Category Archives: Antitrust

Markets Deal With Scarcity, Left Screams “Price Gouging”

11 Monday Apr 2022

Posted by in Antitrust, Environmental Fascism, Oil Prices

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Democrats claim profiteering by oil companies is responsible for the sustained rise in oil prices since Joe Biden’s inauguration (really, his election). That’s among the more laughable attempts at gaslighting in recent memory, right up there with blaming market concentration for the sustained increase in inflation since Biden’s inauguration. At a hearing this week, congressional Democrats, frightened by the prospect of a beat-down just ahead in the mid-term elections, couldn’t resist making “price-gouging” accusations against oil producers. These pols stumble over their own contradictory talking points, insisting on more oil production only when they aren’t hastily sabotaging oil and gas output. Their dishonestly is galling, but so is the foolishness of voters who blindly accept the economic illiteracy issuing from that side of the aisle.

Break It Then Blame It

Those who level “price gouging” charges at oil companies are often the same people seeking to eliminate fossil fuel consumption by making those energy choices unaffordable. The latter is a bad look this close to mid-term elections, so they follow the playbook I described recently in “Break the Market, Blame It, Then Break It Some More“. And this post is instructive: “House Dem: Big Oil is profiteering by, er … doing what we demanded”.

Not only have the Democrats’ policies caused oil prices to soar; for many years they’ve been undermining the stability of the power grid via forced conversion into intermittent renewable energy sources like wind and solar, all while preventing the expansion of safe and carbon-free nuclear power generation. It’s ironic that these would-be industrial planners seem so eager to botch the job, though failure is all too typical of central planning. Just ask the Germans about their own hapless efforts at energy planning.

As economist Lawrence Summers, former Treasury Secretary under Barack Obama, said recently:

“Look, the net effect of the things the administration talks about in terms of micro policies to reduce inflation, this gouging talk is frivolous, nonserious, and utterly ineffectual. A gas price holiday would, ultimately, push up prices by raising demand. … The student loan relief … is injecting resources into the economy at a hundred billion dollar a year annual rate when the economy needs to be cooled off, not heated up. … The administration could be much more constructive than it has been with respect to energy supply.”

The market functions to allocate scarce resources. When conditions of scarcity become more acute, the market mechanism responds by pricing available supplies to both curtail use and incentivize delivery of additional quantities. That involves the processing of vast amounts of information, and it is a balancing at which the market performs extremely well relative to bumbling politicians and central planners, whose actions are too often at the root of acute scarcities.

Antitrust Nonsense

Of course, the Democrats have seized upon the inescapable fact that soaring oil prices cause profits to soar for anyone producing oil or holding stocks of oil. But oil company profits are notoriously volatile. Margins were negative for most of 2020, when demand weakened in the initial stages of the pandemic. And now, some companies are bracing for massive write-downs on abandoned drilling projects in Russia. The oil and gas business is certainly not known for high profit margins. Short-term profits, while they last, must be used to meet the physical or financial needs of the business.

The threats of antitrust action by the Biden Administration are an extension of the price-gouging narrative, even if the threat reflects an injudicious grasp of what it takes to prove collusion. It takes a fertile imagination to think western oil companies could successfully collude on pricing in a market dominated by the following players:

Fat chance. In any case, it’s a global market, and it’s impossible for western oil producers to dictate pricing. Even the OPEC cartel has been unable to dictate prices, not to mention keeping it’s members from violating production quotas. But if a successful conspiracy among oil companies to raise prices was possible, one would guess they’d have done it a lot sooner!

Nor is it possible for the oil majors to dictate prices at the pump, because retail prices are set independently. While the cost of crude oil is only about 54% of the cost of refined gas at retail, fluctuations in prices at the pump correlate strongly with crude oil prices. Here is a ten-year chart of daily price data, where the blue line is the price of West Texas Intermediate crude oil and the orange line is the average price of regular gas in the U.S.:

Here are the same two series for 2022 year-to-date:

Coerced Scarcity

Again, oil prices have been under upward pressure for over a year until a break in early March, following the steep run-up in the immediate wake of the Ukraine invasion. First there was Biden’s stultifying rhetoric, before and after the 2020 election, assisted by radical members of Congress. Then there were executive orders halting drilling on federal lands, killing the Keystone pipeline, efforts to shut down several other existing pipelines, and the imposition of regulatory penalties on drillers. In addition, unrest in certain parts of the Middle East curtailed production, compounded this year by the boycott on Russian oil (which, as a foreign policy matter, was far too late in coming).

