Two Sides to a Market and an Argument

“The successful competitor, having been urged to compete, must not be turned upon when he wins.” Judge Learned Hand, United States v. Aluminum Company of America (1945).

On Monday, July 27^th, the House Judiciary Antitrust Subcommittee will be questioning the CEOs of Amazon, Facebook, Google, and Apple on their digital platform business practices.  The hearing is in addition to probes launched more than a year ago by the DOJ, FTC, and several state attorney generals that may eventually lead to lawsuits being filed.

A sub-plot to the Hearing (and possible lawsuits) is the interpretation and enforcement of the United States’ antitrust laws, specifically Section 2 of the Sherman Act.   The law makes it illegal to acquire, maintain, or enhance monopoly power through improper means.[i] To be found guilty of monopolization, a firm must have substantial, non-fleeting, market power in the defined relevant market AND be engaged in anticompetitive (e.g. exclusionary or predatory) conduct.[ii]  Simple enough.  But, when the Sherman Act was crafted in 1890 and applied by the Courts in the 130 years that followed, digital trade did not exist or had not reached maturity.

Competition remains the ideal, the poster child of how we would like markets to operate because of the existence of productive and allocative efficiency and a normal profit for numerous sellers.  Yet, under certain market conditions, such as when significant economies of scale exist, it may be most efficient to have a few large firms (or even just one) supply the lion’s share of the output.  This is the situation for many digital intermediaries who operate two-sided markets. 

A two-sided market is one in which two separate groups interact on a platform and the decisions of each group affect the outcomes of the other.[iii]  Netflix is a classic example.  On its digital streaming platform, it brings together consumers of video content and the creators of that content.  The more consumers who subscribe to be on the platform the more interest there is among producers of movies and television shows to supply content to Netflix.  The more content on the platform, the more interest there is among consumers to join the platform or maintain their subscription.  Netflix took advantage of being first and scaled its platform.  In a matter of twelve years, it grew its customer base from zero to over 167 million worldwide. It ended 2019 with over $20 billion in revenue, earned mostly from monthly streaming subscriptions.

Although part of FAANG, Reed Hastings, Netflix’s CEO, was not “invited” to speak at the July 27^th Congressional hearing.[iv]  Why not?  In spite of its long-standing dominance in streaming, Netflix’s pricing and non-pricing behavior do not appear to be anticompetitive. Its subscription prices cover its per unit costs (heavily weighed as fixed).  In spite of increasing the amount spent on original content over the years, it does not favor its own content over that supplied by others.  And, lately, its success has prompted others, including Disney and Apple, to enter the streaming market unopposed.

Unlike Netflix, Facebook, Amazon, Apple, and Google are not single-play businesses. With the exception of Facebook, their size and scope allow them to favor their own products, including bundling complementary products (as promotional or free add-ons), foreclosing rivals’ access to distribution, contractually requiring exclusive dealings with other business units, and/or extracting monopoly rents for use of their platforms.[v]  See Exhibit 1.

Size and the possibility of bad behavior, however, do not make a firm guilty.  Consider the flip side.  These firms are innovative, long-term focused, risk-takers, unconventional (Google) and customer obsessed (Amazon).  They warn of complacency and incremental thinking (Google).   They have grown organically and through [big and small] acquisitions, all along not afraid of failure.  They recognize the importance of scale, brand loyalty, and direct and indirect network externalities (e.g. Amazon’s flywheel).  These “successful competitors” have been rewarded for their efforts.

However, if success came or was accelerated because of illegitimate acts that prevented “unfettered competition as the rule of trade,” then the firms have to answer for it.[vi]  It’s a big IF though.  Those trying to build a case against the firms, have to demonstrate that the firm have monopoly power in the relevant markets and their actions harmed the competitive process, not just a single competitor.[vii]  See Exhibit 2.

In the case where users are paying a price of zero for shopping online, searching, connecting with friends, or using smartphone apps, it is difficult to understand the source of the harm.  Consumers love the convenience, the ease of use, the connections, and the “value”.  They are locked into these services, yet they don’t realize it or don’t care – consider the tie-in of apps to smartphones, free shipping and video streaming with prime membership, and the time that would be needed to transfer personal data from one online platform to another.  Consumers do not [fully] consider the value of the personal and behavioral data they share with the intermediaries.  So, they stay.  Inadvertently, they make it difficult for new entrants to amass enough platform participants to gain traction.  Competition fizzles.  Is this the fault of the incumbent?   If competition was possible and was illegally stymied, then there was damage to the competitive process.  Consumers were harmed without realizing it.  Again, it’s a big IF.

