WWaasshhiinnggttoonn UUnniivveerrssiittyy LLaaww RReevviieeww Volume 94 Issue 1 2016 AAnnttiittrruusstt iinn ZZeerroo--PPrriiccee MMaarrkkeettss:: AApppplliiccaattiioonnss John M. Newman University of Memphis School of Law Follow this and additional works at: https://openscholarship.wustl.edu/law_lawreview Part of the Antitrust and Trade Regulation Commons RReeccoommmmeennddeedd CCiittaattiioonn John M. Newman, Antitrust in Zero-Price Markets: Applications, 94 WASH. U. L. REV. 49 (2016). Available at: https://openscholarship.wustl.edu/law_lawreview/vol94/iss1/5 This Article is brought to you for free and open access by Washington University Open Scholarship. It has been accepted for inclusion in Washington University Law Review by an authorized administrator of Washington University Open Scholarship. For more information, please contact [email protected]. ANTITRUST IN ZERO-PRICE MARKETS: APPLICATIONS JOHN M. NEWMAN ABSTRACT “Free” products have exploded in popularity along with widespread Internet adoption—but many of them are not truly free. Customers often trade their attention or personal information to access zero-price products. This exchange dynamic brings zero-price markets within the scope of antitrust law. But despite the critical role that such markets now play in modern economies, the antitrust enterprise has largely failed to account for their unique attributes. In response, this Article undertakes two primary tasks. The first is to address particular areas of current antitrust doctrine that require revision or reinterpretation in the face of zero prices. Topics addressed include consumer standing (can attention or personal information qualify as “property” under the Clayton Act?), market definition (is the SSNIP- based hypothetical-monopolist test still workable?), market power (can the traditional emphasis on “power to control price” be refocused on more relevant modes of competition?), defenses (is there a viable “free goods” defense?), and damages (can attentional or informational harms be quantified with the requisite degree of accuracy?). The second task is to examine applications of antitrust law to particular types of strategic conduct. Toward this end, the Article surveys and critiques the existing antitrust case law involving zero-price markets. Though this analysis reveals some flawed judicial reasoning, it also identifies an encouraging trend toward honest attempts to grapple with the distinctive difficulties posed by zero-price markets.  Assistant Professor, University of Memphis Cecil C. Humphreys School of Law. A portion of this draft was written while the author was practicing as a Trial Attorney with the U.S. Department of Justice, Antitrust Division. The views expressed herein are solely the author’s and do not necessarily reflect those of the Department of Justice. Any discussions of matters in which the author represented the United States reflect solely information gathered from public sources and do not reveal, relate to, or draw upon confidential information. Many thanks for their comments on various drafts of this paper are due to Herbert Hovenkamp, Gregory J. Werden, William Kratzke, Boris Mamlyuk, Jens Prüfer, Peter Swire, Leah McCoy, Susan Musser, and Damon C. Andrews. Thanks also to Devon C. Muse and Gale B. Robinson, Jr., for providing excellent research assistance. 49 Washington University Open Scholarship p 49 Newman book pages 12/13/2016 50 WASHINGTON UNIVERSITY LAW REVIEW [VOL. 94:49 TABLE OF CONTENTS I. INTRODUCTION ...................................................................................... 51 II. THE ANTITRUST ENTERPRISE IN ZERO-PRICE MARKETS ..................... 53 A. Consumer Standing ................................................................... 53 1. Are Attention and Information “Property”? ..................... 53 2. Antitrust Injury .................................................................. 58 B. Modernizing Traditional Standards: Market Definition and Market Power ............................................................................ 60 1. Market Definition .............................................................. 60 a. Reasonable and Functional Interchangeability ......... 61 b. The HMT and Proposed Reforms: Implementing a “SSNIC” Test ............................................................ 64 c. Application and Limitations of a “SSNIQ” Test ....... 69 2. Market Power .................................................................... 71 C. The Zero-Price Effect in Action................................................. 