Antitrust Issues Raised by the Emerging Global Internet Economy (Part II)

By David S. Evans[*]

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II.  The Economics and Technology of Web-Based Businesses

A.  The Economics of Multi-sided Platforms

Many of the key businesses that have arisen on the web are what economists call “multi-sided platforms.”[30]  A multi-sided platform provides goods or services to two or more distinct groups of customers who need each other in some way and who rely on the platform to intermediate transactions between them.[31]  Multi-sided platforms usually lower transactions costs and thereby facilitate value-creating exchanges.  They tend to arise when there is some value available from getting multiple sides together but transactions costs or other obstacles stand in the way.  eBay, for example, drastically lowered the cost of exchange between buyers and sellers of second-hand goods.

Multi-sided platforms usually perform each of three interrelated core functions to some degree.[32]  First, they serve as matchmakers to facilitate exchange by making it easier for members of each group to find each other.  That can be for love (matchmaker.com) or money (eBay).  Second, they build communities (or audiences) because this makes it more likely that members of a group will find a suitable match.  Facebook provides value in part because people are more likely to find people they want to meet and because advertisers can reach a large audience. The value of the platform grows as the audience grows.  Third, they provide shared resources and reduce the cost of providing services to multiple groups of customers. This is an especially important characteristic of software platforms discussed below.

One key feature of multi-sided platforms is the presence of the “indirect network effects” mentioned earlier.[33]  That means that the value that a customer on one side realizes from the platform increases with the number of customers on the other side.  Consumers looking to buy something value a search engine more if it provides advertisements that are more relevant to their search, while companies value advertising on a search engine higher if they are more likely to reach potential consumers.

Another key feature is that multi-sided platforms must cater to multiple, distinct customer groups simultaneously.  To establish a two-sided platform, for example, the founders must solve a chicken-and-egg problem: customers on Side A will not participate without customers on Side B, but customers on Side B will not participate without customers on Side A.  YouTube had to pursue people who want to post videos, people who want to watch videos, and advertisers who want to reach these viewers.  These features make the profit-maximizing calculus for a multi-sided platform more intricate than for a traditional business.  A firm operating one of these platforms must consider the demands of all sides, the interrelationships between these demands, the costs directly attributable to each side, and the costs of running the platform.

Further complicating this calculus is the fact that the profit-maximizing prices for multi-sided platforms can result in users on one side getting a price that is less than the incremental cost incurred by a customer on that side, and even less than zero.[34]  The side that is “needed more” or that is “harder to get” may receive a price break; conversely, the side that gets the most value out of access to members of the other side likely bears more of the cost.[35]  As an empirical matter, many multi-sided platforms make their money from one side and make access to the platform available to another side for a price that does not cover the cost of provision.[36]  Facebook, for example, is free to users and makes money by selling advertising.[37]

There are several major classes of industries in which most if not all of the businesses are based on multi-sided platforms.  These include advertising-supported media including newspapers, magazines, radio, television; payments including credit and debit cards; exchanges including auction houses, commodity exchanges and financial exchanges; and dating and matchmaking such as singles bars and matchmaking services.  Another major class consists of industries that have software platforms as their underlying technology.[38]  These include computer operating systems, mobile telephones, personal digital assistants, and video game consoles.[39]  They also include many web-based businesses.

B.  Software Platforms

A software program is a “platform” if it provides services that other web software can rely on.  Typically a software platform includes modules of code that other software programs can access through application programming interfaces (“APIs”).  By relying on these APIs software developers can obtain services that enable them to write software programs that are complementary to the software platform and useful to those who rely on the software platform.  By relying on Facebook’s APIs, Scrabulous provides a game for Facebook users and thereby makes Facebook a more valuable social networking site for those users.[40]

Historically, a major type of software platform consisted of operating systems that run on personal computers or on servers that are nodes in an organization’s network of computers.  Software applications such as Microsoft Word that ran on operating systems were also installed on these desktop or server computers.[41]  The software platforms that are central to web-based businesses reside on servers that are attached to the internet.  Moreover, applications that work with these platforms may reside on other servers that are attached to the internet.  This has resulted in what is sometimes called “cloud” computing, in which the software platform, and possibly the application, primarily resides on several interchangeable computers that the individual user accesses through the internet.  Google’s search-based advertising platform is an example.  The search engine that individuals use to conduct search queries, much of the software that advertisers rely on for advertising campaigns, and much of the software that publishers rely on for inserting advertisements into their web pages, reside on vast interconnected but indistinguishable “server farms” that Google operates around the world.

