Vital Signs: Google’s huge market share doesn’t automatically make it a monopoly



shutterstock.

Richard Holden, UNSW

This week the United States Department of Justice (DoJ) filed a lawsuit accusing Google of using “anticompetitive tactics to maintain and extend its monopolies in the markets” for search and advertising.

It is the most significant antitrust case since the US government took on Microsoft in 1998 for using its dominant position as the provider of the Windows operating system to force PC makers to bundle its Internet Explorer web browser.

That case was fought out in US courts for years before Microsoft agreed to settle in 2001. This case will no doubt be heavily litigated, and likewise take years to conclude. But it’s not too soon to consider the basic economics.

The bottom line is more complicated than one might think. Yes, Google has a huge share of the search-engine market – 92% globally according to statcounter.com, compared with 2.8% for Microsoft’s Bing, 1.6% for Yahoo! and 0.5% for DuckDuckGo.

But does that give Google a lot of “market power” – the ability to charge high price or produce low-quality products? Probably not.

To judge if a company like Google is really a monopolist, it is crucial to understand the difference between ordinary markets (like those for clothes, cars, or breakfast cereal) and technology markets (like those for internet search, social media, or ride sharing).




Read more:
The US is taking on Google in a huge antitrust case. It could change the face of online search


Markets with ‘network externalities’

Any introductory economics textbook will tell you a large market share is smoking-gun evidence of market power; and that with market power comes the ability to shut out competitors, charge high prices and even get away with producing low-quality products.

Economists of all stripes agree that regulating monopolies and making markets more competitive benefits consumers, through lower prices and better products.

Indeed, this was the motivation behind the so-called “trust-busting” movement in the US in the early 20th century. The most famous scalp was John D. Rockefeller’s Standard Oil, which the US Supreme Court ordered in 1911 be broken up into 34 separate companies. (The break-up made Rockefeller the world’s richest man).

But internet search isn’t like oil. Neither is social media, ride sharing or platforms like Amazon. These are what economists call “markets with network externalities”. That is, when more consumers use the product, it becomes more valuable for other consumers.




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Facebook is useful because it connects one with lots of other users. A thousand little, disconnected social media platforms would be much less useful. Amazon connects lots of sellers with million of consumers. This is hugely valuable for both. Google connects lots of consumers with advertisers and information. Again, this is valuable to both sides of the market.

Because network externalities mean — all else being equal — the bigger the market share the more valuable the company’s product is to consumers, we tend to see one dominant company and a few smaller ones in such markets.

Just because tech companies have a big share of the market now, however, doesn’t mean they are destined to keep it.

Remember Netscape? In the mid-1990s it had a 80% share in the browser market, before losing it to Microsoft’s Internet Explorer.

Netscape Navigator Version 1.11
Netscape Navigator version 1.11.
OiMax/flickr, CC BY-NC-ND

But Internet Explorer’s dominance, peaking at 95% share in the early 2000s, didn’t last either. It now claims barely 1% of the browser market.

This is why companies in markets with network externalities are never asleep. Uber and Facebook are constantly running experiments to innovate their products, as are other companies like Amazon and, you guessed it, Google.

Influencers and defaults

An important part of the Department of Justice’s suit against Google is that it allegedly pays Apple as much as US$11 billion a year to be the default search engine on the Safari browser on every iPhone.

This is a bit like paying for a social media influencer to plug your product — with a twist. Making something the default doesn’t mean the user has to use it, but the small effort to choose an alternative means most don’t bother.

But if it really wasn’t a good product and didn’t deliver good search results, wouldn’t consumers (a) remove it and (b) be less likely to buy iPhones?

There’s a big difference between something being a default and there being no choice. Articulating this difference may end up being an important part of how the Google litigation plays out.

Indeed, Microsoft making Internet Explorer the default browser in Windows has been an ongoing source of back and forth with US and European competition authorities.




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Ultimately misguided

As with the suits against Standard Oil and Microsoft, the case against Google will be decided by the courts, perhaps ending with the US Supreme Court. The outcome will be instructive as to whether other tech companies like Amazon, Facebook or Uber will also wind up in the firing line.

Ironically, at a time of extreme polarisation in US politics, breaking up big tech companies is popular on the left and the right.

But we should remember that consumers are huge beneficiaries from these tech companies. Think about how much it used to cost to take and print photographs. A 2018 International Monetary Fund report cites research suggesting US consumers would need more than US$25,000 a year to compensate for the loss of free services from tech companies.



International Monetary Fund, Measuring the Digital Economy, 2018

That’s a lot.

What is crucial for competition regulators around the world to note is that the markets in which big technology companies operate are not like other markets. Because of network externalities they tend to have big “in” firms (with a large market share) and smaller “out” firms (with small market shares but providing competitive discipline).

That doesn’t mean these markets aren’t competitive. It means the “in” companies have a lot to lose by being leapfrogged by a small competitor. Which is why they work so hard to innovate and keep prices low.The Conversation

Richard Holden, Professor of Economics, UNSW

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The US is taking on Google in a huge antitrust case. It could change the face of online search


Katharine Kemp, UNSW

The US Department of Justice (DoJ) has filed an antitrust lawsuit against Google for unlawful monopolisation. The department says Google’s conduct harms competition and consumers, and reduces the ability of new innovative companies to develop and compete.