74 1. Substitutability of Positive- and Zero-Price Products ....... 74 2. Enhanced Market Power ................................................... 77 C. Defenses: The “Free-Goods” Argument ................................... 79 E. Damages Valuations ................................................................. 82 1. Monetary Damages in Zero-Price Markets ....................... 83 2. Damages-Valuation Approaches ....................................... 84 a. Marketplace Valuation .............................................. 84 b. Stated Preferences and Cognitive Biases .................. 86 3. Disgorgement as an Alternative to Damages .................... 88 4. The Role of Public Enforcement ........................................ 89 III. ANTICOMPETITIVE CONDUCT IN ZERO-PRICE MARKETS ................. 90 A. Price and Cost Fixing ............................................................... 90 1. Zero-Price Fixing .............................................................. 91 2. Information- or Attention-Cost Fixing .............................. 94 B. Tying .......................................................................................... 96 C. Exclusive Dealing .................................................................... 101 D. Predatory Pricing .................................................................... 102 E. Refusals to Deal ...................................................................... 106 F. Mergers ................................................................................... 108 V. CONCLUSION ................................................................................... 111 https://openscholarship.wustl.edu/law_lawreview/vol94/iss1/5 p 49 Newman book pages 12/13/2016 2016] ANTITRUST IN ZERO-PRICE MARKETS 51 I. INTRODUCTION “Free” products have exploded in popularity. Though often labeled as such, many of these products are not free.1 Social networks, web-based email, radio, television programs, news services, mapping programs, online search—all are now widely offered to customers with no prices attached. Yet many providers of these products are not acting altruistically; in fact, zero-price products have grown so profitable that their suppliers boast a combined market capitalization of well over $1 trillion.2 Customers are exchanging something of value—most commonly their attention to advertisements or their personal information—in order to access zero-price products.3 But despite the critical role that zero-price products now play in modern economies, analysts have failed to adequately account for the unique attributes of zero-price markets, leaving the antitrust enterprise woefully unprepared to play its traditional role of safeguarding marketplace competition. This failure has already caused substantial harm to consumer welfare; left unchecked, it will continue to do so. This Article seeks to address that failure. The choice of title was deliberate: to call zero-price products “free” is to beg the question. The discussion that follows builds on the fundamental observation that “free” products often are not free.4 Zero-price markets are a part—and, a fortiori, an increasingly vital part—of the “trade or commerce” Congress intended to regulate under the antitrust laws. Yet, antitrust institutions are, at best, only beginning to wrestle with the unique issues presented by zero-price transactions. 1. In common usage, “free” denotes zero cost. See, e.g., LAWRENCE LESSIG, THE FUTURE OF IDEAS: THE FATE OF THE COMMONS IN A CONNECTED WORLD 12 (2001) (“[W]henever one says a resource is ‘free,’ most believe that a price is being quoted—free, that is, as in zero cost.”). 2. See, e.g., Market Capitalization of the Largest U.S. Internet Companies as of March 2016, STATISTICA, http://www.statista.com/statistics/209331/largest-us-internet-companies-by-market-cap/ (last visited June 2, 2016). Of the ten largest Internet companies listed, seven offered primarily or exclusively zero-price products—and these seven firms alone accounted for over $950 billion in market capitalization. 3. John M. Newman, Antitrust in Zero-Price Markets: Foundations, 164 U. PA. L. REV. 149, 165–72 (2015). 