Introduction
“No competition can exist between two producers of a commodity when one of them has the power to prescribe both the price and output of the other.”
—U.S. House of Representatives, Committee on Interstate & Foreign Commerce
“In short, the choice is between a Bell System restrained by neither regulation nor true competition and a Bell System reorganized in such a way as to diminish greatly the possibility of future anticompetitive behavior.”
—U.S. District Court for the District of Columbia
A handful of digital platforms exert increasing control over key arteries of American commerce and communications. Structuring access to markets, these firms function as gatekeepers for billions of dollars in economic activity. By virtue of setting marketplace rules for the millions of merchants, producers, and developers dependent on their infrastructure, dominant platforms today “function as regulators.”
As these platforms further concentrate market power, there are rising concerns about their size—usually in reference to the large share that each firm captures of its primary markets.
Yet an equally important question concerns not the scale of these companies but their structure. One feature dominant digital platforms share is that they have integrated across business lines such that they both operate a platform and market their own goods and services on it. This structure places dominant platforms in direct competition with some of the businesses that depend on them, creating a conflict of interest that platforms can exploit to further entrench their dominance, thwart competition, and stifle innovation.
Consider Spotify’s effort to reach users through Apple’s iPhone while Apple sought to promote Apple Music. In 2016, Spotify revealed that Apple had blocked the streaming application from the App Store, “continu[ing] a troubling pattern of behavior by Apple to exclude and diminish the competitiveness of Spotify on iOS and as a rival to Apple Music.”
Or take the challenge faced by Yelp, Foundem, and scores of online services to reach internet users while Google sought to build out its own competitor offerings.
In Europe and India, competition authorities have found that Google ranks its own services higher than those offered by rivals, a “search bias” that means anyone competing with Google properties may effectively disappear from Google search results.
Merchants that rely on Amazon to reach consumers are in a similar bind: Not only must they jostle for placement against Amazon’s own goods, but they also face the constant risk that Amazon will spot their bestselling items and produce them itself.
Facebook, equipped with technology that lets it detect which rival apps are succeeding, would often give companies a choice: Be acquired by Facebook, or watch it roll out a direct replica.
Competing with one of these giants on the giant’s own turf is rife with hazards.
Venture capitalists now factor this risk into their investment decisions.
Indeed, the power of these gatekeeper platforms to steer the fate of countless other firms is described by entrepreneurs and investors as “having a profound impact on innovation in Silicon Valley”
and “choking off the start-up world.”
Venture capitalists now discuss a “kill-zone” around digital giants—“areas not worth operating or investing in, since defeat is guaranteed.”
Discussing how tech platform giants today use their integrated structure to undermine rivals, a product manager who worked for Microsoft leading up to its antitrust suit observed, “It’s what we did at Microsoft.”
Indeed, the way in which dominant online platforms threaten to undermine competition and distort markets today is not entirely new. At its core, the problem traces to a basic challenge posed by firms that capture control over a critical network or channel of distribution. Regulators and competition authorities have traditionally harnessed a set of tools to ensure that bottleneck facilities do not distort competition. These tools include common carriage, which requires firms to offer customers equal access on equal terms,
as well as interoperability, which requires networks to maintain an open interface, enabling users to switch between platforms with ease.
These policies respond, respectively, to problems of discrimination and lock-in.
In digital markets, however, third parties that depend on a platform risk not just discrimination and lock-in but also appropriation. Because dominant platforms monitor with unrivaled precision the business activity of third parties while also competing with them, a platform can harvest insights gleaned from a producer at the producer’s expense.
This Article argues that these combined problems of discrimination and information appropriation invite recovering common carriage’s forgotten cousin: structural separations. Structural separations place clear limits on the lines of business in which a firm can engage. Rather than prohibit particular business practices, separations proscribe certain organizational structures. In antitrust, structural remedies are contrasted with behavioral ones: Whereas behavioral remedies seek to prevent firms from engaging in specific types of conduct, structural remedies seek to eliminate the incentives that would make that conduct possible or likely in the first place.
Structural prohibitions have been a traditional element of American economic regulation. They have been applied as a standard regulatory tool and key antitrust remedy in network industries, often to prohibit a dominant intermediary from competing with the businesses that depend on it to get to market. While common carriage regimes prevent a firm from discriminating—requiring equal service on equal terms—structural prohibitions eliminate one source of the incentive to discriminate. In this way, common carriage and structural separations often functioned as complements in the service of nondiscrimination.
Today, structural separations have largely been abandoned.
At the same time that lawmakers have significantly weakened or outright eliminated sector-specific regulatory regimes, judicial interpretation of antitrust law has drastically narrowed the forms of vertical conduct and structures that register as anticompetitive. And when antitrust enforcers have targeted these forms of conduct and structures in recent years, they’ve applied remedies that generally (1) fail to target the underlying source of the problem and (2) overwhelm the institutional capacities of the government actors assigned to oversee them.
Neglecting structural separations results in both substantive harms and institutional misalignments—effects that are especially pronounced in digital markets.
This Article seeks to give structural separations a seat back at the table. Its contribution is twofold. First, it demonstrates that both the risk and cost of information appropriation are heightened in digital markets, rendering conduct remedies especially ineffective and structural remedies critical.
Dominant digital platforms passively capture highly precise and nuanced data on their business customers, information that they can exploit when competing against those same customers. These data are more valuable by virtue of being more sophisticated—and more likely to be exploited given their value. This risk of appropriation coupled with discrimination, moreover, is especially harmful in digital platform markets, given the important role platforms play as innovation catalysts. Even within a framework where only welfare-based harms justify regulatory interventions, the likely innovation harms stemming from platform appropriation and discrimination invite serious consideration of structural limits.
Second, this Article identifies the host of functional goals that motivated previous separations regimes, ranging from fair competition and system resiliency to media diversity and administrability.
These concerns register in a normatively pluralistic framework: While some are cognizable in terms of welfare economics, others appeal to a broader set of democratic and institutionalist values. In the context of business and market structure, these distinct values sometimes align—such that a separation that promotes a robust marketplace of ideas also promotes dynamic efficiency—while in other instances they are in tension.
After identifying the tradition of structural separations and the diverse set of concerns that motivated them,
this Article explores whether integration by dominant tech platforms poses risks and challenges analogous to those previously addressed through separations.
It closes by briefly sketching out relevant considerations for separating platforms and commerce and identifying likely challenges.
This Article is a project in diagnosis and intellectual recovery. It seeks to provide a general analytical framework for thinking through problems stemming from integration by dominant digital platforms and to identify principles through which Congress and agencies can issue policy prescriptions to remedy them. Its goal is to enrich our understanding of the tools and remedies through which lawmakers and regulators have previously addressed integration by dominant intermediaries—an effort in recovery necessitated by the abandonment of traditional regulatory interventions and partial collapse of antitrust. Several questions that this Article only partially engages—such as how to scope and design specific separations in digital markets—invite deeper study.
Several factors render this project especially timely. First, the central role dominant platforms play in structuring access to online commerce and communications is prompting both scholarly and policy discussions about whether these firms should be designated as forms of infrastructure or essential services, meriting regulatory interventions coupled with reinvigorated antitrust.
Second, after years of retreating from structural remedies in favor of behavioral ones, antitrust enforcers are confronting the difficulty of enforcing pure conduct remedies and asking whether greater reliance on structural interventions would better promote competition.
And third, a neo-Brandeisian movement is refocusing attention on the structural underpinnings of the competitive process, critiquing the current welfare-based approach for both betraying the founding values of antitrust and failing on its own terms.
Part I of this Article documents how dominant digital platforms use their integrated structure to engage in both discrimination and information appropriation and reviews why this conduct likely undermines innovation. Part II traces the institutional and doctrinal shifts that account for the retreat from structural separations. Part III reviews five instances in which separations were implemented. Part IV identifies the set of harms that lawmakers, regulators, and enforcers sought to address through structural separations and the functional goals they aspired to promote. Part V examines whether integration by dominant platforms gives rise to analogous harms, briefly explores what a separations framework for digital intermediaries might look like, and identifies likely challenges and questions that remain unresolved. The Appendix engages the relevant economic literature to examine why platforms would act in ways that risk undermining their ecosystems.
I. Integration by Dominant Digital Platforms
Dominant digital platforms serve as critical intermediaries of online commerce and communications. Reflecting on the vital role these firms now play, the Supreme Court has described Facebook, Google, and other online providers as serving as the “modern public square,”
while lawmakers have analogized Amazon to a nineteenth-century railroad.
Governments around the world have initiated studies and investigations examining the market power these firms enjoy.
The dominant digital platforms differ in important ways: They have different business models, different value chains, and different primary markets. But one critical feature they share is the dual role they play in select markets: as both an operator of a dominant platform that hosts third-party merchants, content creators, or app developers, and as a market participant that competes with those same producers. This Part reviews some of the markets in which online platforms are integrated and the practices this integrated structure enables.
A. Amazon
Amazon provides a host of different services. It is the dominant online marketplace, the world’s largest cloud computing service, a massive shipping and logistics network, a media producer and distributor, a grocer, a small-business lender, a live video-gaming streaming platform, a digital home assistant, a designer of apparel, and an online pharmacy.
Two areas where it both serves as a bottleneck facility and competes with those reliant on its bottleneck include online retail and digital home-assistant systems.
1. Marketplace/AmazonBasics. — In Amazon’s early days, it operated primarily as an online retailer: It would procure goods at wholesale prices from suppliers and then sell them at retail prices to consumers. In 1999 it introduced Auctions, an online auctions service, and zShops, a fixed-price marketplace business—services that would evolve into the Amazon Marketplace, an open platform on which other merchants could list their products to sell directly to consumers.
Unlike selling wholesale to Amazon, selling through the Marketplace permitted suppliers to maintain control over retail pricing and shipping.
Inviting producers to sell through Amazon Marketplace significantly expanded the catalogue of goods available on Amazon’s platform, while freeing Amazon of the risk of purchasing inventory.
This dramatic expansion in product selection has helped Amazon become the dominant online marketplace in the United States. The platform is estimated to capture 52.4% of all U.S. online retail spending
and 56.1% of the segment’s traffic,
while 54% of all product searches originate on Amazon.
Amazon’s share of ecommerce is more than double the market share of its next nine competitors combined,
and even merchants who list products on other sites can come to rely upon Amazon for up to 90% of their sales.
For many merchants, “Not being on Amazon doesn’t feel like an option.”
Marketplace sales are a lucrative and booming part of Amazon’s overall business. Amazon charges merchants either a $39.99 monthly subscription fee or a 99¢ per-item flat fee, depending on the plan, as well as a percentage of each transaction.
Analysts estimate that 52% of unit-goods
and 68% of total Amazon sales derived from Marketplace merchants in 2018.
The service fees Amazon charges third-party sellers generated $42.75 billion in 2018,
comprising around 18% of the company’s net sales and its second-largest revenue segment.
Revenue from seller commissions is outpacing Amazon’s overall online sales.
In addition to serving as a major marketplace for third-party sellers, Amazon now also sells Amazon-branded goods on its platform. It first began offering private labels in 2009, primarily selling commodity goods such as batteries and HDMI cables.
In the decade since, its private-label business has expanded to include toys, shoes, apparel, jewelry, coffee, baby wipes, furniture, mattresses, vitamins, towels, and pet food, among other products.
Amazon has around 137 private-label brands—with just one of these brands accounting for over 1,500 distinct products.
Analysts estimate that Amazon’s private-label sales amounted to $7.5 billion in 2018 and will reach $25 billion by 2022.
Amazon exploits this dual role—marketplace operator and marketplace merchant—in two ways: first, by implementing Marketplace policies that privilege Amazon as a seller and give it greater control over brands and pricing, and, second, by appropriating the business information of third-party merchants. One way that Amazon has favored Amazon goods and services is by presenting itself as the default seller even when Marketplace vendors have offered lower prices. A ProPublica investigation discovered that Amazon engineers its ranking algorithm to favor its own products as well as those sold by merchants that buy Amazon’s fulfillment services.
Since an estimated 82% of Amazon sales go to the top listing—namely, whoever wins the Amazon “Buy Box”—this self-preferential treatment is an “oft-decisive advantage.”
Amazon also appears to have privileged Amazon goods in promotional placements. According to The Capitol Forum, Amazon prioritizes its own clothing brands in its space for sponsored placements and appears to restrict competitors’ access to this placement, directing consumers toward its own products over those sold by rivals.
Even when a customer goes on a Marketplace merchant’s product page, Amazon will show prominent ads and pop-ups directing customers to Amazon’s own products instead.
A second way Amazon has favored itself as a seller is through implementing Marketplace policies that enable it to become the exclusive merchant of certain products. According to news reports, Amazon encourages brands to sell directly to Amazon in exchange for Amazon’s commitment to enforce the brand’s minimum advertised prices (MAP) on Amazon.
Enforcing this policy, Amazon expels any third parties selling lower than the MAP, sometimes leaving Amazon as the only remaining seller.
Last November, Amazon also signed a deal to become an authorized reseller of Apple’s devices—an agreement that prompted Amazon to delist any Apple products sold by Marketplace merchants who are not authorized Apple resellers.
Since one of the requirements for becoming an authorized Apple reseller includes purchasing a certain minimum amount of product directly from Apple, most independent merchants will no longer be able to sell Apple products on Amazon.
Another policy change Amazon has instituted is requiring certain brands on Marketplace to instead sell wholesale to Amazon—granting Amazon the ability to set the retail price and maintain exclusive access to certain sales and customer data.
In theory, efforts by Amazon to enter exclusive or semiexclusive agreements with brands could be understood as an effort by Amazon to combat counterfeits, which proliferate on Amazon.
But in practice, Amazon also seems to use its ability to decide whether or not to police counterfeits as leverage against brands who might otherwise refrain from selling on Amazon.
Nike, for example, for years refused to list its products on Amazon. Faced with a situation where merchants were selling both authentic and fake Nike goods on Marketplace anyway, Nike ultimately signed an agreement to sell wholesale to Amazon in exchange for stricter policing of counterfeits.
An executive from Birkenstock—which stopped supplying products to Amazon in 2017—stated that the only way a brand or supplier can get Amazon to fully commit to policing counterfeits is to sell its entire catalogue to Amazon.
Even as Amazon professes a “zero tolerance” policy for counterfeit products,
reports suggest that not only has the company “resisted calls to do more to police its site,” but that it has “thrived” from this practice, given the additional leverage that counterfeiters give Amazon over brands and merchants.
Indeed, sellers confronting any host of difficulties on Amazon’s site—ranging from abrupt account suspensions to sabotage campaigns by rivals—soon learn that “the solution is often to more fully meld with Amazon” in ways that provide Amazon with more revenue, more control, or greater access to a merchant’s sensitive business information.
Earlier this year, Amazon announced that sellers looking to fight counterfeiters and manage other problems on its platform could purchase a new service from Amazon for $30,000 to $60,000 a year.
The rapid growth of Amazon’s digital ad business suggests brands may increasingly need to buy advertising in order to attract more customer clicks.
Separate from policies that explicitly or implicitly require merchants and vendors to buy additional Amazon services, sellers worry about subtler forms of discrimination. There are numerous means by which Amazon can disfavor any particular merchant: It can suspend or shut down accounts overnight, withhold merchant funds, change page displays, and throttle or block favorable reviews.
In addition to implementing Marketplace policies that favor Amazon’s direct sales, Amazon appropriates Marketplace merchants’ data to shape its own retail strategy. By virtue of hosting a digital marketplace, Amazon’s ability to collect and analyze ecommerce data is unrivaled. While even large brick-and-mortar stores can track consumer purchase histories and brand sales, the information Amazon harvests is far more sophisticated and precise.
In addition to tracking overall trends, it captures which goods a customer clicked on but did not buy, the exact price change that induced a customer to peruse an item or purchase it, how long a user hovers her mouse over a particular good, how customers are reacting to product images and videos, and a wealth of other microdetails that add up to a formidable—and constantly evolving—arsenal of market intelligence.
It is as if a shopping mall tracked not only all the foot traffic into a store, but also which items caught a customer’s glance, which products made it into the shopping cart but were never purchased, as well as complete transaction and revenue data and all customer reviews. All of this information is gathered not just on products Amazon sells but also on third-party merchants,
giving Amazon an unprecedented vantage point over 50% of ecommerce in the United States.
Reports suggest Amazon uses this trove of Marketplace data to inform both its retail business and its private labels. In some cases, Amazon has responded to popular items introduced by third-party merchants by sourcing those same products directly from the manufacturer and demoting the third-party merchants in search results.
One study found that in the case of women’s clothing, Amazon “began selling 25 percent of the top items first sold through marketplace vendors.”
Its private label, meanwhile, has also closely tracked successful Marketplace items. While AmazonBasics—Amazon’s private-label brand—initially focused on generic goods like batteries and blank DVDs, it has since expanded into a much broader array of products.
For a few years “the house brand ‘slept quietly as it retained data about other sellers’ successes.’”
As Amazon now rolls out more AmazonBasics products, it is clear that the company has used “insights gleaned from its vast Web store to build a private-label juggernaut that now includes more than 3,000 products.”
Initial empirical work suggests that Amazon’s entry into competition with third-party merchants does not affect product price or customer satisfaction but does dissuade third-party sellers from continuing to offer the product.
Merchants, especially small ones, “are discouraged from growing their business on the platform.”
2. Alexa/Alexa Devices/Alexa Skills. — Another area in which Amazon both serves as a primary platform and competes with platform services is the voice computing market. Amazon jump-started the voice assistant market in 2015 when it publicly rolled out the Echo, its smart speaker, embedded with Alexa, the artificial intelligence software that serves as a voice assistant.
An early mover in this market, Amazon remains dominant.
The applications that power Alexa—that enable it to perform particular tasks—are called “skills.”
Skills execute various requests: They can dim your kitchen lights, offer recipe ideas, and provide allergy forecasts with precise pollen counts.
Skills are created by third-party developers, who have built over 80,000 skills for Alexa.
Meanwhile, a host of manufacturers have produced Alexa-compatible devices or appliances.
