Antitrust in zero-price markets: applications.

Author:Newman, John M.
Position:Continuation of II. The Antitrust Enterprise in Zero-Price Markets D. Defenses: The "Free-Goods" Argument through V. Conclusion, with footnotes, p. 81-111

This outcome was correct. It is an ancient tenet of the law that disposing of ill-gotten gains in an admirable manner is no defense. (186) Robin Hood has no place in antitrust doctrine, wherein competition, rather than vigilantism, is the chosen means of optimally distributing resources. (187) Even if a dominant firm were to pass 100 percent of its supracompetitive profits on to consumers in the form of free products, such "altruism" ought not give rise to a legal defense.

Antitrust economics here aligns with legal doctrine. At least since the impact of the Chicago School was first felt in the 1970s and 1980s, (188) and arguably earlier, (189) antitrust law has been substantially (and some would argue primarily) concerned with allocative efficiency. Even assuming 100 percent pass-through in the form of free products, restraints on trade may still create allocative inefficiencies, regardless of whether the net output of a platform increases or decreases.

To use operating systems (OSs) as an example, assume that a monopolist controlling 100% of OS platforms were to impose a restraint of trade on application developers. Suppose further that the restraint allowed the monopolist to charge those developers supracompetitive prices for access to the OS (i.e., for the ability to develop programs compatible with the OS). Finally, suppose that the monopolist were to pass through 100% of those rents to users, in the form of zero-price OSs.

In this scenario, the restraint would cause a higher number of users to demand OSs, putting upward pressure on OS output. Users would, in isolation, benefit from this scenario; it is that benefit that supposedly justifies the free-goods defense. But the restraint would also cause a lower number of developers to create programs for the OS, putting downward pressure on OS output.

Crucially, the restraint would create allocative inefficiencies regardless of whether net output of the OS were to increase or decrease. Society would devote an inefficiently low amount of resources to producing applications; it would also devote an inefficiently high amount of resources to consuming OSs. Antitrust law condemns such outcomes. At the core of the antitrust enterprise lies the assumption that unrestrained competitive forces, not the whims of firms with market power, "yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress." (190)

  1. Damages Valuations

    Valuing damages for antitrust harms is often difficult, but it is also essential. First, and most obviously, courts awarding damages to private plaintiffs must arrive at some valuation to make the awards. Second, private litigants deciding whether to settle must estimate the size of a potential damages award, discounted by the probability of liability. Third, public enforcement agencies must estimate harm in order to apply an error-cost framework to decide whether to seek a remedy for potential violations.

    In the United States, private plaintiffs (but not the Government) (191) may recover monetary damages if they successfully prove an antitrust violation. Having proved an antitrust injury that caused them harm, antitrust plaintiffs still bear the burden of establishing the amount of damages. The basic objective when calculating antitrust damages is to make the plaintiff whole--to recreate the world as it would have existed had the defendant not violated the antitrust laws. (192)

    As the Court has observed, "[t]he vagaries of the marketplace usually deny us sure knowledge of what plaintiffs situation would have been in the absence of the defendant's antitrust violation." (193) Yet, the equitable intuition is that it would be unjust to allow defendants to escape liability by insisting that plaintiffs prove with specificity the amount of harm the defendants themselves inflicted. (194) These principles have led courts to apply a fairly relaxed standard to private antitrust plaintiffs attempting to prove the amount of their damages claims. (195)

    1. Monetary Damages in Zero-Price Markets

      In zero-price markets, quantifying antitrust damages with a high degree of accuracy will generally be difficult. The "vagaries of the marketplace" noted by the Court in 1981 are no less present in modern zero-price settings. They may well be more intractable today.

      To the extent customers seek damages for harms from attentional or informational overcharges, the complexity of proof increases significantly. For all the reasons that economists use price as an easy stand-in for more complicated competitive functions like quality or innovation--and because damages (like prices) comprise money--prices also facilitate damages calculations.

