(as of November 2021)
Pricing in the Information Age
The implications of new pricing technologies for antitrust and rate regulation are a major ongoing focus of my work. I kicked off my work in this area with Big Data, Price Discrimination, and Antitrust (Hastings L.J. 2017), in which I argued that the information age would bring personalized pricing—using data to tailor prices to individual consumer willingness to pay—within reach of many firms. I showed that personalized pricing, when taken to extremes, necessarily impoverishes consumers, and outlined a number of policy options for addressing the threat of personalized pricing to consumer welfare. These options were: (1) to use enhanced antitrust enforcement to offset personalized-pricing-driven losses to consumers; (2) to prohibit personalized pricing entirely; or, (3) to regulate the personalized prices charged by firms to achieve a more just distribution of wealth. This article has met with some success globally at establishing the terms of the debate over personalized pricing.
In “The Irrelevance of Concentration Levels to the Question Whether the FTC Should More Aggressively Enforce the Antitrust Laws” and “How Algorithmic and Data-Driven Pricing Exacerbate The Consumer Harm Associated with Market Power and Give the FTC a Mandate to More Vigorously Enforce the Antitrust Laws”, two comments I filed with the Federal Trade Commission based on remarks I delivered at the Commission’s Hearings on Competition and Consumer Protection in the 21st Century in fall 2018, I made the case that the Commission should follow the first of the three approaches that I proposed in my big data article.
In Personalized Pricing as Monopolization (Conn. L. Rev. 2019), I showed how antitrust enforcers and the courts could interpret Section 2 of the Sherman Act to take the second approach, that of banning personalized pricing entirely. The key to the argument was recognizing that the steps that firms must take to prevent customers who receive goods at low personalized prices from reselling the goods to those charged high personalized prices amount to anticompetitive conduct designed to prevent resellers from competing with the firm.
In Personalizing Prices to Redistribute Wealth in Antitrust and Public Utility Rate Regulation, 2021 Wis. L. Rev. ___ (2021) (forthcoming), I showed how antitrust enforcers and public utility rate regulators could take the third approach, that of regulating the personalized prices charged by firms to achieve a more just distribution of wealth, without enforcers or regulators exceeding their statutory mandates. I also provided conditions under which compelling the personalizing of lower prices to consumers is efficient. The broad leeway in picking antitrust remedies to maximize consumer welfare that is traditionally given enforcers by courts would make such regulated personalized pricing a permissible antitrust remedy. And rate regulators’ long history of using their mandates to redistribute wealth between different groups of consumers in a given market supports their use of personalized pricing to redistribute wealth as well.
In The Efficient Queue and the Case against Surge Pricing,105 Iowa L. Rev. 1759 (2020) (which appeared under the title “The Efficient Queue and the Case against Dynamic Pricing” due to a publisher’s error), I turned my attention to a related form of data-driven pricing: surge pricing, in which firms use data on shifts in demand along with digital pricing systems to raise prices instantaneously in response to surges in demand. Surge pricing can be very profitable because it takes place faster than competitors are able to increase output in response to the surge in demand, and therefore faster than competitors are able to compete prices back down.
I showed that, contrary to the claims of the increasing number of businesses, from Uber to Disney World, that engage in the practice, surge pricing is not necessary to create an incentive for the market to increase output in response to surges in demand. In the information age, selling out of inventory provides just as powerful a signal to the market to produce more. I argued that surge pricing is akin to price fixing in that, like price fixing, it enhances the ability of firms to exploit pre-existing market power—power created by shortages incident to demand surges in the case of surge pricing and power created by tacit collusion in the case of price fixing. It follows that the antitrust laws, which categorically prohibit price fixing, can prohibit surge pricing as well.
