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Antitrust in zero-price markets: foundations.

"Zero-price markets," wherein firms set the price of their goods or services at $0, have exploded in quantity and variety. Creative content, software, search functions, social media platforms, mobile applications, travel booking, navigation and mapping systems, and myriad other goods and services are now widely distributed at zero prices. But despite the exponential increase in the volume of zero-price products being consumed, antitrust institutions and analysts have failed to provide an adequate response to markets without prices.

Modern antitrust law is firmly grounded in neoclassical economics, which is in turn centered on price theory. Steeped in price theory, preeminent antitrust theorists have urged that without prices there can be no markets, and consequently no market power. This heavy methodological dependence on positive prices has led antitrust courts and enforcement agencies to overlook potentially massive welfare harms. Unfortunately, recent empirical research confirms that such harms have already occurred.

These failures to conceive of zero-price markets as antitrust "markets" indicate how fundamentally zero prices challenge traditional theories and analytical frameworks.

This Article establishes a novel taxonomy of customer-facing costs, distinguishing "market-signaling" from "non-market-signaling" costs. Crucially, it demonstrates that market-signaling costs are present in many zero-price contexts. The absence of positive prices thus does not foreclose antitrust scrutiny; "trade," for purposes of the Sherman and Clayton Acts, encompasses zero-price transactions. To continue ignoring welfare harms in these markets would be both unjust and inefficient. The Article concludes by identifying antitrust law's proper role within--and stance toward--zero-price markets.
INTRODUCTION
I.   THE STRUCTURE OF ZERO-PRICE MARKETS
     A. Sustainable Models
     B. Nonsustainable Strategies
II.  ZERO-PRICE MARKETS AND THE APPLICABILITY OF
     ANTITRUST LAW
     A. The Statutory Standard: "Trade" or "Commerce"
     B. The Counterargument: No Prices, No Welfare Harms
     C. A Taxonomy of Costs
        1. Non-Market-Signaling Costs
        2. Market-Signaling Costs
           a. Exchanged Monetary Costs
           b. Exchanged Information and Attention Costs
              i.  Information Costs
              ii. Attention Costs
           c. Zero-Price Products Are Not "Free"
III. THE FUNCTION OF ZERO-PRICE MARKETS
     A. The Presence of Competition
     B. The Role and Efficacy of Competition
        1. Structural Deviations from Perfect Competition
        2. Behavioral Deviations
           a. Not "Just a Number": Demand and the Zero-Price Effect
           b. Systematic Overconsumption
           c. The Limits of Behavioral Antitrust
        3. Conclusions
     C. Harm to Competition and Consumers
     D. Explaining the Failure of Antitrust Law and Economics
IV.  ANTITRUST LAW IN ZERO-PRICE MARKETS
     A. The Role and Efficacy of Antitrust
     B. The Zero-Price Effect and Consumer Welfare
     C. Antitrust and Privacy
CONCLUSION


INTRODUCTION

Despite its ubiquity and vital importance to the broad economy, antitrust law has failed to develop an adequate response to zero-price markets. Zero-price products--i.e., products for which firms set the price to customers at $0--have existed for decades. (1) Alongside the advent of the Internet, however, they exploded in number, variety, and popularity. (2) With a combined market capitalization that easily exceeds $1 trillion, (3) firms offering zero-price products account for a robust and growing portion of the national output.

In light of the critical importance of zero-price markets to the overall economy, antitrust law's nearly complete lack of attention to their functioning and implications is indefensible. What little precedent and commentary does exist tends to conclude summarily that antitrust law does not apply to "free" products. (4) Without prices, the argument runs, there can be no markets. (5) And without markets, there is no need for antitrust scrutiny. (6)

This Article seeks to fill the gap left by, and to refute, these scattered decisions and comments. The choice of title was deliberate: to call zero-price products "free" is to beg the question. (7) In common usage, "free" denotes zero cost. (8) If zero-price products were indeed "free," it would be impossible for consumer welfare to be harmed via the overcharges and output restrictions targeted by antitrust law. (9) Calling such products "free" without explaining how or why for-profit firms would offer them while getting nothing in return amounts to "the substitution of rhetoric for argument." (10)

After describing the basic structure of zero-price markets in Part I, the Article turns to one of its primary tasks: correcting the rhetoric noted above by demonstrating that "free" products are not free. Toward that end, Part II establishes a novel taxonomy of costs that customers may incur, separating these costs into "market-signaling" and "non-market-signaling." The first premise of the argument is descriptive--customers of zero-price products pay for those products, primarily by exchanging their attention, information, or both. Given the presence of these market-signaling costs, zero-price products can fall within the statutory scope of the Sherman and Clayton Acts. Further support for this claim is found in the common law of contracts: multiple courts have recognized that information and attention can serve as consideration, thus signaling the presence of an enforceable bargained-for exchange. (11) Part II concludes with a deontological claim: by failing to address zero-price markets, the antitrust enterprise (12) has incorrectly deviated from its statutory mandate.