      The shift to zero-price markets can thus take antitrust damages calculations away from an accounting-style exercise and toward something more akin to measuring damages for pain and suffering or loss of consortium. That shift is potentially problematic. Damages awards for such nonmonetary harms, and for pain and suffering in particular, have been heavily criticized as allowing judges and (especially) juries too much discretion. And in the antitrust field, juries have already become the object of much skepticism. (196)

      Thus, on the one hand, accurately calculating damages awards in antitrust cases involving zero-price markets may be quite difficult. The nature of the harms to be remedied may require nonspecialist judges and juries to exercise a greater-than-ideal degree of discretion. On the other hand, the U.S. Supreme Court pointed out decades ago that "[t]he constant tendency of the courts is to find some way in which damages can be awarded where a wrong has been done," and that "[d]ifficulty of ascertainment is no longer confused with right of recovery for a proven invasion of the plaintiff's rights." (197)

    2. Damages-Valuation Approaches

      The questions of whether and how to grant antitrust damages in zero-price markets thus depend on whether some workable, if inexact, metric can be used to quantify the harm to be remedied. One such metric, proposed herein, is the "marketplace valuation" method. This metric contains an inherent shortcoming, yet alternative damages-calculation methods exhibit unique deficiencies that render them much more unreliable.

      1. Marketplace Valuation

        The marketplace-valuation approach would look to the per-unit value of the relevant information or attention to either the defendant (if used internally) or the third-party customers who buy the information or attention. (198) The per-unit value is then multiplied by the number of units of information or attention that constitutes the violation-related overcharge.

        To illustrate, suppose that firm A competes with several rivals in the market for online social-scrapbooking platforms. (199) A's scrapbooking service is a zero-price product as to users, who pay via attention costs by viewing advertisements while using the service. A makes its revenue by selling advertising space to third parties. (200) A is able to sell 100 units of advertising to third parties at the competitive per-unit price of $1.

        Suppose now that A acquires a monopoly and exercises its power by engaging in exclusionary conduct that allows A to extract from consumers more attention costs than it could have gained otherwise. A is now able to sell 110 units of advertising to third parties at a per-unit price of $1. Though the price to users remains zero, users incur relatively higher attention costs. Under the marketplace-valuation approach, the measure of harm is the difference between the amount actually paid by advertisers and the amount they would have paid A if A had not engaged in the anticompetitive conduct: $10.

        The marketplace-valuation approach thus incorporates the actual marketplace value of attention. Its primary advantage is objectivity: the "relevant data" on which triers of fact could base a "just and reasonable estimate" of harm (201) comprises revealed preferences by actual market participants.

        But this approach is inexact. As the above example indicates, it is a measure of what the attention was worth to advertisers, not necessarily the attention costs to consumers. To continue the example, suppose that a massive recession causes all of A's advertisers to lower the per-unit price they are willing to pay for users' attention from $1 to $0.90, but does not affect consumers' willingness to incur attention costs in exchange for using P's service. (202) Going forward, A, which retains its monopoly status, could keep the attention-cost level on the consumer side constant at 110 units. Thus, consumers would experience the same effective amount of attention costs: the amount of harm would remain constant. Yet the amount actually paid by advertisers--the variable used to calculate damages--would decrease.

        Depending on the contours of the particular market at issue, variant market-based valuation methods are available, though they tend to suffer from similar defects. Consumers of the zero-price version of freemium products, for example, may point to the positive-price version of the relevant product as the appropriate metric for measuring damages. (203) To illustrate, suppose a firm were to offer two versions of the same service: a zero-price option that allowed the firm to collect personal information from users and a positive-price option that did not. (204) Users of the zero-price version might argue that the amounts paid by positive-price users represent the value of the information. But this argument is not quite correct--those amounts represent the value to a different user group of not surrendering their information, and different individuals attach varying values to their personal information. (205)

        Such market-based valuation metrics are decoupled from actual harm as compared to the more traditional price-based damages-calculation metrics. But the ultimate question in awarding damages is not whether this (or any...

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