In a series of academic essays and Op-Eds, I have applied this basic idea, that selling out in the information age is no less efficient than surge pricing, to a broad range of contexts, including price gouging (“Toward a Per Se Rule against Price Gouging,” CPI Antitrust Chron., September 2020, at 49), congestion pricing of vehicular access to city streets (“Congestion Pricing Is Class Warfare. Here’s a Better Idea,” OZY, March 31, 2019), inflation during the pandemic (“The Economics of Shortages,” Law and Political Economy Blog, June 2, 2020—appearing with “The Hidden Shortages of the Market Economy,” Law and Political Economy Blog, June 3, 2020, which provided additional background on the theory) and electricity prices in Texas (“What Those Shocking Texas Power Bills Have in Common with Uber Surges, Broadway Tickets, and Airfare: It’s called marginal-cost pricing, and it isn’t just a red-state problem,” Slate, February 25, 2021).
Pricing remains an active area of interest for me. In Using Price Regulation Instead of Competition to Reduce Prices after Patents Expire (SSRN working paper), I argue that it is a mistake to try to use competition policy, rather than direct price regulation, to drive down prices because competition is an inherently wasteful activity, involving duplication of facilities by numerous small firms, and because competition is itself always imperfect, tends to monopoly, and therefore requires constant supervision. The costs exceed the benefits only when competition is deployed to promote innovation, rather than lower prices. It follows, I argue, that patent law makes a fundamental mistake when it assumes that competition will drive down the prices of patented goods once the patents expire. I make the case that Congress should strengthen the patent laws by empowering the Patent & Trademark Office to dictate lower prices for off-patent goods in cases in which competition fails to materialize and prices therefore remain high.
The key to all of my pricing work is a distinction between inframarginal and marginal buyers and sellers. Inframarginal buyers and sellers place divergent values on the good or service being traded and are therefore willing to transact at a range of prices, whereas marginal buyers and sellers place about the same value on the good or service and so can only transact at a unique price. It follows that it is possible to change the prices at which inframarginal buyers and sellers transact—and hence the distribution of the gains from trade between them—without discouraging any transactions and therefore without reducing the efficiency of the market. The basic move in all of my pricing work is to show that the information age makes it possible to alter the prices at which inframarginal buyers and sellers do business without altering the unique prices at which marginal buyers are able to transact. This ensures that price changes designed to redistribute wealth between inframarginal buyers and sellers do not preclude transactions between marginal buyers and sellers and so have no adverse effect on efficiency.
The idea that changing inframarginal prices without changing the marginal price can redistribute wealth without reducing efficiency can be traced back to the work of the first law and economics movement a century ago, but has played a minor role in debates in recent decades. An important focus of my research over the next few years is further to develop this idea, which I am calling “inframarginalism,” and apply it to new corners of the law.
The Radical Consumer Welfare Standard & Corporate Law
In addition to serving as the theoretical foundation of my work on information-age pricing, inframarginalism has also been the inspiration behind my engagement with antitrust’s consumer welfare standard. In recent years, that standard, which requires antitrust enforcers to apply the antitrust laws to the end of preventing harm to consumers, has come under attack from progressive activists, who argue that the standard unjustly ignores the interests of other groups, including workers and vulnerable suppliers.
In two papers, I have argued that while the consumer welfare standard does leave out other groups, its radicalism cannot be questioned, because it openly privileges redistribution of wealth over efficiency, requiring that enforcers condemn conduct that reduces the wealth of consumers even if doing so would be inefficient. I have explored the implications of the consumer welfare standard, so conceived as a radical platform for redistribution, for corporate governance, which has traditionally put the interests of shareholders before those of consumers. And, in a third paper, I have tried to recharacterize the problem of exploitation of monopoly power as a problem of imbalance of power in corporate governance between all of the counterparties of the firm, leading some to demand a larger share of the gains from trade at the expense of others.