While third-party skills developers and manufacturers are critical to expanding the Alexa ecosystem, Amazon also actively competes with both.
Amazon has recently introduced dozens of new features and devices, including an Alexa-enabled microwave, security camera, subwoofer, and smart plug—smart devices that existing Amazon partners had already been providing.
Given how Amazon uses Marketplace data,
it seems reasonable to assume that Amazon uses its retail platform for insight into sales of current smart devices, which then informs its production strategy. In 2015, Amazon launched the $100 million Alexa Fund, which supports voice-technology startups and was designed to help cultivate a “developer ecosystem” around Alexa.
Some observers, however, say that Amazon is using the fund to mine product ideas that it then produces itself.
Nucleus, for example—a startup that had received backing from the Alexa Fund to create a voice-controlled video device—went on to watch Amazon release an almost identical product.
While startups backed by the Alexa Fund sometimes get unique access to Amazon, some investors advise businesses “to be wary of accepting Amazon’s investment, because of the risk of Amazon copying ideas.”
Following allegations that Amazon appropriates from its portfolio companies, Amazon has privately reached out to startups to mitigate those concerns, saying that a “clear ‘firewall’ exists between the Alexa Fund and Amazon’s product development teams.”
Amazon also competes with Alexa-skills developers. From its rollout, Alexa has had some built-in features, such as weather and timers.
It regularly introduces new features, which sometimes offer the same service as an existing skill or tool provided by third parties.
Three areas in which Alexa has entered into direct competition with third-party skill providers are analytics, testing tools, and Blueprints.
The primary advantage that Alexa domains enjoy over third-party skills is that they are set as the default. If a user asks a question that both an Alexa-native and a third-party skill can answer, the default skill activated will be the one native to the Alexa engine.
This default setting can be justified as way to offer users a smoother experience and to solve the technical problem of knowing where to send a request. But the effect is to create a built-in bias to steer users toward Alexa domains over third-party skills. Recent announcements suggest that Amazon is looking to enable the surfacing of skills into the first domain, which would mean Alexa would be able to sort through its abilities to activate the one that best addressed a user’s request.
While, in theory, this could place a third-party skill on equal footing with an Alexa domain, the transition could also strengthen Alexa’s role as a gatekeeper, rendering skills more captive to Amazon’s discretion.
Amazon closely tracks usage patterns on Alexa.
It also enjoys exclusive access to the voice data that Alexa collects—data that capture the questions consumers ask voice platforms.
Alexa maintains access to this data even when the information is collected through third-party skills, and Amazon can use the information to both steer its future moves in the voice-assistant market and enrich other parts of its business, such as advertising.
This unique dataset will also give Amazon a huge advantage in continuing to develop its machine learning.
No empirical work has closely examined what guides Alexa’s entry into certain skills or devices or how the threat of direct competition with Alexa affects third-party developers.
B. Alphabet
Alphabet, the parent company of Google, is a conglomerate comprised of subsidiaries in digital advertising, internet services, artificial intelligence, biotech, broadband, and venture capital.
Google—which encompasses digital advertising, Android, Chrome, Google Cloud, Google Maps, Google Play, Google Search, hardware, search, and YouTube
—remains the entity’s profit center. In 2018, Google pulled in $36.5 billion in operating income, while the combined total of Alphabet’s other segments posted a loss.
There are several markets in which Google both serves as a major platform and competes with platform participants. These include generalized search, Android operating system/apps, and its online ad exchange. Although Google’s integrations in the smartphone and online advertising markets have also attracted antitrust attention, this section focuses on Google’s integration in search.
1. Google Search/Google Verticals. — Google is a dominant internet search company, capturing around 88% of the U.S. search engine market
and 95% of mobile searches.
It began as a general search provider, indexing the web and developing algorithms to identify which web content may provide a relevant response to a user’s search query. Search users do not pay money for their searches; instead, Google collects and analyzes data about users to sell targeted advertisements. In 2018, ad sales constituted 85% of all Alphabet revenue.
The search engine market is comprised of “horizontal” search—a general search engine that offers results regardless of subject area—and “vertical” search, which limits query results to a specific category of content.
Even as Google became the dominant website for horizontal search, a stable of independent entities launched their own specialized search engines, focused on areas like comparison shopping, local search, flight search, and financial data.
Because Google is the dominant provider of online search, this ecosystem of vertical sites relies on Google to be seen and discovered by users.
Although Google introduced its first vertical product around 2002,
only in 2005 did it begin strategically investing in and promoting additional vertical properties, including in local search, finance, and travel.
Its foray into these areas rendered standalone vertical properties, such as Yelp and TripAdvisor, dependent on their biggest rival.
Google took advantage of this dual role in several ways—conduct that the Federal Trade Commission (FTC) investigated as part of an antitrust probe in 2011. As revealed by an FTC staff memorandum that was partially and inadvertently disclosed to the Wall Street Journal in 2015, the investigation found that Google used its position in general search both to give its vertical properties preferential treatment and to appropriate content from third-party competitors in vertical search.
According to FTC staff from the Bureau of Competition (BC), Google rolled out a new interface—“Universal Search”—to privilege Google content and demote third-party content.
It relied on a host of tactics. For one, Google displayed Universal Search results at or near the top of its search engine ranking page, which had the effect of demoting and resulting in “significant loss of traffic” to many vertical rivals.
Google also “embellished” its vertical results with “eye-catching interfaces” that helped steer users to Google’s vertical properties—interfaces that Google did not make available to competitor vertical websites.
Commission staff concluded that Google’s self-privileging had been at least partially motivated by fear that superior vertical competitors would divert search queries—and, subsequently, advertisement dollars—from Google.
The tactic worked: Self-preferential treatment “led to gains in user share for its own properties.”
Google also appropriated information from third-party rivals in order to boost the quality of its own offerings. As of 2012, Google primarily obtained its vertical content through “scraping” other websites.
Google did so through pressuring website publishers to accept a license agreement that gave Google blanket consent to use third parties’ data feeds.
When rivals tried to resist Google’s efforts to copy their information, Google gave them an “all-or-nothing choice”: They could either allow their content to be appropriated by Google or they wouldn’t appear within Google web search results at all.
In short, Google “could now force local websites—that needed access to Google’s web search to reach users—to accede to Google’s use of the large storehouse of reviews that Google’s rivals had built in order to develop its own user base.”
BC staff concluded that the “natural and probable effect” of Google’s scraping was “to diminish the incentives of vertical websites to invest in, and to develop, new and innovative content” and recommended that the FTC condemn this conduct as unlawful.
BC staff also concluded that Google’s self-preferential treatment “likely helped to entrench Google’s monopoly power.” Although the BC recommended bringing an antitrust action against Google on three grounds,
the Commissioners entered a voluntary settlement with the company instead.
The European Commission, by contrast, investigated Google on similar grounds and brought two cases establishing that the corporation had abused its dominance.
Given Google’s integration across internet search, services, and desktop and mobile advertising markets, there are numerous other ways in which it competes with businesses dependent on its services. In addition to discriminating against vertical content, Google has been found to discriminate against rival horizontal search engines and browsers and to hobble competitors in the search advertising market.
C. Facebook
Facebook is a dominant social network. Around two-thirds of Americans use Facebook, three-quarters of them on a daily basis.
In the United States, 80% of user time spent across social networks is spent on Facebook.
Through having purchased Instagram and WhatsApp, Facebook now owns the top three, and four of the top eight, social media apps.
Like Google, Facebook monetizes its service by selling placement to digital advertisers.
There are at least two sets of market participants that both rely on Facebook’s network and find themselves in competition with Facebook: app developers and online publishers. In both markets, Facebook has used its dominant position to appropriate from rivals.
1. Facebook APIs/Facebook Apps. — Facebook’s network of over two billion users gives app developers an opportunity to reach a large audience.
Facebook, meanwhile, has an incentive to cultivate a rich ecosystem of apps built around Facebook’s network. To incentivize developers to invest in building this ecosystem, Facebook offers developers access to its application programming interfaces (APIs), which lets apps access data from Facebook’s network and grow their number of users.
Facebook also delivers certain apps and features directly, placing it in competition with developers. It has both foreclosed competitors from its platform and appropriated their business information and functionality.
Reports describe how Facebook has denied API access to those firms that it considers direct competitors. In 2013, for example, Facebook cut off API access to Vine, the Twitter-owned feature that let users create six-second videos.
Emails released by the U.K. Parliament revealed that the decision to block Vine’s access came directly from CEO Mark Zuckerberg—presumably because Twitter, which owned Vine, is a Facebook competitor, and Facebook was building out its own video offering.
Facebook similarly shut off API access to MessageMe, a messaging app (and competitor to Facebook Messenger) that had soared in popularity, within a week of its release.
Voxer, another communications app, was also cut off shortly after Facebook introduced a competing product.
Explaining its decision, Facebook cited a provision of its platform policy that prohibited developers from using Facebook APIs to promote a product that replicated “a core Facebook product.”
The firms that saw their API access revoked by Facebook all ended up either exiting the market or shutting down entirely.
In addition to blocking apps that it deemed competitive threats, Facebook has also systematically copied them. Through Onavo, a mobile-analytics company that Facebook purchased in 2013, Facebook tracked rival apps, identifying which competitors were diverting attention and usage from Facebook.
Reports capture how the tool has helped Facebook either imitate rivals or seek to buy them out.
Using information captured by Onavo, Facebook has copied the functionality of several apps—including Meerkat, Houseparty, and Snapchat—and bought out WhatsApp and tbh.
Apps whose functionality Facebook has copied—like Snapchat—went on to see declines in user growth.
Like Amazon and Google, Facebook has established a systemic informational advantage (gleaned from competitors) that it can reap to thwart rivals and strengthen its own position, either through introducing replica products or buying out nascent competitors. Strikingly, one of Facebook’s more recent acquisition—the burgeoning social network tbh—had achieved limited market penetration by the time Facebook purchased it.
Analysts speculate that Facebook spotted tbh’s rapid pace of growth through Onavo and then bought it out.
2. Facebook’s Publishing Network/Facebook Ads. — For online publishers, Facebook is both a massive communications network on which they’ve come to depend, as well as a major competitor in selling ad placement. Facebook, meanwhile, has leveraged its dominant position as a communications network to extract sensitive business information from publishers. Collecting this information from publishers has enabled Facebook to significantly enhance the value of its advertising business at publishers’ expense.
For publishers, Facebook’s network offers a highly attractive distribution channel. Given that most online publishers earn revenue from user clicks and visits, greater exposure to Facebook’s 1.52 billion daily users can be a game changer.
Citing the promise of greater user visits—and thus greater revenue—Facebook in 2010 started marketing a set of social plug-ins that publishers could add to their websites.
Installing the “Like” button, for example, would mean that any user that visited a publisher’s website could easily share content from the publisher’s website with the user’s Facebook network, drawing more readers back to the publisher’s site.
In order to add Facebook’s plug-ins, publishers had to install Facebook’s code onto their websites.
In practice, installing this code “opened a backdoor communication between users’ devices and Facebook’s servers,” enabling Facebook to leverage the social plug-ins installed on third-party websites to track the users of those websites.
In other words, Like buttons dramatically expanded the reach of Facebook’s tracking: Any time a Facebook user visited a site with the social plug-in, Facebook could use the user’s Facebook login cookies to identify the user.
Some publishers were wary. The value that online publishers offer advertisers is access to their specific readers; it is this audience relationship that ultimately allows ad-based publishers to monetize their content. If Facebook were able to surveil a publisher’s readers, it could sell access to those readers at a fraction of the publisher’s price—undercutting the publisher’s pricing power in the ad market.
For Facebook, meanwhile, access to this data would enable it to more precisely target Facebook users when selling ads, increasing ad revenue.
To assuage publishers’ concerns, Facebook maintained the perception that it would not use these plug-ins to monitor users for the purpose of selling advertising.
Keen to harness Facebook’s expansive network to increase clicks, publishers flocked to the plug-ins. Within the first week of the rollout, over 50,000 websites installed Facebook’s social plug-ins,
helping Facebook embed its code across the internet.
Contrary to Facebook’s representations, researchers later exposed that Facebook was using the Like button code to track what users were reading or buying—even if a user hadn’t clicked the Like button and even if the user had logged out of Facebook.
Despite facing public backlash for both its apparent deception and its pervasive surveillance, Facebook did not change course—perhaps because it no longer faced serious competition in the social network market.
In 2014, it officially codified its policy of using Facebook code embedded across third-party websites to track users.
The new policy admitted that Facebook would now use this surveillance data to boost Facebook’s advertising business.
It is reasonable to consider this policy change a bait and switch. Facebook induced websites to install Facebook plug-ins by representing that the company would not use this installed code to channel user data to its advertising business. Thirty percent of the top million most-visited websites—including major news publishers—added Facebook’s plug-ins, becoming dependent on Facebook’s network for greater distribution.
Facebook’s decision to switch course has meant that online publishers—and any third-party website that both sells ads and uses Facebook plug-ins—are now feeding valuable business data to a major competitor at their own expense.
Unlike the case of Amazon or Google, Facebook’s appropriation of publishers’ business information is not a feature of Facebook being vertically integrated. Instead, it derives from the fact that Facebook is both a major communications network and a major advertiser, and the price it charges publishers for using its platform as a distribution network is the right to surveil publishers’ users—information that it uses to enrich its advertising business. In other words, collecting publishers’ business information is not a functional necessity of allowing publishers to use Facebook; it is instead the condition Facebook has set.
There are aspects of Facebook’s business in which it is integrated, such as in content. Through Facebook Instant Articles, for example, Facebook has vertically integrated into publishing media content on its own platform.
Reports suggest that Facebook has used its integrated structure to preference its own offerings.
D. Apple
Apple is a major provider of consumer electronics and digital services, spanning smartphone and smartwatch devices, desktop and laptop computers, digital assistants, a music store, and set-top boxes. The first publicly traded corporation in history to reach $1 trillion valuation,
Apple is a major provider of mobile devices and operating systems in the United States.
Across its products, Apple has long championed a vertically integrated model that combines hardware, software, services, and retail.
Unlike the Android operating system—which users operate on non-Alphabet devices—Apple iOS functions only on Apple devices.
Like Android, Apple both operates an app marketplace, offering third-party app developers the opportunity to reach Apple customers, and directly markets its own apps in its app marketplace.
Since it opened in 2008, the App Store has generated more than $120 billion in total sales for app developers.
1. Apple iOS/App Store/Apple Apps. — App developers claim that Apple uses its integrated model to privilege its own apps by setting unfavorable terms for third parties.
A recent complaint filed by Spotify in the European Union summarizes these allegations.
First, Apple charges Spotify and certain other apps a 30% fee on in-app purchases—a fee that, Spotify points out, Apple enforces selectively.
Apple’s own apps do not pay the fee, and neither do many apps, like Uber, that are not in direct competition with a comparable Apple service.
Second, Apple prevents Spotify from communicating directly with Apple-based users or marketing certain services to them—potentially inhibiting Spotify’s sales.
And third, Spotify alleges that Apple “routinely reject[ed]” Spotify’s app enhancements and bug fixes—degrading the product quality it could market through Apple, as Apple ramped up its competitor service, Apple Music.
This is not the first time that developers have alleged discrimination by Apple. Around 2008, Apple explicitly rejected apps on the basis that they “duplicate[d] the functionality” of built-in iPhone apps.
More recently, Apple was reported to have removed a digital wellness app shortly after releasing its own rival product (Screen Time)
and to have rejected a social location planning app that competes with its own “Find My Friends” app.
Faced with slowdown of iPhone sales, Apple is expanding its service offerings, introducing new services in TV, news, payments, and video games.
It has also “intensified monitoring of apps that benefit and threaten Apple,” in part by creating a “release radar” through which Apple tracks apps that pose competitive threats to Apple’s own services.
It is unclear whether Apple’s monitoring efforts are drawing on data on rivals collected through its platform.
E. Effects of Discrimination and Appropriation on Investment and Innovation
There are several reasons why permitting dominant digital platforms to discriminate against and appropriate sensitive business information from producers that depend on them to reach market might be harmful. Drawing on a Progressive Era framework, one could argue that allowing a firm that controls an essential service or form of infrastructure to exploit that control in ways that enrich the firm and harm third-party dependents amounts to a problematic exercise of private coercion.
Seen through this lens, this conduct represents the accumulation of “arbitrary authority unchecked by the ordinary mechanisms of political accountability,” amounting to a “political problem of domination.”
As Part II of this Article traces, in recent decades this expansive framework for understanding and regulating private power has been abandoned in favor of a paradigm that focuses primarily on welfare costs. Yet, as this section outlines, platform discrimination and appropriation also risk undermining innovation, raising dynamic efficiency concerns. Therefore, even under a framework primarily focused on efficiency harms, discrimination and appropriation by dominant platforms merits serious concern.
1. Are Dominant Digital Platforms Stifling Innovation? — One risk associated with foreclosure and value appropriation by dominant digital platforms is that this conduct could deter entry and chill innovation. If independent developers or producers rely on a dominant platform to reach customers and also face the constant risk that the platform will foreclose access, appropriate their business value, or both, producers may be less likely to secure funding and develop their product in the first place. In Microsoft, the district court found that Microsoft’s exclusionary conduct not only had hobbled innovation in middleware and applications software but had discouraged competition throughout the computer industry as a whole.
The long-term effect of its conduct was to “deter[ ] investment in technologies and businesses that exhibit[ed] the potential to threaten Microsoft.”
Anecdotal evidence suggests that both actual entry and the threat of entry by digital platforms into platform-adjacent markets is dampening investment in complementary segments, now known as a “kill-zone.”
For example, a survey of more than two dozen Silicon Valley investors revealed that Facebook’s willingness to appropriate information from and mimic the functionality of apps has created “a strong disincentive for investors” to fund services that Facebook might copy.
One founder observed, “People are not getting funded because Amazon might one day compete with them.”
“We don’t touch anything that comes too close to Facebook, Google or Amazon,” said a managing partner at New Enterprise Associates.