Part III addresses the function and functioning of zero-price markets, demonstrating that they exhibit competition--albeit imperfect (and perhaps highly imperfect) competition. To illuminate further the competitive processes in zero-price markets, Part III draws on a body of behavioral economics research analyzing the effect of zero prices on consumer preferences. With these foundations in mind, Part III then turns to the question of antitrust harm, using a recent historical example as illustrative. In 1996, the Telecommunications Act deregulated ownership in broadcast radio markets. (13) A massive wave of industry consolidation followed, leaving many geographical markets highly concentrated or entirely monopolized. (14) Yet the Department of Justice (DOJ) Antitrust Division, which was responsible for reviewing hundreds of industry mergers and acquisitions, never once analyzed whether harm to listeners might result. (15) The intuitions set forth in this Article would contrarily predict the possibility of such harm--and, in fact, recent empirical research confirms that widespread monopoly overcharges of attention costs followed this zero-price-market concentration. (16) Part III concludes with a consequentialist appeal: the ongoing failure to apply antitrust in zero-price markets has already caused--and will continue to cause--substantial harm to society.

Finally, Part IV addresses the role of antitrust law in zero-price markets. The aim is to provide foundational, rather than exhaustive, insights. Many of the tools developed by antitrust and economics scholars are facially inapplicable absent prices, but can be made workable via surprisingly minor alterations. (17) Of immediate importance is recognizing that antitrust law does encompass zero-price markets. The collective failure to do so has already resulted in massive consumer welfare harms. As zero-price markets continue to expand at an exponential rate of growth, persisting in this failure will concomitantly become increasingly detrimental to society. This Article thus concludes with a call to abandon the current path and shift instead toward a more coherent and efficient body of antitrust law, one that takes full account of zero-price markets.

I. THE STRUCTURE OF ZERO-PRICE MARKETS

The antitrust enterprise has paid little attention to the structure and functioning of markets involving zero-price products. What scant commentary exists does, however, provide a useful starting point. This is particularly so with regard to understanding the basic structure of zero-price markets. (18) Consequently, a survey of and contribution to the literature on the predominant zero-price business models follows.

A market involving zero prices is, as a structural matter, very different from the markets that gave rise to modern antitrust law and theory. The central feature exhibited by zero-price markets is the interrelated nature of the relevant products. (19) To profitably offer products at a price of $0 in the long term, a rational firm must intend to turn a profit in some manner not involving those products.

A. Sustainable Models

Multiple categories of sustainable (i.e., long-run) business models have gained prominence in zero-price markets. These include tying strategies, two- or multisided models, (20) and "premium upgrade" or (more commonly) "freemium" models. (21) The common thread between each of these categories is the presence of interrelated products. (22) Where for-profit firms are competing in zero-price markets, invariably they are making money somehow. In this context, they do so by offering some other product that is somehow interrelated with the zero-price product.

The first commonly used zero-price strategy involves complementary products. Firms offering zero-price products often simultaneously offer complementary products. (23) These complementary products may be tied or nontied.

Tying strategies may be either contractual or technological. In a contractual tying arrangement, the sale of one product (the tying product) is conditioned on the sale of the other (the tied product). Where consumers purchase a fixed unit of the tying product and amounts of the tied product that vary with the use of the tying product, the tie is a variable proportion tie. (24) Firms can use such arrangements to earn greater profits from users who exhibit greater demand for the tied product--that is, to price discriminate. In International Salt Co. v. United States, for example, the defendant contractually conditioned sales of its patented salt processors (purchased in fixed units) on the purchase of salt tablets (purchased in volumes that varied with customer demand). (25)