In The Antitrust Duty to Charge Low Prices (Cardozo L. Rev. 2018), I argued that antitrust enforcers have failed to take the explicit embrace of redistribution embodied in the consumer welfare standard to its logical conclusion because they have used it to roll back old antitrust rules that ultimately harmed consumers but not to impose new antitrust rules that would benefit consumers. I argued that one new consumer-beneficial rule that enforcers could try to get into law would be an affirmative duty in firms to charge low, at-cost prices and thereby to allow consumers to enjoy all of the gains from trade, save whatever markup is necessary to make firms continue to be willing to transact. Thus antitrust could in effect mandate a redistribution of wealth from inframarginal sellers to inframarginal buyers. Consistent with the consumer welfare standard’s preference for distribution over efficiency, I did not treat any harm to efficiency that might result from low prices as a reason to reject out of hand a duty to charge low prices. But I did argue that the duty should be enforced with nominal damages only, so that firms that cannot charge at-cost prices without reducing their output and therefore efficiency would have the option to violate the rule without facing serious consequences. The moral force of the law would, I argued, induce some firms that could efficiently comply with the rule to do so, leaving consumers at least marginally better off.
In The Antitrust Case for Consumer Primacy in Corporate Governance (UC Irvine L. Rev. 2020), I argued that courts could use recognition of an antitrust duty to charge low prices to impose a duty on corporate boards to minimize profits rather than to maximize them, as some believe that boards have a duty to do today. The reason I gave was that corporate law is state law, and hence subordinate to the federal statutes that constitute the antitrust laws. Here I leveraged inframarginalist theory to point out that profit minimization need preclude no transaction and hence do no harm to efficiency because profits—in the economic rather than accounting sense—are not strictly necessary to make firms ready, willing, and able to produce. Profits are the share of the gains from trade appropriated by inframarginal sellers. An antitrust duty to charge low prices, remade into a duty of the corporate board, would require the board to find ways to break the link between inframarginal prices and the marginal price, to the end of delivering as much of the gains from trade to consumers and as little as possible to shareholders, save the minimum necessary to reward shareholders for their willingness to invest. As personalized pricing becomes more sophisticated, it will, of course, become easier for corporate boards to break that link.
In Antitrust by Interior Means, in The Intersections between Competition Law and Corporate Law and Finance (Cambridge Univ. Press 2021) (forthcoming), I am attempting to take my encounter with corporate law further, by recharacterizing the problem of exploitation of monopoly power as a problem of imbalance of power over firm governance between the various counterparties of the firm. I show that a monopolist will not exploit its power over the market in which the monopolist does business with a particular counterparty—consumers, say—unless another counterparty of the firm has more power over the governance of the firm than do any of the others. If no counterparty dominates governance, however, then the firm will do business with each of its counterparties at competitive prices even though the firm is a monopolist and therefore need not charge competitive prices. Thus the problem of monopoly is transformed from a problem of market structure (i.e., of power within markets) to a problem of corporate governance (i.e., of power over the governance of the firm). I elaborated this theory in a recent academic blog post, “The Real Monopoly Is in the Boardroom,” The FinReg Blog, November 8, 2021.
Advertising, the Tech Giants, and the Future of News
A fourth major strand of my research explores the relationship between advertising, monopoly, the press, and free speech. I have explored this relationship in the context of the ongoing conflict between the Tech Giants—Google, Amazon, Facebook, and Apple—and the newspaper industry that the giants have disrupted through their innovative approaches to targeted advertising, ebooks, and content distribution over smartphones.
In my first foray into this subject area, The Obsolescence of Advertising in the Information Age (Yale L.J. 2018), I pointed out that the information age makes redundant advertising’s sole socially beneficial function—that of providing consumers with useful product information—because in the information age consumers can get all the product information they want through a quick google search for user reviews—reviews that are likely to be more reliable and informative than any advertising firms themselves might create. Economists have long recognized that advertising has two main functions, to inform and to manipulate; stripped of its information function, advertising is, I argued, now solely manipulative.
