Enforcing Competition on the Internet Howard Shelanski Georgetown University February 13, 2012

The Problem As on-line services become more essential to everyday life dominance on the Internet becomes an increasing public policy focus Even as firms provide consumers with newer and better services, there is concern about conduct that might impede the arrival of yet more innovative and diverse offerings

Digital “Platforms” are a Particular Challenge “Platforms” are products or services whose value to consumers is, or is greatly enhanced by, their provision of access to complementary products or services. – They may have multiple, inter-related constituencies: e.g. end users on one side, and complementary products on the other.

The Concerns Platforms can “tip” toward dominance because of network effects, scale effects, or both. Platforms may try to leverage their dominance into one level into dominance in complementary markets Platforms may act anticompetitively in complementary markets to protect their platform monopolies

A Role for Enforcement... Government competition enforcement has a place in complex, dynamic markets – Microsoft – Intel – Merger enforcement (Thoratec/HeartWare; Google/ITA) Focus here on monopolization cases

But an Increasingly Difficult One... Identifying violations is especially difficult in “digital” marketplaces. Articulating remedies is especially difficult for digital services

The principal challenge is not doctrinal, but practical Distinguishing competitive strategy from engineering decisions is particularly difficult – Is an algorithmic change designed to yield better search results or drop rivals from those results? Distinguishing technical integration from economic discrimination is especially difficult – Is the better interoperability with a proprietary complement due to improved internal technology or degraded external interfaces? – Are limits on external interfaces designed to preserve technological integrity or harm competition?

Ambiguous Effects Make Remedies Difficult What will an agency or court tell the monopolist it cannot do? Remedies almost always have tradeoffs: much conduct that is on balance anticompetitive has something on the benefit side of the scale This is particularly true for digital goods

Two Relevant lines of competition policy The efficiency strand: conduct that furthers innovation and integration is presumptively valid, and the presumption is very difficult to rebut. The property-rights strand: firms have wide latitude to refuse to deal with rivals and to vertically discriminate.

Implications These Different Policy Strands Suggest a Difference Between Anti-Monopoly Enforcement and Merger Enforcement – The ambiguities of some conduct on the Internet make anti-monopoly enforcement where firms have entered on their own less feasible and possibly less desirable – The fact that once a firm owns a complementary business it will be harder to police its actions to favor that business means entry by acquisition should be more strictly scrutinized. Renewed emphasis on vertical mergers

Moving Beyond the Sherman Act Increased difficulty of using Section 2 in the digital world opens doors to other options – Prescriptive regulation But problems well known and costs likely to be high – Ex post enforcement by the FTC under Section 5 Promising, but limiting principles still to be developed

Conclusions Antitrust enforcement under Section 2 Merger enforcement under Section 7 FTC enforcement under Section 5 ? Public enforcement role greater than private