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Law Without Markets?

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Law and Economics of the Digital Transformation (ILEC 2023)

Part of the book series: Economic Analysis of Law in European Legal Scholarship ((EALELS,volume 15))

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Abstract

In a series of legal fields, from constitutional law to contracts to competition law, the market mechanism has provided a claimed neutral baseline against which to measure rights and remedies. While that neutrality was always somewhat fictional, its rhetorical strength bolstered classical liberals, Chicago School adherents, and others who favored the translation of market ordering into the positive legal framework. But increasingly, “the market” as an open, almost nature-given provider of neutral, homogenous prices may not be true. Increasingly, digital platforms match and target consumers with individualized offers and pricing. Law has relied on the concept of open, uniform markets—if this perception wanes, what will this mean for legal doctrines based on market neutrality as a keystone?

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Notes

  1. 1.

    Coase (1937); Robinson (1933).

  2. 2.

    Section 2 draws on material originally published in Mehra (2021), and is used here with permission, for which the author is thankful.

  3. 3.

    Blumenthal and Wu (2018), describing Microsoft attempt to defend itself by stating that is was giving away Internet Explorer for “free”.

  4. 4.

    See FTC v Facebook/Meta, slip op. at 29–30.

  5. 5.

    Towell (2011), p. 154.

  6. 6.

    “Free as air; thatʼs what they say – ‘free as air.’ Now they bring me my air in an iron barrel.” Waugh (1945).

  7. 7.

    Lender and Martin (1982), p. 104.

  8. 8.

    Ibid.

  9. 9.

    “Throttling” has been used metaphorically to refer to ISPs’ constraining the use of those customers who, in the ISPs’ view, excessively use “unlimited” data. See, e.g., Brodkin (2018), reporting allegations in lawsuit against Verizon.

  10. 10.

    Dahl v HEM Pharmaceuticals, 7 F.3d 1399 (9th Cirl 1993). pointing out precedents for this view going back to Hamer v. Sidway (N.Y. 1891).

  11. 11.

    See Restatement (Second) of Contracts (American Law Institute, 1981), Sect. 71.

  12. 12.

    See, e.g., Kennedy (2017), arguing against antitrust action because “many data-rich companies offer free or low-cost services that are extremely valuable to billions of people, most of whom have a pretty good idea of what data they are providing companies and how it might be used”; Sidak (2015), answering the title negatively.

  13. 13.

    “Google Case is a Chance to Reframe Antitrust Debate” (2020), describing Varian’s argument.

  14. 14.

    87 F. Supp. 2d. 30, 50 (D.D.C. 2000), concluding that “the fact that Microsoft ostensibly priced Internet Explorer at zero does not detract from the conclusion that consumers were forced to pay, one way or another, for the browser along with Windows”.

  15. 15.

    Newman (2015).

  16. 16.

    McLaughlin (2021).

  17. 17.

    See FTC v Facebook/Meta (D.D.C. Jan. 11, 2022), slip op. at 29–30, concluding that the FTC may prove anticompetitive effect due to “lower levels of service quality on privacy and data protection than [Facebook/Meta] would have to provide in a competitive market,” even though the services at issue are provided to consumers at zero monetary cost.

  18. 18.

    Parker et al. (2016), Chapter 2; Gwartney et al. (2016), pp. 200–203.

  19. 19.

    This seems to have become a recurring source of pained comedy in pop music. See Allen (2006); Trainor (2015).

  20. 20.

    See Restatement (Second) of Contracts, Sect. 71(4) (American Law Institute, 1981), stating that “[t]he performance or return promise [given as consideration making a promise enforceable]... may be given by the promisee or by some other person.”.

  21. 21.

    See infra n. 3 and accompanying text; Fisman and Luca (2019), suggesting that free pens, meats and Christmas trees as gifts to physicians from Perdue Pharma representatives hawking OxyContin elicited a psychological response of gratitude in those physicians, who were then more likely to prescribe an addictive medication to their patients.

  22. 22.

    Knopf (2014), p. 80, defining “diminishing marginal utility” as a “‘law’ in the marginal utility of consumption [that] states that as an individual consumes more and more of a good in a given time period, the satisfaction derived from each additional unit will be less than the satisfaction from the preceding unit”, but stating that “[a] major exception to the law is an addictive drug such as heroin, cocaine or ‘crack.’”.

