Competition

We know the familiar story.  New forms of competition arise and the incumbents rebel.  The free market usually permits consumer choice to govern and the marketplace decides which products will prevail.  But incumbents try to use regulation to prevent new products and competition.

The latest example is the almost decade long effort by some parts of the paper industry to prevent the Food and Drug Administration (FDA) from bringing drug notices into the 21st century.  Most are familiar with drug safety disclaimers to consumers, written in incredibly small font (perhaps the font size is promoted by opticians?) that consumers simply discard.  Well, there are similar, much more important notices to healthcare providers which provide even greater detail about safety and drug administration.  This information includes potential warnings and drug interactions, each of which are critical pieces of information for the healthcare provider. Known as “prescribing information,” these notices are incredibly long – they look like old-fashioned road maps and also are printed in incredibly small font.

Since 2007, the FDA has valiantly attempted to take the radical, death-defying step of actually permitting these notices to be made available electronically.  In particular, the FDA has sought to permit “e-labeling” – allowing drug manufacturers to provide information electronically.  This week, the FDA closed public comments on a proposed rule focusing on moving nearly all prescribing information online.

The advantages of e-labeling are obvious to anyone who has entered the 21st century.  E-labeling will reduce costs and is far more likely to be accessible to busy professionals.  E-labeling will be more current than old-fashioned paper notices and can be updated easily.  As the FDA observed:

FDA is taking this action so that the most current prescribing information for distributed prescription drugs will be available and readily accessible to health care professionals at the time of clinical decisionmaking and dispensing.

So why has it taken the FDA nearly a decade to finish a sensible, consumer-driven rule?  The paper industry.  In the United States, there are a number of paper printing companies that specialize in manufacturing drug labeling paper forms.  With the FDA proposing a rule that may diminish pharmaceutical companies’ demand for paper and printing services, it is unsurprising that they are strongly fighting against e-labeling.

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Data is often presented as the lifeblood of our digital economy (please see here why it should not be referred to as the ‘oil’ of the 21st century). Data is everywhere and is collected by Internet companies as well as more traditional businesses like banks. Data has been used by industries for years – think about grocery store reward cards – but advances in the speed of data analysis and the quantity of data available today brought new attention to its use. Of course, data analytics and processing help companies to better understand their customers, providing them with services and products tailored to their needs and preferences.

At the same time, it has been suggested that the possession and accumulation of big data ought to result in more rigorous competition law enforcement. But this argument fails to take into account the low barriers to entry in this market and the disruptive nature of Internet businesses that quickly allow a startup to topple even the most entrenched incumbents. One also needs to remember that the existence of barriers to entry does not in itself mean that competition authorities need to intervene. Competition law is concerned with anticompetitive conduct causing consumer harm. Hence, a competition law analysis of barriers to entry only becomes relevant in merger cases and in determining whether a given company is dominant in a relevant market. Traditional barriers to entry include for example exceptionally large capital investments into a sophisticated distribution network, economies of scale and even the need for large marketing investments (for a discussion of these traditional barriers to entry see the CJEU’s judgment in United Brands v Commission). MORE »

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The European Commission has today released its new Digital Single Market Strategy. The objectives of the strategy sit within the wider political context: helping to restore a limp European economy to growth, whilst maintaining an effective welfare state and public services. Will this strategy help to deliver the kind of dynamic social market economy Europeans demand?

Vice-President of the European Commission Andrus Ansip has rightly set out an ambitious vision of a Digital Single Market. For those who believe in an enabling set of rules that will take society forward now is the time to step forward to support this vision. The alternative — a set of rules that fragment regulation along member state lines and reverse digital progress — is not a viable option. MORE »

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While there has been much discussion of the European Commission’s recent announcement of a statement of objections being sent to Google, over in Paris the French Senate isn’t waiting. The Senate is debating ‘search neutrality’ amendments to the ‘Loi Macron’, an economic reform bill.

This is not a bout of contagion carried on the high speed ‘Thalys’ train from Brussels to Paris. Rather, the French political establishment has long been a critic of Google, and in fact Internet platforms more broadly. While Google may be a tempting opponent, opinion in Paris would like to see Internet platforms more broadly regulated in law, as illustrated by the recent joint Franco-German letter to the European Commission.

So while this initiative isn’t a huge surprise, its consequences could be. Search is a feature of almost every website and application. Putting aside the obvious search engines, think of sites such as Dailymotion, Deezer, eBay, Facebook and Amazon. Without a search function it would be hard to find the information and products you want.