4. Some zero-price products are truly free (or as close to free as is realistically possible)—for example, nonprofit organizations like the Wikimedia Foundation provide online services free of charge. See generally Michal S. Gal & Daniel L. Rubinfeld, The Hidden Costs of Free Goods: Implications for Antitrust Enforcement 8 (N.Y. Univ. Law and Econ. Working Papers, Paper No. 14- 44, 2015), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2529425 (explaining that an array of charitable, social, reputational, and even selfish motives underlie truly free product offerings). Washington University Open Scholarship p 49 Newman book pages 12/13/2016 52 WASHINGTON UNIVERSITY LAW REVIEW [VOL. 94:49 Part II of this Article identifies and addresses several foundational aspects of the antitrust enterprise that are challenged by zero-prices. It begins by establishing that consumers of zero-price products may have standing to sue under the Clayton Act, which requires injury to a plaintiff’s “business or property.”5 The primary argument here is descriptive (though likely not uncontroversial); it employs textual, precedential, and purposive tools of analysis to conclude that, for the narrow purposes of Clayton Act standing, “property” includes information and attention. As a corollary, such consumers may also suffer antitrust injury, another element required for standing. Thus, courts ought to interpret and apply standing requirements so as to include consumers of zero-price products. This conclusion depends, for normative force, primarily on deontological, rather than utilitarian, grounds. Part II then turns to market definition and market power. The most commonly used tests for both elements depend on the presence of positive prices. As a result, existing case law suggests reason for concern—some courts have fallen into fallacious reasoning when attempting to define markets and measure power absent positive prices. But, as Part II explains, the frameworks underlying the traditional tests can be adapted to zero- price markets. Drawing on a robust body of behavioral economics literature, Part II also observes that analyses of market definition and market power should account for the power of the Zero-Price Effect. Part II concludes by addressing defenses and damages. It demonstrates the unviability, as a matter of both antitrust law and antitrust economics, of the “free goods defense” already raised by at least one defendant. Part II also explores the knotty issue of damages calculations. Consumer psychology research reveals that stated preferences are highly unreliable vis-à-vis information and attention costs. As a result, Part II urges caution when stated preferences are proffered as a measure of damages in zero- price markets. Part III surveys and critiques the extant case law involving zero-price markets. It is organized according to well-recognized categories of strategic conduct: horizontal competitor agreements, tying, exclusive dealing, etc. In part, the discussion is purely descriptive; it is the first attempt to gather and report all existing antitrust precedent involving zero- price markets. The discussion is, by turns, also prescriptive: it not only evaluates the competence of judges’ rulings and reasoning, but also recommends superior alternatives for use in future cases. Ultimately, this 5. 15 U.S.C. § 15(a) (2012). https://openscholarship.wustl.edu/law_lawreview/vol94/iss1/5 p 49 Newman book pages 12/13/2016 2016] ANTITRUST IN ZERO-PRICE MARKETS 53 critique exposes a mixed bag. Antitrust courts have done much more than mere “hand waving” in the face of zero prices.6 Yet—perhaps unsurprisingly, given the general lack of guidance from analysts—they have often fallen into error. Thus, Part IV briefly concludes with a call to confront head-on the process of modernizing the antitrust enterprise to account for zero-price markets. II. THE ANTITRUST ENTERPRISE IN ZERO-PRICE MARKETS Zero-price markets pose substantial difficulties for several vital elements of antitrust doctrine. The discussion below is organized around the order in which those constituent elements tend to arise in antitrust litigation: standing, followed by market definition and market power, defenses, and remedies. A. Consumer Standing Federal antitrust law is enforced two ways: by the U.S. government and by private parties.7 The U.S. government is authorized to sue any party who has violated the antitrust laws.8 Private parties, however, must demonstrate that they have standing to sue.9 Clayton Act § 4, which authorizes private treble-damages recovery, grants standing to “any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws.”10 To be granted such standing, a private party must prove (1) injury to its “business or property,” and (2) that the injury suffered qualifies as “antitrust injury,” i.e., the particular type of injury cognizable under federal antitrust law.11 1. Are Attention and Information “Property”? The U.S. government (as well as the rare private plaintiff seeking only injunctive relief)12 need not satisfy the Clayton Act § 4 “business or 6. But see David S. Evans, The Antitrust Economics of Free, 7 COMPETITION POL’Y INT’L 71, 72 (2011) (“[T]here is a tendency on the part of companies, authorities, and courts to do more hand waving than serious analysis when they encounter products and services offered for free.”). 