Another venture capital investor noted that the impact of dominant digital platforms on “what can be funded, and what can succeed, is massive.”
This concern raised by venture capitalists makes sense: A potential innovator (or a potential funder of a potential innovator) decides whether to invest based on the anticipated risk and reward of realizing the innovation. Anticipating platform discrimination or appropriation will lower expected rewards, depressing the incentive to invest. Even the uncertainty of discrimination can dissuade entry by heightening risk.
Data on investment trends do not offer a decisive answer but generally seem consistent with the story told by surveyed investors. Venture capital funding as a whole appears to be booming: In 2018, the total annual venture capital invested surpassed $100 billion for the first time since the dot-com period.
The number of angel and seed investments, meanwhile, has been declining since 2015, signaling that it has become harder for startups to secure an initial round of financing.
Indeed, it is late-stage deals with mature companies that account for an “outsized proportion” of total capital today,
while startups see fewer first financings, even as the deal value for startups has increased.
In other words, venture capital markets seem to be following a winner-take-most model: Fewer firms receive funding, but those that do are raising more capital.
These trends come against a backdrop of falling entrepreneurship: Startup formation is at a thirty-year low, contributing to a loss of business dynamism.
These overall numbers, however, offer limited insight into whether—and in what way—dominant platforms are affecting venture capital funding. Even sector-specific figures compiled by the industry database are based on industry classifications that are too generalized for a precise analysis of this question. Establishing high-level causality between platform conduct and investment decisions would prove extremely challenging; there are a significant number of variables at play, and demonstrating but-for causality is tough. Achieving clarity on this question would require granular case-by-case analysis.
The theoretical literature examining how third-party producers and providers (also called “complementors”) manage or respond to head-to-head competition with platforms is vast.
Empirical work, by contrast, is more limited.
One study found that Amazon is more likely to enter product spaces that have higher sales, better reviews, and that do not require significant effort by sellers to grow.
The effect of Amazon’s entry, meanwhile, is to reduce shipping costs for consumers and increase sales—but its self-preferential treatment can also foreclose consumers’ access to competing products.
Overall, Amazon’s entry has not yet affected customer perceptions of product quality,
but it does “discourage[ ] third-party sellers from continuing to offer the products.”
The authors of that study note that existing merchants discouraged by Amazon’s entry “may bring fewer innovative products to the platform.”
A study assessing how app developers reacted to perceived or actual entry by Google, meanwhile, found that developers are “discouraged from innovating in the affected market.”
Indeed, even the threat of direct competition by Google spurs developers to “significantly reduce[ ]” updates on affected apps—and to reallocate their efforts to markets unaffected by Google’s entry.
Notably, the average small firm also responds by pivoting to a focus on short-term profits, leading to higher prices.
Empirical studies assessing how actual or potential entry by a dominant platform affects complementors are still limited. Investors acknowledge unequivocally that the dominance of digital platforms deters investment in certain markets, and data suggest that firms looking to compete with a core functionality of Google, Facebook, or Amazon have seen funding dry up.
The few available case studies confirm that the risk of appropriation chills or at least diverts certain forms of investment and innovation. More empirical work on this issue would help deepen public understanding of how funders assess the risk of platform foreclosure and appropriation, and what impact platform expansion into adjacent markets may have on innovation.
At first glance, the idea that dominant digital platforms may be using their integrated structure to undermine dynamic efficiency appears in tension with standard economic theory. The Appendix to this Article reviews leading theories on when integrated firms can be expected to discriminate against or exclude rivals in adjacent markets, identifies the set of conditions under which this is likely to happen, and explains why digital platform markets fit these conditions.
2. Innovation and Platform Design Principles. — While initial evidence suggests that platform discrimination and appropriation is stifling innovation, definitively determining the net effects on innovation—which involves significant uncertainty, lengthy time horizons, and interdependencies
—is complex. Indeed, the debate over what type of market structure and forms of business organization best promote innovation is longstanding and extensive.
While contributing to this debate is beyond the scope of this Article, this section will briefly offer that (1) promoting innovation in platform-adjacent markets should be a key goal of platform policy, and (2) innovation architecture literature offers useful principles for thinking through how to create digital platform ecosystems conducive to innovation.
There is broad consensus that, over the long run, promoting dynamic efficiency is more important to well-being than static efficiency.
For this reason, scholars have devoted a wealth of research to identifying how to cultivate and promote instrumentalities of innovation.
Commonly recognized innovation catalysts include patents, standard-setting processes, and platforms.
Because platforms have the potential to lower the cost of entry for firms looking to market new products or services, platforms have the potential to “increase the rate at which product innovation can happen.”
The Windows platform had the potential to ease entry for Netscape, which could access millions of consumers without having to create its own operating system—just as Android has the potential to ease entry for thousands of app developers. Given the critical role that platforms can play in spurring innovation, protecting the integrity of platforms as innovation catalysts should be a key goal of competition policy in digital markets.
This would include preventing platforms from engaging in forms of discrimination, exclusion, appropriation, and self-privileging, conduct that can lead to “the corruption of the entire system of platform-based innovation.”
Separate from policing conduct that risks undermining innovation, policy can also draw from innovation architecture principles.
This approach was central to designing the internet, whose original architecture was based on the “end-to-end” principle.
In general, end-to-end stipulates that “the ‘intelligence’ in a network should be located at the top of a layered system—at its ‘ends,’ where users put information and applications onto the network[,]” while the “communications protocols themselves (the ‘pipes’ through which information flows) should be as simple and as general as possible.”
Professors Mark Lemley and Lawrence Lessig observe that designing the Internet around end-to-end has had social significance, most notably in “the competition in innovation the Internet enables.”
As they explain, because “there is no single strategic actor who can tilt the competitive environment (the network) in favor of itself, or no hierarchical entity that can favor some applications over others, an e2e network creates a maximally competitive environment for innovation.”
The end-to-end principle was embedded partly through the Internet Protocol, an open-standard networking protocol that empowered “developers at the network’s edge to design and deploy new services and applications without having to rely on network operators to build any new functionality into the physical core of the network.”
This principle, in turn, traces to the concept of common carriage, which required common carriers to grant equal treatment to equally situated parties.
The key attributes of common carriage are “nondiscriminatory public access and indifference to the nature of the goods carried.”
Digital platforms exist in a different “layer” from the physical network providers governed by end-to-end.
As scholars have noted, regulations at the “application” layer—which includes digital platforms—have encouraged “content awareness,” in part due to the role some of these services play in intermediating speech and expression.
Still, these architecture design principles offer a fruitful way of thinking through what set of constraints should apply to dominant digital platforms in order to best promote innovation.
II. Legal Scrutiny of Vertical Integration by Dominant Networks
Confronting the risks of integration by dominant intermediaries is not new. Up until around the 1970s, a basic regulatory principle held that dominant gatekeepers should not be permitted to compete with third parties for access to the gatekeeper’s facilities. Limits on business entry for network monopolies, gatekeeper intermediaries, and other businesses deemed to have outsized control over key services were a mainstay of economic regulation.
This Part traces the evolution in both the institutional mechanisms and the substantive considerations by which government actors have imposed limits on business entry. It closes by sketching out how current antitrust law neglects to address harms from vertical integration that should trigger scrutiny even under the current framework.
Notably, state and federal governments have issued line-of-business restrictions through a variety of legal tools: corporate charters, regulatory regimes, and antitrust law.
In some cases, these limits prohibited firms from expanding into any distinct market; in others, they prohibited firms from entering only adjacent markets—namely, those markets that involve a successive stage of production or distribution. A categorical prohibition would, for example, ban a movie distributor from entering any nondistributor market, whereas a ban on integration would prohibit it from entering only the movie-production market or the movie-theater market. Since this Article examines the dual role that digital platforms play—as both marketplace operators and merchants in the marketplace—this Part primarily focuses on limits on entry into adjacent markets.
A. Evolving Approaches to Restricting Business Lines
Early American corporations had their activities restricted by their charters. States issued corporate charters as a special grant of limited liability in exchange for the performance of specific duties and functions.
Corporate charters generally limited the size, scope, and duration of operations and steered business activity toward serving community purposes.
This effort to use charters to impose “some degree of social control” on firms lasted into the late nineteenth century, by which point most state legislatures had passed general incorporation laws—with the expectation that companies would now be regulated by competition.
With this shift from special to general incorporation, the corporation largely ceased being viewed as an instrument of state policy and instead became seen as a “private institution” that had authority “to carry on virtually any kind of business.”
Following this shift, restricting the lines of business in which a firm could engage mostly fell to regulatory regimes that Congress introduced to govern specific sectors. Typically overseen by an administrative agency, these regulatory regimes spanned industries including railroads, banking, airlines, trucks, telecommunications, electricity, and natural gas—sectors considered both critical to the economy and, in some cases, susceptible to monopolistic market structures.
In some instances, the statute creating the regulatory regime specifically prohibited regulated firms from entering certain markets.
In other cases, these limits on entry (and exit) were instituted by the administrative agency.
While each regime had its own specific policy goals and regulatory tools, government oversight of these “regulated industries” shared a general aim of ensuring reliability and nondiscrimination.
Agencies applied restrictions on market entry and exit to promote both of these goals.
In some cases, regulated firms were permitted to enter multiple markets so that they could cross-subsidize: Long-distance service, for example, could subsidize local service, enabling the provision of universal service.
In other instances, regulated firms were prohibited from entering certain lines of business in order to further the goal of nondiscrimination.
While common carriage regimes would require a firm to offer equal service on equal terms, prohibiting a firm from competing with its business customers would eliminate one source of the incentive to discriminate. In this way, common carriage and structural separations often functioned as complements in the service of nondiscrimination. In addition to limiting entry and exit, standard agency interventions included regulating rates, requiring standard packages of services at uniform prices, and mandating universal service.
No precise set of criteria determined the sectors that Congress decided to oversee through regulatory regimes. Several of the regulated industries exhibited natural monopoly characteristics—including high fixed costs and low marginal costs—but these economic characteristics offer only a partial explanation.
Direct government oversight tended to hinge more on the degree to which an industry was, as the Supreme Court termed it, “affected with a public interest.”
In some cases, the “public-ness” of an industry correlated to the degree to which it was a public necessity, as was the case, for example, with electricity.
Nondiscriminatory access requirements, however, were generally tied to physical distribution networks, which the government has a long history of overseeing.
All regulated industries were related in some way to transportation and communication networks, even as “different economic and social facts seem to carry different weight” depending on the context.
As Professors Joseph Kearney and Thomas Merrill have described, starting in the 1970s this legal regime gave way to a different regulatory paradigm.
Instead of promoting equal treatment and reliable service, the new framework sought to encourage competition both among providers and within their forms of service, the idea being that maximizing consumer choice would minimize the need for regulatory involvement.
The specific way lawmakers applied this new framework varied by industry. The Airline Deregulation Act of 1978, for example, ended the public utility approach to regulating airlines, while the Telecommunications Act of 1996 loosened some restrictions and introduced a new set of requirements oriented around the goal of promoting competition.
Across industries, tariffed services, integrated service packages, and regulatory control were abandoned in favor of individually negotiated contracts, unbundled services, and an abridged role for administrative agencies.
The transition away from the traditional regulatory paradigm took place against a background assumption that antitrust laws would robustly police formerly regulated dominant firms. Both Alfred Kahn and then-Professor Stephen Breyer, strong advocates of the shift in regulatory paradigm, described the new regime as a distinct form of regulation.
And while most tools of the first regulatory paradigm (rate-setting, for example, or mandated universal service) were largely eliminated in favor of the new competition-based paradigm, structural restrictions on business have remained a feature of both. This is because even as the new model was less directly interventionist, it still relied on the antitrust laws to police markets—and structural limits have been a key remedy in antitrust.
The antitrust laws broadly prohibit anticompetitive conduct and anticompetitive mergers. Structural prohibitions can apply in both contexts. When a company is found to be monopolizing or attempting to monopolize a market in violation of Section 2 of the Sherman Act, breakup of the company is an available remedy.
Separately, when a court determines that the effect of a particular merger or acquisition “may be substantially to lessen competition, or to tend to create a monopoly” in violation of Section 7 of the Clayton Act, it can enjoin the merger.
Compared to separations implemented through regulations, antitrust separations are less likely to categorically deny market entry, although consent decrees that govern a significant market segment may achieve that effect.
In either case, the separation intervenes at the level of business structure rather than conduct.
Unknown at the time of the shift away from regulated industries was how drastically antitrust law, too, would be transformed. Through the 1960s, antitrust courts and enforcers assessed business expansion into adjacent markets through “economic structuralism,” an approach that analyzed competition primarily through examining the structure of markets.
Although the government was light on bringing antitrust actions in vertical merger cases up until the 1930s, scrutiny of vertical expansion picked up after the Great Depression, which wiped out thousands of small unintegrated businesses and catalyzed a political movement against integrated chain stores.
Skeptics of vertical integration offered two primary theories of harm: leverage and foreclosure. The concern with leverage was that a dominant firm would use its market power in one line of business to establish an outsized advantage in an adjacent market.
The risk posed by foreclosure meanwhile was that a vertically integrated firm would compel its subsidiary to deal exclusively with the parent, depriving unintegrated rivals of access to the firm’s good or service.
At a minimum, critics worried that vertical integration increased barriers to entry by necessitating potential entrants to compete in both lines of business.
In 1950, Congress amended Section 7 of the Clayton Act to make it expressly applicable to vertical acquisitions.
Through the 1970s, the Justice Department successfully challenged vertical deals, resulting in divestitures.
Ruling that a merger between a major producer and leading retailer of shoes would undermine competition, the Supreme Court explained that
[t]he primary vice of a vertical merger or other arrangement tying a customer to a supplier is that, by foreclosing the competitors of either party from a segment of the market otherwise open to them, the arrangement may act as a ‘clog on competition,’ which deprive(s) rivals of a fair opportunity to compete.
And in holding that the second largest auto manufacturer’s acquisition of a leading auto parts dealer would foreclose market access for independent dealers, the Court concluded that “only divestiture would correct the condition caused by the unlawful acquisition.”
Though enforcers’ analysis of vertical control—through ownership or contract—was case-specific, it was integration by dominant firms that was most commonly held to be anticompetitive, given that exclusionary conduct by dominant companies could, in practice, entirely close off markets to unintegrated rivals.
In United States v. E.I. du Pont de Nemours & Co., the Court held that internal transfers within a vertically integrated firm could be anticompetitive if they denied competitors market access.
And in the 1968 Merger Guidelines, the Justice Department stated that integration achieved through a large vertical merger “will usually raise entry barriers or disadvantage competitors to an extent not accounted for by, and wholly disproportionate to, such economies as may result from the merger.”
This approach to vertical integration underwent a sea change during the 1980s. Though some economists had for decades maintained a benign view of vertical integration, it was work by Robert Bork, Ward Bowman, and Richard Posner, among others, that helped drive an overhaul in policy.
Bork’s scholarship challenged both the leverage and foreclosure theories of harm as logical fallacies,
while Bowman argued that the jurisprudence around tying agreements was deeply flawed.
These scholars, associated with the Chicago School, argued that, contrary to prevailing economic theory and antitrust policy, vertical integration was almost always procompetitive. This view was premised primarily on three arguments. First, they maintained, firms could not extract additional profits from extending a dominant position into a distinct market, because—assuming that a firm was already selling a combination of goods at its profit-maximizing price—increasing the price of one would result in a corresponding offset in the other.
Second, the Chicago School held that an integrated firm would be able to foreclose rivals only to the degree that the firm had generated cost savings, outdoing less efficient competitors—an outcome that antitrust should encourage.
Insofar as a vertically integrated entity did cut off both upstream sellers and downstream customers, those firms now had an opportunity to transact with one another. And third, they argued, vertical mergers would invariably generate significant efficiencies.
Because the upstream division would transfer its input to the downstream entity at marginal cost rather than at a sales price, vertical mergers eliminated double marginalization, leading the downstream partner to lower prices for consumers.
With the election of President Reagan, these theories were stamped into policy through both the antitrust agencies and federal judiciary. For the next decade, antitrust officials did not challenge a single vertical merger and relaxed scrutiny of vertical restraints more generally.
The transformation in how antitrust authorities approached vertical structures and conduct was part of a broader revolution in antitrust law, which embraced “consumer welfare” as the lodestar of antitrust and adopted price theory as the proper methodology for analyzing competition.
As courts incorporated this new learning into their analysis, they shifted from rules to standards, narrowing the range of dominant firm conduct treated as anticompetitive.
Although the Chicago School’s influence drove these changes at the level of policy, the Harvard School—whose prominent members included Phil Areeda and Stephen Breyer—also played a critical role in setting the intellectual foundation for narrowing the zone of liability for dominant firms.
Since the Chicago School’s “resounding victory,” scholars have critiqued some of its excesses and moderated its theories, delivering the “Post-Chicago School.”
Today’s approach to antitrust law largely follows in this Post-Chicago tradition, where Chicago’s influence has been tempered even as it remains indelible.
The following section reviews the current antitrust approach to vertical integration and why it risks neglecting potentially anticompetitive vertical conduct by dominant platforms.
B. Contemporary Antitrust’s Treatment of Vertical Integration
Most forms of vertical integration today are “viewed as economically beneficial and competitively benign.”
Antitrust scrutiny of vertical integration has two legal hooks: (1) Section 7 of the Clayton Act, which states that mergers that may “substantially lessen competition” are unlawful,
and (2) Section 2 of the Sherman Act, which prohibits monopolization or attempted monopolization.
An unlawful vertical merger could be challenged under Section 7, and vertical conduct that constitutes monopolization or attempted monopolization could be targeted under Section 2. Given the dearth of cases challenging vertical mergers, the law governing vertical mergers has remained “undeveloped.”
Two factors that inform whether a vertical merger or vertical conduct is held to be anticompetitive are the competitiveness of a market and the presence of entry barriers. Economic analysis holds that foreclosure is a viable antitrust strategy in monopolistic and oligopolistic markets protected by entry barriers.
