Can data exploitation be properly addressed by competition law? A note of caution
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Concurrences REVUE DES DROITS DE LA CONCURRENCE | COMPETITION LAW REVIEW Can data exploitation be properly addressed by competition law? A note of caution Law & Economics l Concurrences N° 1-2021 l pp. 75-82 Jörg Hoffmann joerg.hoffmann@ip.mpg.de Doctoral Student and Research Fellow Max Planck Institute for Innovation and Competition, Munich Omar Vásquez Duque omarvd@stanford.edu J.S.D. and M.A. (Econ) Candidate Stanford University John Olin Fellow in Law and Economics Stanford University
Law & Economics Jörg Hoffmann Can data constitutes a violation of the publisher's rights and may be punished by up to 3 years imprisonment and up to a € 300 000 fine (Art. L. 335-2 Code de la Propriété Intellectuelle). Personal use of this document is authorised within the limits of Art. L 122-5 Code de la Propriété Intellectuelle and DRM protection. joerg.hoffmann@ip.mpg.de Ce document est protégé au titre du droit d'auteur par les conventions internationales en vigueur et le Code de la propriété intellectuelle du 1er juillet 1992. Toute utilisation non autorisée constitue une contrefaçon, délit pénalement sanctionné jusqu'à 3 ans d'emprisonnement et 300 000 € d'amende (art. L. 335-2 CPI). L’utilisation personnelle est strictement autorisée dans les limites de l’article L. 122 5 CPI et des mesures techniques de protection pouvant accompagner ce document. This document is protected by copyright laws and international copyright treaties. Non-authorised use of this document Doctoral Student and Research Fellow exploitation be Max Planck Institute for Innovation and Competition, Munich Omar Vásquez Duque* omarvd@stanford.edu J.S.D. and M.A. (Econ) Candidate properly addressed by competition law? Stanford University John Olin Fellow in Law and Economics Stanford University A note of caution ABSTRACT Introduction In this brief piece of caution, we argue that competition law is not well-suited for dealing 1. Competition law is experiencing a remarkable revival. The U.S. antitrust with exploitative data practices. As consumers authorities have recently sued both Google and Facebook, and antitrust usually act as if they did not value their policy was a matter of debate in the last presidential elections.1 The European privacy, legal remedies that neglect what social scientists call “the privacy paradox” Commission just presented charges against Amazon2 and fined Google for alleged are unlikely to improve the current status quo. abuses in the markets of mobile operating systems, and mobile communication We claim that privacy exploitation is better applications and services.3 The increased awareness about the role of antitrust explained by informational and behavioral in a well-functioning economy encompasses not only its political salience and failures. Our analysis has important policy and legal implications as is shown in our its enforcement but also academic proposals that suggest expanding antitrust’s assessment of the German Facebook domain to incorporate broader goals, such as political power and industrial Case. Under plausible assumptions, concentration.4 While those ends may influence the principles of competition if consumer demand does not police the privacy attribute, any competitor policy in some jurisdictions, another group of scholars recommends using will exploit it and thus competition will fail competition laws to tackle excessive data collection, inequality, sustainability, to yield higher privacy protection standards. among other economic or social failures. These goals would greatly expand the Dans cet article, nous soutenons que le droit scope of antitrust policy in most jurisdictions. However, many of these market or de la concurrence n’est pas bien adapté social failures are precisely the result of free-market competition.5 pour traiter des pratiques d’exploitation des données. Les consommateurs agissant généralement comme s’ils n’attachaient 2. Competitive markets, for better or worse, provide what consumers reveal they pas d’importance à leur vie privée, les voies want with their purchasing behavior. Either by failing at rewarding fair-trade de recours juridiques qui négligent ce companies paying a couple of extra pennies for bananas that were not produced que les spécialistes des sciences sociales appellent le «privacy paradox» ont peu by employing children,6 by driving fuel-inefficient cars, or by “agreeing” to share de chances d’améliorer le statu quo actuel. one’s data in return for getting a service “for free,” consumers send important Nous affirmons que l’exploitation des données signals to the supply side of the market on what we want and how much we are personnelles s’explique mieux willing to pay.7 While our moral principles tell us that child labor, pollution, and par les défaillances informationnelles et comportementales. Notre analyse a d’importantes implications politiques et juridiques, comme le montre notre évaluation 1 A. Douglas Melamed, Antitrust Law and Its Critics, (January 14, 2020) Antitrust L. J. 83 (forthcoming), available at SSRN: de l’affaire Facebook en Allemagne. http://dx.doi.org/10.2139/ssrn.3519523. Selon des hypothèses plausibles, si la demande des consommateurs 2 https://ec.europa.eu/commission/presscorner/detail/en/ip_20_2077. ne contrôle pas l’attribut de la vie privée, tout concurrent l’exploitera et la concurrence 3 https://ec.europa.eu/commission/presscorner/detail/it/MEMO_15_4782. ne parviendra donc pas à produire 4 For a summary of some of these proposals, see H. Hovenkamp, Antitrust’s Borderline, (August 11, 2020) University of Pennsylvania, des normes de protection de la vie privée Institute for Law & Economics Research Paper No. 20-44, available at SSRN: http://dx.doi.org/10.2139/ssrn.3656702. plus élevées. 5 See, e,g., G. A. Akerlof and R. J. Shiller, Phishing for Phools: The Economics of Manipulation and Deception (Princeton University Press, 2015); O. Bar-Gill, Seduction by Contract: Law, Economics, and Psychology in Consumer Markets (Oxford University Press, 2012), chap. 1; O. Vásquez Duque, No Alarms and Many Surprises: Salience as a Basis for Excessive Pricing Intervention in an Antitrust Context, Journal of Competition Law & Economics 16, No. 3 (2020), https://doi.org/10.1093/joclec/nhaa017. * The authors are ordered alphabetically. Omar 6 See, e.g., Lidl Backs Away from Fairtrade Bananas, Banana Link, May 20, 2019, https://www.bananalink.org.uk/news/lidl- Vásquez Duque is the corresponding author backs-away-from-fairtrade-bananas. invited to contribute to this issue. The author acknowledges the thoughtful feedback provided 7 F. A. von Hayek, Der Wettbewerb als Entdeckungsverfahren, in Freiburger Studien (1969) 249–65; M. S. Snow, Competition by A. Douglas Melamed, Daniel Sokol and as a Discovery Procedure, The Quarterly Journal of Austrian Economics 5, No. 3 (September 1, 2002): 9–23, https://doi. Mark Lemley. org/10.1007/s12113-002-1029-0. Concurrences N° 1-2021 I Law & Economics I Jörg Hoffmann, Omar Vásquez Duque I Can data exploitation be properly addressed by competition law? 75
