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[TOTM: The following is part of a digital symposium by TOTM guests and authors on the law, economics, and policy of the antitrust lawsuits against Google. The entire series of posts is available here.]

It is my endeavor to scrutinize the questionable assessment articulated against default settings in the U.S. Justice Department’s lawsuit against Google. Default, I will argue, is no antitrust fault. Default in the Google case drastically differs from default referred to in the Microsoft case. In Part I, I argue the comparison is odious. Furthermore, in Part II, it will be argued that the implicit prohibition of default settings echoes, as per listings, the explicit prohibition of self-preferencing in search results. Both aspects – default’s implicit prohibition and self-preferencing’s explicit prohibition – are the two legs of a novel and integrated theory of sanctioning corporate favoritism. The coming to the fore of such theory goes against the very essence of the capitalist grain. In Part III, I note the attempt to instill some corporate selflessness is at odds with competition on the merits and the spirit of fundamental economic freedoms.

When Default is No-Fault

The recent complaint filed by the DOJ and 11 state attorneys general claims that Google has abused its dominant position on the search-engine market through several ways, notably making Google the default search engine both in Google Chrome web browser for Android OS and in Apple’s Safari web browser for iOS. Undoubtedly, default setting confers a noticeable advantage for users’ attraction – it is sought and enforced on purpose. Nevertheless, the default setting confers an unassailable position unless the product remains competitive. Furthermore, the default setting can hardly be proven to be anticompetitive in the Google case. Indeed, the DOJ puts considerable effort in the complaint to make the Google case resemble the 20-year-old Microsoft case. Former Federal Trade Commission Chairman William Kovacic commented: “I suppose the Justice Department is telling the court, ‘You do not have to be scared of this case. You’ve done it before […] This is Microsoft part 2.”[1]

However, irrespective of the merits of the Microsoft case two decades ago, the Google default setting case bears minimal resemblance to the Microsoft default setting of Internet Explorer. First, as opposed to the Microsoft case, where default by Microsoft meant pre-installed software (i.e., Internet Explorer)[2], the Google case does not relate to the pre-installment of the Google search engine (since it is just a webpage) but a simple setting. This technical difference is significant: although “sticky”[3], the default setting, can be outwitted with just one click[4]. It is dissimilar to the default setting, which can only be circumvented by uninstalling software[5], searching and installing a new one[6]. Moreover, with no certainty that consumers will effectively use Google search engine, default settings come with advertising revenue sharing agreements between Google and device manufacturers, mobile phone carriers, competing browsers and Apple[7]. These mutually beneficial deals represent a significant cost with no technical exclusivity [8]. In other words, the antitrust treatment of a tie-in between software and hardware in the Microsoft case cannot be convincingly extrapolated to the default setting of a “webware”[9] as relevant in the Google case.

Second, the Google case cannot legitimately resort to extrapolating the Microsoft case for another technical (and commercial) aspect: the Microsoft case was a classic tie-in case where the tied product (Internet Explorer) was tied into the main product (Windows). As a traditional tie-in scenario, the tied product (Internet Explorer) was “consistently offered, promoted, and distributed […] as a stand-alone product separate from, and not as a component of, Windows […]”[10]. In contrast, Google has never sold Google Chrome or Android OS. It offered both Google Chrome and Android OS for free, necessarily conditional to Google search engine as default setting. The very fact that Google Chrome or Android OS have never been “stand-alone” products, to use the Microsoft case’s language, together with the absence of software installation, dramatically differentiates the features pertaining to the Google case from those of the Microsoft case. The Google case is not a traditional tie-in case: it is a case against default setting when both products (the primary and related products) are given for free, are not saleable, are neither tangible nor intangible goods but only popular digital services due to significant innovativeness and ease of usage. The Microsoft “complaint challenge[d] only Microsoft’s concerted attempts to maintain its monopoly in operating systems and to achieve dominance in other markets, not by innovation and other competition on the merits, but by tie-ins.” Quite noticeably, the Google case does not mention tie-in ,as per Google Chrome or Android OS.

