Network Effects: The Problem of Antitrust and the Internet

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The following was an article I published in the Pro Se, the University of Connecticut School of Law student newspaper, in November 2017 and can be downloaded here.

Network Effects: The Problem of Antitrust and the Internet

I implore you to list five sites on the internet where you purchased something. Now, ask yourself when was the last time you purchased something from each of them.

I am practically certain Amazon was put as your number one choice and your last purchase from them was within the previous six months. Unfortunately, this deep affinity for Amazon, along with other technology companies including Facebook and Google, represent a growing and persistent trend of large, near monopoly, corporations flexing their financial and political power over the infrastructure of our economy, while dominating nearly every aspect of our consumer life. 2

A typical citizen might believe these companies are just trying to make money and provide innumerable goods to people at the lowest possible price. Truth be told, you would not be incorrect as 55% percent of online shoppers start their shopping on Amazon. 3 Google has two-billion monthly active users on Android alone and Facebook has nearly 90% of the US population on its platform. 4 While all of these services are provided to people for free, your initial conclusion would also be applauded by the supporters of the Chicago School of Antitrust as they believe the central goal of antitrust is to ensure low prices and such a policy is exactly what has been the instituted by the courts since the 1980s.5 

The rise of Amazon, Google, Facebook and other internet companies is a troubling sign for our republic and presents a vexing problem to determine how to regulate their industry and business models. Although the business models of these companies can generally provide low prices, we have seen that they detrimentally affect the competitive conditions that are needed for markets to thrive. Understand that all of their business models are based on network effects, where the value of each additional user exponentially increases the service’s value. Facebook is the simplest example to explain this concept and its anticompetitive effects. Even though users dislike many features of Facebook, given the innumerable users are on the platform it is simply too hard to ignore. Additionally, for those that are currently on the platform, the fact that it is nearly impossible to switch to another service, and the unwillingness of others to either stop using Facebook means that for all intents and purposes you are stuck using the service to derive the benefits you need to communicate with your friends, store your photographs, read the news, or promote your business. 6 Moreover, why would you stop using a service where the largest quantity of people are located if you want to grow your business through social media. And it certainly does not help when you know more than 50% of all users log in every day.7

Now you may believe that a networked company, like all other businesses, can be duplicated and another competitor can displace it. However, let’s revisit a past situation. Google, one of the largest and well-known companies, tried four times to replace Facebook as a social network by creating Orkut, Google Buzz, Google Wave, and Google Plus and still it has failed. Moreover, all of Google’s attempts were before Facebook became the powerhouse of advertising that it is today. 8 Google’s failure is certainly not because consumers do not like using their services and cannot plausibly be because Google lacks financial or intellectual capital. Google’s failure is just small example of the near insurmountable challenge to displace a networked company. The same failure can be seen in Microsoft’s failure to create a viable phone operating system to displace Apple’s iOS and Google’s Android. 9 In a sense, it might take a significant market paradigm shift to convince users to switch or simply use another service to accomplish the same goals.

Moreover, these companies are continuously leveraging their market power to incrementally take over new industries. For example, try and think of a business Amazon is not a member of – to put it lightly there are not many. Lina Khan of the Open Markets Institute states it succinctly in her recent publication Amazon’s Antitrust Paradox.

[Amazon is a] retailer, it is a marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer, and a leading provider of cloud server space and computing power. 10

The same could almost be said for Google. Now consider applying this concept to a more recent event by contemplating Amazon’s acquisition of Wholefoods. Why would Amazon acquire Wholefoods? Do you think it was out of love for the Wholefoods’ brand and its devotion to locally cultivated food products, out of a desire to sell organic soap and homemade chicken noodle soup? Or perhaps the purchase of Wholefoods was designed to provide Amazon 460 distribution centers in the wealthiest areas in the country where it can further increase its economies of scale to provide the most expedient delivery of goods and services to the people with the greatest purchasing power knowing that at least 50% of them have a Prime subscription and continue to supplant all other retailers. 11 All of the reasons are plausible, and they are certainly not mutually exclusive, but we all know which one is practical and reasonable. 12

But Amazon is not alone in engaging in business practices with sinister motives by overtly flexing its business prowess. Google as well has its own share of controversy, such as preferring its services over others or stifling opinions it disagrees with. 13 Facebook as well has engaged in practices designed to test the limits of its platform such as purposefully manipulating user emotions. 14

These fiendish practices are indicative of the fact that companies are willing to engage in any behavior, however nefarious, as long as it grows and locks in customers on to their platform, and all market power abuse concerns can be dismissed under the guise of low prices. What’s worse is that these practices are incentivized given the nature of a networked market and are not currently part of our antitrust analysis, which only causes other companies to adopt them.

What I find most perplexing is that citizens across this nation, at least for a brief moment, accepted the premise that there is an economic and social cost to low prices, convenience, and big business as in the case of Wal-Mart. I will never forget the ending credits of Wal-Mart: The High Cost of Low Price where the movie listed all of the local resistance movements taken against a Wal-Mart due to the damage its presence imposed on communities – and that was twelve years ago.

To overcome such a difficult situation, we need to rethink the effects our purchasing habits and the role that our antitrust laws have in regulating the business practices of networked internet companies. Legislatures and Courts need to expand the goal of our antitrust laws beyond the purview of providing low prices to consumers and incorporate into their analysis the anticompetitive effects network business practices have on markets. 15

Consumers once recognized the dangers a pure pursuit of low prices has on communities and markets; we need to reinvigorate that desire and fight back.

 

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