selling out our privacy are reproachable, our consumer Section III assesses the German case, criticizing its shift constitutes a violation of the publisher's rights and may be punished by up to 3 years imprisonment and up to a € 300 000 fine (Art. L. 335-2 Code de la Propriété Intellectuelle). Personal use of this document is authorised within the limits of Art. L 122-5 Code de la Propriété Intellectuelle and DRM protection. behavior is inconsistent with our reported ethical towards a normative causality based on hypothetical Ce document est protégé au titre du droit d'auteur par les conventions internationales en vigueur et le Code de la propriété intellectuelle du 1er juillet 1992. Toute utilisation non autorisée constitue une contrefaçon, délit pénalement sanctionné jusqu'à 3 ans d'emprisonnement et 300 000 € d'amende (art. L. 335-2 CPI). L’utilisation personnelle est strictement autorisée dans les limites de l’article L. 122 5 CPI et des mesures techniques de protection pouvant accompagner ce document. This document is protected by copyright laws and international copyright treaties. Non-authorised use of this document identity. counterfactuals drew on misleading empirical evidence. Section IV concludes echoing what experts report have 3. Markets may fail at achieving an optimal outcome for already suggested: that new regulatory bodies are needed, several reasons. Monopoly power is just one of those which should have the expertise and the power to design reasons. Other commonly accepted bases for regulatory adequate rules to regulate the challenges brought by the intervention are informational problems, and externalities.8 digital economy, notwithstanding the possibility that Interestingly, what many academics are arguing when competition authorities could count on a specialized unit. they advocate for the expansion of antitrust is the use of competition laws to address problems unrelated to the lack of competition, or actually caused by competition itself.9 Privacy exploitation, we claim, is one of these cases where I. Privacy related market failures, competition does not discipline market outcomes. Either because of informational failures, bounded rationality, or a combination of both, most people overlook the privacy dimension when comparing among different products and services.10 If demand forces do not discipline this competition law, product feature, sellers will not compete on providing less intrusive data protection standards for their customers. Thus, insofar consumers neglect the privacy attribute in and market regulation their decision-making, actual or potential competition— entry—will not discipline this product attribute. 1. Competitive markets, inertia 4. In this brief note of caution, we focus on the recent and informational market failures German Facebook case as an example of the challenges 5. According to traditional economic theory, absent that privacy protection brings to the institutions and the externalities, monopoly power, and information enforcement of competition laws. This note offers more asymmetries, the free functioning of markets provides questions than answers about the case. Yet, we hope what people want at lowest cost.11 The market mechanism that our case analysis will allow a better formulation also sends important information regarding what goods of the questions arising from the competition and and services people value and how much they are willing privacy conundrum. In particular, we discuss challenges to pay for them, encouraging the development of products dealing with theories of competitive harm that rely on that satisfy unmet needs, improving the alternatives that references to fundamental rights and the role and efficacy already exist, or even creating products that set new of competition law remedies. We structure this note as standards. In this sense, competition is a “discovery follows: Section I reviews the rationales for regulation and process.”12 The coordination of autonomous actors the conventional scope of competition laws. This section driven by their self-interest typically leads to efficient may seem basic, but it explains why data exploitation outcomes. This resembles the ordoliberal foundations is unlikely to be a good target for competition law of competition law that builds on the freedom of choice enforcement. Section II summarizes and analyzes as an individual expression of economic preferences.13 the recent German antitrust case against Facebook. Yet negative externalities, such as pollution, lead to an excessive production of goods. To equal the private cost of pollution to its social cost, regulatory intervention is needed. Poor information also requires legal intervention 8 J. E. Stiglitz, Economics of the Public Sector, 3rd Revised edition (W. W. Norton & Company, 2000). as it can lead people to enter into deals that are not beneficial for them.14 Furthermore, self-control problems 9 For instance, there is consensus that food quality has not improved throughout the years despite competition. S. M. Krebs-Smith, J. Reedy, and C. Bosire, Healthfulness of the U.S. lead to similar outcomes.15 Food Supply: Little Improvement Despite Decades of Dietary Guidance, American Journal of Preventive Medicine 38, No. 5 (May 1, 2010): 472–77, https://doi.org/10.1016/j. amepre.2010.01.016. If most consumers prefer tasty Cheetos over a healthier alternative, the market will produce the less healthy option to give consumers what they want. This is, of course, an oversimplification since consumers are heterogeneous and there is enough demand for healthy food to secure the existence of such a market. Nonetheless, obesity may well be a market failure, and while some regulatory strategies have intended to make 11 See, e.g., W. Kip Viscusi, J. E. Harrington, D. E. M. Vernon, Economics of Regulation and the “healthy” or “nutritional quality” attribute more salient for consumers, and thus Antitrust, 4th edition (The MIT Press, 2005), 377; Stiglitz, supra note 8, 63. improve their ability to make decisions more consistent with their long-term goals, this is not a problem that is properly addressed by competition laws. Unfortunately, regulatory 12 Snow, supra note 7, 9–23. simplification strategies have shown that complex problems are unlikely to be solved easily. 13 W. Eucken, Die Grundlagen der Nationalökonomie (1947, 9th edition, Springer-Verlag, See, O. Vásquez Duque, The Non-Trivial Regulation of Nutrition Labels: An Exploratory 1989), 275, 313. Analysis of the Chilean Experience, SSRN Scholarly Paper (Social Science Research Network, February 8, 2018), https://papers.ssrn.com/abstract=3120696. 14 R. Korobkin, Bounded Rationality, Standard Form Contracts, and Unconscionability, The University of Chicago Law Review 70, No. 4 (2003): 1203–95. 10 See, e.g., P. A. Norberg, D. R. Horne, and D. A. Horne, The Privacy Paradox: Personal Information Disclosure Intentions versus Behaviors, Journal of Consumer Affairs 15 See, e.g., T. O’Donoghue and M. Rabin, Doing It Now or Later, The American 41, No. 1 (2007): 100–26, https://doi.org/10.1111/j.1745-6606.2006.00070.x. Economic Review 89, No. 1 (March 1, 1999): 103–24; T. O’Donoghue and M. Rabin, S. Kokolakis, Privacy attitudes and privacy behaviour: A review of current research on the Present Bias: Lessons Learned and to Be Learned, The American Economic Review privacy paradox phenomenon Computers & Security 64 (2017): 122–34; L. Brandimarte 105, No. 5 (2015): 273–79, D. Laibson, Golden Eggs and Hyperbolic Discounting, and A. Acquisti, The Economics of Privacy, in The Oxford Handbook of the Digital The Quarterly Journal of Economics 112, No. 2 (May 1, 1997): 443–78, https://doi. Economy, M. Peitz and J. Waldfogel, eds. (Oxford University Press, 2012), 1, 14. org/10.1162/003355397555253. 76 Concurrences N° 1-2021 I Law & Economics I Jörg Hoffmann, Omar Vásquez Duque I Can data exploitation be properly addressed by competition law?