In the mid-20th-century, antitrust enforcers took a hard line against manipulative advertising, bringing successful cases against Procter & Gamble and General Foods, among others, on the theory that manipulative advertising short-circuits the competitive process, enabling firms that sell inferior products to win out in the marketplace against competitors that sell better products but fail to advertise them as effectively. This campaign against advertising ultimately petered out in the late 1970s because enforcers ran out of advertising that could be characterized as exclusively manipulative rather than partly manipulative and partly informative. In this article, I argued that, with the demise of the information function of advertising, virtually all advertising is now fair game from an antitrust perspective. I also rejected free-speech-based objections to condemning advertising on the ground that the demise of the information function of advertising also eliminated First Amendment protection for advertising. For the Supreme Court has explicitly predicated First Amendment protection for advertising on advertising’s now obsolete information function.
This article, and a followup Op-Ed and essay that I wrote summarizing its thesis—“Advertising Is Obsolete – Here’s Why It’s Time to End It,” The Conversation, August 20, 2018 and “Advertising as Monopolization in the Information Age,” CPI Antitrust Chron., April 2019, at 50, respectively—attracted considerable attention outside of the academy and the basic obsolescence thesis went on to be featured in a documentary, “Rebels against Advertising,” which aired on Dutch public television in April 2020.
In The Fourth’s Estate (SSRN working paper), I am building on my argument that the information age renders obsolete both advertising’s information function and its First Amendment protection to propose a solution to the newspaper industry’s current funding crisis. The Tech Giants caused the crisis by creating social media products that out compete newspapers for consumer attention and hence for advertising revenue. But the solution is not for newspapers to obtain compensation from the tech giants for the news that appears on their platforms—as newspapers have mistakenly argued—because the tech giants do not use much news (it represents less than 5% of the content consumed by Facebook users, for example) and so will not pay much for it. I argue that funding for newspapers can be preserved instead by government imposition of a cap on the amount of advertising that may be delivered through the Tech Giants’ platforms, with the excess to be delivered exclusively through newspapers, thereby forcing advertisers to redirect their purchases back to the beleaguered industry.
Will advertisers respond by spending less money on advertising and thereby offsetting any revenue gains for newspapers that might otherwise come from such a quota system? I argue that the answer is “no.” Although newspaper advertising is less effective than social media advertising, which is why advertising dollars have shifted from newspapers to social media over the past two decades, advertisers will continue to spend roughly the same amount of money on advertising as they do now, even if required by my proposed quota system to advertise in newspapers, because advertising is largely defensive. Firms advertise to counter the advertising of competitors, not to increase demand, and so firms constrained to advertise in newspapers will continue to advertise, if only to prevent their competitors from being the sole commercial voices with respect to the product categories in which they do business.
In Ruinous Competition in News, The Postal Internet, and the Three Laws of Techno-Legal Change (SSRN working paper), I am turning my attention from the problem of how to shore up news funding to the related problem of how to put an end to misinformation in Internet news. I argue that misinformation in Internet news is the result of ruinous competition between news providers—understood to include everyone from legacy news outlets to individual posters on Twitter—resulting from the radical reduction in the cost of news provision brought about by the Internet. Economic theory suggests that when the cost of entry into a market—in this case, the news market—is too low, competition drives prices too low for firms to cover their fixed costs—in this case the cost of investigatory journalism—causing firms to skimp on product quality, which in the case of news means the reliability of fact reporting. At the same time, ruinous competition causes firms to seek out inexpensive, and hence superficial, ways to differentiate their products from those of competitors. In the case of news, that is reflected in an emphasis on opinion reporting over fact reporting, and the consequent fragmentation of news markets along ideological lines.
In this working paper, I make the novel proposal that the United States Postal Service should step in to address the problem of misinformation by charging postage for the delivery of large-volume electronic missives over the Internet. I argue that the USPS is empowered to charge postage for electronic missives—even those that the USPS does not itself deliver—under the “letterbox monopoly” conferred on the company by current federal law. Charging postage to websites or social media accounts with large numbers of followers would restore some of the cost of entry into the news market and so put an end to the ruinous competition in news that is driving the current misinformation epidemic.