C.  The Interconnected Web Ecosystems: The Example of Google

The economics and technology of web-based businesses has resulted in an ecosystem that consists of interconnecting multi-sided platform businesses—based on software platform technology—that provide services to each other, to many other web-businesses that depend on them, and to consumers.  This pattern can be seen by starting with Google’s advertising platform and considering the businesses that are connected to that node.  The relationships are shown in Figure 1.

Figure 1: Google’s advertising platform connections.

Google’s advertising platform enables companies to insert ads based on keywords used in a search query, in which case the ad appears on the search-results page, or based on the keywords found in a website that belongs to Google’s network of web publishers.[42]  Google’s search engine makes money by drawing traffic to its search-results pages, where it sells and places advertising.  That search engine also helps people find web-based businesses—including publishers and e-tailers—that are not paid advertisers.  Those businesses benefit from Google’s search engine, but Google does not charge them for being listed in the organic search results that appear on the left-hand side of the search-results page.  Google also provides advertising services to web publishers.  Those publishers make space available for Google to insert ads; Google sells that space to advertisers and pays the publishers a portion of its ad revenues.

Many of the entities that Google interconnects with are also multi-sided platforms.  Web publishers operate two-sided platforms in which they use content to attract viewers and sell access to those viewers to advertisers.  Many small publishers, including blogs, rely entirely on Google to sell their advertising space.  Many large publishers use Google to sell some portion of their advertising space; some of them also have Google search boxes and receive payments from Google for advertising revenue that results from their visitors clicking on ads on Google’s search results pages.  Social networking sites are similar to web publishers in using advertising to make money.  The site attracts traffic by providing social networking and makes money by selling that traffic—and data related to individual users—to advertisers through platforms such as Google.  Google’s advertising platform also intersects with eBay’s transaction platform.  eBay buys advertising on Google’s search results pages to obtain leads to various products and services on eBay.  In addition, eBay makes advertising space available to Google and receives payments in return.

Google makes its APIs available to software developers that are writing programs to provide other services.  In return, Google reserves the right to insert advertising on those services. Since January 2007, developers have written around 20,000 “gadgets”—mini-applications that use the Google Gadgets API and can run on Google platforms (e.g. Google Calendar, iGoogle—a personalized Google homepage, Google Desktop, Blogger, Google Maps, Orkut), which can be embedded in any webpage, and can run on other third party applications (e.g. MyAOL)—which are used across 100,000 Web sites.  Developers can also create map applications on their websites using the Google Maps API.  For example, using the Google Maps API, Orbitz added “Orbitz Updates” to its site, a map which shows real-time user-reported weather, traffic, parking, and wait-line conditions at U.S. airports.

D.  Scale and Dominance in the Web-Based Economy

The economics and technology of web-based businesses has resulted in the emergence of companies that have substantial shares in their categories in many countries globally.[43]  These shares are partly the result of scale economies in production and indirect network effects for these multi-sided platforms. Table 2 reports data on the two largest platforms in three representative categories:[44] online auctions, search-based advertising, and social networking for a number of countries.[45]  These categories are highly concentrated in every country.  Moreover, the search-based advertising and online auction categories are dominated by the same firm in most countries for which data are available.  eBay is the largest auction site, with over 90 percent share of this category in all of countries for which individual data are available.  Google is the leading search-engine provider with a share in excess of 80 percent in 7 out of 16 countries for which data are available and a share in excess of 50 percent in 12 out of 16 countries.  Social networking does not have a single leader although the leading social networking site has more than a 50 percent share in most countries for which there are data.[46]

