in this failure will concomitantly become increasingly detrimental to society. This Article thus concludes with a call to abandon the current path and shift instead toward a more coherent and efficient body of antitrust law, one that takes full account of zero-price markets.

1. THE STRUCTURE OF ZERO-PRICE MARKETS

   The antitrust enterprise has paid little attention to the structure and functioning of markets involving zero-price products. What scant commentary exists does, however, provide a useful starting point. This is particularly so with regard to understanding the basic structure of zero-price markets. (18) Consequently, a survey of and contribution to the literature on the predominant zero-price business models follows.

   A market involving zero prices is, as a structural matter, very different from the markets that gave rise to modern antitrust law and theory. The central feature exhibited by zero-price markets is the interrelated nature of the relevant products. (19) To profitably offer products at a price of $0 in the long term, a rational firm must intend to turn a profit in some manner not involving those products.

   1. Sustainable Models

      Multiple categories of sustainable (i.e., long-run) business models have gained prominence in zero-price markets. These include tying strategies, two- or multisided models, (20) and "premium upgrade" or (more commonly) "freemium" models. (21) The common thread between each of these categories is the presence of interrelated...