Platform Antitrust

By Hovenkamp, Erik | Journal of Corporation Law, Summer 2019 | Go to article overview

Platform Antitrust


Hovenkamp, Erik, Journal of Corporation Law


I. INTRODUCTION

About two decades ago, economists began to recognize that many firms face a complex "chicken-and-egg" problem that is not accounted for in conventional theories of competition and pricing. (1) The firm, acting as an intermediary, caters to two or more distinct "sides" of users that derive value from interacting with one another. But, the firm's service will not attract one side unless there are participating users on the other. Commenters had already recognized that the credit card industry is fundamentally "two-sided" in this way, with both merchants and consumers valuing the payment network only if the other side is actively participating. (2) But it has now become clear that such firms--known as two-sided (or multi-sided) platforms--are broadly scattered throughout the modern economy. (3) This has been fueled in part by advancements in technology and interconnectivity, (4) which provide the infrastructure for many prominent tech platforms like Facebook, Google Search, and Microsoft Windows. The prevalence of this business model, once deemed an idiosyncrasy of payment card networks, has provoked an outpouring of economic research on platforms and platform competition. (5)

Consider an example. Airbnb lets homeowners list their spare bedrooms or entire homes for potential short-term rentals by prospective guests who subscribe to the service. For each stay booked over the platform, Airbnb takes a separate fee from each party. Further, the two sides of users--hosts and guests--use the service on a purely voluntary basis. For instance, Airbnb cannot necessarily guarantee a prospective guest that she will be able to book a home in a particular city on a particular night; there has to be a host in that city who has listed his home as being available. As such, each side's demand for the platform depends not only on the fees it is charged by the platform, but also on the extent of active participation by users on the other side: guests value the service only if there are reasonably many homes available for booking; and it is only worthwhile to be an active host if there are reasonably many guests who might submit booking requests.

As such, the platform faces a significant coordination challenge. It must maintain an adequate balance of participation levels within the two sides in order for anyone to derive value from its service. Such balancing is a tangled and dynamic process: anything affecting participation on one side (such as the fees charged to its users) will necessarily influence the platform's appeal to users on the other side, which, in turn, affects the latter side's participation as well. (6)

Two-sidedness adds new layers of complexity to the analysis of pricing and competition, and the results sometimes run counter to conventional economic intuition. As a consequence, platform economics has important implications for antitrust. However, this article's central policy claim is that such considerations can (and should) be accounted for within the established structure of antitrust's "rule of reason" analysis, which is a multi-stage burden shifting framework. (7) In particular, the courts should address two-sided commerce by continuing to rely on the rule of reason as a tool for sorting through complex cases incrementally--not by forcing all of the added complexities, including all conceivable efficiencies that might justify a platform's conduct, into the plaintiff's initial burden.

A hallmark of platform commerce is the acute need to garner (and maintain) a sufficient balance of active participants across the two sides of the market. In some cases, this may require that the platform impose restrictions or coordinate transactions in ways that facially intervene in the competitive process. For example, Uber sets ride prices on drivers' behalf, which necessarily prevents them from competing with each other on price. (8) But if such competition were permitted, the resulting decline in prices would diminish drivers' earnings, potentially leading many fewer drivers to sign up in the first place. …

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