The complaint only refers to tie-ins concerning Google’s app being pre-installed on Android OS. Therefore, concerning Google’s dominance on the search engine market, it cannot be said that the default setting of Google search in Android OS entails tie-in. Google search engine has no distribution channel (since it is only a website) other than through downstream partnerships (i.e., vertical deals with Android device manufacturers). To sanction default setting on downstream trading partners is tantamount to refusing legitimate means to secure distribution channels of proprietary and zero-priced services. To further this detrimental logic, it would mean that Apple may no longer offer its own apps in its own iPhones or, in offline markets, that a retailer may no longer offer its own (default) bags at the till since it excludes rivals’ sale bags. Products and services naked of any adjacent products and markets (i.e., an iPhone or Android OS with no app or a shopkeeper with no bundled services) would dramatically increase consumers’ search costs while destroying innovators’ essential distribution channels for innovative business models and providing few departures from the status quo as long as consumers will continue to value default products[11].

Default should not be an antitrust fault: the Google case makes default settings a new line of antitrust injury absent tie-ins. In conclusion, as a free webware, Google search’s default setting cannot be compared to default installation in the Microsoft case since minimal consumer stickiness entails (almost) no switching costs. As free software, Google’s default apps cannot be compared to Microsoft case either since pre-installation is the sine qua non condition of the highly valued services (Android OS) voluntarily chosen by device manufacturers. Default settings on downstream products can only be reasonably considered as antitrust injury when the dominant company is erroneously treated as a de facto essential facility – something evidenced by the similar prohibition of self-preferencing.

When Self-Preference is No Defense

Self-preferencing is to listings what the default setting is to operating systems. They both are ways to market one’s own products (i.e., alternative to marketing toward end-consumers). While default setting may come with both free products and financial payments (Android OS and advertising revenue sharing), self-preferencing may come with foregone advertising revenues in order to promote one’s own products. Both sides can be apprehended as the two sides of the same coin:[12] generating the ad-funded main product’s distribution channels – Google’s search engine. Both are complex advertising channels since both venues favor one’s own products regarding consumers’ attention. Absent both channels, the payments made for default agreements and the foregone advertising revenues in self-preferencing one’s own products would morph into marketing and advertising expenses of Google search engine toward end-consumers.

The DOJ complaint lambasts that “Google’s monopoly in general search services also has given the company extraordinary power as the gateway to the internet, which uses to promote its own web content and increase its profits.” This blame was at the core of the European Commission’s Google Shopping decision in 2017[13]: it essentially holds Google accountable for having, because of its ad-funded business model, promoted its own advertising products and demoted organic links in search results. According to which Google’s search results are no longer relevant and listed on the sole motivation of advertising revenue

But this argument is circular: should these search results become irrelevant, Google’s core business would become less attractive, thereby generating less advertising revenue. This self-inflicted inefficiency would deprive Google of valuable advertising streams and incentivize end-consumers to switch to search engine rivals such as Bing, DuckDuckGo, Amazon (product search), etc. Therefore, an ad-funded company such as Google needs to reasonably arbitrage between advertising objectives and the efficiency of its core activities (here, zero-priced organic search services). To downplay (the ad-funded) self-referencing in order to foster (the zero-priced) organic search quality would disregard the two-sidedness of the Google platform: it would harm advertisers and the viability of the ad-funded business model without providing consumers and innovation protection it aims at providing. The problematic and undesirable concept of “search neutrality” would mean algorithmic micro-management for the sake of an “objective” listing considered acceptable only to the eyes of the regulator.

Furthermore, self-preferencing entails a sort of positive discrimination toward one’s own products[14]. If discrimination has traditionally been antitrust lines of injuries, self-preferencing is an “epithet”[15] outside antitrust remits for good reasons[16]. Indeed, should self-interested (i.e., rationally minded) companies and individuals are legally complied to self-demote their own products and services? If only big (how big?) companies are legally complied to self-demote their products and services, to what extent will exempted companies involved in self-preferencing become liable to do so?

Indeed, many uncertainties, legal and economic ones, may spawn from the emerging prohibition of self-preferencing. More fundamentally, antitrust liability may clash with basic corporate governance principles where self-interestedness allows self-preferencing and command such self-promotion. The limits of antitrust have been reached when two sets of legal regimes, both applicable to companies, suggest contradictory commercial conducts. To what extent may Amazon no longer promote its own series on Amazon Video in a similar manner Netflix does? To what extent can Microsoft no longer promote Bing’s search engine to compete with Google’s search engine effectively? To what extent Uber may no longer promote UberEATS in order to compete with delivery services effectively? Not only the business of business is doing business[17], but also it is its duty for which shareholders may hold managers to account.

