Here’s an excerpt from a new paper on the limits of antitrust, which I will present at the ABA Antitrust in the Americas Conference in Mexico City on June 1. If you are interested in reading the whole submission (a little over 5,000 words), please write me.
[Update: The full article is available here.]
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Consider a hypothetical case in which an Internet service provider (ISP) offers preferential treatment for an online content supplier’s packets for a fee, but declines to make the same terms available to other content providers. To make the matter concrete, assume the preferred content supplier offers telemedicine service, a real-time application that performs better with enhanced quality of service from the ISP. Preferential treatment could also take the form of the ISP’s not counting the content provider’s packets against the customer’s data cap (known as “zero rating”). To an economist, the precise nature of the preference afforded the content provider is not critical, so long as preference of some kind is provided for a fee. What matters from a competition perspective is that as a result of the pay-for-preference arrangement, the favored content provider operates at a competitive advantage vis-à-vis its content rivals. Because the offer of preference is, by assumption here, not extended to all comers, the arrangement is discriminatory, plain and simple.
But does it amount to an antitrust offense? This essay answers that question in the negative: Unlike traditional discriminatory-refusal-to-deal (DRTD) cases in antitrust, there is no effort by the ISP in our hypothetical to disadvantage a horizontal rival. Even if an edge provider could structure its net neutrality complaint as a DRTD, private litigants are unlikely to pursue antitrust cases where the only harm to competition is an innovation loss (in the form of less investment/innovation by edge providers in future periods). Moreover, antitrust litigation imposes significant cost on private litigants, and it does not provide timely relief; if the net neutrality concern is a loss to edge innovation, a slow-placed antitrust court is not the right venue. While public enforcement of innovation-based claims is possible, it likely would take an edge provider months if not years to motivate an antitrust agency to bring a case. Finally, competition is not the only value that net neutrality aims to address; end-to-end neutrality or non-discrimination is a principle that many believe is worth protecting on its own.
This essay also offers an alternative, ex post regime patterned loosely from the tribunal used to adjudicate discrimination complaints against cable video operators pursuant to Section 616 of the Cable Act. Like a rule-of-reason case under antitrust, the tribunal would begin with the presumption that preferential arrangements extended by ISPs to edge providers are presumptively not in violation of a (to-be-adopted) non-discrimination standard, but would allow complainants to overturn that presumption upon meeting certain evidentiary criteria. Importantly, the tribunal need not import the evidentiary criteria verbatim from antitrust—for example, there would be no need to establish market power, profit-sacrifice, or anticompetitive effects. Because the gaps in antitrust identified in this essay also fail to restrain search-neutrality violations, there is no reason why the tribunal could not accommodate complaints against dominant Internet intermediaries such as Google and Facebook. In this sense, a new tribunal could provide a layer-neutral approach to dealing with neutrality issues.
Are the Antitrust Laws a Good Fit?
Monopolists are generally free to choose their suppliers and engage in price discrimination under the antitrust laws. Where such constraints exist, the source is often industry-specific regulation. For example, the obligation to deal with rivals or content suppliers on nondiscriminatory terms flows from common-carriage or program-carriage rules under Section 202 of the Communications Act and Section 616 of the Cable Act. As explained by Yoo (2013), telecom regulators ensure nondiscrimination by requiring the telephone company to offer service under the terms specified by a tariff to any requesting party that qualifies to receive the service. Importantly, these nondiscrimination obligations do not flow from the antitrust laws.
Indeed, the recent tendency in antitrust jurisprudence has been to relax nondiscrimination obligations. In Terminal Railroad, the defendant discriminated against rival railroads by refusing to grant access to its terminal facilities. The essential-facilities doctrine, which grew out of that case, has been undermined by more recent developments. In Trinko, the Supreme Court ruled that telephone companies had no antitrust obligation to deal with resellers (horizontal rivals) above and beyond the unbundling obligations in the Telecommunications Act. Trinko cast doubt in the viability of the essential-facilities doctrine, particularly as applied to regulated industries such as telecom and potentially Internet access.
The closest surviving cognizable antitrust offense for our hypothetical case of discrimination by an ISP is a discriminatory refusal to deal (“DRTD”). For example, a dominant firm may discriminate by refusing to deal with—or offering worse terms to—horizontal rivals or those buyers (or suppliers) who deal with horizontal rivals. In Aspen, the defendants discriminated against rivals by refusing to sell lift tickets to its rival at any price. In Otter Tail, the defendant discriminated against rivals by refusing to supply electric power to those municipalities that competed with the defendant in retail distribution. In Dentsply, the defendant discriminated against rivals (indirectly) by using exclusive contracts with dental-product dealers to limit rival manufacturers’ access to dental laboratories that purchase artificial teeth. And in Lorain Journal, the defendant discriminated against rivals (indirectly) by refusing to sell advertising space to those advertisers who dealt with its rival. Based on a review of these and other seminal DRTD cases, Elhauge (2003) explains that a duty to deal turns not on a prior course of dealings with the buyer or distributor, but instead on whether the dominant firm’s present dealings discriminate between rivals and non-rivals; in particular, whether the dominant firm deals only with non-rivals and excludes rivals. And even then, to prevail under the antitrust laws, the plaintiff would still need to demonstrate that the DRTD enhanced or maintained defendant’s monopoly power and harmed competition. Kulick (2013) develops an alternative post-Chicago model of exclusive dealing where exclusive dealing takes the form of a DRTD.