Table 2. Shares of Market Leaders in Major Internet Platforms

Measure	Auctions Page Views		Search Searches		Social Networking Page Views
	Leading Platform	Second Platform	Leading Platform	Second Platform	Leading Platform	Second Platform
Countries
Argentina			Google 91%	Yahoo! 4%
Australia			Google 79%	eBay 6%	MySpace 43%	Bebo 25%
Brazil			Google 90%	Yahoo! 2%	Google 98%	Fotolog 1%
Canada			Google 78%	Microsoft 6%
China			Baidu 54%	Google 19%
France	eBay 99%	Delcampe 0%	Google 82%	Microsoft 3%	Skyrock 78%	Facebook 7%
Germany	eBay 99%	Yatego GmbH 0%	Google 80%	eBay 6%	StudiVZ 43%	Schueler 12%
Hong Kong					Facebook 50%	Xanga 30%
India			Google 81%	Yahoo! 11%	Google 87%	Facebook 6%
Italy	eBay 99%	Bidplaza 0%	Google 85%	Telecom Italia 3%	Netlog 27%	Badoo 23%
Japan			Yahoo 49%	Google 41%	Mixi 62%	Google 14%
Malaysia					Friendster 58%	MySpace 25%
Mexico			Google 89%	Microsoft 4%
New Zealand					Bebo 81%	Facebook 7%
Russia			Yandex 52%	Google 32%
Singapore					Friendster 54%	Facebook 15%
Spain	eBay 94%	MercadoLibre 3%	Google 93%	Microsoft 2%	Fotolog 50%	Metroflog 9%
South Korea			NHN 65%	Lycos 16%	CyWorld 97%	Paran.com Club 0%
Taiwan					Microsoft 23%	Yahoo! 16%
UK	eBay 98%	Price-drop tv 0%	Google 74%	eBay 6%	Bebo 40%	Facebook 28%
USA	eBay 96%	Bidz 1%	Google 53%	Yahoo! 17%	MySpace 62%	Facebook 21%
Worldwide	eBay 57%	Taobao 14%	Google 62%	Yahoo! 13%	MySpace 17%	Facebook 15%

Sources: comScore, MyMetrix Key Measures Report (Dec. 2007); comScore, MyMetrix qSearch 2.0 Key Measures Report (Dec. 2007).

Notes: The search figures are shares as reported by comScore.  They include searches on web sites where searches are primarily or exclusively used to search within the site rather than generally on the internet.  They also include searches on sites where advertising is not featured.  Shares of search engines used for general searches on the internet and shares of search engines relevant to search advertising will likely be higher than the shares reported here.  Social networking shares are also as reported by comScore.  They include blogging sites such as Blogger.  If these sites are excluded, the shares of the market leaders would be higher.

The web-economy is still young compared to other industries.  Some of the leading firms are not even a decade old. It remains to be seen whether they maintain their leadership and the extent to which other platforms, through differentiation, can survive.  Yahoo has long been a leading portal and advertising platform, but its market value fell 33 percent between January 31, 2007 and January 31, 2008.  Following this decline, Microsoft announced its desire to acquire Yahoo on February 1, 2008.  Despite its past success and enormous user base, some analysts concluded that Yahoo could not succeed on its own.[47]   Other web giants have also encountered problems.  The growth of eBay has slowed, and the company was undergoing a shakeup in management in early 2008.  It faces increased competition from Amazon, Google, and other web properties that provide transaction platforms for businesses.  The capital markets have also expressed profound uncertainty over Google’s growth.  Its share price fell by 34 percent between January 2, 2008 and April 17, 2008, the day it announced its first quarter earnings.[48]  Google reported a 30 percent increase in quarterly profits that day and its stock increased by 23 percent by April 22, 2008. [49]

III.  Competition and Regulatory Policy

Antitrust scrutiny of the leading web-based platforms from around the world was, and is, inevitable.  This scrutiny has come, so far, either through self-initiated investigations by competition authorities, through complaints by their diverse stakeholders, or through complaints by their rivals.[50]  These web-platforms have large shares of the segments in which they operate.  While one can debate whether these segments correspond to well-defined antitrust markets, the competition authorities and complainants may take these categories as a starting point.  Under European Community law, a firm can be considered dominant with a share as low as 40 percent.[51]  Many of these platforms have segment shares that exceed 80 percent in many countries.  The European Commission suggested, in its case against Microsoft, that such “super-dominant firms” should receive even greater scrutiny; some observers believe that the Court of First Instance has agreed with the Commission in its Microsoft judgment.[52]  Under U.S. law, firms that have market shares in excess of 60 percent are often considered to have monopoly power.[53]  Although it has become more difficult for plaintiffs to prevail on various monopolization theories in the United States, the case law on tying products together and offering discounts for bundles of products continues to provide significant opportunities for plaintiffs to pursue cases.

