This is the first time in a long time that I disagree with RSJ. Apple, specifically, has a kind of lock-in in the States (and increasingly in India) which cannot be bypassed. The network effect of iMessage and Facetime is very large. Once you have a group of people you communicate with only on iMessage you cannot move platforms. It sounds trite. Just move to WhatsApp is the default exhortation, but in the States, that is often not an option, one, and two, one segregates chat apps for multiple reasons. And that is to say nothing about Apple restricting payment methods in its App Store, which, on the iPhone, is a monopoly. While one may agree that breaking Apple up might be extreme, to state that consumers have a choice is slightly farcical. Consumers have to buy apps through the App Store. That is something most are happy to do: the advantages over the comparitive Wild West in the land of Android are clear and welcome, but one would prefer to have that choice and exercise it rather than have it thrust upon them.
Also, a typo: the FTC commissioner is Lina Khan, not Hina Khan.
RSJ makes several points regarding Apple and Amazon antitrust actions; I respond to those below.
Timing of case filing
Whether political signaling, happenstance, or otherwise, this is in the realm of speculation. An important reason to bring the case during a particular President’s term is to put forth the economic logic for the case that the administration agrees with. An antitrust case brought by a Democratic administration may have different contours (and chances of victory) than that by a Republican administration, even when both have a problem with the alleged monopolist. Investigations and putting together a case can take years. The DoJ’s investigation during the Biden years can only come to fruition if the case is brought during the term.
Apple’s monopoly
The gist of RSJ’s argument is that (a) customers have choice and yet, buy iPhones/iPads; (b) Apple’s “strange alchemy of design chops, innovation and brand image” makes it worth it; (c) customers can leave any time; (d) Apple is better at protecting customer data through tight control over ecosystem; (e) “go full tilt at breaking it up” is an extreme remedy.
Unfortunately, RSJ does not appear to know or appreciate the logic of American antitrust. Any antitrust case is made of 3 parts – liability (possession of monopoly in a properly defined product and geographic market); causation (that the monopoly was illegally acquired or maintained, shown with evidence of specific actions; and relief (whether fines or structural remedies).
Read the original DOJ complaint - https://www.justice.gov/opa/media/1344546/dl?inline. The Table of Contents shows that the complaint is written in conformance with the antitrust textbook. The DOJ lays out contours of the case, includes anecdotes, and provides background on Apple and platforms (Sections I-III). It carefully defines the market as “performance smartphones in the US” (main position) or “smartphones in the US” as alternative position (section VII). It lists specific actions by Apple by which Apple “unlawfully maintains its monopoly power” in the defined market (section IV). It shows anticompetitive effects (section V). It addresses alternative explanations (section VI), establishes jurisdiction and venue (section VIII) and lastly, alleges specific violations of law and requests appropriate relief (sections IX and X).
First, RSJ gets it wrong by saying DOJ wants to “break it up”– the “request for relief” on page 76 merely seeks that the Court adjudge Apple to have “acted unlawfully to monopolize/ attempted to monopolize the smartphone/performance smartphone market in the United States” and “enter relief as needed to cure any anticompetitive harm” and seeks to prevent Apple from continuing the challenged practices (control over app distribution, private APIs, and contractual terms”. Nowhere does the DOJ ask the court to break up Apple. In fact, while some in the DOJ prefer structural remedies like breakups, this article states that DOJ has been careful to not address the exact remedies they will seek.
Second, RSJ is judging the case by saying “there’s no monopoly Apple has for any customer to choose an iPhone or iPad to begin with” before evidence from both sides is heard. The whole point of DOJ’s case to have a court examine the market definition, and the pro- and anti-competitive arguments. It remains to be seen whether DOJ’s argument that Apple unlawfully maintains its monopoly power over smartphones/performance smartphones by (a) contractual restrictions, fees, and taxes on app creation and distribution; (b) uses APIs to control behavior and innovation of third-parties; and (c) Apple’s smartphone moat is wide and deep and extends to other products.
The DOJ has not alleged that Apple acquired the alleged monopoly illegally. It is a maintenance of monopoly case.