Similarly, establishing monopolization generally requires showing both the existence of monopoly power and the existence of entry barriers.
In digital platform markets, two potential entry barriers worth assessing are network effects and unequal access to data. In markets characterized by network effects, the value of the relevant good or service increases with greater use of that good or service.
Whereas supply-side economies of scale reflect declining average and marginal costs of production, network effects are a demand-side feature. Depending on the type and strength of the network effects, these externalities can serve as barrier to entry—a finding that formed the basis of the Microsoft decision.
Scholarship analyzing the conditions under which unequal access to data serves as an entry barriers is still developing, but initial work suggests that the self-reinforcing advantages of data may give incumbents a sufficiently significant lead that potential competitors struggle to enter.
Given the turn away from structuralism, contemporary antitrust law generally requires that the allegedly anticompetitive merger or conduct have an anticompetitive effect, defined as harm to consumer welfare.
This welfare-based framework is understood to include not just static concerns about price and output but also dynamic concerns about innovation.
Notably, discrimination and appropriation by dominant tech platforms seem to generate antitrust harms cognizable even within this welfare-based framework. Insofar as platform conduct reduces investment and entrepreneurial activity by independent parties, any subsequent loss in innovation would—in a dynamic efficiency framework—constitute a harm to competition.
These dynamics are an echo of Microsoft, insofar as it was Microsoft’s conduct against Netscape that prompted the Justice Department to bring its antitrust suit alleging that Microsoft’s activity “adversely affect[ed] innovation,” by “impairing the incentive[s]” of rivals to “undertake research and development” and “impairing the ability” of “competitors to obtain financing.”
Some former state enforcers and lawyers have argued that dominant platforms are engaging in exclusionary conduct to acquire and maintain monopoly power in ways reminiscent of Microsoft—but that enforcers have yet to rectify these marketplace harms, due to unfavorable case law in the United States and inadequate remedies by the European Commission.
Platform discrimination and appropriation also risk going unaddressed by contemporary antitrust. This is because of both specific doctrinal changes that have significantly narrowed the range of instances in which single-firm conduct rises to an antitrust offense as well as general blind spots of a consumer welfare approach primarily focused on price and output effects.
To appreciate the likely neglect of antitrust to these competition harms, it’s worth briefly reviewing the doctrinal obstacles to bringing an antitrust case against a dominant tech platform for discrimination or appropriation.
1. Denial of Access and the Essential Facilities Doctrine. — Prior to 2004, a dominant tech platform that blocked independent parties in favor of its own goods or services might have been liable under the “essential facilities” doctrine.
Under essential facilities, dominant firms that deny other businesses nondiscriminatory access to their unique facilities may incur antitrust liability.
This doctrine traces to the early years of the federal antitrust law, when the Supreme Court interpreted Section 1 of the Sherman Act to impose obligations of equal and nondiscriminatory access.
In subsequent decades, the Court interpreted the Sherman Act to require that the only railroad bridge across the Mississippi river grant open and equal access to all rivals;
that the Associated Press grant nondiscriminatory membership to publishers that competed with its existing members;
and that the sole power company in a region must transmit power generated by rival firms to customers that sought to buy cheaper power from those rivals.
In 1983, the Seventh Circuit formalized essential facilities into a doctrinal test, requiring plaintiffs to establish four elements: (1) the monopolist controls access to an essential facility; (2) the facility cannot be practically or reasonably duplicated by a competitor; (3) the monopolist denies access to a competitor; and (4) it is feasible for the monopolist to provide access.
In this way, essential facilities could be seen as “a means of protecting or injecting competition into a market susceptible to monopolization due to structural factors.”
Insofar as independent producers or developers could prove these elements, the dominant platform would have been liable.
The essential facilities doctrine, however, has died a “death by a thousand cuts,”
having drawn academic criticism since the 1980s.
As of 2004, the essential facilities doctrine lives in “near extinction.”
That year, in Trinko, the Court ruled on whether a customer of a local phone monopolist could bring an antitrust class action challenging discrimination by a monopolist against a rival.
Although the Court’s holding did not involve essential facilities, in dicta the Court all but rejected the viability of the doctrine.
While courts continue to review essential facilities claims, in the wake of Trinko no plaintiff has successfully litigated one to judgment.
2. Discriminatory Refusal to Deal. — A dominant tech platform that discriminates against those independent parties that provide competing goods or services could, in theory, be liable for discriminatory refusal to deal in violation of Section 2 of the Sherman Act.
The key precedent is Aspen Skiing, in which the defendant’s refusal to sell lift tickets to a rival resort was held to constitute unlawful monopolization.
What distinguishes a legitimate refusal to deal from an illegitimate one is whether the dominant firm’s actions discriminate between rivals and non-rivals.
For example, if Android demoted from the Google Play Store apps that competed with Google-owned apps but did not demote non-rivals, the demoted competitors would likely be able to allege a discriminatory refusal to deal claim against Android.
Here, too, the Supreme Court has thrown into doubt the practical viability of unilateral refusal to deal claims. In Trinko, the Court denied the existence of any duty to deal and characterized Aspen Skiing as “at or near the outer boundary of § 2 liability.”
Stopping short of foreclosing refusal to deal claims entirely, the Court distinguished Trinko from Aspen Skiing on the grounds that (1) Aspen involved a defendant that had stopped participating in an existing venture, and (2) the existence of a regulatory structure that already governed the defendant’s duty to deal couldn’t be reconciled with a separate antitrust duty to deal.
The blow of Trinko is softened slightly in the context of the dominant tech platforms, which presently are not governed by a separate regulatory regime. But the Court also codified a heightened requirement, establishing that discriminatory refusals to deal will only be actionable if the conduct is likely to create a new monopoly or entrench an existing one.
In other words, the dominant platform must have a “dangerous probability of success” in monopolizing the adjacent market. Discrimination by Android against independent apps, for example, would constitute a viable claim only if that discrimination were enabling Google to capture a monopolistic share of the relevant app market.
Although some commentators have read this requirement as “squeeze[ing] much of the remaining vitality out of Section 2 claims challenging unilateral refusals to deal,”
it is possible that platform conduct in certain adjacent markets could be shown to meet even this heightened standard.
3. Information Appropriation. — Antitrust enforcers recognize that appropriation of sensitive competitor information can undermine competition. When reviewing vertical mergers, the antitrust agencies assess whether the deal would enable the merging firm to use rivals’ information in anticompetitive ways.
Enforcers recognize that positioning a dominant firm to collect and analyze a rival-customer’s business information could “reduce the incentives of the rivals even to attempt . . . procompetitive moves,” resulting in longer-term harm.
Outside of the merger context, appropriation of sensitive business information by a rival is more difficult to cognize as an antitrust harm. Exclusionary conduct cases are generally governed by the rule of reason.
The standard follows a burden-shifting approach: In the first stage, the plaintiff must show a significant anticompetitive effect.
If the plaintiff succeeds, then the defendant must demonstrate a legitimate procompetitive justification.
If the defendant succeeds in doing so, then the plaintiff can show that the restraint is not reasonably necessary or that the objectives could be achieved by less restrictive alternatives.
An empirical study of rule of reason cases found that courts dispose of 97% of cases at the first stage on the ground that there is no anticompetitive effect; courts balance the pro- and anticompetitive effects in only 2% of cases.
An exclusionary conduct case based on information appropriation is especially unlikely to succeed under the current antitrust framework because establishing anticompetitive effects purely on innovation-based harms is extremely challenging under the consumer welfare standard.
In part this is because static harms are easier to measure than innovation harms, a fact that tends to bias antitrust analysis towards a focus on price and output effects.
In part this is also because dynamic harms can involve significantly greater indeterminacy, such that conduct that yields short-term price reductions might also lead to long-term losses in innovation.
It is true that the Justice Department prevailed in United States v. Microsoft by focusing on innovation-based harms.
Since Microsoft, however, the antitrust agencies have not brought a single case involving a pure-innovation theory of harm in a monopolization case. In the twenty years since, courts have raised evidentiary standards for plaintiffs, demanding “empirical proof of antitrust impact or injury for consumers that can be directly tied to the conduct.”
Given both doctrinal hurdles imposed by courts since Microsoft as well as the general challenges of concretizing innovation-based harms, a growing set of scholars is concluding that “antitrust generally, and the antitrust agencies specifically, are currently ill-equipped to effectively pursue a platform owner that commands sufficient market power to stifle innovation.”
Indeed, the Supreme Court recently made it even more difficult for plaintiffs to successfully allege even price-based anticompetitive effects in certain cases. In Ohio v. American Express Co. last term, the Court introduced a special rule for analyzing the conduct of companies operating in “two-sided transaction platforms,” requiring that plaintiffs alleging anticompetitive harm on one side of the market must—as part of establishing a prima facie case—also show that the purported harm was not offset by benefits on the other side.
A drastic departure from traditional forms of antitrust analysis, this “netting” requirement redefines what constitutes anticompetitive conduct in the context of platforms that facilitate a “simultaneous transaction,” effectively creating an insurmountable hurdle for plaintiffs.
While several commentators — including the Assistant Attorney General for Antitrust — have said they interpret the holding as applying only to a small number of tech platform markets,
it is too early to tell whether antitrust defendants will successfully expand its reach to cover exclusionary conduct by non-simultaneous transaction platforms.
4. The Shift Away from Structural Remedies. — A final trend in antitrust worth identifying is the shift away from structural remedies in vertical merger cases. The 2004 merger guidelines strongly disfavored behavioral remedies.
The 2011 guidelines, by contrast, established a preference for a combination of structural and conduct remedies.
In practice, the Obama Administration proved reluctant to issue strong structural remedies in vertical cases; it approved two major vertical deals—both described by critics as raising significant anticompetitive concerns—by issuing primarily conduct remedies.
These conduct remedies—in the Ticketmaster–Live Nation and Comcast–NBC mergers—have proved difficult to oversee and enforce.
Concerns that Live Nation has failed to abide by the remedies in any meaningful sense have prompted the Justice Department to open a Section 2 investigation, examining whether Live Nation is indeed using its control over concert facilities to pressure customers to also use its ticketing service and retaliating against those who decline its ticket service but still seek access to the concert facility.
Comcast, too, has violated the conduct remedies that enforcers imposed when permitting the merger.
These incidents raise broader questions about the relative efficacy and administrative costs of imposing conduct remedies over structural ones.
As Professor Spencer Weber Waller has noted, the retreat from structural remedies has led the antitrust agencies to adopt highly complex remedies that typically “exceed the resources and strengths” of the Justice Department and FTC.
Another way to understand the trend is that the agencies have shifted away from structural remedies in favor of remedies that do more regulatory work
—even as the agencies are institutionally structured to serve as enforcers rather than regulators.
Stark information asymmetries between enforcers and platforms suggest that enforcing conduct remedies in digital markets will prove even more challenging.
Given that rebalancing away from an exclusive reliance on conduct remedies in favor of structural remedies could mitigate these administrability costs and challenges, the case for structural separations in digital markets is worth assessing.
5. Adjusting Competition to Regulation? — These trends can be summarized as follows: In the wake of deregulation of network industries and dominant intermediaries, lawmakers expected antitrust to police dominant intermediaries. But in the decades since, courts and enforcers have drastically contracted the basis for antitrust liability in cases involving dominant firms.
The result is a highly enfeebled and impoverished set of tools for confronting dominant intermediaries in network industries.
Meanwhile, even innovation harms seem to go unaddressed under the consumer welfare framework, although innovation is central to dynamic efficiency and long-term welfare.
In instances when vertical mergers are scrutinized, moreover, growing reliance on conduct remedies has stretched the antitrust agencies beyond their institutional capacities, enabling exclusionary conduct.
Notably, the Court has suggested in recent antitrust cases that remedies for injuries that result from dominant firm conduct may be better pursued through a regulatory paradigm rather than through antitrust law—further suggesting that judicial aversion to antitrust will make addressing platform integration through current law extremely challenging.
In light of these trends, the question of whether structural separations should be recovered as a tool of competition policy is salient because digital platform markets seem to favor monopolistic market structures. Growing empirical research shows that dominant tech platforms enjoy uniquely durable market power.
Network effects and the self-reinforcing advantages can lead to winner-take-all dynamics, where markets tip early and potential entrants face significant barriers.
Expectations that the tech sector would be sufficiently fast-moving and rapidly innovating so as to justify a relatively hands-off approach to antitrust were too rosy.
The question of how to adjust expectations of competition to the reality of its absence has an analogue. As formerly monopolistic sectors were opened up to competition, a wave of scholarship in the 1990s and 2000s explored how the legal regime governing these markets should adjust accordingly.
Specifically, these scholars asked: When should an increasingly competitive market lead us to abandon regulations whose justifications depend on monopoly market structure?
What we lack is an understanding of the inverse question: When do we decide that what was perceived as a competitive market in fact is monopolistic or oligopolistic, warranting the application of rules traditionally applied to dominant firms? And which traditional tools should apply?
These questions animate this Article, with a focus on one of these tools: structural separations. As Part III will discuss, structural separations have been a mainstay tool applied to network industries and dominant intermediaries. While much of the focus—and criticism—of the public utility regime has centered on rate regulation, vertical separations have been less closely studied.
Separations differ from rate regulation and several other regulatory tools in that separations are ex ante rules whose application does not require continuous government intervention or constant monitoring. Insofar as a primary criticism of the public utility era is that many of the regulations proved too unwieldy for courts and enforcers to implement, structural separations appear far more appealing.
Contrasted with other public utility tools, separations reduce regulatory burden and reflect humility about the capacity of public officials to manage business conduct.
III. Separations Regimes
This Part provides an overview of five separations regimes, as applied to railroads, bank holding companies, television networks, and telecommunication carriers. Two of these separations were implemented through statute,
two through agency regulations,
and one as an antitrust remedy.
To be sure, this list is not exhaustive; lawmakers and enforcers have implemented structural prohibitions in a variety of other contexts.
This section seeks to offer a representative sample across a few network industries to identify the range of concerns that arise when companies that play an infrastructure role in distribution networks integrate into lines of business that rely on those networks.
A. Railroads
By 1900, a handful of railroads had captured the market for anthracite coal. Six firms owned 90% of the total anthracite resources, resulting in high, uniform prices and yielding massive profits for the railroads.
Through controlling both the tracks and the coal, railroads came to engage in the same kinds of discriminatory conduct that Congress had outlawed through the Interstate Commerce Act.
Independent coal companies found, for example, that the railroads refused to provide them with sufficient cars to transport their coal to market,
giving the railroad-owned coal superior access to markets.
Seeking to rectify this runaround, Congress included in the 1906 Hepburn Act a provision separating the function of transportation from the function of ownership over goods.
While this specific prohibition was introduced last-minute in the Senate and therefore did not generate extensive debate,
the concept was not new; a congressional committee in 1892 had undertaken an investigation of the railroad sector and concluded that “the public interest demanded that the business of a common carrier should be absolutely separated from any other.”
Known as the “commodities clause,” this provision forbade a railroad from carrying “any article or commodity” that it had “manufactured, mined, or produced,” or in which it “may have any interest[,] direct or indirect.”
Under the original version of the bill, this rule would have applied to all “common carriers,” including pipelines for oil, natural gas, and other commodities.
But business interests in the oil and gas sector managed to narrow the provision so that the final language emerging from conference covered not common carriers in general but only railroads.
Several senators also successfully pushed to exclude timber and lumber from the general prohibition, arguing that a whole group of railroads that had invested in tracks for the sole purpose of transporting lumber would otherwise go bankrupt.
More extensive debate and discussion might have yielded a more sweeping ban,
had Congress not been “anxious to secure the speedy passage of the bill.”
The Hepburn Act passed the Senate by 71-3, with fifteen senators not voting.
The backlash from the railroads against the law was almost immediate. States in the anthracite region—including New Jersey, New York, and Pennsylvania—had been encouraging railroads to purchase coal lands in order to develop those states’ natural resources.
In some cases the states had embedded the right to own coal mines in corporate charters.
Following state guidance and incentives, the railroads had invested heavily to purchase coal mines—only to see the Hepburn Act penalize them for it.
Shortly after the bill was enacted, the Attorney General filed suits against six railroad companies that had not divested their coal interests.
One firm responded with a constitutional challenge, alleging that the act fell outside congressional authority to regulate interstate commerce and that the commodities clause would constitute an impermissible “taking” under the Fifth Amendment.
The Court rejected this view and clarified that, contrary to the government’s position, a carrier may transport goods that it had produced, so long as the carrier had clearly divested its ownership of those goods prior to commencing transport.
The Court also construed the statute to permit railroads to carry goods produced by a bona fide distinct company in which the railroad was a stockholder.
Three subsequent cases at the Supreme Court would further test the boundaries of the commodities clause. In 1911, the Court held that a railroad using direct stock ownership in a coal company to wield “complete power over the affairs of the coal company, just as if the coal company were a mere department of the railroad,” violated the Hepburn Act.
Critically, the problem was not stock ownership per se but “the ‘commingling of the affairs . . . ,’ so as to make both corporations virtually one.”
Four years later the Court confronted a coal operation that had been spun off as a separate organization yet remained beholden to its former parent railroad.
The vice president of the railroad company also served as the president of the coal company, the two firms shared directors and an office building, and the railroad corporation dictated contractual terms to the coal company, effectively prohibiting it from doing business with other entities.
The Court held that no single factor was decisive, but ruled that—taken together—the facts proved that “the relation between the parties was so friendly that they were not trading at arm’s length.”
The key question was whether one company had been “converted into a mere agent or instrumentality of the other.”
Lastly, the Court reviewed a case in which a single holding company owned both a railroad and a coal company, and the railroad company, in turn, was a majority shareholder in the mining company.
Upon examining the circumstances, the Court found that the owners had sought the “abdication of all independent corporate action,” surrendering to the holding company the “entire conduct of their affairs.”
Explaining that courts would “look through the forms to the realities of the relation between the companies,”
the Court required that the businesses separate to establish “entire independence.”