However, existing facilities have been capable of squeezing out more oil and gas. Lo and behold, supply curves slope upward, even in the short-run! Despite all of Biden’s efforts to cripple domestic oil production, higher crude prices have brought forth some additional supplies. Biden’s raid on the Strategic Petroleum Reserve has also boosted supply for now, but its magnitude won’t help much, and it must be replaced for use during real U.S. national emergencies, which the war in Ukraine is not, as awful as it is.

That said, investing in new drilling capacity is not wise given the political climate created by Biden and the Democrats: they have been quite clear that they mean to crush the fossil fuel industry. For some time, the oil companies have been busy investing cash flows in “green” initiatives in an effort to bolster their ESG scores, a dubious exercise to say the least. Arguably, in this policy environment, the most responsible thing to do is to return some of the capital over which these firms are stewards to its rightful owners, many of whom are middle-class savers who hold oil stocks in their 401(k) funds. That approach is manifest in the recent stock buybacks and dividend payments oil companies have announced and defended before Congress.

Conclusion

A forced shutdown of fossil fuel energy was much ballyhooed by the Left as a part of Joe Biden’s agenda. Biden himself bought into the “Green New Deal”, imagining it might win him a vaunted place alongside FDR’s legacy in American history. The effort was unwise, but Biden is trying to hang onto the narrative and maintain his punitive measures against American oil companies. All the while, he begs OPEC producers to step up production, bending a knee to despots in countries such as Iran and Venezuela. Why, it’s as if their fossil fuels are somehow cleaner than those extracted in the U.S! The feeble Biden and congressional Democrats are proving just how mendacious they are. They can rightfully blame Vladimir Putin for the recent escalation in oil prices, but they bear much responsibility themselves for the burden of high gas prices, energy bills, and the unnecessary, ongoing scarcity victimizing the American public.

Amazon, Happy Users Face Lust for Antitrust

02 Thursday May 2019

Posted by in Antitrust, Capitalism, Regulation

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It’s almost always best to resist the temptation to “fix” perceived market failures, perceptions that are often incorrect to begin with. An equivalent truism is that government intervention in any market will almost always damage outcomes for consumers and producers alike. So it is with ill-advised calls to bring antitrust action against Amazon. Elizabeth Warren is a prominent voice among the would-be meddlers. She tells the story of a hypothetical pillow manufacturer reliant on sales through Amazon’s platform. But alas, the small company is squeezed out of its market because Amazon gives its own brand of pillows superior placement and pricing. Is this a clear case of anti-competitive behavior? And if so, what’s to be done?

In this Yale Law Journal article Lina M. Kahn asserts that there is an antitrust case against Amazon. From the abstract:

“We cannot cognize the potential harms to competition posed by Amazon’s dominance if we measure competition primarily through price and output. Specifically, current doctrine underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anticompetitive. These concerns are heightened in the context of online platforms for two reasons. First, the economics of platform markets create incentives for a company to pursue growth over profits, a strategy that investors have rewarded. Under these conditions, predatory pricing becomes highly rational—even as existing doctrine treats it as irrational and therefore implausible. Second, because online platforms serve as critical intermediaries, integrating across business lines positions these platforms to control the essential infrastructure on which their rivals depend. This dual role also enables a platform to exploit information collected on companies using its services to undermine them as competitors.”

A basic argument against anti-trust action is that the retail market and e-commerce market are not as concentrated as Kahn and Warren suggest. Amazon’s share of U.S. retail sales was an estimated 5% in 2018, but its share of e-commerce is the more worrisome to modern-day trust busters: Amazon is estimated to have controlled about 49% of U.S. online sales in 2018.

Obviously 49% is not close to monopolization, but the company is far ahead of other on-line rivals: eBay’s share was slightly less than 7%; Apple and Walmart each had less than 4%, and an assortment of sellers such as Home Depot, QVC and Wayfair, had shares of 1.5% share or less. The point is, however, that there are prominent rivals, some with aggressive plans to compete in the space. For example, apart from its traditional auction model, eBay is instituting a number of changes to its platform and offerings that it hopes will help it to compete with Amazon, some of which are very much like the practices for which Amazon is now criticized, such as preferential placement for big advertisers. Wal Mart is investing heavily in an effort to expand its online sales.