Technological ties involve integrating what could be considered as two separate products. Microsoft famously tied its Windows operating system to its Internet Explorer web browser (a non-variable proportion tie, as customers demanded fixed units of each "product"). (26) Google has been accused of violating the antitrust laws in similar fashion by bundling its mobile applications with its zero-price Android mobile operating system. (27) An example of a variable proportion technological tie involving zero prices can be found in In re Apple iPod iTunes Antitrust Litigation. (28) Apple was able to offer its proprietary iTunes software--the tying product--to consumers free of charge because it was simultaneously profiting from sales of the tied product: digital music (via its iTunes Store). (29) Allegedly, Apple modified the iTunes object code such that only songs purchased from Apple's iTunes Store (and not from competitors) would play through iTunes. (30)

Some zero-price strategies involving complementary products do not entail tying in either form. For example, many online travel services offer both airline and hotel booking. The two products often are consumed together--they are complements, not substitutes. Yet they are frequently nontied--consumers are free to use one or both.

Not all complementary-products strategies are anticompetitive, regardless whether the relevant products are offered at zero or positive prices. (31) But the interrelated nature of complementary products does create multiple avenues for anticompetitive behavior by a firm with market power in at least one of the relevant product markets. (32)

A second common business form involving zero prices is the multisided platform. Multisided markets comprise multiple distinct groups of customers who interact with one another via a platform, which sits astride the market and, for a fee, performs the function of bringing the customer groups together. (33) In a multisided platform market, at least one of the customer groups positively values the presence of the other. General purpose credit card networks, for example, bring merchants and consumers together via a complex system of acquirers, processors, and issuing banks. (34) While merchants pay substantial fees for this service, some cardholders can access it for a price of zero--indeed, many are essentially charged a negative price in the form of loyalty points or other rewards. (35) Card networks aside, many (if not most) multisided markets involving zero-price products are at least partially supported by advertising revenues. Broadcast television, content-streaming services, and online search all are widely offered to consumers as zero-price, ad-supported services. (36) Profitability in such markets turns on whether firms who have acquired a group of consumers can then sell those consumers' information or attention (or both) to advertisers or data-seekers. (37)

Third, businesses may operate using a freemium strategy. This consists of firms offering a basic version of a good or service for $0, while offering a higher quality version of the service at a positive price. (38) Freemium offerings have become particularly prolific in digital-content markets, where they are often combined with ad-supported strategies to form "hybrid" models. (39) Hybrid models may feature advertisements for third-party products and/or for the supplier's own for-pay version of the service. (40)

B. Nonsustainable Strategies

A second group of zero-price business strategies can be termed "nonsustainable." These are strategies that for-profit firms cannot depend on for long-run profitability. As an initial matter, some products are offered at zero prices for nonfinancial reasons. For example, nonprofit organizations may be able to offer zero-price services at a loss, depending instead on charitable donations for their survival. (41) Individuals also frequently offer goods and services at zero prices, motivated by nonpecuniary (or at least not directly pecuniary) incentives. A classic example is the Linux operating system, which is available free of charge and is maintained by a large open-source community of volunteers. (42)

Another set of nonsustainable zero-price business strategies depends on recoupment. Firms may temporarily offer zero prices for promotional reasons, (43) planning to recoup the costs of the zero-price transactions after the promotion ends. Similarly, a new entrant might offer zero prices during the entry period in order to attract initial customers, then begin charging positive prices after the product gains sufficient marketplace exposure. (44) Under this model, the new entrant incurs initial losses in order to gain enough traction (e.g., scale, scope, and market power) to become competitive. (45) Less benignly, firms may offer zero prices as part of a predatory-pricing scheme. (46) As with typical predatory-pricing strategies, a firm would initially offer low (here, zero) prices, drive rivals to exit the market, and then recoup any losses by charging monopoly prices. (47) Scholars have recognized that such schemes may be anticompetitive. (48)

II. ZERO-PRICE MARKETS AND THE APPLICABILITY OF ANTITRUST LAW

Customers incur multiple types of costs en route to accessing zero-price products. Some of these are the types of costs that do not necessarily signal the presence of markets. Others, however, do signal marketplace activity--"trade" or "commerce" in the language of the Sherman and Clayton Acts. Antitrust law applies where customers incur market-signaling costs, even absent above-zero prices.