7. 3 PHILIP E. AREEDA & HERBERT HOVENKAMP ¶ 335 n.1 (3d ed. 2007) (“Everyone other than the federal government falls into the “private” plaintiff category, which thus includes a state attorney general invoking federal antitrust law, whether on behalf of the state or of its citizens.”). 8. See 15 U.S.C. § 4 (2012). 9. 3 AREEDA & HOVENKAMP ¶ 335a. 10. 15 U.S.C. § 15(a) (2012). 11. Id. 12. Private plaintiffs seeking only injunctive relief need not satisfy the “business or property” Washington University Open Scholarship p 49 Newman book pages 12/13/2016 54 WASHINGTON UNIVERSITY LAW REVIEW [VOL. 94:49 property” requirement. Thus, for example, the federal government obtained an injunction against the defendants in United States v. H & R Block, Inc., a case involving (in part) zero-price products,13 without needing to prove injury to “business or property.” Private antitrust plaintiffs, however, almost universally seek treble damages, thereby triggering the business-or-property requirement. Private firms participating in zero-price markets can receive antitrust treble-damages standing by alleging injury to their “business.”14 Individual consumers, however, must rely on the “property” prong of the requirement.15 “Property” (for purposes of Clayton Act § 4 standing) includes money. In Reiter, a class action brought by consumers against manufacturers of hearing aids,16 the U.S. Supreme Court held that “[a] consumer whose money has been diminished by reason of an antitrust violation has been injured ‘in his . . . property’ within the meaning of § 4.”17 Thus, consumers who are overcharged supracompetitive retail prices have antitrust standing, even where the relevant products were for personal use.18 In zero-price markets, however, consumers generally pay not with money, but with their attention or information.19 Consumer standing in requirement. Clayton Act § 16, which authorizes injunctive relief, states simply that “[a]ny person . . . shall be entitled to . . . injunctive relief . . . against threatened conduct that will cause loss or damage [by a violation of the antitrust laws under the traditional equitable principles].” 15 U.S.C. § 26 (2012). 13. 833 F. Supp. 2d 36 (D.D.C. 2011). 14. Cf. AREEDA & HOVENKAMP, supra note 7, ¶ 336 (“[Business] refers to ‘commercial interests or enterprises,’ although it also embraces nonprofit plaintiffs.” (citation omitted)). 15. Cf. id. (“Illegally overcharged consumers are injured in their ‘property’ interest in the price and product quality of an unrestrained, competitive market.”). 16. Reiter v. Sonotone Corp., 442 U.S. 330, 335 (1979). Not at issue on appeal was whether the suit would have been barred under the indirect purchaser rule, which forecloses plaintiffs from recovering where they did not purchase the relevant products directly from the defendant(s). See id. at 334–37. 17. Id. at 339. 18. Id. at 337–45. 19. Newman, supra note 3, at 152. But see Katherine J. Strandburg, Free Fall: The Online Market’s Consumer Preference Disconnect, 2013 U. CHI. LEGAL F. 95 (2013). Strandburg argues that equating payment via information to payment via money is erroneous: The common analogy between online data collection for behaviorally targeted advertising and payment for purchases is seriously misleading. There is no functioning market based on exchanges of personal information for access to online products and services. In a functioning market, payment of a given price signals consumer demand for particular goods and services, transmitting consumer preferences to producers. Data collection would serve as “payment” in that critical sense only if its transfer from users to collectors adequately signaled user preferences for online goods and services. It does not. Id. at 95. Strandburg convincingly demonstrates that markets involving the exchange of information for desired products are imperfect, and likely very imperfect. But it does not follow from such imperfections that “[t]here is no [such] functioning market.” Id. (emphasis added). Markets exist on a https://openscholarship.wustl.edu/law_lawreview/vol94/iss1/5 p 49 Newman book pages 12/13/2016 2016] ANTITRUST IN ZERO-PRICE MARKETS 55 zero-price markets thus presents a thorny—and, thus far, unanswered— question: Are information