RSJ’s points are essentially the case Apple will make:
(a) it will define a product market bigger than DOJ’s definition of “performance smartphones” and US as relevant geographic market;
(b) it will submit its innovation and privacy practices as the reason consumers pay a premium;
(c) it will likely argue technical and consumer benefit reasons for design choices it has made with respect to APIs, app store, and interoperability with other devices/ platforms;
(d) it will submit evidence of customer switching, and say no “lock-in”
Whether the DOJ has sufficient evidence, or whether Apple can persuade the court that its actions are legal will only be known through the litigation process.
PS: tablets are excluded from the DOJ’s market definition, so iPads are not even a subject of the case!
Lina Khan and Amazon
RSJ makes two points regarding FTC’s Amazon case – that a predatory pricing case presupposes future harms and that Lina Khan’s regret at not being able to “make the victims whole”. Additionally, RSJ objects to Lina Khan’s broad definition of the role of antitrust to “safeguard against concentrations of economic power”.
I agree with RSJ that there are several problems with Khan’s arguments – at least in her paper, Lina Khan’s critique of Bork-era “consumer welfare” standard is not fully-formed and has lacunae. Preemptive regulatory action can cause harm and any preemptive action does have Orwellian aspects. Moreover, Amazon hasn’t always been successful and coming up with a coherent product market definition for Amazon is very difficult.
That said, Khan is correct on a lot of counts, especially the nature of platform economics. The problem of platform regulation stems not just from the behavior of platform companies, but also from insufficient progress on an economic theory of platforms.
Traditional microeconomics, with its “widget” factories, has described markets of “products” and “services” which for the most part are devoid of externalities/ scale economics. Externalities are added on later, as a complexity to be dealt with.
Common carrier/utility regulation attempts to address these for things like fax machines, telephone networks, etc. However, platforms are an odd beast where the demand-supply economics runs into limits. Multi-sided platforms combine externalities/scale economic with agents on multiple sides causing the conventional “price = marginal cost” in a competitive market to no longer be valid due to different amounts of market power and corresponding variance pricing decisions on different sides of the market. Simply put, it is far more difficult to determine abuse of power in such markets.
Economics literature and practice needs to evolve to address this, and however illogical “predatory pricing” may appear and however abhorrent preemptive action may seem, there is a lot of evidence that platform power in technology markets is hard to dislodge and Khan is right about such lasting concentration of power. “three decades” as RSJ argues may be short, but there can be plenty of harm within such a time period. Francis Fukuyama has argued that Amazon’s role in diminished downtowns across the US, while outside the strict consumer welfare standard and evidence of pricing, needs to be examined at a broader-than-Bork level in terms of its effects on society.
RSJ’s argument that “for going back in time and extracting money out of these enterprises for supposedly running a monopoly in the past when there was no case against them” is misguided and somewhat contradicts his own position against preemptive action.
DOJ/FTC bring cases post-facto, and if illegal acquisition/maintenance of monopoly is proven, both financial and structural remedies can be provided by courts. While consumers do not get “made whole” directly, indirect benefits do accrue. And in many cases, follow-on consumer class action cases from these victories (whether direct purchasers or indirect) can actually deter companies through financial awards to consumers (the US Government’s Microsoft cases were followed by consumer class actions in many states and did cost Microsoft several billion dollars), going back in time within permitted time windows.
As long as laws are in-place through the entire period, there can be no rational expectation for a firm to argue that they cannot take “ex-ante decisions” – firms hire expensive lawyers and economists precisely to estimate the risk when making product and pricing decisions!
I am very irritated by Apple's closed-garden approach. Using the lure of its superior design and hardware, it attempts to create very hotel-california like grip on customers. And in general, Apple's application software is pretty crappy.
But I don't support a government cure which is worse than the disease. Free markets (how so ever oligopoly it may look like) should have something up its sleeve.
PS: Hotel California. Where you can check-out any time of the year, but can never leave.
