Articles

The American Express Decision and Its Critics: Reflections after Five Years CPI Antitrust Chronicle, July 2024 (forthcoming)

The Supreme Court’s 2018 decision in Ohio v. American Express Co. (“Amex”) was its first involving two-sided platforms since the emergence of platform economics. As the Internet continues to facilitate the growth of two-sided businesses, cases involving them are likely to be both common and important. This essay first summarizes the core conclusions of the Amex decision and relates them to the economic literature. We then consider the main criticisms of that decision in light of platform economics. We argue that sensibly interpreted and applied the Amex decision can set the stage for the development of the case law on platforms in economically sound directions.

The Economic Analysis of Exclusive Contracts in Two-Sided Markets: Federal Trade Commission vs. Surescripts Revue Concurrence,  March 2024.

Over the last 15 years in the United States electronic networks have almost entirely displaced fax, phone, and paper for transmitting prescription information between doctors and pharmacies and for transmitting insurance information between pharmacy benefits managers and doctors. In 2019 the U.S. Federal Trade Commission sued Surescripts alleging the company has had monopolies over these networks and, beginning in 2010, had maintained those monopolies through loyalty pricing and other actual or de facto exclusive contracts. In 2023, the FTC secured a permanent injunction of the loyalty pricing contracts and of contracts that would have similar effects. The FTC and Surescripts agreed that the networks were two-sided transaction platforms as defined by the Supreme Court in American Express.

Multisided Platforms in Antitrust Practice Elgar Encylopedia of Competition and Regulation (Michael Noel, ed.), 2024 (forthcoming).

The pioneering paper on the economics of two-sided platforms started circulating as a working paper around 2000 and soon after economists saw the import for antitrust analysis. The competition authorities and courts eventually did too. In the United States the Supreme Court’s decision in State of Ohio et al. v. American Express enunciated a framework for applying platform economics to key areas of antitrust. This paper describes that framework and how the courts have applied it in decisions on motions to dismiss, summary judgment, and liability through September 2023. It thereby provides a brief summary of how the economics of multisided platforms has been used in practice.

Can Crypto Fix Itself in Time? CPI TechREG Chronicle, February 2022.

Payment methods have a high degree of inertia making change slow and challenging for new alternatives. So, it is not surprising that crypto currencies based on public blockchains are not broadly used 13 years after Bitcoin launched. The future of the largest public blockchains is limited, however, because they cannot, as is now widely acknowledged, provide stable currencies or operate efficient payment systems and other transactional services at scale. The ability of platforms to correct these problems is impeded by the fact that they serve several masters—decentralization of authority in particular—and are not as nimble at making hard pivots as traditional startups given their consensus-based governance. Established public blockchains may solve these problems but that will take time; new faster public blockchains are entering but must attract capital and labor, which takes time too. Meanwhile payments and financial services are not standing still. Real-time payment methods, mobile money platforms, non-crypto FinTechs, and private permissioned blockchains are developing innovative payment and financial services. In the end it is race, probably over a decade or more, to see who prevails in this competition. Could crypto fix itself in time to win this race? That is possible but far from sure. For those concerned about systemic risks, the public blockchains, and their applications, given the plausible pace of adoption, are less alarming than they may appear from the current hype and valuations. There may be sound reasons to consider regulations but there is no reason to panic. The same is true for businesses concerned about missing out on an opportunity. There is likely time to evaluate the best technologies and business models for innovations in payments, financial services, and the digital economy.

Tech Reg: Rules for the Digital Economy. CPI TechREG Chronicle, December 2021.

Tech Reg refers to the regulation of internet-connected digital businesses and the discipline that studies the when, and how, to do that. It covers areas as diverse as big tech, crypto, fintech, gig, misinformation, privacy, and telemedicine. It will expand over the coming decades as the digital economy expands, leading to disruptive innovation, much unforeseen, and causing fundamental changes in the physical economy. The digital transformation will, as it already has, raise questions as to whether we need new laws and regulations, should modify existing ones, or do nothing at all. Tech Reg can build on an extensive body of economics, including platform economics, and experience on the role and design of regulation but will face new problems. This paper provides a brief overview covering the implications of the digital transformation, the basic economics of regulation, principles for applying tech reg, and application to few interesting topics.

Vertical Restraints and the Digital Economy. Evans, Fels, and Tucker, eds., The Evolution of Antitrust in the Digital Era: Essays on Competition Policy (Boston, MA: Competition Policy International, 2020), vol. 1.

The subject of vertical restraints is well-trod territory in antitrust economics. Most of the cases, and economic literature, have focused, however, on the physical world of manufacturers and distributors. This paper considers what’s new and different about the digital world that matters for the antitrust analysis of vertical restraints. Cases and economic learning from the physical world remain highly relevant. What makes the digital world different is the prominence of intermediaries, most of which are multisided platforms, and the implications of the Internet and other information technologies for these intermediaries and the businesses that rely on them. After describing key platform economics features — including critical mass, multi-homing, and governance regimes — this paper considers important aspects of analyzing vertical restraints in the digital world. It then considers several applications involving platform rules, exclusive contracts, and MFNs for digital intermediaries.

Deterring Bad Behavior on Digital Platforms. Evans, Fels, and Tucker, eds., The Evolution of Antitrust in the Digital Era: Essays on Competition Policy (Boston, MA: Competition Policy International, 2020), vol. 1.

This paper is about the regulation of bad behavior by participants on digital platforms. It shows that these platforms have private incentives to limit this bad behavior and, in fact, have rules, monitoring, and enforcement systems to do so. However, these private incentives may not provide motivation to limit harmful behavior enough. That may require the government to enhance public regulation of the perpetrators and better align the platform’s private incentives to engage in regulation with public incentives to do so. The paper uses the economic theory of the regulation of negative externalities, along with platform economics, to examine these issues and provide general guidance for devising interventions. It identifies issues that policymakers should consider in determining the optimal regulation of bad behavior on digital and applies these to current discussions over the regulation of speech, privacy, and copyright. Finally, it shows that these negative externalities, and governance systems to address them, also raise important issues for antitrust economics and competition policy.

The Economics of Attention Markets. Working Paper, Global Economics Group, April 2020.

The attention market involves competition in which platforms acquire time from consumers, with bundles of content and ads, and sell ads to marketers to deliver messages during that time. Applying platform economics, this paper shows that the attention market solves a transaction-cost problem that prevents efficient exchange between consumers and advertisers and that content plays a central role in solving that problem. The attention market contributes to consumer welfare by supplying valuable content, which more than compensates for any nuisance value of ads, and by facilitating competition through the provision of ads. This paper shows that American adults will spend more than 500 billion hours on ad-supported content in 2019. The value of content is measured in the trillions of dollars given the opportunity cost of time; recent studies of the consumer valuation of online media are consistent with that order of magnitude. Attention markets are important contributors to the digital economy and are the frequent subject of antitrust economics.

What Caused the Smartphone Revolution? Working Paper, Global Economics Group, September 2019.

This paper examines the contribution of 3G and 4G cellular technologies to the smartphone revolution and the digital economy. It relies on quasi-natural experiments in which these technologies were launched at different times and deployed at different rates across countries while the availability of handsets, operating systems, and apps were similar. Using panel data regressions, we find that average smartphone connections per capita would have been at least 68 percent lower if the countries only had 2G cellular networks and average cellular data use would have been at least 41 percent lower if the countries had 3G coverage but did not have 4G coverage as of 2017. For the US, much of the adoption and online use of smartphones would not have occurred in the absence of 3G and 4G, leading to a substantial loss of consumer surplus. Other evidence indicates that Wi-Fi networks were not sufficient for the widespread adoption of smartphones, app development, or increased use of apps by consumers and that the development of major apps, and digital platforms, was an endogenous response to the deployment of advanced cellular technologies.

Attention Platforms, the Value of Content, and Public Policy Review of Industrial Organizaton, February 2019.

This paper shows that two related aspects of attention platforms are important for the sound economic analysis of public policy, particularly for the digital economy, and antitrust economics: First, attention platforms generate valuable content. Even though people often don’t pay for content, we know from revealed preference that content is valuable because people spend a considerable amount of time — which has an opportunity cost — consuming it. Second, demand for advertising and the supply of content are interdependent. A decrease in the demand for advertising reduces the returns to supplying content and therefore the amount of content that is provided. Accounting for the value of content and these positive feedbacks cannot determine optimal interventions; but failing to do so can result in policies that reduce consumer — as well as advertiser — welfare. The paper then considers the implications of these considerations for public policy: particularly privacy regulation and antitrust enforcement. From the standpoint of promoting consumer welfare, the failure to account for the value of content and the ad-content interdependencies increases the chances that authorities do not intervene when they should and do intervene when they should not. The attention markets considered in this paper are important contributors to the digital economy and are the frequent subject of antitrust economics.

Essential Principles for the Design of Antitrust Analysis for Multisided Platforms. Journal of Antitrust Enforcement, Vol. 7, Iss. 3 (2019)

This paper presents some basic principles for conducting the antitrust economic analysis of multisided platforms that courts could adapt to the particulars of their jurisdictions and case laws. It has a particular focus on measuring consumer surplus for platform businesses and the implications of that for the design of antitrust rules. It shows how multisided platforms increase welfare by reducing transactions costs and resolving externalities among economic agents. Guided by modern platform economics, it presents three normative principles for policy interventions and illustrates these principles by showing how they apply to recent debates over privacy. The paper then develops a framework for considering antitrust rules in light of these principles given the objectives of antitrust law, error costs, and developing administrable rules. It lastly considers the competing approaches to analyzing multisided platforms that were presented to the Supreme Court in the American Express litigation and the Court’s decision in light of these principles. Getting these rules right is critical given the importance of platform businesses to the digital economy.

Two-Sided Red Herrings CPI Antitrust Chronicle, October 2018.

A surprising amount of debate leading up to the Supreme Court’s decision in American Express, and the commentary following this landmark ruling, attempt to trivialize and marginalize the modern economic learning on multi-sided platforms. Despite these efforts the 2nd Circuit Court of Appeals and the Supreme Court ultimately embraced the platform economics and antitrust economics literature on these business models.
This article debunks five red herrings that have been floated in the debate:
(1) the two sides are just complements, nothing new there;
(2) everything is two-sided, or who’s to know what’s two-sided;
(3) as industries mature two-sidedness goes away;
(4) markets must be one sided since the services to the two sides aren’t interchangeable; and
(5) two-sided analysis “devastates” antitrust law.
The Supreme Court’s decision has raised a host of interesting issues, including how to deal with two-sided platform businesses that look different from American Express’s credit-card platform and what sort of evidence is necessary or sufficient in markets with platform businesses to establish competitive effects. Like any Supreme Court decision, not every word was chosen as carefully as it might have been, and clarifications will be needed going forward. The large and evolving literature on two-sided platforms will prove helpful to sort that out and we anticipate that the courts will embrace this constructive approach.

The Role of Market Definition in Assessing Anti-Competitive Harm in Ohio v. American Express CPI Antitrust Chronicle, June 2019

This article shows that the Supreme Court reached the right outcome in Ohio et al. v. American Express. The District Court had found, following the literature on platform economics, that American Express was a two-sided transaction platform that provided joint services simultaneously to cardholders and merchants. But it then chose, by adopting a single-sided merchant services market, to analyze the effect of the anti-steering provisions at issue solely on one side of these simultaneous transactions. That decision appears to have prevented the lower court from seeing that the plaintiffs’ evidence of anticompetitive harm to merchants was weak as a matter of antitrust economics The District Court also decided that case law prevented it from considering the effect of the conduct on the other half of the transactions even at the second-stage of the rule of reason. The Supreme Court did not discuss the limitations of the plaintiffs’ theory and evidence at length but simply and properly found that the plaintiffs had failed to prove antitrust injury to platform competition for transactions. This article also shows that criticisms of the Supreme Court decision seem to be based on the rejection or misunderstanding of the platform economics literature, and related antitrust economics literature, on which the District Court, the Appeals Court, and the Supreme Court all accepted and relied on.

