Geoffrey Manne, Senior Adjunct Fellow

Today, it was reported that the Justice Department plans to sue Apple and five of the largest publishers for allegedly colluding to raise prices on electronic books. The following statement can be attributed to Geoffrey Manne, Senior Adjunct Fellow at TechFreedom:

Antitrust regulators all too often forget that the most important innovations are frequently not in technology but in business models—and that disruptive media consumption technologies like the Kindle generally force re-thinking of established models for producing, and pricing, media content. Amazon's early dominance of the e-book market prompted genuine concern about how to fund book publishers, authors, editors and all the other people who bring books to consumers. So it's hardly surprising that publishers were eager to negotiate a new pricing model for their content and found Apple a willing partner. Apple’s tablet now threatens Amazon’s market power in the e-reader market, in part because Apple enlisted publishers with a favorable pricing model.

To assess the competitive effects of this pricing scheme in the e-book (content) market without considering the competitive effects in the e-reader (platform) market is a mistake. It would be an even graver mistake to focus on market power at any given moment rather than on the overall dynamism of the industry. While Amazon pioneered the e-reader category, it now faces stiff competition not just from Apple but from Google, too—competition that will continue to transform both the platform and content markets in unpredictable ways. And as with other antitrust interventions in dynamic technology markets, this one will likely be moot before a court can fashion a remedy.

The Department of Justice should remember the caution of the Nobel Laureate Ronald Coase forty years ago: "If an economist finds something . . . that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of un-understandable practices tends to be very large, and the reliance on a monopoly explanation, frequent”—and frequently wrong.

Manne is available for further comment at media@techfreedom.org.

Back in September, the Senate Judiciary Committee's Antitrust Subcommittee held a hearing on "The Power of Google: Serving Consumers or Threatening Competition?" Given the harsh questioning from the Subcommittee's Chairman Herb Kohl (D-WI) and Ranking Member Mike Lee (R-UT), no one should have been surprised by the letter they sent yesterday to the Federal Trade Commission asking for a “thorough investigation” of the company. At least this time the danger is somewhat limited: by calling for the FTC to investigate Google, the senators are thus urging the agency to do . . . exactly what it's already doing.

So one must wonder about the real aim of the letter. Unfortunately, the goal does not appear to be to offer an objective appraisal of the complex issues intended to be addressed at the hearing. That's disappointing (though hardly surprising) and underscores what we noted at the time of the hearing: There's something backward about seeing a company hauled before a hostile congressional panel and asked to defend itself, rather than its self-appointed prosecutors being asked to defend their case.

Senators Kohl and Lee insist that they take no position on the legality of Google’s actions, but their lopsided characterization of the issues in the letter—and the fact that the FTC is already doing what they purport to desire as the sole outcome of the letter!—leaves little room for doubt about their aim: to put political pressure on the FTC not merely to investigate, but to reach a particular conclusion and bring a case in court (or simply to ratchet up public pressure from its bully pulpit).

In advance of today's Senate Judiciary hearing, "The Power of Google: Serving Consumers or Threatening Competition?," we've assembled a list of fallacies you're likely to hear, either explicitly or implicitly:

1. Competitors, not Competition.  Antitrust protects consumer welfare: competition, not competitors.  Competitors complain because a practice hurts them, but antitrust asks only whether a practice actually hurts consumers. The two are rarely the same.
2. Big Is Bad. Being big ("success") isn't illegal.  Market share doesn't necessarily create market power.  And even where market power does exist, antitrust punishes only its abuse.
3. Burden-Shifting. Google, like any defendant, is presumed innocent until proven guilty.  So Google's critics bear the burden of proving both that Google has market power and that it has abused that power to the detriment of consumers.  Yet, ironically, it's Google at the table defending itself rather than the antitrust agencies explaining their concerns.
4. Ignoring Error Costs. The faster technology moves, the greater the risk of a "false positive" and the more likely "false negatives" are to be mooted by disruptive innovation that unseats incumbents.  Thus, error costs counsel caution.
5. Waving the Magic Wand.  Google's critics often blithely assume that Google is "smart enough to figure it out" when it comes to implementing, or coping with, a wide range of proposed remedies.  But antitrust remedies, like all regulation, must be grounded in technological reality, and we must be realistic about real-world trade-offs.
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