The Friction Paradox: Intermediaries, Competition, and Efficiency

• Author: Barak Orbach
• DOI: http://doi.org/10.1177/0003603X231162999
• Published date: 01 June 2023
• Date: 01 June 2023

https://doi.org/10.1177/0003603X231162999

The Antitrust Bulletin

2023, Vol. 68(2) 234 –249

© The Author(s) 2023

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DOI: 10.1177/0003603X231162999

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Article

The Friction Paradox: Intermediaries,

Competition, and Efficiency

Barak Orbach*

Abstract

Commentators sometimes say that the elimination of impediments to trade—namely, market

friction—tends to expand trade and foster competition. This casual assumption is known to

be erroneous. Antitrust law recognizes that restraints of trade—which are forms of market

friction—are often pro-competitive and frequently have both pro- and anticompetitive effects.

Accordingly, antitrust law prohibits unreasonable restraints of trade, but not all restraints of

trade. Trust-busting advocates promote a different approach to market friction. They argue

that the antitrust laws intend to maintain fragmented industries and favor small businesses.

This approach, which has been embraced by the antitrust agencies in recent years, implies that

high-friction markets are more competitive than low-friction markets. It is an expression of

a phenomenon that can be called the “friction paradox”: the elimination of market friction

is desirable until this goal is accomplished. Notable examples of the friction paradox include

hostility toward new generations of market intermediaries, such as supermarkets, chain

stores, department stores, big-box stores, digital platforms, and digital ecosystems. This

article observes that antipathy for large intermediaries results in a willingness to sacrifice

the core benefits of competition—low prices, convenience, efficiency, and innovation. It,

therefore, argues that antitrust expressions of the friction paradox place competition policy

at war with itself.

Keywords

antitrust, competition policy, intermediaries, friction

I. Introduction

As commonly used, the term “market friction” means any impediment to trade, such as impediments

caused by transaction costs, imperfect information, uncertainty, business practices, contractual

restrictions, and regulation. It has long been assumed that, because the elimination of market friction

facilitates trade, it also fosters competition. The common law of restraints of trade, which inspired

*Robert H. Mundheim Professor of Law and Business, James E. Rogers College of Law, The University of Arizona, Tucson,

AZ, USA

Corresponding Author:

Barak Orbach, Robert H. Mundheim Professor of Law and Business, James E. Rogers College of Law, The University of

Arizona, 1201 E. Speedway Blvd., Tucson, AZ 85721, USA.

Email: barak@orbach.org

1162999ABXXXX10.1177/0003603X231162999The Antitrust BulletinOrbach

research-article2023

Orbach 235

the enactment of the Sherman Act,1 reflects this premise. Correspondingly, antitrusts’ core legal

standard is a ban on unreasonable restraints of trade.2 As Justice Black famously wrote in Northern

Pacific Railway (1958),

The Sherman Act was designed to be a comprehensive charter of economic liberty aimed at preserving free and

unfettered competition as the rule of trade. It rests on the premise that the unrestrained interaction of competitive

forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the

greatest material progress, while at the same time providing an environment conductive to the preservation of

our democratic political and social institutions. But even were that premise open to question, the policy

unequivocally laid down by the Act is competition.3

This article explores the antitrust implications of situations in which the premise regarding the

inverse relationship between friction and competition does not hold. Instead, the elimination of friction

results in high levels of market concentration and the formation of powerful economic enterprises. The

emergence of digital intermediaries in the past three decades has drastically reduced friction throughout

the economy while creating “winner-take-most markets,” which are markets that tend to tip toward

oligopolies and monopolies.4

Digital intermediaries create demand for their services through low-friction business environments

and generate revenues from other forms of friction that are less transparent to consumers, such as fees

that sellers pay, advertising, and the monetization of personal information. There is nothing novel in

this strategic utilization of friction by intermediaries. Market intermediaries typically create demand

for their services through the elimination of friction and collect revenues from sources of friction that

they preserve.5 For example, credit card companies offer low-friction payment systems and generate

revenues from fees and interest.6 The strategic exploitation of friction gave middlemen a bad name and

often warrants regulation.7 What separates digital intermediaries from prior generations of intermediar-

ies is their superior capacity to exploit friction profitably. Digital intermediaries typically draw mass

pools of consumers to low-friction environments that produce positive network effects, such as online

markets and social media networks. Their intermediation services are provided through dynamic data

infrastructures whose fixed costs are very high and marginal costs are negligible, and the returns to

scale and scope are extreme.

1. To recruit support for his bill, Senator John Sherman stated that the bill “[did] not announce a new principle of law, but

applie[d] old and well recognized principles of the common law.” 21 Cong. ReC. 2456 (Mar. 21, 1890).

2. In Addyston Pipe, then Circuit Judge William Howard Taft pointed out that the Sherman Act modified the common law

of restraints of trade: “Contracts that were unreasonable restraint of trade at common law were not unlawful . . . but were

simply void, and were not enforced by the court . . . . The effect of the [Sherman Act] is to render such contracts unlawful

in an affirmative or positive sense.” United States v. Addyston Pipe & Steel Co., 85 F. 271, 279 (6th Cir. 1898).

3. Northern Pac. Ry. Co. v. U.S., 356 U.S. 1, 4 (1958).

4. See Technology and Competition: Collusion and Collisions, eConomist, Feb. 27, 2021, at 49; The Dust-Up, eConomist,

Feb. 27, 2021, at 9; W. Brian Arthur, Increasing Returns and the New World of Business, 74 HaRv. Bus. Rev. 100 (1996);

W. BRian aRtHuR, inCReasing RetuRns and PatH dePendenCe in tHe eConomy (1994).

5. See, e.g., Barak Orbach, Middlemen Forever: Competition and Opportunism in the Digital Economy, ConCuRRenCes N°

4-2021 (Nov. 2021) 30; Daniel F. Spulber, Market Microstructure and Intermediation, 10(3) J. eCon. PeRsP. 135 (1996);

Ariel Rubinstein & Asher Wolinsky, Middlemen, 102 Q. J. eCon. 581 (1987).

6. See, e.g., Ohio v. American Express Co., 138 S.Ct. 2274 (2018); United States v. Visa U.S.A., Inc., 344 F.3d 229 (2d Cir.

2003).

7. See, e.g., Edna Bonacich, A Theory of Middleman Minorities, 38(5) am. soC. Rev. 583 (1973); Abba P. Lerner, The Myth

of the Parasitic Middleman: “Productive” and “Unproductive” Labor, 8 CommentaRy 45 (1949); Postscript, sPeCtatoR,

Apr. 12, 1845, at 347 (quoting Benjamin Disraeli describing the middleman as a person “who bamboozles one party and

plunders the other”).