Facebook and Antitrust, Part 2: Where Is the Consumer Harm?

Critics of Facebook and other large digital technology firms are stepping up calls for some sort of regulatory intervention, including the possibility of breaking up the firms.

In the first installment in this series we concluded that Facebook is not a monopoly, at least not in the traditional understanding of the term, and that large returns to scale and network externalities do not automatically mean that firms are “locked in” forever.

In this second installment, we explore the questions surrounding consumer harm. To build an antitrust case against a firm, breakup proponents would need to prove that the benefits are outweighed by the harm to consumer welfare. But what are the harms here?

When evaluating consumer welfare from an antitrust perspective, economists look beyond market structure and firm size. They look at a broader array of factors, including price, quality, and quantity, as well as possible opportunities for innovation. So is Facebook harming consumer welfare using these metrics?

Facebook offers the public an unpriced suite of services that is constantly evolving in response to its users’ needs and preferences. After all, different people use Facebook for different reasons. Some use it as an open diary, sharing a constant stream of thoughts, photos, and videos, and more. Others use the site to engage with private groups for common hobbies and interests. Facebook also offers an easy way to coordinate events, sell goods, organize fundraisers, search for jobs, and much more.

An advertising system funds this unique collection of services. Facebook uses data disclosed through both public information and inferences based on user activity to best reach consumers in the desired audience. Some critics decry this and other forms of online advertising, claiming that “free” services come at the expense of privacy and could lead to other problems. For example, Wall Street Journal tech writer Christopher Mims suggests that “free is too high a price” when considering social media’s social and personal prices such as the loss of privacy.

But this system also provides major consumer benefits. It is clear that a great many people value having all these services available together on a non-priced basis and are willing participants in the exchange. How much more would Mims and other critics ask consumers to pay in order to satisfy their new standard?

While social media services have become the substitute for many analog alternatives and the typical user highly values these services, many would also be unwilling to pay enough to cover losses in advertising revenue. If Facebook charged $10 or $20 per month for service, it is unlikely many consumers would be willing to pay for it, especially since other free, comparable options are available and more would likely emerge to serve the market.

Switching to a subscription model would harm Facebook. By raising its price and, as a result, reducing its number of active users, Facebook would diminish the network effects that make the free service so valuable. The fact that Facebook would reduce its profits by raising its price and restricting its output is a serious strike against claims that Facebook exerts monopoly power and harms consumers.

Will Oremus of Slate has noted that some critics of Facebook seem to believe that “everything would be solved if only we had to pay for the privilege of social networking. The idea that paying for a product ensures better treatment holds some appeal at a time when the likes of Apple and Netflix are enjoying success without resorting to intrusive ads,” he observes. “Of course, not everyone can afford Apple products, or Netflix for that matter. And there are plenty of companies making paid products that don’t have their customers’ best interests in mind, either.”

Even if some consumers opted for a priced version of the service, “they’d still need to provide plenty of data to Facebook just to power their own feeds,” Oremus correctly notes. Indeed, even companies that do not resort to “intrusive advertising” like Netflix have had their own privacy issues, as they still process consumer data to craft a better user experience.

These considerations need to be evaluated when pondering antitrust remedies and determining the effects on consumer welfare. While Facebook could still offer a paid tier service in the future, $0.00 is a very good price from a traditional antitrust perspective—and many users clearly appreciate it. It is hard to allege consumer harm when so many people flock to an unpriced platform to take advantage of a unique collection of ever-changing services.

Some critics instead allege that the “harm” in need of remedy is a non-price harm, such as loss of privacy or “unfair” practices in Facebook’s data collection practices (or Facebook has been a poor stewards of the information). There may be truth to these claims, but those are matters for other legal or regulatory instruments, not antitrust law.

The same is true regarding the even more amorphous claims about “addiction” or “manipulation” that lead some critics to call for sweeping action against Facebook and other digital media operators. The Center for Humane Technology, for example, accuses Facebook and these firms of engaging in “a zero-sum race for our finite attention,” which leads them to “use increasingly persuasive techniques to keep us glued.”

Regardless of the merit of such claims—which, it should be noted, have been levelled at many previous mediums like radio, television, and even novel reading—antitrust law is not the appropriate regulatory mechanism to address such matters. If such concerns prove to be true, particularly manipulation or misleading claims, this is properly handled via consumer protection law. Both the FTC at a federal and state attorneys general possess powers to police and sanction “unfair and deceptive practices.”

Meanwhile, debate is currently raging over potential federal privacy rules that might govern data collection practices by Facebook and many other firms and solve these concerns far better than antitrust. Moreover, the FTC is rumored to be close to imposing a major fine on Facebook for violating a previous consent decree concerning data privacy in a separate action from any antitrust investigation.

There are still other ways of addressing these concerns that offer a less extreme remedy than an antitrust breakup of the firm—which would not guarantee any solution to these problems anyway.  A future essay in this series will explore some of those options.

To conclude, despite the firm’s various troubles, Facebook offers consumers many benefits that almost certainly outweigh any alleged harms. Many of these harms are quite amorphous and lie outside the realm of traditional antitrust policy. Policymakers should also be cautious about assuming that differing technology use preferences amount to harm.

In our next essay in this series, we will explore some of the technical complexities associated with a formal breakup of Facebook.

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