A. The Statutory Standard: "Trade" or "Commerce"

The Sherman Act, by its terms, applies only to "trade or commerce." (49) The Clayton Act generally applies to "commerce." (50) Throughout the century-plus span of its history, antitrust jurisprudence has repeatedly recognized that Congress, in so drafting the antitrust laws, intended to cut a wide path. (51) Application was to be as comprehensive as possible. In 1944, the Supreme Court stated that "[o]n its face [the Sherman Act] shows a carefully studied attempt to bring within the Act every person engaged in business whose activities might restrain or monopolize commercial intercourse among the states." (52) The same Court also observed "[t]hat Congress wanted to go to the utmost extent of its Constitutional power in restraining trust and monopoly agreements ... admits of little, if any, doubt." (53) Thus, the scope of antitrust "trade or commerce" can be seen as coextensive with the scope of Congress's power under the Commerce Clause--and the latter has an extraordinarily broad scope. (54) Echoing these sentiments in 1975, the Court held that the practice of law involves "trade or commerce" under the Sherman Act, stating that "Congress intended to strike as broadly as it could in [section] 1 of the Sherman Act." (55)

Clearly, the scope of U.S. antitrust law is broad. Precisely defining "trade" and "commerce" is no simple task, but the Court has helpfully phrased antitrust law's focus as "commercial competition in the marketing of goods or services." (56) More recently, in a 2012 ruling involving an antitrust challenge to certain NCAA bylaws, the Seventh Circuit approvingly quoted the leading antitrust treatise: "[T]he Sherman Act applies to commercial transactions, and the modern definition of commerce includes 'almost every activity from which [an] actor anticipates economic gain.'" (57)

This understanding--that antitrust laws apply to transactions from which actors anticipate economic gain--accords with the intent of Congress as elucidated by the Supreme Court. Such transactions necessarily involve an exchange, the foundation of economic "gains from trade." (58) An actor gives up something that is of less value to her than the consideration she acquires from her trading counterpart. Her counterpart, meanwhile, values what he acquires more than what he trades away. For each party, the benefits outweigh the costs. Each side is made better off by the trade. (59) This behavior is what is contemplated when antitrust courts, enforcement agencies, and commentators refer to "markets," or in the statutory parlance, "trade" and "commerce."

B. The Counterargument: No Prices, No Welfare Harms

Courts, enforcers, and theorists have concluded that without prices, there can be no welfare harms of the type that antitrust law seeks to prevent. In zero-price contexts, the argument runs, customers do not pay anything in exchange because the relevant products are "free." As a result, there can be no monopoly overcharges, and there is no need for antitrust scrutiny. The following discussion gives a flavor of this argument.

United States legal precedent contains multiple examples of courts creating de jure antitrust immunity by declining to apply antitrust scrutiny in zero-price contexts. These courts have done so on the grounds that the antitrust laws cannot apply in the absence of prices. And (although generally beyond the scope of this Article) the European Union's (EU) top regulator has similarly concluded that competition law does not apply to "free markets." (60)

In Stephen Jay Photography, Ltd. v. Olan Mills, Inc., the plaintiffs (small regional photographers) alleged that the defendants (large national photographers) provided high school yearbook photographs to students free of charge, but anticompetitively tied the sale of individual portraits to the "free" yearbook photos. (61) "The district court, relying on an affidavit which stated that in all cases the yearbook photographs were provided at no charge ..., dismissed the claim, holding that a 'tying arrangement cannot exist when the tying product is not sold to the consumer, but is provided free of charge.'" (62)

More recently, in Kinderstart.com, LLC v. Google, Inc., (63) a U.S. district court took an even stronger position. The plaintiff, KinderStart, operated a childcare-focused website. (64) In its complaint, KinderStart alleged that search giant Google anticompetitively manipulated search results in a scheme to monopolize the "Search Market." (65) En route to dismissing the plaintiff's claim, the district court reasoned that KinderStart "failed to allege that the Search Market is a 'grouping of sales.' It does not claim that Google sells its search services, or that any other search provider does so." (66) The court further observed that "KinderStart cites no authority indicating that antitrust law concerns itself with competition in the provision of free services." (67)

Scholars and enforcers have voiced similar views. In 2012, Robert Bork--whose impact on the development of modern U.S. antitrust law remains immense--wrote a passionate editorial addressing then-ongoing investigations of search provider Google by U.S. and EU enforcement agencies. (68) The editorial states that "[regulators may attempt to develop ... antitrust complaints against the search engines but they are unsupportable. There is no coherent case for monopolization because a search engine, like Google, is free to consumers." (69)

