Don’t Punish Companies for Being the Best: Thinking Through Potential Antitrust Cases Against Google

Joe Kennedy May 22, 2020
May 22, 2020

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We are repeatedly warned that the increased market power of the largest Internet companies poses a threat to our economy and society. Alleged harms include lower wages, less innovation, and the concentration of political power. Lax antitrust policy is often blamed for letting this happen. Most recently, press reports have suggested that the U.S. Department of Justice and the attorneys general of most states are preparing to file one or more antitrust cases against Google later this year. The reports mention Google’s dominance in Internet search and its central role in digital advertising as potential targets.

Although U.S. government officials have not released any details, a recent report by the Omidyar Network gives a detailed outline of a potential case against Google. The authors, Fiona Scott Morton and David Dinielli, both served as antitrust authorities in the Obama administration and therefore give some insight into a prospective Biden administration.

The report relies heavily on detailed findings by the United Kingdom’s Competition and Market Authority (CMA), which issued an interim report last year. Both the interim report and the Omidyar paper focus largely on the advertising market. The Omidyar authors acknowledge their dependence on the CMA report: To the extent that its conclusions are wrong, their case against Google is weakened.

Relying on the CMA report, Morton and Dinielli list 20 ways in which Google has apparently violated antitrust laws. Generally, they argue Google has acquired a dominant position in the market for Internet advertising that extends to every sector of the market between publishers who want to sell ads and advertisers who want to attract customers. Google allegedly acquired this dominance through a series of mergers and keeps it through a number of anti-competitive actions. The latter include serving as both buyer and seller, refusing to deal with certain parties, withholding market information, hoarding data, and misleading regulators.

Importantly, the authors clearly adhere to the standard of existing antitrust law, which bases most decisions on consumer welfare impacts. This contrasts with more extreme views that would target Google solely for its bigness, even if the immediate effect would be to reduce choice and increase prices. They thus acknowledge the need for a detailed factual understanding of the U.S. market in which Google is allowed to give its side of the story. ITIF reserves judgement on the merits until such an investigation is completed.

Still, several points help keep the issue in perspective. First, antitrust decisions are very dependent upon the definition of the relevant market. For example, does advertising on YouTube compete with television and magazine advertising, or is it a separate market? If the former, then Google’s market power is reduced. Similarly, are the various parts of the advertising stack separate markets? Ultimately, this is a factual issue that depends on how both buyers and sellers view the respective markets, and on the extent to which prices in the markets respond to each other. Until such technical details are determined, it is hard to define whether a firm has market power and therefore the ability to harm consumers.

Getting to the substance of the case against Google, it is important to remember that companies are allowed, and even encouraged, to compete hard in the marketplace by offering customers better and cheaper products and services. The inevitable consequence of this is that firms with less competitive products lose market share. This is especially true in information technology, where efficiencies of scale and network effects often make it most efficient to have one dominant platform. That is OK. Indeed, as a report from the Obama administration’s Council of Economic Advisers notes, “Some newer technology markets are also characterized by network effects, with large positive spillovers from having many consumers use the same product. Markets in which network effects are important, such as social media sites, may come to be dominated by one firm.” For the last 40 years, the dominant concern of antitrust policy has been to increase consumer welfare, not to protect firms from the threat of competition.

Has Google harmed consumers? A recent press story quotes Google as saying that the price of digital advertising has dropped by 40 percent since 2010. If true, a drop that large is not normally associated with anticompetitive behavior. Morton and Dinielli effectively argue that consumers would have received even lower prices but for Google’s conduct. Perhaps, but it is also possible that, but for Google’s activity, the market may never have achieved enough efficiency to deliver the existing price decline. For example, Morton and Dinielli argue that Google’s ability to better target ads so that people are more likely to click on them represents a barrier to entry. But this is like saying that a large auto company’s economy of scale, which lets it be more productive, is a barrier to entry. It is, but it is one that increases overall economic welfare by boosting efficiency, in this case because targeted ads increase revenue for the advertiser.

Which leads to another point: In some cases, what looks like anticompetitive behavior actually increases market efficiency and helps consumers. No doubt, if Google pursued different policies it could transfer some of its profits to advertisers, publishers, and the general public. But companies are allowed to capture as much of the competitive surplus as they can, as long as they do not engage in anticompetitive conduct. The social cost of market power does not come from transferring surplus from one group to another. It comes from the deadweight loss that occurs when monopolists reduce supply in order to raise prices.

On the surface, Google seems to be expanding the market and cutting prices. It might be that, had Google not fought so hard, the current market of digital advertising would be more costly for all parties. Determining this often requires an extremely detailed knowledge of both the market and the technology being used. But practices that look questionable to the casual observer may have a legitimate business rationale and add to consumer welfare.

Implicit in the Omidyar report is the assumption that government regulators could design and implement a “fairer” system. Doing so would require deep expertise in both the markets and the technology, and this expertise would need to be maintained in order to respond to continual changes in both. In reality, it is unlikely that regulators, exposed to self-interested lobbying on all sides, would have any better insight into the best market structure and practices than the private sector.

The Omidyar report lists a series of actions that Google took to acquire and maintain its current position in the digital advertising market. But many of those actions, if not all, are common in highly competitive markets. Firms are allowed to pursue strategies that raise their profits even if those strategies come at the expense of rivals or consumers. The authors imply that, because Google has significant market power, at least some of these strategies now violate the antitrust laws. But they ignore the possibility that, in the very act of attaining whatever market power it has, Google created a more efficient marketplace that has delivered significant benefits to both advertisers and publishers.

Finally, it is important to differentiate between antitrust issues related to structure and those related to conduct. As discussed above, any discussion of structure issues must balance any potential losses from market power with gains from that power, including greater efficiency, economies of scope, and increased investment in innovation. With regard to conduct, it is important to differentiate between that which is tough and competitive, but still legitimate within antitrust jurisprudence, and conduct that crosses the line and harms consumers. If Google has crossed this line, then the government should pursue remedies. But tough competition by itself is not a violation of antitrust law.