6. Monopoly power produces higher prices or lower firms that exploit consumers’ imperfect information, constitutes a violation of the publisher's rights and may be punished by up to 3 years imprisonment and up to a € 300 000 fine (Art. L. 335-2 Code de la Propriété Intellectuelle). Personal use of this document is authorised within the limits of Art. L 122-5 Code de la Propriété Intellectuelle and DRM protection. quality than what a consumer would see in a competitive bounded rationality, and self-control survive in a Ce document est protégé au titre du droit d'auteur par les conventions internationales en vigueur et le Code de la propriété intellectuelle du 1er juillet 1992. Toute utilisation non autorisée constitue une contrefaçon, délit pénalement sanctionné jusqu'à 3 ans d'emprisonnement et 300 000 € d'amende (art. L. 335-2 CPI). L’utilisation personnelle est strictement autorisée dans les limites de l’article L. 122 5 CPI et des mesures techniques de protection pouvant accompagner ce document. This document is protected by copyright laws and international copyright treaties. Non-authorised use of this document market. Monopoly power is, however, more than market competitive equilibrium.21 The solutions to these market power.16 The latter is pervasive. In fact, most producers failures are difficult to design and implement. Often, they of differentiated products enjoy some degree of market require industry-specific knowledge and the formulation power. Monopoly power, in contrast, is the ability of a of tailored legal mandates to protect a heterogeneous firm to impair competition, turning conduct that would pool of consumers. be irrational for firms in a relatively competitive market— such as excluding competitors by charging prices below cost—into rational business strategies.17 Usually, under 2. A basic model of market a legal analysis, the starting point for an inference of monopoly power consists of high barriers to entry plus failure stemming from high market shares. Monopolists benefit at the expense imperfect information of consumers and society as a whole, since monopoly power comes with static and dynamic inefficiencies. 9. Let’s denote the demand for a product as d. Consumer i has two alternatives: (i) product “good” and (ii) product 7. Competition laws prevent the unlawful acquisition “not-so-good.” Each product has several attributes: ag1,a and/or exercise of monopoly power by prohibiting …agn and ansg1, ansg2…ansgn. Naturally, each product has g2 anticompetitive agreements and joint ventures, a price: Pg and pnsg, respectively. A rational and well- mergers that substantially lessen competition, as well informed consumer will assign a value to each attribute, as the exclusion of reasonably (or equally) efficient which would yield the benefit of each product: vg and vnsg. competitors. The direct exploitation of a monopoly against consumers is a matter of debate, yet legislation in Such a consumer, as long as she does not face budget or several jurisdictions regards excessive or abusive pricing other types of constraints, will prefer the “good” product as an antitrust offense.18 Antitrust remedies put an end to if: vig – pg > vinsg – pnsg. Choosing the “not-so-good” the abusive conduct or forbid the creation of monopoly product may be rational but this depends on consumers’ power ex ante, in addition they serve as deterrents.19 preferences as well as their budget. If there are high entry barriers in a market and only a handful of competitors, merger control should forbid 10. Let’s assume now that consumers are not well informed the acquisition of actual or potential competitors. If two or that for whatever reason (e.g., it is costly to assess each competing firms fix the prices of their goods or allocate option and compare with competing alternatives) they exclusive territories to each other, the firms will have to overlook an important product attribute and believe the pay high fines and in many countries the managers who price they pay is lower than it really is (the perceived price were involved in the offense would have to serve some is denoted as pg thus pg> pg). For instance, when choosing time behind bars. a credit card, consumers may neglect the interest rates and focus mostly, or exclusively, on the annual fees.22 For 8. But what should competition law do if poor regulation some, usually sophisticated, this would make sense since leads firms to use dirty energy sources in order to charge the probability of missing a payment might be very low. prices as low as possible? Or when consumers are ill- So, the more important case is that of those consumers informed, which induces sellers to supply services or who face a non-negligible probability of missing a goods that appear to be more convenient than they really payment and yet overlook the high-interest rates. are? This piece focuses on the latter case. Competition laws protect the free functioning of markets. Many 11. Banks may offer different combinations of fees. times, free and competitive markets lead to undesirable In fact, if the market is competitive, banks may choose results.20 When consumer demand is a function of poor any combination of c and f that covers their costs. information or behavioral biases, competitive pressures When consumers consider both c and f, the market will tend to lead sellers to exploit consumers’ misperceptions provide levels of both that reflect the actual preferences and biases. Actually, under reasonable assumptions, only of consumers. Yet if consumers overlook the interest fee, the banks will offer contracts with very low or even zero salient prices (f) and high non-salient prices (c). Since consumers base their decisions mainly or exclusively on 16 D. W. Carlton and J. M. Perloff, Modern Industrial Organization, 4th Global Edition (Pearson/Addison Wesley, 2015), 117, 687. f, competition is distorted. This is because competition occurs only with respect to f, leaving room for sellers to 17 E. Elhauge and D. Geradin, Global Antitrust Law and Economics, 3rd edition (Founda- tion Press, 2018), 320–21. backload the real price of their goods to c. Furthermore, since c is non-salient, the banks may increase the total 18 Ibid. chap. 3. 19 See, e.g., A. Douglas Melamed, Afterword: The Purposes of Antitrust Remedies, Antitrust Law Journal 76, No. 1 (2009): 359–68; W. P. J. Wils, Relationship between Public Antitrust Enforcement and Private Actions for Damages, World Competition 32, No. 1 (2009): 3–26. 21 Bar-Gill, supra note 5, chap. 1. 20 As Shiller and Akerlof note: “Free markets are products of peace and freedom, flourishing 22 We base this example on those provided by Oren Bar-Gill in a consumer contracts context. in stable times when people do not live in fear. But the same profit motive that produced those See, O. Bar-Gill, Consumer Transactions, in The Oxford Handbook of Behavioral Economics boxes that opened and gave us something we wanted has also produced slot machines with and the Law, E. Zamir and D. Teichman, eds. (Oxford University Press, 2014), 465–90, an addictive turn of the wheel that takes your money for the privilege.”Akerlof and Shiller, http://www.oxfordhandbooks.com/view/10.1093/oxfordhb/9780199945474.001.0001/ supra note 5, p ix-x. oxfordhb-9780199945474-e-018. Concurrences N° 1-2021 I Law & Economics I Jörg Hoffmann, Omar Vásquez Duque I Can data exploitation be properly addressed by competition law? 77
