Monopolists sometimes innovate more and offer higher-quality products than a “perfect competitor,” Meta Platforms' economic expert John List told a US federal judge overseeing high-profile antitrust litigation brought by the US Federal Trade Commission.
Monopolists sometimes innovate more and offer higher-quality products than a “perfect competitor,” Meta Platforms' economic expert John List told a US federal judge overseeing high-profile antitrust litigation brought by the US Federal Trade Commission.Damaged vocal cords didn’t prevent List, an economics professor at the University of Chicago and chief economist for Walmart, from testifying today in Washington, DC, federal court as Meta seeks to speed up proceedings in a monopolization trial — scheduled to run until early June — by wrapping their case-in-chief this week.
“Does a monopolist provide more quality, more innovation than a perfect competitor?” List floated during his direct examination while referencing an economic textbook he authored.
“Theoretically, it's ambiguous,” he said. When it comes to studies on “what happens empirically,” he added, “you can find papers on both sides of that equation.”
As for whether the quality of Meta’s apps would be better in a but-for world where Facebook did not acquire Instagram in 2012 and WhatsApp in 2014, List said, the lack of a “legitimate” measure for quality meant “I'm willing to say that quality could go either way.”
List presented the results of experiments and research undertaken in the case that he said undermine the FTC’s support for a personal social networking services market and “core” use cases for Facebook and Instagram that revolve around sharing content with friends and family.
Those experiments included a time-tracking study of Meta users modeled off of clinical drug trials, data analysis of a “natural experiment” where India banned TikTok in 2020 and a simulated break-up of Facebook and Instagram that List called a “direct refutation” of claims from the agency that a break-up would bring down the amount of advertising shown to users.
A key question in the FTC’s case, which seeks to undo Meta’s Instagram and WhatsApp acquisitions, is whether TikTok or YouTube were improperly excluded from the agency’s alleged universe of relevant competitive rivals (see here).
Four “very different” empirical approaches all tell the same story, List said: “This market is too narrow; you should be thinking about YouTube and TikTok.”
During cross examination, List was questioned about a book he authored in 2020 that includes a discussion of network effects, which make certain products more valuable when adopted by a large number of users.
These benefits from an increased scale of users are so powerful that “members are almost shackled to these platforms,” List wrote in The Voltage Effect.
All apps have so-called network effects that can lead to “lock-in,” List responded during questioning from FTC attorney Mitchell London.
US District Judge James Boasberg overruled a Meta objection to the FTC’s questioning about the book, which followed List’s claim that “I don’t know why people use Facebook.”
“If only 10 other people use these platforms, the benefits they provide are small,” the book said. “In Facebook’s case, you want to stay connected to the lives of many people you know.”
— Theoretically ambiguous —
After presenting what List described as his “state of the art” pricing experiment tracking how Facebook and Instagram users shifted their time toward Google Chrome, YouTube, TikTok and other activities when being paid to reduce Meta app usage, defense counsel posed questions about the robustness of his results.
Meta attorney Mark Hansen asked List whether his pricing experiment results could be rendered unreliable because of a commonly recognized principle in antitrust economics that customers in monopolized markets may respond to price increases by switching to products that would not be true substitutes in a more competitive environment.
List prefaced his response by telling Boasberg that he was so sympathetic to the idea, known as the “cellophane fallacy,” that he had authored a satirical play about it during the global coronavirus pandemic.
But because “everyone in the case” agrees the price for Meta apps like Facebook and Instagram is zero, the relevant question is whether consumers would switch to an inferior substitute when facing degraded quality instead of a higher price tag, List said.
He acknowledged evidence introduced earlier in the trial that showed Facebook Chief Executive Mark Zuckerberg and other senior company leaders grappling with the need to differentiate Instagram from Facebook and mitigate potential “family cannibalization” of engagement between the apps (see here).
While higher prices in monopolized markets reflect the “usual case,” List said, “price is the same here and we’re not sure about quality.”
The Meta expert also said it was arguable that Instagram and Facebook are “closer substitutes today than they would have been in the but-for world.”
“I'm just saying that theoretically and empirically, there are forces in both directions,” he said.
— Attention brokers —
During his questioning, List described the competitive landscape of the case as a two-sided market where “attention brokers” and “attention merchants” sit between a market for eyeballs and a market for advertising that enables monetization of users’ time.
“This is exactly what this case is about, competing for user attention,” List said. “On the one side, you're competing for user attention, and you have to monetize that user attention to stay in business ... so then you go to the second side of the market, which is the ad side.”
One of Meta’s recurring criticisms of the FTC’s case is that it failed to analyze the advertising side of this two-sided market, and thus failed to comprehensively account for the potential harms and benefits to competition from the company’s alleged conduct.
“Meta’s profits are legally irrelevant,” the company said in a motion for judgment filed once the FTC rested its case-in-chief last week (see here). “Meta earns its profits in an advertising market, not the FTC’s posited market.”
Catherine Tucker, a Massachusetts Institute of Technology economist focused on monetization strategy, digital platforms and advertising, also testified briefly toward the end of today’s proceedings.
“In the end, the money that Meta makes comes from advertising,” she said.
FTC expert Scott Hemphill’s analysis of Meta’s alleged market power does not account for the robust competition Meta faces to attract advertisers, Tucker said, and the company’s successful advertising business has been driven by innovation rather than the “friends-and-family use case.”
List today said his so-called “de-merger experiment” sought to test Hemphill’s “very clear prediction” that breaking up Facebook and Instagram would result in greater competition that would decrease the frequency of advertisements being shown to users — also known as “ad load.”
Using data from what List described as a “gold standard” pricing experiment — where users were paid $4/hour for reducing Meta app usage — he simulated a break-up that resulted in more ads being shown to users of the separate companies’ apps.
A “standard intuition” in economics is that consumers benefit when there are more competitors, according to List. But in a two-sided market, he said, “all bets are off.”
At one point, Boasberg asked List to explain a presentation slide claiming that the merged entities would have an incentive on the advertising side of the market to decrease ad load.
“I can’t say I’m fully following all of the higher math, in any event,” Boasberg responded later on when overruling a Meta objection to an extended sparring session between London and List over advertising market economics that the judge called “not terribly consequential.”
“I think we’re losing our guy,” List responded.
During the FTC's cross-examination, the Meta expert acknowledged he did not have any evidence on the rate at which advertisers shifted from Meta’s apps to elsewhere.
The proportion of ads a typical user would see on their Facebook and Instagram feeds has grown considerably in the last decade, driving record profits for Meta, according to Hemphill (see here).
If Facebook and Instagram were broken up today, London asked List, would the impact extend beyond ad load?
“I’m not sure,” List responded. “I didn’t analyze anything else.”
Tucker’s testimony is scheduled to continue tomorrow.
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