Companies like these rivals have the resources and access to capital to pose a legitimate threat to Amazon’s online dominance. That sort of competitive pressure, or even its mere possibility, imposes a far more effective form of market discipline than government regulators can hope to achieve, assuming they wouldn’t break the market. The governance imposed by the market itself keeps the focus squarely on bringing value to customers, which for Amazon means both buyers and third-party sellers. And while Amazon’s business model and platform are highly successful, no one, including Amazon management, can anticipate the shape of new technological developments that could lead to the next revolution in retail. Again, there are potent incentives for those who might be in a position to foment such a revolution.

But what about those sellers who rely so heavily on Amazon’s platform? Does Amazon exercise monopsony power to the detriment of these sellers, as Kahn and Warren contend? Again, sellers have alternatives. While it might be a burden for the smallest startups to compete on several different platforms, they do have choices. Therefore, the monopsony story just doesn’t hold up. Amazon has a large marketplace precisely because so many third-party sellers have chosen to compete there. But they can compete elsewhere.

If barriers to entry are created by Amazon’s platform management, it would involve a loss of revenue earned from hosting third-party sellers and create market opportunities for competitive platforms. The same can be said of “predatory placement” of Amazon’s own first-party product offerings. This practice bears a similarity to grocery stores giving preferred placement to certain brands in exchange for fees, which allow grocers to offer those products at lower prices. Indeed, few if any grocery stores carry all national brands, but those brands are usually available at competing stores. If anything, it would seem that getting a product listed on an online platform is relatively easy compared to getting space on grocery shelves, though like grocery brands, preferred placement is another matter. Building a brand has never been easy, and it may be necessary for less established products to be marketed on multiple platforms, including platforms based on auction models.

It would be very difficult to prove that Amazon engages in predatory pricing of their own offerings (also see here). That involves pricing below cost (including the loss of revenue from third-party sellers). Amazon might practice what has been described as loss leadership: offering products below cost from time-to-time in oder to spur sales of other products, which is a time-honored marketing tradition. The following quote, taken from the first link in this paragraph, is from a judge in a recent price fixing case involving Apple and Amazon:

“… the Complaint asserts that Amazon’s e-books business was ‘consistently profitable.’ Moreover, to hold a competitor liable for predatory pricing under the Sherman Act, one must prove more than simply pricing ‘below an appropriate measure of . . . costs.’ There must also be a ‘dangerous probability’ that the alleged predator will ‘recoup its investment in below-cost prices’ in the future. None of the comments demonstrate that either condition for predatory pricing by Amazon existed or will likely exist. Indeed, while the comments complain that Amazon’s $9.99 price for newly-released and bestselling e-books was ‘predatory,’ none of them attempts to show that Amazon’s e-book prices as a whole were below its marginal costs.” 

The basic considerations discussed above are couched in terms of traditional anti-trust thinking: monopoly, concentration, competitive threats, and predatory pricing. However, there is another, more fundamental point to be made: Amazon’s massive success is due precisely to the popularity of their platform as well as service to consumers and third-party sellers. That’s capitalism, baby! Does Amazon extract a price from users? Yes, it engages in mutually beneficial trade! If it tries to extract too much, it will suffer at its own hands by creating market opportunities for others. It is Amazon’s platform, asset, and private property. The Amazon Marketplace belongs to Amazon, and the company is free to manage it as shareholders allow. There is no social value in interfering with private property and voluntary arrangements that bring unambiguous benefits to customers on both sides of the transactions sponsored on the platform. Such interference would diminish those benefits and destroy private value belonging to Amazon shareholders.

Jeff Bezos’ recent letter to Amazon shareholders tells of third-party sellers “kicking our first-part butt.” Amazon’s total sales have grown fast over the past two decades, and while its sales in first-party transactions have grown at a robust 20% a year, third-party sales on the platform have grown at a rate of 52%! The last link provides this Bezos quote:

“Why did independent sellers do so much better selling on Amazon than they did on eBay? And why were independent sellers able to grow so much faster than Amazon’s own highly organized first-party sales organization? There isn’t one answer, but we do know one extremely important part of the answer: We helped independent sellers compete against our first-party business by investing in and offering them the very best selling tools we could imagine and build.”

