Google, Antitrust, and First Principles

Josh Wright —  31 March 2011

I’ve read with interest over the last few days the commentary on Microsoft’s filing of a formal complaint with the EU, Microsoft’s defense of its actions, and the various stories around the web.  Geoff and Paul appropriately focus on the error-cost concerns associated with intervention in high-tech markets; Paul also emphasizes the ironies associated with Microsoft’s new status as antitrust complainant.  There will be ample time to discuss the substantive merits of these complaints as they develop.  But I wanted to make two points in this post that I think haven’t received much attention.

The first combines Geoff and Paul’s concerns.  I do not find it particularly interesting that Microsoft has taken this role.  In fact, these developments have been a long time coming.  Competitors frequently attempt to induce regulators to intervene against rivals.  The fact that Microsoft is the competitor certainly is ironic, but it is also expected.  The real lesson about Microsoft’s involvement in this suit is what inferences we should make about antitrust policy in high-tech markets given Microsoft’s quick decline from the alleged dominant and entrenched monopolist that was the focus of the DOJ enforcement action to its current status as rival seeking to employ the antitrust agencies to weaken its rival.  How quickly things change.  Indeed, that is precisely the point.  Dynamic competition, innovation, and quick moving industries do not mean that antitrust rules should never apply; however, these conditions should warrant caution in intervening in the name of consumers without firm evidence of consumer harm.

The second point is that the discussions I’ve read recently focus almost entirely on the question of whether Google favors its own content over that of rivals.  This is not the first time this type of argument has been made in antitrust.  Indeed, the argument is commonly made that whether in search or otherwise (e.g. vertical integration with YouTube), so-called “bias” or “discrimination” in favor of one’s own content is prima facie evidence of a competitive problem that will lead to consumer harm.  That is not so.  Neither economic theory nor empirical evidence support the assertion that, without more, vertical integration is a competitive.  Quite the contrary, the evidence suggests these arrangements are generally pro-consumer and efficient.  On a case-by-case analysis, the facts might suggest a competitive problem in any given case.  The facts, of course, matter.

Unfortunately, most of the discussion of “search bias” and other forms of vertical integration at issue here has focused on whether these arrangements are good or bad for Google’s rivals, not consumers.  First principles tell us that the competitive effects are what matters.  And there is indeed a reason to be skeptical of competitive harm here.  While some commentary in recent days has offered principles of antitrust analysis that are flat out wrong (see, e.g. here, the observation that the antitrust laws require “Microsoft, as a competitor, to have equal access”), we can rely on Professor Hovenkamp to re-focus the discussion on first principles:

“You do need to show consumer harm,” said Herbert Hovenkamp, an antitrust expert at the University of Iowa College of Law. “That becomes more difficult with search engines, where it is easy for consumers to switch to another search engine. That is different than in PC operating systems in the Microsoft case, where the technological lock-in was more obvious.”

Indeed.  It is important to note that this is case is in the EU, not the US.  While both jurisdictions emphasize the need to show consumer harm, the EU appears to be significantly more willing than US courts to infer harm to competition from harm to competitors.  I will leave more substantive analysis of the allegations here for another day as more facts develop.  But I suspect that the ultimate outcome here will turn on, in large part, precisely how faithful the EU analysis is to antitrust’s “first”-first principle: intervention requires evidence of consumer harm.

6 responses to Google, Antitrust, and First Principles

  1. 

    Interesting post, I wish I had time to study the intricacies of law.

  2. 
    Rafael 3L at DePaul 1 April 2011 at 10:05 am

    Although it is undisputed that competition is not the goal of antitrust but rather a means to an end–that end being efficiency–efficiency enhancing measures taken by monopolists invariably come under intense scrutiny. This is especially true of monopolists operating in dynamic, information markets, where novel business practices are viewed with a suspicious eye. Often overlooked, however, is the enormous utility gains with which monopolists in information markets provide society; the idea that dominant firms should compete vigorously against fringe firms or potential competitors; and the notion that innovation is the driving force behind many business decisions. What’s more, because consumers in such markets are often more concerned with quality than price, dominant firms are vulnerable to Schumpeterian waves of creative destruction, in which new firms displace monopolists by providing consumers with superior goods (Consider, for example, Facebook leapfrogging Myspace). This is to say that monopoly power in these innovative-driven markets might be more ephemeral than that which is found in traditional industrial settings. And since innovation and long-term increases in consumer welfare are directly linked, excessively scrutinizing and condemning firms operating in innovative-driven markets for conduct whose effects is unknown and apt to be ephemeral if unsuccessful might result in substantial long-term consumer welfare harm.

  3. 

    There was supposed to be an “also” in there Paul. Its fixed.

  4. 
    Paul H. Rubin 31 March 2011 at 6:55 pm

    My point was not (mainly) the irony. It was that Google is already being challenged (by Facebook), again showing the rapidity of change and the futility of antitrust in these rapidly changing markets.

Trackbacks and Pingbacks:

  1. The End of An Era? « Truth on the Market - April 29, 2011

    [...] itself is in the clear.  The Chronicle story gives a few reason to think that (despite its various interferences as a would-be plaintiff or complainant in antitrust proceedings around the globe) its [...]

  2. Welcome to Net Neutrality « Truth on the Market - April 1, 2011

    [...] Comments Insider Trading and Delaware Law on Sokol’s tradesRafael 3L at DePaul on Google, Antitrust, and First PrinciplesMatt Dubuque on When markets let corporations be goodMatt Dubuque on Costs of [...]