Google’s Enemies Gear up to Make Antitrust Case

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From The Wall Street Journal:

As U.S. officials prepare an antitrust probe of Alphabet Inc.’s Google and possibly other Silicon Valley giants, a loose-knit crew of its rivals is gearing up to help.

In industries from news to travel to online shopping, competitors of Google are readying documents and data in anticipation of meetings with the Justice Department, according to industry representatives.

Many of these companies have long argued that Big Tech platforms illegally abuse their market power. In recent years some of them have found a receptive audience in Europe, where authorities have thrice fined Google for alleged monopolistic practices. Google has paid the fines but is challenging them in court.

Now rivals are stepping up their advocacy in the U.S., where antitrust enforcers recently divvied up the job of examining antitrust concerns at large tech platforms, with the Justice Department preparing a Google probe. The Wall Street Journal reported on the potential probes by the department and the Federal Trade Commission earlier this month, citing people familiar with the matter.

Antitrust lawyers say any probe could take years to complete. Battle lines are already forming. Google is preparing its own data and arguments, the Journal has reported. It also recently overhauled its Washington lobbying operation with an eye toward amplifying the message that its products promote competition and benefit consumers.

. . . .

News Corp, which owns The Wall Street Journal, and other publishers say Google and other tech platforms siphon ad revenue away from content creators.

. . . .

Still more firms haven’t criticized Google publicly, but privately stand ready to provide information to U.S. authorities about practices they view as potentially anticompetitive, according to industry representatives.

“There is a lot more concern that you hear behind closed doors,” said Jason Kint, chief executive of Digital Content Next, a trade association for online publishers that has argued online tech platforms are harming competition and consumers.

. . . .

“We need to assume that internet giants, like any other big companies, will use their assets to maximize profit and strategic value,” said Brian O’Kelley, former chief executive of AppNexus, an advertising technology firm bought by AT&TInc. last year after what he says was an unsuccessful attempt to compete with “the Google Super-monopoly.”

“Either break up the internet giants or force them to treat their component parts at arm’s-length,” he said.

Link to the rest at The Wall Street Journal (Sorry if you encounter a paywall)

From the Journal of Antitrust Enforcement (Oxford University, footnotes omitted):

‘Predatory Pricing’ is a legal concept that refers to business strategies, which are designed to stifle competition within markets by driving prices below cost.

In the economic context, this work argues that the current perception of recoupment is too limited and that it can occur without raising prices post-predation. In particular, it demonstrates that recoupment can be achieved in the post-predation stage by achieving greater technological or volume efficiencies that enable the attainment of a previously unattainable ‘break-even threshold’. Accordingly, this article suggests that in certain circumstances, predatory pricing is a sound business decision with a high probability of successful recoupment.

In the legal context, this work seeks to emphasize that under the Sherman Act, a plaintiff must only establish an injury that resulted from a rival’s below-cost pricing and demonstrate ‘a dangerous probability’ that the competitor will recoup his investment in implementing below-cost prices.2 Legally, price predation is inherently injurious and the plaintiff does not have to demonstrate any implication of the act of predation upon consumer welfare.

. . . .

The last section of this work is an attempt to apply these theoretical insights to Amazon’s current business strategy. First, it is argued that theoretically, it is entirely possible that Amazon is engaging in short-, medium-, or even long-term phases of below average variable cost (AVC) price predation as part of its overall expansion strategy. Secondly, the article maintains that if such predation occurs, it is subsidized by short- and medium-term borrowing. Thirdly, it argues that in the long run, recoupment will occur once Amazon achieves its ‘break-even threshold’ and that this type of recoupment will not necessitate any rise in average prices.

. . . .

The test as proposed by Areeda and Turner is composed of two distinct prongs, which must be satisfied to demonstrate predation.

Under the first prong, the plaintiff has to demonstrate that given the nature and condition of the market in which the alleged predator operates, it was rational for the alleged predator to predict that price predation would prove a profitable strategy. This is not a subjective test that requires evidence of the alleged predator’s intent but rather an objective test that involves a demonstration of objective facts that rendered predation a viable business decision. To satisfy this objective test, the plaintiff must prove the likelihood of recoupment at the onset of the predation campaign. In other words, it must be contended that the present costs of predation at the beginning of predation would have been more than offset by the present value of anticipated future profits.

Under the second prong of the test, the plaintiff needs to demonstrate that in a great share of its sales, the alleged predator’s prices were below an applicable measure of cost. This measure of cost is less rigid and depends on the nature of the alleged predator’s market. In some cases, the AVC will serve as an adequate measure, and in other cases that involve short-run price reduction, marginal costs will become a more reliable indicator.

. . . .

However, unlike Areeda and Turner, who assumed that in some particular cases price predation was a rational business decision, (Robert) Bork dismissed the feasibility of predatory pricing in any and all circumstances. In fact, Bork deemed the entire practice as completely irrational and insisted that the reason for the lack of any palpable proof of price predation in the historical cases of antitrust stemmed from the fact that the practice, for practical reasons, was fundamentally financial suicide.

