FILL ME IN…
Last fall the House Judiciary Antitrust Subcommittee released a long-anticipated report outlining a series of recommendations intended to rewrite our country’s antitrust laws. The majority staff report, while initially intended to focus on four tech companies, makes a series of erroneous policy conclusions that if implemented would wield government control over the entire U.S. economy, hampering growth, and innovation to the detriment of consumers.
As part of the report’s recommendations, it proposes any number of ways to force companies to work cooperatively or to look out for its competitors. In this post, we look at the recommendation the report makes regarding self-preferencing and product designs that “undermine” competition, regardless of the benefits to consumers.
Specifically, the report states:
“The Subcommittee’s investigation uncovered several instances in which a dominant platform used the design of its platform or service to privilege its own services or to disfavor competitors. This practice undermines competition by enabling a firm that controls an essential input to distort competition in separate markets. The Subcommittee recommends that Congress consider whether making a design change that excludes competitors or otherwise undermines competition should be a violation of Section 2, regardless of whether the design change can be justified as an improvement for consumers.”
HOW DOES CURRENT U.S. ANTITRUST LAW TREAT SELF-PREFERENCING & PRODUCT DESIGN?
Antitrust embraces competition between competitors, it does not create expectations that one firm must somehow compete less vigorously in the market or begin to cooperate or even support the competitive position of another company. Companies dueling to win over consumers as they compete to put out better products or offer better services places consumers in the driver seat. This is exactly what antitrust wants to see occurring in the market.
Therefore, antitrust does not punish a company for making investments in beneficial designs for its products or services. There is a great danger in allowing the government to micromanage the level of competition it sees as desirable in the market. This would only serve to undermine the competitiveness of our economy.
For example, the U.S. Court of Appeals for the Ninth Circuit has cautioned that “[t]o weigh the benefits of an improved product design against the resulting injuries to competitors is not just unwise, it is unadministrable.” In essence, the court pointed to the lack of objective criteria that could easily be developed to “calculate the proper amount of innovation, that would maximize social gains and minimize competitive injury.”
The same goes for self-preferencing. As a general rule, every company should be expected to favor its own products over those of its competition. Where distribution channels are owned and operated by a company that sells its product but also distributes the products of others, antitrust has narrow concerns. At the outset, antitrust places no obligation on a distributor to distribute any product or service. Further, the producer of a product or service is not required to use a specific distribution channel. There are plenty market-based incentives to sort out the relationship between producers and distributors. There are also reasons why some producers decide to invest in their own distribution network and keep that network closed to other producers. This too presents zero antitrust concern.
Only in specific circumstances can self-preferencing raise an antitrust concern. Where a distribution channel has agreed to distribute a product or service, but over time it decides to also produce and use its distribution channel, antitrust scrutiny can arise. Antitrust is interested in these situations only where the business decisions of the now combined producer/distributor are designed to undermine other producers on its distribution network, and those decisions clearly cause more harm than benefit to consumers. In these instances, the conduct in question is evaluated to determine if the harm to the competitor translates into harm to consumers and whether the conduct in question delivers any benefits to the consumer. Only after a balancing test that stacks up the benefits and measures them against the harm, does antitrust step in. Even in this limited scenario, antitrust is focused on the ultimate impact on the consumer - not whether the conduct in question merely made it difficult on another business to compete.
WHY THIS MATTERS…
The staff report’s proposal seeks to impose an antitrust duty on companies to design products in ways that better accommodate competitors or universally eliminate self-preferencing. And, remarkably, it would do so regardless of whether the product design or the conduct in question has overwhelming benefit to consumers.
It is well-established that innovations, including even small changes in product design can generate significant consumer benefits. For example, new drug formulations may involve changes that appear small but are of significant benefit to consumers. For example, a drug that needed to be taken every 4 hours is developed into a time release version that allows a patient to take it once a day. Similarly, a grocery style routinely may find ways to preference its store brand items that are in direct competition against popular name brand products. In these examples, antitrust liability could be established if the benefits to consumers were no longer recognized by the law. Excluding consumer benefits from the law would risk chilling competition and future innovation that yields obvious and significant consumer benefits.
Antitrust law is not a suitable instrument for micromanaging product design and innovation. Imposing an antitrust duty to design or promote products in ways that better accommodate rivals, while sacrificing the benefits to consumers, is dangerous and wholly contrary to the goal of U.S. antitrust law, which is to protect consumers, not competitors.
For more on antitrust, check out other posts here.