The self is moral; there is a corporate morality of business self-interest. In other words, corporate selflessness runs counter to business ethics since corporate self-interest yields the self’s rivalrous positioning within a competitive order. Absent a corporate self-interest, self-sacrifice may generate value destruction for the sake of some unjustified and ungrounded claims. The emerging prohibition of self-preferencing, similar to the established ban on the default setting on one’s own products into other proprietary products, materializes the corporate self’s losing. Both directions coalesce to instill the legally embedded duty of self-sacrifice for the competitor’s welfare instead of the traditional consumer welfare and the dynamics of innovation, which never unleash absent appropriabilities. In conclusion, to expect firms, however big or small, to act irrespective of their identities (i.e., corporate selflessness) would constitute an antitrust error and would be at odds with capitalism.

Toward an Integrated Theory of Disintegrating Favoritism

The Google lawsuit primarily blames Google for default settings enforced via several deals. The lawsuit also makes self-preferencing anticompetitive conduct under antitrust rules. These two charges are novel and dubious in their remits. They nevertheless represent a fundamental catalyst for the development of a new and problematic unified antitrust theory prohibiting favoritism:  companies may no longer favor their products and services, both vertically and horizontally, irrespective of consumer benefits, irrespective of superior efficiency arguments, and irrespective of dynamic capabilities enhancement. Indeed, via an unreasonably expanded vision of leveraging, antitrust enforcement is furtively banning a company to favor its own products and services based on greater consumer choice as a substitute to consumer welfare, based on the protection of the opportunities of rivals to innovate and compete as a substitute to the essence of competition and innovation, and based on limiting the outreach and size of companies as a substitute to the capabilities and efficiencies of these companies. Leveraging becomes suspicious and corporate self-favoritism under accusation. The Google lawsuit materializes this impractical trend, which further enshrines the precautionary approach to antitrust enforcement[18].


[1] Jessica Guynn, Google Justice Department antitrust lawsuit explained: this is what it means for you. USA Today, October 20, 2020.

[2] The software (Internet Explorer) was tied in the hardware (Windows PC).

[3] U.S. v Google LLC, Case A:20, October 20, 2020, 3 (referring to default settings as “especially sticky” with respect to consumers’ willingness to change).

[4] While the DOJ affirms that “being the preset default general search engine is particularly valuable because consumers rarely change the preset default”, it nevertheless provides no evidence of the breadth of such consumer stickiness. To be sure, search engine’s default status does not necessarily lead to usage as evidenced by the case of South Korea. In this country, despite Google’s preset default settings, the search engine Naver remains dominant in the national search market with over 70% of market shares. The rivalry exerted by Naver on Google demonstrates that limits of consumer stickiness to default settings. See Alesia Krush, Google vs. Naver: Why Can’t Google Dominate Search in Korea? Link-Assistant.Com, available at: https://www.link-assistant.com/blog/google-vs-naver-why-cant-google-dominate-search-in-korea/ . As dominant search engine in Korea, Naver is subject to antitrust investigations with similar leveraging practices as Google in other countries, see Shin Ji-hye, FTC sets up special to probe Naver, Google, The Korea Herald, November 19, 2019, available at :  http://www.koreaherald.com/view.php?ud=20191119000798 ; Kim Byung-wook, Complaint against Google to be filed with FTC, The Investor, December 14, 2020, available at : https://www.theinvestor.co.kr/view.php?ud=20201123000984  (reporting a complaint by Naver and other Korean IT companies against Google’s 30% commission policy on Google Play Store’s apps).

[5] For instance, the then complaint acknowledged that “Microsoft designed Windows 98 so that removal of Internet Explorer by OEMs or end users is operationally more difficult than it was in Windows 95”, in U.S. v Microsoft Corp., Civil Action No 98-1232, May 18, 1998, para.20.

[6] The DOJ complaint itself quotes “one search competitor who is reported to have noted consumer stickiness “despite the simplicity of changing a default setting to enable customer choice […]” (para.47). Therefore, default setting for search engine is remarkably simple to bypass but consumers do not often do so, either due to satisfaction with Google search engine and/or due to search and opportunity costs.

[7] See para.56 of the DOJ complaint.

[8] Competing browsers can always welcome rival search engines and competing search engine apps can always be downloaded despite revenue sharing agreements. See paras.78-87 of the DOJ complaint.

[9] Google search engine is nothing but a “webware” – a complex set of algorithms that work via online access of a webpage with no prior download. For a discussion on the definition of webware, see https://www.techopedia.com/definition/4933/webware .

[10] Id. para.21.