Bezos also tells of the heavy investments Amazon makes in efforts to improve its platform, which have brought tremendous successes and a few noteworthy failures. His letter is obviously self-serving, both as an effort to engage shareholders and as an implicit appeal against anti-trust action. Nevertheless, it is hard to deny the company’s outstanding performance, the benefits it brings to the consuming public, and the opportunities it creates for enterprising sellers and entrepreneurs. The unfortunate fact is we must always be vigilant for the itchy fingers of leftists grasping for the value created by private effort.

Preserve the Separation of Google and State

28 Friday Sep 2018

Posted by in Antitrust, Censorship, Privacy

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Little did we suspect that Google’s collection of personal data and manipulation of search results was mere practice for the job of censoring, curating, and providing behavioral surveillance for repressive governments (more on search manipulation here and here). Actually, some of us have expressed trepidation that our own individual liberty might face such a vulnerability, with Google working in concert with our own government:

“As a firm like Google attains the status of an arm of the state, or multiple states, it could provide a mechanism whereby those authorities could manipulate behavior and coerce their citizens, making the internet into a tool of tyranny rather than liberty. ‘Don’t be evil’ is not much of a guarantee.”

Now, however, the company is working with the government of mainland China to implement a version of its search engine that meets the needs of the Communist regime. J.D. Tuccille calls this “Privatized Authoritarianism”. Search results from Google’s Chinese utility might come back blank, or certain sites might be banned, or at least banned from the first page of results (e.g., Wikipedia, the BBC).

Not only that, the Chinese government is building a system of “social credit scores” for its citizens, essentially a one-number report card like the FICO credit score in the West. This one, however, is driven by more than financial transactions; it’s intended to account for a variety of behaviors including one’s record in criminal and civil matters, anything reflecting one’s “trustworthiness”, general comportment, and alignment with official doctrine. The country is building a gargantuan network of surveillance cameras with visual recognition technology and artificial intelligence that will be used to generate inputs to the social score. And Google’s Chinese search platform?

“… users’ interest in pursuing forbidden paths of inquiry will certainly become part of their permanent record. That’s no joke in a country that’s rapidly modernizing the hoary old mechanisms of the police state with a modern ‘social credit’ system that can effectively place people under house arrest with nary a trench coat in sight.

‘A poor Chinese social credit score can lead to bans from travel, certain schools, luxury hotels, government positions, and even dating apps,’ notes the Brookings Institution. Liu Hu, an investigative journalist, incurred the Chinese government’s wrath for exposing corruption among Communist Party officials. He’s among millions who have been punished with a tanked social credit score that prevents him from easily working or even leaving his hometown.”

Political search activity is one thing. What happens if you search for information on foreign news sources? Certain medications or certain disfavored goods? Movies? Books? Sex? What are the consequences of actually clicking on a particular link in a search result? Could the governments place “honey pots” into search results? Could the system be used by the government to entrap citizens? You bet it could!

The Chinese government is everything a liberal should hate, classical or otherwise. But they do what they do. Google, which takes pride in its “do the right thing” mantra, is most certainly not doing the right thing by contributing to this intrusive effort. And it could happen here in the West. In fact, it is probably already happening here to some degree.

Google was fined $2.7 billion by the European Union in 2017 for biasing its search results in favor of its own services. That ruling was made on traditional antitrust grounds: the bias in search results was judged to have anti-competitive effects on the searched-for service markets. But apart from a direct connection to some other form of commerce, traditional antitrust arguments are difficult to make against a free search engine. The company has a high market share but by no means a monopoly over search results, at least in the U.S.

Still, a partnership between Google and government is potentially troublesome, and more so than run-of-the-mill corporatism, though there is that, too. Many individuals are blasé about managing their privacy on social media, while many others seek a level of anonymity to those outside of their social circle. The latter may be wise, but it won’t do them much good if the government gains access to their on-line behavior. The real issue is ownership of our personal information, and that is an unsettled area of the law. Google acquires that information for free in exchange for providing a free search engine. But can Google or any other company with an online platform legally use your personal data as it likes? No, at least not in principle, but that’s no guarantee that the data won’t be used in ways to which you’d object. If anyone should have rightful monopoly rights over the use of individual data, it’s the individual. But strict data privacy might mean we’ll have to pay to use the search engine.