What Times-Picayune Tells Us About the Antitrust Analysis of Attention Platforms CPI Antitrust Chronicle, April 2019

Times-Picayune, a 1953 Supreme Court decision involving newspapers, has gained notoriety from the Court’s American Express decision concerning credit-card networks. The Amex dissent argued that the Court had already decided how to apply the rule-of-reason analysis to two-sided platforms in Times-Picayune, and got it right then, but got it wrong in Amex. Times-Picayune is a shaky foundation for that proposition. In that case, the Government had alleged per se tying involving advertising and monopolization of the dissemination of news and advertising. By the time the case reached the Supreme Court it was mainly about per se tying, and didn’t pose the particular two-sided issues that concerned the Court in Amex. After dismissing the per se tying claim, the Court provided a short rule-of-reason analysis which is consistent with considering the newspaper platform overall and not just one side. In particular, the lower court had analyzed the Government’s predation claims for the newspaper by considering the platform in its entirety, as recommended by the platform economics and related antitrust economics literature, and the Court relied on that analysis in its conclusion.

Ignoring Two-Sided Business Reality Can Also Hurt Plaintiffs CPI Antitrust Chronicle, April 2018.

The two-sided analysis of platform businesses isn’t pro-defendant or pro-plaintiff—it is just sound platform economics and antirust economics. By accounting for business reality and modern economics, it helps courts and enforcement agencies reach the right decision and thereby reduce the likelihood of false negatives as well as false positives. Sometimes two-sided analysis is essential for uncovering how conduct harms competition and consumers. Other times it helps establish that conduct is innocuous or beneficial. Fears, and hopes, that two-sided analysis will discourage enforcement efforts are misplaced.

Debunking the ‘Network Effects’ Bogeyman Regulation, Winter 2017-2018

It is currently fashionable to argue that certain “network” industries—like telephones in the old days or various internet platforms today—are subject to market power because of “network effects”: lock-in by early movers. However, recent history belies that; Facebook displaced MySpace and Orkut, Amazon displaced eBay, Android and iPhone displaced Blackberry, Spotify displaced iTunes, Google displaced a slew of earlier search engines, and so forth. Though there are reasons to monitor these networks for market power, current fears of that power are more the product of political slogans than substantiated antitrust economics and sound platform economics.

Network Effects: March to the Evidence, Not to the Slogans CPI Antitrust Chronicle, September 2017

Though network effects are important for multisided platforms, the simple winner-take-all notion that they always give larger platforms an insurmountable advantage over smaller rivals has been disproven by numerous counterexamples. It is now being argued that big data is power, so that a firm that has more customer data than its rivals has an insurmountable advantage over them. This argument has no theoretical or empirical support, and it, too, has been disproven by numerous counterexamples, and without more is not the sound basis for applying antitrust economics.

Why the Dynamics of Competition for Online Platforms Leads to Sleepless Nights But Not Sleepy Monopolies N. Charbit, ed., Douglas H. Ginsburg Liber Amicorum: An Antitrust Professor on the Bench, Concurrences 2017

Recent claims that online platforms have secured permanent monopolies, protected by barriers to entry from network effects and stockpiles of data, and should be the focus of intense antitrust and regulatory scrutiny, are inconsistent with the economics, technology, and history of online competition. Digital platforms face dynamic competition as a result of: disruptive innovation that provides opportunities for entry; competition from online platforms that have secured a toehold in one area but compete across multiple areas; the fragility of category leadership resulting from the fact that network effects are reversible and entry costs are low; and the prevalence of ad-supported models which result in seemingly disparate firms competing for consumer attention and advertiser dollars. The last two decades of online platform competition, in the digital economy, demonstrate that category leaders are often toppled, unexpectedly, through some combination of technological change, business model innovations, and cross-platform rivalry. The palpable threat of displacement prevents online platforms from taking their customers for granted. The history of online platform competition also provides empirical refutation of the proposition that data on users protects platform leaders from competition or puts an insurmountable obstacle before entrants. All this points to online platforms facing sleepless nights since any online platform that tries the quiet life of monopoly risks catastrophe. Sound antitrust economics cannot just assume that indirect network effects and data bestow durable monopoly power.

The Emerging High-Court Jurisprudence on the Antitrust Analysis of Multisided Platforms CPI Antitrust Chronicle, February 2017

Between September 2014 and September 2016 high courts in multiple jurisdictions released five decisions that address applying competition law to matchmakers that operate virtual or physical platforms for connecting multiple groups of customers. The decisions rely, directly or indirectly, on the platform economics literature that commenced around 2000 and the subsequent antitrust economics literature that applied it. The high courts all recognize that it is necessary to consider the several distinct groups of customers and their interactions in evaluating whether business practices are anticompetitive.

Mobile Advertising: Economics, Evolution and Policy CPI Antitrust Chronicle, June 2016

Consumers have shifted their consumption of online content dramatically from websites that they browse from a personal computer to apps that they use on mobile devices. Marketers have moved with the eyeballs, particularly since people use their smartphones much of the day and carry them wherever they go. These changes have disrupted the online advertising industry. This paper, relying in part on modern platform economics, provides a primer on the mobile advertising business, particularly on how the economic structure of the online advertising industry has changed as a result of the move to mobile, and explores some of the issues that policymakers, and antitrust economics, will need to consider as the digital economy moves from websites browsed from fixed devices to apps used on mobile devices.

The New Economics of Multi-Sided Platforms: A Guide to the Vocabulary Market Platform Dynamics Working Paper, June 9, 2016

Modern platform economics platforms involves a number of concepts that are familiar to economists as well as some new ones. This glossary, which is drawn from our book Matchmakers: The New Economics of Multi-sided Platforms, is an attempt to put together the main concepts and to provide short definitions for them. We believe this common vocabulary, which we’re sure others will refine and evolve, will be helpful for research and the exchange of ideas going forward and may serve as a quick primer for those who are new to the field, including students.

The Census Bureau Needs to Significantly Revise Reporting and Calculation of Its Online and Physical Retail Sales Figures and Commission an Independent Review Market Platform Dynamics Working Paper, February 7, 2016

This paper reports significant discrepancies in the Census’s methods and reports of online and physical retail sales in the United States. We recommend material changes in how the Census Bureau reports e-commerce and physical sales reported to it. We also recommend that the Census commission an independent review of its methods and reporting. Doing so is critical for tracking and understanding the evolution of the digital economy.

Multisided Platforms, Dynamic Competition, and the Assessment of Market Power for Internet-Based Firms CPI Antitrust Chronicle, Spring 2016

Platform economics teaches that market power on each side of a multisided platform, whether in the form of increasing prices or decreasing quality, is constrained by the risk of losing sales on the other sides. That tends to weaken market power on each side and encourages platforms to keep prices lower and quality higher than they would absent these feedback effects. In some cases the nature of the business model, and competition, result in the platform allowing one type of customers to participate in the platform for free or even to subsidize their participation. Non-price methods of attracting customers are especially important in this case, particularly when the business model adopted by the industry makes it difficult for platforms to move from free participation. To provide a reliable assessment of competitive constraints, and the application of antitrust economics, market power analysis must consider the interdependencies in demand by the participants on the platform as well as have heightened focus on non-price competition when the participation for one group is free. Market shares should be used cautiously in assessing market power for multi-sided platforms, especially when they reflect only one side of the platform, and therefore do not account for the interdependent customer groups, or concern a free platform side where there is no monetary measure of value. Finally, dynamic competition makes the analysis of market power complex because it results in feature competition, and potentially drastic innovation, on one side of a platform that has feedback effects on the other side of the platform. The courts and authorities have recognized these points in Qihoo 360 v. Tencent, Cartes Bancaires v. European Commission, the Facebook/WhatsApp merger, and the Microsoft/Skype merger. These principals should become part of the standard analysis of multi-sided platforms by courts and competition authorities globally. These antitrust economic issues are illustrated in the context of multi-sided platforms that offer online services where free services and dynamic competition are especially important.

The Move to Smart Mobile and Its Implications for Antitrust Analysis of Online Markets UC Davis Business Law Journal, 2016

Online markets have changed as a result of people shifting massively from using personal computers and browsers to using technologically powerful mobile devices and apps. These changes cover leading online players, consumer behavior, and products in the digital economy. The use of smartphones and mobile apps, and the speed of change, vary between countries and in particular between countries based on their stage of development. Mobile app use is lower in fast-growing countries, such as India, than in developed ones, such as the United States. However, as smart mobile phones with mobile broadband connections become ubiquitous among consumers in developing countries, mobile app use in these countries is likely to leapfrog the use of personal computers and browsers. As a result of the movement to smart mobile, the antitrust economics analysis of markets that might have made sense several years ago, does not today, and will make even less sense several years hence. The widespread adoption of smart mobile has caused, and continues to result in, significant market disruption, including for incumbent Internet-based companies, which are themselves young compared to the traditional companies they disrupted. These dramatic and unpredictable changes pose several issues for antitrust. They show that antitrust economics analysis that focuses on static markets is highly prone to error when it comes to dynamic online industries, that authorities risk making assumptions during investigations that are disproven by the markets soon after they have brought charges or decided a case, and antitrust remedies are prone to be ineffective or harmful because they are developed for markets during the investigation but are radically different by the time the remedies are implemented.

An Empirical Examination of Why Mobile Money Schemes Ignite in Some Developing Countries but Flounder in Most Review of Network Economics, December 2015

Mobile money schemes have grown rapidly in some developing countries, promoting financial services and the digital economy, but failed in many more. This paper reports the results of an empirical study of mobile money schemes in 22 developing countries chosen based on prior evidence to include roughly equal numbers of successes and failures. It uses a combination of quantitative and qualitative evidence to determine why some countries succeeded in launching mobile money schemes and others failed. The analysis is guided by platform economics literature and in particular recent work on the role of ignition and critical mass. We found that of the 22 countries, mobile money schemes have grown rapidly in 8; mobile money schemes have grown but not rapidly in 3; and mobile money schemes have largely failed to take hold in 8. (It is still too soon for us to make a call in 2 countries and there are no bases to determine ignition for 1 country.) Based on a detailed investigation into the similarities and differences between these countries and across the categories we reached several key findings. The first finding is the most robust and important. (1) Heavy regulation, and in particular an insistence that banks play a central role in the schemes, together with burdensome KYC and agent restrictions, is generally fatal to igniting mobile money schemes. (2) Mobile money schemes have been more likely to succeed in poorer countries that lack basic infrastructure. (3) The growth of the send-receive and the cash-in/cash-out platforms must go hand in hand. (4) Ignition and explosive growth occurs quickly or not at all.

The Impact of the U.S. Debit Card Interchange Fee Caps on Consumer Welfare: An Event Study Analysis Journal of Competition Law and Economics, March 2015

The cost to merchants of taking payment on debit cards declined by more than $7 billion annually as a result of the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, while the effective cost to issuers of providing debit card services to consumers increased by a corresponding amount. This paper reports an event-study analysis of stock prices to determine the impact on consumers of the Durbin Amendment. Did consumers gain more from cost savings passed on by merchants, in the form of lower prices and better services, than they lost from cost increases passed on by banks, in the form of higher prices or less service? We find that consumers lost more on the bank side than they gained on the merchant side. Our estimate is that, based on the expectations of investors, the present discounted value of the losses for consumers as a result of the implementation of the Durbin Amendment is between $22 and $25 billion. These findings are relevant to the antitrust economic analysis of platforms outside of financial services and to the platform economics literature on two-sided pricing.

The Antitrust Analysis of Multi-Sided Platform Businesses R. Blair and D. Sokol, eds. Oxford Handbook on International Antitrust Economics, Oxford: Oxford University Press, 2015

This Chapter provides a survey of the platform economics literature with particular focus on antitrust economics, including market definition, mergers, monopolization, and coordinated behavior. It provides a survey of the general industrial organization theory of multi-sided platforms and then considers various issues concerning the application of antitrust analysis to multi-sided platform businesses. It shows that it is not possible to know whether standard economic models, often relied on for antitrust analysis, apply to multi-sided platforms without explicitly considering the existence of multiple customer groups with interdependent demand. It summarizes many theoretical and empirical papers that demonstrate that as a matter of platforms a number of results for single-sided firms, which are the focus of much of the applied antitrust economics literature, do not apply directly to platforms businesses. These results are important for the rapidly growing digital economy which is well-populated by platforms.