Joshua Wright, former Federal Trade Commissioner, and Geoffrey Manne, Director of the International Center for Law & Economics, have made this claim as well. Wright and Manne responded to a Wall Street Journal column that had claimed Internet monopolies may harm consumers: "[I]t's really hard to see the above-marginal-cost pricing in these [online] markets. From the point of view of the buyers ..., these monopolists are really pathetic at extracting profits, as most of them give away their products for free...." (70) Discussing social networking services, Catherine Tucker and Alexander Marthews similarly posit that "it is not clear that so far [these services'] extraordinary growth has created an antitrust issue.... [Consumers do not pay for using these services on most social networking sites." (71) They go on to observe that "users almost always experience social networking sites for free." (72) And in the international arena, at least one scholar makes the claim that EU competition law does not apply absent prices. (73)

Even those who advocate some antitrust oversight of firms offering zero-price products have made claims along these lines. Nathan Newman, for example, urges antitrust and competition-law oversight of Google, yet states, "[H]ere's the key place to start in understanding proper technology policy for Google: there is no market for search engines; there is no market for online geolocation mapping software; there is no market for online video. Google, by making these products free, has destroyed those markets...." (74)

Tying these various entities' arguments together is a common thread: the idea that zero-price products are/fee to customers. If that premise were true, then customers would not exchange anything for zero-price products.

Without a two-way exchange, the economic gains from trade referred to above cannot accrue. (75) There is no "trade" or "commerce" under the meaning of the Sherman and Clayton Acts. As a result, the antitrust laws would not apply.

C. A Taxonomy of Costs

Whether antitrust markets can exist in the absence of positive prices depends on whether customers--though they do not exchange money-- exchange something for zero-price goods or services. Put another way, the question is whether customers incur the type of costs that double as media of exchange. The courts, enforcers, and theorists discussed above summarily conclude that customers do not incur such costs. (76) Their argument is that because zero-price products are "free" to customers, zero-price transactions do not qualify as "trade" or "commerce" under the Sherman and Clayton Acts.

That conclusion is wrong. Customers in zero-price transactions may incur multiple types of costs. As with any other marketplace transactions, some of the costs incurred are not tied to exchanges. These costs are "non-market-signaling": they do not necessarily signal the presence of "trade" or "commerce" for antitrust purposes. The crucial point is that some of the costs incurred are exchanged and play the same role that money plays in positive-price markets--these costs are "market-signaling."

1. Non-Market-Signaling Costs

Some types of costs do not necessarily signal the presence of antitrust markets. These costs cannot be the subject of exchanges. Opportunity costs are a clear example. Every decision entails opportunity costs--the costs of not pursuing the potential alternatives. (77) Opportunity costs are unilaterally absorbed by the party incurring them; they are not exchanged as part of a transaction. A finalized transaction will properly reflect each party's opportunity costs, at least assuming the parties accounted for such costs in bargaining. But the lost opportunities are not actually exchanged. Consequently, they do not necessarily signal an antitrust market. A professor, sitting alone in her office, may decide to devote an hour to scholarship instead of class preparation. She has incurred an opportunity cost (the lost chance to prepare for class) but has not engaged in market activity, for there has been no exchange. (78)

External costs are another example. External costs are created by one individual or firm but borne by a third party. (79) Like opportunity costs, they can be created unilaterally--every driver who has tossed a piece of garbage out a car window has imposed external costs on someone. Again, there has been no exchange; there is no "market" comprising this type of behavior. (80)

2. Market-Signaling Costs

Certain types of costs necessarily signal the presence of "trade" or "commerce"--i.e., markets--thereby signaling that antitrust scrutiny may be appropriate. What distinguishes these costs from the non-market-signaling costs discussed above is that they function as the media of exchange. They allow parties to enter into "commercial" transactions seeking "economic gain" (81) from trade. Market-signaling costs place the attendant behavior within the statutory scope of the antitrust laws.

a. Exchanged Monetary Costs

What this Article refers to as "exchanged monetary cost" is the quintessential example of a market-signaling cost. "Exchanged monetary cost" describes the cost to a trade partner of losing ownership of the money that that partner exchanges (i.e., pays) to her counter-partner in return for the product she seeks. If a customer surrenders $1 to a merchant in exchange for one widget, the exchanged monetary cost incurred by that customer is $1.