This is the first time in a long time that I disagree with RSJ. Apple, specifically, has a kind of lock-in in the States (and increasingly in India) which cannot be bypassed. The network effect of iMessage and Facetime is very large. Once you have a group of people you communicate with only on iMessage you cannot move platforms. It sounds trite. Just move to WhatsApp is the default exhortation, but in the States, that is often not an option, one, and two, one segregates chat apps for multiple reasons. And that is to say nothing about Apple restricting payment methods in its App Store, which, on the iPhone, is a monopoly. While one may agree that breaking Apple up might be extreme, to state that consumers have a choice is slightly farcical. Consumers have to buy apps through the App Store. That is something most are happy to do: the advantages over the comparitive Wild West in the land of Android are clear and welcome, but one would prefer to have that choice and exercise it rather than have it thrust upon them.
Also, a typo: the FTC commissioner is Lina Khan, not Hina Khan.
RSJ makes several points regarding Apple and Amazon antitrust actions; I respond to those below.
Timing of case filing
Whether political signaling, happenstance, or otherwise, this is in the realm of speculation. An important reason to bring the case during a particular President’s term is to put forth the economic logic for the case that the administration agrees with. An antitrust case brought by a Democratic administration may have different contours (and chances of victory) than that by a Republican administration, even when both have a problem with the alleged monopolist. Investigations and putting together a case can take years. The DoJ’s investigation during the Biden years can only come to fruition if the case is brought during the term.
Apple’s monopoly
The gist of RSJ’s argument is that (a) customers have choice and yet, buy iPhones/iPads; (b) Apple’s “strange alchemy of design chops, innovation and brand image” makes it worth it; (c) customers can leave any time; (d) Apple is better at protecting customer data through tight control over ecosystem; (e) “go full tilt at breaking it up” is an extreme remedy.
Unfortunately, RSJ does not appear to know or appreciate the logic of American antitrust. Any antitrust case is made of 3 parts – liability (possession of monopoly in a properly defined product and geographic market); causation (that the monopoly was illegally acquired or maintained, shown with evidence of specific actions; and relief (whether fines or structural remedies).
Read the original DOJ complaint - https://www.justice.gov/opa/media/1344546/dl?inline. The Table of Contents shows that the complaint is written in conformance with the antitrust textbook. The DOJ lays out contours of the case, includes anecdotes, and provides background on Apple and platforms (Sections I-III). It carefully defines the market as “performance smartphones in the US” (main position) or “smartphones in the US” as alternative position (section VII). It lists specific actions by Apple by which Apple “unlawfully maintains its monopoly power” in the defined market (section IV). It shows anticompetitive effects (section V). It addresses alternative explanations (section VI), establishes jurisdiction and venue (section VIII) and lastly, alleges specific violations of law and requests appropriate relief (sections IX and X).
First, RSJ gets it wrong by saying DOJ wants to “break it up”– the “request for relief” on page 76 merely seeks that the Court adjudge Apple to have “acted unlawfully to monopolize/ attempted to monopolize the smartphone/performance smartphone market in the United States” and “enter relief as needed to cure any anticompetitive harm” and seeks to prevent Apple from continuing the challenged practices (control over app distribution, private APIs, and contractual terms”. Nowhere does the DOJ ask the court to break up Apple. In fact, while some in the DOJ prefer structural remedies like breakups, this article states that DOJ has been careful to not address the exact remedies they will seek.
Second, RSJ is judging the case by saying “there’s no monopoly Apple has for any customer to choose an iPhone or iPad to begin with” before evidence from both sides is heard. The whole point of DOJ’s case to have a court examine the market definition, and the pro- and anti-competitive arguments. It remains to be seen whether DOJ’s argument that Apple unlawfully maintains its monopoly power over smartphones/performance smartphones by (a) contractual restrictions, fees, and taxes on app creation and distribution; (b) uses APIs to control behavior and innovation of third-parties; and (c) Apple’s smartphone moat is wide and deep and extends to other products.
The DOJ has not alleged that Apple acquired the alleged monopoly illegally. It is a maintenance of monopoly case.
