key: cord-0049669-8ytej34v
authors: Spiegel, Yossi; Waldfogel, Joel
title: Introduction to the Special Issue of Information Economics and Policy on “Antitrust in the Digital Economy”
date: 2020-09-08
journal: nan
DOI: 10.1016/j.infoecopol.2020.100894
sha: 24c97dd3f8c628e146a4607471ede9394704992d
doc_id: 49669
cord_uid: 8ytej34v

nan

Guest editors: Yossi Spiegel and Joel Waldfogel  Prior to the arrival of covid-19 and 2020's renewed calls for racial justice, it would have been fair to say that antitrust issues in the digital economy were among the most pressing, and among the most controversial, in economics. With appropriate humility about the importance of our corner of the intellectual world, we believe that antitrust issues in the digital economy remain significantly worthy of attention. And in that spirit, we are delighted to share this special issue of Information Economics & Policy.

When the internet arrived roughly two decades ago, many observers expected it to usher in an era of -frictionless commerce.‖ 1 Fixed costs of entry into many markets had fallen, the costs of switching between products appeared to be low, and some observers worried about Bertrand paradoxes, with prices driven to marginal costs and razor-thin margins, rather than antitrust. 2

The reality of digital markets in 2020 is a far cry from economists' 1999 daydreams of perfect competition. With the possible exception of markets for homogenous products, such as the memory modules in Ellison and Ellison (2009) Brynjolfsson and Smith (2000) , who examined claims of a frictionless internet and conclude that -while there is lower friction in many dimensions of Internet competition, branding, awareness, and trust remain important sources of heterogeneity among Internet retailers.‖ Perhaps not surprisingly, five digital firms, Google, Amazon, Facebook, Apple, and Microsoft, or GAFAM, as they are often referred to in the popular press, now have market valuations placing them among the most valuable firms in the world. The GAFAM firmsmany of whose business models are based on direct or indirect network effectsare among the ten most valuable firms with valuationsdepending on the monththat number in the trillions of dollars each.

These concentrations of economic power, along with concerns about competitive conduct and anti-competitive mergers, have focused a good deal of attention on these digital giants.

Politicians around the world discuss plans to dismantle tech firms. 6 Activists and academics debate tightening merger control, possibly with prospective screening informed by the proposed acquisition price. 7

While it is possible that the digital economy has particular characteristics -such as the presence of network effectsthat bring about concentration, concerns about concentration and market power are hardly specific to the GAFAM firms. The chorus of concerns are nicely summarized in Carl Shapiro's aptly titled essay, -Antitrust in a Time of Populism‖ (Shapiro 2018) . Even the usually sober Economist magazine concluded in various articles published in 2016 that -the rise of the corporate colossus threatens both competition and the legitimacy of business‖ and that the -world needs a healthy dose of competition to keep today's giants on their toes and to give those in their shadow a chance to grow.‖ 8

Against this backdrop, we have had the pleasure to edit this special issue on -Antitrust in the Digital Economy.‖ The volume includes eleven papers on a variety of issues, and from a variety of perspectives. The papers were submitted following an open call for submission, but we also encouraged submissions from some scholars and market participants to attempt to get a range of perspectives in the issue. All papers went through regular refereeing, and we are grateful to the referees for their valuable contributions. The authors are both academics and, in some cases, current or former market participants or regulators, who bring both the perspectives of their field and their experiences to the discussion. We doubt that any reader will agree with everything in this issue. In that sense, the special issue reflects the nature of the contemporary debate. We do 6 A case in point is Senator Elizabeth Warren's suggestion during her campaign for the 2020 US presidential elections that, -[t]o restore the balance of power in our democracy, to promote competition, and to ensure that the next generation of technology innovation is as vibrant as the last, it's time to break up our biggest tech companies‖ see -How we can break up big tech,‖ available at https://elizabethwarren.com/plans/break-up-big-tech. See also Committee for the Study of Digital Platforms (2019). 7 For instance, Caffarra, Crawford, and Valletti (2020) write that -A major strand of the debate around the expanding power of tech platforms has been the failure of merger policy to examine at all hundreds of consummated deals that went below the radar …As we do know ex post that there have been a few spectacular misses, the notion that we have not vetted hundreds of deals has driven a diffuse concern that we have missed cases where the deal -killed‖ the -next big thing‖ In similar vein, Scott Morton et al. (2019), argue that -there is increasing evidence that the enforcement agencies and courts have permitted too many mergers between competing firms that have led to post-merger price increases and other indications of increased market power.‖ 8 See Economist, 26 March 2016, -Too Much of a Good Thing,‖ available at https://www.economist.com/news/briefing/21695385-profits-are-too-high-america-needs-giant-dosecompetitiontoo-much-good-thing and Economist, 17 September 2016, -A Giant Problem,‖ available at https://www.economist.com/leaders/2016/09/17/a-giant-problem believe, however, that the issue contains interesting and important contributions that can move the discussion forward.

