David Evans, Dec 20, 2012
In the last decade a number of internet-based multi-sided platforms have emerged that provide free services to, in some cases, millions of businesses. This article argues that under current norms in adversarial proceedings these platforms are likely to face large numbers of complaints in multiple jurisdictions, a substantial likelihood that at least one of these complaints will result in a false-positive decision against the platform, and material risk of a false-positive decision that results in catastrophic consequences. These effects result from a combination of business users of free services receiving a free litigation option they can pursue if they have any complaints; an adverse-selection problem that results from free services being particularly attractive to start-ups that do not have or want to invest capital in their businesses; and the sheer number of free-business users resulting in a high cumulative probability of at least one false-positive decision. After documenting these phenomena, this article argues that government policymakers, including competition authorities and courts, should adopt a heightened level of scrutiny concerning complaints from free business users. This heightened level of scrutiny is necessary to counteract the impact of excessive litigation on innovation by multi-sided platforms.