The Doctrine of Moral Hazard
When it comes to self-preferencing, right wing economists are right: incentives matter.
Last week, the House Judiciary Committee spent 23 hours debating a historically unprecedented package of tech competition bills, surprising observers by passing all six of the legislative proposals under consideration, with bipartisan support.
Each of the six bills is interesting in its own ways — for example, the ACCESS Act (HR 6487) uses interoperability and standards to reduce the costs we bear when we leave monopoly platforms behind, by letting us stay in touch with the friends who stay.
But while ACCESS uses a digital solution to tackle digital problems, another bill, Pramila Jayapal’s Ending Platform Monopolies Act (HR 3825), hearkens back to the golden age of trustbusting, by breaking up large platform companies and forcing them to divest of subsidiaries that compete with the companies that rely on their platforms.
The philosophy here is simple: a platform makes a marketplace, sets its rules, and mediates between buyers and sellers to keep everyone honest. If the platform also competes with the sellers who rely on it, they will be tempted to cheat, to engage in “self-preferencing” that pads the company’s bottom line by steering its users to buy or use its own products instead of offerings from rivals that are cheaper or better (or both).
This is called “structural separation,” and it was once a bedrock of antitrust law. We once banned railroads from operating freight companies that competed with their own customers and prohibited banks from owning businesses that competed with the businesses it issued loans to. After all, a railroad’s decision about what to charge for freight determined what could be profitably bought and sold, while a bank’s decisions about interest rates, as well as its willingness to work with borrowers who come up short some months, determined what businesses could operate in its community and how fat their margins had to be in order to stay in business.
Structural separation wasn’t a measure of first resort; before it was tried, lawmakers and regulators tried to keep the system honest through rules that required large, structurally important companies to operate fairly and not…