Assessing Unfair Pricing Under China’s Anti-Monopoly Law for Innovation-Intensive Industries Competition Policy International, Spring 2014

China, like a number of other antitrust jurisdictions, has a law concerning unfair pricing. This article develops an antitrust economics framework for applying the unfair pricing law in China. The framework draws on the experience of courts and competition authorities in other jurisdictions and the writings of various commentators, particularly economists, on unfair pricing in those jurisdictions. It shows that virtually all jurisdictions have decided to consider unfair pricing claims only in exceptional circumstances, and rarely, if ever, in innovation-intensive industries. For those cases that pass this screen and receive consideration, the courts and competition authorities then, under the leading test, insist on substantial evidence that the price is significantly higher than cost and is unfair given the value provided to the buyer. This article shows that the exceptional circumstances screen and the rigorous unfair pricing test are motivated by a recognition, supported by substantial empirical evidence, that successful firms must have the assurance of receiving significant rewards to induce them to invest time and capital in highly risky innovation that is the source of economic growth and welfare. It concludes by showing that this approach is consistent with modern Chinese economic policy.

Economic Aspects of Bitcoin and Other Decentralized Public-Ledger Currency Platforms University of Chicago Coase-Sandor Working Paper Series in Law and Economics, May 2014

A number of internet-based digital currency platforms based on decentralized public ledgers have started since the introduction of the blockchain concept by the founder of Bitcoin in 2008. An important element of these public ledger platforms is an incentive system that elicits efforts from a distributed global workforce to verify and record transactions on the public ledger and a governance system for the platform. The economic efficiency and possibly viability of a public ledger platform ultimately depend on the design of these incentive and governance systems. Even if a decentralized public ledger were a more efficient technology for conducting financial transactions, and for providing a digital platform for distributed innovation, deficiencies in its incentive and governance systems could make it overall inferior to alternatives, including existing systems. Current claims that public ledger platforms can conduct financial transactions more efficiently ignore the inefficiencies associated with the incentive and governance systems and the likely costs associated with regulation of these platforms and complementary service providers such as vaults, wallets, and exchanges. It is possible that public ledger platforms are more efficient than other alternative digital platforms for conducing financial transactions, but as of now the proposition is based on apples-to-oranges comparisons compounded with speculation. Competition will lead to better incentive and governance systems for public ledger platforms. For now it is uncertain whether public ledger platforms will play a material role in the digital economy.

The Antitrust Analysis of Rules and Standards for Software Platforms Competition Policy International, Autumn 2014

Software platforms anchor vast global communities of users, application developers, device manufacturers, content providers, advertisers, and others. They drive innovation by enabling entrepreneurs, often anywhere in the world, to develop “applications” and to reach all the users of the platform, often anywhere in the world. These applications are sometimes the foundation of substantial businesses. As we know from the platform economics literature, the value of these software platforms, and their ability to support large communities, depends on the ability of the platform to promote positive externalities and reduce negative externalities. Software platforms usually impose rules and standards and often exclude, or bounce, participants that harm others in the community, and reward participants that benefit others in the community. Competition policy, and antitrust economics, should presume that these governance systems, and the restrictions they place on platform participants including their possible expulsion from the platform, are efficient and pro-competitive. Software platforms could, however, employ governance systems to foreclose competition. These restrictions, therefore, should not be lawful per se. Rather, courts and competition authorities should employ screens to protect pro-competitive restrictions and isolate anti-competitive ones. The application of these screens should be neutral to the licensing model chosen by the software platform creator. There is, in particular, no basis for imposing tougher limitations on software platforms that use an open-source license model than on software platforms that use a proprietary license. Balancing anticompetitive and procompetitive considerations will prove important soundly applying antitrust economics the platforms that are helping to drive the growth of the digital economy.

The Economics and Regulation of the Portuguese Retail Payments System SIBS, December 4, 2013

This study provides a detailed analysis of how the Portuguese payment system operates and how regulatory interventions, especially those involving price controls, would likely affect the interest of the various stakeholders in the system including consumers, merchants, banks, schemes, and infrastructure providers. It applies platform economics to help understand the key players and their interrelationships.

Market Definition Analysis in Latin America with Applications to Internet-Based Industries Journal of Law and Policy for the Information Society, Winter 2014

There has been a surge of recent antitrust cases involving digital economy industries around the world, including in Latin America. These types of industries present special challenges for authorities, as their analysis requires an understanding of the fast-paced, innovative, and multi-sided platform nature of these businesses. In this paper we present methods and techniques for market definition and power analysis which, drawing on platform economics, emphasize the need to focus on competitive constraints rather than structural or functional characteristics of products and services — a particularly relevant issue in Internet-based industries. We next explore whether the legal frameworks of Argentina, Brazil and Mexico can accommodate this type of analyses. Our focus then shifts to how competition takes place in Internet-based industries; we describe how firms vie for consumer attention and provide this attention to advertisers and developers using the concept of “attention rivalry”. Taking this theoretical background into account we pose the question of whether the three largest Latin American economies have the tools, legal ability and expertise to undertake these types of complex analyses. We use cases to illustrate where they have done so, and review the most relevant antitrust economics work they have undertaken in digital economy industries since 2000. In our view, nothing prevents competition agencies in these countries from conducting the correct antitrust economic analyses.

Paying with Cash: A Multi-Country Analysis of the Past and Future of the Use of Cash for Payments by Consumers Market Platform Dynamics Working Paper, June 2013

This paper focuses on the value of consumer payments made with cash, which we refer to as “total cash spending”, and the share of total spending that is made with cash, which we refer to as the “cash-spending share”. We provide estimates of these measures of cash use for 2000-2011 and forecasts of these measures of cash use for 2012-2022 for ten diverse countries: France, Germany, Italy, Poland, Portugal, Spain, Sweden, Turkey, the United Kingdom, and the United States. We summarize the results across these countries using GDP-weighted compound annual growth rates. We estimate that total real cash spending increased by 2.4 percent annually between 2000 and 2011 and forecast that this growth will decline to a 0.9 percent increase annually between 2012 and 2022. We also show that the cash-spending share increased by 1.6 percent annually between 2000 and 2011 but will likely decline by 1.5 percent annually between 2012 and 2022. We find that total cash spending will increase between 2012 and 2022, despite the decline in the cash-spending share, because total spending will increase over this period. There is great diversity in the details across countries in the historical and future evolution of cash use by consumers. However, our key finding is that, contrary to popular reports, cash is not dying despite the growth of the digital economy and digital alternatives for paying. In most countries total cash spending will continue to increase, although at a slower rate than historically, and the share of spending with cash will decline but at a modest rate.

The Consensus Among Economists on Multisided Platforms and its Implications for Excluding Evidence that Ignores It CPI Antitrust Chronicle, June 2013

There is now a professional consensus among economists that multisided platforms are the main form of business organization in many industries; that these platforms face interdependent demand from multiple groups of customers; and that profit-maximization in the face of this interdependent demand can in theory, and often does in practice, result in their charging a price to one group of customers that is less than marginal cost including zero or less than zero. Traditional economic models that do not consider interdependent demand—that is, ignore sound platform economics—do not yield reliable results for platform businesses. Many of the economic tools used in antitrust economics, including the various back-of-the-envelope tools such as critical loss analysis, are not reliable when applied to multisided platforms. In conducting reliable economic analysis of multisided platforms economists must either explicitly consider interdependent demand in their models or assess biases resulting from traditional tools to verify that they do not alter conclusions.

Attention Rivalry among Online Platforms and Its Implications for Antitrust Journal of Competition Law and Economics, 2013, 9(2)

Many digital economy businesses, including most of the largest platforms, seek and provide attention. These online attention rivals provide products and features to obtain the attention of consumers and sell some of that attention, through other products and services, to merchants, developers and others who value it. The multi-sided business of seeking and providing attention is fluid with rivalries crossing boundaries defined by the features of the products and services. It is also dynamic. Rivals introduce new products and services, some involving drastic innovation, frequently. Online attention rivals impose competitive constraints on each other. Product differentiation tempers the significance of these constraints in particular situations. But the relevant differentiation mainly involves aspects of the attention that is procured and sold rather than, necessarily, particular features of the products and services used for acquiring and delivering that attention. Antitrust economics analysis should consider these competitive constraints, and the relevant platform economics, in evaluating market definition, market power, and the potential for anticompetitive effects. Most importantly, antitrust economics analysis should focus on competition for seeking and providing attention rather than the particular products and services used for securing and delivering this attention. The existence of competition among attention rivals does not imply that antitrust should reduce the vigor with which it examines mergers and exclusionary practices among these platforms. It just needs to look for problems in the right places.

Enhancing Financial Benchmarks: Comments on the OICU-IOSCO Consultation Report on Financial Benchmarks Global Economics Group Working Paper, February 2013

In this comment we advance a number of guiding principles on matters of benchmark formation, administrative governance, screening, transparency and regulation, in response to the OICU-IOSCO Consultation Report on Financial Benchmarks dated January 2013 (“Report”). We are looking for practical solutions which discourage, to the extent possible, attempts at manipulation or fraud while providing the most useful information to the market.

Economics of Vertical Restraints for Multi-Sided Platforms Competition Policy International, Spring 2013

This paper presents an overview of what economists can say about vertical constraints by multi-sided platforms, and the implications for antitrust economics, at this stage in the development of our knowledge about platform economics. It describes the general procompetitive and anticompetitive uses of vertical restraints by multi-sided platforms. It then focuses on the role of critical mass for multi-sided platforms and how vertical restraints might be used on the one hand, anti-competitively to prevent rivals from achieving critical mass and long-term growth and, on the other hand, pro-competitively, to ensure the platform and its customers that the platform will remain viable.

The Role of Keyword Advertising in Competition among Rival Brands CPI Antitrust Chronicle, December 2012

This paper considers recent proposals for restricting keyword advertising using competitor brand names. Keyword advertising which is used in the digital economy is similar to many other widely used and valuable methods of marketing to the customers of rivals that increase competition and facilitate entry in the physical economy. Queries for products or services using search engines help inform consumers about other competitive alternatives and may enable them to compare different product offerings. Economists have found overwhelmingly that this type of informative and comparative advertising benefits consumers and, conversely, that restricting such advertising harms consumers. Complainants in some recent keyword advertising cases have sought to forbid search engines from using trademarked names as keywords, claiming that this may cause confusion. We argue that most consumers are likely to benefit from keyword advertising and are unlikely to be confused by the practice. Moreover, without a careful weighing of the likely costs and benefits of this type of regulation, consumers might bear significant costs by eliminating an easy reference with which to compare existing or new products, resulting in important reductions in consumer benefits. In fact, even more narrow remedies such as case-specific penalties for causing consumer confusion could discourage search engines from offering this service to advertisers, decreasing their value to consumers as a search tool and resulting in significant harm.

Will the Wheatley Recommendations Fix LIBOR? CPI Antitrust Chronicle, November 2012

In this article we summarize the main problems with the current LIBOR setting, describe our proposal on how to reform LIBOR through a committed quote system (“CLIBOR”), and explain why the final Wheatley Review proposal on how to reform LIBOR, and its reasons for stopping short of our proposals, are not satisfactory for putting LIBOR on solid ground.

Governing Bad Behavior by Users of Multi-Sided Platforms Berkeley Technology Law Journal, 2012, 27(2)

Multi-sided platforms such as exchanges, search engines, social networks and software platforms create value by assembling and serving communities of people and businesses. They generally come into being to solve a transaction problem that prevents agents from getting together to exchange value. Platform economics teaches that an essential feature of these businesses is that they promote positive externalities between members of the community. But as with any community, there are numerous opportunities for people and businesses to create negative externalities, or engage in other bad behavior, that can reduce economic efficiency and, in the extreme, lead to the tragedy of the commons. Multi-sided platforms, acting selfishly to maximize their own profits, often develop governance mechanisms to reduce harmful behavior. They also often develop rules to manage many of the same kinds of problems that beset communities subject to public laws and regulations. They enforce these rules through the exercise of property rights and, most importantly, through the bouncer’s right to exclude agents from some quantum of the platform including prohibiting them from the platform entirely. Private control is likely to be more efficient than social control in dealing with negative externalities on platform communities because the platform owner can monitor bad behavior more closely and deal with this behavior more expeditiously than a public regulator. The courts and antitrust authorities, and practitioners of antitrust economics, should exercise caution in finding anticompetitive exclusion when that exclusion is conducted as part of a governance mechanism for dealing with bad behavior of some platform users that harm other users.