cost to non-competitive levels.23 This finding is far from 14. To begin with, are these competition law cases? constitutes a violation of the publisher's rights and may be punished by up to 3 years imprisonment and up to a € 300 000 fine (Art. L. 335-2 Code de la Propriété Intellectuelle). Personal use of this document is authorised within the limits of Art. L 122-5 Code de la Propriété Intellectuelle and DRM protection. being new. From a neoclassical perspective, Carlton and The main source of market power that allows sellers Ce document est protégé au titre du droit d'auteur par les conventions internationales en vigueur et le Code de la propriété intellectuelle du 1er juillet 1992. Toute utilisation non autorisée constitue une contrefaçon, délit pénalement sanctionné jusqu'à 3 ans d'emprisonnement et 300 000 € d'amende (art. L. 335-2 CPI). L’utilisation personnelle est strictement autorisée dans les limites de l’article L. 122 5 CPI et des mesures techniques de protection pouvant accompagner ce document. This document is protected by copyright laws and international copyright treaties. Non-authorised use of this document Perloff point out that: “The full-information, competitive to adopt intrusive privacy policies is an informational price equilibrium is not an equilibrium when consumers issue (and probably inertia as well). The market may have limited information about price and positive search have several suppliers, which might offer homogeneous costs.”24 Why? Imagine each individual faces a search products at the eyes of consumers (e.g., email providers, cost of s, a competitive price is pc. Buyers suspect they even cell-phone networks). If there were a monopolist, can find pc somewhere with a low probability but, as entry would not discipline the privacy attribute since indicated, finding such a price entails a search cost of s. competition would occur only over the attributes that Then, each seller could increase her price as long as the consumers care about (which is revealed by consumers’ new price pn is lower than pc + s. As search costs increase, actual behavior, not by their stated preferences). sellers may rationally raise their prices even reaching the Furthermore, what competition law remedy may fix this monopoly price.25 problem? Obligations to disclose the average hidden costs? Generic mandates to offer a fair contract, more 12. There are different possible outcomes when some options, or a general ban of abusive terms? consumers are well informed.26 If many consumers are informed, then firms may charge the competitive price.27 15. Some have suggested considering data exploitation But this depends on a crucial trade-off: charging higher as an abusive price. Yet in excessive pricing cases, the prices entails losing the demand of informed consumers plaintiff bases her position on a competitive benchmark. and keeping the demand of uninformed consumers for If the goods or services in the benchmark market are whom the price difference is lower than their search costs, similar to the one that is the object of the trial, then direct assuming they have the expectation of finding a lower price regulation overcomes an important informational price at a cost of s. In repeated transactions, inertia poses challenge. In fact, the existence of a competitive another search cost.28 benchmark stems from the fact that competition does discipline net prices in the benchmark market. What is 13. The case of privacy is similar to the credit cards the benchmark when sellers exploit consumers’ lack of example from above. Privacy is a product attribute. information, and/or their imperfect rationality and their For simplicity, let’s assume digital products have only inertia and this is a generalized practice (an equilibrium)? three attributes: price (p), connectivity (b), and privacy This point is developed in further detail in paragraph 26. intrusion (h). If consumers do not ponder the privacy attribute h in their decision-making, platforms will exploit such attributes, extracting all the value they can, which allows them to subsidize the nominal price of the II. The privacy paradox and the German product. While the real price consumers pay is p + h, poorly informed consumers believe the price they pay is only p (or more optimistically a value lower than p + h but not close enough to demand a different alternative). Sellers will compete offering low perceived prices (p) and Facebook case connectivity (b) that satisfies their customers. This is the 16. Germany has been a pioneer jurisdiction in enforcing competitive benchmark we believe should be applicable antitrust laws against the alleged privacy-intrusive to the Facebook case. What can we do to solve problems conduct of digital platforms. Most recently, in the like these in which market prices and/or quality are not Facebook judgment, the German Federal Supreme disciplined by demand forces? Court backed the Federal Cartels Office decision29 that considered Facebook’s current data policy as an abuse of dominance under German Competition Law.30 The court preliminary held that Facebook’s terms and conditions 23 S. P. Anderson and R. Renault, Pricing, Product Diversity, and Search Costs: A Bertrand- Chamberlin-Diamond Model, The RAND Journal of Economics 30, No. 4 (1999): illegally enabled it to use aggregated data from its 719–35. network and combine it with other “Off-Facebook-data” 24 D. W. Carlton and J. M. Perloff, Modern Industrial Organization (Pearson/Addison Wesley, from other social networks that belong to Facebook 2005), 478. (e.g., WhatsApp and Instagram), as well as third-party 25 Based on Carlton and Perloff, Modern Industrial Organization, 478. Given the length websites and apps to provide user-centric services and of this piece we may not develop the interesting differences regarding the rationales better sell the attention of consumers to advertisers. and strategies for regulating traditional and behavioral market failures. Yet, as Doug Melamed told us, this difference is crucial. For instance, privacy costs may be overlooked This “imposed personalized experience,”31 the court because of hyperbolic discounting. If this were the case, traditional tools to overcome outlined, may lead consumers to succumb to intrusive informational failures would be ineffective, practices by consciously or subconsciously giving up 26 Salop and Stiglitz’s article is an important reference in this respect. They also summarize their sovereignty over their privacy or their right to the previous literature. See S. Salop and J. Stiglitz, Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion, The Review of Economic Studies 44, No. 3 (1977): 493–510, https://doi.org/10.2307/2296903. 27 Carlton and Perloff. p. 483. This is based on P. A Diamond, A Model of Price 29 BKartA WuW 2019, 277 = BeckRS 2019, 4895. Adjustment, Journal of Economic Theory 3, No. 2 (June 1971): 156–68, https://doi. org/10.1016/0022-0531(71)90013-5. 30 It has to be noted that it is still a summary proceeding and thus is not only a preliminary ruling, it also has a lower standard of proof. 28 See, e.g., A. MacKay and M. Remer, Consumer Inertia and Market Power (April 29, 2019), available at SSRN: http://dx.doi.org/10.2139/ssrn.3380390. 31 BGH GRUR 2020, 1318 para. 58 – Facebook. 78 Concurrences N° 1-2021 I Law & Economics I Jörg Hoffmann, Omar Vásquez Duque I Can data exploitation be properly addressed by competition law?