In doing so, the Court explained that it was “using the antitrust laws to close a gap” in the Hepburn Act,” which had banned railroads from owning commodities but not from entering contractual agreements.
The Court recognized that railroads could achieve through exclusive contracting what the law forbade them from achieving through integration.
By the 1920s, any unity of control—through stock ownership or by means of a holding company—was recognized as a violation of the Hepburn Act. Rejecting the view that the statute outright prohibited railroads from having any ownership interest in the firms whose goods they transported, the Court adopted an approach that assessed the degree of control between the two firms. Any association of management between railway companies and commodity companies was prohibited.
B. Banking
A core principle at the heart of banking regulation in the United States is the separation of banking and commerce. This policy of separation traces back to the charter for the Bank of England
—an example that the United States looked to when forming its own banks, and a principle that many state banking regimes also adopted.
Between 1870 and 1910, the Supreme Court four times upheld rules enjoining banks from owning commercial businesses.
In 1956, the United States codified this separation principle in the Bank Holding Company Act (BHCA).
The Act applied to all firms controlling multibank holding companies (i.e., two or more banks).
Specifically, § 4(a) prohibited banks from acquiring nonbanking companies and required banks covered by the Act to divest any nonbanking subsidiaries within two years of becoming subject to the law.
The Act granted banks some latitude: They could own nonbanking subsidiaries whose activities were deemed by the Federal Reserve to be “so closely related to the business of banking or of managing or controlling banks as to be a proper incident thereto.”
But in practice, the Federal Reserve granted this exception extremely rarely.
Because the BHCA had applied only to multi-bank firms, it had created a loophole. By 1970, the six largest banks in the United States had formed one-bank holding companies in order to engage in commercial activities.
Responding to this runaround, Congress amended the BHCA to extend its prohibitions to one-bank holding companies.
Lawmakers described the revision as a way to “continue our long-standing policy of separating banking from commerce.”
Lawmakers and policymakers have appeared willing to also apply the separation to commercial entities. Starting in 2005, Walmart, Home Depot, Target, and several other commercial firms made moves to acquire FDIC-insured industrial loan companies (ILCs), a type of financial entity.
Had the FDIC approved the acquisitions, Walmart’s financial arm, for example, would have become the primary processor of payments for Walmart.
Critics of the deals worried that Walmart would be able to pressure Walmart Bank to ignore credit problems
and that Target and Home Depot would make loans to finance exclusive purchases of their own goods.
In the face of opposition from business groups, labor unions, community activists, public interest groups, and members of Congress, Walmart withdrew its application.
Applications by the other firms were stalled by FDIC’s moratorium.
While the Federal Reserve moved to erode the legal wall between banking and commerce in the late 1990s and early 2000s, renewed publicity around 2013 thrust the issue back into the center of policy debate,
prompting congressional hearings and a Senate investigation.
Scholarship and reporting newly identified the original hazards of permitting our biggest banks to serve as merchants of essential raw materials.
In 2016, the Federal Reserve proposed a rule to rein in banks’ nonbanking activities and largely return to the earlier regime.
Although many of the biggest banks significantly divested their commodities holdings in the wake of public attention,
the Federal Reserve rule has yet to be finalized.
C. Television Networks
As the television industry grew in the 1950s, the sector consolidated around three networks: ABC, CBS, and NBC. These networks owned and operated the majority of television stations and affiliated stations, controlling the distribution of television programs for a majority of the country.
They also produced their own programs. Through an investigation into the networks’ programming practices, the Federal Communications Commission (FCC) determined that the networks had acquired significant power over the financing, development, and syndication of television programming.
The top three networks controlled all aspects of programming, from creating programs to deciding which programs got aired and syndicated.
The FCC reached two main conclusions. First, by virtue of being the only program providers that could reach almost all Americans, the networks enjoyed monopsony power, which they could wield to acquire programming at terms highly unfavorable to producers.
Second, the networks also possessed monopoly power, which they could use to withhold programs from independent stations and to grant favorable syndication rights to their network affiliates.
The networks were powerful vertically integrated entities that used their heft against both independent programmers and independent stations. The problem, as the FCC saw it, was that the networks’ power would have “the effect of limiting the number and variety of programs available to the public, thereby limiting program diversity, contrary to the FCC’s much sought after goal.”
The FCC followed its investigation with an order that structurally disallowed networks from entering the production and syndication markets.
Specifically, the rule prohibited networks from both syndicating any of their own programs and obtaining financial interests in programs created by independent producers that the networks aired.
By separating production and distribution, these structural rules sought to curb the conflicts of interest created through integration.
Almost from inception, these “fin-syn” rules faced pushback from industry, which lobbied the FCC to revise its order. In a follow-up inquiry in 1978, the FCC observed that the rise of satellite technology had opened up the market to new networks, potentially rendering the 1970 prohibitions obsolete.
News that the FCC was considering modifying its order prompted a major advocacy effort by the major motion picture studios, which benefited from limits placed on the networks’ activities.
Hollywood’s interests found a friend in the Reagan Administration, and the FCC kept the 1970 rules in place for another decade. In the early 1990s, the FCC once again moved to review the fin-syn regime, this time issuing revised rules that loosened restrictions on networks’ ability to own and syndicate programming.
After the Seventh Circuit struck down the rules for being arbitrary and capricious,
the FCC responded by issuing rules that imposed on the networks minimal structural restrictions that would phase out in two years.
In 1995, the FCC released an order observing that the advent of cable, VCR, and direct broadcasting had opened up the market and loosened the networks’ gatekeeper power, resolving concerns about their ability to undermine diversity.
Its 1995 order effectuated the end of the fin-syn rules.
D. Telecommunications: Maximum Separation
By the 1960s, advances in computing had given rise to a new industry: data processing. Data-processing services relied on communications lines run by telephone monopolies.
As telecom carriers began to enter data processing, officials worried that the carriers would use their control over the pipes to squash nascent rivals.
To examine the issue, the FCC launched a series of proceedings called the “Computer Inquiries.”
In the first proceeding (Computer I),
the FCC focused on whether to regulate the data-processing industry and whether to limit common carriers from expanding into the new market.
The FCC concluded that the data-processing market was highly competitive, innovative, and characterized by low entry barriers, therefore demonstrating no need for regulation.
The reliance of data processing on incumbent carriers, however, posed a risk.
Concerned that carriers would stifle data processing, the FCC adopted a policy of “maximum separation,” under which regulated communication carriers could enter the unregulated data-processing market only through a fully separate subsidiary.
Carriers could do business with their data-processing affiliates but were prohibited from discriminating among affiliates “in the offering of facilities or services, in the timing of the installation of facilities, in the quality of service offered or in the charges for like services.”
The rule also prohibited carriers from promoting the data-processing services offered by their subsidiaries or from using any excess network capacity to provide data-processing services.
Affiliated subsidiaries, meanwhile, were not allowed to own transmission services and instead had to acquire them on a service basis.
These structural safeguards sought to create “an open communications platform available to all users on a nondiscriminatory basis.”
Recognizing that discrimination by the largest firms posed the most serious risk to competition, the “maximum separation” regime applied only to carriers with annual operating revenues exceeding one million dollars.
Through basing the separation on the distinction between data processors and carriers, the FCC created a loophole for hybrid services that provided both the processing and transportation of data.
Initially the FCC held that, so long as the data processing was “incidental” to the communications service, the entire activity would be treated as communications.
But the hybrid category continued to pose problems for the FCC, prompting the agency to revisit its rules.
In the late 1970s the FCC undertook a second round of inquiries (Computer II).
This time the FCC created a new distinction between “basic service” (which referred to pure transmission) and “enhanced service” (which rode the pipes of the “basic service” and included email, voice mail, the internet, newsgroups, interactive voice response, and protocol processing).
The FCC maintained its basic conclusion: that “enhanced services” should remain unregulated and that permitting “basic services” into the new market for enhanced services would risk stifling competition in this adjacent market.
In response to claims that structural separations on all carriers were “inefficient,” the FCC raised the size threshold requirement, leaving only AT&T and GTE subject to the ban.
All other carriers had to comply with unbundling rules— separating basic from enhanced services—but were otherwise allowed to maintain joint operations.
The Commission undertook a third round of investigations (Computer III) in 1985.
The inquiry was prompted by the FCC’s determination that the second round of inquiries had imposed “significant costs on the public in decreased efficiency and innovation.”
In 1986, the Commission issued its new plan: require carriers to ensure that their network remain open to all users of the basic services, by permitting users to interconnect to certain network functions and interfaces on an “unbundled and equal access basis.”
In other words, the new rule allowed common carriers to enter computing, so long as they offered unbundled basic service, adopted interconnection, and adhered to special accounting practices to prevent subsidization across lines of business.
Over the course of the Computer Inquiries, the FCC switched from structural separation to an unbundling and equal-access regime.
Twice the Ninth Circuit struck down the FCC’s move, finding that the Commission “had not adequately explained its apparent ‘retreat’ from requiring ‘fundamental unbundling.’”
Absent compelling justification, the court worried that this halfway unbundling regime would fail to prevent the Bell Operating Companies (BOCs) from engaging in discrimination.
Meanwhile, the FCC passed an Interim Order that allowed BOCs to provide some computing services without a separate subsidiary.
The regime remained in place until the Telecommunications Act of 1996, which undid some of the restrictions on dominant networks in favor of competition.
Competition, however, “never arrived.”
Enforcers permitted waves of consolidation, leading to highly concentrated cable and telecommunications markets.
For this reason, policymakers have continued to examine ways to manage the bottleneck power of dominant actors in these markets, most recently in the form of net neutrality.
Notably, the net neutrality policy discussion has occurred within a framework partly established by the Computer Inquiries, which introduced into communications law the conceptual distinction between information and telecommunications. The question of which category internet services fall into has been at the center of the net neutrality debate.
E. Telecommunications: The Breakup of AT&T
For much of the twentieth century, the telecommunications industry was intensely regulated through requirements that carrier services, prices, and entry be approved by the FCC and state regulators. The Communications Act of 1934 served as the basic statutory framework guiding the FCC’s regulation, which held universal service as a central goal.
In the 1970s AT&T provided local and long-distance phone service, owned a major producer of telephone equipment (Western Electric), and ran a leading research facility (Bell Labs).
The Justice Department filed an action against the Bell Systems empire in 1949, alleging that Western Electric had monopolized the manufacturing, sale, and distribution of telephones and other equipment material.
In 1974, the government filed a separate action, arguing that AT&T had abused its dominant position in three markets—local exchange, long distance, and equipment—in order to monopolize the entire telecommunications industry, a strategy described as the “‘triple-bottleneck’ theory.”
The government’s complaint alleged that AT&T had illegally refused to provide competitors with local interconnection services, furnished rivals with inferior maintenance services, and imposed requirements that thwarted the reach of competing local networks.
In lieu of going to trial, the parties reached a settlement. The agreement required AT&T to divest ownership and control of the BOCs.
Premised on the idea that regulators would be unable to stop an integrated monopoly from engaging in predatory anticompetitive conduct in adjacent markets,
the settlement was designed to prohibit the companies from combining monopoly and competitive lines of business after divestiture. The Justice Department argued that prohibiting the act of discrimination would be insufficient—the government had to target the underlying incentive to discriminate outright.
Notably, the consent decree combined the breakup requirement with an “equal access” obligation imposed on the independent BOCs. Under this provision, the divested BOCs had to provide unaffiliated long-distance carriers access to the local exchanges that was “equal in type, quality, and price” to that given to AT&T.
This obligation was eventually extended to all local-exchange carriers.
The consent decree was administered by Judge Harold Greene for twelve years.
Over this time, Judge Greene responded to the parties’ requests for modification of the decree, assessing whether the market had sufficiently changed to justify loosening the line-of-business restrictions.
The decree remained in place until the passage of the Telecommunications Act.
F. Common Threads
Drawing from these separations regimes, a few observations stand out. First, policymakers have applied separations regimes to three sectors: transportation, communications, and banking. Broadly all three have involved particular markets and services where a bottleneck facility served as infrastructure or a critical intermediary.
Within these categories, we can further distinguish between bottleneck services that are or were essential for the functioning of our economy—such as railroads or banking—and those that constitute an important distribution channel but have not been viewed as essential in the same way.
Second, a majority of the separations were coupled with common carriage rules requiring equal access on equal terms. This was the case with railroads, data processing, and telecommunications, further capturing how structural separations and nondiscrimination rules can function as critical complements in the service of nondiscrimination.
Third, defining the separation may not always be straightforward, especially when dealing with new technologies. With time, the FCC came to see that the initial distinction it had drawn—between data processors and common carriers—was unworkable, prompting the agency to redesign the rule around a distinction between basic and enhanced services instead. This form of learning and reworking is bound to be a part of implementing separations regimes.
Fourth, the efficacy of a separations regime rests intimately on the timing of its implementation. This is true both with regard to its introduction and its repeal. Insofar as it is the existence of a bottleneck that invites the separation, identifying when market conditions have changed such that discrimination or appropriation by the firm is no longer likely to have market-wide effects can help inform if and when a separation should be revoked. The separations implemented through the Computer Inquiries and the AT&T remedy both underwent continuous scrutiny by regulators and the judiciary, who regularly evaluated whether the market had become more competitive.
And with the exception of banking, the separations regimes discussed above were eliminated once enforcers or lawmakers determined that market developments had created more pathways for distribution, softening the bottleneck’s market power. Applying separations requires periodic reassessment that the remedy is still addressing an underlying harm.
Lastly, the separations principle has been applied in different forms. Broadly, two levels of strictness emerge: (1) complete bans (or total separations), which prohibit a company from any engagement or involvement, interest, or ownership in particular activity; and (2) partial bans (or functional separations), which permit a company to engage in a particular business activity but prescribe the organizational form it must take—requiring, for example, that the separate business activity be conducted through a separate affiliate. There is no clear pattern as to when lawmakers or regulators opted for one form over the other.
IV. Functional Goals
This Part explores the policy motivations and functional goals that underlay these structural separations. Although policymakers applied structural limits in a variety of sectors, six justifications recur: (1) eliminating conflicts of interest, (2) preventing cross-financing that would extend existing dominance, (3) preserving system resiliency, (4) promoting diversity, (5) preventing excessive concentration of power, and (6) prioritizing administrability.
Notably, these motivations register in a normatively pluralistic framework: While some are cognizable in terms of welfare economics, others appeal to a broader set of institutional and democratic values. Some goals sound in both registers. This Part reviews these various policy motivations.
A. Eliminating Conflicts of Interest
A key policy objective that runs through the separations explored above is the elimination of conflicts of interest. The animating idea is that companies in infrastructure-like sectors that compete with the businesses using their services have an incentive to favor their own goods or services over those owned by rivals. Because these intermediaries comprise a backbone for a broader set of economic or social activity, whether they actually act on the incentive and ability to discriminate is secondary—the incentive and ability are deemed a sufficient threat. By forbidding the very structural arrangement that gives rise to the conflict of interest, prophylactic bans safeguard against discrimination.
The goal of eliminating conflicts of interest motivated the implementation and/or enforcement of structural separations in railroads, banking, and computing. As railroads continued to experiment with arrangements that facilitated control over coal, a group of critics argued that the commodities clause should be read as a sweeping structural ban—to prohibit railroads from transporting any commodity produced by any company in which it held any stock. This view was first articulated by Justice John Harlan dissenting in the first commodity clause case to reach the Court.
A reading of the act that permitted railroads to affiliate with producers in any capacity would, he warned, “enable the transporting railroad company, by one device or another, to defeat altogether the purpose which Congress had in view, which was to divorce, in a real, substantial sense, production and transportation, and thereby to prevent the transporting company from doing injustice to other owners of coal.”
While a majority of the Court refused to go along with this specific interpretation, it rested on the idea that integration created possibilities for abuse, and therefore bans on cross-ownership would help “avoid the tendency to discrimination,” which “necessarily inheres in the carrying on by a railroad company of the business of manufacturing, mining, producing, or owning, in whole or in part, . . . commodities which are by it transported in interstate commerce.”
In other words, Justice Harlan wrote, history showed that discrimination “inevitably grew up where a railroad company occupied the inconsistent positions of carrier and shipper.”
Only a clear separation between production and transportation would eliminate this risk of discrimination.
Similarly, the structural separation in banking was driven by the desire to prevent conflicts of interest that could bias how banks make loans or extend credit. Owning or even affiliating with a commercial entity could incentivize banks to make lending decisions with an eye to the effects on their own commercial entities.
By interfering with the allocation of credit, this dynamic could threaten to distort not just competition in any given market but the economy as a whole.
At root, the concern about biased lending echoes the antitrust fear about foreclosure. Both focus on how an integrated business may use its integrated structure to undermine or discriminate against rivals. The concern is more acute in the context of banking given the critical role financial institutions play in providing access to credit, the lifeblood of the economy.
The FCC echoed concerns about conflicts of interest in the Computer Inquiries. As the telephone companies expanded into the nascent computing market—thereby competing with the data-processing firms dependent on them
—the FCC worried about “even the most subtle preferences a common carrier might give its data processing subsidiary.”
In its tentative decision first considering the structural regime, the Commission observed that the primary dangers of allowing common carriers to integrate into data processing “relate primarily to the alleged ability of common carriers to favor their own data processing activities by discriminatory services, cross-subsidization, improper pricing of common carrier services, and related anticompetitive practices and activities.”
Notably, the FCC acknowledged that permitting carriers to use excess capacity for data processing might yield efficiencies that could lower costs.
But the agency maintained that “the potential abuses inherent in operations of this nature outweigh whatever benefits might be achieved.”
Moreover, the FCC argued that permitting carriers to integrate would distort the market by enabling a firm to succeed based on existing dominance rather than business-specific talent.
B. Preventing Protected Profits from Financing Entry into New Markets
Another concern that recurs as a functional justification is the desire to prevent companies from using protected profits to finance entry into new lines of business—a tactic that was deemed anticompetitive. This concern was especially heightened in the context of banking and telecommunications, as officials worried that firms would use their regulated services to finance their unregulated businesses.