The existence of indirect network effects and scale economies means these platforms are competing in “winner-take-all” and “a few winners take all” markets.  That leads to aggressive struggles to win market share at the expense of rivals.  Competition authorities worry and rivals complain, however, when “tough” business tactics succeed in reducing the rivals’ sales, thereby “foreclosing” them from the market.  Complicating matters, competition authorities and courts have difficulty distinguishing pro-competitive from anti-competitive business practices for multi-sided platforms.  For example, as mentioned previously, multi-sided platforms often charge prices that are below cost to customers on one or more sides of the platform.  In some circumstances these low prices drive out competition as a result of what business strategists refer to as “envelopment.”[54]  Rivals who lack the money-making side of the platform that subsidizes the money-losing product cannot survive.

Several competition and regulatory issues are likely to arise in the coming years as a result of this antitrust scrutiny and given the probable evolution of the web-based economy.

The emergence of impregnable monopolies.  There are likely to be concerns over the seeming monopolization of certain segments. It is possible that the web-economy will see a constant churning of its leading players.  The fact that eBay and Yahoo have lost their once seeming impregnability is consistent with the view that dominance is fleeting.  However, the evolution of the web-economy thus far is also consistent with the evolution of other industries in which it takes time for the winners to emerge.[55]  If so, it is possible that a handful of firms will have near-monopoly positions in certain segments and that those positions will be protected in part by indirect network effects and the scale economies resulting from the ability to average fixed software and hardware costs across larger communities.  American antitrust policy recognizes that such monopoly is the reward for successful investment and innovation.[56]  European Community (EC)-based competition policy views competition as the more desirable outcome, and when that is not possible, it imposes significant obligations on the dominant firm.[57] 

Leveraging into adjacent markets. The structure of the web ecosystem makes it likely that dominant firms will seek to move into related markets for complementary products or services.  Because these firms are based on software platforms it is relatively easy to add new features and services.  For example, Google introduced its Google Checkout payment service in competition with PayPal by extending its software platform, integrating code into Google Product Search and bundling Google Checkout for merchants into AdWords for advertisers.  Moreover, the leading web platforms often provide complementary services. It is a well-established economics proposition that a monopoly could make greater profit if it also owned complementary monopolies or if it could replace these complementary monopolies with competitive markets.[58]  Therefore, assuming that competition is not feasible, we would expect the dominant firms to attempt to establish monopolies across more segments than is true today.  That could happen through mergers or through one dominant firm challenging another, as Google is doing with eBay.

Access to facilities. Access to the other platforms and to the intellectual property that enables one platform to work together (“interoperate”) with another are likely to be raised when, as is the case in the European Community, the law is conducive to do so.[59]  One set of issues concerns access to a “closed platform.” The Apple iTunes/iPod platform is largely closed.  Apple does not encourage—and indeed seeks to prevent—other music stores from making music available for iPods or for other device makers to play music from iTunes.  Although it could obtain indirect network effects from an open strategy, it has chosen a tightly integrated business software-hardware model.  This issue is central to the recent European Community cases against Apple.[60]  Other platforms close themselves in particular dimensions. Facebook, for example, does not allow search engines to crawl its website, and as a result, the content on this social networking site is not available to searchers.

Another set of issues relates to portability of data.  Web platforms derive benefits from the data they collect in a variety of ways.  eBay’s “Feedback Forum” provides quality information on sellers that is valuable to buyers.  Users input a great deal of valuable personal information into social networking sites such as MySpace and Facebook.  Google retains data on search queries that it can use to refine searches and deliver ads. In these cases one could imagine competitors seeking access to this information under an “essential facilities” theory under European Community law.[61]  One could also imagine competition policy cases over restrictions that prevent users from exporting their data to competing sites.  This battle has already begun, as Facebook rivals are currently lobbying publicly for the portability of social networking data.