informational self-determination. Such conduct may 19. According to Article 19(2) Nr. 2 GWB, an abuse of constitutes a violation of the publisher's rights and may be punished by up to 3 years imprisonment and up to a € 300 000 fine (Art. L. 335-2 Code de la Propriété Intellectuelle). Personal use of this document is authorised within the limits of Art. L 122-5 Code de la Propriété Intellectuelle and DRM protection. further imperil competition in the social communication a dominant position exists “if a dominant undertaking Ce document est protégé au titre du droit d'auteur par les conventions internationales en vigueur et le Code de la propriété intellectuelle du 1er juillet 1992. Toute utilisation non autorisée constitue une contrefaçon, délit pénalement sanctionné jusqu'à 3 ans d'emprisonnement et 300 000 € d'amende (art. L. 335-2 CPI). L’utilisation personnelle est strictement autorisée dans les limites de l’article L. 122 5 CPI et des mesures techniques de protection pouvant accompagner ce document. This document is protected by copyright laws and international copyright treaties. Non-authorised use of this document and the advertisement selling markets. Notably, the court demands (. . .) business terms which differ from those which developed a new theory of harm that deviated from the would very likely arise if effective competition existed; in Federal Cartel Office’s reasoning in two ways. First the this context, particularly the conduct of undertakings in court abandoned the excessive pricing rationale that was comparable markets where effective competition exists the lynchpin of the Federal Cartel Office’s argumentation. shall be taken into account.” The offense thus has to be Second, the court based its reasoning on data-specific a consequence of the firm’s market power (causality exclusionary abuse considerations.32 stricto sensu). The preceding point means that consumers would benefit from higher privacy protection standards if the market was competitive. Yet, the Federal Court 1. Breach of informational of Justice quite extraordinarily attenuated the strict causality requirement by referring to the general clause of self-determination as an abuse Article 19(1) GWB,37 outlining that it sufficed that consumer of dominance harm could only arise in the case of market-dominant companies. This was despite the fact that it was clear in the 17. The court reasoned that Facebook’s market dominance discussion that data-specific abuses were possible for any and the pivotal role of social communication services business, including non-dominant firms.38 Accordingly, in daily lives leave consumers without any real choice the court analyzed the case under a weaker standard of but accepting Facebook’s terms and conditions in their “as-if competition” (normative causality). This implied entirety. The fact that consumers give up their data and the assessment of whether the user preferences could be the imposition of data-driven services—the personalized better realized in a hypothetical competitive market (i.e., user experience—were tantamount to exploitation. whether in a hypothetical competitive market rational Consumers lose their possibility to discipline the market market actors would opt for a less privacy intrusive option and are left without any choice. Here the court adhered than the one Facebook was offering).39 to the concept of “consumer choice” of Averitt, Lande and Nihoul as an alternative to the traditional focus of 20. The court found such evidence in a market study competition law on price effects.33 conducted by the Federal Cartel Office. That study merely asked people whether they would choose less 18. According to the court, the consumers’ fundamental privacy-intrusive services if such options were provided right of informational self-determination needs to be by Facebook. Not surprisingly, 46% of Facebook-users considered in Article 19(1) German Antitrust Code answered that they would switch to a less intrusive (GWB).34 This fundamental right entails a consumer option. Furthermore, 38.5% of Facebook users even right to—at least—freely determine what information declared that they would pay for a “data light” version is provided to a third party. The forced personalized of Facebook.40 As it should be evident, the court justified experience provided by Facebook and the lack of its decision on a survey concerning consumers’ stated alternatives available violated such power. The court preferences. This is despite the fact that there are several rebuffed claimed justifications for Facebook’s data empirical studies demonstrating the divide between business model due to specific exceptions and limitations people’s stated and revealed preferences regarding their in the General Data Protection Regulation (GDPR),35 privacy. As we explain in the next section, people tend and reasoned it was obliged to put an end to Facebook’s to report that they care about the personal information exploitative data practice.36 they share. However, in reality people undertake little to protect their data, and act as if they did not care much (or not care at all) about it.41 This conundrum is called “the privacy paradox.” A possible explanation is the naïve trust on survey responses about sensitive topics that are subject to a social-desirability bias. 32 Ibid., para. 64. 37 BGH GRUR 2020, 1318 para. 81 – Facebook. 33 R. H. Lande and N. W. Averitt, Using the “Consumer Choice” Approach to Antitrust Law, Antitrust Law Journal 74, No. 1 (2007): 175–264; P. Nihoul in Choice: A New 38 Ibid. Standard for Competition Law Analysis? P. Nihoul, N. Charbit, and E. Ramundo, eds. (Concurrences, 2016), 9. 39 Ibid. The court explicitly outlined that as there never has been proper competition in the social communication market it cannot be answered what a counterfactual was. 34 BGH GRUR 2020, 1318, para. 102ff. On the relevance of fundamental rights even This fact however, cannot serve as an excuse for Facebook.” In order to meet the causality between private actors within Article 19 GWB, see the German Highest Supreme Court requirement it has to suffice “that there are identifiable user preferences of economically in the Pechstein case, BGHZ 210, 292 Rn. 57 – Pechstein and the Highest Constitutional reasonable consumers. Accordingly, consumers need to have a willingness to make use of Court in Stadionverbot, BVerfGE 147, 267 Rn. 41 – Stadionverbot. other conditions of use. Such willingness must be based on actual evidence. 35 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 40 Cf. Question 11, Amtsakte, 682. Cf. BGH GRUR 2020, 1318, para. 85. 2016 on the protection of natural persons with regard to the processing of personal data. The right of self-determination is still applicable in Article 19 GWB and not directly 41 See, S. Barth and M. D. T. de Jong, The Privacy Paradox – Investigating Discrepancies circumscribed by the GDPR. As privacy is not considered an absolute right, there are between Expressed Privacy Concerns and Actual Online Behavior – A Systematic certain exceptions and limitations enshrined in the GDPR. Literature Review, Telematics and Informatics 34, No. 7 (November 2017): 1038–58, https://doi.org/10.1016/j.tele.2017.04.013; D. J. Solove, A Taxonomy of Privacy, 36 i.e., the status positivus of such rights. See on the scope of the right of informational University of Pennsylvania Law Review 154, No. 3 (January 2006): 477–560; A. Acquisti, self-determination in Germany, Highest Constitutional Court, BVerfG, WRP 2020, 39 Nudging Privacy: The Behavioral Economics of Personal Information, IEEE Security and para. 87 – Recht auf Vergessen I. Cf. BGH GRUR 2020, 1318 para. 105 – Facebook. Privacy 7, No. 6 (2009): 82–85. Concurrences N° 1-2021 I Law & Economics I Jörg Hoffmann, Omar Vásquez Duque I Can data exploitation be properly addressed by competition law? 79
