Politicians are working themselves into a frenzy about major online platforms “self-preferencing” their own products. Apparently, it’s bad a thing that your iPhone comes with FaceTime pre-installed, or that Amazon sells Basics yoga mats that it prioritizes in search rankings to compete with other generics on Marketplace.
Senator Elizabeth Warren summarized the simplistic unease about platforms preferencing their own products best when she claimed “You can be the umpire, or you can be a player, but you can’t be both.” Despite this naïve view going against the economic consensus of the past four decades, legislation in Congress now seeks to enforce openness and neutrality on a host of online platforms by limiting self-preferencing.
Senator Amy Klobuchar’s American Innovation and Choice Online Act would generally make it unlawful for an online big tech platform to preference its own goods, limit business users from competing with its products, or discriminate in its terms of service in ways that would “materially harm competition.”
Companies covered would not be able to restrict business users from interoperating with software open to the platform’s own products, use third-party sales data to improve their own products, or treat their own products favorably in search rankings.(Yes, if the business can prove their conduct is essential to protecting security, privacy, or a core platform functionality then the conduct might be permitted. But having to prove this in court is clearly a strong deterrent to self-preferencing).
All this might sound pro-competition to the unattuned ear. But in a new brief today, we explain why this panic is unjustified and why, far from enhancing the process of competition, this sort of legislation would actually have anticompetitive consequences:
- Self-preferencing is a normal form of business conduct common to many sectors, including retail and online payments systems. Yet this legislation would, for now, only target major online firms.
- Banning certain forms of self-preferencing conduct per se amounts to an abandonment of judging conduct by a consumer welfare standard, so putting the interests of competing businesses over that of consumers.
- Consumers value platform features other than openness or interoperability, and there are often big trade-offs with delivering a smooth customer experience when companies can’t set restraints against business users’ conduct.
- A healthy market for competition does not mean every platform needs to be open and neutral. In fact, self-preferencing can enhance competition by a) helping leverage user engagement for the host to launch new products into other markets, or b) encouraging geographically dispersed users to join a platform such that business users can then access wider pools of customers.
- Banning forms of self-preferencing online can actually distort the playing field of competition between offline and online firms, between firms under or over the thresholds for which companies covered, and between incumbent and emerging firms.
There are many other problems with the anti-self-preferencing zeitgeist explored in the paper. But the economic arguments above are key to why this legislation is misguided.