Government has a monopoly on force, but one can hardly bring antitrust action against government, Google partnership or not. That monopoly on force is why our constitutional rights are so critical. Those rights are primarily unenumerated in the U.S. Constitution, while the powers of the federal government are explicitly limited and enumerated. Individual liberty, including the right to privacy, must be respected and protected by our institutions. That should include data privacy. As the reach of government social programs grows, however, participation requires that personal data is increasingly shared with the government. That’s another good reason to keep government small!

Social Media and the Antitrust Reflex

10 Tuesday Apr 2018

Posted by in Antitrust, Regulation, Social Media

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Falling Zuckerberg

Facebook is under fire for weak privacy protections, its exploitation of users’ data, and the dangers it is said to pose to Americans’ free speech rights. Last week, Mark Zuckerberg, who controls all of the voting stock in Facebook, attempted to address those issues before a joint hearing of the Senate Judiciary and Commerce Committees. It represented a major event in the history of the social media company, and it happened at a time when discussion of antitrust action against social media conglomerates like Facebook, Google, and Amazon is gaining support in some quarters. I hope this intervention does not come to pass.

The Threat

At the heart of the current uproar are Facebook’s data privacy policy and a significant data breach. The recent scandal involving Cambridge Analytica arose because Facebook, at one time, allowed application developers to access user data, and the practice continued for a few developers. Unfortunately, at least one didn’t keep the data to himself. There have been accusations that the company has violated privacy laws in the European Union (EU) and privacy laws in some states. Facebook has also raised ire among privacy advocates by lobbying against stronger privacy laws in some states, but it is within its legal rights to do so. Violations of privacy laws must be adjudicated, but antitrust laws were not intended to address such a threat. Rather, they were intended to prevent dominant producers from monopolizing or restraining trade in a market and harming consumers in the process.

Matt Stoller, in an interview with Russ Roberts on EconTalk, says antitrust action against social media companies may be necessary because they are so pervasive in our lives, have built such dominant market positions, and have made a practice of buying nascent competitors over the years. Steps must be taken to “oxygenate” the market, according to Stoller, promoting competition and protecting new entrants.

Tim Wu, the attorney who coined the misleading term “network neutrality”, is a critic of Facebook, though Wu is more skeptical of the promise of antitrust or regulatory action:

“In Facebook’s case, we are not speaking of a few missteps here and there, the misbehavior of a few aberrant employees. The problems are central and structural, the predicted consequences of its business model. From the day it first sought revenue, Facebook prioritized growth over any other possible goal, maximizing the harvest of data and human attention. Its promises to investors have demanded an ever-improving ability to spy on and manipulate large populations of people. Facebook, at its core, is a surveillance machine, and to expect that to change is misplaced optimism.”

Google has already been subject to antitrust action in the EU due to the alleged anti-competitive nature of its search algorithm, and Facebook’s data privacy policy is under fire there. But the prospect of traditional antitrust action against a social media company like Facebook seems rather odd, as acknowledged by the author at the first link above, Navneet Alang:

“… Facebook specifically doesn’t appear to be doing anything that actively violates traditional antitrust rules. Instead, it’s relying on network effects, that tendency of digital networks to have their own kind of inertia where the more people get on them the more incentive there is to stay. It’s also hard to suggest that Facebook has a monopoly on advertising dollars when Google is also raking in billions of dollars.“

Competition

The size of Facebook’s user base gives it a massive advantage over most of the other platforms in terms of network effects. I offer myself as an example of the inertia described by Alang: I’ve been on Facebook for a number of years. I use it to keep in touch with friends and as a vehicle for attracting readers to my blog. As I contemplated this post, I experimented by opening a MeWe account, where I joined a few user groups. It has a different “feel” than Facebook and is more oriented toward group chats. I like it and I have probably spent as much time on MeWe in the last week as Facebook. I sent MeWe invitations to about 20 of my friends, nearly all of whom have Facebook accounts, and a few days later I posted a link to MeWe on my Facebook wall. Thus far, however, only three of my friends have joined MeWe. Of course, none of us has deactivated our Facebook account, and I speculate that none of us will any time soon. This behavior is consistent with “platform inertia” described by Alang. Facebook users are largely a captive market.