Not all monetary costs are market-signaling. To continue the example, suppose the merchant had previously made unrecoverable capital expenditures in order to acquire retail space and to advertise its widgets. (82) And suppose further that the customer must pay for transportation to the widget store. (83) For both the merchant and the customer, these sunk costs are monetary costs, and they are related to the ultimate transaction (should one occur). But they are not exchanged, so they are not necessarily market-signaling costs. If the merchant pays for retail space and advertising, but no customers buy any of the merchant's widgets, there is no "trade," no "commerce"--no market. The same is true if a customer drives to the store but does not ultimately make a purchase. It is only the exchanged monetary costs that necessarily signal marketplace behavior of the type with which the antitrust laws are concerned.

b. Exchanged Information and Attention Costs

For zero-price markets to fall within the statutory purview of antitrust law, customers must incur some type of exchanged--i.e., market-signaling--costs in order to acquire the products they seek. Exchanged monetary costs are the quintessential market-signaling costs, but customers in zero-price markets do not incur exchanged monetary costs. To the courts, enforcers, and theorists quoted above, (84) the analysis stops there. Without prices, there can be no antitrust markets, because customers do not exchange anything for "free" products. (85) Demonstrating that this view is wrong--that zero-price markets are markets--requires identifying some costs incurred by zero-price-market customers that are structurally analogous to the monetary costs embodied by prices. Put another way, it requires identifying "exchanged nonmonetary costs." Zero-price markets feature at least two types of exchanged nonmonetary costs: information and attention costs.

i. Information Costs

"Today's currency is data...." (86)

Zero-price business models often--particularly often in digital-focused industries (87)--depend heavily on customer information. The very same innovations that created the platforms necessary for online commerce also created (or drastically enhanced) the ability of firms to gather and transfer customer information. (88) Information gathering and trading is not unique to Internet firms, however. Many brick-and-mortar retailers (e.g., grocery stores) also engage in widespread information gathering. (89)

In zero-price markets, customer information can serve multiple functions. It can inform procompetitive behavior; it can also enable anticompetitive exclusionary practices. (90) It can be the source of indirect network externalities, which in turn can cause a market to tip in favor of a dominant firm. (91) And information can be a valuable and tradable good: it can be sold to (or used by) firms that wish to use it strategically, integrated as an input to production, or used to target certain customers with advertisements. (92)

But--and this is the crucial point--information can also be surrendered (i.e., paid) by customers in exchange for the object sought. What the antitrust enterprise has failed to recognize is that information costs may be market-signaling. Along with attention costs, discussed below, information costs are one of the primary media of exchange that underlie sustainable business models featuring products offered at zero prices. (93)

Customers frequently surrender information as payment in exchange for access to zero-price products like webmail, search, social networking, and creative-content services. This personal information serves as a form of currency, taking the place of money. (94) As FTC Chairwoman Edith Ramirez observed, "Today's currency is data." (95) As do exchanged monetary costs in positive-price markets, (96) information costs represent a cost to customers and also to the media of exchange allowing the transaction to occur. (97)

Firms facilitate voluntary information disclosure by providing incentives to customers. (98) Where the benefits offered exceed the total costs to the customer--including the costs of surrendering the information sought--a rational customer will surrender the requested information. (99) A majority of respondents to a 2014 survey stated that they were "willing to share some information about themselves with companies in order to use online services for free." (100) Marketplace behavior bears out this survey research: "[M]ost consumers have shown that they are willing to release personal information if they can profit by doing so." (101)

Courts outside the antitrust context have recognized this dynamic. In a breach of contract action, the promisee's surrender of personal information can constitute consideration for a promise. In Gottlieb v. Tropicana Hotel & Casino, for instance, Ms. Gottlieb accepted the Tropicana casino's offer to join its "Diamond Club," which entitled her to "one free spin of the Million Dollar Wheel each day." (102) The casino did not charge a fee for Diamond Club membership (103)--i.e., membership was a zero-price product. The application process did, however, require applicants to submit their personal information to the casino. (104) The information was then tied to a Diamond Club card, which members swiped before playing casino games. (105) "The casino's marketing department ... use[d] that information to tailor its promotions." (106) Allegedly, Ms. Gottlieb then swiped her card and spun the Million Dollar Wheel, which landed on the "$1 million grand prize." (107) The casino refused to pay, arguing that its promise to do so was not supported by consideration--that Ms. Gottlieb did not exchange anything for the promise. (108) Rejecting this defense, the court observed that
   [b]y ... allowing [her card] to be swiped into the casino's
   machine, [Ms. Gottlieb] was permitting the casino to gather
   information about her gambling habits.... [T]hese detriments to Ms.
   Gottlieb were "the requested detriments] to the promisee induced by
   the promise" of Tropicana to offer her a chance to win $1 million.
   Tropicana's motives in offering the promotion were "in nowise
   altruistic." ... In short, Ms. Gottlieb provided adequate
   consideration to form a contract with Tropicana. (109)


