US v. Google: Why Behavioral Economics Fails to Capture the Realities of Competition

The Department of Justice's (DOJ) recent antitrust lawsuit against Google, which alleges the company unlawfully maintained monopolies in search and search advertising, has brought renewed attention to the role of behavioral economics in antitrust law. The DOJ's complaint, filed in October 2020, claims that Google entered into exclusionary agreements with phone manufacturers and carriers to make its search engine the default and pre-installed option on devices. To make its case, the DOJ argued that behavioral economics can help explain Google's allegedly anticompetitive conduct. In response, Google claimed that its distribution agreements reflect the competitive realities of the market and the preferences of consumers, and not an effort to exploit behavioral biases.

While neoclassical economic theory and its assumptions of rational, self-interested profit maximizers still underpin much of modern antitrust analysis, behavioral economics is increasingly popular among critics of the consumer welfare standard and the antitrust status quo. Proponents of behavioral antitrust generally contend that behavioral economics provides a better understanding of real-world market behavior than traditional economic models premised on rational actors. They argue that firms can exploit consumer cognitive biases, limited willpower, and bounded self-interest in ways that lead to anticompetitive outcomes, even if such conduct doesn't fit neatly into conventional antitrust paradigms.

Others remain skeptical of bringing behavioral law and economics into antitrust law. They argue that incorporating behavioral economics into antitrust law fails to provide a coherent theory of market failure or consumer harm that can be applied predictably by courts and regulators in antitrust cases—making antitrust law indeterminate. Moreover, there are concerns that behavioral theories often discount the ability of market forces to correct consumer biases and incomplete information over time. On this view, antitrust enforcers should be cautious about using behavioral theories to second-guess business arrangements that benefit consumers and have sound economic justifications.

On day three of the Google trial, the DOJ called to the stand Professor Antonio Rangel, a behavioral economist at the California Institute of Technology. Dr. Rangel testified that Google exploits users' "default bias" by securing preset default positions for its search engine on browsers and devices. According to Dr. Rangel, the effect is a "choice architecture" that makes it cognitively difficult for users to exercise deliberate choices about their search provider. In other words, defaults exploit biases that make it more likely users will stick with Google rather than switch to rival search engines. And, by increasing the "choice frictions," Google helps maintain its market position. Citing Google's persistently high market share, Dr. Rangel argued that rival search engines have clearly been unable to overcome the cognitive switching costs created by Google's choice architecture, allowing it to preserve its dominance.

While behavioral economics may offer valuable insights in some contexts, it is not clear that it provides the appropriate framework for evaluating the specific allegations against Google in this case. First, Google's distribution agreements are a product of its investments in developing a superior search engine, not a nefarious plot to exploit biased consumers. Google became the predominant search provider because its product outperformed rivals in meeting user needs - for speed, relevance, and convenience. Its Android operating system, now used on over 2.5 billion devices worldwide, succeeded for similar reasons. Manufacturers and carriers chose to partner with Google because its services were in high demand.

Second, behavioral theory overlooks consumers' ability to make deliberate choices about which search engine to use. Contrary to the DOJ's portrayal of device users as helpless creatures of habit, Google's agreements don't prevent anyone from switching to alternative search engines with just a few taps. Not only do consumers switch frequently, but consumers use Google because they prefer it, not because they are unknowingly locked in: as was revealed at trial, the most searched term on Bing is Google! In fact, when given an explicit choice of search providers, as occurred on Android devices in Europe following a 2018 EU ruling, the vast majority of users still chose Google over rivals, reflecting its superior quality.

Third, the DOJ’s behavioral critique fails to properly account for how dynamic factors can correct market imperfections. As a transformative Schumpeterian gale of creative destruction, AI is already creating new competitive forces that cast doubt on the DOJ’s case in chief. In particular, as Google and its rivals invest heavily in AI-powered innovations such as large language models and generative AI, consumers are already getting new ways to access and search for information. Amidst this disruptive Schumpeterian competition, static user biases may play a much smaller role than the DOJ's behavioral theory needs to win its case and miss the forest for the trees.

While behavioral economics can shed light on certain aspects of firm conduct, it should not be used to justify antitrust intervention if there are clearly rational explanations for consumer behavior, especially in dynamic markets. As Schumpeter explained, capitalism is an evolutionary process of "creative destruction," and antitrust policy must be careful not to destroy the very creativity it seeks to protect. Courts and enforcers should focus on evidence of actual anticompetitive harm, not hypothesized exploitation of user biases. By resting its case against Google on a shaky behavioral theory that under-emphasizes the company's product innovations, the competitive constraints it faces from rivals, and the choices of consumers, the DOJ appears to have clearly missed the mark.