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David Balto and Matthew Lane, antitrust attorneys, have authored a guest paper for DisCo on innovation in the music delivery sector.  David previously served as Policy Director at the Federal Trade Commission’s Office of Policy and Evaluation, and attorney advisor to the FTC chairman.

There is no doubt that we live in exciting times.  New technologies are constantly emerging that promise to change our lives for the better.  These disruptive technologies give us an increase in choice, make technologies more accessible, make things more affordable, or give us a voice.  However, disruptive innovations do not hit all areas of our lives equally.  There are some industries that are controlled by companies that don’t want to be shaken up and have the power to prevent it.  These consolidated industries are an anathema to disruptive innovation.  So how do we enable disruptive competition in these industries?

One answer is found in our competition enforcement agencies and the oversight they can achieve through antitrust enforcement and consent decrees secured when cases are brought.  The important role of consent decrees is often overlooked.  A properly constructed consent decree between the government and a company accused of anticompetitive behavior can restore competition and foster new competitive entry.  Permitting entry is vital to disruptive innovation because much of this innovation comes from start-ups and new entrants. MORE »

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We have been a little boozy here at DisCo.  A couple of years ago myself and my colleague Matt Schruers had a mini blog symposium of sorts where we used alcoholic anecdotes to illustrate larger policy points about the nature of competition and innovation.  Last week, fellow DisCo writer Ryan Heath used a Belgian beer example to illustrate the success of crowd funding.  In this post, I turn to U.S. beer regulation and market structure as an illustrative example of a phenomenon that has plagued the tech world: out-dated regulation that artificially props up legacy middlemen and harms innovative competitors.

Against that backdrop, let’s turn our attention to a fight brewing in Florida between craft brewers and beer distributors (and the major beer brands) in the state legislature.  At the end of last week, a Florida Senate Committee approved a bill that would allow craft brewers to sell 64oz growlers to their consumers.  Presumably, the bill will soon be voted on by the full Senate.  Similar legislation is also winding its way through the Florida House.  According to the Sarasota Herald-Tribune, the bills “could make it easier for grocery stores to sell hard liquor and brew pubs to sell more of their products.”

Currently, in Florida, it is unlawful for breweries to sell half-gallon size growlers — a staple product for craft brewers seen as the “industry standard” — to consumers.  This is because Florida, like all other states (except for Washington), utilizes a “three-tiered” alcohol distribution structure where (1) wholesalers are required to sell to (2) distributors who then sell to (3) retailers.

Florida has an exception to the three-tiered system, however: A law pre-dating the rise of craft breweries, which was designed to allow beer giant Anheuser-Busch to sell beer directly to consumers in the days when they owned the Busch Gardens theme parks, allowed craft brewers to pour pints and sell cans on their premises (thus avoiding beer distributors).  Under the complex and capricious Florida beer laws, craft breweries were able to sell quarts and gallon jugs of beer, just not the popular half-gallon size.  When legislation last year looked poised to fix this curious 96 ounce exception, it was derailed by language added at the behest of beer distributors.  The new language required, among other things, craft brewers to sell their wares to distributors who would then sell it back to them (at a healthy markup, of course) before they would be able to sell them to brewery visitors!  With their typically smaller profit margins, craft brewers — who often face a daunting journey just to turn a profit — saw this unnecessary layer of costs as a threat to their businesses.  In fact, “holding the growler hostage” was merely a strategy of “Big Beer” to attack the craft brewers’ right to sell directly to consumers.  (They said so themselves.)  The craft brewers — in good disruptive innovator fashion — turned to Indiegogo to fund their lobbying efforts against big beer.

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Big data, and its effects on online markets, has been thrust into the center of the tech policy chattering class debate.  In the last few weeks, events have been held on both sides of the Atlantic focusing on the concept of big data as an entry barrier.  (The topic has also come up in speeches by FTC Commissioners [and a paper], in discussions surrounding the EU’s forthcoming Digital Single Market strategy, and is the frequent topic of recent academic writing.)  Specifically, the concept being debated is whether the accumulation of data by Internet companies hinders competition because the new entrants will not be able to compete effectively with the first mover in the marketplace.  In this post, I will address why startups and entrepreneurs should not be overly concerned.

In a stylized view of the Internet economy, as a platform (such as Google, Facebook, Amazon, Pinterest or Twitter) achieves scale and gains users, it acquires more data.  This data leads to product improvement, which leads to more users and, subsequently, more data.  The process repeats.  According to proponents of the data as a barrier to entry theory, this leads to an unbreakable positive feedback loop that makes effective competition impossible.