Replacing the LIBOR with a Transparent and Reliable Index of Interbank Borrowing: Comments on the Wheatley Review of LIBOR Initial Discussion Paper University of Chicago Institute for Law & Economics Olin Research Paper No. 620, November 2012

We propose an alternative to the LIBOR based on three pillars. (1) Banks that participate in the rate setting process would have to submit bid and ask quotes for interbank lending and commit that they would conduct transactions within that range. If they traded outside of those ranges they would have to justify and face a penalty. This leads to the CLIBOR — for “committed” LIBOR. (2) All large banks would have to submit interbank transactions including rates to a data-clearing house. The data-clearing house would use the actual transactions to verify the commitment of the banks to the submitted rates. It would also report aggregate transaction data, keeping the actual identities of the trading parties anonymous, with a necessary time delay. (3) A governing body would be established from the CLIBOR participating banks, representatives of CLIBOR users, and other independent parties such as academics. That governing body would enter into a long-term contract, based on competitive solicitation, with a private sector entity to supervise the CLIBOR, operate the data-clearing house, and disseminate information.

Two-Sided Markets Market Definition in Antitrust: Theory and Case Studies, Amberican Bar Association, 2012

This paper addresses the antitrust economics analysis of market definition when the parties involved in an antitrust or merger analysis include one or more two-sided platforms. We discuss how standard market definition measures such as SSNIP tests, diversion ratios, and conditional logit demand analyses have to be modified to account for the unique characteristics of two-sided platforms, uncovered by the modern platform economics literature. We also review how market definition of two- sided platforms was treated in recent US and EC case law.

Lightening Up Market Definition E. Elhauge, ed., Research Handbook on the Economics of Antitrust Law, New York: Edward Elgar, 2012

This article proposes a resolution to the longstanding controversy between courts, economists, and antitrust authorities over the appropriate role of market delineation and contributes to the antitrust economics literature on this topic Market definition should remain the first step in antitrust and merger analysis. It provides information on competitive constraints and other aspects of the economic landscape that are essential for understanding whether the practice at issue could harm consumers. However, there is no basis in antitrust economics for, as a general matter, drawing hard market boundaries and making strong inferences about market power from shares calculated based on those boundaries. The courts should abandon these practices, which are not required by the antitrust statutes, as they have done with other antitrust jurisprudence, such as maximum price fixing, that has been shown to be inconsistent with economics. They can write coherent analyses of antitrust issues without relying on hard market boundaries. The antitrust authorities should examine the competitive effects of business practices such as mergers only after a market inquiry that focuses on understanding the competitive landscape and the potential competitive constraints on business practices; but that inquiry does not need to settle on a hard boundary.

Excessive Litigation by Business Users of Free Internet-Platform Services University of Chicago Institute for Law & Economics Olin Research Paper No. 603, November 2012

In the last decade a number of Internet-based multi-sided platforms have emerged that provide free services to, in some cases, millions of businesses. More such platforms are being spawned as the Internet-based economy grows. Drawing in part on the modern literature on platform economics, this Article argues that under current norms in adversarial proceedings, such as those involving competition policy, these platforms are likely to face large numbers of complaints in multiple jurisdictions, a substantial likelihood that at least one of these complaints will result in a false-positive decision against the platform, and material risk of a false-positive decision that results in catastrophic consequences. These effects result from a combination of business users of free services receiving a free litigation option they can pursue if they have any complaints; an adverse-selection problem that results from free services being particularly attractive to start-ups that do not have or want to invest capital in their businesses; and the sheer number of free-business users resulting in a high cumulative probability of at least one false-positive decision. After documenting these phenomena, this Article argues that government policymakers, including competition authorities and courts, should adopt a heightened level of scrutiny concerning complaints from free business users. This heightened level of scrutiny is necessary to counteract the impact of excessive litigation on innovation by multi-sided platforms.

Payments Innovation and Interchange Fees Regulation: How Inverting the Merchant-Pays Business Model Would Affect the Extent and Direction of Innovation David S. Evans, ed., Interchange Fees: The Economics and Regulation of What Merchants Pay for Cards, (Boston: Competition Policy International, 2011

This paper examines the possible impact on innovation involving payment cards as a result of price caps that lead to the drastic reduction in interchange fees. Such reductions invert the traditional platform business model for the payments card industry from a merchant-pays model to a consumer-pays model. The paper argues, drawing on platform economics, that this inversion is likely to reduce the overall level of innovation in the industry, divert innovation away from the role of payments in transactions and towards improvements for which consumers can be charged non-transaction related fees, and discourage the entry of new payment systems.

How Changes in Payment Card Interchange Fees Affect Consumers Fees and Merchant Prices: An Economic Analysis with Applications to the European Union David S. Evans, ed., Interchange Fees: The Economics and Regulation of What Merchants Pay for Cards, (Boston: Competition Policy International, 2011)

A number of jurisdictions are considering imposing price caps on the interchange fees that card issuers receive from merchant acquirers when cardholders pay with their cards. Several have already done so. This paper, applying the modern literature on platform economics, examines the net impact of these price caps on consumers. The economics of pass-through predicts that issuers would pass on some of their lost revenues to consumers in the form of higher fees while merchants would pass on some of their reduced costs to consumers in the form of lower prices. The net impact depends on the relative magnitude of these two effects. While the answer depends on the parameters for the particular jurisdiction that is imposing the caps, this paper shows that there are asymmetries between the issuer and merchant side that are likely to result in consumers incurring greater costs from increased fees than they obtain in lower costs from merchants thereby resulting in a loss of consumer welfare. Banks are likely to have higher pass-through rates than merchants so that the long-run impact on bank fees is greater than on merchant prices. While the analysis is general, we pay particular attention to the situation in the European Union. The paper is also relevant to applying antitrust economics to interchange fees which are the subject of a number of antitrust cases.

Economic Analysis of Claims in Support of the ‘Durbin Amendment’ to Regulate Debit Card Interchange Fees David S. Evans, ed., Interchange Fees: The Economics and Regulation of What Merchants Pay for Cards, (Boston: Competition Policy International, 2011)

Section 1075 of the 2010 Dodd-Frank Act requires the Federal Reserve Board to regulate the debit card industry including the interchange fee banks and credit unions receive from merchants. This paper reviews the arguments in support of this regulation put forward by Senator Durbin, who proposed the amendment that led to Section 1075, large retailers, and merchant trade associations. Contrary to their claims, the leading government entities that have examined interchange fees specifically reject the approach taken by the Durbin Amendment; no US antitrust authority or court has found that MasterCard or Visa have engaged in price fixing with regard to debit interchange fees; debit card interchange fees have not increased materially over time in the US; Canadians have not benefited from zero debit interchange fees in that country since they pay more for using cards, and retail banking accounts, than Americans and since Canadians cannot use their zero-interchange fee debit cards to pay online or internationally; and consumers and small businesses will not benefit from the planned reductions in interchange fees, in fact they will lose hundreds of millions of dollars a year. Drawing on the modern literature on platform economics, this paper has important lessons for imposing price regulation on platform based businesses and for the antitrust economics analysis of them.

The Antitrust Economics of Free Competition Policy International, Winter 2011

This article examines antitrust economics analysis when one of the possible subject products of an antitrust or merger is ordinarily offered at a zero price. It shows that businesses often offer a product for free because it increases the overall profits they can earn from selling the free product and a companion product to either the same customer or different customers. The companion product may be a complement, a premium version of the free product, or the product on the other side of a two-sided market. The article then shows how antitrust and merger analysis should proceed when the subject is either the free product or the companion product. A key point is that the existence of a free good signals that there is a companion good, that firms consider both products simultaneously in maximizing profit, and that commonly used methods of antitrust economics analysis, including market definition, probably need to be adjusted to properly analyze two inextricably linked products. When antitrust or merger analysis involves a free product, the analysis of consumer welfare and injury also needs to account for customers of both the free product and its companion product since any change in market conditions for customers of one product affects the customers of the other product. Much of the analysis of the article is also relevant to other common situations in which price is set less than marginal cost.

Failure to Launch: Critical Mass in Platform Businesses Review of Network Economics, 2010, 9(4)

Platform businesses add value by facilitating interactions between customers who are attracted at least in part by network externalities. Platform businesses with low switching costs have become more important with the rise of the internet. This essay explores the sources of the initial critical mass constraint that new, potentially viable businesses of this sort generally seem to face. For two-sided platforms, we show that this constraint is two-dimensional and depends on the nature of network effects and the distribution of customer tastes. Depending on the dynamics of adjustment to equilibrium, it may pose a chicken-and-egg problem. The paper contributes to the growing platform economics literature and is relevant to the antitrust economics of platform businesses.

The Effect of the Consumer Financial Protection Agency Act of 2009 on Consumer Credit Loyola Consumer Law Review, 2010, 22(3)

The U.S. Department of the Treasury has submitted the Consumer Financial Protection Agency Act of 2009 to Congress for the purpose of overhauling consumer financial regulation. This study has examined the likely effect of the Act on the availability of credit to American consumers. To do so we have examined the legislation in detail to assess how it would alter current consumer protection regulation, reviewed the rationales provided for the new legislation by those who designed its key features, considered why consumers borrow money and benefit from doing so, and reviewed the factors behind the expansion of credit availability over the last thirty years. Based on our analysis we have concluded that the CFPA Act of 2009 would make it harder and more expensive for consumers to borrow. Under plausible yet conservative assumptions the CFPA would:

• increase the interest rates consumers pay by at least 160 basis points; • reduce consumer borrowing by at least 2.1 percent; and,

• reduce the net new jobs created in the economy by 4.3 percent.

By reducing borrowing the Act would also reduce consumer spending that further drives job creation and economic growth. In addition to restricting the availability of credit over the long term, the CFPA Act of 2009 would also slow the recovery from the deep recession the economy is now in by reducing borrowing, spending, and business formation.

The financial crisis has surfaced a number of serious consumer financial protection problems that were not dealt with adequately by federal regulators. Rather than proposing expeditious and practical reforms that can deal with those problems, the Treasury Department has put forward a proposal that would disrupt current regulatory agency efforts to deal with these issues.

This paper focuses on the CFPA Act that the Administration introduced in July 2009. House Finance Committee Chairman Frank has proposed changes to this Act which the Treasury Secretary Geithner appears to be willing to accept. However, given that these changes could be reversed or other changes could be made as the legislation works its way through Congress, we focus on the Administration’s original bill rather than a moving target. Chairman Frank’s proposed changes do not significantly alter any of our conclusions.

The New Consensus on Class Certification: What it Means for the Use of Economic and Statistical Evidence in Meeting the Requirements of Rule 23 CPI Antitrust Chronicle, January 2010.

Offering expert testimony that is a hair’s breadth away from nutty is no longer sufficient to secure class certification according to an emerging consensus across the circuit courts. The court must also get into any merits issues that are relevant to the class issues. As a practical matter credible expert testimony will prove more important going forward in all types of class certification for both plaintiffs and defendants. This note summarizes the consensus that is emerging and describes the sorts of analyses that will prove critical in seeking or opposing the certification of a particular class.

The Effect of the Consumer Financial Protection Agency Act of 2009 on Consumer Credit Loyola Consumer Law Review, Vol. 22, No. 3, 2010

The U.S. Department of the Treasury has submitted the Consumer Financial Protection Agency Act of 2009 to Congress for the purpose of overhauling consumer financial regulation. This study has examined the likely effect of the Act on the availability of credit to American consumers. To do so we have examined the legislation in detail to assess how it would alter current consumer protection regulation, reviewed the rationales provided for the new legislation by those who designed its key features, considered why consumers borrow money and benefit from doing so, and reviewed the factors behind the expansion of credit availability over the last thirty years. Based on our analysis we have concluded that the CFPA Act of 2009 would make it harder and more expensive for consumers to borrow. Under plausible yet conservative assumptions the CFPA would:
• increase the interest rates consumers pay by at least 160 basis points;
• reduce consumer borrowing by at least 2.1 percent; and,
• reduce the net new jobs created in the economy by 4.3 percent.

By reducing borrowing the Act would also reduce consumer spending that further drives job creation and economic growth. In addition to restricting the availability of credit over the long term, the CFPA Act of 2009 would also slow the recovery from the deep recession the economy is now in by reducing borrowing, spending, and business formation.