In recent years, there has been a surge of interest in reinvigorating the antitrust laws, driven in part by concerns regarding wealth inequality and in part by favorable reporting in the press, which hopes to bring the antitrust hammer down on the heads of its rivals for advertising dollars, the Tech Giants. I have made a number of contributions to debates about how best to reform antitrust theory to support more vigorous enforcement.
My first contribution to the problem of antitrust reform came in my first article, Inconsistency in Antitrust, 68 U. Miami L. Rev. 105 (2013), in which I pointed out that, as presently interpreted, the antitrust laws have a bias against contract-law-based forms of monopolization and in favor of property-law-based forms of monopolization. This is reflected, I argued, in the contrast between antitrust’s per se rule of illegality for cartel agreements, which applies regardless whether those agreements lead to higher prices, and antitrust’s per se rule of legality for innovation-based monopolization of markets by individual firms even when the monopolization leads to above-cost prices. The implication of this line of argument was that antitrust should increase enforcement against single-firm monopolies in order to ensure that groups of firms and individual firms are treated consistently.
I returned to advocacy of greater antitrust enforcement with The Hidden Rules of a Modest Antitrust, 105 Minn. L. Rev. 2095 (2021), in which I argued that the Supreme Court’s embrace of the rule of reason in the vast majority of antitrust cases, starting in the 1970s, has necessarily triggered a reduction in antitrust enforcement, as budget-limited antitrust enforcers lack the resources to bring cases under the case-specific approach to rule determination required by the rule of reason. I used a mathematical model to show that, if the Court believes that most antitrust-relevant conduct is likely to harm consumers, then the reduction in enforcement triggered by the rule of reason has necessarily made consumers worse off. I argued that the Court therefore cannot continue to pretend that the rule of reason is a method of improving accuracy in adjudication. The Court must instead either explicitly embrace the view that there is little antitrust-relevant conduct that genuinely harms consumers or jettison the rule of reason and return to the Court’s old mid-20th-century approach of condemning make large amounts of antitrust-relevant conduct on a per se basis.
In A Critique of the Chicago School from the Perspective of the History of Life on Earth (SSRN working paper), I turn my attention to the intellectual foundation for the lull in antitrust enforcement that has persisted since the 1970s, namely, the skepticism regarding the efficacy of government intervention in markets associated with the Chicago School of law and economics. I argue that Chicago’s skepticism is ultimately based on a flawed analogy to the natural world. Far from representing a triumph of unregulated markets, the evolution of life and indeed of humanity on earth demonstrates the basic flaw in laissez faire. For life is shot through with theft—biologists call it predation—and therefore necessarily fails to achieve its potential.
One can only imagine what greater heights life might have achieved so far had a regulator capable of blocking predation forced evolution to focus on production, rather than theft. Organisms that are capable of generating energy directly from inanimate matter rather than through predation would have been favored by a regulated evolution that prohibited theft. And organisms naturally able to generate energy directly from rocks or sunlight might not, then, have had to wreck the environment to extract energy and so would not face the grave threat of climate change that humanity faces today. Chicago implicitly accepts this account because Chicago generally supports vigorous enforcement of property rights. I argue that by preventing firms from harming each other except by producing and marketing superior products, the antitrust laws amount to no more than an extension of the property concept and so are consistent with Chicago’s implicit acceptance that the predation associated with unregulated markets is bad for the economy.
While I continue to believe that more antitrust enforcement would be good for consumers, I am exploring the limits of healthy antitrust enforcement—and continuing to plumb the theoretical foundations of the field—in three current research projects that will occupy me over the next two years.
