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Is Privacy an Antitrust Concern?

| Jul 22, 2014 | Analysis

The Federal Trade Commission’s (FTC) two primary missions are to promote competition and consumer protection. The agency enforces antitrust laws through its Bureau of Competition and privacy regulations through its Bureau of Consumer Protection. In the last several years, a number of commentators and politicians have advocated that the Commission incorporate privacy concerns into antitrust enforcement.

Keyboard with EyeIt is widely accepted that American antitrust law seeks primarily to maximize consumer welfare. Consumer welfare is the surplus of how much a consumer values a good or service above its price. Thus, when evaluating mergers and anti-competitive activity, antitrust regulators examine how a firm’s conduct affects both price and quality. In theory, a reduction in quality is just as harmful to consumer welfare as an increase in price. However, because quality is subjective and often difficult to measure, in practice the agency scrutinizes price more than quality.

Proponents of incorporating privacy into antitrust enforcement argue that the traditional approach to analyzing consumer welfare makes it difficult to regulate internet content providers like Google and Facebook. Most social media, e-mail, and search engines are nominally free to consumers. Antitrust attorney Allen Grunes notes that “antitrust does not generally look at the consumer side of the market when the consumer is not paying for the product or service.”

However, some commentators argue that Internet and social media services are not truly free because consumers pay with their privacy. Content providers use their consumers’ private data, with their formal consent, to display targeted ads. This practice is called behavioral advertising.

Senator Al Franken (D-MN) describes the content providers’ business model as a deal where consumers get “to use these amazing, innovative, helpful services” for free, but “unless you knew where to find that opt-out link,” the service providers are allowed “to use your use of these services to better target ads to you.”

Because consumers click boxes to indicate a measure of consent to the privacy terms, Franken worries that the “more dominant these companies become over the sectors in which they operate, the less incentive they have to respect your privacy.”

Progressives like Franken are not alone in their misgivings. Senator Mike Lee (R-UT) argues that Google’s position as the dominant search firm “reduces the company’s incentive to compete with other search engines by providing enhanced privacy protection for consumers.” Lee also suggests that increasing antitrust enforcement against Google would not necessarily lead to more government interference with private enterprise because it “may unlock beneficial competition for the protection of user privacy and avert the need for additional privacy regulation.” Other conservative Republicans like Representative Marsha Blackburn (R-TN) similarly express concern that Google’s “monopoly power might hurt competition and…unnecessarily invite even broader government regulations on everyone else.”

Former Commissioner of the FTC, Pamela Harbourcontends that firms will use private data to obtain more market power. She notes that behavioral advertising market has network effects—the more data a company obtains, the more efficient its targeted ads become. Thus, she argues that “Google might be uniquely positioned to control not only the data market, but also the related market for behavioral advertising itself.”

Of course, not everyone agrees that privacy concerns should be incorporated into antitrust. Former FTC Commissioner Orson Swindle contends that “since consumers have the choice of whether or not to use these websites, the companies can hardly be legitimately subjected to allegations of unfair business practices or monopolistic pricing schemes when everything is available for free.”

His fellow former Commissioner, J. Thomas Rosch, notes that behavioral advertising is not the only “multisided-market” where consumers do not pay firms directly. He points out that consumers do not pay any pecuniary fee to a number of other businesses such as shopping malls and broadcast television stations. Rosch argues that antitrust regulators “have a long experience” with these markets and do not need to make radical antitrust policy changes to regulate them well.

MIT economics professor Catherine Tucker and University of Toronto marketing professor Avi Goldfarb conducted an empirical study that found that consumers who value privacy are less likely to click on ads that they find “behaviorally intrusive.” This suggests that even monopolies have market incentives to keep from excessively intruding on their customers’ privacy.

The FTC has been reluctant to consider privacy concerns when conducting merger reviews. When the agency approved Google’s merger with the online advertisement service DoubleClick in 2007, many progressive organizations and politicians urged the agency to consider privacy.

While the Commission did acknowledge that privacy could be evaluated as one of many non-price aspects of consumer quality, it held that the FTC does not have the “legal authority to require conditions to this merger that do not relate to antitrust.” It cautioned that “regulating the privacy requirements of just one company could pose a serious detriment to competition in this vast and rapidly evolving industry.”

Only Commissioner Harbour dissented from the FTC’s decision. Although she and other Commissioners involved in that decision have since left the agency, recently appointed Commissioner Joshua Wright has made similar arguments against conflating privacy with antitrust.

The FTC appears unlikely to take up the linkage between privacy and antitrust again soon; however, the courts may. Hagens Berman, one of the country’s top plaintiff’s firms, recently filed an antitrust class action suit against Google, alleging anti-competitive behavior related to Google’s arrangement with Android mobile apps. Similar to the claims made by former Commissioner Harbour, the complaint alleges that Google’s use of private data entrenches its dominant position and also argues that Google’s allegedly anti-competitive arrangement with Android may have prevented consumers from installing non-Android apps that would have been “more protective of user privacy.”



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