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Swampetition: Hobbling Rivals with Regulation, from Horses to the Internet

· May 17, 2018

The last decade has seen numerous instances of businesses, having been disrupted by successful tech firms, turning to champion government intervention in response.  Rather than fight it out in the market, these businesses aim to improve their competitive position by waging war against rivals with the regulatory process, demanding investigation and regulatory intervention.  These demands often receive media coverage, but the parochial interest often escapes notice.

The strategy of persuading regulators to hamstring competitive rivals, competing not in the market but in the political swamp—what I’ve called “swampetition”—is at least a century old.   Legacy industries have long used political influence to produce new regulations that cripple those entrants chipping away at their businesses with superior offerings.  As DisCo has previously covered, the Horse Association of America, a group of horse breeders and horse equipment makers, once successfully lobbied some cities to ban automobiles.  Given the increased disruption and competition that defines the tech sector, this tactic remains popular both among and beyond legacy incumbents.  Even Silicon Valley firms, normally highly innovative, aren’t immune to the seductiveness of swampetition, as some have turned to regulators for respite from an increasingly competitive marketplace.  The result is that leading firms are frequently targeted with this form of swamp warfare.

Weaponization of antitrust

DisCo frequently covers this kind of story.  Often it involves strategies to fetter upstart rivals with professional licensing schemes or other market constraints presented as consumer protection.  [1], [2], [3].  The contexts are diverse, ranging from hair styling to hospitality to ride-sharing.  In other cases, rivals seek to use competition law itself against their adversaries.  In fact, an early criticism of antitrust was that companies could engage in the political swamp to “weaponize” regulators and curtail legitimate competition from rivals.  As scholars Baumol and Ordover worried 30 years ago, “far from serving as the bulwark of competition, [antitrust] institutions will become the most powerful instrument in the hands of those who wish to subvert it.”

For this reason, the litmus test of U.S. antitrust law is the promotion of consumer welfare, not competitors’ welfare.  By assessing anticompetitive conduct based on whether it harms consumers, rather than competitors, antitrust is supposed to be calibrated against weaponization by competitors.  

This hasn’t deterred all firms from engaging in swampetition, however.  It remains an attractive strategy.  By targeting a single firm, antitrust allegations present a uniquely effective tool for an incumbent or disrupted business to attack successful rivals on a battlefield outside the free market, without the risk of blowback associated with generally applicable regulatory initiatives.  Particularly around the Internet sector, characterized by rapid innovation and disruptive change, many legacy companies have been left behind, and focus energies on seeking government help.  By virtue of their imperiled condition, they may present as appealing victims needing assistance from policymakers, a phenomenon referred to as ‘the loser’s paradox.’

Examples of “swampetition”

To illustrate this is not an Internet-specific phenomenon, consider an earlier example: Chrysler’s 1980s attempt to scuttle a U.S.-Japan joint venture.  Chrysler attacked a proposed venture between General Motors and Toyota, centered around a faltering California auto plant, by arguing the deal would result in market concentration that would harm consumers.  Chrysler opposed and unsuccessfully appealed the FTC consent order which authorized the limited joint venture.  It later brought its own private antitrust action in an unsuccessful bid to kill the deal.  Far from charging monopoly prices, the venture operated at a loss over the next two decades, ultimately winding down as the Great Recession dragged down GM.

In a more recent example (cited in a book chapter collecting such instances by antitrust lawyer John Harkrider), online travel agencies’ opposition to Google’s acquisition of ITA Software, a company whose pricing engine was popular in online travel search, follows a similar path.  Despite these rivals’ complaints, the U.S. Justice Department approved the deal with some conditions in 2016, and the result was a competitive ‘nothingburger’.

During the same period, Yelp, which describes itself as the “de facto local search engine,” has waged its own lengthy competition campaign against Google.  The N.Y. Times profiled this quixotic quest to persuade regulators that the Mountain View company had an obligation to drive web traffic to Yelp, and characterized it as an “obsession.”  That obsession took a blow when the FTC declined to pursue a case based on staff recommendations in 2013, concluding that any design changes to Google Search that might have disadvantaged Yelp “could plausibly be viewed as an improvement in the overall quality” of the search product, and announced the Commission had “not found sufficient evidence that Google manipulates its search algorithms to unfairly disadvantage vertical websites that compete with Google-owned vertical properties.”

Yelp later assured investors that changes to the structure of Google search don’t affect it, while continuing to tell regulators a different story.  Yelp even enlisted the Mississippi Attorney General (previously covered in DisCo here) in making the company’s case to the the Federal Trade Commission, using research whose methodologies several scholars have since questioned.  [1], [2], [3].  Over time, the version of Yelp’s narrative presented to investors—that it isn’t struggling to obtain users—appears to have been vindicated.  Since the FTC closed its investigation in January 2013, the company’s shareholder reports indicate that its unique visits per month have increased almost 70%.  [1], [2].  

While this campaign has borne no fruit in the United States since 2013, it successfully fueled European regulators’ hostilities to U.S. tech services.  This outcome does not track the sentiment of consumers, three-quarters of whom report they continue to trust the tech industry to do what is right, making it the most trusted U.S. sector.  [1], [2], [3].  Consistent with that, tech brands number among the most admired (and valuable) in the world.  [1], [2].  And whereas companies in un-competitive industries are generally characterized by low levels of R&D, Alphabet’s R&D spending is the second-highest in the world.

Naturally, not every concern raised by a business about a rival’s conduct will be an exercise in swampetition.  As Harkrider notes in his chapter cited above, product changes can in fact have exclusionary effects (Harkrider cites Microsoft’s 1990s-era machinations against Netscape as one example).  He derives from this point several objective criteria to identify competitive concerns: (1) whether there exists a defined market, with identifiable barriers to entry; and (2) objective evidence of exclusionary conduct, which (3) is not actually preferred by consumers.  Upon these criteria, the previous examples of flagging firms efforts’ to enlist regulators against rivals look decidedly swampy.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.