The financial crisis has surfaced a number of serious consumer financial protection problems that were not dealt with adequately by federal regulators. Rather than proposing expeditious and practical reforms that can deal with those problems, the Treasury Department has put forward a proposal that would disrupt current regulatory agency efforts to deal with these issues.

This paper focuses on the CFPA Act that the Administration introduced in July 2009. House Finance Committee Chairman Frank has proposed changes to this Act which the Treasury Secretary Geithner appears to be willing to accept. However, given that these changes could be reversed or other changes could be made as the legislation works its way through Congress, we focus on the Administration’s original bill rather than a moving target. Chairman Frank’s proposed changes do not significantly alter any of our conclusions.

The Online Advertising Industry: Economics, Evolution, and Privacy Journal of Economic Perspectives, 2009, 23(3)

Online advertising accounts for almost 9 percent of all advertising in the United States. This share is expected to increase as more media is consumed over the internet and as more advertisers shift spending to online technologies. The expansion of internet-based advertising is transforming the advertising business by providing more efficient methods of matching advertisers and consumers and is transforming the media business by providing a source of revenue for online media firms that compete with traditional media firms. The precipitous decline of the newspaper industry is one manifestation of the symbiotic relationship between online content and online advertising. Online-advertising is provided by a series of interlocking multi-sided platforms, the subject of the new literature on platform economics, that facilitate the matching of advertisers and consumers. These intermediaries increasingly make use of detailed individual data, predictive methods, and matching algorithms to create more efficient matches between consumers and advertisers. Some of their methods raise public policy issues, some that will become the subject of antitrust economics, that require balancing providing consumers more valuable advertising against the possible loss of valuable privacy.

Why Different Jurisdictions Do Not (and Should Not) Adopt the Same Antitrust Rules Chicago Journal of International Law, 2009, 10

This article summarizes the theory on the optimal design of antitrust rules and discusses the application of such theory in different jurisdictional settings including the relevance for antitrust economics. It establishes the proposition that divergence is the norm for antitrust rules. This paper argues that the quest for convergence is quixotic and the disdain when another jurisdiction has a different rule than one’s own is uncalled for. Along the way it considers two beacons of divergence that appeared on either side of the Atlantic at the end of 2008 – the US Department of Justice’s report on unilateral conduct and the European Commission’s enforcement guidelines on abusive exclusionary conduct.

Innovation in Payments M. Baily and R. Litan, eds., Moving Money: The Future of Consumer Payments, DC: Brookings Institution Press, 2009

Three major technological trends will lead to a significant transformation of the payments industry: the development of online advertising technologies that will increasingly rely on transaction data, the movement of payment innovation from the existing jerry-rigged linkages of hardware and software to cloud-based computing, and the proliferation of mobile telephones and other handheld devices that are connected to the Internet. Innovation will result from the integration of these new technologies and will transform the payment and shopping experience in ways that promise to bring enormous benefits to consumers and businesses, and help accelerate the expansion of the digital economy.

How Catalysts Ignite: The Economics of Platform-Based Start-Ups A. Gawer, ed., Platforms, Markets and Innovation, Cheltenham, UK and Northampton, MA, US: Edward Elgar, 2009

This paper applies the new platform economics literature to the start-up problem. Entrepreneurs who start multi-sided platforms must secure enough customers on both sides, and in the right proportions, to provide enough value to either group of customers and to achieve sustainable growth. In particular, these entrepreneurs must secure “critical mass” to ignite the growth of their platforms; the failure to achieve “critical mass” quickly results in the implosion of the platform. There are a number of strategies available to entrepreneurs to reach critical mass. For example, the “zig-zag” strategy involves successive accretions of customers on both sides to build up the value to both. The relevant strategies depend in large part on whether the nature of the platform requires securing participation by both platform sides at launch (e.g. dating venues), whether it is possible to acquire one side before approaching the other side (e.g. search engines), and whether it is necessary to make pre-commitments to one side to induce them to make investments (e.g. video games). These platform ignition considerations will prove important for startups in the digital economy.

The Microsoft Judgment and its Implications for Competition Policy Towards Dominant Firms in Europe Antitrust Law Journal, 2009, 75(3)

The European Court of First Instance (CFI) rejected Microsoft’s grounds for annulling the Commission’s Decision that the software maker had abused its dominant position in computer operating systems by refusing to supply certain protocols for interoperating with rivals’ computers and by tying Windows Media Player to its Windows operating system. This article argues that the Court’s judgment continues the form-based approach it has followed for four decades to abuse of dominance cases and is inconsistent with the Court’s emphasis on coherent antitrust economics reasoning in merger clearance reviews, thereby reinforcing a divide between these two critical parts of European competition policy. The CFI’s approach also continues its historical adherence to focusing on market structure and putting aside direct evidence of adverse effects on consumer welfare. In particular, the CFI did not embrace parts of the Commission’s Decision against Microsoft that advocated an effects-based approach. At the same time the CFI’s judgment expands the possibilities for finding an abuse of dominance by weakening key prongs of the Bronner/Magill/IMS exceptional circumstances test for refusal to supply and adopts a separate products test for tying that has illogical implications for many standard cases.

Trustbusting Goes Global D. Evans and F. Jenny, eds., Trustbusters: Competition Policy Authorities Speak Out, Boston: Competition Policy International, 2009

Antitrust has grown explosively in the last quarter century. As of the end of 2004, 102 countries – from Albania to Zimbabwe – had national competition laws on their books. Together, these countries account for more than 85 percent of the world’s population. Many of these countries, including China and India, have been strengthening those laws and their enforcement. More than three fifths of the countries with antitrust laws today did not have any laws on the books before 1990, and many of those that did had ineffectual ones. Antitrust spread rapidly as country after country started relying more on markets, rather than central planning and government enterprise, to spur economic growth. Countries that embraced markets soon adopted the same sort of rules for regulating the game of competition that the United States had put in place in 1890 to rein in the excesses of laissez faire capitalism.

The Economics of Market Coordination for the Check-Clearing System in the Late 19th Century United States Explorations in Economic History, Vol. 45, 2008

On the basis on anecdotes centered on the alleged circuitous routing of checks, researchers focusing on the pre-Fed check-clearing system have usually argued that it was inefficient. In this paper we study a 1910 check remittance register from the State National Bank of Bloomington, Illinois – we dissect the way the bank forwarded checks to various destinations for clearing and collection. We find that the bank followed an orderly process of check remittance according to which checks tended to move in the right direction. This casts doubts on the alleged pervasiveness of cycling and circuitous routing of an extreme nature in the pre-Fed check-clearing process.

Markets with Two-Sided Platforms Issues in Competition Law and Policy, Vol. 1, American Bar Association, August 2008

Two-sided platform businesses serve distinct groups of customers and need each other in some way as shown in the new platform economics literature. They provide these customers a real or virtual meeting place, and they facilitate the interactions between members of these customer groups. They essentially act as intermediaries between the two groups and create efficiencies by lowering transactions costs and reducing duplication costs. Many significant industries are populated by businesses based on two-sided platforms. These include many traditional businesses, such as shopping malls, and most Internet-based businesses, such as social networks. Several economic conclusions that are relevant for antitrust analysis follow from the fact that these platforms are maximizing profits based on interlinked demand from the two sides. Prices on one side may be below marginal cost and possibly negative in long-run equilibrium. Many two-sided platforms in practice subsidize one side and earn profits on the other. Moreover, the standard result that the percent markup of price over marginal cost is inversely related to the elasticity of demand does not hold for either customer group. Antitrust economics analysis, tools, and techniques require modification when two-sided platforms account for a significant portion of supply. Failure to account for the consequences of interlinked demand between the two sides can lead antitrust analysis into serious error.

Antitrust Issues Raised by the Emerging Global Internet Economy Northwestern University Law Review, 2008, 102(4)

Web-based businesses are increasingly the subject of antitrust concerns. Plaintiffs in the United States have sued eBay for tying its online payments service to its transaction service. Multiple jurisdictions in the European Community have claimed that Apple has violated the competition laws by limiting the ability of its music player to play music from competing music stores and limiting the ability of competing music players to play music purchased from its music stores. During 2007, although the U.S. Federal Trade Commission decided not to block Google’s acquisition of DoubleClick after a lengthy investigation, it expressed its intent to “closely watch these markets” involved in online advertising. The web economy poses two major challenges to competition authorities. The law and economics for analyzing the multi-sided platforms that dominate the internet sector is not well developed although the platform economics literature is growing rapidly as is the related antitrust economics literature. At the same time the digital economy is evolving very rapidly and in ways that are sure to result in antitrust complaints and investigations. Competition authorities and courts will need to exercise great care in balancing the protection of consumers from anticompetitive behavior against causing harm from interfering in complex businesses that are both rapidly moving and not fully understood.

Competition and Regulatory Policy for Multi-Sided Platforms with Applications to the Web Economy Concurrences, 2008, No. 2

This article is about a type of business that connects distinct groups of customers on a “multi-sided platform.” Such businesses have been around for millennia. But their economic importance has increased with the Internet revolution. Many significant digital economy businesses such as eBay, Facebook, and Google are multi-sided. Multi-sided platform businesses must account for the fact that each type of customers they attract values more of the other type of customers. Buyers value many sellers and sellers many buyers, for example, on Internet auction sites. As we know from the platform economics literature, that interdependence has significant implications for the economic behavior of these businesses (they often break even or lose money on customers on one side) and for how competition authorities and regulators should analyze them (market definition must account for the linkages between the multiple customer groups). Multi-sided platforms tend to engage in complex business practices. The challenge for policymakers, and the application of antitrust economics particularly to the digital economy, is distinguishing anticompetitive from complicated but benign behavior. This paper is based on the Beesley Lecture, sponsored by the London Business School and the Institute for Economic Affairs, which I was invited to deliver on 26 October 2007 in London.

The Lawful Acquisition and Exercise of Monopoly Power and its Implications for the Objectives of Antitrust Competition Policy International, 2008, 4(2)

The antitrust laws of the United States have, from their inception, allowed firms to acquire significant market power, to charge prices that reflect that market power, and to enjoy supra-competitive returns. This article shows that this policy, which was established by the U.S. Congress and affirmed repeatedly by the U.S. courts, reflects a tradeoff between the dynamic benefits that society realizes from allowing firms to secure significant rewards, including monopoly profits, from making risky investments and engaging in innovation; and the static costs that society incurs when firms with significant market power raise price and curtail output. That tradeoff results in antitrust laws that allow competition in the market and for the market, even if that rivalry results in a single firm emerging as a monopoly, but that prevent firms from engaging in practices that go out of bounds. The antitrust laws ultimately regulate the “boundaries” of the “game of competition.” Three implications follow. First, the antitrust laws and intellectual property laws are based on similar policy tradeoffs between static and dynamic effects. Second, the antitrust rules have, all along, been based on this tradeoff and not on the effects of business practices on static consumer welfare in relevant antitrust markets. Third, one unintended consequence of the increased role of economics in antitrust analysis is to overemphasize static considerations which the almost the sole focus of the economics literature that courts and competition authorities consider.

The Analysis of Mergers that Involve Multisided Platform Businesses Journal of Competition Law and Economics, 2008, 4(3)

A multisided platform serves as an intermediary for two or more groups of customers who are linked by indirect network effects. The new platform economics literature has found that multisided platforms are significant in many industries and that some standard economic results-such as the Lerner Index-do not apply to them, in material ways, without some significant modification to take linkages between the multiple sides into account. This article extends several key antitrust economics tools used for the analysis of mergers to situations in which one or more of the suppliers are multisided platforms. It shows that the application of traditional antitrust economics tools to mergers involving multisided platforms results in biases, the direction of which depends on the particular tool being used and other conditions. It also extends these tools to the analysis of the merger of multisided platforms. The techniques are illustrated with an application to an acquisition involving the multisided online advertising industry.

The Economics of the Online Advertising Industry Review of Network Economics, 2008, 7(3).

Online advertising has grown rapidly and accounts for about 7% of US advertising spending. It is projected to increase sharply as more consumers spend time online on their personal computers and as additional devices such as mobile phones and televisions are connected to the web thereby expanding the digital economyThis article describes how the online advertising industry works. The industry is populated by a number of multisided platforms that singly or in combination facilitate connecting advertisers to viewers; the new platform economics literature provides insights into their working. Search-based advertising platforms, the most well developed of these, has several interesting economic features that result from the combination of keyword bidding by advertisers and single-homing.