The separation of banking and commerce, for example, was seen as a way to keep banks from leveraging a government-granted advantage into other lines of business.
Some accounts view this as a foundational reason that England first instituted the separation. As the British government had granted the Bank of England a corporate charter, separation was a “protection against whatever advantages the special corporate charter implied and whatever advantages the Bank might obtain in the future.”
Keeping banks from entering commerce would prevent a government-sponsored entity from constraining opportunities for private entrepreneurs. In other words, separation was a “protection against a firm affiliated with the government.”
In computing, the FCC wanted to prevent regulated telephone monopolies from subsidizing their data-processing entities, which would have given them an edge over independent data processors.
Because data processors depended on the carriers, permitting carriers to enter computing would mean the carrier’s data-processing division would receive an “implicit subsidy” from its competitors.
This would lead to “unfairly and artificially low prices in the data processing market for the carrier’s computer services.”
And because the monopoly had its long-run rate of return effectively guaranteed, it had latitude to engage in predatory pricing.
Again, this cross-financing was viewed as anticompetitive, as it would permit the monopoly to leverage its government-protected advantage against firms in a separate market. The FCC wanted to “prevent any arbitrary manipulation in the allocation of revenues and expenses between a carrier’s regulated and unregulated service offerings.”
Specifically, the FCC worried that a carrier could charge inflated prices to its customers and use these revenues to finance its data-processing unit, which could underprice competitors in the data-processing market.
This concern applied even in the context of smaller carriers, which would still have “the incentive and opportunity to take advantage of their monopoly control of the transmission capacity, and to act in anticompetitive ways.”
The FCC’s desire to prevent the affiliate from enjoying any residual benefits from the monopoly led it to prohibit affiliates from sharing even names or symbols with the common carrier.
Branding the affiliate as an extension of the common carrier would produce the “same coercive effect” as if the carrier were soliciting sales on behalf of its data-processing business.
Preventing cross-financing was treated as a tool to enhance competition in the data-processing market. Allowing exclusive transactions between a carrier and its affiliate would “substantially impact the competitive market in which hundreds of small competing service bureau firms would be unable to obtain and retain the patronage of so significant a data processing customer.”
This is one reason the FCC required carriers to provide basic services to all other enhanced services on the same terms and conditions—effectively combining a structural separation with a nondiscrimination regime.
C. Preserving System Resiliency
Another justification that recurs is promoting the resiliency of systems. Because several of the entities subject to structural separations serve an “infrastructural” role—structuring access to markets or to an essential good or service—the public has a strong interest in maintaining their stability and shielding them from disruption.
Crashes that cripple these infrastructural services can have an outsized effect on economic activity, and involvement in multiple lines of business can increase the likelihood of system crashes. For this reason, policymakers treated strict limits on entry and exit as one way to shield critical services from undue risk.
Structural separations in banking and telephony, too, were partly justified on grounds of promoting system stability.
Precisely because banking services constitute a critical good, ensuring the soundness and stability of banking is a central goal of banking policy. Lawmakers and regulators have argued that preventing banks from expanding into commercial activities may help insulate banks from the vagaries of other sectors.
This line of argument is premised on the idea that exposing banks to manufacturing, physical trading, or other commercial activities “increases the vulnerability of the banking and payments systems, the federal deposit insurance fund, and thereby the broader economy.”
A question frequently raised during the 2013 debates around banks’ expansion into physical commodity trading was: What would happen if Morgan Stanley repeated the BP oil spill? Would taxpayers be on the line for the $61.2 billion in damages? In this way, a structural separation helps eliminate the risk that instability or disruption in commercial markets could necessitate a financial bailout.
To be sure, not all commercial activities are inherently more risky than financial activity—and, some might argue, expanding into these spheres may help banks diversify risk. That said, it is true that some commercial activities—like drilling oil or mining—pose particularly expensive risks to which federally insured depository institutions should not be exposed.
Concerns about system stability and resiliency also informed the FCC’s Computer Inquiries. The carriers argued that, in order to promote efficiency, they should be permitted to use excess capacity for data processing.
The Commission stated, first, that “the potential abuses inherent” in the system far outweighed any purported efficiencies,
and, second, the carriers should have a “‘back-up’ system” that “should be designed to meet foreseeable breakdowns of equipment dedicated to public service” and “should be available instantly for that purpose without the conflicting claims of other users.”
In other words, the FCC privileged redundancy over efficiency, recognizing that the former would serve the public by helping to ensure the stability of communications services and networks. Although expanding into data processing wouldn’t necessarily heighten the risk of a crash, keeping that capacity for backup would enable the system to absorb any shocks, helping promote resiliency.
D. Promoting Diversity
By creating conditions that invite greater competition among producers, structural bans can promote diversity in the goods and services produced. The history of the media sector shows that mandating a separation between production and distribution can help create an open market for content.
A key reason the FCC issued the fin-syn rules was to promote media diversity. One effect of the networks’ vertical control was that they effectively controlled the production process of most programming, “from idea through exhibition.”
Their programming decisions, in turn, were driven by advertising profits. As a result, “programs were produced on the basis of ‘formulas’ that were pre-approved by the three networks and their advertisers, such that the subject matter would satisfy tested commercial patterns.”
The networks’ grip on production, coupled with their commercial priorities, dramatically limited the range of programming that they would run. Lacking both the financial support of the networks as well as national exposure, independent producers languished.
The FCC worried that the networks’ dominance was sapping program diversity, limiting the shows and voices that Americans could access.
For this reason, the FCC structured its rules with diversity as a primary goal.
Key to achieving greater variety in programming was restructuring the networks’ incentives and restricting their ability to steer content. On this metric, the fin-syn rules worked: Between 1970 and 1990, the number of independent television stations increased from 65 to 340.
The Big Three networks’ aggregate share of nationwide primetime audience over this same period, meanwhile, declined from 90% to nearly 62%.
Safeguarding diversity of information also motivated Judge Harold Greene to modify the government’s consent decree with AT&T.
The decree proposed by the Justice Department would have permitted the new AT&T—having divested local carriers—to provide electronic publishing services.
Reviewing the provision, Judge Greene held that First Amendment values required that AT&T be blocked from entering this market.
Judge Greene’s primary concern was that AT&T would use its power in the interexchange market to undermine competing electronic publishers. He identified a set of tactics that the corporation could use to discriminate against rivals.
For example, he explained, AT&T could use its control over the network to prioritize traffic from its own publishing operations, to develop technology that favored its own operations over those of the industry at large, or to discriminate against competitors when providing needed maintenance on their lines.
Judge Greene acknowledged the Justice Department’s likely argument—namely, that market dynamics would limit AT&T’s ability to discriminate.
But he stated that “the peculiar characteristics of the electronic publishing market” invited particular caution.
Noting that information and news were “especially sensitive” to even small delays, and that publishers would “have no realistic alternative transmission system,” he concluded that “AT&T’s entry into the electronic publishing market poses a substantial danger to First Amendment values.”
Judge Greene required that the consent decree be modified to prohibit AT&T from entering electronic publishing for seven years, with the prospect of extension if the court determined that threats remained.
Abandoning the principle of structurally separating production and distribution has enabled widespread integration across media markets—potentially at the expense of media diversity. Critics of the Comcast–NBC merger, for example, warned that the tie-up would incentivize Comcast to privilege NBC programming
—and evidence suggests that Comcast has, in fact, discriminated against rival content.
The recent vertical tie-up of Time Warner and AT&T
poses some of the same hazards—including, public advocates predict, less media diversity.
Weeks after the D.C. Circuit approved the deal, AT&T threatened to drop rival programming, prompting allegations that the merged firm was using its “newfound market dominance” as “leverage to drive consumers to the content it owns.”
E. Preventing Excessive Concentration of Power and Control
By preventing certain forms of centralized control, structural separations can help safeguard against the concentration of power. The antimonopoly movement and the foundational antitrust laws were partly animated by a recognition that tyranny in our commercial spheres would preclude true democracy and liberty in our political sphere.
Structural separations were seen as a tool in this antimonopoly toolbox. Perhaps due to the outsized power that a financial oligarchy can wield—and the trove of findings by the Pujo Committee showing how a handful of financiers had seized control over entire sectors of the economy
—preventing excessive concentration featured as a prominent justification in debates on banking law through the mid-twentieth century.
On some accounts, all bank holding company regulation in the United States has had this antimonopoly goal as its focus—both to prevent “the unrestrained concentration of banking resources under the control of a single organization” and “to prevent undue concentration of economic power that Congress perceived may result when banking and nonbanking enterprises combine under the same corporate umbrella.”
The BHCA follows this antimonopoly tradition, and its passage was in part the product of effective lobbying by small independent and community banks.
Embedded in the separation of banking and commerce is a preference for small, local business enterprise as a unit of economic activity.
How would banks’ foray into commercial activities risk concentrating excessive power, rather than exhibiting bigness per se? One factor is control. If the same organizations that control access to money also control access to commercial products and services, banking experts worry that the arrangement would hand outsized decision-making power to a few. This concern is heightened when the products and services are of an essential nature—such as commodity inputs and raw materials like copper, grain, and energy—and when the controlling banks hold dominant positions.
If one worry about big banks steering both credit and commerce is outsized economic control, the other is excessive political influence. The ways that corporate actors can translate economic power into political influence are legion.
If history suggests that banks and finance interests have enjoyed political influence by virtue of their influence over the American economy, then prohibiting banks from acquiring significant equity in American industry remains one safeguard against their amassing greater political power.
F. Prioritizing Administrability
A final functional justification for structural separations is that they are highly administrable. Issuing outright bans obviates the need to engage in lengthy rule-of-reason type analysis; structural limits prescribe rules instead of standards. Structural separations are sometimes criticized for being far-reaching, crude, and overly broad, prohibiting benign as well as pernicious activity.
This criticism is fair, given that rules are “by nature both over- and under-inclusive.”
They accept some degree of error in return for clarity and predictability.
In at least two instances, public officials introduced structural regimes by citing their administrability, noting the limits of the government’s capacity to consistently detect discrete acts of wrongdoing. The FCC, for example, stressed its inability to “monitor carefully” the types of activities it had prohibited, “since even the injured party may not be aware of them.”
The Commission observed that “subtle forms of favoritism” are “numerous and difficult to detect,” and that it was unlikely that the agency would “be prompt in cracking down on discovered abuses.”
Relying on the agency to track individual acts of injury would risk extensive harm to competition. Structural bans, the agency explained, could also aid “the deterrence of foreseeable abuse.”
Members of Congress cited some of these same factors when constructing the BHCA. Lawmakers acknowledged that not all banks that expanded into commerce would discriminate or otherwise abuse their power.
But short of flagrant abuses, “subtle bias” might creep in, and it would be “quite unrealistic to expect [banking regulators] to monitor and detect” these less overt forms of discriminatory lending.
G. Shared Features Across Justifications
As explored above, six primary justifications recur across the structural separations reviewed: (1) eliminating conflicts of interest, (2) preventing dominant firms from using protected profits to enter new markets, (3) preserving system resiliency, (4) promoting diversity, (5) limiting the concentration of power, and (6) prioritizing administrability.
Several justifications share features, even as they draw on different values. First, these goals generally seek to preserve the integrity of a process rather than achieve a specific market outcome. Eliminating conflicts of interest and preventing use of protected profits to finance entry, for example, target purported distortions of market competition; both seek to curb a firm’s ability to harness existing market power. While the rhetoric surrounding these two justifications occasionally draws on notions of fairness, the substantive justifications also ring soundly in welfare terms, given that preventing dominant firms from harnessing existing advantages at the expense of new firms can promote dynamic efficiency. Preserving system resiliency, too, can be viewed as a welfare-based goal, insofar as ensuring greater reliability of core infrastructure is likely to facilitate greater economic activity.
Several of the policy goals, however, can instead be understood as appealing to a broader set of democratic and institutionalist values.
Preserving the system resiliency of essential services, for example, also draws on a tradition concerned with facilitating broad access to critical resources and restricting the arbitrary power that providers of essential services can exercise. Promoting diversity in production and preventing the excessive concentration of private power, meanwhile, are informed by a foundational recognition of the connection between economic structure and political outcomes. Drawing on the republican insight that domination is wrongful “even if the empowered party never affirmatively interferes with the dependent’s party choices,” structural separations target the source of the power, rather than its exercise.
V. Toward a General Framework for Separating Platforms and Commerce
The competition issues posed by dominant digital platforms have emerged against a doctrinal and institutional backdrop that seems particularly ill-equipped to handle them. The enfeebling of antitrust, coupled with the shift away from direct regulation of network industries, has permitted businesses that enjoy dominant positions as key infrastructure to integrate in ways that threaten to undermine competition. Yet even prominent proponents of deregulation have championed strong antitrust enforcement, including limits on vertical mergers.
The debate around how to tackle the power of dominant tech platforms is in its early stages. Recognizing that these entities play critical gatekeeper roles can help illuminate legal regimes that have been used to address analogous challenges in the past. While structural separations were a mainstay in a previous era, their role in structuring open markets has been largely abandoned.
This Part examines whether integration by dominant platforms gives rise to the sort of harm previously addressed through separations, offers a rough sketch of what a separations framework for digital intermediaries might look like, and identifies the likely challenges and unresolved questions. Ultimately, any separations proposal will require a case-by-case analysis of the relevant market that the platform dominates, the types of network effects and entry barriers that suggest the platform’s market power may be durable, and the potential costs of implementing a separation. Several questions that this Part only briefly engages—such as how to define what constitutes a platform, how to assess the contours of the platform, and how to scope structural separations—invite deeper study.
A. Substantive Case
1. Innovation Concerns. — Reports document that dominant digital platforms are using their integrated structure to discriminate against rivals and appropriate their competitively significant business information.
If this dynamic depresses the incentive to innovate—as studies suggest it does
—then this cost of digital platform integration is worth taking seriously. While standard economic theory states that only under certain exceptions will dominant platforms have the incentive and ability to discriminate against complementors, digital markets characterized by network externalities help create the conditions under which platforms are likely to discriminate.
Moreover, because dominant digital platforms passively capture highly precise and nuanced data on their business customers—information that is more valuable by virtue of being more sophisticated
—both the risk and cost of information appropriation is heightened in digital markets.
Concerns about information exploitation are not new. In 1971, when the FCC was considering whether its “maximum separation” regime should prohibit involvement by carriers in data processing entirely (or should require instead that their data-processing services be run as an independent affiliate),
it noted that an integrated carrier could potentially misappropriate information against processor rivals.
Data processors worried that integrated carriers would be able to collect their sensitive business information to exploit against them as rivals in data processing. The FCC concluded that this risk of misappropriation was low.
Its final decision stated that that the majority of independent data processors would likely use the Bell System for communication services,
and since Bell was forbidden from operating in unregulated markets (including data processing) altogether, there would be no risk of misappropriation of information by a rival.
Still, the FCC recognized the potential threat and noted it would “consider any attempt on the part of a carrier to secure and use such information for the benefit of its data processing affiliate as a serious breach of the policy established herein.”
2. Broader Concerns. — As reviewed in Part IV, separations have been motivated by a host of functional goals, some of which fit squarely within a welfarist frame, while others appeal to a set of institutional and democratic values. Recalling these broader concerns that animated laws and regulations effecting separations helps bring into focus the range of factors at stake when dealing with a dominant intermediary. Below I briefly review how these functional goals do or do not resonate in the context of digital platforms.
a. Extending Dominance Through Cross-Financing. — As described above, structural separations imposed on banks and telecommunications carriers were partly motivated by a desire to prevent cross-financing. Lawmakers and regulators worried that firms whose dominance stemmed from government-granted privileges would use that cushion to advantage new lines of business.
In particular, they worried that companies would use their regulated monopoly businesses to finance their unregulated businesses, thus gaining a competitive edge over rivals.
One way in which this could occur is if a firm shifted the costs of supplying the unregulated market to the regulated sector. The regulator—hypothetically unable to detect that the higher costs should be attributed to a distinct market—would then raise the revenue requirement that ratepayers of the regulated product would have to cover.
Effectively forcing consumers of the firm’s regulated service to finance its entry into the unregulated market would, in turn, undermine competition by discouraging potential rivals from entering the unregulated market.
Because digital platforms are unregulated, they cannot use regulated rates to finance new ventures. To the degree that it is the regulated nature of the subsidizing rates—namely, the fact that these rates are set by the government in a market where customers lack real choice—then digital platforms do not raise analogous concerns. If, instead, the concern is responding to dominant firms using supracompetitive profits to finance entry in an array of other markets, then the platform fact pattern becomes relevant.
Since dominant platforms report earnings and revenue at a highly generalized level, without breaking revenues and profits down to specific lines of business, we can mostly only speculate about the degree to which these firms are cross-financing. For example, Google’s operating margins over the last decade have hovered between 22% and 35%,
margins that would qualify as supracompetitive and that derive from a market that Google dominates. Since 2004, Alphabet has purchased close to 200 companies.
Several of these acquisitions strengthened Google’s position in digital advertising, its core market.
But many of its purchases have established its position in new markets; indeed, Alphabet has built its strength outside of advertising almost entirely through acquisitions.
Google established its home-automation business,
for example, primarily through buy-ups.
Most recently, the race for capturing the AI market is spurring a new flurry of acquisitions.
Its pattern of acquisitions suggests that the company “will continue to push into entirely new areas, from genomics and healthcare to autonomous transport.”
A dominant digital platform that uses its supracompetitive profits to buy its way into other markets can raise entry barriers in two ways. First, the platform can bundle its various services, such that any new firm seeking to compete in any one line of business may be unable to enter unless it could enter in multiple lines.
Second, entering multiple markets positions a digital platform to combine multiple sources of data, potentially enabling a “super-platform” to control “key portals of data, which helps it attain or maintain its power across many products.”
Amazon’s growing suite of acquisitions—which have picked up since Amazon Web Services (AWS) started reporting enormous profits
—has also led analysts to speculate that Amazon uses AWS profits to finance entry into new markets.
The desire to prevent companies from extending their existing dominance into new lines of business motivated policymakers to impose structural limits on firms with government-granted advantages.
