Antitrust and Information Technologies
46 Pages Posted: 29 Nov 2014 Last revised: 5 Apr 2016
Date Written: April 5, 2016
Technological change strongly affects the use of information to facilitate anticompetitive practices. The effects result mainly from digitization and the many products and processes that it enables. These technologies of information also account for a significant portion of the difficulties that antitrust law encounters when its addresses intellectual property rights. In addition, changes in the technologies of information affect the structures of certain products, in the process either increasing or decreasing the potential for competitive harm.
For example, digital technology affects the way firms exercise market power, but it also imposes serious measurement difficulties. The digital revolution has occurred in stages. The most recent is "complete" digital distribution, where all of the content being shipped to the consumer is digital. Prior to that, although continuing to this day, music and some books and other media are distributed in formats such as digital compact disc (CD) or digital video disc (DVD). Although most of the direct user content in such formats is digital, it is still placed on a physical object, which is then packaged and distributed to consumers through traditional channels, including brick-and-mortar retailers and the mails. By contrast, complete digital distribution refers to markets such as downloaded songs and downloaded or streamed video content, including movies, games, and software, as well as electronic books. The entire consumer "package" is distributed purely electronically. Complete product digitization changes the size or shape of the markets in which firms operate, in the process affecting their opportunities to exercise market power.
In purely digital markets intellectual property rights are crucial to the ability to exercise significant market power. Once a book such as Moby Dick enters the public domain it can be very cheaply copied and digitization reduces marginal costs to practically nothing. As a result even explicit price fixing is unable to maintain prices above cost for extended periods. If an anticompetitive restraint occurs in purely digital markets it is almost never in the product itself, but rather in the infrastructure necessary for distribution. One feature of antitrust litigation in purely digital markets is that the "product" consumers want is frequently only the tail, while the delivery device is the dog. For example, the major bottlenecks in the eBook and eMusic industries have not been the books or songs themselves, which are rarely capable of being monopolized, but rather technological constraints on reading or listening devices and the software formats that they run.
Another important characteristic of purely digital markets is high fixed costs but marginal costs that are very close to zero. So if digital media are sold in competition with one another then why is the price not zero or something very close? That answer has to do with the twin effects of intellectual property protection -- namely, per use royalties and product differentiation. A per use royalty is a variable cost that the seller incurs each time it sells a unit. As a result it is part of marginal cost. For example, if the author of an ebook is entitled to one dollar on each copy sold, then the price must be at least one dollar. By contrast, lump sum royalties (or zero royalties, as is common for academic publications), which are a single royalty on a product over its entire commercial life irrespective of output, do not show up in marginal costs.
Intellectual property rights also create product differentiation, which considerably blunts the impact of competition. Books that are still under copyright cannot be precise copies of one another. The second of two identical books would infringe the copyright on the first. To the extent they differ, however, customers have preferences for one over another and this permits prices at above cost even though the market has multiple competitors. Entry into the public domain leads to product homogeneity under competition, often driving the price of purely digital products to zero. This is reflected in the pricing of public domain books and other texts.
This paper focuses mainly on five issues: (1) assessments of market power and the opportunities for its exercise in information technologies; (2) the largely misconceived antitrust inquiries into Google Search; (3) the eBooks price-fixing and most-favored nation litigation, where the Second Circuit recognized that the use of naked collusion to force increases in eBook prices was not only per se unlawful but also an attempt to prevent a revolution in book distribution and pricing that is all but inevitable; (4) the appropriate role of antitrust policy in facilitating internet neutrality; (5) the important but also limited role of antitrust law in assessing certain patent practices, including standard setting, FRAND commitments, and patent pools.
There is little reason for thinking that competition cannot work in most digital markets, including most that are purely digital. The trick is keeping the channels open for new entry, movement, and consumer choice.
Keywords: antitrust, digital, ebooks, itunes, market power, market definition, amazon, product differentiation, fixed costs
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