But Facebook is not a monopoly and it is not a necessity. Neither is Google. Neither is Amazon. All of these firms have direct competitors for both users and advertising dollars. It’s been falsely claimed that Google and Facebook together control 90% of online ad revenue, but the correct figure for 2017 is estimated at less than 57%. That’s down a bit from 2016, and another decline is expected in 2018. There are many social media platforms. Zuckerberg claims that the average American already uses eight different platforms, which may include Facebook, Google+, Instagram, LinkedIn, MeWe, Reddit, Spotify, Tinder, Tumblr, Twitter, and many others (also see here). Some of these serve specialized interests such as professional networking, older adults, hook-ups, and shopping. Significant alternatives for users exist, some offering privacy protections that might have more appeal now than ever.

Antitrust vs. Popular, Low-Priced Service Providers

Facebook’s business model does not fit comfortably into the domain of traditional antitrust policy. The company’s users pay a price, but one that is not easily calculated or even perceived: the value of the personal data they give away on a daily basis. Facebook is monetizing that data by allowing advertisers to target individuals who meet specific criteria. Needless to say, many observers are uncomfortable with the arrangement. The company must maintain a position of trust among its users befitting such a sensitive role. No doubt many have given Facebook access to their data out of ignorance of the full consequences of their sacrifice. Many others have done so voluntarily and with full awareness. Perhaps they view participation in social media to be worth such a price. It is also plausible that users benefit from the kind of targeted advertising that Facebook facilitates.

Does Facebook’s business model allow it to engage in an ongoing practice of predatory pricing? It is far from clear that its pricing qualifies as “anti-competitive behavior”, and courts have been difficult to persuade that low prices run afoul of U.S. antitrust law:

“Predatory pricing occurs when companies price their products or services below cost with the purpose of removing competitors from the market. … the courts use a two part test to determine whether they have occurred: (1) the violating company’s production costs must be higher than the market price of the good or service and (2) there must be a ‘dangerous probability’ that the violating company will recover the loss …”

Applying this test to Facebook is troublesome because as we have seen, users exchange something of value for their use of the platform, which Facebook then exploits to cover costs quite easily. Fee-based competitors who might complain that Facebook’s pricing is “unfair” would be better-advised to preach the benefits of privacy and data control, and some of them do just that as part of their value proposition.

More Antitrust Skepticism

John O. McGinnis praises the judicial restraint that has characterized antitrust law over the past 30 years. This practice recognizes that it is not always a good thing for consumers when the government denies a merger, for example, or busts up a firm deemed by authorities to possess “too much power”. An innovative firm might well bring new value to its products by integrating them with features possessed by another firm’s products. Or a growing firm may be able to create economies of scale and scope that are passed along to consumers. Antitrust action, however, too often presumes that a larger market share, however defined, is unequivocally bad beyond some point. Intervention on those grounds can have a chilling effect on innovation and on the value such firms bring to the market and to society.

There are more fundamental reasons to view antitrust enforcement skeptically. For one thing, a product market can be defined in various ways. The more specific the definition, the greater the appearance of market dominance by larger firms. Or worse, the availability of real alternatives is ignored. For example, would an airline be a monopolist if it were the only carrier serving a particular airport or market? In a narrow sense, yes, but that airline would not hold a monopoly over intercity transportation, for which many alternatives exist. Is an internet service provider (ISP) a monopoly if it is the only ISP offering a 400+ Mbs download speed in a certain vicinity? In a very narrow sense, yes, but there may be other ISPs offering slower speeds that most consumers view as adequate. And in all cases, consumers always have one very basic alternative: not buying. Even so-called natural monopolies, such as certain public utilities, offer services for which there are broad alternatives. In those cases, however, a grant of a monopoly franchise is typically seen as a good solution if exchanged for public oversight and regulation, so antitrust is generally not at issue.

One other basic objection that can be made to antitrust is that it violates private property rights. A business that enjoys market dominance usually gets that way by pleasing customers. It’s rewards for excellent performance are the rightful property of its owners, or should be. Antitrust action then becomes a form of confiscation by punishing such a firm and its owners for success.

Political Bias

Another major complaint against Facebook is political bias. It is accused of selectively censoring users and their content and manipulating user news feeds to favor particular points of view. Promises to employ fact-check mechanisms are of little comfort, since the concern involves matters of opinion. Any person or organization held to be in possession of the unadulterated truth on issues of public debate should be regarded with suspicion.