RSJ’s points are essentially the case Apple will make:
(a) it will define a product market bigger than DOJ’s definition of “performance smartphones” and US as relevant geographic market;
(b) it will submit its innovation and privacy practices as the reason consumers pay a premium;
(c) it will likely argue technical and consumer benefit reasons for design choices it has made with respect to APIs, app store, and interoperability with other devices/ platforms;
(d) it will submit evidence of customer switching, and say no “lock-in”
Whether the DOJ has sufficient evidence, or whether Apple can persuade the court that its actions are legal will only be known through the litigation process.
PS: tablets are excluded from the DOJ’s market definition, so iPads are not even a subject of the case!
Lina Khan and Amazon
RSJ makes two points regarding FTC’s Amazon case – that a predatory pricing case presupposes future harms and that Lina Khan’s regret at not being able to “make the victims whole”. Additionally, RSJ objects to Lina Khan’s broad definition of the role of antitrust to “safeguard against concentrations of economic power”.
Khan has made these points throughout her career. Interested readers can refer to her very readable paper Amazon’s antitrust paradox- https://www.yalelawjournal.org/pdf/e.710.Khan.805_zuvfyyeh.pdf.
I agree with RSJ that there are several problems with Khan’s arguments – at least in her paper, Lina Khan’s critique of Bork-era “consumer welfare” standard is not fully-formed and has lacunae. Preemptive regulatory action can cause harm and any preemptive action does have Orwellian aspects. Moreover, Amazon hasn’t always been successful and coming up with a coherent product market definition for Amazon is very difficult.
That said, Khan is correct on a lot of counts, especially the nature of platform economics. The problem of platform regulation stems not just from the behavior of platform companies, but also from insufficient progress on an economic theory of platforms.
Traditional microeconomics, with its “widget” factories, has described markets of “products” and “services” which for the most part are devoid of externalities/ scale economics. Externalities are added on later, as a complexity to be dealt with.
Common carrier/utility regulation attempts to address these for things like fax machines, telephone networks, etc. However, platforms are an odd beast where the demand-supply economics runs into limits. Multi-sided platforms combine externalities/scale economic with agents on multiple sides causing the conventional “price = marginal cost” in a competitive market to no longer be valid due to different amounts of market power and corresponding variance pricing decisions on different sides of the market. Simply put, it is far more difficult to determine abuse of power in such markets.
Economics literature and practice needs to evolve to address this, and however illogical “predatory pricing” may appear and however abhorrent preemptive action may seem, there is a lot of evidence that platform power in technology markets is hard to dislodge and Khan is right about such lasting concentration of power. “three decades” as RSJ argues may be short, but there can be plenty of harm within such a time period. Francis Fukuyama has argued that Amazon’s role in diminished downtowns across the US, while outside the strict consumer welfare standard and evidence of pricing, needs to be examined at a broader-than-Bork level in terms of its effects on society.
RSJ’s argument that “for going back in time and extracting money out of these enterprises for supposedly running a monopoly in the past when there was no case against them” is misguided and somewhat contradicts his own position against preemptive action.
DOJ/FTC bring cases post-facto, and if illegal acquisition/maintenance of monopoly is proven, both financial and structural remedies can be provided by courts. While consumers do not get “made whole” directly, indirect benefits do accrue. And in many cases, follow-on consumer class action cases from these victories (whether direct purchasers or indirect) can actually deter companies through financial awards to consumers (the US Government’s Microsoft cases were followed by consumer class actions in many states and did cost Microsoft several billion dollars), going back in time within permitted time windows.
As long as laws are in-place through the entire period, there can be no rational expectation for a firm to argue that they cannot take “ex-ante decisions” – firms hire expensive lawyers and economists precisely to estimate the risk when making product and pricing decisions!
I am very irritated by Apple's closed-garden approach. Using the lure of its superior design and hardware, it attempts to create very hotel-california like grip on customers. And in general, Apple's application software is pretty crappy.
But I don't support a government cure which is worse than the disease. Free markets (how so ever oligopoly it may look like) should have something up its sleeve.
PS: Hotel California. Where you can check-out any time of the year, but can never leave.