We group the eleven papers in the issue into four broad themes: platforms competition, Big Tech mergers, anticompetitive practices in digital markets, and the interaction between antitrust and privacy protection.

Bruno Jullien and Wilfried Sand-Zantman (-The Economics of Platforms: A Theory Guide for Competition Policy‖) review the major theories of platform competition with an eye toward competition policy. They explore conditions favoring the emergence of competition in the market, versus competition for the market (when the market is a natural monopoly or oligopoly), and revisit competition policy for digital platforms. They discuss market power, the essential definition of markets, and the consequences of platform practices such as tying, exclusionary pricing, exclusivity, foreclosure, collusion, and mergers, and show that multi-sided externalities create new opportunities for anti-competitive conduct. These new forms of conduct can be related to pricing or contractual imperfections, in particular zero-pricing and imperfect coordination between sides.

Markets: A Survey‖) survey the economics of digital markets with particular emphasis on features that are commonly deemed critical for antitrust. They pay particular attention to the role of network effects, the -incumbency advantage‖ of an installed base of consumers for incumbents, differentiation in the business models that different platforms adopt, and the potential impact of mergers on research activity. They also consider competition over limited human attention, the incentive of platforms to -tweak‖ their algorithms to increase revenues at the expense of consumers' surplus, and the competitive effect of big data, its potential to serve as a barrier to entry, and the incentives to sell, share, or license it.

Hal Varian (-Seven Deadly Sins of Tech?‖) provides an industry perspective on competition in digital markets and offers a counterpoint to critics' concerns about potentially anti-competitive effects of Google. 9

The four merger papers include three theoretical and one empirical contribution. Massimo Motta and Martin Peitz (-Big Tech Mergers‖) study the competitive effects of Big Tech mergers. Using a simple model they show that an acquisition of a startup that has a project that may or may not succeed by an incumbent will be anti-competitive if the startup can pursue its project absent a merger. Otherwise, the merger can be pro-competitive provided that the incumbent has an incentive to develop the project after acquiring the startup (i.e., the incumbent does not acquire the startup only to eliminate competition). They also show that the prospect of a merger may stimulate the startup's effort to innovate. In addition, they sketch a few recent theories of harm of horizontal and conglomerate mergers that are potentially relevant in digital industries and draw some policy recommendations on how to deal with mergers in such industries.

Michael L. Katz (-Big-Tech Mergers: Innovation, Competition for the Market, and the Acquisition of Emerging Competitors‖) argues that digital markets are characterized by strong increasing returns and positive feedback loops. Under these conditions, firms may use successive generations of innovation to attain temporary market dominance, what is known as competition for-rather than in-the market. As do Motta and Peitz, he finds that permissive merger policy can stimulate startups' innovation efforts by facilitating entry for buyout, whereby a firm enters the market solely to induce the incumbent to acquire it in order to avoid competition. However, he also shows that permissive merger policy can discourage entrant innovation in other cases. One way is by diminishing entrants' incentives to invest in marginal product improvements when such improvements reduce the gains from merger. A second way is by facilitating incumbency for buyout, whereby an incumbent makes investments in order to extract rents from an entrant through merger. Katz concludes that the acquisition of startups deserves heightened scrutiny in digital markets subject to competition for the market but that each merger must be evaluated based on the facts specific to it.