and attention “property” for the narrow purposes of antitrust damages standing?20 The following analysis suggests that the answer is “yes.” Courts have yet to weigh in squarely on the issue.21 The leading treatise observes briefly that “[n]onpecuniary injuries are not covered.”22 In general, antitrust theorists appear not to have raised or addressed the question in any depth. A number of privacy-law scholars have advanced the argument that personal information be treated as property for general legal purposes23—there is also, however, “an extensive literature on the problems” of doing so.24 Against the backdrop of this robust scholarly debate, courts have been uniformly reluctant to treat personal information as property for general legal purposes.25 Left unexplored by both privacy scholars and courts is the question of whether attention should ever be treated as property. For the narrow purposes of Clayton Act standing, the better reading of “property” is to include information and attention when they are exchanged for the relevant product(s). A preliminary caveat: this Article does not seek to weigh in on the scholarly debate, mentioned above, over spectrum, ranging from “perfectly imperfect” to “perfectly perfect.” Imperfect competition does not equal zero competition. This argument is addressed more thoroughly in Newman, supra note 3. 20. In a state unfair-competition case, a federal district court flatly concluded that “[a] plaintiff’s ‘personal information’ does not constitute property under [California’s Unfair Competition Law].” In re Facebook Privacy Litig., 791 F. Supp. 2d 705, 714 (N.D. Cal. 2011) (quoting Thompson v. Home Depot, Inc., No. 07cv1058 IEG (WMc), 2007 WL 2746603, at *3 (S.D. Cal. Sept. 18, 2007)). 21. Interestingly (albeit tangentially), firms’ databases may be regarded as personal property for purposes of secured transactions, even if the data is not protected under copyright or trade-secret law. See, e.g., In re Levitz Ins. Agency, Inc., 152 B.R. 693, 697 (Bankr. D. Mass. 1992); Xuan-Thao N. Nguyen, Collateralizing Privacy, 78 TUL. L. REV. 553, 580–81 (2004). 22. 2A AREEDA & HOVENKAMP, supra note 7, ¶ 345, at 156. This may be referring only to the personal-injury scenarios contemplated in, e.g., Chadda v. Burcke, 180 F. App’x 370 (3d Cir. 2006). 23. See, e.g., Christopher Rees, Tomorrow’s Privacy: Personal Information as Property, 3 INT’L DATA PRIVACY L. 220, 220–21 (2013); Jamie Lund, Property Rights to Information, 10 NW. J. TECH. & INTELL. PROP. 1 (2011); Lawrence Lessig, The Architecture of Privacy, 1 VAND. J. ENT. L. & PRAC. 56, 63–65 (1999); Richard S. Murphy, Property Rights in Personal Information: An Economic Defense of Privacy, 84 GEO. L.J. 2381, 2383 (1996). 24. Jeffrey M. Skopek, Anonymity, the Production of Goods, and Institutional Design, 82 FORDHAM L. REV. 1751, 1800 n.227 (2014) (citing examples). 25. See Lauren Henry Scholz, Privacy as Quasi-Property, 101 IOWA L. REV. 1113, 1121 (2016). Scholz posits that “privacy as property has taken hold in the courts,” supporting the statement by noting two privacy-related torts that “are routinely handled as the property interest ‘right of publicity’ in several jurisdictions.” Id. But, as Scholz recognizes, “the right of publicity is not relevant to all forms of privacy.” Id. Moreover, the negative implication is that by recognizing only those two types of privacy harms as touching upon property rights, even the subset of courts that grant this narrow recognition are simultaneously declining to recognize general property rights over personal information. Washington University Open Scholarship p 49 Newman book pages 12/13/2016 56 WASHINGTON UNIVERSITY LAW REVIEW [VOL. 94:49 whether individuals possess general property rights in their information, nor does it seek to begin such a debate over whether individuals should possess such rights in their attention. The scope of the present claim is restricted to Clayton Act standing. It is, to be sure, unlikely that Congress contemplated either information or attention when enacting the Clayton Act in 1914. Then, as now, neither was treated as such for broader legal purposes. Under a strictly originalist interpretation, therefore, zero-price consumers would likely lack standing to seek damages under the Clayton Act.26 The U.S. Supreme Court, however, has not employed such an approach in interpreting the Clayton Act’s grant of standing. Reasoning that the statute serves an “expansive remedial purpose,” the Court has refused to take a “technical or semantic approach” in interpreting it.27 Rather, the Court has