Antitrust in zero-price markets: applications.

• Author: Newman, John M.
• Position: Abstract into II. The Antitrust Enterprise in Zero-Price Markets D. Defenses: The 'Free-Goods' Argument, p. 49-81

ABSTRACT

"Free " products have exploded in popularity along with widespread Internet adoption--but many of them are not truly free. Customers often trade their attention or personal information to access zero-price products. This exchange dynamic brings zero-price markets within the scope of antitrust law. But despite the critical role that such markets now play in modern economies, the antitrust enterprise has largely failed to account for their unique attributes.

In response, this Article undertakes two primary tasks. The first is to address particular areas of current antitrust doctrine that require revision or reinterpretation in the face of zero prices. Topics addressed include consumer standing (can attention or personal information qualify as "property" under the Clayton Act?), market definition (is the SSNIP-based hypothetical-monopolist test still workable?), market power (can the traditional emphasis on "power to control price" be refocused on more relevant modes of competition?), defenses (is there a viable "free goods" defense?), and damages (can attentional or informational harms be quantified with the requisite degree of accuracy?).

The second task is to examine applications of antitrust law to particular types of strategic conduct. Toward this end, the Article surveys and critiques the existing antitrust case law involving zero-price markets. Though this analysis reveals some flawed judicial reasoning, it also identifies an encouraging trend toward honest attempts to grapple with the distinctive difficulties posed by zero-price markets.

TABLE OF CONTENTS I. INTRODUCTION II. THE ANTITRUST ENTERPRISE IN ZERO-PRICE MARKETS A. Consumer Standing 1. Are Attention and Information "Property"? 2. Antitrust Injury B. Modernizing Traditional Standards: Market Definition and Market Power 1. Market Definition a. Reasonable and Functional Interchangeability b. The HMT and Proposed Reforms: Implementing a "SSNIC " Test c. Application and Limitations of a "SSNIQ " Test 2. Market Power C. The Zero-Price Effect in Action 1. Substitutability of Positive- and Zero-Price Products 2. Enhanced Market Power C. Defenses: The "Free-Goods" Argument E. Damages Valuations 1. Monetary Damages in Zero-Price Markets 2. Damages-Valuation Approaches a. Marketplace Valuation b. Stated Preferences and Cognitive Biases 3. Disgorgement as an Alternative to Damages 4. The Role of Public Enforcement III. ANTICOMPETITIVE CONDUCT IN ZERO-PRICE MARKETS A. Price and Cost Fixing 1. Zero-Price Fixing 2. Information- or Attention-Cost Fixing B. Tying C. Exclusive Dealing D. Predatory Pricing E. Refusals to Deal F. Mergers V. CONCLUSION I. INTRODUCTION

"Free" products have exploded in popularity. Though often labeled as such, many of these products are not free. (1) Social networks, web-based email, radio, television programs, news services, mapping programs, online search--all are now widely offered to customers with no prices attached. Yet many providers of these products are not acting altruistically; in fact, zero-price products have grown so profitable that their suppliers boast a combined market capitalization of well over $1 trillion. (2) Customers are exchanging something of value--most commonly their attention to advertisements or their personal information--in order to access zero-price products. (3)

But despite the critical role that zero-price products now play in modern economies, analysts have failed to adequately account for the unique attributes of zero-price markets, leaving the antitrust enterprise woefully unprepared to play its traditional role of safeguarding marketplace competition. This failure has already caused substantial harm to consumer welfare; left unchecked, it will continue to do so.

This Article seeks to address that failure. The choice of title was deliberate: to call zero-price products "free" is to beg the question. The discussion that follows builds on the fundamental observation that "free" products often are not free. (4) Zero-price markets are a part--and, a fortiori, an increasingly vital part--of the "trade or commerce" Congress intended to regulate under the antitrust laws. Yet, antitrust institutions are, at best, only beginning to wrestle with the unique issues presented by zero-price transactions.