Tying and bundling.  As the current spate of cases suggests, it is probable that leading web platforms will face complaints over tying of various forms.[62]  It is also a common business strategy for software platforms to expand by adding features.  They face low marginal costs for doing so, they can sometimes provide efficiencies by integrating features together or making it easier for consumers to obtain them more conveniently, and they can aggregate demand over users who may value one feature but not another.[63]  The D.C. Court of Appeals found that it was appropriate to apply a rule-of-reason legal standard to tying for software platforms[64] because of the possibility that there were particularly compelling efficiency explanations for the practice in this situation.[65]  Whether the U.S. courts treat the web-based companies as software platforms, however, remains to be seen; these companies have different business models and practices than Microsoft did with Windows, which was the subject of the D.C. Circuit decision. Moreover, the European Community’s Court of First Instance has re-affirmed the Community’s formalistic approach to tying in the Microsoft judgment.[66]

Envelopment and predation.  Multi-sided platforms are a bit like clumsy giants stepping on other creatures as they move through the ecosystem.  Although they may crush competitors intentionally, this may also happen as a natural byproduct of legitimate pricing and design decisions. Multi-sided platforms—and this is particularly true with the leading web platforms—give many features and services away, often for the purpose of attracting traffic.  They can readily crush companies that charge for features and services they offer for free. But it is not only the little guy that faces concern from this strategy. Google Checkout can undercut eBay’s PayPal because Google, unlike eBay, can obtain more advertising revenue from having an efficient payment method and can secure data that it can use to target ads better.  Likewise, Google’s ability to subsidize software with advertising poses a threat to Microsoft and other software companies that charge for software; Microsoft is moving rapidly into online advertising just so that it can have a source of revenue similar to a key rival.  Nevertheless, one would expect that tying, bundling and pricing strategies that foreclose rivals will lead to competition policy investigations and prosecutions.

Conclusions

At the inception of most new industries, hundreds of firms enter.[67]  They battle it out over time.  A few winners usually emerge—firms that have secured scale economies or that have benefited from superior management or both.  This pattern has been repeated numerous times over the course of the second industrial revolution that started after the U.S. Civil War. Consider the automobile industry.  It began with the invention of the automobile by Karl Benz in 1885.  The first commercial automobile company in the United States was Duryea, which entered the market in 1893.  As of 1908, 253 automobile companies were competing in the U.S. This was whittled down to the big four—General Motors, Ford, Chrysler, and American Motors—by 1960. Many other industries followed a similar course.

Antitrust scrutiny often follows consolidation.  The leaders in the industry have large market shares, which, under longstanding antitrust practice, makes them vulnerable to claims of unlawfully maintaining or acquiring a monopoly or running afoul of other antitrust laws that have a market power screen.  AT&T was hit with its first major antitrust case in 1911, twenty-six years after it opened the first telephone exchange.  IBM faced its first antitrust case forty-seven years after it received patents for the punch card machine.

We can expect the web-based industries will follow the same trajectory, and thus far they have.  Massive entry has taken place.  As with many new industries, we remember the YouTubes that succeeded but we forget that Google Video and hundreds of other start-ups tried and quickly failed. There are some differences, though, which suggest more antitrust controversy will result, sooner.  The first is speed.  Although the notion of “Internet Time” may have been exaggerated, it is true that web-based firms can achieve leading positions in many countries around the world very quickly. The second is complexity.  Almost all of the leading web-based firms have intricate multi-sided business models.  The third is interconnectedness.  The web-economy is interconnected, which leads to dependencies and rivalries that can create conflict and antitrust complaints.

As a result, the competition authorities and courts will have a challenging set of issues to deal with concerning the web-based economy in the years to come.  The future will bring merger cases as firms seek to consolidate to achieve economies of scale and indirect network effects; refusal-to-deal cases as closed platforms deny others access to their communities; predation cases as rivals complain about “free” offerings that foreclose if not destroy them; tying cases as platforms use software platform technologies to add features and functions which in some cases will foreclose their rivals; and exclusive dealing cases as platforms lock up traffic to achieve indirect network effects.  Courts and competition authorities should exercise care in balancing the need to protect long-run social welfare against the need to stop anti-competitive strategies in this highly dynamic and complex part of the economy.

