Re-Assessing the Consumer Welfare Standard by Ramat Jose

A court gavel over the Apple logo

By es1665 April 1, 2024

Posted in 2024 The Gnovis Blog  |  Tagged , , , , ,

By Ramat Jose

Last Thursday, the Justice Department filed a civil antitrust suit against Apple for monopolizing the App Store and thus violating the Sherman Act.  This is a significant case that has the potential to revolutionize the App Store and how we interact with our iPhones. The Sherman Act of 1890 restricts the unreasonable restraint of trade and the monopolizing or attempt to monopolize trade or commerce. Although the Sherman Act is how we regulate monopolies, Robert Bork’s, former solicitor general, consumer welfare standard decides how we understand antitrust. The prevalence of the consumer welfare standard has allowed monopolies such as Apple to grow unchallenged. How the Court plans to address the civil suit will have ramifications regarding the dominance of the consumer welfare standard. 

Today, antitrust is measured by Bork’s consumer welfare standard, which uses the rational, efficient business model as a way of testing if a company is a good trust or bad trust.  The rational, efficient business test has three components — low cost, high production, and innovation. Bork argued that in any antitrust case, “the government or plaintiff had to prove that the complained behavior raised prices for consumers.” If prices have not been raised for consumers, then antitrust has not been violated. Bork’s test is the dominant method of assessing whether a company has committed antitrust violations allowing companies like Apple to grow unchallenged anticompetitively due to the test’s narrow components. 

The complaint alleges that Apple maintains a monopoly over smartphones by imposing contractual restrictions, fees, and taxes on the development and distribution of apps. Apple uses APIs in the smartphone ecosystem to undermine and control third-party apps, products, and services that would otherwise make users less reliant on the iPhone. Apple’s smartphone monopoly is extensive and uses similar methods to maintain its monopoly through other products and services. An Apple spokesman, Fred Sain, stated that the lawsuit was “wrong on the facts and the law” and that the company “will vigorously defend against it.”

Similar cases have been previously brought against Apple in the past. In the 2012 United States v. Apple, the Supreme Court found Apple guilty of violating the Sherman Act by engaging in horizontal price-fixing with book publishers. In the 2019 Apple v. Pepper case, an antitrust class action was filed against Apple for its alleged monopolization of the App Store. The Supreme Court ruled in the plaintiffs’ favor, arguing that iPhone users who bought Apps from the App Store were ‘direct purchasers’ and thus could sue Apple for monopolizing the App Store. However, not all cases against Apple have succeeded in court. In Epic Games v. Apple, the federal appeal court sided with Apple when Epic Games challenged Apple’s restrictions on apps that had other non-App store in-app purchasing methods. The Court argued that Epic Games failed to prove that Apple could have implemented an alternative App Store. 

Apple’s monopoly can be seen best in the App Store. The App Store is the only avenue to distribute Apps on iOS devices. Alternative App Stores cannot be installed on iOS devices, nor can apps be sideloaded. Apple argues that sideloading, which is downloading apps outside the approved app store, will “cripple the privacy and security concerns” of the smartphone. Apple could be right, but considering that more than half of mobile devices in the U.S. run on iOS or iPad OS, this is a significant abuse of power. 

Apple charges a 30% commission on paid apps, a 30% fee on in-app purchases of ‘digital goods and services,’ and a 0.15% commission from banks on credit card transactions through the digital wallet. Additionally, Apps cannot communicate with Apple users that their Apps are available for a lower price outside the Apple Store. Through this, there is essentially no competition on the App Store. Additionally, Apple seeks to undermine web applications, forcing developers to build iOS applications. As a result, apps are only built how Apple wants them built, hindering their growth. 

Aside from the App Store’s dominance, Apple’s history of acquisitions and mergers has led to it becoming a monopoly. Apple’s CEO, Tim Cook, even bragged about Apple’s acquisitions by saying that Apple buys a company every two or three weeks, focusing on talent and intellectual property. Apple’s most renowned acquisition, Beats Electronics, which was bought for $3 billion, allowed Apple to launch Apple Music. Apple Music now competes with Spotify, Pandora, and other streaming applications. This particular acquisition led Apple, previously just a primary software and hardware company, to have a powerful presence in the music industry, leading to its economic dominance. 

Bork’s consumer welfare standard assesses antitrust in the context of the consumer. Applying the test suggests that the App Store should be viewed as high output, low cost (most apps are free), and innovative as it provides multiple apps to its users. Apple has gotten away with its monopoly due to the Bork consumer standard even when it has hurt consumers by limiting their choices. Economists Marshall Steinbaum and Maurice Stucke propose a new standard for evaluating antitrust, the Efficient Competition Standard. The effective competition standard aims to restore the primary aim of antitrust laws—the dispersion and deconcentration of significant private power wherever in the economy it is to be found, including throughout supply chains and the labor market. 

The Efficient Competition Standard has five main elements: 

  1. Preservation of competitive market structures 
  2. Protection of individuals, purchasers, consumers, and producers
  3. Preservation of opportunities for competitors 
  4. Promotion of individual autonomy and well-being 
  5. Dispersion of private power  

In assessing Apple through Steinbaum and Stucke’s competition standard test, we see that Apple has not preserved competitive market structures; it controls more than half of the smartphone market. Apple fails in the second element, hindering third-party app development and limiting individuals’ choices. Apple routinely engages in acquisitions, e.g., Beats by Dr. Dre, which hinders opportunities for competitors. Apple publicly supports the Right to Repair but makes it difficult for iPhone users to repair it, thus limiting individual autonomy. Lastly, Apple is the second largest American company in market capitalization, showing large amounts of private power. 

Considering that two out of three American smartphone users own an iPhone, with more than half of Americans making use of the iOS operating system, it is safe to assume that Apple has a monopoly on the market and Bork’s consumer welfare standard has failed in countering Apple’s dominance. Simply focusing on the consumer cannot be the end, especially considering Apple limits consumer choices and potential app developers, hindering competition. Other options, such as the Efficient Competition Standard, exist to show other alternatives in assessing antitrust violations. The court’s ruling is unknown, but Apple’s monopoly cannot grow unchallenged as it does now.

References

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  10. Sherr, I. (2021, October 13). Apple again makes its case against sideloading apps on iPhones in new security research report. CNET. https://www.cnet.com/tech/mobile/apple-again-makes-its-case-against-sideloading-apps-on-iphones-in-new-security-research-report/ 
  11. Steinbaum, Marshall, and Maurice E. Stucke. “The Effective Competition Standard: A New Standard for Antitrust.” The University of Chicago Law Review, vol. 87, no. 2, 2020, pp. 595–623. JSTOR, https://www.jstor.org/stable/26892422. 
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