The American Innovation and Choice Online Act is an “Economics-Free Zone”, by Dr. George S. Ford
Americans love to shop online. The combination of a wide array of products, fast shipping, low prices, and convenience are increasingly shifting retail sales to the Internet. Shopping online proved invaluable during the COVID Pandemic when consumers were shut-in for months. Thousands of new online-only retailers have emerged, increasing the array of product choices for Americans.
One difficulty experienced by shoppers is that a search for a particular item often yields an overwhelming number of options—frequently thousands—from which to choose. How does a consumer choose the best deal? And how does the online vendor improve the consumer experience and build a reputation for reliable, low priced, quickly shipped, quality products?
Online vendors, some of which permit third-parties to sell on their sites, often know a lot about the products sold on their marketplaces, including information on reviews, returns, shipping reliability, and so forth. Rather than randomly presenting available products to consumers, the vendor can sort the list of products by favorable attributes and even make a recommendation for a product that ranks highly in several desirable characteristics. Such guidance (or “signals” as economics designates it) improves the online shopping experience, increasing the probability the “best” product is chosen. Absent such guidance, the consumer may have a bad experience, harming not only the consumer but also the vendor and all of the third-party sellers the vendor hosts. As new economic research demonstrates, these informative signals benefit society, and they arise naturally, without any need for regulation.
But, as they say, no good deed goes unpunished, and consumers should enjoy this help while they can still get it.
The American Innovation and Choice Online Act (“AICOA”), sponsored by Senator Amy Klobuchar of Minnesota, is now working its way to the Senate floor. AICOA proposes an onerous regulatory framework for retail platforms that may make shopping more difficult, and could put an end to retail platforms altogether—or at least the select few platforms targeted by the bill (a list that, unsurprisingly, does not include Target, which is headquartered in Minnesota). As the ostensible purpose of the bill is to impose a non-discrimination standard on platforms to prevent self-preferencing, many of the bill’s provisions are expressly directed towards prohibiting information signaling by covered platforms. (Indeed, signaling—by definition—is a form of deliberate preference, as a signal purposefully seeks to highlight one product over another.)
The claimed motivation for AICOA is the alleged presence of a platform operator’s bias for its own products over those of its third-party sellers. Yet, there is no systematic evidence that such bias, if present, is affecting consumers or third-party sellers. When an online vendor permits third-party sellers—creating what is called an online marketplace or platform—we might think that the vendor prefers to sell its own products over those of third parties. In fact, new economic research suggests that even if we can expect such a bias exists, the desire to maximize the value of the platform to consumers continues to prevail as it produces a better experience for consumers. In simple terms, even if a platform operator is biased toward its own products, which it may or may not be, the platform is nonetheless motivated to offer valuable guidance to consumers. To do otherwise is self-defeating. Indeed, digital platforms permit third-party sellers voluntarily. Absent compulsion, and absent regulation of the fees paid by third-party sellers under compulsion, economic research shows that there is no motivation for a digital platform to sabotage its third-party partners.
Adding to AICOA’s many analytical contradictions, while the bill is designed to target discrimination against third-party sellers, the bill ignores online vendors that offer consumers only their own products—the ultimate expression of bias. Under the terms of AICOA, total discrimination against third-party sellers is a safe harbor—a way to escape from the bill’s onerous regulations and excessive penalties (10% of revenues in a small margin business). Thus, the easy way for online platforms to evade the legislation’s oversight is not to allow third parties on their websites, but this is a decidedly poor outcome for society—third-party sellers are denied access to what may be a huge customer base and consumers have reduced choice. So while AICOA is allegedly designed to curb non-discrimination, the bill ironically will, in fact, maximize it, spoiling the online shopping environment for most Americans.
As Congress continues to debate the American Innovation and Choice Online Act, new economic research provides some crucial insights for policymakers to evaluate the welfare effects of regulating signals such as search results on platforms where the platform operator may offer its own goods in competition with those of third-party sellers. A platform operator who sells its own goods in competition with other hosted vendors offers a less biased assessment to consumers regarding products. Allowing a retail platform to provide an informative signal to consumers can be welfare enhancing, and no legal obligation is necessary to insure this result. Because the American Innovation and Choice Online Act directly targets such welfare-enhancing practices and encourages the end of third-party sellers, this bill will do more harm than good.
Dr. George S. Ford is the Chief Economist of the Phoenix Center for Advanced Legal & Economic Public Policy Studies (www.phoenix-center.org), a non-profit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.