2. Excessive aggregation of data practice has found such scenarios implausible in several constitutes a violation of the publisher's rights and may be punished by up to 3 years imprisonment and up to a € 300 000 fine (Art. L. 335-2 Code de la Propriété Intellectuelle). Personal use of this document is authorised within the limits of Art. L 122-5 Code de la Propriété Intellectuelle and DRM protection. cases, and revolved back to the traditional error‑cost as a barrier to entry in the social Ce document est protégé au titre du droit d'auteur par les conventions internationales en vigueur et le Code de la propriété intellectuelle du 1er juillet 1992. Toute utilisation non autorisée constitue une contrefaçon, délit pénalement sanctionné jusqu'à 3 ans d'emprisonnement et 300 000 € d'amende (art. L. 335-2 CPI). L’utilisation personnelle est strictement autorisée dans les limites de l’article L. 122 5 CPI et des mesures techniques de protection pouvant accompagner ce document. This document is protected by copyright laws and international copyright treaties. Non-authorised use of this document framework. In the Facebook/WhatsApp merger, for networks and advertising markets instance, the EC cleared the merger and stated that “the consumer communications sector is a recent and fast- 21. As mentioned above, the court also developed an growing sector which is characterised by frequent market exclusionary theory of harm. According to the court, the entry and short innovation cycles (. . .). [I]n this market excessive aggregation of data and the gained insights on high market shares are not necessarily indicative of market user experiences may ultimately strengthen Facebook’s power and, therefore, of lasting damage to competition.”47 market power on both sides of the platform. Increased Recent studies, however, have claimed that the predicted user experience may directly boost the attention of market disruptions that favored the hands-off approach users in the social network market, which may give have not occurred.48 Facebook more—and particularly more accurate and comprehensive—information about their users. This allows Facebook to sell an unrivaled product to advertisers.42 Due to strong indirect network effects III. Assessment on both sides of the market, Facebook’s personalized services are likely to create high entry barriers. In fact, of the German Facebook case the court, in a similar way to the reasoning of the General Court of the Microsoft case,43 reasoned that the aggregation of data from multiple sources may position Facebook as an incontestable market actor.44 23. A great motivation of the Supreme Court’s judgment is to provide more choices for consumers. The court 22. Accordingly, for the court the object of proof was the seems to believe that there is an intrinsic value in having potential negative effects on competition given Facebook’s more choices and that free competition is a silver bullet. specific responsibility as a dominant firm.45 This is quite By assuming these two points, the court overlooks what extraordinary as such data-specific foreclosure theory experts have called “the privacy paradox” as well as of harm has already been subject to scrutiny in the the very basic taxonomy of market failures presented European Commissions’ merger control practice. In fact, in Section I. From a legal perspective, these issues the European Commission (EC) has assessed whether the influenced the lower causality threshold adopted by concentration of control over valuable and non-replicable the court. Actually, the Federal Supreme Court quite data resources may create a significant impediment bluntly lowered the causality threshold on the grounds for competition by either strengthening market power of the justified expectation that rational consumers may or leveraging their data advantages to other markets respond to product diversification (...) if competition and thus lead to foreclosure effects.46 The EC’s merger was in place.49 This also explains the lower standard of proof applied in such case. Yet—and this is what the court oversees—its counterfactual is based on several 42 BGH GRUR 2020, 1318 para. 94 – Facebook. The court explicitly states that the more unrealistic normative assumptions that lead to inaccurate data Facebook gets, the more accurate the predictability of user behavior is. This does predictions. not only allow Facebook to more accurately develop tailored services and personalize future or other business strategies and technologies, it also allows Facebook to more accurately predict the users’ behavior. The more data in terms of quantity and quality 24. A critical piece of evidence for the court was the the better Facebooks’ data analytics. As the number of users is already very large, high market study conducted by the Federal Cartel Office, direct network effects cause barriers to entry for both current and potential competitors as they can hardly compete with the offered services and the strong network. In addition which showed that people stated that they valued to the barrier to entry caused by direct network effects, there is also the risk of market their privacy and that many were willing to pay for a foreclosure on the other side of the platform, i.e. advertising market. Particularly the less intrusive Facebook version. Many studies have advertising market is however required to amortize the costs from the other side of the platform, i.e. the social communication service market. documented, however, that in reality people undertake little to protect their data, despite the fact that they report 43 Case T-201/04 Microsoft [2007] ECR II 3602 5 CMLR 11 para. 631. caring about their privacy.50 This so-called “privacy 44 Cf. J. Drexl, Intellectual Property and Sources of Market Power, in Intellectual Property, Market Power and the Public Interest, I. Govaere and H. Ullrich, eds. (PIE Peter Lang, 2008), 13; A. Heinemann, The Contestability of IP-Protected Markets, in Research Handbook on Intellectual Property and Competition Law, J. Drexl, ed. (Edward Elgar