However plausible this argument sounds, a review of the short history of the Internet economy, which has been characterized by intense competition and frequent disruption, seems to cast doubt on the soundness of the theory.  (See Andres Lerner’s discussion of the User Scale – Service Quality feedback loop.)  Besides the common examples of Facebook overtaking Myspace and Google overtaking prior search competitors (who, at the time, were predicted to be unassailable largely on account of the User Scale – Service Quality feedback loop discussed above), a casual look at online markets illustrates how competitive the market is.  Why are online markets so competitive even though some firms are believed to have an unassailable advantage in big data?

First, this view of Internet markets is extremely simplistic.  Data is just one input of many in the process of innovation and market success.  Second, unique economic characteristics of data — such as it being non-rivalrous and the diminishing marginal returns of data — mean that the accumulation of data, as opposed to other barriers to entry like intellectual property portfolios or high-fixed capital costs, in and of itself does not function as much of a barrier at all.  When you couple these characteristics with the fact that data, and the tools to use and analyze data, are readily available from numerous third party sources, the notion of an iron-clad data feedback loop falls apart.

I’ll break this down piece by piece.

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Today, the Wall Street Journal published an article after getting its hands on a confidential FTC memo from the now settled U.S. antitrust investigation of Google.  The document, an internal memo by the FTC’s Bureau of Competition recommending that that the Commission proceed with an antitrust case against Google for a variety of allegedly anticompetitive actions, was mistakenly released in response to a FOIA request.  The Journal also reports that the FTC’s Bureau of Economics disagreed with the Bureau of Competition, recommending that the agency not proceed with charges — a recommendation the agency ultimately followed.  Also, and perhaps most interestingly, the Bureau of Competition’s recommendation advised against proceeding with the most high-profile accusation, search bias, which is now the focus of the European Commission’s competition investigation.  As most DisCo readers probably remember, the FTC eventually voted to close its investigation of Google (and dismissed the search bias accusations outright) after the company addressed several of the practices outlined in the Bureau of Competition’s memo.

Although the WSJ article is certainly an interesting read, the fact remains that there are many checks and balances within the FTC and — with the benefit of hindsight — it is pretty clear that the Commission’s decision not to proceed on the charges of “search bias” was the right call.

Let’s look at what has happened in the marketplace since the FTC settlement.

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We in Europe know that petrol (gas) prices are usually double that of the United States. Vehicle ownership can overall cost you EUR10,000 annually. All this makes transport systems ripe for disruption in the digital era. Throw in ongoing high unemployment and economic uncertainty, and the enablers of disruption – like  collaborative consumption – have shifted from nice idea to necessity for many.

It is this sharing economy that has fuelled increasing disruption in the field of mobility. Until recently mobility had been enhanced by services like apps for maps and transit timetables, but was yet to be truly disrupted as media, music and travel bookings have been.

Now digital innovation and the competition it fuels is coming thick and fast. There are hundreds of taxi apps alone, offering their platform to consumers for free. The lack of lock-in has been a consumer boon: the apps have to impress immediately or the customer will ditch them. Which is about as far away from the old taxi cartels as can be imagined.

But are Uber-headlined fights with legacy systems and regulators the full story? Is the US the source of the best innovations? I would say no. In hindsight, 2014 was the year that a diverse range of European innovators started to reach critical mass at home and achieve major expansion globally.

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European digital policy debate is in flux. In the new uncertain mix we find new EU leadership figures; gridlocked legal proposals on data protection; Parliament nakedly chasing after Google; and posturing by the French and German governments to ban or regulate certain platforms in order to create ‘platform neutrality.’

This final demand occupied the minds of panelists at a recent CCIA event at Bloomberg last week. It was a relief to hear figures such as Kaja Kallas MEP, Chris Sherwood (Allegro Group), Adam Cohen (Google) and Brian Williamson (Plum Consulting) agreed that the shadow boxing needs to end. They collectively pinned down the problem: Europe can’t afford to be fighting imaginary opponents or dancing around the issues holding back digital companies. Europe keeps trapping itself by looking backwards.

For Kallas, the invention of debates around ‘platform neutrality’ is “protectionism in disguise.” She’s not wrong. The French and German governments have failed to make an adequate case about why certain digital companies need special regulation ; they simply resort to alluring phrases and words like ‘neutrality.’ This tactic dresses up the favours they’d like to do for Europe’s non-existent search engine champion, but it doesn’t change the market reality. Digital innovations are continuing to integrate into the economy, meaning the idea of ‘platform neutrality’ is quickly moving from the category of ‘flimsy’ to ‘irrelevant.’

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