Last week, the Federal Trade Commission (FTC) filed its amended antitrust complaint against Facebook
The amendment was needed because a federal judge dismissed the FTC’s first complaint, finding that the agency had failed “to plausibly establish…that Facebook has monopoly power in the market for Personal Social Networking (PSN) Services.” The judge allowed the FTC the opportunity to fix that deficiency.
Based on the amended filing, the case will probably move forward, but it will be weak.
An antitrust case has two basic components. First is the problem of determining whether a firm has monopoly power, which I will call “market power”—as this term is more accurate and less pejorative. If such power can be effectively proven, the antitrust enforcer must then show that the power is being abused in a way that harms consumers.
In demonstrating that a firm has market power, the enforcer must first define the market at hand. In antitrust, a “market” means a set of products that customers in a specific geographic region purchase and for which the customers do not find reasonable substitutes. In Facebook’s case, the FTC argues that the market is a set of social media capabilities that Facebook offers for connecting friends and families in the United States, which the FTC believes no one else adequately provides.
In dismissing the FTC’s initial filing, the judge did not quibble with the FTC’s chosen market definition but did say the agency had not provided sufficient information to show market power. In its amended complaint, the agency tried to remedy that deficiency by providing statistics on social media users’ choices of service providers and time spent using selected services. Based on the amended complaint, the FTC still faces an uphill battle.
Let’s begin with the market definition. Facebook is a multisided market, which I will simplify to just two sides: Facebook subscribers and advertisers. The FTC discusses only the subscriber side. As I explained in an earlier post:
“Choosing personal social networking as the market was a strategic mistake. Facebook is right that, at best, personal social networking is a market for inputs—namely, users’ time and attention—that Facebook uses for advertising services. If…advertising is competitive, then it naturally follows that the “time and attention” market is also competitive or is not a market at all because there are great substitutes.”
Are there great substitutes for Facebook? Evidently. According to Backlinko, the average American has more than seven social media accounts. And people are finding more and more social media options: On a global basis, the number of accounts per person nearly doubled between 2014 and 2020. As I also wrote previously:
“According to Statista, the average American uses social media for about 123 minutes per day. According to Social Media Today, the average Facebook user is on Facebook about 10 minutes per day, or only 8% of the time Americans spend on social media daily.”
Although the FTC cites other sources that give different statistics, it appears Americans take advantage of numerous social media options and spend the majority of their ad-viewing time somewhere besides Facebook.
Regarding advertising, the Justice Department and some state attorneys general have an antitrust case against Alphabet
claiming it uses search to monopolize advertising, and other state attorneys general claim that Google monopolizes advertising technology. The definition of a monopoly is such that Facebook and Google cannot have both monopolized advertising.
But suppose that Facebook does have market power. Is the company abusing it to the harm of customers? Apparently not.
The FTC argues that Facebook buys or buries potential rivals. As I demonstrated in an earlier post, empirical evidence counters the theory that Facebook has simply bought rivals. Regarding the burial of rivals, the FTC argues that Facebook used to give its resources for free to potential rivals, but now limits access. Is that unreasonable? Should we expect Berkshire Hathaway
to give rival investment firms free access to its financial analyses? Or for Tesla
to give away its technologies and data?
The economics profession addressed years ago this issue of when a business should allow rivals to use its resources. The solution was for the incumbent business to build forgone profits into the prices it charged rivals. This was called the “parity principle” in railroads and the “efficient component pricing rule” (also known as “retail minus”) in telecommunications. Facebook cannot apply this principle while also allowing free access to its resources. Restricting access is a reasonable alternative.
The bottom line is that the FTC has probably provided enough information to allow its case to go forward. But if this amended complaint is representative of the FTC’s larger case against Facebook, the case itself should fail.
Mark Jamison is a nonresident senior fellow at the American Enterprise Institute, where he works on how technology affects the economy, and on telecommunications and Federal Communications Commission issues. He is concurrently the director and Gunter Professor of the Public Utility Research Center at the University of Florida’s Warrington College of Business. He has a Ph.D. in economics from the Warrington College of Business at the University of Florida.
(Disclosure statement: Mark Jamison provided consulting for Google in 2012 regarding whether Google should be considered a public utility.)
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