Information, innovation, and competition policy for the Internet.

AuthorShelanski, Howard A.

Antitrust agencies around the world are increasingly focusing on digital industries. Critics have justifiably questioned the ability of competition agencies to make beneficial enforcement decisions given the complexity and rapid pace of change in online markets. This Article discusses those criticisms and addresses the argument that, because the error costs of overenforcement of antitrust laws in digital markets would be much higher than the error costs of underenforcement, courts and antitrust agencies should presume against antitrust intervention in digital industries. While acknowledging that there is often good reason for such modesty in enforcement, this Article discusses several ways in which competition policy can adjust to better account for potential costs and benefits of enforcement in digital platform markets. It argues that nonprice effects related to information and innovation are particularly important to the performance of online platforms, and may hold the key to a better understanding of the costs of antitrust underenforcement and the assessment of the competitive effects of conduct and transactions in digital industries.

INTRODUCTION I. ANTITRUST ENFORCEMENT AND ERROR COSTS A. Cautionary Tales B. Policy Responses to "Dynamic" Markets 1. Reduced Emphasis on Market Definition and Market Structure 2. Increased Emphasis on Innovation II. CHARACTERISTICS OF DIGITAL PLATFORMS A. Amplification of Market Power B. Multisided Markets and Multiple Products C. Customer Information as Critical Asset 1. Customer Data as Input of Production 2. Information as a Strategic Asset 3. Customer Data as Commodity D. Entrenchment Through Network Effects and Switching Costs E. Innovation F. Implications for Antitrust Enforcement III. REFOCUSING ANTITRUST ON INFORMATION AND INNOVATION EFFECTS A. Customer Information and Competitive Effects 1. Information and Exclusion 2. Customer Information and Market Power over End Users B. Innovation Effects 1. Innovation-Excluding Conduct a. Raising Rivals' Costs b. Forced Free Riding 2. Mergers and Innovation CONCLUSION INTRODUCTION

The enforcement of competition and consumer protection laws has focused increasingly on industries related to digital content and the Internet. The landmark cases against Microsoft over a decade ago were just the beginning; (1) more recent investigations have addressed conduct by Google, (2) the merger of digital music giants EMI and Universal, (3) Comcast's acquisition of NBC-Universal, (4) the alleged e-books conspiracy by Apple and others, (5) privacy and data security violations by Facebook and Twitter, (6) IP portfolio acquisitions, (7) and many other matters. The enforcement agencies' principal antitrust concern is with digital markets that are, or may become, dominated by firms that maintain their market power through anticompetitive conduct and acquisitions. (8) This concern has been particularly salient for firms that serve as digital "platforms."

There is no consensus on exactly what constitutes a digital platform, although there are common elements to the definitions that commentators have offered. One early effort to describe a digital platform called it "intermediation activity linked with the 'assembly' of content and services onto a coherent technical and commercial access platform." (9) A more recent popular definition describes "an audience-centric platform across different media and various business functions." (10) David Evans describes platforms as entities that provide software and services on which other businesses rely to produce complementary products. (11) For purposes of this Article, I will define digital platforms as products or services through which end users and a wide variety of complementary products, services, or information ("applications") can interact. Platforms therefore include devices (e.g., phones and tablets), software (e.g., operating systems and browsers), and services (e.g., search engines, social networks, and e-commerce sites). The common thread, in keeping with the other definitions cited above, is that the platform provides a gateway between consumers and many diverse applications well beyond the specific product or service that constitutes the platform itself. Platforms serve to expand and aggregate functionality and to enhance consumers' access to the aggregated applications. In addition, they serve as "enablers" of innovation by providing common interfaces through which entrepreneurs can connect their complementary products to critical masses of consumers. (12)

The rapid pace of change in the technology and economic structure of the Internet and associated markets raises an important question for competition policy: whether antitrust enforcement in digital industries can protect consumers without "causing harm from interfering in complex businesses that are both rapidly moving and not fully understood." (13) One prominent set of commentators offers a strongly negative answer and argues that competition enforcement is likely to make costly errors when exercised in digital platform markets. (14)

Some who argue against antitrust enforcement in digital industries do so based on an unreflective claim that enforcement can never do anything but get in the way of beneficial economic conduct. Some more thoughtful and knowledgeable commentators criticize antitrust on grounds of the comparative economic costs of overenforcement and underenforcement errors: because digital platform markets have characteristics that make it particularly difficult for antitrust authorities to assess the effects of conduct in those markets, the likelihood of overenforcement is high. (15) Moreover, the argument continues, the cost of such errors is high because overenforcement could deter investment and innovation and therefore have substantial, lasting consequences for economic welfare. In contrast, underenforcement will more likely lead to short-term harm that the market will correct as firms innovate and compete for their chance to reap the rewards of temporary dominance. Taking the high likelihood that antitrust authorities will make mistakes of overenforcement together with the relatively high costs of those errors, those who espouse the error-cost analysis argue for calibrating antitrust policy to favor underenforcement errors instead of overenforcement errors in digital platform markets. (16)

At the heart of the critiques of antitrust enforcement in digital industries is the mismatch between the conventional, price-oriented antitrust framework and the more innovation-based competition that characterizes markets for digital goods and services. Fast changing markets, such as those related to the Internet, might be hard to define and less subject to the structural presumptions of conventional antitrust analysis. More fundamentally, the usual price-oriented antitrust analysis may be irrelevant in markets where many consumers pay nothing for the services they use and in which firms compete more through technological advancements than through lower prices.

Both of the above criticisms have some merit. The critics of enforcement are right that market definition and structural presumptions are less relevant in fast changing markets and that it is important for antitrust analysis to adjust to the innovation-based competition that occurs in such markets. (17) But those observations do not suffice to sustain the error-cost argument against enforcement for two reasons: First, antitrust enforcement has steadily moved away from reliance on market definition and structural presumptions even in "conventional" markets. Enforcement has also moved beyond static efficiency to focus on innovation effects. Second, digital platforms raise competitive concerns related to innovation and customer information that may warrant increased antitrust scrutiny of their conduct and merger activity. So, even if some aspects of digital industries render competition enforcement less appropriate, other aspects might make it quite important.

This Article examines the error cost arguments in light of several important characteristics of digital platforms and their market environment. It agrees that competition enforcement in the digital world requires particular caution on the part of antitrust agencies and courts. Nevertheless, it finds that the features that distinguish digital platforms from firms in "conventional" industries do not all weigh in favor of biasing policy toward underenforcement, the social costs of which could be at least as high as those of overenforcement. This Article therefore argues that competition policy for digital platforms should start with caution in its application of existing tools but should not end there. Competition policy should also examine the ways in which conventional competition analysis as applied to digital platforms falls short in an effort to better adapt to the economic environment of the Internet. The challenge for competition policy is to identify the characteristics that differentiate competition on the Internet from competition as conventionally conceived in antitrust law, and to determine if, and how, those differences translate into differences in antitrust enforcement. While this adaptation to digital platforms might sometimes take the form of less aggressive antitrust intervention, it might also take the form of new emphases, approaches, and remedies.

Further, this Article examines several directions in which competition policy might adjust to better account for the potential costs and benefits by better assessing the risks of enforcement in digital platform markets. Part I further describes the error-cost argument and its rationale. Part II examines several defining characteristics of digital platforms, including the importance of customer information and innovation, and discusses how those characteristics can affect competition and business conduct on the Internet. Part III discusses how...

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