Last Tuesday at the joint session, Zuckerberg acted as if such a bias was quite natural, given that Facebook’s employee base is concentrated in the San Francisco Bay area. But his nonchalance over the matter partly reflects the fact that Facebook is, after all, a private company. It is free to host whatever views it chooses, and that freedom is for the better. Facebook is not like a public square. Instead, the scope of a user’s speech is largely discretionary: users select their own network of friends; they can choose to limit access to their posts to that group or to a broader group of “friends of friends”; they can limit posts to subgroups of friends; or they can allow the entire population of users to see their posts, if interested. No matter how many users it has, Facebook is still a private community. If its “community standards” or their enforcement are objectionable, then users can and should find alternative outlets. And again, as a private company, Facebook can choose to feature particular news sources and censor others without running afoul of the First Amendment.

Revisiting Facebook’s Business Model

The greatest immediate challenge for Facebook is data privacy. Trust among users has been eroded by the improprieties in Facebook’s exploitation of data. It’s as if everyone in the U.S. has suddenly awoken to the simple facts of its business model and the leveraging of user data it requires. But it is not of great concern to some users, who will be happy to continue to use the platform as they have in the past. Zuckerberg did not indicate a willingness to yield on the question of Facebook’s business model in his congressional testimony, but there is a threat that regulation will require steps to protect data that might be inconsistent with the business model. If users opt-out of data sharing in droves, then Facebook’s ability to collect revenue from advertisers will be diminished.

As Jonathan Zittrain points out, Facebook might find new opportunity as an information fiduciary for users. That would require a choice between paying a monthly fee or allowing Facebook to continue targeted advertising on one’s news feed. Geoffrey A. Fowler writes that the idea of paying for Facebook is not an outrageous proposition:

“Facebook collected $82 in advertising for each member in North America last year. Across the world, it’s about $20 per member. … Netflix costs $11 and Amazon Prime is $13 per month. Facebook would need $7 per month from everyone in North America to maintain its current revenue from targeted advertising.”

Given a choice, not everyone would choose to pay, and I doubt that a fee of $7 per month would cost Facebook much in terms of membership anyway. It could probably charge slightly more for regular memberships and price discriminate to attract students and seniors. Fowler contends that a user-paid Facebook would be a better product. It might sharpen the focus on user-provided and user-linked content, rather than content provided by advertisers. As Tim Wu says, “… payment better aligns the incentives of the platform with those of its users.” Fowler also asserts that regulatory headaches would be less likely for the social network because it would not be reliant on exploiting user data.

A noteworthy aspect of Zuckerberg’s testimony at the congressional hearing was his stated willingness to consider regulatory solutions: the “right regulations“, as he put it. That might cover any number of issues, including privacy and political advertising. But as Brendan Kirby warns, regulating Facebook might not be a great idea. Established incumbents are often capable of bending regulatory bodies to their will, ultimately using them to gain a stronger market position. A partnership between the data-rich Facebook and an agency of the government is not one that I’d particularly like to see. Tim Wu believes that what we really need are competitive alternatives to Facebook: he floats a few ideas about how a Facebook competitor might be structured, most prominently the fee-based alternative.

Let It Evolve 

Like many others, I’m possessed by an anxiety about the security of my data on social media, an irritation with the political bias that pervades social media firms, and a suspicion that certain points of view are favored over others on their platforms. But I do not favor government intervention against these firms. Neither antitrust action nor regulation is likely to improve the available platforms or their services, and instead might do quite a bit of damage. “Trust-busting” of social media platforms would present technological challenges, but even worse, it would disrupt millions of complex relationships between firms and users and attempt to replace them with even more numerous and complex relationships, all dictated by central authorities rather than market forces. Significant mergers and acquisitions will continue to be reviewed by the DOJ and the FTC, preferably tempered by judicial restraint. I also oppose the regulatory option. Compliance is costly, of course, but even worse, the social media giants can afford it and will manipulate it. Those costs would inevitably present barriers to market entry by upstart competitors. The best regulation is imposed by customers, who should assert their sovereignty and exercise caution in the relationships they establish with social media platforms … and remember that nothing comes for free.