identified the task and available tools as follows: The purpose, the subject matter, the context, the legislative history, and the executive interpretation of the statute are aids to construction. . . . [W]e are to read the statutory language in its ordinary and natural sense, and if doubts remain, resolve them in the light . . . of the policy intended to be served by the enactment [and] by all other available aids to construction.28 Using this holistic approach to interpretation in the Reiter case, the Court observed that “the word ‘property’ has a naturally broad and inclusive meaning. In its dictionary definitions and in common usage ‘property’ comprehends anything of material value owned or possessed.”29 In fact, lower courts have read “property” broadly enough to include interests not commonly thought of as “owned or possessed,” for example, a labor union’s opportunity to obtain members30 or the opportunity to work as an 26. Cf. Martin H. Redish & Theodore T. Chung, Democratic Theory and the Legislative Process: Mourning the Death of Originalism in Statutory Interpretation, 68 TUL. L. REV. 803, 805 (1994) (“[O]riginalist interpretive models treat statutes as commands that emanate from the legislative branch. The judge’s role as interpreter is limited to deciphering these commands and applying them to particular cases.”). 27. Pfizer, Inc. v. Gov’t of India, 434 U.S. 308, 313 (1978). 28. United States v. Cooper Corp., 312 U.S. 600, 605 (1941). 29. Reiter v. Sonotone Corp., 442 U.S. 330, 338 (1979). 30. E.g., Int’l Ass’n of Heat & Frost Insulators & Asbestos Workers v. United Contractors Ass’n, 483 F.2d 384, 398 (3d Cir. 1973) (“Since their income is derived from the dues of their members, it would be contrary to common sense to say that a right to acquire members is not a property right of a labor union.”). https://openscholarship.wustl.edu/law_lawreview/vol94/iss1/5 p 49 Newman book pages 12/13/2016 2016] ANTITRUST IN ZERO-PRICE MARKETS 57 employee at a rival firm.31 Even though such opportunities “may not be property in the ordinary sense,”32 they may support Clayton Act standing. Given such a broad reading, the business-or-property “limiting words are of little effect today.”33 As the leading treatise explains, “Reiter . . . made plain that the ‘business or property’ requirement is virtually always satisfied provided there is some kind of injury that can properly be characterized as economic.”34 Zero-price markets involve commerce and exchange of the type that can give rise to economic gains from trade.35 Such markets can, therefore, allow economic harm that is structurally identical to the types of harms traditionally cognizable under the antitrust laws. Consumers who have incurred monetary overcharges suffer harm to their “‘property’ interest in the price and product quality of an unrestrained, competitive market.”36 Like all consumers, those who use zero-price products have a “property interest” in the fruits of a competitive marketplace. That interest can suffer economic injury.37 As a result, existing precedent disfavors a categorical denial of standing to consumers of zero-price products. Moreover, as the Reiter Court observed, “‘property’ comprehends anything of material value owned or possessed.”38 Information and attention have come to hold “material value.” And consumers may “possess” their information or attention, even assuming they do not “own” those assets as a general matter of property law.39 One might well ask: If consumers do not initially possess their information or attention, who does? Consumers possess their attention, and at least some types of their information, until the moment they trade these assets to firms in exchange for valuable products. Pursuing the transaction further through the chain of distribution bolsters this conclusion. For example, once a firm has collected and stored personal information in its servers, the firm—which can often exclude third parties from accessing that particular data while it is under the firm’s control—would seem to possess that information. Such 31. Nichols v. Spencer Int’l Press, Inc., 371 F.2d 332, 334 (7th Cir. 1967). 32. Id. 33. 3 AREEDA & HOVENKAMP, supra note 7, ¶ 335c1. 34. Id. ¶ 336. 35. See Newman, supra note 3. 36. 3 AREEDA & HOVENKAMP, supra note 7, ¶ 336. 37. See infra Part II.A.2 (discussing antitrust injury). 38. Reiter v. Sonotone Corp., 442 U.S. 330, 338 (1979) (emphasis added). 39. See supra notes 23–25 and accompanying text (discussing the debate over whether information is “property” for general legal purposes). Washington University Open Scholarship