The Gottlieb court rightly recognized that a mutual exchange had taken place between Ms. Gottlieb and the casino, such that an enforceable contract was formed. The information cost functioned as consideration--it signaled the presence of a bargained-for exchange. (110) The fact that Ms. Gottlieb exchanged her personal information instead of money was of no moment.

Where a customer voluntarily exchanges personal information for a zero-price product, the resulting gains from trade leave both parties better off. These are the sorts of "economic" gains that accrue only from marketplace behavior. (111) Transactions where information serves as currency are "trade" or "commerce" under the meaning of the antitrust laws. (112) And, absent some compelling reason to conclude otherwise, the default and correct position is that the antitrust laws apply to zero-price markets.

ii. Attention Costs

"If I'm giving you something of value at no cost, I will charge you with your time, not your money...." (113)

Despite its vital role in the modern marketplace, customer attention remains relatively unexamined. (114) Customer attention to advertisements has driven much of the rise to prominence of zero-price markets. (115) This is most obviously the case with regard to two-sided, ad-supported products. It is also true of hybrid business models; the zero-price version of the product in such markets includes advertisements, and paid versions often also include (relatively fewer) advertisements. (116) Additionally, freemium (and complementary-goods) business models often also rely on internal advertisements (i.e., advertisements featuring products offered by the supplier itself). (117) When they appeared, freemium services represented an advance over take-it-or-leave-it products that forced consumers into a Hobson's choice: either use the service and view the advertisements or do not use the service at all. (118) Freemium offers a more sophisticated choice: "[Consumers can make individual decisions to pay money for a product or service or to barter their attention for an ad-sponsored version." (119)

To customers, advertisements carry both costs and (potentially) benefits. The putative benefits can arise where advertising conveys product information that is helpful in making consumption decisions. (120) (Critics of advertising paint a different picture, arguing that advertising seeks to persuade, not inform, and that it changes consumer preferences in suboptimal ways. (121)) The costs arise because "advertisements take time" to watch, view, or hear. (122) For the customers they target, advertisements are a "nuisance." (123) The attention expended in order to obtain the desired product is incurred as a cost--an "attention cost."

Advertisements may be unsolicited. Though exact definitions vary, advertisements are generally considered "unsolicited" where they are transmitted to a person without that person's invitation or permission. (124) Common examples include email spam, junk faxes, and telemarketing calls. (125) Attention costs paid to unsolicited advertisements are often extremely frustrating to their targets, who perceive that they have not obtained anything of value in exchange for their expenditure. (126) Unsolicited advertisements impose costs but often yield no (or incommensurate) benefits. (127) Though less offensive than the examples given above, advertisements that are "given away, as those in ... billboard advertisements" (128) may also be considered unsolicited for present purposes.

As to unsolicited advertisements, attention costs are non-market-signaling. The individuals who incur the costs are not exchanging their attention for something of value. Without an exchange, there cannot accrue economic gains from trade. (129) Consequently, for purposes of the antitrust laws, these cost expenditures do not imply "trade" or "commerce." (130) This is not to say that unsolicited advertisements never offer value. A billboard advertisement, for example, may provide travelers valuable information, like the location of the nearest restaurant. But a traveler does not exchange her attention for a desired product. The attention costs expended are not part of a trade or transaction. (131)

Advertisements may also, however, be delivered via express or implied invitation or permission. Here, customers literally pay attention to obtain the product delivered along with the advertisements. "Consumers receive desired content (e.g., television programming, Internet web sites) in exchange for their attention to advertisements." (132) The attention costs incurred are the consideration for the product sought; that product is, in turn, the consideration for the attention. (133) For example, broadcast television viewers--by virtue of choosing to view broadcast television--impliedly give permission to television broadcasters to subject the viewers to advertisements. Viewers do so in exchange for the content they ultimately desire. (134) In fact, one television executive went so far as to state, "Your contract with the network when you get the show is you're going to watch the [advertising] spots. Otherwise you couldn't get the show on an ad-supported basis. Any time you skip a commercial ... you're actually stealing the programming." (135)

