A novel theory of antitrust law may be tested in the case of FTC v. Facebook. This case focuses on how pricing might be monopolistic even when the goods delivered to end users are priced at zero. An illegal assertion of monopoly power is then charged with violating the FTC Act. The main allegation is that Facebook has taken a “buy or bury” approach to its rivals in order to defend its social media monopoly. The case is due to be tried around mid-2024. If successful, the government could win a divestiture order and dismantle the company. While considerable political momentum has gathered behind a regulatory push to toughen antitrust sanctions on digital platforms in general, and Facebook in particular, the economic theory behind the government’s antitrust case is not compelling, based as it is on misinterpretations of economic theory.
A key feature of digital platforms is that the audience created allows the host platform to monetize a second side of the market, typically by selling advertising. Thus, the host often charges no fee to consumers using basic services. The novel argument by the FTC is that platforms like Facebook can exercise market power in this second side of the market even when the price of the primary service for customers is zero. But, with high prices, low prices, or zero prices, the same basic features of economic rivalry exist and can be evaluated to determine how market power is being created and utilized.
For example, the FTC argues that Facebook achieved market dominance through acquisition of competitors, leaning heavily on Facebook CEO Mark Zuckerberg’s allegedly “smoking gun” email advising company executives that “it is better to buy than to compete.”
The government argues this allowed Facebook to overwhelm competitors like Friendster and MySpace—even after MySpace’s 2005 acquisition by News Corp, a corporate entertainment behemoth. As an empirical matter, Facebook did not buy all of the platforms competing in social media. It did not purchase, but did outcompete, for example, Friendster, Orkut, MySpace, and Google+.
The FTC also claims that, with monopoly power, Facebook was able to restrict output by reducing quality with respect to privacy protections. But nowhere does the FTC establish that the privacy policies of Facebook are not preferred, given the bargain extended customers (end users), and indeed produces evidence that the asserted quality-adjusted price increases imposed by Facebook were not price increases at all. Moreover, the argument given by the FTC is contradicted by the observed lack of market response, implying that consumers did not value the asserted change in service as the Commission hypothesized—in other words, no quality-adjusted price increase was actually observed.
This does not mean that a given court will necessarily reject the FTC’s arguments, but it presumably lowers the chances of success. A negative verdict may not end the matter, however. If the government’s case does fail, it may well fuel populist demands pushing legislation to fundamentally alter the antitrust statutes.
Excerpt: The Backlash From FTC v. Facebook
The antitrust case against Facebook was filed by the Federal Trade Commission during a Republican administration and is being vigorously pursued during the Democratic administration that followed. There appears to be substantial bipartisan support to bring new regulatory restrictions, by antitrust or other means, to the large digital platforms in general, and Facebook in particular.
Yet the mergers in question were not only considered benign when reviewed a decade ago by U.S. and foreign regulators; they have proven successful in extending and improving the Facebook ecosystem. The government’s claims about Facebook inevitably pursuing mergers with potential rivals is theoretically dubious and is then contradicted by marketplace facts (including those presented in the FTC complaint itself). Labeling an increased user-agreed barter of private data for continued free platform use as a “price increase” is unpersuasive. Contracts between Facebook users and the platform routinely create value by bartering service for data, and the increased use of data for advertisement targeting does not imply a categorical reduction in consumer surplus.
If successful, this antitrust allegation purporting to show how free goods have featured monopolistic price increases would likely ripple throughout the digital economy. This then becomes a test case for a new, path-breaking interpretation of antitrust policy.
Contracts between Facebook users and the platform routinely create value by bartering service for data, and the increased use of data for advertisement targeting does not imply a categorical reduction in consumer surplus.
Ironically, the FTC antitrust suit may fail, and have large impact in that failure. A popular case, prosecuted and then rejected in court, may spur further political support for statutory reforms that extend the regulatory reach of antitrust enforcement agencies. Whatever the outcome of the antitrust action brought by the FTC against Facebook, the battle for enhanced antitrust enforcement against the practices of digital platforms may just be beginning.
Full Policy Brief: Antitrust Gambit: The F.T.C.’s Monopoly Case Against Facebook