Part II of this Article identifies and addresses several foundational aspects of the antitrust enterprise that are challenged by zero-prices. It begins by establishing that consumers of zero-price products may have standing to sue under the Clayton Act, which requires injury to a plaintiffs "business or property." (5) The primary argument here is descriptive (though likely not uncontroversial); it employs textual, precedential, and purposive tools of analysis to conclude that, for the narrow purposes of Clayton Act standing, "property" includes information and attention. As a corollary, such consumers may also suffer antitrust injury, another element required for standing. Thus, courts ought to interpret and apply standing requirements so as to include consumers of zero-price products. This conclusion depends, for normative force, primarily on deontological, rather than utilitarian, grounds.

Part II then turns to market definition and market power. The most commonly used tests for both elements depend on the presence of positive prices. As a result, existing case law suggests reason for concern--some courts have fallen into fallacious reasoning when attempting to define markets and measure power absent positive prices. But, as Part II explains, the frameworks underlying the traditional tests can be adapted to zero-price markets. Drawing on a robust body of behavioral economics literature, Part II also observes that analyses of market definition and market power should account for the power of the Zero-Price Effect.

Part II concludes by addressing defenses and damages. It demonstrates the unviability, as a matter of both antitrust law and antitrust economics, of the "free goods defense" already raised by at least one defendant. Part II also explores the knotty issue of damages calculations. Consumer psychology research reveals that stated preferences are highly unreliable vis-a-vis information and attention costs. As a result, Part II urges caution when stated preferences are proffered as a measure of damages in zero-price markets.

Part III surveys and critiques the extant case law involving zero-price markets. It is organized according to well-recognized categories of strategic conduct: horizontal competitor agreements, tying, exclusive dealing, etc. In part, the discussion is purely descriptive; it is the first attempt to gather and report all existing antitrust precedent involving zero-price markets. The discussion is, by turns, also prescriptive: it not only evaluates the competence of judges' rulings and reasoning, but also recommends superior alternatives for use in future cases. Ultimately, this critique exposes a mixed bag. Antitrust courts have done much more than mere "hand waving" in the face of zero prices. (6) Yet--perhaps unsurprisingly, given the general lack of guidance from analysts--they have often fallen into error. Thus, Part IV briefly concludes with a call to confront head-on the process of modernizing the antitrust enterprise to account for zero-price markets.

2. THE ANTITRUST ENTERPRISE IN ZERO-PRICE MARKETS

Zero-price markets pose substantial difficulties for several vital elements of antitrust doctrine. The discussion below is organized around the order in which those constituent elements tend to arise in antitrust litigation: standing, followed by market definition and market power, defenses, and remedies.

1. Consumer Standing

   Federal antitrust law is enforced two ways: by the U.S. government and by private parties. (7) The U.S. government is authorized to sue any party who has violated the antitrust laws. (8) Private parties, however, must demonstrate that they have standing to sue. (9) Clayton Act [section] 4, which authorizes private treble-damages recovery, grants standing to "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws." (10) To be granted such standing, a private party must prove (1) injury to its "business or property," and (2) that the injury suffered qualifies as "antitrust injury," i.e., the particular type of injury cognizable under federal antitrust law. (11)

   1. Are Attention and Information "Property"?

      The U.S. government (as well as the rare private plaintiff seeking only injunctive relief) (12) need not satisfy the Clayton Act [section] 4 "business or property" requirement. Thus, for example, the federal government obtained an injunction against the defendants in United States v. H & R Block, Inc., a case involving (in part) zero-price products, (13) without needing to prove injury to "business or property." Private antitrust plaintiffs, however, almost universally seek treble damages, thereby triggering the business-or-property requirement. Private firms participating in zero-price markets can receive antitrust treble-damages standing by alleging injury to their "business." (14) Individual consumers, however, must rely on the "property" prong of the requirement. (15)

      "Property" (for purposes of Clayton Act [section] 4 standing) includes money. In Reiter, a class action brought by consumers against manufacturers of hearing aids, (16) the U.S. Supreme Court held that "[a] consumer whose money has been diminished by reason of an antitrust violation has been injured 'in his ... property' within the meaning of [section] 4." (17) Thus, consumers who are overcharged supracompetitive retail prices have antitrust standing, even where the relevant products were for personal use. (18)

      In zero-price markets, however, consumers generally pay not with money, but with their attention or information. (19) Consumer standing in zero-price markets thus presents a thorny-and, thus far...