The Role of Cost in Determining When Firms Offer Bundles Journal of Industrial Economics, 2008, 56(1)

We model competitive bundling and tying, allowing for marginal cost savings from bundling, fixed costs of product offerings, and variation in customer preferences. Pure bundling can arise either because few people demand only one component or because, with high fixed costs, a single product efficiently satisfies customers with diverse tastes. We conclude by analyzing empirically the bundling of pain relievers with decongestants. The discount for the bundled product is large. We argue that our model provides a simpler, more compelling explanation for the size of the discount than the demand-centered approach to bundling by a monopolist. The results contribute to the antitrust economics literature on tying and bundling.

Economics and the Design of Competition Law W Collins, ed., Issues in Competition Law and Policy, Vol. 1, American Bar Association, August 2008

The courts have adopted implicitly and explicitly economic premises in developing rules towards business practices under the competition laws in the United States and the European Community. Courts in both jurisdictions hold the view that monopoly is not bad in and of itself because it can promote long-run innovation and investment. They have sought to determine, subject to relevant legislation, rules that can assess whether practices are harmful to competition generally or in particular factual circumstances. In some cases, these premises become modified over time as the result of economic learning; in other cases these premises do not have close counterparts in academic economics including antitrust economics. This article describes the economics that seems to underlie competition law; it draws contrasts and comparisons between the US and Europe. It also explores ways in which economists, authorities, and the courts can better question, and bring evidence to bear, on these economic premises.

Has the Pendulum Swung Too Far? Regulation, Winter 2007-2008. 30(4)

The prosecution of corporate fraud has garnered increasing attention in recent years. When guilt is certain, justice is easy. But prosecutors make mistakes in bringing cases – sometimes through carelessness, other times through zealotry – and judges and juries err in finding guilt. We argue that the balance struck by the prosecutorial and judicial system has tipped too far toward pursuing criminal indictments against companies and their executives. The result is harm to the general public, whose members depend on a dynamic, competitive economy for their welfare.

Designing the Right Product Offerings Sloan Management Review, Fall 2007

What choices should you offer your customers and which ones shouldn’t you? The answer to this question has profound consequences for business strategy, product design, marketing, and pricing, not to mention product adoption. Designing products and architecting product lines are the most difficult, expensive, and vital decisions that your business will make. They determine a significant part of your development, manufacturing, and distribution costs and most, if not all, of your sales to consumers. Yet, aside from glib anecdotes and vague “lessons learned,” existing management literature provides little guidance to managers and entrepreneurs. Product-offering architecture (POA) fills that void. This management concept is based on field research on product offerings, business models, and pricing in diverse industries and draws on theoretical work on bundling, versioning, and other aspects of product architecture. POA provides a unified framework for making informed decisions about consumer choice and optimal product design. The POA principles set forth here help enable companies to increase long-run profits, identify product innovations, and avoid disruptive competition. Product-offering architecture provides a framework and set of principles for assisting businesses in achieving that proper balance. Armed with both POA and the knowledge about your customers, your markets and the costs of your product, your business can design products and product lines that maximize its profits and provide customers with just the right amount of choice.

The Industrial Organization of Markets with Two-Sided Platforms. Competition Policy International, 2007, 3(1).

The new platform economics literature shows that many diverse industries are populated by businesses that operate two-sided platforms. These businesses serve distinct groups of customers who need each other in some way, and the core business of the two-sided platform is to provide a common (real or virtual) meeting place and to facilitate interactions between members of the two distinct customer groups. Platforms play an important role throughout the economy by minimizing transactions costs between entities that can benefit from getting together. In these businesses, pricing and other strategies are strongly affected by the indirect network effects between the two sides of the platform. As a matter of theory, for example, profit-maximizing prices may entail below-cost pricing to one set of customers over the long run and, as a matter of fact, many two-sided platforms charge one side prices that are below marginal cost and are in some cases negative. These and other aspects of two-sided platforms affect almost all aspects of antitrust analysis – from market definition, to the analysis of cartels, single-firm conduct, and efficiencies. This paper provides a brief introduction to the economics of two-sided platforms and the implications for antitrust economics analysis.

A Pragmatic Approach to Identifying and Analyzing Legitimate Tying Cases European Competition Law Annual 2003: What is an Abuse of a Dominant Position? Oxford: Hart Publishing, 2006.

There is a wide and growing consensus among antitrust scholars and practitioners in favor of a rule-of-reason approach to the assessment of tying by dominant firms. However, a rule-of-reason analysis may or may not produce socially optimal outcomes depending on how it is conducted in practice. A rule-of-reason test that places the same weight on factual evidence as on theoretical speculation is bound to cause as much harm as a rule that considers tying per se illegal: many socially beneficial ties will be found illegal. This paper discusses how to best implement a rule-of-reason approach and apply antitrust economics to these business practices. We consider two alternatives, a simple balancing test and a structured test, and conclude in favor of the structured test, as it is less likely to lead to costly mistakes.

An Empirical Analysis of Bundling and Tying: Over-the-Counter Pain Relief and Cold Medicines J. Choi, ed., Recent Developments in Antitrust: Theory and Evidence, Massachusetts: The MIT Press, 2006

We apply and extend the cost-based approach to bundling and tying under competition developed in Evans and Salinger (2004a) to over-the-counter pain relievers and cold medicines. We document that consumers pay much less for tablets with multiple ingredients than they would to buy tablets with each ingredient separately. We then decompose the sources of these savings into marginal cost savings and a component that reflects fixed costs of product offerings. The analysis both documents substantial economies of bundling and illustrates the sort of cost analysis that is necessary for understanding tying. The findings are relevant for applying antitrust economics to bundling and tying.

Tying: The Poster Child for Antitrust Modernization R. Hahn, ed., Antitrust Policy and Vertical Restraints, DC: Brookings Institution Press, 2006.

U.S. antitrust law has made enormous strides in the last twenty years towards becoming intellectually coherent and based on sound economic analysis. Economic analysis now has a preeminent place in evaluating and bringing cases, among enforcement agencies and in the courts. There is no serious debate that unilateral practices should be subjected to a per se test rather than a rule of reason analysis. Likewise, there is no debate among antitrust economists or legal scholars that tying should be removed from the genus of unilateral practices and placed in its own leper colony.
The time has therefore come to abandon the per se label and refocus the inquiry on the adverse economic effects, and the potential economic benefits, that the tie may have. The law of tie-ins will thus be brought into accord with the law applicable to all other allegedly anticompetitive economic arrangements, except those few horizontal or quasi-horizontal restraints that can be said to have no economic justification whatsoever. This change will rationalize rather than abandon tie – in doctrine as it is already applied. Modern antitrust analysis does not support the per se condemnation of tying or the Jefferson Parish test. Neither should modern antitrust law.

U.S. V. Microsoft: Did Consumers Win? Journal of Competition Law and Economics, 2005, 1(3)

U.S. v. Microsoft and the related state suit filed in 1998—a seminal digital economy case—appear finally to have concluded. In a unanimous en banc decision issued in late June 2004, the D.C. Circuit Court of Appeals rejected challenges to the remedies approved by the District Court in November 2002. The wave of follow-on private antitrust suits filed against Microsoft also appears to be subsiding. In this paper we review the remedies imposed in the United States, in terms of both their relationship to the violations found and their impact on consumer welfare. We conclude that the remedies addressed the violations ultimately found by the Court of Appeals (which were a subset of those found by the original district court and an even smaller subset of the violations alleged, both in court and in public discourse) and went beyond them in important ways. Thus, for those who believe that the courts were right in finding that some of Microsoft’s actions harmed competition, the constraints placed on its behavior and the active, ongoing oversight by the Court and the plaintiffs provide useful protection against a recurrence of such harm. For those who believe that Microsoft should not have been found liable because of insufficient evidence of harm to consumers, the remedies may be unnecessary, but they avoided the serious potential damage to consumer welfare that was likely to accompany the main alternative proposals. The remedies actually imposed appear to have struck a reasonable balance between protecting consumers against the types of actions found illegal and harming consumers by unnecessarily restricting Microsoft’s ability to compete.

The Effect of Regulatory Intervention in Two-Sided Markets: An Assessment of Interchange-Fee Capping in Australia Review of Network Economics, 2005, 4(4)

This paper contributes to the new literature on platform economics and to the role price balancing for platform businesses. Its findings are relevant for applying regulatory and antitrust economics to these businesses.The Reserve Bank of Australia reduced interchange fees by almost half thereby eliminating a significant source of revenue to issuers of credit cards. The purpose of this intervention was to align the prices of using various payment instruments with their social costs and thus reduce the use of cards, which the RBA viewed as a socially less efficient payment method than cash, checks, and PIN debit cards. The short-run result of this regulatory intervention has been the following: (1) Bank issuers have increased the fixed prices for cards and thereby recovered between 30 and 40 percent of the loss of interchange fee revenue; this fraction is likely to increase over time as cards renew and new solicitations go out. Bank issuers have not changed the per-transaction fees for cards much. (2) Merchants experienced a very small reduction in their costs. Both theory and limited empirical evidence suggest that the highly concentrated merchant sector in Australia has captured the reduction in interchange fees as profits and has not passed it on in the form of lower consumer prices. (3) The per-transaction price at the point of sale has not changed significantly. Merchants have not generally availed themselves of their right to surcharge card transactions and the per-transaction price faced by consumers from their card issuers has not changed much. Holding the number of cards fixed, the regulatory intervention has not altered prices in a way that could achieve the intent of the intervention. (4) There is relatively little evidence thus far that the intervention has in fact affected the volume of card transactions in Australia as intended by the regulation. (5) In the short-run, the effect of the regulation has been to transfer significant profits to the Australian merchant sector with that transfer being borne partly by bank issuers and partly by cardholders. (6) Since proprietary systems such as American Express were not subject to the pricing regulations and since American Express can enter into deals with banks to issue cards, banks have shifted volume from the regulated association systems to the unregulated proprietary systems.

Designing Antitrust Rules for Assessing Unilateral Practices: A Neo-Chicago Approach University of Chicago Law Review, 2005, 72(1)

This essay describes an approach for designing antitrust rules for assessing whether firms have engaged in anticompetitive unilateral practices that is based in part on the error-cost framework pioneered by Judge Easterbrook. We focus particularly on the role of economic theory and evidence in forming presumptions about the likelihood that unilateral business practices reduce welfare and on the implications of this role for the kinds of research that economists need to conduct concerning unilateral business practices. We then apply this approach to tying. Our approach towards designing legal rules proceeds in two steps. First, economic theory and empirical evidence are used to formulate explicitly a set of presumptions regarding the cost and likelihood of errors resulting from condemning welfare-increasing business practices or condoning welfare-reducing ones. Second, based on those presumptions, a legal rule that minimizes the cost of errors is selected. We will refer to this as a neo-Chicago approach, since it accepts the fundamental tenet of Chicago thinking that legal rules and legal outcomes can and should be assessed based on their efficiency properties, while also incorporating the learning of the Chicago and post-Chicago literatures in designing these rules. These rules provide guidance for the application of antitrust economics to practices.

Why Do Firms Bundle and Tie? Evidence from Competitive Markets and Implications for Tying Law Yale Journal on Regulation, 2005, 22(1)

Tying the sale of products that could be sold separately is common in competitive markets – from left and right shoes, to the sports and living sections of daily newspapers, to cars and radios. This paper presents a cost-based theory for why tying occurs in competitive markets and uses this theory to examine bundling and tying in pain relievers and cold medicines, foreign electrical plug adapters, and mid-sized automobile sedans. It shows that product-specific scale economies are needed to understand tying but that these scale economies might be hard to detect even when they are present. We draw two principle conclusions for tying doctrine. First, per se condemnation in its various manifestations is wrong as a matter of economics. Neither the Jefferson-Parish test in the United States nor the Hilti/Tetra-Pak approach in the EU is capable of screening anti-competitive from pro-competitive tying. Second, if it is hard to establish efficiencies when practices could not arise for anticompetitive reasons, it might also be hard to establish the efficiencies required by the rule of reason or per se approaches. Both approaches are therefore likely to result in the frequent condemnation of efficient tying – that is a high rate of false convictions. This paper contributes to the antitrust economics literature on bundling and tying.