  23. 23.

    See Crane (2005); Orbach (2010), questioning whether increased output of tobacco, with its harmful effects, does in fact benefit consumers, and if it does not, how the consumer welfare standard should be altered.

  24. 24.

    See, e.g., Complaint, U.S. v Anheuser-Busch InBev SA/NV and Grupo Modelo S.A.B. de C.V. (Jan 31, 2013), challenging merger in beer industry.

  25. 25.

    Rosenquist et al. (2021).

  26. 26.

    Farrell and Katz (1998), observing that “when firms recognize the possibility of tipping [due to network effects], they may compete vigorously to become the dominant supplier: so-called ‘competition for the market’”; United States v Microsoft, 253 F3d 34, 49 (DC Cir 2001), describing tendency for competition in network-effects laden industries to be “‘for the field’ rather than ‘within the field’”, quoting Demsetz (1968).

  27. 27.

    Verizon v Trinko, 540 US 398, 407–08, arguing that “[t]he opportunity to charge monopoly prices – at least for a short period – is what attracts ‘business acumen’... [and] induces risk taking that produces innovation and economic growth.”.

  28. 28.

    United States v Alcoa (1945).

  29. 29.

    Hayek (1948a), declaring the then unimaginability of “the mere assembly of data” and calculation of equilibria as “beyond human capacity” that led famed price-system proponent Friedrich Hayek to declare it the only option for economic ordering.

  30. 30.

    Lange (1967), writing that “My answer to Hayek... would be: so what’s the trouble? Let us put the simultaneous equations on an electronic computer and we shall obtain the solution in less than a second. The market process with its cumbersome tatonnements appears old-fashioned. Indeed, it may be considered a computing device of the pre-electronic age.”.

  31. 31.

    Matt Stoller (2014), quoting Uber’s then-CEO Travis Kalanick.

  32. 32.

    This is not to say that legal doctrine is correct in believing that traditional market mechanisms generate a single, uniform equilibrium, just that legal rules have been frequently designed with that assumption as a guiding norm.

  33. 33.

    See Mirkowski (2002), p. 235.

  34. 34.

    Hayek (1948a), p. 187.

  35. 35.

    Hayek (1935).

  36. 36.

    Hayek (1948b), pp. 77–78.

  37. 37.

    See, e.g., Todd Henderson (2005) (empirical supporter); van Horn and Mirkowski (2009), historical account of influence by opponents.

  38. 38.

    See, e.g., Chen and Hanson (2004), describing how Hayek’s ideas influenced those of Friedman and thereby the programmes of Thatcher and Reagan; But see Posner (2005), identifying possible distinction between Hayek/Austrian economists and neoclassicists “about the degree to which government regulation is doomed to failure because of ability to obtain the information necessary for ascertaining value”.

  39. 39.

    Cockshott and Cottrell (1993), recognizing that the Leontief matrix calculations were then newly feasible, though a problem still remained as to the “task of gathering the vast amount of data required”.

  40. 40.

    TN (2014).

  41. 41.

    Cockshott and Cottrell (1993), p. 23.

  42. 42.

    Cockshott and Cottrell (1989).

  43. 43.

    Spicer (2014), describing the IBM Pavillion at the fair as the “second most popular stop,” which was “[f]or a great number” of people “their first direct interaction with a computer of any kind,” and which included exhibits of Russian-to-English “machine translation” and “the Information Machine” which could “give you a lot of information in a very short time”.

  44. 44.

    Reilly (2016).

  45. 45.

    Simpson (2014), describing Amazon’s “plan that would ship products to you before you even purchase them because Amazon knows what you want better than you do”.

  46. 46.

    See generally Roth (2016).

  47. 47.

    For an argument that there may be a downside to this type of growth, see Calo (2016).

  48. 48.

    Farrell and Katz (1998), observing that “when firms recognize the possibility of tipping [due to network effects], they may compete vigorously to become the dominant supplier: so-called ‘competition for the market’”; United States v Microsoft, 253 F3d 34, 49 (DC Cir 2001), describing tendency for competition in network-effects laden industries to be “’for the field’ rather than ‘within the field’” (quoting Demsetz (1968).

  49. 49.