Publishing 2008), 54– 79. See Joint Committee of the European Supervisory Authority, Joint Committee Discussion 47 Facebook/WhatsApp, supra note 46, para. 99. See also Judgment of the General Court, Paper on the Use of Big Data by Financial Institutions (2016) JC 2016 86, 6; J. Hoffmann, 11 December 2013, Cisco Systems and Messagenet v. Commission, Case T-79/12, Safeguarding Innovation Through Data Governance Regulation: The Case of Digital EU:T:2013:635. Payment Services (2020), Max Planck Institute for Innovation and Competition Research Paper No. 20-08, 21–26. For a dissenting opinion see A. Lambrecht and C. E. Tucker, Can big data 48 See, J. Crémer, Y. A. de Montjoye, and H. Schweitzer, Competition policy for the digital protect a firm from competition?, Competition Policy International (2017). era (2019), 49–54; J. Furman, Unlocking digital competition, Report of the Digital Competition Expert Panel (2019), 4; Report of the German Competition Commission 4.0, 45 GRUR 2020, 1318 Rn. 81ff. – Facebook. Ein neuer Wettbewerbsrahmen für die Digitalwirtschaft (2019), paras. 9–11 46 See for example Commission decision of 6 September 2018, Case M.8788 – Apple/Shazam, 49 BGH GRUR 2020, 1318 para. 81 – Facebook. C(2018) 5748 final; Commission decision of 6 December 2016, Case M.8124 – Microsoft/ LinkedIn, C(2016) 8404 final; Commission decision of 3 October 2014, Case M.7217 50 See, S. Barth and M. D. T. de Jong, The Privacy Paradox – Investigating Discrepancies – Facebook/WhatsApp, C(2014) 7239 final; Commission decision of 4 September between Expressed Privacy Concerns and Actual Online Behavior – A Systematic 2012, Case M.6314 – Telefónica UK/Vodafone, C(2012) 6063 final. Cf. J. Hoffmann and Literature Review, Telematics and Informatics 34, No. 7 (November 2017): 1038–58, G. Johannsen, EU-Merger Control and Big Data: On Data-specific Theories of Harm and https://doi.org/10.1016/j.tele.2017.04.013; D. J. Solove, A Taxonomy of Privacy, Remedies (2019), Max Planck Institute for Innovation and Competition Research Paper University of Pennsylvania Law Review 154, No. 3 (January 2006): 477–560; Acquisti, No. 19-05, 1, 9–29. supra note 41, 82–85. 80 Concurrences N° 1-2021 I Law & Economics I Jörg Hoffmann, Omar Vásquez Duque I Can data exploitation be properly addressed by competition law?
paradox” casts doubt on what is the actual consumer 26. It is important to bear in mind that in excessive constitutes a violation of the publisher's rights and may be punished by up to 3 years imprisonment and up to a € 300 000 fine (Art. L. 335-2 Code de la Propriété Intellectuelle). Personal use of this document is authorised within the limits of Art. L 122-5 Code de la Propriété Intellectuelle and DRM protection. preference that the court should have regarded as the real pricing cases the plaintiff has to refer to one or several Ce document est protégé au titre du droit d'auteur par les conventions internationales en vigueur et le Code de la propriété intellectuelle du 1er juillet 1992. Toute utilisation non autorisée constitue une contrefaçon, délit pénalement sanctionné jusqu'à 3 ans d'emprisonnement et 300 000 € d'amende (art. L. 335-2 CPI). L’utilisation personnelle est strictement autorisée dans les limites de l’article L. 122 5 CPI et des mesures techniques de protection pouvant accompagner ce document. This document is protected by copyright laws and international copyright treaties. Non-authorised use of this document one—aiming to guarantee people’s self-determination, benchmarks.53 For instance, if someone for whatever which sounds like an oxymoron. People say many reason enjoys a monopoly in funerary services in a small things, but only a few buy fair-trade products, donate to town, which allows her to charge higher prices than charities, and prefer electric or hybrid cars (having the those charged in places where there is competition, the chance to do so). We believe there is a critical experience plaintiff may gather that relevant pricing information that proves that our argument applies to people’s and argue that the benchmark provides a reasonable privacy: The evolution of DuckDuckGo’s market comparison to set a fair price.54 While the best remedy share. DuckDuckGo is a search engine that offers high for the medium run may be to introduce competition in privacy standards. As the plot below shows,51 even after the market, issuing a behavioral remedy requiring the being present in the choice screen that resulted from the firm to charge prices above cost and below the monopoly Android case, DuckDuckGo’s market share has not risen price in the meantime would do no harm. This exercise above 1% despite the fact that it is a good alternative to is possible because the source of market power is a more intrusive environments and that it actively displays legal monopoly. Competition works well in this type its commitment with people’s privacy. of market, where there are no significant informational failures and no externalities. But markets fail for causes Market Shares Europe 2018 to 2020 other than the lack of competition, and when that is the case, competition law usually lacks the institutional competence and erga omnes effects to improve market Marcket Share in % outcomes. The recent response of Google in Germany, by which it provides a menu of options to its users, may be interpreted as a counterargument to our position. Of course, no one denies that the enforcement of law may have a deterrent effect. However, the services provided by Google are multidimensional and complex. A court may well approve the conditions offered by a firm in Year a potential settlement, or enforcers might interpret a change of conduct as a law-abiding effort. However, courts and general enforcers usually lack the technical 25. One of the core rationales of informational self- knowledge to assess the impact of legal remedies. If a determination is to let consumers decide. Yet people’s firm operating in a platform market loses a source lack of reaction towards the status quo is what of profit, it may well (and probably would) try to has allowed many firms to exploit people’s privacy. compensate for the loss in the other side of the market Regulation for competition (e.g., simplification, standard (e.g., with higher prices for advertisers, a part of which setting, interoperability) may be a reasonable alternative. would be passed on to their consumers) or in a related But thoughtful efforts to change the status quo for the market. What is the net effect of the intervention? This is better need good information about the causes of the a reason why a sound prediction and assessment of the problem and possible alternatives, as well as general remedies is critical. If a data sharing remedy was offered, effects. For instance, why has not DuckDuckGo increased it would be hard to predict whether merely sharing its market share? Is it because the choice screen is poorly information would effectively restore competition