IF any of the firms are found guilty, forcing the sale of a business unit or two is not the answer.[viii]  After all, size was never the issue.  Instead, require the firms to alter business practices by mandating conduct remedies (e.g. sharing data with others or placing restrictions on how used), and to pay fines, much like the $9.3 billion imposed by the European Commission against Google in three recent cases.[ix]

With all of this said, we are a long way away from seeing if Section 2 of the Sherman Act is robust enough to fully evaluate the conduct of these firms.  Let us see what unfolds in the weeks (and years) ahead.

Exhibit 1

	Amazon	Facebook	Google	Apple
Year Founded	1994	2004	1998	1976
Net Sales ($M)	280,522	70,697	161,857	260,174
Net Income ($M)	11,588	18,485	34,343	55,256
Market Leadership	e-commerce	social media	internet search	comm. electronics (iPhone)
Related Businesses
Cloud and/or network	AWS	XX	Android, Google cloud, Google Apps	iCloud, iOS, App Store
Devices	Kindle, Fire, Echo, Ring	XX	Chrome, Nest, Waze	AirPods, Apple TV, Apple Watch, Beats, HomePod
Other (among hundreds)	Whole Foods Video Prime	WhatsApp Instagram	YouTube Google Fiber	Apple Pay Apple TV+
Fiscal year ending 12/31/2019, except for Apple, Inc. which was 9/28/2019

Exhibit 2

In the January, the House Judiciary Antitrust Subcommittee heard from four small competitors.  A summary of some of their accusations is provided in the table below.[x]

Accuser	Line of Business	Accused	Claim
Sonos	Voice-controlled wireless speakers	Google (Home) Amazon (Echo)	Using dominance in one market, namely search (Google) and e-commerce (Amazon), to predatory price in another (speakers).
PopSockets	Online retailer – phone accessory	Amazon	Corporate bullying because of power asymmetry.  Pressured firm to lower price to keep product on platform.
Basecamp	Web-based project management tool	Google	Monopoly rent – allowing competitors to pay Google to appear as the first listing in search results.
Tile	Bluetooth trackers	Apple	Tile needs to be paired with an app on a smartphone or tablet.  Competing against Apple’s “Find My” tracking app which is given preferential treatment.

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[i] The United States Department of Justice, “Chapter 1 - Single-Firm Conduct and Section 2 of the Sherman Act: An Overview,” accessed July 20, 2020, https://www.justice.gov/atr/competition-and-monopoly-single-firm-conduct-under-section-2-sherman-act-chapter-1#:~:text=Section%202%20of%20the%20Sherman%20Act%20makes%20it%20unlawful%20for,foreign%20nations%20.%20.%20.%20.%22.

[ii] Ibid.

[iii] Marc Rysman, “The Economics of Two-Sided Markets,” Journal of Economic Perspectives, 23 (3), 125-143.

[iv] FAANG stands for Facebook, Apple, Amazon, Netflix, and Google.

[v] For example, Spotify and Microsoft have complained about the high revenue share percentage (“tax”) on in-app purchases and the forced tie-in to use Apple Pay.

[vi] DOJ, Chapter 1, op. cit.

[vii] A finding of monopoly power is consistent with possession of a large share in the relevant market and protection by entry barriers.  All else equal, the narrower the market definition (e.g. online market for diapers) the greater the shares of the included firms.

[viii] Elizabeth Warren proposed that the big tech firms who participate on their own platforms should be forced to spin off those platforms (e.g. Google Search and Amazon’s Marketplace).  She also called for the reversal of mergers, such as Whole Foods by Amazon, WhatsApp and Instagram by Facebook, and Waze and Nest by Google.

[ix] Adam Satariano, “Google Fined $1.7 Billion by E.U. for Unfair Advertising Rules,” New York Times, March 20, 2019, https://www.nytimes.com/2019/03/20/business/google-fine-advertising.html.

[x] Jason Del Rey, “6 Reasons Smaller Companies Want to Break Up Big Tech,” Vox, January 22, 2020, https://www.vox.com/recode/2020/1/22/21070898/big-tech-antitrust-amazon-apple-google-facebook-house-hearing-congress-break-up.