Unlike in the case of telephone carriers, the additional costs of these new ventures are not raising government-set rates that the public must pay.
But if durable and persistent dominance is enabling a platform to earn supracompetitive profits that it can sink into any new market it chooses to enter, the dynamic may raise analogous concerns, especially given that dominant platforms’ serial acquisitions—431 over the last decade
—appear to have helped them maintain and extend their dominance.
Placing structural limits to address this concern would require separating the business earning supracompetitive profits from other businesses. This would not necessary fall along the line of separating platforms from commerce. Although in other contexts the functional goal of preventing protected profits from financing entry into new markets aligned with the goal of preventing conflicts of interest, in this context the two goals may yield different forms of breakup.
b. Media Diversity. — As in the past, integration by dominant platforms today could undermine the richness and diversity of outlets providing media and news. At first blush, this may seem counterintuitive, given how much easier and cheaper the digital age has made it to disseminate information. But the proliferation of information in the digital age—the age of information overload—means that the firms organizing and delivering desired and valued information gain in importance. The dominant platforms have emerged as powerful gatekeepers and network distributors in part because they serve as digital portals, and “choosing and switching among different portals entails cognitive costs.”
This stickiness helps explain why a portal that achieves early dominance can prove so challenging to dislodge.
Critics have argued that Amazon’s outsized power to cut off publishers and authors from the online marketplace threatens First Amendment values.
Google and Facebook’s role as dominant portals of news and media, meanwhile, may undermine the health and diversity of the media ecosystem. For one, the need to be visible in search rankings and the News Feed incentivizes publishers to invest in content that the platforms’ algorithms favor. Facebook’s emphasis on video content, for example, spurred publishers to fire hundreds of journalists in favor of video producers—only to learn that Facebook had inflated its video numbers.
A market structure in which two companies set the metrics determining whether internet content gets seen is not a system that promotes diversity. In recent years, questions about news bias by Facebook and the black-box nature of Google search rankings have prompted a larger discussion about whether permitting two firms to capture control over digital information mediation undermines the integrity of our news ecosystems.
This algorithm-chasing dynamic is primarily a feature of Google and Facebook’s horizontal dominance. But Facebook and Google also vertically compete with the news publishers that depend on their platforms for greater exposure to readers.
This dual role they play—as a competitor in the sale of digital ads and as an intermediary in the distribution of information—diverts advertising revenue from publishers to the dominant platforms, helping them maintain their duopoly in the digital advertising market.
The news industry, meanwhile, is on life support: Hundreds of local and regional newspapers have been rolled up or shuttered, such that two thirds of counties in America now have no daily newspaper and 1,300 communities have lost all local coverage.
Even outlets native to the web, like Buzzfeed and the Huffington Post, are laying off reporters.
Insofar as this dual role played by Facebook and Google deprives publishers of digital advertising revenue, structurally separating the communications networks these firms operate from their ad businesses could potentially be justified on the basis of protecting the news media. Rather than separating platforms from commerce, such a separation would target a particular business model in order to promote media diversity and protect journalism.
Careful analysis would be needed to determine precisely what kinds of limits on behavioral-ad based business models might be justified.
c. System Resiliency. — As a growing share of online commerce and communications rely on dominant online platforms, the resiliency of platform infrastructure becomes paramount. Yet concentrating activity can also concentrate risk, creating the possibility that a single system crash could have cascading effects.
For example, AWS leads the cloud computing market, capturing a greater share than its next three competitors combined.
This level of concentration has at least two potential risks. One is general fragility. For example, a single outage at AWS a few years ago led Netflix, Reddit, Business Insider, and several other major websites to crash for five hours.
The second risk is the security vulnerabilities created by monoculture. Homogeneity can render a system more susceptible to malware or hacks, a risk recognized in the context of computer systems.
As more businesses come to use AWS as default computing power (the company counts among its clients the CIA
), the potential systemic ramifications are not trivial. Indeed, the prospect of Amazon winning a single-source contract for the Pentagon has prompted concerns that awarding the business to a single provider could increase cybersecurity risks.
Analogous concerns raised by Google’s dominance have prompted policy officials to debate whether the company should be designated as “critical infrastructure.”
Notably, these resiliency concerns are primarily responding to concentration, not integration. A vertical separation would not address the underlying issue, unless exiting an adjacent market would reduce exposure to risk.
B. Institutional Shortcomings
Over the last decade, antitrust agencies have primarily responded to anticompetitive vertical acquisitions through behavioral remedies.
Behavioral remedies include, for example, transparency provisions, information firewalls, and nondiscrimination provisions, as well as limits on certain contracting practices.
Unlike structural remedies, behavioral remedies seek to change the firm’s conduct, while leaving the underlying incentives untouched.
In effect these remedies constitute “attempts to require” a merged firm to “operate in a manner inconsistent with its own profit-maximizing incentives”—an effort that proves both “paradoxical” and “likely difficult to achieve.”
Behavioral remedies carry at least four substantial costs.
First, there are the direct costs of monitoring the merged firm’s activity to ensure compliance with the decree. Second, there are costs of evasion associated with the merged firm sidestepping the spirit of the decree.
Third, there are costs of restraining potentially procompetitive behavior.
And fourth, a behavioral remedy may hamper the firm’s ability to adapt effectively to changing market conditions.
Stating that “a structural remedy can in principle avoid” these costs, the Justice Department has historically “strongly preferred” structural merger remedies to behavioral ones.
The challenges of enforcing a behavioral remedy are likely heightened in digital markets, where the information asymmetry between the integrated firm and public enforcers is even starker. This is especially true with regard to information firewalls, which—in theory—could help prevent information appropriation by dominant integrated firms.
In practice, seeking to regulate the dissemination of information within a firm is difficult in any market—let alone in multibillion dollar markets built around the intricate collection, combination, and sale of data.
The significant business insights, market intelligence, and competitive advantage derived from gathering and analyzing data suggest that firms will have an even greater incentive to combine different sets of information—meaning that any regulatory attempts to limit that sharing or dissemination is more likely to fail. The fact that these regulatory remedies are imposed by antitrust enforcers, who generally lack regulatory tools and resources,
makes successful oversight and compliance even more doubtful.
The Justice Department’s remedies in the Google–ITA merger illustrate one instance of imposing an information firewall in a digital market. ITA developed and licensed a software product known as “QPX,” a “mini-search engine” that airlines and online travel agents used to provide users with customized flight search functionality.
Because the merger would put Google in the position of supplying QPX to its rival travel-search websites, the Justice Department required as a condition of the merger that Google establish internal firewalls to avoid misappropriation of rivals’ information.
Although one commentator highlighted the risks and inherent difficulties associated with designing a comprehensive behavioral remedy, the court approved the order.
Whether the information firewall was successful in preventing Google from accessing rivals’ business information is not publicly known. A year after the remedy expired, Google shut down its QPX API.
The challenges of enforcing behavioral remedies—both generally and in digital markets specifically—highlight the importance of assessing the relative enforcement costs of alternate remedies. A focus on enforcement costs—which include administrative costs, monitoring costs, and the misallocation of resources resulting from rent-seeking activity
—can help identify instances when the purported welfare benefits of a conduct remedy may not be worth the steep enforcement costs. Another factor to consider is the prospect that rejecting a structural remedy earlier could result in more regulation later. This prospect is especially likely in monopolistic markets, where the failure to build an “effective institutional firewall between the regulated monopoly and the other segments of a vertical chain” could mean that “as the number of competitive interfaces between regulated monopoly and competitive segments expands, the regulation of these competitive interfaces will expand as well.”
In other words, cabining the monopoly can cabin regulation.
Lastly, it is worth considering whether increases in information asymmetries between companies and enforcers should weigh in favor of greater reliance on structural remedies. If enforcers have less ability to discern a firm’s business activities—be it due to heightened opacity or complexity—then targeting the firm’s incentives, rather than attempting to police its behavior, may make more sense.
C. Theory
One condition that generally united previous separations is that they were applied to bottleneck firms. This was true in both the regulated industries and antitrust contexts.
The regulated-industries paradigm identified dominant intermediaries through functional criteria rather than strict economic ones. Although most regulated industries exhibited natural monopoly features, separations were often implemented not — as natural monopoly regulation is sometimes described — to correct market failure but instead to promote goals that privately regulated markets could not deliver.
Antitrust separations, meanwhile, sought to remedy abuses of monopoly power.
In either case, separations were responding to the dominance of a gatekeeper entity.
In regulated industries, outsized market power was what rendered a firm’s business decisions systemically significant, while in antitrust, a lack of competition meant a lack of market discipline.
Assessing whether integration by dominant platforms might invite structural separations requires evaluating (1) whether a digital platform is dominant and serving as a gatekeeper intermediary, and (2) whether that dominance is likely to be durable and persistent, in light of high entry barriers. In other words, is it likely that, absent separations, discrimination or appropriation by these firms will be disciplined by competition? Critically, it is not discrimination or information appropriation per se that is harmful—but rather discrimination or information appropriation by a network intermediary for which there are no substitute channels to market.
Insofar as a platform grants access to third-party products, “a bottleneck to everything can potentially take a share of, and exercise some control over, everything.”
For many years, an underlying assumption regarding digital markets has been that they are characterized by “uniquely low” entry barriers.
Unlike industries involved in the production and distribution of physical goods, digital markets have been understood to involve relatively low capital investment and rapid rates of innovation.
Market power enjoyed by digital firms is assumed to be fleeting, constantly susceptible to the dizzying pace of technological change.
This general view of digital markets—as exceptionally dynamic and self-correcting—has produced a highly permissive approach to regulation and antitrust enforcement in these markets.
More recently, however, new research and experience has demonstrated that digital markets can favor long-term dominance. This is due to several features. One is network effects, whereby the value of the network increases with greater use of that network.
Bigger is generally better. But the same demand-side economies of scale that help a network form can also come to shield the network from competition, as a potential competitor must induce a significant number of users to choose its network over the existing good or service.
In the absence of interconnection, the switching costs for users can be significant, making it difficult for even a rival with a superior product or service to induce users to switch.
Not all network effects are the same, and not all network effects serve as entry barriers. Indeed, the significance of the entry barriers created by network effects will vary depending on the strength and type of the network and on the availability of interconnection, interoperability, multihoming, and other tools that could soften these exclusionary effects.
A second feature that can favor platform dominance is heightened returns to scale. The cost structure of many digital markets involves steep up-front costs followed by low marginal costs.
Firms in the business of providing information see their marginal cost plummet, as information—once produced—can be disseminated online to large groups at negligible costs.
Increasing returns to scale can also discourage entry, as only a firm with either a far superior or far cheaper product would enter the market.
A third factor that can benefit dominant incumbents is the critical and competitive significance of data.
Services like Google Maps, for example, have been built through collecting billions of user data inputs, operating camera-fitted cars that collected more than 21.5 billion megabytes of street-view images from around the world, and combining multiple sources of place data across various Android devices.
Theoretically a new firm could attempt to build a rival service by relying on public data, but the continued data inputs that Google Maps receives after achieving initial success are likely to keep any potential competitor a distant second.
These self-reinforcing advantages of data can amplify network effects, lead markets to tip, and close off entry.
Assessing whether a dominant platform should be subject to separations would require analyzing these factors and the degree to which they serve as high entry barriers or render merchants or trading partners “unavoidable.”
Limiting digital dominant platforms whose services constitute a “unique infrastructural asset” from entering adjacent markets and competing with dependent trading partners could avoid distortions of the competitive process and generate a host of other payoffs.
D. Application: Challenges and Unresolved Questions
Implementing a separations regime presents some first-order questions and challenges. First, how do we define platforms and to which platforms should a separation apply? Second, how does one identify the parameters of the platform, especially when integration provides heightened functionality? Third, what should be the scope of the prohibited activity and how should the prohibition be structured? And fourth, what is the proper institutional mechanism for implementing the separation? This section offers some initial suggestions for how to approach these questions. Arriving at a complete analytical framework for structuring separations in digital markets will require deeper engagement with these issues.
1. Defining Platform. — Offering a clearly bounded definition of “platform” is challenging. Most definitions look to the role that the entity plays in intermediating activity by others. One definition, for example, is “a firm that controls a network, facility, or essential input that those providing a complementary good or service” must “rely on.”
Another set of definitions focuses on the infrastructure-like role that these firms play, by structuring access to markets or facilitating transactions.
And some discussions use the terms “network,” “infrastructure,” and “platform” interchangeably.
Recent studies by policymakers have also settled on the idea that dominant platforms play a unique role that regulators should recognize. In March, the Digital Competition Expert Panel—a panel convened by the U.K. government to study digital markets—issued a report proposing, among other ideas, that dominant platforms that enjoy a “powerful negotiating position” be designated as having a “strategic market status” and be required to abide by a special code of conduct.
A report commissioned by the European Commission, meanwhile, noted that, by designing marketplace rules that govern millions of users, dominant platforms “function as regulators” that should face a special responsibility to “ensure a level playing field” on their marketplace and “not use [their] rule-setting power to determine the outcome of competition.”
Given the challenge of offering a bounded definition of “dominant platform,” any definition will likely be under- or over-inclusive. But any definition should seek to capture the degree of market power that the platform enjoys over users.
How essential is the platform’s infrastructure? To what degree do other businesses depend on the platform to reach users, and what is the cost to businesses of avoiding this platform and using alternative channels? Relevant factors could include: (1) the extent to which the entity serves as a central exchange or marketplace for the transaction of goods and services, including the level of market power that it enjoys in its platform market; (2) the extent to which the entity is essential for downstream productive uses, and whether downstream users have access to viable substitutes for the entity’s services; (3) the extent to which the entity derives value from network effects, and the type of network effects at play; (4) the extent to which the entity serves as infrastructure for customizable applications by independent parties; and (5) the size, scope, scale, and interconnection of the company.
There are no neatly bounded ways to capture these dimensions of platform power. When implementing “maximum separation,” the FCC initially used operating revenue as the criterion for determining which carriers must comply.
In the context of digital platforms, market share may prove a better proxy than operating revenues, given that it is the platform’s role as a gatekeeper or bottleneck—for which there are no real adequate substitutes—that gives rise to the relevant harms.
The prohibition should be centered on the activities that the platform facilitates as a bottleneck. Since a key goal of the separations regime is to eliminate the conflict of interest that arises when a dominant platform directly competes with the firms using the platform,
only activity that would place platforms in direct competition in this way would be subject to the prohibition. This would not prevent platforms from integrating into lines of business that do not rely on the platform market. Nor would such a separations regime target conglomeration or vertical integration categorically; it would instead focus on platform entry into markets that creates the ability and incentive to discriminate, to leverage dominance, and to use information collected on firms as customers against them as competitors.
2. Distinguishing Between Platform and Commerce. — Applying separations to digital platforms would likely raise the challenge of identifying what constitute distinct products or services. In Microsoft, for example, the court had to determine whether the operating system and the browser—the two products the government claimed Microsoft had “tied”—should be considered a single integrated system.
Microsoft argued that bundling new functionality into old products was a basic component of technological evolution.
A similar issue may arise with digital platforms: Android, for example, could claim that certain apps must be integrated with its operating system in order to provide basic functionality or for technical necessity.
The traditional metric for assessing whether a set of bundled products constitute separate products is consumer demand. In Microsoft, the D.C. Circuit relied on Jefferson Parish’s consumer-demand test to determine whether consumers preferred a choice in browsers.
Applying a similar inquiry in the platform context could similarly help identify whether integration of distinct functionalities should be viewed as an integrated system or as a platform.
Regulators would also have the capacity to determine, over time, whether certain apps or features were necessary for basic functionality and whether the benefits of integration were sufficiently high to offset any potential harms to innovation. There may also be specific apps or functionalities where innovation is less likely to be transformative, and therefore where integration may prove fewer risks. As with earlier regimes, periodic reassessment and revisions would prove necessary to ensure the separation continued to accord with and reflect evolving market realities.
3. Institutional Mechanism and Timing. — A separations regime separating platforms and commerce could be implemented through statute or rulemaking or as antitrust remedies (under existing or new antitrust law). A statute from Congress could also establish the principle of separating platforms from commerce—as was the case with banking—with the specific authority to design and implement separations delegated to an agency. This approach would benefit from having an expert agency design and revisit the separation. Absent new legislation, the FTC could use its Section 5 authority to implement a separations principle through rulemaking.
Designing separations only through rulemaking would require the agency to create rules of general applicability and—absent a specific congressional mandate—could limit the agency’s ability to structure highly tailored separations. Antitrust remedies would be costlier and take significantly longer, requiring the government or a private party to successfully show anticompetitive conduct and effects stemming from a digital platform’s involvement in multiple markets. Given the enfeebling of antitrust doctrines that police single-firm anticompetitive conduct—and the judicial requirement that remedies be carefully tailored to competitive harm—this path is likely to be significantly more challenging.
Previous instances of structural separations offer a few models for structuring these prohibitions. An operational or functional separation requires the firm to create separate divisions within the firm, requiring that a platform wishing to engage in commerce may do so only through a separate and independent affiliate, which the platform may not favor in any manner. A full structural separation, by contrast, requires that the platform activity and commercial activity be undertaken through separate corporations with distinct ownership and management. For example, the functional approach would permit Alphabet to operate Google search and vertical services that produce content so long as the two complementary services are structured as separate affiliates. The second option would prohibit Alphabet from running both the platform service and the complementary service, requiring that one be spun off and run by an independent owner.
It’s not clear that anything short of a full structural separation would be sufficient, especially given the risks of information misappropriation. While running complementary services as affiliates could be accompanied by information firewalls, the efficacy of firewalls requires close monitoring.
Evidence shows that the antitrust agencies have neglected to fully monitor and enforce conduct remedies in the past.
Moreover, firewalls may prove especially difficult to monitor in the context of digital platforms, given the heightened information asymmetries between private platform firms and public enforcers. It is possible that the risk of information misappropriation may vary by platform—but dominant platforms should carry the burden of establishing why operating complementary services as affiliates would not be anticompetitive.
