Ed. Note: With this post we welcome WLF’s newest attorney, Corbin K. Barthold, as a WLF Legal Pulse author.
Many legal disputes pit the affective and sometimes utopian thinking of lawyers against the statistical and efficiency-oriented thinking of economists. The archetypal lawyer subscribes to the maxim ubi jus ibi remedium—“where there is a right, there is a remedy.” The archetypal economist is more likely to agree with Oliver Wendell Holmes, Jr.’s view that “such words as ‘right’ are a constant solicitation to fallacy.”
In antitrust cases, at least, the Supreme Court often sides with the economists. Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), is a good example. It says that only the direct purchaser of an abusive monopolist’s goods or services may sue the monopolist for violating the antitrust laws. Someone who buys a product only indirectly—someone who, say, buys from a retailer who buys from an antitrust-law-violating manufacturer—is out of luck. She may not sue even if the retailer incorporated some of the supracompetitive wholesale price into the retail price. It would be too difficult, Illinois Brick concludes, to accurately apportion damages among distributers, retailers, and consumers.
Better to preserve the rights of the direct purchaser—the party with the most incentive to sue—and to avoid inflicting a double recovery on the offending monopolist, whom the antitrust laws already require to pay treble damages. Illinois Brick instantiates Holmes’s observation that “the general tendency of the law, in regard to damages at least, is not to go beyond the first step.”
In 2011 a group of iPhone owners, seeking to represent a class of plaintiffs, accused Apple of illegally monopolizing distribution of iPhone software applications. The group pointed out that a software developer may sell such apps only through Apple’s App Store, and that Apple collects a thirty-percent commission on each app sold. In response Apple invoked Illinois Brick. An iPhone owner buys apps from developers who, agreeing to pay the thirty-percent commission, purchase monopolized app distribution from Apple. It is the app developer, Apple argued, who directly pays the allegedly abusive monopoly price. And it is the app developer, therefore, who may sue Apple under Illinois Brick. The district court agreed and dismissed the lawsuit.
The Ninth Circuit reversed on the ground that Apple distributes apps to iPhone owners. The panel explicitly declined to say whether this means that app developers are barred from suit. The court thus opened the way for Apple to be sued for one alleged antitrust violation by two sets of purchasers: the app developer may sue because it purchased app distribution from Apple the platform owner, and the retail consumer may sue because she purchased the app from Apple the app distributer. This outcome cannot be squared with Illinois Brick.
Apple petitioned the Supreme Court for review (WLF filed a supportive amicus brief), and the justices asked the United States to weigh in. Last week the United States submitted an amicus brief urging the court to reverse the U.S. Court of Appeals for the Ninth Circuit. Apple’s role as a distributor of apps, the United States explains, is irrelevant. An app developer agrees to bear the thirty-percent commission, and it then decides how much, if any, of that charge to pass on to app purchasers. The developer is therefore the direct purchaser of Apple’s supposedly illegal distribution service. The Supreme Court will likely accept the case and reimpose Illinois Brick on the Ninth Circuit.
The most arresting fact about the iPhone app lawsuit is that it has already lasted almost seven years. Even if Apple restricted the iPhone app market, so what? Apple invented the iPhone app market. It didn’t stifle a market; it created one. Increasing consumer welfare is not punishable under the antitrust laws.
In any event, Apple is not a monopolist. It controls about a third of the American smartphone market. Its market share would have to double for the iPhone even to approach qualifying as a monopoly product. True, the plaintiffs claim that Apple wrongly monopolized not the market in smartphones, but the distribution for a market in iPhone apps. But unless Apple obtains monopoly power in the smartphone market, its decision to sell third-party apps only on a thirty-percent commission and only through an App Store is no different from a corner grocery mart’s decision to sell condiments only on a thirty-percent commission and only on a certain shelf. A non-monopolist cannot hurt competition this way. At most it can just drive consumers to its competitors.
Lacking monopoly power, Apple is incentivized to support the development of apps. iPhones and iPhone apps are complementary goods. If apps become better, cheaper, and more numerous, demand for the iPhone increases. As MIT professors Andrew McAfee and Erik Brynjolfsson explain in their book Machine Platform Crowd:
The ‘killer app’ varies across potential iPhone customers. Some want games, some want business tools, some want to stream music while others want to make music, some want to use social media, some want to use their phones as small scientific instruments, and so on. The best way to discover these preferences, let alone to satisfy them, is to turn the App Store into something closer to an open marketplace than a store with a single owner.
The more Apple encourages developers to create apps, the more apps there will be. The more apps there are, the more iPhones Apple will sell. A proliferation of apps, McAfee and Brynjolfsson write, “is exactly what Apple wants.”
The plaintiffs in the iPhone app lawsuit should have had to address this logic long ago. A rational set of antitrust rules would put plaintiffs to the test immediately, and it would ask much of them. If an antitrust lawsuit is meritless, after all, it is the plaintiffs, not the company, needlessly adding to the price of consumer products.
The longer the meritless lawsuit, the higher the markup. And chances are the lawsuit is meritless. A key factor is the incommensurability of the stakes. If a court unwittingly bars a beneficial practice, the consumer surplus created by the practice is probably gone forever. If a court unwittingly allows an exploitative practice, the practice’s monopoly revenue will attract entry and—especially in the fast-moving tech sector—quickly eliminate the practice’s profitability and thus the practice itself.
No company can stay ahead of the market for long. In his recent book Scale, the theoretical physicist Geoffrey West shows that a company’s capacity to innovate scales sublinearly. As a company grows, the proportion of revenue it spends on administration rises, while the proportion it spends on research and development falls.
Like a biological organism, a successful company will eventually stop growing, become sclerotic, and ultimately die. Amazon becomes Sears, Netflix becomes MGM, and Uber becomes PanAm. Contrast this with a city, whose socioeconomic quantities scale superlinearly. Most cities never die, and many can in theory continue to grow indefinitely. West proposes, in fact, that the accelerating pace of growth and change in cites is further shortening the lifespan of corporations. A seemingly invincible company will soon resemble Ozymandias:
And on the pedestal these words appear:
‘My name is Ozymandias, king of kings;
Look on my works, ye Mighty, and despair!’
Nothing besides remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.
Every antitrust defendant is already doomed.
Also published by Forbes.com on WLF’s contributor site.