MARKET POWER PARASITES: ABUSING THE POWER OF DIGITAL INTERMEDIARIES TO HARM COMPETITION.

• Author: Shchory, Noga Blickstein

TABLE OF CONTENTS I. INTRODUCTION 74 II. IDENTIFYING THE PROBLEM: THREE CASE STUDIES OF MARKET POWER PARASITES 78 A. Exclusion by Market Power Parasites 79 1. Black Hat Search Engine Optimization ("SEO") 79 2. Information Misrepresentation via Fraudulent Ratings or Reviews 82 3. Click Fraud 84 B. Market Power of Infomediaries 85 C. The Failure of the Market Response 88 1. Limitations on Competitors' Reactions: "Black Box" Algorithms of Infomediaries 89 2. Limitations on Infomediaries' Reactions: The High Cost of Fighting Parasites 90 III. THE INABILITY OF CURRENT LAW TO DEAL WITH MARKET POWER PARASITES 92 A. Section 2 of the Sherman Act 92 B. Business Torts 96 C. Section 5 of the FTC Act and Other Consumer Protection Laws 100 IV. PROPOSAL: FRAUD ON THE ONLINE INFORMATION MARKET 103 A. Fraud on the Market in Securities Law 104 B. Fraud-on-the-Online-Information-Market 108 1. Application 108 2. Justifications 112 V. CONCLUSION 115 I. INTRODUCTION

Some digital information intermediaries (hereinafter "infomediaries"), such as Google or Facebook, enjoy significant and durable market power. Concerns regarding the anti-competitive effects of such power have largely focused on conduct engaged in by the infomediaries themselves, (1) which have recently led to several well-publicized regulatory actions in the United States (2) and elsewhere. (3) This Article adds a new dimension to such concerns: the abuse of such power by other market players that lack market power themselves, in a way that can significantly harm competition and undermine the integrity of the relevant information market. We call such abusers "market power parasites." (4)

A small firm wishing to enter or expand in its market must normally compete on its merits. Any unilateral anti-competitive conduct it might engage in, it is presumed, will not affect competition. This is because substantial market power is needed to influence market conditions --power that small firms lack by definition. (5) Accordingly, antitrust laws (6)--designed to protect consumer welfare by ensuring that market players do not erect artificial barriers to the competitive process--focus on the behavior of firms with significant market power. Unilateral anti-competitive conduct engaged in by smaller firms is thus not prohibited. (7)

But what if a small firm can free-ride on the market power of another to significantly affect competition in its market? We provide three examples of parasitic conduct in online information markets. Such conduct challenges the basic assumption of a link between the market power of the entity engaged in anti-competitive conduct and its competitive effects. As we show, a small market player might nonetheless cause substantial harm to competition by abusing the market power of another. As discussed below, this concern increases when the parasite abuses the market power of dominant digital infomediaries. The cumulative effect of such attacks by a large number of small market players might distort the integrity of online information markets.

Dealing with such parasitic abuses of market power requires reevaluation of our legal tools. The separation between power and conduct creates an unwarranted lacuna that is not addressed by existing laws aimed at preventing abuses of market power. Antitrust law does not capture such parasites because it only prohibits unilateral anti-competitive conduct if such conduct is engaged in by a monopolist. At the same time, fraud torts require proof of specific reliance and are therefore limited to a particular wrong, which disregards the broader competitive concerns resulting from parasitic conduct.

To bridge this gap, we suggest a fraud-on-the-online-informationmarkets rule, akin to the fraud-on-the-market rule in securities law. We propose to eliminate the rigid fraud tort requirement to prove reliance and to replace it with a presumption of reliance that will apply once the plaintiff proves harm to the integrity of an online infomediary. Our proposal strengthens competitors' cause of action, releasing them from the arguably ill-fitting need to prove specific reliance, thereby increasing enforcement against the anti-competitive acts of market power parasites that harm the integrity of information in digital markets.

