The FTC’s Absurd Attempts At Defining Facebook’s Product Market

By Ryan Bourne of Cato.

"When it comes to Facebook, antitrust authorities are making it up as they go along. The company is extremely big, and so necessarily “bad” in the eyes of today’s neo-Brandeisian trustbusting movement, one member of whom, Lina Khan, now chairs the Federal Trade Commission. These people just know that Facebook is a monopolist using its market power anticompetitively, and so see the task of their agencies to define the market to first prove that Facebook meets the conditions necessary for antitrust action against them.

Back in late June, the U.S. District Court in DC threw out a complaint by the FTC against Facebook, saying that “The FTC has failed to plead enough facts to plausibly establish a necessary element of all of its Section 2 claims — namely, that Facebook has monopoly power in the market for Personal Social Networking (PSN) Services.” In an amended complaint yesterday, the FTC attempted to flesh out the contours of this supposed product market and, well, the results were remarkable.

According to the FTC’s revised complaint, Facebook dominates a market dubbed “Personal Social Networking (PSN) services in the United States,” which consists “of online services that enable and are used by people to maintain personal relationships and share experiences with friends, family, and other personal connections in a shared social space.”

Three features purportedly distinguish products in this market. They:

• “are built on a social graph that maps the connections between users and their friends, family, and other personal connections”;
• “include features that many users regularly employ to interact with personal connections and share their personal experiences in a shared social space, including in a one-to-many “broadcast” format" (i.e. a news feed);
• and “include features that allow users to find and connect with other users, to make it easier for each user to build and expand their set of personal connections.”

According to the FTC, making these three features necessary excludes a whole range of other social media companies from this relevant product market.

Apps or websites providing “messaging services” aren’t included, as they don’t have a shared broadcast space or use social graphs. Specialist social networks such as LinkedIn, dating apps, or NextDoor are out, as these networks are designed “to maintain or communicate with a distinct or narrow set of connections.” Twitter, Reddit, or Pinterest? Nope, they aren't incorporated either, as the “services do not focus on connecting friends and family,” instead involving discussions, conversations, or searches based on the users’ interests. And then there’s audio and video content social media, such as YouTube and TikTok. No again, says the FTC: these products entail passively absorbing content or else uploading or creating it for audiences you don’t know, rather than friends and family.

Now, this market definition is obviously ridiculous as a matter of economics, as anyone who has opened their phone and interchangeably flicked through social media apps will attest.

Facebook is really selling advertising space, and so is competing for users’ time. To secure that time, Facebook actually incorporates many of the features of other sites or apps it supposedly does not compete with. It has its own messaging service. Colleagues and acquaintances connect through it. Groups on Facebook allow people to discuss issues in their local community or neighborhood. People broadcast their opinions using it, or “like” or follow prominent figures, businesses, or content they are interested in. And, yes, people upload videos and other content too.

To pretend then that there’s something really distinct about this bundle of goods together against other social media companies seems daft. At best, you could say Facebook, on the user side, is like a conglomerate, competing for our time in all these little user subsectors against more specialist sites.

Pretending instead though that Facebook operates in a very siloed product market amounts to shoe-horning the facts to suggest the company only faces one real competitor: Snapchat. This gerrymandering of the market definition helpfully allows the FTC to prove (with numbers redacted) that Facebook enjoys extremely high shares of users’ time or reach within its "market." In other words: an admission that Facebook competed for users’ attention with all these other apps or websites would extinguish the case for it being a monopoly.

Yet there’s a bigger contradiction here, and one pointed out by Sam Bowman last time the FTC complaint was rejected. On the one hand, the FTC wants to set the market definition extremely narrowly like this to suggest that Facebook dominates. On the other, it wants to claim that Facebook’s acquisitions of WhatsApp and Instagram were anticompetitive, even though WhatsApp was and is clearly a messaging app, while Instagram was narrowly about picture sharing.

The way of squaring that circle is to suggest that these companies, if not acquired, had the potential to meaningfully compete with Facebook's core offer, due to their growing user base or certain features of their business. But if that’s the case, then so, presumably, do many other existing social media companies that compete for users’ time with adjacent products. The FTC is trying to have it both ways.

In reality, the social media sector is dynamic and experimental. A range of other sites are springing up with different privacy offerings, while a lot of the other sites or apps the FTC says don't compete with Facebook test out services that clearly do overlap with Facebook and Instagram. Twitter has recently tried "Fleets," and has added “Spaces,” newsletters, video streams, and other user monetization recently, for example.

Now many economists would just reject this whole framing. Ordinarily, we can try to judge what products are substitutes in markets by examining “cross price elasticities of demand” – i.e. how much a price rise in one good affects the quantity demanded of another. The FTC seems not to have done that in this case. And little surprise: it would be virtually impossible, since almost all the prices are the same and constant over time at $0.

The meaningful market (with prices!) that Facebook competes in is for advertising revenue. But even here, the FTC has been rather arbitrary in defining the relevant market. In order to claim Facebook is overwhelmingly dominant, the FTC says "social advertising" is distinct from "display advertising," "search advertising," or "offline advertising." How convenient.

Our new trustbusters talk a lot about major companies manipulating markets. Under new leadership, the FTC are proving masters in manipulating market definitions."