This is a polished version of a lecture given by Hovenkamp last year, and it can be found here. As the name indicates it provides an overview of “the relationship between competition policy and the technologies of information.”
- A first section looks at the relationship between digital technology and market power. In particular, digital technology affects the way firms exercise market power and also creates serious measurement difficulties.
A pervasive problem in analysing power in digital markets is that sellers typically have a very high ratio of fixed to variable costs. This entails that prices must be considerably above short-run marginal cost to be profitable. As a result of this, many traditional measures of market power produce unacceptable false positives. These measures include the Lerner Index and other tools derived from it, but are not limited to them: “None of the antitrust tools for assessing power is particularly sensitive to the presence of fixed costs”. He thus concludes that antitrust should not draw inferences of substantial market power unless returns are excessive over a fairly long run.
Furthermore, care must be taken not to conflate product-differentiated markets, for it is only in those markets where products cannot be differentiated that antitrust problems are likely to arise. However, in information technology markets it is not only difficult to estimate market power, it is also difficult to define markets. As an alternative: “in some cases one can estimate market power from behavior, and these estimates can be more reliable than estimates taken from information about price–cost relationships”; and decision-makers “can infer market power from other criteria than market definition or price–cost relationships in circumstances where this more traditional evidence is not very helpful.”
Another common feature of digital markets is networks, which also create further complexities for assessing market power. The discussion here veers onto an analysis of network effects and multi-sided markets with which you are familiar from (many) previous emails, so I will not get into it in detail. Suffice it to say that the author recognises that: “Measuring market power in multi-sided markets poses special difficulties” and that “Market multi-sidedness can make traditional market share measures much less valuable as well”. These problems are further exacerbated by the fact that in most multisided platform markets fixed costs are high, which as was seen above limits the use of price–cost margins to assess power.
As a result: “All of these factors serve as a warning that assessment of market power is extremely difficult in markets characterized by very low variable costs, IP rights, networking, multi-sidedness, or some combination of these things. Not uncommonly, networked digital markets exhibit all of them. Power evaluations in these situations are at significant risk of false positives or false negatives if the market is not fully understood”.
- A second section looks at consumer choice, which is presented as the “other coin” of market power in IT markets: “One consequence of the simultaneous revolutions in telecommunications and digital technology is that consumers have never faced a wider array of choices, and the cost of switching among alternative products has never been lower.”
This section relies heavily on the Google cases. Given the ability of users to multi-home and switch providers, “high market share should not be confused with monopoly. The latter requires the ability to hold prices above the competitive level or provide an inferior service even while retaining one’s own dominant market share.” While there may be problems with IT providers such as Google – such as deceptive queries – those are not antitrust problems. If anything, “Competition law authorities should focus on ensuring that every platform from which search engines are launched, including mobile platforms, have adequate alternatives available to which reasonably well-informed customers can easily switch.”
- A third section deals with ‘Digitisation, Cost Structure and Collusion’, and it uses the e-book cases as an example of how digitisation changed markets and competition. This section is undoubtedly interesting on its own, but it’s quite specific to the topic, so I shall limit myself to recommending that you read it if you are interested in the topic.
- To my surprise, net neutrality is the topic of the fourth section. I say to my surprise because ‘Net neutrality is not exclusively nor even predominantly an antitrust problem. Antitrust may become relevant when vertical integration by ISPs leads to exclusion of or discrimination against competing downstream content. In the United States, these practices violate the antitrust laws only infrequently’, and are straightforward examples of traditional exclusionary practices such as exclusivity and refusal to deal.
In the context of antitrust, ‘net neutrality concerns can become more prominent when old technology firms such as cable companies attempt to protect their position by restraining the development of newer technologies like internet broadband’ (Note: this is a particular – if not exclusively – US concern, which goes to show how much the regulatory framework affects competition enforcement). He notes that the most common concept of net neutrality refers to the internet as a kind of public utility where concerns similar to ‘universal service’ may apply. However: ‘these are not antitrust concerns, and antitrust law does not have good tools for addressing them. To the extent that they are important, a case exists for government regulation of access and prices that goes beyond antitrust.’