Here again, courts outside the antitrust context have recognized this market dynamic. Jennings v. Radio Station KSCS, 96.5 FM, Inc., (136) provides an example. In Jennings, Steve Jennings, a prisoner in Texas, faithfully listened to radio station KSCS, which promised on-air to "play at least three-in-a-row, or we pay you $25,000." (137) Jennings alleged that KSCS then repeatedly played only two songs in a row and that he had unsuccessfully demanded the promised $25,000. (138) KSCS raised a defense similar to the casino's in Gottlieb: because Jennings had not paid anything for access to radio programming, no consideration supported the station's promise to pay $25,000. (139) The Jennings court rejected the argument, recognizing that Jennings "could have listened to any station, but he listened to KSCS." (140) KSCS, in turn, had benefited from its promise by gaining new listeners, including Jennings. (141) Attention costs signaled the presence of an exchange--they served as consideration to uphold the bargain between the prisoner and the radio station. (142)

For consumers in many zero-price markets, money is replaced by attention--these consumers literally pay attention. Where advertisements are solicited, consumers exchange their attention to advertisements for corresponding products. (143) And because such attention costs are also the media of exchange, such transactions allow for economic gains from trade. (144) These attention costs are market-signaling. Transactions where attention serves as currency are "trade" or "commerce" under the meaning of the antitrust laws. (145)

c. Zero-Price Products Are Not "Free"

Zero-price markets are "markets" for purposes of the antitrust laws. Though no price is attached to products distributed in zero-price markets, they are not "free" to customers. (146) There are always costs. Though the Internet lowered distribution costs for many products, for-profit firms must still recoup their production costs (as well as any distribution costs that remain). (147) Firms do so by imposing costs on customers. And some of the costs incurred in zero-price markets are market-signaling--they are both a cost to customers and the consideration exchanged to suppliers. That attention and information costs can be exchanged is a point missed by those who dismiss zero-price products as "free." The transactions made possible by the exchange of attention and information allow economic gains from trade. For purposes of the Sherman and Clayton Acts, these exchanges can in the aggregate qualify as "trade" or "commerce." (148)

Concluding that the scope of antitrust law does not extend to zero-price markets is mistaken. (149) In part, the errors made by the Kinderstart.com and Stephen Jay courts resulted from a misguided focus on the term "sales" in defining relevant markets. The Kinderstart.com court, for example, observed that the plaintiff "failed to allege ... a 'grouping of sales.'" (150) This language--"grouping of sales"--is not found in the statutory language of the antitrust laws. Using "grouping of sales" as a standard may be appropriate in markets that feature positive prices, but it is misleading in zero-price contexts because of the pecuniary connotations of "sales." The proper focus is on whether the defendant is involved in "trade" or "commerce." (151) As the discussion above shows, zero-price products can satisfy this statutory standard. (152)

The more fundamental error, however, is made by those who observe that zero-price products are necessarily "free" and conclude that antitrust law does not apply to their suppliers. In common usage, "free" means "[cjosting nothing." (153) Overlooking the costs that customers often pay in exchange for zero-price products translates into bad antitrust policy by ignoring an increasingly vital sector of modern economies. Rational, for-profit firms offer products at zero prices because they have determined that doing so is profitable. Customers, having determined that the benefits outweigh the costs, enter into contracts to acquire those products from suppliers. This give-and-take is the very essence of the "trade" and "commerce" contemplated by the Sherman and Clayton Acts.

Zero-price markets present opportunities for the creation, enhancement, or abuse of market power--precisely the evils that antitrust laws are intended to remedy. That customers pay for zero-price products with information and attention rather than money is irrelevant here: "The antitrust laws are concerned with maintaining competition in private markets." (154) Conduct that raises costs or restricts output of zero-price products can harm welfare just as seriously as conduct that raises price or reduces output in other markets.
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Title Annotation:Abstract through II. Zero-Price Markets and the Applicability of Antitrust Law, p. 149-174
Author:Newman, John M.
Publication:University of Pennsylvania Law Review
Date:Dec 1, 2015
Words:6440
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