It’s the most important monopolisation case in the US since 1998, when the DoJ brought proceedings against Microsoft.

It’s possible the current proceedings, given their timing, are politically motivated. US President Donald Trump and other Republicans have repeatedly voiced the view that Google is prejudiced against conservative beliefs.

But even if Democratic candidate Joe Biden is elected president, this action against Google is unlikely to go away.

The ramifications for Google, if the court rules against it, could ultimately be dramatic. The DoJ’s associate deputy attorney general, Ryan Shores, has refused to rule out seeking orders to break up the tech giant, saying “nothing is off the table”.

Google’s monopoly power

Google’s economic power is no secret. Regulators around the world, including in the European Union, are investigating the company’s conduct and bringing actions under competition, consumer and privacy laws.

US Attorney General William Barr said the new DoJ action:

[…] strikes at the heart of Google’s grip over the internet for millions of American consumers, advertisers, small businesses and entrepreneurs beholden to an unlawful monopolist.

Specifically, the DoJ claims Google is illegally monopolising the markets for online search and search advertising (the advertising that appears alongside search results).

According to the DoJ, Google’s US market share is roughly:

  • 88% in the market for general search services

  • 70% in the search advertising market.

However, holding a dominant position isn’t against the law. A company is allowed to enjoy a dominant position or even a complete monopoly, as long as it doesn’t do so by unlawful means.




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So what has Google allegedly done wrong?

The DoJ’s main complaint is Google has entered into several “exclusionary agreements” that preserve its monopoly power by hindering competition from rivals (and potential rivals). Exclusionary agreements are deals that restrict the ability of at least one party to deal with other players.

The DoJ says Google spends billions of dollars each year on:

  • long-term agreements with Apple that require Google to be the default search engine on Apple’s Safari browser

  • exclusivity agreements that forbid pre-installation of competing search services by certain mobile device manufacturers and distributors

  • arrangements that force certain mobile device manufacturers and distributors to pre-install Google search applications in prime locations on mobile devices and make them undeletable, regardless of consumer preference

  • using monopoly profits to buy preferential treatment for its search engine on devices, web browsers and other search access points.

The DoJ claims these agreements have created a “continuous and self-reinforcing cycle of monopolisation” in the market for online search and search advertising (which relies on Google’s dominance in online search).

Google has responded by describing the court action as “deeply flawed”. In a blog post it said:

[…] people don’t use Google because they have to, they use it because they choose to.

It also said users are free to switch to other search engines.

But even if that’s technically true, Google’s agreements for pre-installation, default settings and preferential treatment give it a substantial advantage over its rivals.

Does any of this matter when Google is ‘free’?

Google provides services that are hugely valued the world over — and with no direct financial cost to the user. That said, “free” services can still cause harm.

According to the DoJ, by restricting competition Google has harmed search users, in part “by reducing the quality of search (including on dimensions such as privacy, data protection, and use of consumer data)”. This is an important recognition that price is not all that matters.

The logic behind this claim is that other search engines with better track records on privacy, such as DuckDuckGo, might otherwise be more successful than they are.

Or, to frame that another way, Google might actually have to compete vigorously on privacy, instead of allegedly imposing privacy-degrading terms on its users.

DuckDuckGo logo
DuckDuckGo says it ‘does not collect or share personal information’ from users.
Shutterstock

What might happen if the action succeeds?

If Google is found to have contravened the prohibition against monopolisation under the US Sherman Act, it could face substantial fines and damages claims.

But perhaps more concerning for Google would be the prospect of the DoJ seeking to break up Google’s various businesses.

Google owns a range of highly successful services, including Google search, Google Chrome, the Android operating system, and numerous ad tech (“advertising technology”) services. Google’s position and access to data in one business arguably give it advantages in its other businesses.

Eleven Republican attorneys general from various US states have joined the proceedings and could individually seek remedies.

The action won’t be having a major impact any time soon, though. Google’s lawyers estimate the case would only come before the US District Court for the District of Columbia in a year.

Could our competition watchdog be taking notes?

Google could contravene Australia’s misuse of market power law under the Competition and Consumer Act 2010, if it has engaged in conduct of the kind alleged by the DoJ that has an effect on Australian markets.

As part of its 2019 Digital Platforms Inquiry, the Australian Competition and Consumer Commission (ACCC) said Google has substantial market power in the general search and search advertising markets in Australia. It has a market share of about 95% in both cases.

If this is true, it would be unlawful for Google to engage in any conduct that substantially lessens competition in a market (or has the purpose or likely effect of doing so). This could include entering exclusionary agreements that affect Australian markets.

So far, the ACCC has twice brought proceedings against Google, alleging it misled users about how it collects and uses their data. It is also investigating the conduct of Google and Facebook, in particular, in digital advertising markets as part of its ad tech inquiry.

While Australia’s consumer watchdog might wait and see how proceedings against Google fare in the US and the EU, the recent DoJ action could encourage the ACCC in any action it might be contemplating under Australian law on misuse of market power.




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The Conversation


Katharine Kemp, Senior Lecturer, Faculty of Law, UNSW, and Academic Lead, UNSW Grand Challenge on Trust, UNSW

This article is republished from The Conversation under a Creative Commons license. Read the original article.