The Economics of Interchange Fees and Their Regulation: An Overview MIT Sloan Working Paper No. 4548-05, May 2005

This essay surveys the economic literature on interchange fees, informed by the new platform economics literature, and the debate over whether interchange should be regulated and, if so, how. We consider, first, the operation of unitary payment systems, like American Express, in the context of the recent economic literature on two-sided markets, in which businesses cater to two interdependent groups of customers. The main focus is on the determination of price structure. We then discuss the basic economics of multi-party payment systems and the role of interchange in the operation of such systems under some standard, though unrealistic, simplifying assumptions. The key point of this discussion is that the interchange fee is not an ordinary price; its most direct effect is on price structure, not price level.

We then examine the implications for privately determined interchange fees of some of the relevant market imperfections that have been discussed in the economic literature. While some studies suggest that privately determined interchange fees are inefficiently high, others point to fees being inefficiently low. Moreover, there is a consensus among economists that, as a matter of theory, it is not possible to arrive, except by happenstance, at the socially optimal interchange fee through any regulatory system that considers only costs. This distinguishes the market imperfections at issue here for multi-party systems from the more familiar area of public utility regulation, where setting price equal to marginal cost is theoretically ideal.

Next, we consider the issues facing policy makers. Since there is so much uncertainty about the relation between privately and socially optimal interchange fees, the outcome of a policy debate can depend critically on who bears the burden of proof under whatever set of institutions and laws the deliberation takes place. There is no apparent basis in today’s economics – at a theoretical or empirical level – for concluding that it is generally possible to improve social welfare by a noticeable reduction in privately set interchange fees. Thus, if antitrust or other regulators had to show that such intervention would improve welfare, they could not do so. This, again, is quite unlike public utility regulation or many areas of antitrust including, in particular, ordinary cartels. By the same token, there is no basis in economics for concluding that the privately set interchange fee is just right. Thus, if card associations had to bear the burden of proof – for example, to obtain a comfort or clearance letter from authorities for engaging in presumptively illegal coordinated behavior – it would be difficult for them to demonstrate that they set socially optimal fees.

We take a pragmatic approach by suggesting two fact-based inquiries that we believe policymakers should undertake before intervening to affect interchange. First, policymakers should establish that there is a significant market failure that needs to be addressed. Second, policymakers should establish that it is possible to correct a serious market imperfection, assuming one exists, by whatever intervention they are considering (such as cost-based regulation of interchange fee levels) and thereby to increase social welfare significantly after taking into account other distortions that the intervention may create. We illustrate both of these points by examining the recent Australian experience. The insights from this paper contribute to the regulatory and antitrust economics of platform businesses more generally and the role of two-sided prices in platform economics.

Tying Under Article 82 EC and the Microsoft Decision: A Comment on Dolmans and Graf World Competition: Law and Economics Review, 2005, 28(1)

The recent article by Maurits Dolmans and Thomas Graf summarizes their views on the analytical framework adopted under EC tying law and applies this framework to the European Commission’s March 2004 decision in Microsoft. We appreciate the opportunity this article provides for engaging in a healthy debate about sound approaches towards tying practices and for examining the permissible limits of product design by dominant firms. Both have significant ramifications for the development of the Common Market, and the application of antitrust economics to tying.

The Changing Role of Economics in Competition Policy Decisions by the European Commission During the Monti Years Competition Policy International, 2005, 1(1)

This paper examines the evolution of the use of antitrust economics in EC competition policy matters and the reforms in the use of economics that occurred in the latter part of EC Competition Commissioner Mario Monti’s term (1999-2004). Under his predecessors, the use of economics had been steadily increasing for many years. The revolutionary reforms under Commissioner Monti were triggered when the Court of First Instance (CFI) voided, in quick succession, three merger prohibitions adopted by the European Commission. The CFI criticized the Commission for relying on unverified economic theories. The reforms rapidly had an impact on merger analysis at the Commission. It is unclear, however, whether the Commission will embrace the use of sound economic analysis for abuse of dominance inquiries in the absence of a clear mandate from the EC courts to do so.

Excessive Prices: Using Economics to Define Administrable Legal Rules Journal of Competition Law & Economics, 2005, 1(1)

This paper contributes to the antitrust economics of excessive prices by dominant firms. European competition laws condemn as ‘exploitative abuses’ the pricing policies of dominant firms that may result in a direct loss of consumer welfare. Article 82(a) of the EC Treaty, for example, expressly states that imposing ‘unfair’ prices on consumers by dominant suppliers constitutes an abuse. Several firms have been found to abuse their dominant positions by charging excessive prices in cases brought by the European Commission and the competition authorities of several Member States. Those cases show that the assessment of excessive pricing is subject to substantial conceptual and practical difficulties, and that any policy that seeks to detect and prohibit excessive prices is likely to yield incorrect predictions in numerous instances. In this Paper, we evaluate the pros and cons of alternative legal standards towards excessive pricing by explicitly considering the likelihood of false convictions/acquittals and the costs associated with those errors. We find that the legal standard that maximizes long-term consumer welfare given the information typically available to regulators would involve no ex post intervention on the pricing decisions of dominant firms. A possible exception to this general rule is discussed.

Software Patents and Open Source: The Battle Over Intellectual Property Rights Virginia Journal of Law & Technology, Summer 2004, 9(10)

In the wake of a series of court cases extending patents to software, open-source software proponents have proposed a number of arguments for limiting or even eliminating software patents. In particular, they claim that the U.S. Patent and Trademark Office has done a poor job of reviewing software patent applications, resulting in obvious, trivial patents. They also maintain that software patents hinder the standards setting process so important for high-technology industries and that patents will to lead to intellectual property rights “thickets” that slow down or stop the innovative process in the software industry. We evaluate these claims, examining relevant empirical evidence where available. While it is clear that problems exist with the patent-granting process, they do not rise to the level of justifying a ban on software patents. Instead, other reasonable – and far less drastic – measures are available. The USPTO has already begun reforms that should improve its software patent review process. As for patent thickets, theory suggests they could form in the software industry, but empirical evidence suggests that in fact they have not formed. Moreover, tools such as patent pools and cross-licensing that increase innovation sharing are available to limit the development of thickets. While the academic literature is still debating the link between patents and innovation, patents have been show to have some positive effects, including increased venture capital funding for small firms. In the end, reform is far more attractive than abolition because it retains the good while minimizing the bad.

The Antitrust Economics of Tying: A Farewell to Per Se Illegality Antitrust Bulletin, 2004, 49(1/2)

We describe the main features of U.S. and E.C. tying law and consider their recent evolution. We then review the economic literature on tying and summarize its main implications for the analysis of tying cases: First, recent advances in antitrust economics theory unambiguously endorse a rule-of-reason approach to tying such as that adopted by the D.C. Circuit Court of Appeals in Microsoft III. Second, there is no economic basis for a per se prohibition of tying. And third, the modified per se rule adopted by the U.S. Supreme Court in Jefferson Parish does not accurately screen pro-competitive from anticompetitive tying. Drawing on the findings of the economic models developed by the Chicago and post-Chicago Schools, we conclude by proposing a three-step test to implement rigorously a rule-of-reason analysis to tying cases.

Some Empirical Aspects of Multi-Sided Platform Industries Review of Network Economics, 2003, 2(3)

This paper makes an empirical contribution to the new platform economics literature. Multi-sided platform markets have two or more different groups of customers that businesses have to get and keep on board to succeed. These industries range from dating clubs (men and women), to video game consoles (game developers and users), to payment cards (cardholders and merchants), to operating system software (application developers and users). They include some of the most important industries in the economy. A survey of businesses in these industries shows that multi-sided platform businesses devise entry strategies to get multiple sides of the market on board and devise pricing, product, and other competitive strategies to keep multiple customer groups on a common platform that internalizes externalities across members of these groups.

Demand-Side Efficiencies in Merger Control World Competition Law and Economics Review, 2003, 26(2).

Firms may be able to create new and improved products as a result of merging. Sound antitrust economics shows that these “demand-side efficiencies” should be considered by competition authorities in considering whether to allow a merger. Unlike reductions in costs that merged firms may not pass on to consumers, new and better products necessarily make consumers better off. Moreover, the value of demand-side efficiencies can be quite large, as recent studies of improved products ranging from toilet paper to minivans has demonstrated. Of course, competition authorities should seek evidence that mergers will facilitate new and improved products and weigh these benefits against increased prices and other costs the merger may create. A review of European Union merger cases shows that the Commission needs to consider demand-side efficiencies, and provides further caution against making efficiencies an “offense” rather than a “defense.”

Has the Consumer Harm Standard Lost its Teeth? R. Hahn, ed., High-Stakes Antitrust – The Last Hurrah? Washington, DC: Brookings 2003

There appears to be universal agreement that antitrust policy should “protect competition, not competitors” and that consumer welfare is the fundamental standard for evaluating competitive effects. There is considerable debate, however, about how to implement those principles in practice when evaluating rule-of-reason antitrust claims under the Sherman Act. The choice of an appropriate consumer harm necessarily involves a tradeoff between the risk of being so lenient that firms think they can get away with anticompetitive behavior and the risk of being so strict that the courts condemn practices that help consumers and thereby stifle the very competitive process the antitrust laws seek to protect. There is no way to eliminate both risks, and the courts and ultimately society need to choose how to minimize the expected costs of the inevitable errors.

The Clinton Administration, in cases brought against Intel, Microsoft, and Visa/MasterCard, asked the courts to use a consumer harm standard that relied on an inference of harm to consumers from harm to competitors. In the two cases that went to trial and for which there is a complete record U.S. v. Microsoft and U.S. v. Visa U.S.A. et al. the district court accepted this approach. We explore two important issues in inferring consumer harm from competitor harm. The first is what preconditions must hold for it to be valid to make this inference. We show in this paper that courts in both Microsoft and Visa did not require Clinton Administration antitrust enforcers to establish critical preconditions for sound antitrust economics analysis. The second important issue is whether a showing of substantial harm to consumers should be required for liability. The courts can reduce errors by requiring evidence that the challenged practices have caused, or are likely to cause, substantial harm to consumers. The Microsoft and Visa cases both demonstrate that this is a realistic evidentiary hurdle that could have been required of the plaintiffs. There were many studies plaintiffs could have done to demonstrate significant effects on consumers if in fact there were such effects.

The Antitrust Economics of Multi-Sided Platform Markets Yale Journal on Regulation, 2003, 20(2).

“Two-sided” markets have two different groups of customers that businesses have to get on board to succeed – there is a “chicken-and-egg” problem that needs to be solved as the new platform economics literature shows. These industries range from dating clubs (men and women), to video game consoles (game developers and users), to credit cards (cardholders and merchants), and to operating system software (application developers and users). They include some of the most important industries in the economy.
Two-sided firms behave in ways that seem surprising from the vantage point of traditional industries, but in ways that seem like plain common sense once one understands the business problems they must solve. Prices do not and prices cannot follow marginal costs in each side of the market. Price levels, price structures, and investment strategies must optimize output by harvesting the indirect network effects available on both sides. By doing so, businesses in two-sided industries get both sides on board and solve the chicken-and-egg problem. There is no basis for asking regulators or antitrust enforcers to steer clear of these industries or to spend extra effort on them. The antitrust economics analysis of these industries, however should heed the economic principles that govern pricing and investment decisions in these industries.

Government Preferences for Promoting Open-Source Software: A Solution in Search of a Problem Michigan Telecommunications and Technology Law Review, 2003, 9(2)

Governments around the world are making or considering efforts to promote open-source software (typically produced by cooperatives of individuals) at the expense of proprietary software (generally sold by for-profit software developers). This article examines the economic basis for these kinds of government interventions in the market. It first provides some background on the software industry. The article discusses the industrial organization and performance of the proprietary software business and describes how the open-source movement produces and distributes software. It then surveys current government proposals and initiatives to support open-source software and examines whether there is a significant market failure that would justify such intervention in the software industry. The article concludes that the software industry has performed remarkably well over the past 20 years in the absence of government intervention. There is no evidence of any significant market failures in the provision of commercial software.

The New Trustbusters—Brussels and Washington May Part Ways Foreign Affairs, January/February 2002, 81(1).

