This paper examines developments in the Internet marketplace that favor embedded intermediaries that have significant market power and the ability to install a platform that both upstream sources of content and applications as well as downstream consumers need to access. Ventures such as Amazon, Facebook and Google have exploited, “winner take all” networking externalities resulting in the creation of seemingly impenetrable barriers to market entry even by innovative companies. Courts and regulatory agencies have recognized the substantial market shares these ventures have acquired, but have refrained from imposing sanctions on grounds that consumers accrue ample benefits when platform operators use upstream revenues to subsidize downstream services. Consumers also benefit when platform intermediaries eschew short term profits in the quest for greater product diversity and “shelf space” in the Internet marketplace. Additionally, courts and regulators may over-estimate the opportunities for consumers to migrate to alternatives, but underestimate the harms to competition and consumers occurring on either, or both sides of an intermediary’s platform.
The paper identifies four types of government responses to price and quality of service discrimination that intermediaries use when handling large volumes of traffic. Governments can refrain from regulating access and accept aspects of market concentration as proper rewards to ventures offering desirable content and carriage services. Alternatively, they can impose access sanctions for antitrust violations, unfair trade practices, consumer harms and unreasonable access discrimination to offset market-driven concentration and dominance. Between these poles, governments can apply antitrust/competition policies remedies, or rely on expert regulatory agencies to respond to complaints.
The paper examines digital broadband platform operators with an eye toward assessing the aggregate benefits and costs to both upstream firms and downstream consumers. The paper notes that in some instances, government-imposed, ex ante safeguards anticipate and attempt to resolve transitory, comparatively insignificant, or possibly nonexistent problems. In other instances, governments have stated an intention to rely on ex post remedies, but they never get around to refining procedures to reduce the potential for false negatives that ignore, or underestimate significant marketplace harm.
The paper concludes that governments have failed to revise and recalibrate tools that examine potential marketplace distortions and assess the potential for damage to competition and consumers. The paper demonstrates how the Justice Department, Federal Trade Commission and the Federal Communications Commission have relied on economic and legal doctrine ill-suited for digital broadband market assessments. These agencies have generated false positives, resulting in market intervention where not major problem exists and false negatives, where undetected major problems cause harm without remedy. Additionally, these agencies appear to misallocate their resources and attention on insignificant matters when more compelling problems exist.
The paper recommends that courts and government agencies consider both sides of an intermediary’s market when assessing current and prospective harms, commit to more accurate estimates of the potential for consumers to change platform allegiances and consider the overall impact of two-sided market domination instead of simply dismissing market concentration as necessary and harmless.