Finally, a basic challenge facing regulators and enforcers when dealing with high-tech industries is the role of timing. Because these markets can evolve quickly, market changes can render regulatory interventions obsolete.
Similarly, the failure to intervene can leave exclusionary conduct unchecked, resulting in path-dependent reductions in innovation. Any subsequent attempt to impose separations should include a built-in review process every two to three years, to ensure that the remedy still matches the market conditions.
E. Costs and Tradeoffs
Separations may come at a cost. Vertical relations can generate certain efficiencies that structural limits forego. This section reviews some of the potential costs and tradeoffs of a separations regime, and it considers how separations might be structured to minimize potential harms and maximize countervailing benefits.
First, insofar as integration can eliminate double markups, it is possible that limiting a network monopolist’s ability to compete on its own network would sacrifice certain cost savings, resulting in higher prices.
This loss in static efficiency should be weighed against the innovation benefits that would likely result from creating an ecosystem in which the platform lacks the incentive and ability to exclude or appropriate from third-party complementors.
Second, separations could come at the expense of platform innovation. Prohibiting dominant platforms from competing in markets that the platform operates would reduce platform investment in certain platform-adjacent markets.
Insofar as directly competing with complementors can generate for a dominant platform additional profits, uniquely valuable business intelligence, and greater leverage over complementors, closing off this avenue of business could reduce platform profits, diminishing the platform’s incentive to invest.
Again, this potential reduction in platform innovation would need to be weighed against the likely increase in complementor innovation—as well as the potential for greater competition in the platform market.
It is possible that separations could spur development of competing platforms, allowing smaller intermediaries to continue developing into viable alternatives to incumbents.
Whether we should privilege platform or complementor innovation is, in turn, a question of whether decentralized or centralized innovation should be favored.
The answer is likely to vary by industry and market.
But innovation literature suggests that “external” innovation is more valuable for two reasons.
First, “external innovation is more likely to be of a disruptive nature,”
that which marks a “radical departure from the past.”
And second, even “disruptive” internal innovation can be contingent on the existence of external competitors.
For this reason, it may make sense to structure an ecosystem that encourages external innovation, even if it comes at the expense of some platform innovation.
Third, some argue that separations would dampen entrepreneurial investment by creating a barrier to exit.
Since venture capitalists invest in startups in order to reap the rewards of “scaling a venture to exit,” this argument holds, closing off one exit path would deter investment and chill business formation.
It is worth noting that a policy preventing dominant platforms from competing in the very markets they mediate would leave the vast majority of exit options totally unaffected. The policy would not categorically limit vertical acquisitions or acquisitions more generally by a dominant platform. Limits would apply only if a dominant platform that controlled a key distribution channel or marketplace sought to acquire a firm that would compete in that marketplace. It seems unlikely that such a targeted and limited restriction—that would affect each dominant platform differently, given the distinct markets in which each is dominant—would meaningfully undermine investment. Moreover, in an environment in which startups face a threat of appropriation and discrimination by the platforms on which they are reliant, dramatically reducing the likelihood of that threat should spur some investment, not categorically diminish it.
Even if closing off a small number of exit options altered some investment decisions, the impact on innovation is likely to be ambiguous at worst. This is especially likely to be true in light of research showing that incumbent firms may acquire innovative startups in order to squash their research and thwart future competition
and that “some limited antitrust restrictions on startup acquisitions by highly-dominant incumbents would be socially beneficial.”
Introducing this limit as a presumption would increase administrability, leading to significant administrative savings.
Applying a separations regime, however structured, will involve unavoidable uncertainties. But this uncertainty is not a compelling argument for inaction. The fact that enforcers did not block a single one of the over 400 acquisitions made by the five largest dominant platforms over the last ten years strongly suggests systemic underenforcement.
Switching the presumption under a limited set of conditions—namely, when a dominant platform seeks to acquire a firm that would give the platform the incentive and ability to discriminate and appropriate against third-party platform dependents—is likely to involve some costs and significant benefits.
F. Alternative Remedies
It is worth briefly assessing what alternate remedies might address information appropriation and discrimination by dominant digital platforms.
The main alternative that has been proposed is a standalone nondiscrimination regime. One such proposal would create a new tribunal to assess innovation harms under a new nondiscrimination standard.
The idea is modeled after a tribunal created by the 1992 Cable Act, a forum that adjudicates discrimination complaints against vertically integrated cable video operators pursuant to Section 616 of the Cable Act.
If applied to dominant digital platforms, edge innovators alleging discrimination by a dominant platform could file a complaint in the tribunal.
Drawing from the cable example, Kevin Caves and Hal Singer observe that the specialized tribunal has resolved discrimination claims in half the time it takes on average to adjudicate a Section 2 antitrust claim in federal court.
In contrast with a separations regime, this proposal institutes a remedy ex post rather than ex ante and through case-by-case adjudication rather than a prophylactic rule.
In particular, the complainant bears the burden of showing (1) that its network is similarly situated to the cable operator’s affiliated network(s); (2) that it received unfavorable treatment owing to its lack of affiliation as opposed to some efficiency justification; and (3) as a result of (1) and (2) it was materially impaired in its ability to compete effectively. When considering the likely efficacy of such a tribunal in resolving discrimination, it is important to consider its administrability.
For one, the proposal assumes that third-party innovators can identify when they are the subject of discrimination or appropriation. While this may be true in the cable context—where getting blocked or relegated to a less penetrated tier is relatively easy to detect—digital platforms can discriminate in highly subtle ways.
While well-resourced incumbents may have the resources to hire experts to identify and investigate discrimination and satisfy the evidentiary burden at a hearing, most small- and medium-sized entrepreneurs will be less able to detect and verify discrimination.
Second, the tribunal approach adopts a quasi-contractual frame, assuming that platforms and edge companies are equal parties to a transaction. This assumption is at odds with the significant asymmetry of power between dominant platforms and the producers that depend on them to get to market. In other words, the fact that bringing discrimination claims would require independent developers or producers to challenge their biggest business partner
makes it even less likely that third parties would freely use the tribunal, given potential risks of retaliation.
More generally, the tribunal assumes some base level of resources: Independent edge companies without resources would have to depend on the deterrent effect from private enforcement by those with means to avail themselves of the protections. The universe of merchants, developers, and content producers that rely on a dominant platform to reach market is far more numerous and diverse than the universe of cable video programmers that could rely on the tribunal to adjudicate discrimination claims, suggesting that the remedy that works in the cable context may be inapt for the digital platform context.
Moreover, even disputes between well-heeled corporations can take years to resolve. For example, in 2011 Bloomberg filed a complaint with the FCC, alleging that Comcast was improperly grouping Bloomberg’s channel in an unfavorable cluster of channels.
Since the FCC had conditioned Comcast’s acquisition of NBC on the basis of fair “neighborhooding” of independent news networks, Bloomberg claimed that Comcast was in violation of its commitments.
Granted that this dispute was adjudicated outside the auspices of section 616 and the agency’s ALJ, the FCC took over two years to reach a final decision.
Given the importance of timeliness in high-tech markets—where a slight delay can render a remedy obsolete—even a two-year process in digital markets will likely come at the expense of innovation.
In short, while a nondiscrimination regime coupled with a separations remedy would target the platform’s incentive and ability to discriminate—be it through integration or through contract—a standalone nondiscrimination remedy would risk being ineffective. For example, the European Commission’s remedy in the Google Shopping case—which required Google to implement a nondiscrimination approach—has not changed the underlying market dynamic, prompting content producers to describe it as “neither compliant nor effective.”
A remedy that was more attuned to the significant asymmetry in leverage would not rely entirely on third parties to contest the very intermediary on which their business often depends. Imposing a structural separation—that targets the underlying incentive to discriminate—would mitigate these shortcomings.
Conclusion
A handful of digital platforms enjoy increasing control over key arteries of online commerce and communications. How lawmakers and regulators should respond to this concentration of market power is now the subject of a global debate. Public authorities around the world are studying digital platforms to understand how antitrust and competition tools can be applied to markets mediated by digital technologies.
These studies vary slightly in their methods and conclusions, but they generally demonstrate that digital platform markets today are governed neither by real competition nor regulation—giving dominant platforms astounding power to shape market outcomes.
In the United States, the process of exploring how to respond to dominant platforms has been stunted by the fact that we are living through a major regulatory gap. The abandonment of traditional regulatory tools in favor of antitrust—followed by the partial collapse of antitrust—has left us with a diminished sense of the policy levers available to address dominant network intermediaries. This Article joins an emerging field of scholarship that is responding to this sense of impoverishment by exploring how traditional principles of economic regulation may apply in the digital age.
The process of identifying how to confront the challenges posed by dominant platforms requires, first, an understanding of the relevant problems and, second, an understanding of the relevant set of legal tools and principles available to confront them. Recovering our understanding of structural separations—traditionally a mainstay regulatory principle for confronting dominant intermediaries—is one part of this process. Reviewing the tradition of separations, moreover, underscores the broader set of values and concerns that traditionally informed how we assessed and arrived at the proper form of intervention when confronted with dominant intermediaries.
Recent events, meanwhile, seem to be driving the public discussion toward separations. Earlier this year, India began enforcing a structural separation on foreign online retailers—requiring Amazon to separate its private-label business from its marketplace.
In March, Senator Elizabeth Warren rolled out, through her presidential campaign, a proposed separations regime for dominant tech platforms, even drawing support from some tech workers.
Getting the policy right will require careful case-by-case analysis and further study to assess the relevant tradeoffs. Closer study, moreover, may reveal that the set of contexts that warrant separations is relatively limited. Arriving at the proper set of interventions, however, requires first knowing the full set of available tools.
Appendix. Why Would Platforms Undermine Their Ecosystem?
At first glance, the idea that dominant digital platforms may be using their integrated structure to undermine dynamic efficiency appears in tension with standard economic theory. This Appendix examines how to square digital platforms’ conduct with an economic understanding of integration in adjacent markets.
Vertical relationships, including full integration, can deliver certain benefits.
Integration can help resolve contractual holdup problems that can arise in economically interdependent relationships.
It can also reduce costs: Since each company in a vertical transaction usually charges consumers a markup above marginal cost, vertical integration can eliminate this “double marginalization.”
Moreover, by granting a single firm greater control over quality and interoperability, integration can also better guarantee a stable ecosystem in which platforms and complementary products work together smoothly.
Vertical restraints can also be anticompetitive. Economic literature extensively documents how vertical relationships can raise rivals’ costs or deny rivals scale, enable exclusion, or facilitate tacit collusion.
When assessing the competitive implications of vertical acquisitions, enforcers largely assess tradeoffs between foreclosure incentives and claimed reductions in price.
Two theories maintain that integrated firms are unlikely to use their dominant network to discriminate against independent products and services (which are sometimes described in platform literature as “complementors”). Both focus on the incentives faced by an integrated monopolist. Although a monopolist may have the ability to discriminate against complementors, these theories hold, the monopolist will generally lack the incentive to do so. It is worth reviewing these economic theories and identifying the exceptions that may explain why dominant platforms appear to engage in this conduct, even in instances in which the platform is not strictly a monopolist.
First, the “single monopoly profit” theory suggests that a monopolist does not have an incentive to discriminate against complementors because it cannot increase its profit by monopolizing a market for complementary products.
Say, for example, a monopolist in the bolts market sought also to monopolize the market for nuts. Economic theory holds that there is a single profit-maximizing price for any combination of nuts and bolts, such that raising the price of nuts while maintaining the monopoly-level price of bolts would lead to a decline in demand sufficient to lower total profits.
In other words, the bolts monopolist is no better off by also monopolizing nuts. Therefore, the theory goes, the bolts monopolist has nothing to gain by excluding—and thereby driving out—rivals in the nuts market.
The second major explanation for why monopolists lack an incentive to discriminate against complementors is that these independent services may actually raise the monopolist’s profits. This “internalizing complementary efficiencies” (ICE) argument holds that if complementors introduce valuable goods or services that generate surplus, the monopolist that hosts these services on its network can capture that surplus.
If an operating system with a broader range of applications (or a marketplace with a broader range of products) is more valuable to users than one with a narrower range, then the monopolist has an incentive to cultivate a broader set of complementors. On this view, the monopolist’s incentives are aligned with the user’s.
Not only does the monopolist lack an incentive to exclude valuable complementors
but doing so may even lower its profits.
ICE explains why it is assumed that a platform monopolist will be a “good steward” of the applications and products that seek access to its platform.
Subsequent learning and research has led scholars to refine both of these theories. While the single monopoly profit idea was initially introduced as a general rule, scholars have since understood that it provides definitive answers under a relatively narrow set of condition.
Today the theory is understood to be decisive only when: (1) the monopolist is both unregulated and protected by prohibitive entry barriers, (2) the monopolist’s product is used in fixed proportion with the product sold in the adjacent market, and (3) the adjacent market is perfectly competitive.
When any of these conditions does not hold, the welfare effects of integration are far more ambiguous. Single monopoly profits, it turns out, are “the exception, not the rule.”
Similarly, the assumption that a monopoly platform will always make its platform available whenever it is efficient to do so does not always hold.
There are several circumstances under which a platform can be expected to engage in exclusionary conduct that is inefficient.
Broadly, a dominant platform can be expected to engage in exclusionary conduct when (1) it is able to more fully exploit its existing market power or (2) it is able to achieve additional market power.
It is worth briefly identifying the contexts under which these conditions are likely to arise in digital markets.
A. More Fully Exploiting Existing Market Power: Exclusionary Conduct Enables Price Discrimination
First, a dominant platform may have an incentive to exclude complementors from its network when doing so would enable it to price discriminate.
Price discrimination—or charging customers different prices based on their willingness to pay—enables a monopolist to more fully exploit its existing market power by extracting more consumer surplus.
In order to engage in price discrimination, a seller must enjoy some market power — namely, the ability to profitably set price above marginal costs.
Foreclosing or discriminating against certain applications or services can enable the platform to separate consumers into different groups, based on their willingness to pay.
For example, the platform can offer different tiers of service: a basic version that provides access to the network but excludes certain applications and a premium version that provides access to the network as well as all applications.
This form of price discrimination may or may not undermine the static welfare of consumers.
Analyzing the welfare effects of any price discrimination scheme requires empirical analysis based on consumer preferences and the market’s cost structure.
But insofar as price discrimination lowers the profits available to complementors, it can depress their incentive to invest and innovate—thereby undermining dynamic efficiency.
More generally, discriminatory pricing can “introduce distortion into the overall market” by “disadvantaging certain classes” of complementors and decreasing the profits available to them by diverting more consumer surplus to the dominant platform.
B. Expanding Market Power: Complementary Market Is a Source of Outside Revenue
In the standard economic model, a monopolist in the primary market is assumed to capture its entire monopoly profit from that market, limiting its ability to earn a second monopoly profit.
But if firms in the complementary market derive revenue from other sources—such as advertising—then the monopolist in the primary market will likely have an incentive to monopolize the secondary market as well.
Since excluding rivals in the complementary market can diminish for consumers the value of the primary network, the overall gains in outside revenue postexclusion will need to be greater than the profit reduction in the primary-good market in order for exclusion to be a profitable strategy.
Digital platforms that operate in distinct but interrelated markets are likely to fit this exception. Google, for example, provides its search engine at zero monetary price and earns the vast majority of its net income through selling digital ad placement.
When considering whether to grant third-party content providers equal access to its search platform, Google must weigh the revenue it could lose through discriminating against third-party content
against the revenue it could gain through monopolizing the secondary market. Privileging its own content sites would help keep users within the Google ecosystem, which would in turn allow Google both to capture greater user data and to sell more (and potentially higher-priced) ads.
Given that behavioral ad markets place a premium on comprehensive user data,
prioritizing Google verticals in Google search results is likely to be lucrative. Whether this exclusionary conduct would offset potential revenue losses to Google’s primary network is an empirical question.
More generally, it is worth examining whether certain features exhibited by digital platform markets may change the default calculus in favor of exclusion. If a standard choice faced by a dominant platform is whether to grant rival complementors access to its network and charge a fee to extract some of their revenue or to exclude all rival complementors and sell the service itself, then digital markets seem to tip the balance in favor of the latter. This is because digital platforms are making an ecosystem play: By bundling different services and portals, a platform can heighten switching costs and collect more user data by tracking individuals across services, both of which amount to a lucrative strategy.
The enormous value assigned to user datasets suggests that platforms will have an even greater incentive to keep users within their walled gardens, meaning that they will be more likely to choose direct access and exclusion over shared access and complementor revenue.
Lastly, online markets may lower the cost of exclusion. While foreclosure strategies traditionally involve denying a third-party access outright, digital markets enable subtler forms of discrimination.
Discriminating against a complementor risks increasing user dissatisfaction with the product, but users will have limited insight into the source of the quality degradation, reducing the chance that they will respond by abandoning the platform. In other words, if Apple denies Spotify upgrades on iOS, users may blame Spotify rather than Apple, limiting Apple’s exposure to users abandoning Apple. Switching costs, moreover, can be significant in digital platform markets, especially in the absence of interoperability or data portability regimes—a fact that also reduces the cost of exclusion.
C. Expanding Market Power: Primary Good Is Inessential for Uses of Complementary Good
Another set of conditions under which a dominant platform will have an incentive to foreclose rivals in a complementary market occurs when: (1) the dominant platform’s complementary good can be used independently of the primary platform, (2) the platform can stop its competitors from selling their version of the complementary good to the platform’s users, and (3) the complementary market exhibits economies of scale or network effects.
Because a platform monopoly facing these conditions would not be able to extract all monopoly profits through its pricing of the primary service, it would have an incentive to extend its monopoly into the complementary market.
The existence of network effects, meanwhile, enables the monopolist to thwart potential rivals from the complementary market by excluding them from the primary market.
Even if the platform is not a monopolist, exclusionary conduct that drove more sales of the complementary good or service would likely be profitable. Because the cost structure of applications and content usually involves high fixed costs and low marginal costs, any subsequent sales—presumably at prices above marginal cost—would likely generate profits.