Antitrust in zero-price markets: foundations.

• Author: Newman, John M.
• Position: III. The Function of Zero-Price Markets through Conclusion, with footnotes, p. 174-206

3. THE FUNCTION OF ZERO-PRICE MARKETS

   Under the consensus view, modern antitrust law takes as its goal the protection and promotion of competition in private markets. (155) In a perfectly competitive market, strategic behavior that harms the competitive process and consumers will be disciplined by market forces more efficiently than by government intervention. It follows that, if markets are perfectly competitive, antitrust laws have no role to play. Even if the statutorily defined scope of the antitrust laws encompasses zero-price markets, regulatory market intervention is not necessarily appropriate.

   Of course, no market in the real world achieves the idealized model of perfect competition. The degree to which zero-price markets approach--or deviate from--that ideal can, however, inform the role antitrust should play in such markets. Do firms actually compete in zero-price markets? Can market power be anticompetitively attained, exercised, or maintained? If so, how is society harmed? And how did antitrust institutions fail to account for the possibility of such harm?

   1. The Presence of Competition

      Buyer-seller exchanges in zero-price markets are structurally similar to those in markets with positive prices. Rational firms find it profitable to exchange zero-price products to customers in exchange for their attention or information. Just as in markets with positive prices, one would expect the presence of competition in zero-price markets. Absent competition, an individual supplier (or oligopoly or cartel) would be able to exact inefficiently high information or attention costs, reducing output--just as a monopolist in a positive-price market can set prices at the monopoly level, reducing output and creating a deadweight loss. (156) The presence of monopoly profits may attract entry by competitors. (157) Actual or threatened customer substitution in favor of competitors' products will spur a monopolist to lower costs and increase quality--in short, to compete. (158)

      Unsurprisingly, customers of zero-price products make substitution decisions based in part on attention or information costs. (159) The same substitution effect observed in positive-price markets (or the threat of it) spurs firms to compete for business in ways that benefit customers. Broadcast radio markets provide one compelling example of reduced competition leading to higher attention costs imposed on listeners. (160) Empirical analysis of programming conducted in the wake of deregulation shows that the advertising time increases as firm size increases (i.e., as market concentration increases); (161) tellingly, the amount of time devoted to advertisements increases most sharply during times of the day when listeners have fewer ready substitutes. (162) This substitution strongly suggests that, where possible, customers will substitute away from products that entail overly high attention costs. Reducing the number of competitors in the market limits customers' ability to do so.

      Information costs provide a similar avenue for competition: multiple firms have launched search engines that differentiate themselves primarily on the basis of low information costs. (163) These entrants enjoyed rapid growth, (164) though their long-term viability is uncertain. Firms in zero-price markets compete along multiple dimensions, including the information and attention costs they impose on customers.

      In light of the foregoing, it would be a mistake to conceive of zero-price markets as essentially a single, competitive market where consumer-facing differentiation is important only insofar as it allows platforms to deliver a differentiated type of consumer to advertisers or data-seekers. Evans, in analyzing attention rivalry, takes this approach by arguing that "attention seekers compete for procuring attention regardless of the products and services they offer for doing this." (165) Under this conception, social media platforms, search engines, news websites, and online shopping portals are all locked in intense competition with each other for a scarce resource: users' attention. Unsurprisingly, "attention seekers are price takers in terms of what they pay to secure attention." (166)

      This conception overlooks the exchange aspect of zero-price markets discussed above. The error can be seen by transporting the analysis to the more familiar positive-price context. Automobile dealers, restaurants, clothing stores, and movie theaters are all locked in intense competition with each other for a scarce resource: consumer money. But that sort of competition does not give rise to a "strong presumption" that all "attention seekers" "are price takers." (167) Evans uses the example of the social networking site Pinterest to illustrate that the rise in popularity of one online platform necessarily diverts attention from other platforms, regardless of their content. (168) But a similar argument can be made about any innovative new entrant; sales of a new product will almost always reduce sales of other products. (169) It is the closeness of substitutability that matters for antitrust analysis. Thus, for example, "when the automobile was first invented, competing auto manufacturers obviously took customers primarily from companies selling horses and buggies ..., but that hardly shows that cars and horse-drawn carriages should be treated as the same product market." (170)

   2. The Role and Efficacy of Competition

      The proper role of competition in a modern market economy is to act as a private check on self-interested economic behavior. (171) This function leaves all of society better off by increasing consumer welfare, maximizing efficiency and productivity, and spurring innovation, among other benefits. (172) Seeking to increase sales and profits, firms are driven by their competitors to increase quality, lower costs and prices, or create entirely new and better products. Where the primary costs to customers are exchanged monetary costs, competition ensures that the buyer can choose the best possible product in exchange for the minimum possible amount of money. (173) This role is vital to the very pillars of a market economy: "The main claims for a private-enterprise system rest upon the workings of competition...." (174)

      In zero-price markets, competition should ensure that customers receive the best possible zero-price products while minimizing the attention and information costs those customers must exchange for the products. How well competition serves that goal is relevant to antitrust law's role and stance.

      In the early twentieth century, economists arrived at what, more or less, remains the modern conception of the requirements for a market to be perfectly competitive. These conditions include, but are certainly not limited to, perfect rationality, perfect knowledge, zero transaction costs, low entry and exit barriers, many producers, and commoditized products. (175) Where these conditions are met, prices are driven down to the marginal cost of production, and firms are driven to minimize their costs. (176)

      1. Structural Deviations from Perfect Competition

         Structurally, a perfectly competitive market features homogeneous products, low barriers to entry and exit, sufficient competitors (or rapid entrants), and perfect knowledge on the part of suppliers and customers. Zero-price markets often deviate from these assumptions, creating the potential for the creation, acquisition, exercise, or maintenance of market power.

         Zero-price markets are relatively heterogeneous. Early antitrust enforcers targeted commoditized lines of commerce like steel, tobacco, oil, and aluminum. (177) This focus is unsurprising, given that such markets once dominated the broader economy. (178) The products offered by zero-price market participants, by comparison, tend to be differentiated--and often highly so. (179)

         It is commonplace but misguided to claim that Internet-based markets, many of which feature zero prices, uniformly exhibit low entry barriers. (180) As in other contexts, the type and magnitude of entry barriers in zero-price markets vary widely across different individual markets. On one end of the spectrum lie products like simple mobile applications (apps), many of which are distributed at zero prices. (181) Barriers to entry may consist of only a few thousand dollars and a small amount of time. (182) At the other end of the spectrum are more complex products that require years of time, considerable expertise, and millions of dollars to launch. (183) The barriers to launching a rival product are quite high, even if the market price for such products is set at zero.

         Perfectly informed customers seeking to buy a product from firms operating in a perfectly competitive market act as a very effective check on firms' behavior. If a single firm were to attempt to raise prices above the market-clearing level, customers--perceiving the cost of that firm's product to be higher than the costs of competing products, with no corresponding increase in benefits--would simply buy from competitors. (184) This substitution would cause the price-increasing firm to forgo the potential profits from the lost sales, thereby disciplining its attempted price increase. (185) Customers thus restrain such decisions, ensuring that firms are (at least in part) incentivized to choose pro-customer strategies. This function requires that customers be able to assess and compare the relative costs and benefits of the products in the market.

         Comparing costs in many positive-price markets is a straightforward exercise. In zero-price markets, however, it is no small task. Without a perfectly fungible baseline of comparison like currency, customers are left to make qualitative judgments about which product will cost the least amount of information and attention. Price information is quantitative, simple, and almost costless to gather. Nonprice cost information is qualitative, complex, and relatively costly to...