The Article proceeds as follows. In Part II, we identify the problem by demonstrating how parasites can abuse digital infomediaries' market power in order to exclude competitors and to harm competition and market integrity. We analyze three case studies exemplifying different parasitic methods of exclusion via (mis)information. The first example is black hat search engine optimization--manipulative methods for artificially improving a website's ranking in search results, such as cloaking, keyword stuffing, link scheming, and scraping or auto-generating content. The second example is fake ratings and reviews, which distort information in the markets. Our last example is click fraud--using fake clicks to artificially increase a rival's advertising costs and distort his data on consumers' preferences. Clearly, an exclusionary effect does not occur every time such conduct takes place. However, as elaborated below, a relatively easy and costless attack through a digital infomediary that enjoys substantial market power can potentially create a significant exclusionary effect. We also show that in many cases, market forces cannot be relied upon to correct such information distortions.

In Part III, we analyze the existing legal tools that might be used to address the harms caused by parasitic manipulation of infomediaries, including antitrust, tort, and consumer protection laws. Antitrust laws, which are specifically designed to deal with harms to competition resulting from distortions to the competitive process, would have been an obvious choice. Yet application of these laws is hampered by the de-linkage of market power and parasitic conduct. Tort laws provide a partial remedy for some parasitic conduct. In particular, prohibitions of fraudulent conduct, (8) false designations of origin and false descriptions, (9) tortious interference in contractual or business relationships, (10) and defamation and commercial disparagement (11) may apply in some situations. However, the need to prove reliance on a specific fraudulent misrepresentation often creates a high burden of proof and disregards the broader, market-wide distortions created by parasitic conduct. Consumer protection laws suffer from the same limiting requirement to prove reliance, as well as from administrative failures and limited remedies.

To remedy this situation, Part IV proposes the adoption of a fraud-on-the-online-information-market rule, akin to the rule adopted in securities law. Because evidence of reliance on fraudulent information by each and every investor in financial markets is difficult to obtain, the fraud-on-the-market rule for securities creates a presumption that investors did in fact rely on fraudulent information that was publicly available in the market in their decisions regarding trade in securities. (12) This presumption forms a broader, market-based cause of action, which aims to protect and vindicate the integrity of markets, rather than to compensate victims for their losses. By implementing a similar concept in fraud suits against parasitic attacks on infomediaries, competitors who suffer from exclusion will not be required to prove reliance on the misrepresentation by each and every consumer. This may transform fraud torts as well as some consumer protection laws into more suitable tools for fighting the wider market influences of parasitic exclusionary practices, regardless of whether the wrongdoer possesses or is likely to gain significant market power. By strengthening such a private cause of action, courts can relieve competitors from the burden imposed in antitrust law of proving that the wrongdoer had market power.

Part V concludes the Article and touches upon the possible expansion of this proposal beyond digital information markets.

2. IDENTIFYING THE PROBLEM: THREE CASE STUDIES OF MARKET POWER PARASITES

   To make the case that parasitic abuse of market power can harm competition as well as the integrity of the information market, we first introduce three case studies (Section II.A). In all three, the infomediary holds significant market power, but is neither a party nor an accomplice to the anti-competitive scheme. The parasite does not hold market power in any market, yet engages in unilateral anticompetitive conduct that could significantly reduce or distort competition in its market by free-riding on the market power of the infomediary. After reviewing these examples, we briefly explore the conditions necessary for parasitic conduct and argue that the characteristics of infomediaries increase both the prevalence of such conduct and its anti-competitive effects (Section II.B). These characteristics also partly explain why we cannot simply rely on the market to prevent such conduct (Section II.C).

   All three examples relate to exclusion via misinformation. Two of the three relate to information presented to consumers. In the black hat search engine optimization example, exclusion is achieved through artificial demotion of a rival in "organic" search results. In the false ratings or reviews example, the conduct excludes by misrepresenting the relative qualities of competing products or services (referred to together hereinafter as "products"). The third example relates to information presented to competitors: by fraudulently increasing the number of clicks on competitors' ads, click fraud raises rivals' costs and distorts their ability to learn from data gathered on the behavior of their potential customers.

   In all cases explored, the anti-competitive effects occur in two stages. In the first, the conduct distorts the information available in the market. Such information is key to the market's proper...