Jun 7, 2019

Facebook and Antitrust, Part 1: What Is the Relevant Market?

Adam Thierer Senior Research Fellow , Jennifer Huddleston Research Fellow

In an era of deeply divided politics, it appears that at least one common enemy unites the left and right: Facebook. Politicians and pundits on both sides of the aisle are lining up to take shots at the social networking giant, blaming it for election interference, privacy violations, digital addiction, and online discrimination, among other things. These concerns, as well as Facebook’s acquisition of companies like Instagram and WhatsApp, are now prompting calls for antitrust actions, and possibly even some sort of breakup.

The House Judiciary Committee recently announced a bipartisan investigation into competition in digital markets, which “will conduct a top-to-bottom review of the market power held by giant tech platforms,” and examine “whether dominant firms are engaging in anti-competitive conduct.” At the same time, the Federal Trade Commission (FTC) will lead an antitrust investigation into Facebook to determine whether a case should be opened.

While it is still early and no formal case has been launched, it is worth posing some questions that any antitrust case against Facebook would need to answer. In a series of essays, we will explore these issues.

This first installment focuses on one of the core questions for an antitrust case: what is the “relevant market,” and does Facebook have a monopoly over it?

Generally speaking, antitrust action is only taken when a firm has sufficient market power to maximize its profits by restricting output and raising prices, or it possesses an “essential facility” that cannot be replicated. The Sherman Act of 1890 and the Clayton Act of 1914 grant antitrust regulators substantial powers to dismantle or prohibit the formation of monopolies. They also establish the basic framework for determining when anti-competitive behavior has occurred.

Under this legal framework, a business is an unlawful monopoly when it acquires or maintains its market power with practices that undermine competition in a way that ultimately harms consumers (the case against Standard Oil was decided on predatory pricing practices that resulted in it controlling over 90 percent of the American oil refining business, which allowed it to raise prices). This is distinct from market power that may develop through nature or innovation—indeed, the US Constitution establishes patent and copyright protections, a form of lawful monopoly.

While innovation may harm competitors, as Facebook’s digital advertising has hurt traditional advertisers, a vital part of American antitrust law requires proof that harm to competitors is passed on to consumers as higher prices, restricted output, or diminished quality. In such situations, new entrants can still compete and even topple what might have initially looked like a monopoly.

It is hard to see how Facebook can be considered a monopoly or essential facility when so many people do not need or use its service. While many Americans do use the site, 30 percent of people aren’t on Facebook at all. Meanwhile, according to Pew Research, younger users are deleting Facebook or using other platforms such as Snapchat and YouTube. Even if every American was on Facebook, it is hard to argue that it is a life-essential utility on par with water or electricity that one would be unable to survive without.

Even if one thinks intervention is needed, it is still difficult to determine what the relevant market is for antitrust purposes. If broadly defined as social media, it is easy to identify other large and successful market competitors like Twitter. Similarly, even more narrow services like encrypted messaging offered by Facebook-owned WhatsApp have significant competitors like Signal and Telegram.

In many cases, these substitutes show that using Facebook is a consumer choice for reasons of familiarity and convenience, but users can and will make other choices. For example, Telegram reported three million new signups when WhatsApp and Facebook experienced outage and connectivity problems in March. Similarly, 43 percent of adults surveyed had left a social media platform at some point, and the number is even higher for younger demographics. Many others are “on” Facebook and count as users, but rarely use the service after signing up. What is clear is, however it is defined, this market is volatile, constantly-evolving, and “contestable” in economic terms.

Some critics might respond that Facebook’s combination of social media with advertising market power makes it a monopoly. But Google has a bigger share of the online advertising market, Microsoft’s LinkedIn also fuses social media with advertisement, and many other smaller players also provide both advertising and social media services. Further, “advertising” is also a large, diverse market made of up of many older firms and mediums—billboards, radio and television spots, print ads, mobile ads, and more. Moreover, a heated debate continues over whether online advertising is as effective as other means of reaching audiences.

It is difficult, even for courts, to identify the appropriate market in these multifaceted technologies. For example, some have pointed out that the Supreme Court’s recent decision in Apple v. Pepper neglected to consider whether the app market was an integrated market. As Geoff Manne and Kristian Stout point out,

“If the decision in Apple v. Pepper hewed to the precedent established by Ohio v. Amex it would start with the observation that the relevant market analysis for the provision of app services is an integrated one, in which the overall effect of Apple’s conduct on both app users and app developers must be evaluated. A crucial implication of the Amex decision is that participants on both sides of a transactional platform are part of the same relevant market, and the terms of their relationship to the platform are inextricably intertwined.”

These complications in determining the relevant market for newer technology like Facebook show it is not as easy to figure out as it was for companies that were once considered monopolies in more settled, well-established sectors like oil or railroads. As Nobel-winning economist Jean Tirole explains:

“In the past, we have broken up Standard Oil, AT&T, railroad, and electricity systems. Regarding internet platforms, we need to give it more thought. First, it takes time to implement divestitures. Railroads and electricity, and to a large extent telecoms in 1984, were simple and stable technologies. By contrast, the current platforms are rapidly evolving. We must make sure that the intervention is not obsolete by the time it is implemented.”

In a recent University of Chicago Stigler Center report, a group of antitrust experts reached a similar conclusion. “Pinpointing the locus of competition and therefore the relevant market in which technology platforms compete can also be challenging because the markets are multisided and are often ones with which economists and lawyers have little experience,” they noted. “This complexity can make market definition another hurdle to effective enforcement.” For such reasons, Tirole concludes, it is likely that an antitrust-related remedy for any digital media operator might be “obsolete by the time it is implemented.”

These remedies can also get locked in and last much longer than needed. For example, the Department of Justice is just now ending its oversight in earlier antitrust cases, including not only the infamous Standard Oil case, but also markets for player pianos and horseshoes.

Nonetheless, like Facebook critics, Tirole claims that “the existence of large returns to scale and/or network externalities, [are] leading to natural monopoly situations and a winner-take-all scenario” in digital markets. There is no doubt Facebook and other large digital firms benefit from returns to scale and/or network externalities, but that does not mean that innovation is not occurring or that new entry is not possible. That criticism lines up with neither the history of modern tech markets nor the way most Americans view these platforms. In fact, according to at least one survey, fewer than 16 percent of Americans believe that a better product or service couldn’t replace today’s popular tech platforms.

In that regard, it is worth remembering that “monopoly” claims were heard during earlier generations of search and social media sites. Around the turn of the 21st century, AOL-Time Warner was considered the dominant player of its era despite competition from CompuServe, Prodigy, Geocities, Lycos, and others. Of course, the merger of AOL-Time Warner turned out to be an epic boondoggle and the deal fell apart almost as quickly as it came together.

Those other first generation services mostly disappeared, too, but were replaced with new social networking platforms like Six Degrees, Friendster, Live Journal, and especially MySpace. MySpace quickly became a supposedly unstoppable force in the field, leading a Guardian columnist to famously ask in 2007, “Will MySpace Ever Lose Its Monopoly?” Other market analysts insisted that, “MySpace Is a Natural Monopoly.” Of course, MySpace proved nothing of the sort and, while it is still around today, it is mostly the butt of jokes.

The lesson here is that large returns to scale and network externalities do not automatically mean that firms are “locked in” forever. Competition comes from unexpected sources and innovation often changes the very nature of the markets that once seemed impenetrable. Thus, Facebook is not a monopoly, at least not in the traditional understanding of the term.

In our next installment in this series, we will explore the question of consumer harm as it relates to Facebook.

Photo credit: Chip Somodevilla/Getty Images

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