    Verizon v Trinko, 540 US 398, 407–408, arguing that “[t]he opportunity to charge monopoly prices – at least for a short period – is what attracts ‘business acumen’... [and] induces risk taking that produces innovation and economic growth.”.

  50. 50.

    United States v Alcoa (1945).

  51. 51.

    Hayek (1948a), declaring the then unimaginability of “the mere assembly of data” and calculation of equilibria as “beyond human capacity” that led famed price-system proponent Friedrich Hayek to declare it the only option for economic ordering.

  52. 52.

    Lange (1967), writing that “My answer to Hayek... would be: so what’s the trouble? Let us put the simultaneous equations on an electronic computer and we shall obtain the solution in less than a second. The market process with its cumbersome tatonnements appears old-fashioned. Indeed, it may be considered a computing device of the pre-electronic age.”.

  53. 53.

    Stoller (2014), quoting Uber’s then-CEO Travis Kalanick.

  54. 54.

    See, e.g., Willis (1998), arguing, a generation ago, that “[e]ven if Amazon does become profitable, its margins are likely to be paper-thin” because “competition is only a click away.”.

  55. 55.

    Bork (1978), pp. 107–108, famously using an Econ 101 style diagram stating that “[t]his diagram can be used to illustrate all antitrust problems, since it shows the relationship of the only two factors involved, allocative inefficiency and productive efficiency.”.

  56. 56.

    Convention for the International Sale of Goods, Article 74, Advisory Council Opinion No. 6, Comment 3, stating that “[t]he aggrieved party is entitled to non-performance damages, which [are] typically measured by the market value of the benefit of which the aggrieved party has been deprived through the breach.”.

  57. 57.

    The economist Thomas Schelling introduced a general theory of tipping, in which the interaction of individual preferences in a market could lead to self-sustaining momentums that could result in multiple possible equilibria, tipping away from a starting point in one direction or another. Schelling (1969); Schelling (1971).

  58. 58.

    Katz and Shapiro (1999), p. 39.

  59. 59.

    See US v Microsoft, supra n. 49.

  60. 60.

    Hovenkamp (2019), making this argument.

  61. 61.

    See Complaint, U.S. v. Google; First Amended Complaint, FTC v. Facebook; See also Complaint, D.C. v. Amazon; Meyer v Kalanick.

  62. 62.

    Bork (1978), p. 96, figure.

  63. 63.

    See Kleinberg and Tardos (2005), pp. 4–7, explaining Gale-Shapley algorithm and its implications.

  64. 64.

    See, e.g., Networks II info (2016), explaining how Airbnb, Lyft and Tinder can be “modeled by the Gale-Shapley algorithm; Wells (2018), explaining how Hinge online dating app is based on the Gale-Shapley algorithm; Harrenstein et al. (2013), describing use of Gale-Shapley algorithm in “auction mechanisms for sponsored search in Internet search engines “.

  65. 65.

    Roth (2016), pp. 5–6.

  66. 66.

    Ibid.

  67. 67.

    Ibid.

  68. 68.

    See, e.g., Symposium on Personalized Law (2019).

  69. 69.

    US v Microsoft (D.C. Cir. 2001).

  70. 70.

    Kodak v Image Tech. Servs. (1992).

  71. 71.

    See, e.g., Fowler (2021), describing designed exclusion in home automation devices.

  72. 72.

    Ohio v American Express (2018); Epic v Apple (N.D. Cal. 2021).

  73. 73.

    See Meta (Facebook) and Google cases referenced in nn. 4 and 13.

  74. 74.

    CISG Article 45.

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Authors and Affiliations

  1. Charles B. Klein Professor in Law and Government, Temple University, Philadelphia, US

    Salil K. Mehra

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Correspondence to Salil K. Mehra .

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  1. Faculty of Law, University of Lucerne, Lucerne, Switzerland

    Klaus Mathis

  2. School of Law, University of Notre Dame, Notre Dame, IN, USA

    Avishalom Tor

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Mehra, S.K. (2023). Law Without Markets?. In: Mathis, K., Tor, A. (eds) Law and Economics of the Digital Transformation. ILEC 2023. Economic Analysis of Law in European Legal Scholarship, vol 15. Springer, Cham. https://doi.org/10.1007/978-3-031-25059-0_4

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