PART I: Dr. Hal Singer on How to Best Regulate Big Tech

GJIA: Both the United States and the European Union have been increasingly scrutinizing technology giants. Most recently, the House of Representatives Antitrust Subcommittee accused Amazon, Google, Facebook, and Apple of abusing their monopoly power. What practices are these companies conducting that prompt these concerns?

HS: There are a whole host of practices that are prompting the concerns. Let us focus on what I think is at the core of the complaint; it is two strategies that go hand in hand. One is the appropriation of ‘edge’ ideas. This is when a platform provider uses its privilege as a platform because it can observe the popularity of, say, new merchandise, if we are talking about Amazon, or for Google, different websites. [A platform] gets to observe that popularity and steal the best ideas on the internet to introduce its own branded clone. So in the Amazon space, that would be when Amazon goes into a private label. They are typically copying a best-selling product by an independent. For Google, the appropriation takes the form of identifying a website, like a local search review, and then copying that and turning it into their own affiliated local search review. That is step one: appropriation.

Step two is discrimination. Discrimination always flows from appropriation. It almost would not make sense for platform providers just to appropriate, because if all they did was just dip their toe into the edge, like if Amazon makes its own private label, then that new device that Amazon created would not get any attention from Amazon’s customers. So why do it in the first place? The answer is that not only do [platforms] appropriate, but they then steer searches to their affiliated clone. The fancy word that economists and the Report use for that is self-preferencing. Self-preferencing means in search, rather than allowing the kind of organic results that brings you to the best merchandise or the best places on the web, they are raising their own products in search results in a way that undermines these organic best results and instead allows them to put weight on their own affiliated services. 

That to me is the core of the conduct that the House is complaining about. There is a lot more to it than that. To me, if I did pick one type of conduct that the House is challenging, it is that two-part strategy: appropriation and self-preferencing.

As a result of this sort of conduct, to what extent have technology giants been able to erode competition or harm third party vendors?

Well, they have eroded it in the sense that we do not have a level playing field any longer. So if you were once an independent, you started to do well in searches, your product took off, and then Amazon copies it and starts steering the searches to its own clone. You are going to lose, and you might lose so much that you might actually go out of business. In the very short run, if we close our eyes to the long-run effects, it is difficult for the traditional antitrust lens to detect harm.

The Amazon defenders, who I affectionately call Amazombies, like to say, “what is the harm, Hal? Joe is buying it at .00 and now he is paying .99 for the Amazon clone. Who cares?” There is no price effect. There is no output effect. The way that the harm manifests itself is only in the long term. In the long term, if there aren’t enough independents, if these merchants (merchants in the Amazon edges, websites in the edges of Google’s platform, etc.) see that there is really no hope in competing and that the landscape is so unlevel, they might decide to throw in the towel in future periods. In fact, there is academic research that suggests this is happening at least on the Amazon portfolio. We know merchants whose space has been invaded tend not to show up in future periods. The problem there from a consumer perspective and from a traditional economic welfare lens is that we know that some of the most important contributions to consumer welfare come in the form of new entry and new product innovation that comes from independents. 

Google and Amazon are breaking that innovative cycle that would otherwise happen organically and naturally. That is the harm that we are concerned about. The primary harm is innovation harm. We are worried that in future periods there is going to be less innovation, less investment, and consumers as a result are going to be deprived of some of the best ideas that come about from independents.

Much of the arguments made by tech firms and part of the decline in antitrust cases over the past couple of decades is that larger firms are able to generate efficiency, which thereby lowers prices for consumers. In your view, this argument does not necessarily pan out because of the long-term harms?

Correct. I do not think that a plaintiff builds its case on short-term price effects. Suppose that instead, the focus was long-term innovation. Google would come back and say, “that is all fine, but it is very speculative. What we want you to focus on, Your Honor, is this lower price in the instance period.”

I think that [tech firms] would actually have to show that the price is being lowered or that there is some kind of short-run benefit to offset the long-term innovation harm. On the Google front, when it comes to self-preferencing and search, there have been studies that have shown that Google is actually degrading the quality of search by injecting its own affiliated, inferior properties at the top of the rank. The way that economists have figured this out (this was a piece co-authored by some Yelp data scientists) is that they found that the click-through rate–which as the name suggests is how often users click through the links after they are served up by Google–falls when Google feeds you its affiliated properties. The click-through rates increase when Google is tricked into reverting back to its organic algorithm. This is a long way of saying that I actually think that there are short-term harms. They are just not price harms. We have a short-term quality degradation. The more important harm is this innovation harm. We will ultimately see a judge engage in that balancing, and it is not going to be easy.

A lot of people like you are also concerned about these sorts of harms, which is why the House subcommittee and the EU commissioner have suggested divesting certain operations from the firm’s main line of business to preserve competition. Do you believe breaking up these big tech firms is necessary to preserve competition?

It is not technically necessary because there is a less invasive approach that would get at the same outcome. I know that is probably going to upset all sides when I say that, but let me see if I can do this justice. Would divestiture solve the problem? Yes. If Google is giving preference to its own search properties and Amazon is giving preferences to its own merchandise, and if you forced those platforms to spin off their edge properties so that some other company held it, you would solve the problem.

But, the way that you phrased the question was a trick. As someone who gets deposed for a living, I cannot help picking out what you said: “Is it necessary?” It is not technically necessary to the extent that you can solve it with a non-discrimination regime. Right now, there is a big controversy in policy circles as to whether or not a non-discrimination regime on its own would work. But what I have in mind and what the House-majority Report picked up as their second remedy is the idea that Google and Amazon and these other vertically-integrated platforms would be subjected to a non-discrimination regime.

In layman’s terms, a non-discrimination regime means if an independent felt that it had been discriminated against in carriage either by Google or Amazon, it could lodge a discrimination complaint in front of some neutral third-party factfinder like an administrative law judge. That judge could make a determination as to whether or not the carriage or the treatment was in fact motivated for discriminatory reasons. If so, the judge would come up with the proper relief.

To be clear, right now it is legal for these tech companies to discriminate against different vendors, or is this a legal grey area?

That is the million-dollar question, right? The Department of Justice (DOJ) complaint did have a few paragraphs related to self-preferencing in search. If you ask someone at the DOJ, they might tell you that they actually think it is illegal, and that it is in violation of antitrust laws. But since it has been going on for over a decade, I am sure Google is acting as if it is legal until proven otherwise, so they are just going to continue to do it.

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This transcript has been lightly edited for clarity and length. 

Dr. Hal J. Singer is a managing director at Econ One Research, a senior fellow at the George Washington Institute of Public Policy, and an adjunct professor at Georgetown’s McDonough School of Business. He is a co-author of the e-book The Need for Speed: A New Framework for Telecommunications Policy for the 21st Century (Brookings Press 2013) and co-author of the book Broadband in Europe: How Brussels Can Wire the Information Society (Kluwer/Springer Press 2005). Dr. Singer has testified before Congress and has been widely cited by courts and regulatory agencies, including the Federal Communications Commission, the Federal Trade Commission, and the Department of Justice. His Twitter handle is @HalSinger.