Antitrust Law Daily Antitrust chief calls on fellow enforcers to consider innovation, choice, and quality in evaluating competitive effects in digital media markets
Wednesday, May 23, 2018

Antitrust chief calls on fellow enforcers to consider innovation, choice, and quality in evaluating competitive effects in digital media markets

By Robert B. Barnett Jr., J.D.

In a speech in Rome at The Jevons Colloquium 2018 on May 22, Makan Delrahim, Assistant Attorney General in charge of the Department of Justice Antitrust Division, urged his fellow antitrust enforcers to give greater attention to innovation, consumer choice, and product quality in analyzing competitive effects and in enforcing the consumer welfare standard in digital media markets. Because those three factors are often difficult to quantify, they are frequently minimized in antitrust evaluations in favor of price and output. In the digital media context, however, where output in particular can be difficult to quantify, enforcers should begin considering whether a particular merger or practice reduces innovation, unduly restricts consumer choice, or seriously deteriorates product quality.

Of the two "prongs" of antitrust enforcement—the evidence-based approach and the consumer welfare standard—Delrahim’s comments focused on the second one, the consumer welfare standard, which is based on the idea that consumers benefit from free market competition in the form of lower prices or increased output. As a result, antitrust enforcement under a consumer welfare standard necessarily focuses on the effects on price and output. Delrahim pointed out, however, that output in the digital platform market context can be difficult to measure. For a social media network, for example, is output measured by the number of users? The time spent using the network? The views shared? The number of "likes"? His suggested solution is to return to a consideration of three factors often ignored in antitrust evaluations: innovation, choice, and quality.

Innovation. Innovation, Delharim argued, is central to consumer welfare. Entrenched businesses often see innovation by new market entrants as an existential threat. The enforcer’s role, Delrahim contended, should be to encourage innovation because it typically benefits the consumer. Whether a merger or practice reduces innovation, therefore, can be a useful metric.

Choice. If a merger or practice eliminates a unique product offering, it reduces consumer choice. Delrahim called on his fellow enforcers to "carefully analyze whether a company with market power uses that power in a manner that excludes an innovative product, service, or feature that customers desire." He cited the Microsoft example, in which Microsoft tied its Internet Explorer browser to its operating system to reduce competition from other browser developers, as a prime example of a practice that reduced consumer choice. Delrahim, on the other hand, also cautioned enforcers not to see all elimination of choice as "inherently suspect," particularly in mergers. The goal of the antitrust laws, he reminded his listeners, is to protect competition, not competitors. Mergers resulting in fewer marketplace choices can actually be pro-competitive.

Quality. In the media market context, product quality encompasses the entire customer experience. Admitting that product quality can be difficult to measure, Delrahim suggested using a metric called NPS or net promoter score. Originally suggested in a 2003 article in the Harvard Business Review, NPS measures whether customers or users are likely to recommend a product to a friend or to a stranger (positive score) or to disparage the product (negative score). Perhaps, Delrahim suggested, an NPS score could be applied to a merger to determine whether product quality is likely to increase or decrease. He called on enforcers to consider whether this and other benchmarks might be useful in capturing the impact on product quality.

Exclusionary conduct. Moving away from the three factors, Delrahim also opined on the need for enforcers to reconsider how barriers to entry and other exclusionary conduct may harm consumers. In the digital media context, for example, barriers to entry may be quite low. A software product, for example, can gain popularity with relatively minimal investment, rendering that analysis less significant. Similarly, Delrahim said, the antitrust field has begun re-examining how to evaluate predatory pricing claims in digital markets. He urged enforcers to focus on the question of whether the presence of network effects can dilute the ability of new competitors to emerge or whether they pose a significant competitive challenge to entrenched incumbents. Network effects can work either way, to prove or to disprove predatory pricing claims.

Conclusion. Delrahim concluded by acknowledging that further research and debate is needed in the digital media area. He warned enforcers not to "punish the very competitors who have won the race we encouraged them to compete in," while not hesitating to bring an action where some merger or practice raises prices, lowers output, reduces innovation, restricts consumer choice, or deteriorates product quality.

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