————      

30.  Multi-sided platforms are also called “two-sided markets” by economists even though they are not markets—at least as markets are defined in antitrust. See, e.g., Jean-Charles Rochet & Jean Tirole, Two-Sided Markets: A Progress Report, 37 RAND J. Econ. 645 (2006) [hereinafter Rochet & Tirole, Two-Sided Markets]. Most web-based businesses are at least two-sided because they are transaction platforms (such as eBay, Amazon, Alibaba) which connect buyers and sellers, social networking sites (such as MySpace and Facebook) which connect friends, of advertising-supported sites (such as cnn.com as well as the social networking sites) which connect viewers and advertisers.

31.  See David S. Evans, The Antitrust Economics of Two-Sided Markets, 20 Yale J. Reg. 325, 328 (2003); David S. Evans, Some Empirical Aspects of Multi-Sided Platform Industries, 2 Rev. Network Econ. 191 (2003); Jean-Charles Rochet & Jean Tirole, Platform Competition in Two-Sided Markets, 1 J. Eur. Econ. Ass’n 990 (2003).

32.  See David S. Evans & Richard Schmalensee, The Industrial Organization of Markets with Two-Sided Platforms, 3 Competition Pol’y Int’l 158–59 (2007).

33.  See, e.g., Michael L. Katz & Carl Shapiro, Systems Competition and Network Effects, 8 J. Econ. Persp. 93 (1994).

34.  See Rochet & Tirole Two Sided Markets, supra note 30, at 659; Mark Armstrong, Competition in Two-Sided Markets, 37 RAND J. Econ. 668–70 (2006); Geoffrey G. Parker & Marshall W. Van Alstyne, Two-Sided Network Effects: A Theory of Information Product Design, 51 Mgmt. Sci. 1494, 1498 (2005).

35.  See David S. Evans & Richard Schmalensee, Catalyst Code: The Strategies Behind the World’s Most Dynamic Companies 71–92 (2007).

36.  When there are more than two sides, at least one side must make money. Id.

37.  See About Facebook, http://www.facebook.com/about.php (last visited Apr. 23, 2008) (link).

38.  See generally David S. Evans, Andrei Hagiu & Richard Schmalensee, Invisible Engines: How Software Platforms Drive Innovation and Transform Industries (2006).

39.  See id. at 1–2.

40.  The owners of Scrabble have objected to this take off on their game. See Heather Timmons, Scrabble Tries to Fight a Popular Imposter at its Own Game, N.Y. Times, April 7, 2008, at C7, available at http://www.nytimes.com/2008/04/07/technology/07scrabulous.html?scp=1&sq=scrabulous&st=nyt (link).

41.  Operating systems are a type of software platform that manipulates the computer hardware in addition to providing code that supports other software and hardware applications.

42.  See David S. Evans, The Economics of the Online Advertising Industry (Jan. 2008) (unpublished manuscript at 37), available at http://ssrn.com/abstract=1086473 (link).

43.  I am using the term “category” to refer to commonly known types of products or services such as social networking, portals, instant messaging, and auction-sites. These categories do not necessarily correspond to markets because products and services in one category can substitute to some degree for products and services in another category. Moreover, the extent of cross-category substitution can vary over time; for example, in my experience people are increasingly using social networking sites such as Facebook as their entry point when they sign on to the web rather than a traditional portal such as Yahoo.

44.  I have chosen these three because, as discussed below, they reflect the most important types of platforms for the foreseeable future. However, the same basic points apply to instant messaging, online payment systems, and web mail.

45.  These categories do not necessarily correspond to relevant antitrust markets and any analysis of market definition should properly consider the two-sided issues mentioned above. As noted below, these shares are based on categories as reported by comScore and may over or understate the true significance of the leading companies. First, the shares of the main search engine providers (Google, Yahoo, Microsoft, and Baidu) are understated because comScore includes searches that are done within websites such as eBay in its calculation of search shares, even though eBay is not generally used for internet searches. Second, the calculation of search query shares further understates the search revenue share for Google because Google earns a higher revenue per search than Microsoft or Yahoo. See Search Marketing Communications, http://cohn.wordpress.com/category/revenue-per-visit/ (Feb 7, 2008) (link); Miguel Helft, A Long-Delayed Ad System Has Yahoo Crossing Its Fingers, N.Y. Times, Feb. 5, 2007, at C1.