The European Commission’s rejection of the GE/Honeywell merger in July 2001, a deal that the United States Department of Justice had already approved, highlights the dangers that multinational companies face as antitrust laws proliferate around the globe. Although American and European regulators generally agree on enforcement actions, the GE/Honeywell case revealed some important differences in substantive and procedural approaches to antitrust enforcement and the application of antitrust economics. U.S. antitrust laws are enforced in the courts, where the burden generally falls to the enforcement agencies (or other plaintiffs) to demonstrate anti-competitive harm. U.S. courts have espoused several core principles that guide antitrust enforcement in the United States. First, the sole purpose of antitrust laws is to protect consumers. Second, antitrust laws should not be used to protect businesses from competition. Third, unfettered competition generally benefits consumers even when a single firm captures most or all of the market. In Europe, by contrast, the Commission acts as prosecutor, judge, and jury. The process gives greater voice to competitors and limits the ability of companies to respond to allegations presented by their rivals. In addition, the Commission, which employs fewer economists than its counterparts in the U.S., has embraced economic theories such as “conglomerate effects” that protect competitors at the expense of consumers. As multilateral discussions about international competition policy commence, the United States should bare in mind two points. First, the conflicts between the United States and Europe over antitrust enforcement are not about the protection of national interests. Second, the European Commission has generally been a progressive force in the EU. However, as the Commission becomes a more aggressive regulator, more disputes along the lines of GE/Honeywell are likely to occur, and the United States must continue to emphasize the core principles of antitrust policy.

Class Certification, the Merits, and Expert Evidence George Mason Law Review, 2002, 11(1).

What standards should the courts use to determine whether or not to certify the class proposed by the plaintiffs? The answer to this question has ramifications for many areas of the law in which class actions have become an oft-used method for pursuing claims against alleged wrongdoers, including mass torts, securities, employment discrimination, and antitrust. This Article discusses two related aspects of the class-certification standard that determine where that standard lies on the strictness spectrum. One concerns whether evidence that bears on the merits of the claims should be walled off from the analysis of the class certification questions. The other deals with whether the courts should weigh expert evidence on the class certification requirements.

Class Certification and the Substantive Merits Duke Law Journal, 2002, 51(4).

The United States Supreme Court, in its 1974 decision, Eisen v. Carlisle & Jacquelin, held that judges should not conduct a preliminary inquiry into the merits of a suit as part of the decision whether to certify a class. The federal courts ever since have struggled to honor Eisen’s bar while still conducting a credible certification analysis – a task complicated by the fact that merits-related factors are often relevant to Rule 23 requirements. The result is a muddled body of case law in which courts tend to certify generously and avoid inquiring into the merits of substantive issues even when those issues are crucial to the certification analysis. This approach creates high social costs by inviting frivolous and weak class action suits. This article argues that the Eisen rule should be abolished. Trial judges should assess competing evidence, not just allegations, and evaluate case strength, whenever the specific requirements of Rule 23 call for an inquiry into merits-related factors. For example, a party relying on a substantive issue to show commonality or predominance should have to demonstrate a significant likelihood of success on the issue. The article goes further and recommends that judges always conduct a preliminary inquiry into the merits before certifying a class, whether or not merits-related factors are directly relevant to a specific requirement of Rule 23.

The article first reviews the history of the Eisen rule and surveys the state of current law, before turning to a policy analysis of the rule’s effects. The policy discussion criticizes the traditional arguments and then offers a systematic evaluation of error and process costs. Error costs must be evaluated in light of the extremely high probability of post-certification settlement. Eisen’s liberal approach creates a substantial risk of erroneous certification grants that cannot be corrected later when a case settles. This risk coupled with the high likelihood of settlement invites frivolous and weak class action suits. The result is a serious error cost problem with regard to certification grants. At the same time, requiring a merits review at the certification stage increases the risk of erroneous certification denials. But for several reasons this risk is not likely to increase dramatically, and the associated costs are not likely to be large. The net result therefore supports a merits inquiry, and this conclusion remains valid even after process costs are added to the policy mix.

Some Economic Aspects of Antitrust Analysis in Dynamically Competitive Industries A. Jaffe, J. Lerner and S. Stern, eds., Innovation Policy and the Economy, Vol. 2, Cambridge, MA: MIT Press, 2002.

Competition in many important industries centers on investment in intellectual property. Firms engage in dynamic, Schumpeterian competition for the market, through sequential winner-take-all races to produce drastic innovations, rather than through static price/output competition in the market. Sound antitrust economic analysis of such industries requires explicit consideration of dynamic competition. Most leading firms in these dynamically competitive industries have considerable short-run market power, for instance, but ignoring their vulnerability to drastic innovation may yield misleading conclusions. Similarly, conventional tests for predation cannot discriminate between practices that increase or decrease consumer welfare in winner-take-all industries. Finally, innovation in dynamically competitive industries often involves enhancing feature sets; there is no sound economic basis for treating such enhancements as per se illegal ties.

Clinton’s Brave New Business World Regulation, Fall 2001, 24(3).

An aggressive effort to use antitrust law to regulate the economy took place almost unnoticed in the final four years of the Clinton presidency. Highlighted by federal charges and assertions made in antitrust actions against Microsoft, Intel, American Airlines, Visa, and MasterCard, the government appeared to assume that successful companies engaging in aggressive business practices were guilty of antitrust violations unless they proved themselves innocent. The government also took the position that business practices could be unlawful even if there was no specific evidence that the practices harmed consumers.
Given that perspective, federal enforcement agencies under Clinton sought the restructuring and ongoing court-administered regulation of several critical industries. The new Bush administration, which inherits many still-open Clinton antitrust suits, must now weigh the virtues of policy continuity against the possibility that the courts will defer to a level of agency intervention that runs counter to Bush’s business philosophy.

An Analysis of the Government’s Economic Case in U.S. V. Microsoft Antitrust Bulletin, Summer 2001.

The classic digital economy case, U.S. v. Microsoft, was mainly about the “browser war” between Microsoft and Netscape. From late 1995 to June 2000, when the court issued its final judgment, Microsoft’s Web browser (IE) went from being the choice of less than 10 percent of Web users to about 70 percent, while Netscape Navigator fell from about 80 percent to under 30 percent. The government alleged that Microsoft accomplished this shift by anticompetitive actions, including tying its browser to its dominant operating system and various predatory and exclusionary acts. At times the government appeared to brand virtually of Microsoft’s actions – including its large investment in improved quality and its “zero price” – as anticompetitive. According to the government, Microsoft feared that Navigator (and Sun’s Java) would attract application developers, thus lowering the “applications barrier to entry” that protects Microsoft’s monopoly in the “market” for operating systems for Intel-compatible PCs.

The antitrust economics analysis presented by the government was internally inconsistent, based on unsound economic theory, and conflicted with the facts. The government refused to acknowledge that the relevant antitrust market was software platforms – not operating systems narrowly defined – even though its case was mainly about Microsoft’s efforts to ensure that Windows would remain the leading platform. That conceptual error forced the government to depend on a series of economic arguments whose logic hinged on software platforms not being a relevant market. In analyzing predation, the government did not acknowledge that platform competition gave Microsoft legitimate reasons to invest in the development and distribution of IE. In analyzing tying, the government refused to accept that Web-browsing capabilities logically belong in software platforms, even though all platform vendors, including IBM and Apple, also have included browsers.

In the end, the court found a relatively narrow set of actions to be anticompetitive, but nonetheless concluded that Microsoft had caused substantial harm to competition in violation of the Sherman Act. But there was no evidence in the record that the subset of actions found unlawful had a material effect on Netscape, let alone on consumers or competition. For example, it was not unlawful for Microsoft to invest $100 million per year in improving IE or to integrate it into Windows without separate charge. The tie occurred only when Microsoft refused to allow computer vendors to disable access to IE. But there was no evidence of significant demand for a browser-disabled operating system. Similarly, it was legal to get AOL to agree to use IE components in the access software distributed to all its members, but not to limit the ability of AOL and other service providers to give copies of Navigator to members who asked for it. But there was no evidence that the restrictions in practice limited AOL’s distribution of Navigator or that AOL had an interest in promoting alternative browsers.

An Estimated Model of Entrepreneurial Choice Under Liquidity Constraints Journal of Political Economy, 1989, 97(4)

Is the capital function distinct from the entrepreneurial function in modern economies? Or does a person have to be wealthy before he or she can start a business? Knight and Schumpeter held different views on the answer to this question. Our empirical findings side with Knight: Liquidity constraints bind, and a would-be entrepreneur must bear most of the risk inherent in his venture. The reasoning is roughly this: The data show that wealthier people are more inclined to become entrepreneurs. In principle, this could be so because the wealthy tend to make better entrepreneurs, but the data reject this explanation. Instead, the data point to liquidity constraints: capital is essential for starting a business, and liquidity constraints tend to exclude those with insufficient funds at their disposal.

Some Empirical Aspects of Entrepreneurship American Economic Review, 1989, 79(3)

This paper examines the process of selection into self-employment over the life cycle and the determinants of self-employment earnings using data from the National Longitudinal Survey of Young Men for 1966-1981 and the Current Population Surveys for 1968-1987.

Tests of Alternative Theories of Firm Growth Journal of Political Economy, 1987, 95(4)

This study examines the relationships among firm growth, firm size, and firm age for a sample of manufacturing firms between 1976 and 1982. Firm growth is found to decrease with firm age and firm size. These findings are robust to alternative assumptions concerning the effects of sample censoring and the functional form of the growth relationship. The inverse growth-age relationship is consistent with a theory of firm learning proposed by Jovanovic while the inverse growth-size relationship is inconsistent with a number of theories that assume or imply Gibrat’s law.

The Relationship Between Firm Growth, Size and Age- Estimates for 100 Manufacturing Industries Journal of Industrial Economics, June 1987

The study uses a sample of all firms operating in 100 manufacturing industries to examine some aspects of firm dynamics. It finds that firm growth, the variability of firm growth, and the probability that a firm will fail decrease with firm age. It also finds that firm growth decreases at a diminishing rate with firm size even after controlling for the exit of slow-growing firms from the sample. Gibrat’s Law therefore fails although the severity of the failure decreases with firm size.

The Differential Effect of Regulation Across Plant Size: Comment on Pashigian Journal of Law and Economics, 1986, 29(1)

I show that the conclusion of a recent article by B. Peter Pashigian, that environmental regulatory costs have fallen more heavily on smaller than on larger businesses, is not supported by the statistical evidence he presents and is contradicted by data on the actual distribution of pollution abatement costs across plant and firm sizes. Section II shows that average pollution abatement costs per employee are substantially smaller for smaller plants and firms than for larger plants and firms. Section III shows that Pashigian’s statistical analysis does not support his conclusion that small businesses have borne the brunt of environmental regulations. Section IV presents conclusions.

The Economics of Regulatory Tiering RAND Journal of Economics, 1985, 16(3)

Many regulations impose lighter requirements on smaller firms than on larger firms. Such differential treatment is known as tiering. This article presents a framework for analyzing tiering. It assumes that regulators use taxes to reduce negative externalities, that the collection of taxes imposes administrative costs on the taxed firm and the regulatory agency, and that firm heterogeneity arises because firms have differential access to a scarce factor. The scarce factor is taken as managerial ability, although this identity is not essential for any of the results obtained. The article shows that when there are scale economies in regulatory compliance, tiered regulations may be Pareto-superior to untiered regulations under certain circumstances. It then compares existing tiering schemes with Pareto-efficient tiering schemes and suggests possible improvements in existing tiering schemes.

A Test for Subadditivity of the Cost Function with an Application to the Bell System American Economic Review, September 1984

This article proposes a new test of necessary conditions for natural monopoly that does not require global information on firm cost functions. Our test does not require the extrapolation of estimated cost functions well outside the range of the available data that are required in tests currently proposed in the literature.

The Audience Revenue Relationship for Local Broadcast Stations Bell Journal of Economics, 1980, 11(2)

Econometric analysis of television station revenue is undertaken to help assess the effects of changing cable television regulations on broadcast stations. Revenue is closely related to audience size and characteristics. Audience value depends upon its location relative to the station and differs according to time of day. It also differs between independent and affiliated stations and between UHF and VHF stations. To assess the effects of cable systems accurately, regulators need estimates of audience diversion by geographic location and by time of day. Independents, affiliates, UHF stations, and VHF stations will be differently affected by given patterns of audience diversion.