In The Contrasting Approaches to Power of the Modern State and the Antitrust Laws (SSRN working paper), I try to tease out lessons regarding the limits of antitrust by comparing the way antitrust regulates monopoly power to the way the U.S. Constitution and other laws regulate the power of the state. I argue that the state can be understood to be a monopolist of a single production input, that of security, which, because it is essential to virtually all forms of production, gives the state its preeminence in social life. From this perspective, a democratic constitution makes the state qua security monopolist into a consumer cooperative in which consumers pay for security through their tax dollars and use the electoral system to vote for the directors of the cooperative (Congress) as well as its chief executive (the President). One of the principal lessons of the U.S. Constitution for antitrust comes from the absence in the constitution of any prohibition on the creation of state-owned enterprises. In antitrust terms, the security monopolist is free to buy up customers and thereby to integrate vertically down the supply chain, so long as management (i.e., the elected representatives of the people) feel that integration leads to better outcomes for customers.
The lesson for antitrust is that one of the proposals of the current antimonopolism movement, that firms should be categorically prohibited from competing on their own platforms (read: should not be permitted to integrate vertically down the supply chain) is probably a bad idea. Antitrust should show the same flexibility as does constitutional law in eschewing a blanket rule in this area and permitting vertical integration when that may make consumers better off.
In How Antitrust Really Works: A Theory of Input Control and Discriminatory Supply (SSRN working paper), I attempt a complete theory of antitrust built around the notion that all antitrust rules fall into one of two categories. They either prohibit the acquisition of control over an essential input into a production process or they prohibit use of control already acquired to manipulate downstream markets in ways that make the ultimate product that reaches consumers worse rather than better. The paper shows how virtually all major antitrust cases fit into this paradigm. This work lends further support to the notion that antitrust should not categorically prohibit firms from competing on their own platforms. For a firm that competes on its own platform effectively uses an input (i.e., its platform) to manipulate a downstream market (i.e., the market in which the firm competes on the platform). My paper shows that the deep structure of antitrust does not support a categorical prohibition on own-platform competition but rather supports condemnation only when own-platform competition threatens to make downstream products less desirable for consumers.
In Antimonopolism as a Symptom of American Political Dysfunction (SSRN working paper), I turn my attention to another important limit of antitrust: its ability to rectify the problem of wealth inequality. Finding solutions to that problem appears to be a major motivation behind contemporary antimonopolism. But I show that, going back to the first law and economics movement a century ago, progressive thought has rejected antitrust as a means of achieving economic equality, and with good reason. For inequality is primarily a consequence of natural scarcity: the fact that some products or natural resources are better than others. The owners of those superior products or natural resources confer more gain on consumers than do other owners, which allows them to extract a larger share of the gains from trade from consumers. Antitrust enforcement cannot prevent these owners from appropriating the gains from trade because the owners’ ability to appropriate them is not due to anticompetitive conduct but rather to the fact that no other sellers are able to make or find products of the same quality to sell. Wealth inequality is, in other words, a common consequence of competitive markets, in which some firms succeed at producing or finding better products than others, rather than a consequence of the artificial scarcity associated with monopolized markets. It follows that the best way to address wealth inequality is through policies like taxation and rate regulation that attack profits however earned, and therefore serve to redistribute wealth generated in competitive markets.
But if progressives have long known that taxation and rate regulation are more effective ways of reducing inequality, why do progressives look for solutions in antitrust today? The reason, I argue, is that voters have proven unwilling to vote for higher taxes or more rate regulation, forcing progressives to seek redress for inequality in more unlikely policy corners.
In addition to these works in progress, I have also published an academic essay and two blog posts on the subject of contemporary antimonopolism. These are: “Digital Monopoly without Regret,” Concurrences, no. 1, 2020, in which I argued that Google and Amazon will likely escape antitrust liability because their size is due primarily to fielding superior products rather than to degrading the products of competitors; “Big Ink v. Bigger Tech,” Truth on the Market Blog, December 30, 2019, in which I argued that the press has played an import role in the success of contemporary antimonopolism because the press stands to gain from antitrust action against the Tech Giants, which latter compete with newspapers for advertising dollars; and “Google and Shifting Conceptions of What It Means to Improve a Product,” Truth on the Market Blog, December 16, 2020, in which I argued that the government’s antitrust case against Google will likely fail because Google’s exclusive dealing agreements with smartphone makers improve the quality of Google’s search engine.