46.  Facebook’s implied market value after investments by Microsoft and Chinese billionaire Li Ka-shing is $15 billion; that suggests that at least some investors are betting that Facebook will become the leading social network. See Suzy Jagger, Li Ka-shing makes big impression on Facebook, The Times Online, Mar. 29, 2008, http://business.timesonline.co.uk/tol/business/industry_sectors/technology/article3642805.ece (link); Thomas R. Eisenmann and Brian Feinstein, Facebook Platform, Harvard Business School Case Study N2-808-128 (Mar. 18, 2008), at 1.

47.  See, e.g., Michael Liedtke, Microsoft Woo Yahoo?, St. Paul Pioneer Press, Feb. 12, 2008, at C1; Grouchy Geek, http://grouchygeek.blogs.fortune.cnn.com/2008/02/01/yahoo-needs-microsofts-help/ (Feb. 1, 2008, 11:56 EST) (link); Claudine Beaumont, Fading Yahoo! Needs Microsoft rescue, The Telegraph, Feb 2, 2008, http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/01/bcnmicro601.xml (link).

48.  See Google Finance, Google Inc., http://finance.google.com/finance?q=NASDAQ:GOOG (follow “compare” hyperlink, then follow “Zoom: 6m” hyperlink, then track the dates and corresponding share prices on the graph). In fact, Google’s stock price had been stumbling since November, 2007. See Posting of Jim Kerstetter to CNET Tech News Blog, http://www.news.com/8301-10784_3-9920376-7.html (Apr. 16, 2008, 11:06 PDT) (link).

49.  See Google Finance, supra note 48; Press Release, Google, Google Announces First Quarter 2008 Results (April 17, 2008), available at http://www.google.com/intl/en/press/pressrel/revenues_q108.html (link).

50.  In keeping with the global focus of this article “complainants” is used to refer to parties that complain to a competition authority as well as plaintiffs in private actions, which is the dominant form of antitrust enforcement in the United States.

51.  See British Airways, PLC v. Comm’n, 2003 E.C.R. II-5917, ¶¶ 211, 223–25; Wanadoo Interactive, Commission Decision of July 16, 2003, ¶ 227 (link).

52.  See Renata B. Hesse, Microsoft and the Court of First Instance: What Does it All Mean?, Global Competition Policy, Oct. 3, 2007, http://www.globalcompetitionpolicy.org/index.php?id=562&action=907 (link); Harry First, Strong Spine, Weak Underbelly: The CFI Microsoft Decision, Global Competition Policy, Sept. 28, 2007, http://www.globalcompetitionpolicy.org/index.php?id=555&action=907 (link).

53.  See Gerald F. Masoudi, Deputy Assistant Attorney Gen., Antitrust Div., U.S. Dep’t of Justice, Some Comments on the Abuse-of-Dominance Provisions of China’s Draft Antimonopoly Law, Address Before the University of International Business and Economics Competition Law Center Conference on Abuse of Dominance: Theory and Practice, (July 21, 2007), available at http://www.usdoj.gov/atr/public/speeches/225357.htm.

54.  See Thomas R. Eisenmann, Geoffrey Parker & Marshal W. Van Alstyne, Platform Envelopment (Harv. Bus. Sch. Tech. & Operations Mgt. Unit, Working Paper No. 07-104, 2007) (manuscript at 3), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=996852 (link).

55.  See David S. Evans, Daniel D. Garcia Swartz & Bryan G. Martin-Keating, The Failure of E-Commerce Business: A Surprise or Not? 3 Eur. Bus. Org. L. Rev.1, 7 (2002); Michael Gort & Steven Klepper, Time Paths in the Diffusion of Product Innovations, 92 Econ. J. 630, 331 and Table 3 (1982) (on the decline in number of firms).