There is an interesting section on the nature of exploitative practices which the author seems to think are obviously not anticompetitive even if they are problematic – such as non-exclusionary price discrimination, or the provision of lower quality services. I am not sure I agree with this in all circumstances, but I was brought up as a fluffy EU lawyer, so I don’t see why absent sectoral regulation and in very specific cases competition law may not intervene (I do recognise that this raises issues of rule design and administrability, though. There are always trade-offs…).
- A fifth section then looks at the interaction of antitrust and IP law in information technology markets. This is a topic in which Hovenkamp has been interested for a (very) long time, as you can see from the paper attached above. As a result, it is one of the meatiest sections of the paper (and my personal favourite).
The section is particularly concerned with standard setting and FRAND obligations. These issues often arise in the context of technologies related to the creation, formatting, dissemination, and consumption of digital information. The crucial importance of networking in information technologies, which demands interoperability, and thus technological compatibility, among the devices and programs of different competitors largely accounts for the relevance of these standards for competition law.
The extent to which antitrust law should address these problems in addition to or instead of patent law has been controversial. While antitrust should not operate as a subterfuge to amend IP law, the patent system does not allow for consumer and end-user protection. Given the shared goals of promoting consumer welfare, competition law should be applied in tandem with IP law. This is not to say that this is what has been happening. Take FRAND as an example. FRAND related disputes have led to several litigated cases, a few of which are relevant to competition policy. One issue has to do with whether the owner of a FRAND-encumbered patent is entitled to obtain an injunction against a user or, relatedly, with the circumstances under which the granting of such an injunction is appropriate. A second issue has to do with how a fair, reasonable, and non-discriminatory royalty obligation is computed. Unlike EU law (see previous email of 28 April), US law tends to see this as a matter of IP law, except as concerns vexatious claims – i.e. legal claims that are so poorly founded that the firms have no reasonable expectation of winning.
- Regarding patent pooling – i.e. situations in which two or more firms share a technology via common licensing –, it seems clear that the rationales for pooling in networked information intensive technologies are different from the rationales for pooling more traditional technologies. The literature regarding patent pooling used to focus on whether the patents were complementary or competed one against the other. This rationale fails to explain the phenomenon of widespread pooling of complex digital technologies. Given the astounding number of patents a company may own, and that go into producing goods and services, pooling functions in digital markets as a mechanism for managing communal ownership – because sharing property rights is less costly and more effective than defending individual IP rights. The central problem for patent owners is the cost of determining the scope of each patent, examining the licensee’s products, and determining which of the pool’s many patents the devices infringe. Those costs could easily exceed the benefits from licensing agreements. By simply cross-licensing their portfolios or licensing them in the aggregate to manufacturing licensees, firms can eliminate most of the costly problems that accompany individual patent interpretation.
Ultimately: ‘There is little reason for thinking that competition cannot work in most markets involving digital and other information technologies. Nevertheless, effective policy design requires careful thought. The trick is to keep the channels open for new entry, resource movement, and consumer choice—things that antitrust policy is capable of doing well.’
This is a good overview of how antitrust applies to IT technologies. It is nothing if not comprehensive, even if its scope (antitrust and Innovation Technologies) comes at the cost of thematic consistency (e.g. I’m not sure what the various sections have in common with each other, other than providing examples of the application of competition law in which IT industries were involved).
However, an issue I have with this piece is that it is better at identifying problems than at presenting solutions. For example, explaining that antitrust has difficulties in identifying market power in information technology markets is useful. On the other hand, the proposed solutions – e.g. stating that antitrust should only identify market power when returns are excessive over a long period without defining what excessive means or a sufficiently long period is; recommending that it be acknowledged that market definition in IT markets is extremely difficult, and that alternative measures of market power should be adopted when market definition and price-cost are not suitable – do not really help decision-makers or companies.
Yet another concern I had was that pro-competitive arguments seem to be taken at face value. For example, it is obviously true that multihoming and the ability to switch can counteract and discipline monopolies. At the same time, the practical issue seems to be that – a bit as with utility providers and bank accounts – users may not make use of such multihoming and switching options. In other words, while I believe that pro-competitive arguments should be taken seriously, I also have doubts whether they are empirical valid. Such matters are ultimately empirical and assumptions can be disproved by evidence, which is not something that the article seems to take into account.