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HJC Hearing: Should Regulators or Markets Decide Where Products are Placed?

· February 24, 2021

closeup photo of gavel

This week the House Judiciary committee will hold an antitrust hearing, following on a long string of competition hearings in the previous Congress.  With a planned focus on “gatekeepers”, the hearing is likely to focus on a business model common in many sectors of the economy: vertical integration.  

Consumers can acquire complex and innovative goods and services at a lower price, oftentimes thanks to companies being vertically integrated and, hence, more efficient.  A computer manufacturer will often build computers using a mix of its own components and third-party components, for example.  Consumers regularly see vertical integration elsewhere too, such as the grocery store.  Grocery stores and other retailers frequently used the insights gleaned from consumers’ choices to offer their own brands, usually shelved near the premium brands they compete against.  Often similarly packaged and situated at eye-level, these products often compete on price.  Store brands may also be featured in a tried-and-true means of grocery store marketing: endcaps. These displays located at the end of the grocery aisles are commonly used for promotions, and to promote store products, as shown in this Wikipedia entry on endcaps depicting a Walmart endcap featuring its house brand, Great Value. 

Visually featuring a store’s own products in a conspicuous location is an age-old practice in retail.  But despite being widely accepted in the physical space, the same practice in the digital space is sometimes regarded with suspicion.  Though it is common for a website or digital service to use high-traffic areas of the interface to feature its own products, “virtual endcaps” have recently become a source of unwarranted controversy.  

Last year’s House Judiciary Committee report argued against “self-preferencing”, arguing for government-mandated separation of digital intermediaries and the sale of products and services, and for the resurrection of Depression-era regulations that once restricted banks from offering depository and investment services.  To prohibit businesses from featuring their own products is a radical stance, however; it effectively mandates that companies practice selflessness against their competitors.

Structural separation and banning what lines of business a company may enter are not the only proposed digital-specific regulation of vertical integration.  Other suggestions include a proposal for a ‘tribunal’ modeled on program carriage regulations of the 1992 Cable Act (under which Congress imposed more stringent regulations on the cable sector before substantially deregulating via the more market-driven 1996 Telecommunications Act only four years later).  This approach doesn’t use that standard antitrust yardstick of guarding against harm to competition, but rather uses harm to competitors as a proxy.  This deviates from the long-standing U.S. approach of protecting the competitive process, rather than protecting less- dynamic firms from their competitors.  This also creates an apparatus which a minority report from the House Judiciary Committee accurately criticized as an apparatus through which “the government determines who receives equal terms and defines what services are equal”.  

Regulating how digital services may feature their own products and services reflects a degree of government involvement in business decisions that has no precedent in competitive markets.  We wouldn’t want regulators to dictate what brands can appear on physical shelves, or where they are situated, since this is a losing proposition for the consumer.  It shouldn’t happen in the digital space for the same reason. 

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.