56.  See Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004).

57.  Firms that are dominant are subject to the provisos of Article 82 EC Treaty which has been interpreted to prohibit various forms of tying, refusals to deal, bundled price rebates, pricing below cost, and other activities. See Richard Whish, Competition Law 202–208 (5th ed., 2004) (discussing examples of abuse of dominance). In many of these cases the practices are essentially prohibited per se if the firm is dominant—has a share of an antitrust market that is higher than forty percent or so. See British Airways, PLC v. Comm’n, 2003 E.C.R. II-5917, ¶¶ 211, 223–25; Wanadoo Interactive, Commission Decision of July 16, 2003, ¶ 227.

58.  See Michael A. Salinger, Introduction to Chapters VII and IX of Augustin Cournot, Mathematical Principles of the Theory of Wealth, 4 Competition Policy Int’l 274, 280–82 (2008) (“Today, the fundamental distinction between horizontal and vertical effects is widely accepted by antitrust practioners.”).

59.  The OpenGroup, a consortium that aims to facilitate interoperability, explains that interoperability is the ability to both exchange information and to use it. “Without a way to exchange information ... [sic] high-tech systems literally can’t communicate with each other. And, if they can’t communicate, they can’t work—interoperate—with each other.” The Open Group, Interoperability Matters, http://www.opengroup.org/bus_area/interoperability/info1/IBinfo1.htm#what, (last visited Apr. 10, 2008).

60.  See Keith Regan, iTunes Draws Ire of EU Commissioner, MacNewsWorld, Mar. 13, 2007, http://www.macnewsworld.com/story/56255.html (link); Eric Bangeman, EU Commissioner Criticizes iPod-iTunes Tie-in, ars technica, Mar. 11, 2007, http://arstechnica.com/news.ars/post/20070311-eu-commissioner-criticizes-ipod-itunes-tie-in.html (link).

61.  “[T]he essential facilities doctrine imposes liability when one firm, which controls an essential facility, denies a second firm reasonable access to a product or service that the second firm must obtain in order to compete with the first.” Alaska Airlines, Inc. v. United Airlines, Inc., 948 F.2d 536, 542 (9th Cir. 1991). For a review of the implementation of the essential facilities doctrine by the European Union, see James Turney, Defining the Limits of the EU Essential Facilities Doctrine on Intellectual Property Rights: The Primacy of Securing Optimal Innovation, 3 Nw. J. Tech. & Intell. Prop. 179 (2005) (link).

62.  For example, in September 2007, The European Court of First Instance (CFI) upheld the European Commission’s accusations against Microsoft of illegal tying of the Windows Client PC Operating System and Windows Media Player. See Case T-201/04, Microsoft v. Comm’n, 2007 ECJ CELEX LEXIS 554 (Sept. 14, 2007). Further, in January 2008, the Commission opened an investigation into the alleged tying of Internet Explorer and other software products to the Windows PC operating system. See Memorandum from the European Commission, Antitrust: Commission Initiates Formal Investigations Against Microsoft in Two Cases of Suspected Abuse of Dominant Market Position (Jan. 14, 2008) available at http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/08/19. The Commission has also censured Apple for its tying of the iPod music player and the iTunes Music Store. See Regan, supra note 60; Bangeman, supra note 60.

63.  See Evans, Hagiu & Schmalensee (2006), supra note  38, at ch. 11. Demand aggregation is most easily seen with newspapers: many people only read portions of the newspapers; however, by offering various features readers find enough content to persuade them to subscribe to the newspaper.

64.  “A rule-of-reason analysis requires first checking whether the facts of a given case suggest that anti-competitive tying is a possibility and then weighing those anti-competitive effects with the benefits resulting from a tying policy.” See David S. Evans, A. Jorge Padilla & Michele Polo, Tying in Platform Software: Reasons for a Rule-of-Reason Standard in European Competition Law, 25 World Competition 509, 514 (2002).

65.  See United States v. Microsoft Corp., 253 F.3d 34, 93 (D.C. Cir. 2001).

66.  See Christian Ahlborn & David S. Evans, The Microsoft Judgment and its Implications for the Competition Policy Towards Dominant Firms in Europe, Antitrust L. J., (forthcoming 2008).

67.  See Gort & Klepper, supra note 55 at 631.

————      

Copyright 2008 Northwestern University      

Cite as: 102 Nw. U. L. Rev. Colloquy 285 (2008).

Persistent URL: http://www.law.northwestern.edu/lawreview/Colloquy/2008/13

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