in designed? Because advertising new search engines is too the market. Actually, dominance may stem from critical difficult/costly? Because for some reason the dominant infrastructure—i.e. data scientists, other data sources, firm has an advantage that is not replicable by the machine learning models, etc. This knowledge however entrants, which makes it unfeasible for them to provide is the key competitive factor in the data related theory of a product that is as good as the incumbent’s? If sound harm that the Supreme Court addressed. answers are found, how can the solution be implemented obliging all market actors and not only the defendant? This may bring back the discussion on paternalistic market regulation, which has already been envisioned in the Digital Markets and Digital Services Acts.52 53 M. de la Mano, R. Nazzini, and H. Zenger, Article 102, in The EU Law of Competition, J. 51 This is based on O. Vásquez Duque, Forced Choice vs. Inertia? An Exploratory Analysis of Faull and A. Nikpay, eds., 3rd ed. (Oxford University Press, 2014), 329–538; O. Vásquez Choice Screens Applied in the European Microsoft Antitrust Case, draft on file with author. Duque, Excessive Pricing: A View from Chile, The University of Oxford Centre for Competition Law and Policy Working Paper CCLP L 41 (April 8, 2015), available at: 52 Cf. Proposal for a Regulation on a Single Market For Digital Services (Digital Services https://dx.doi.org/10.2139/ssrn.2591931. Act) COM/2020/825 final; Proposal for a Regulation on contestable and fair markets in the digital sector (Digital Markets Act), COM/2020/842 final. 54 Corinne Bodson v. SA Pompes funèbres des régions libérées, 1998 ECR 2479 (1998). Concurrences N° 1-2021 I Law & Economics I Jörg Hoffmann, Omar Vásquez Duque I Can data exploitation be properly addressed by competition law? 81
IV. Conclusion privacy-related market failures that stem from a lack of constitutes a violation of the publisher's rights and may be punished by up to 3 years imprisonment and up to a € 300 000 fine (Art. L. 335-2 Code de la Propriété Intellectuelle). Personal use of this document is authorised within the limits of Art. L 122-5 Code de la Propriété Intellectuelle and DRM protection. consumer engagement and informational deficiencies.55 Ce document est protégé au titre du droit d'auteur par les conventions internationales en vigueur et le Code de la propriété intellectuelle du 1er juillet 1992. Toute utilisation non autorisée constitue une contrefaçon, délit pénalement sanctionné jusqu'à 3 ans d'emprisonnement et 300 000 € d'amende (art. L. 335-2 CPI). L’utilisation personnelle est strictement autorisée dans les limites de l’article L. 122 5 CPI et des mesures techniques de protection pouvant accompagner ce document. This document is protected by copyright laws and international copyright treaties. Non-authorised use of this document Horizontal regulation has erga omnes effects and 27. Competition law is not a silver bullet. Enhancing regulators tend to have market-specific knowledge, which privacy protection by means of enforcing competition is critical to properly regulate a complex set of related but law has already been claimed as a political stance that distinct markets. Competition laws may have deterrence goes beyond traditional antitrust reasoning. Of course, effects. Yet, the dependency on market dominance that there is nothing wrong in thinking outside of the box, has to be assessed by competition authorities may create but for regulation, either direct or indirect, to work considerable legal uncertainty, including the risk of well, the regulator has to count on good information opinions based on naive accounts of people’s behavior and and issue general mandates. We argue that privacy- poor empirical evidence. This can be seen in the German related exploitative abuses can hardly be dealt with by Facebook case, especially when assessing the causal competition remedies. As consumers usually act as if they relationship between Facebook’s dominant position and did not value their privacy, market responses that neglect its ability to provide tailored services to its users. the privacy paradox are likely to fail to improve the current status quo. Actually, because privacy exploitation 29. Notwithstanding the above, by defining a new theory is better explained by informational failures, there is of harm that builds on exclusionary abuse considerations, no legal causality between the defendant’s dominance the German Supreme Court has paved the way for a more and intrusive privacy practices. Furthermore, since a coherent and dogmatically well-aligned competition law competitive market is unlikely to police the privacy solution to tackle the data exploitation. This goes in line attribute, it is impossible to see a benchmark in the real with the current legislative platform regulation endeavors world. The German Supreme Court built its reasoning on a European and German level. Thereby, the German on a hypothetical ideal market in which consumers value Supreme Court decision certainly backs these current having the chance of choosing a less intrusive social legislative actions and pioneers in strengthening the network. Nevertheless, the privacy paradox is such contestability of digital markets. More importantly, because people’s stated preferences are in contradiction however, the Supreme Court sets the scene for a new with their actual behavior. Actively engaging consumers theory of harm that overcomes existing deficiencies in may indeed be the right way forward, and regulation data-specific exploitative abuse considerations. Such may make competition more viable (for instance, by theory of harm may also have to be looked at in merger mandating the interoperability of networks and assuring control cases. It remains to be seen how the court will a privacy protection floor). eventually decide in its main proceedings and how the Digital Services and Digital Markets Acts address the 28. Despite being critical of the German Facebook case, data specific theory of harm. Either way, the German we do think that privacy protection is important. Yet the Facebook case will be at the forefront of the debate on determination of the proper scope of people’s privacy the limits of competition law and will be important to and informational self-determination should be left to shed light on the legislative procedure of the European horizontal regulation like ad hoc privacy instruments. and German digital laws, which are likely to affect other Privacy regulators are better equipped to address the jurisdictions worldwide. n 55 Cf. A. Fletcher, Disclosure as a tool for enhancing consumer engagement and competition, Behavioural Public Policy (Cambridge University Press, 2019), 4. 82 Concurrences N° 1-2021 I Law & Economics I Jörg Hoffmann, Omar Vásquez Duque I Can data exploitation be properly addressed by competition law?
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