. . . .

Most importantly, Bork defined Areeda and Turner’s theoretical stage of recoupment as the stage in which a firm would raise its prices in the period that follows predation. This narrow definition of recoupment effectively barred other potential strategies that might still ensure ‘that the losses he [the predator] incurs in the predatory campaign will be exceeded by the profits to be earned after his rivals have been destroyed’. And although Areeda and Turner did not articulate all of the ways in which recoupment can occur, it is clear that they did not construe the term as only encompassing raising prices after the goal of monopolization was achieved.

The first major Supreme Court decision that integrated some elements of the Areeda and Turner test was Matsushita. In the decision, the Court determined that the plaintiff was unable to demonstrate that price predation was a rational decision given the nature of the market in question and that the probability of recoupment was non-existent. Notably, however, this was also the first time that the Court cited Bork’s treatise approvingly on the matter as part of its decision. It can be said that the Court adopted the recoupment requirement from Areeda and Turner, but it also embraced Bork’s unsubstantiated rhetoric regarding the overall likelihood of the phenomena in any and all markets.

. . . .

[Critics of Bork contend] that certain markets may induce predation and render recoupment possible.

. . . .

In other words, both Hovenkamp and Bork’s more vocal critics essentially accept, albeit reluctantly, that recoupment can occur only via a rise in prices. To this date, no scholar in the field of antitrust has openly questioned the assertion that recoupment occurs only when the predator raises his prices in the post-predation period.

. . . .

Bork’s limiting interpretation of the term recoupment that ultimately came to be understood as the term’s sole acceptable construction. Only a rise in prices after predation qualified in his view as a business practice that harms both consumers and the competition. The second reason for this limitation was derived from Bork’s rather practical assumption that only a rise in prices in the post-predation period will render predation itself economically sustainable and therefore rational.

To better understand the difference between the definition of recoupment under the original Areeda–Turner test and Bork’s own understanding, the two definitions must be contrasted. Under the Areeda–Turner test, recoupment can be any corporate action that allows a firm to offset the losses it incurred during the predation period. The recoupment act itself does not need to be harmful to consumers. In other words, according to the Areeda–Turner test that harm does not flow from the act recoupment but rather from the entire practice of price predation that always does.

In contrast, Bork’s view of recoupment was composed of two distinct elements. The first was similar to the one articulated in the Areeda–Turner test. But the second required that the act of recoupment harms itself would harm consumers by the rise in prices. According to Bork, predatory pricing is only harmful to consumers if, and only if, its recoupment phase will also be harmful to consumers.

Link to the rest at Journal of Antitrust Enforcement

For the benefit of anyone who has made it through the typically-legalese sentence construction and paragraph structures of either of the two OP’s, PG will attempt to be simple and direct about his explanations and opinions on the subject, particularly as they apply to Amazon:

  1. As a general proposition, any action by a company that offers consumers lower prices for goods and services (or more valuable goods and services without increasing prices) is beneficial.
  2. The primary object of antitrust laws and regulations should be the protection of competition, not the protection of any particular competitor no matter how large or long-established.
  3. Individuals and organizations that attempt to approach the business of providing goods and/or services to others in an innovative manner (for which customers demonstrate their preference by their patronage) should not be limited or restrained because regulators and judges (who are highly unlikely to be competent to judge the virtues or drawbacks of disruptive technology or business innovations) cannot foresee how the innovative party will be able to harvest value from its innovations in the future. Today’s “cut-throat competition” may be tomorrow’s ordinary method of commercial operation.
  4. The ultimate validity of antitrust regulation lies in protecting competition and the opportunity of those inside and outside various businesses to compete with established participants by offering lower prices or other innovations to consumers (individual or business).
  5. The largest danger of the improper use of antitrust regulations lie in the potential for it to be misused to protect business incumbents when their customers demonstrate their preference for better prices or other benefits customers value which are offered by a competitor.

3 thoughts on “Google’s Enemies Gear up to Make Antitrust Case”

  1. This stuff will go nowhere until someone develops new economic anti-trust models that do not rely on existing law. The problems raised are not addressed by existing law, so trying to force a solution through existing law is doomed. The guys who wrote existing law knew nothing about digital commerce and the networking effect of information platforms.

  2. Number 5 is something politicians the world over fail (or choose not) to understand. Then too, there is good money to be made protecting entrenched legacy players.

    • Number 5 is a cornerstone of Progressive economics. It was developed in the early 1900s, and has come down to us almost intact.

      Anyone remember the article by Franklin Foer a few years back? It came straight out of 1906. Scott Turrow was pushing the same thing when he was president of the Authors Guild. And the guy at Smashwords was preaching it on a regular basis.

      Key words to watch for are fairness, level playing field, and health of the industry.

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