Luis Cabral (-Merger Policy in Digital Industries‖) cautions against tightening merger policy in the high-tech space. His argument is based on three points. First, in digital markets it is very hard to predict the evolution of business models and often it is hard to tell if an entrant poses a competitive threat; hence preemptive mergers are difficult to target in such markets. Second, IP rights are difficult to protect in the software space and markets for technology licensing work poorly, implying that technology transfer is frequently accomplished by means of firm acquisition. Third, the prospect of future acquisitions provides a strong innovation incentive for startups. He concludes that while vigorous enforcement is required in order to curb the increasing power wielded by GAFAM and other giants, merger policy is not the area where substantial reform is required.

Axel Gautier and Joe Lamesch (-Mergers in the Digital Economy‖) offer an empirical complement to the theoretical papers in this section that highlight possible anticompetitive effects of Big Tech mergers. The paper provides new data on 175 acquisitions by Google, Amazon, Facebook, Apple, and Microsoft over the period 2015-17. They show that targets' products are usually discontinued at acquisition, a finding consistent with anti-competitive behavior, among other possible explanations.

Richard J. Gilbert (-Separation: A Cure for Abuse of Platform Dominance?‖) addresses the concerns about anticompetitive conduct by vertically integrated platforms and the economic arguments for and against structural or functional separation of services provided by the major digital platforms. He shows that a platform has incentives to discriminate between firms that rely on its services even if it does not compete with these firms; hence, structural separation of a vertically integrated platform need not reduce discrimination. Moreover, he identifies the potential consumer harm and benefit when an online retail platform uses consumer information to promote its competing products. In addition, he draws lessons from deregulation of the vertically integrated telecommunications giant AT&T for whether separating the major digital platforms would significantly benefit consumers.

Jason O'Connor and Nathan E. Wilson (-Reduced Demand Uncertainty and the Sustainability of Collusion: How AI Could Affect Competition‖) explore how newfound forecasting ability due to Artificial Intelligence (AI) affects the sustainability of collusion. They study a Green and Porter (1984) type of model with two firms that are subject to two independent negative demand shocks and consider the sustainability of collusion when firms have access to an AI technology that enables them to perfectly forecast one of the shocks. They show that on the one hand, AI may facilitate collusion by allowing firms to better tailor collusive prices to demand conditions and shorten the duration of punishment phases. On the other hand, it may also hinder collusion because firms may better time their decision to deviate from a collusive agreement. The net effect of AI depends on specific market characteristics.

Ginger Zhe Jin and Liad Wagman (-Big Data at the Crossroads of Antitrust and Consumer Protection‖) study the interaction between antitrust and consumer protection in digital markets, arguing that big data blurs the distinction between the two. They illustrate this point with recent consumer protection and competition enforcement cases, demonstrating that enforcement under one can have spillover effects on the other. They argue that such spillovers tend to occur because classic market failures such as asymmetric information, negative externalities, market power, and bounded rationality are potentially exacerbated or face new challenges due to data. For instance, data can make every product a credence good with future uncertainty; firms have incentives to extract value from data, but tend to ignore the negative externalities of data; data could be an essential input that an incumbent platform uses against potential competition; and consumers, facing an expanding overload of information, are likely subject to more bounded rationality. They conclude with a call for more economic research at the crossroads of antitrust and consumer protection.

Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry

Frictionless Commerce? A Comparison of Internet and Conventional Retailers

How Tech Rolls‖: Potential Competition and -Reverse‖ Killer Acquisitions,‖ CPI Antitrust Chronicle

Committee for the Study of Digital Platforms

Search, Obfuscation, and Price Elasticities on the Internet,‖ Econometrica

Unlocking digital competition

Noncooperative Collusion under Imperfect Price Information

Committee for the study of digital platforms: Market structure and antitrust subcommittee-report,‖ Chicago: Stigler Center for the Study of the Economy and the State