[11] Such outcome would frustrate traditional ways of offering computers and mobile devices as acknowledged by the DOJ itself in the Google complaint: “new computers and new mobile devices generally come with a number of preinstalled apps and out-of-the-box setting. […] Each of these search access points can and almost always does have a preset default general search engine”, at para. 41. Also, it appears that present default general search engine is common commercial practices since, as the DOJ complaint itself notes when discussing Google’s rivals (Microsoft’s Bing and Amazon’s Fire OS), “Amazon preinstalled its own proprietary apps and agreed to make Microsoft’s Bing the preset default general search engine”, in para.130. The complaint fails to identify alternative search engines which are not preset defaults, thus implicitly recognizing this practice as a widespread practice.

[12] To use Vesterdof’s language, see Bo Vesterdorf, Theories of Self-Preferencing and Duty to Deal – Two Sides of the Same Coin, Competition Law & Policy Debate 1(1) 4, (2015). See also Nicolas Petit, Theories of Self-Preferencing under Article 102 TFEU: A Reply to Bo Vesterdorf, 5-7 (2015).

[13] Case 39740 Google Search (Shopping). Here the foreclosure effects of self-preferencing are only speculated: « the Commission is not required to prove that the Conduct has the actual effect of decreasing traffic to competing comparison shopping services and increasing traffic to Google’s comparison-shopping service. Rather, it is sufficient for the Commission to demonstrate that the Conduct is capable of having, or likely to have, such effects.” (para.601 of the Decision). See P. Ibáñez Colomo, Indispensability and Abuse of Dominance: From Commercial Solvents to Slovak Telekom and Google Shopping, 10 Journal of European Competition Law & Practice 532 (2019); Aurelien Portuese, When Demotion is Competition: Algorithmic Antitrust Illustrated, Concurrences, no 2, May 2018, 25-37; Aurelien Portuese, Fine is Only One Click Away, Symposium on the Google Shopping Decision, Case Note, 3 Competition and Regulatory Law Review, (2017).

[14] For a general discussion on law and economics of self-preferencing, see Michael A. Salinger, Self-Preferencing, Global Antitrust Institute Report, 329-368 (2020).

[15]Pablo Ibanez Colomo, Self-Preferencing: Yet Another Epithet in Need of Limiting Principles, 43 World Competition (2020) (concluding that self-preferencing is « misleading as a legal category »).

[16] See, for instances, Pedro Caro de Sousa, What Shall We Do About Self-Preferencing? Competition Policy International, June 2020.

[17] Milton Friedman, The Social Responsibility of Business is to Increase Its Profits, New York Times, September 13, 1970. This echoes Adam Smith’s famous statement that « It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard for their own self-interest » from the 1776 Wealth of Nations. In Ayn Rand’s philosophy, the only alternative to rational self-interest is to sacrifice one’s own interests either for fellowmen (altruism) or for supernatural forces (mysticism). See Ayn Rand, The Objectivist Ethics, in The Virtue of Selfishness, Signet, (1964).

[18] Aurelien Portuese, European Competition Enforcement and the Digital Economy : The Birthplace of Precautionary Antitrust, Global Antitrust Institute’s Report on the Digital Economy, 597-651.

This guest post is by Patrick Todd, an England-qualified solicitor and author on competition law/policy in digital markets.

The above quote is not about Democrat-nominee hopeful Elizabeth Warren’s policy views on sport. It is in fact an analogy to her proposal of splitting Google, Amazon, Facebook and Apple (“GAFA”) apart from their respective ancillary lines of business, a solution to one of the current hot topics in antitrust law, namely the alleged practice of GAFA exploiting the popularity of their platforms to gain competitive advantages in neighboring markets. Can a “referee” favor its own “players” in the digital platform game? Can we blame the “referee” if one “player” knocks out another? Should the “referee” be forced to intervene to protect said “player”? The analogy reflects a growing concern that platform owners’ entry into adjacent markets that are, or theoretically could be, served by independent firms creates an irreconcilable misalignment between the interests of users, independent companies and platform owners. As Margrethe Vestager, European Competition Commissioner and Vice-President of the European Commission (“EC”), has said:

[O]ne of the biggest issues we face is with platform businesses that also compete in other markets, with companies that depend on the platform. That means that the very same business becomes both player and referee, competing with others that rely on the platform, but also setting the rules that govern that competition.

Whether and to what extent successful firms in digital markets can enter and compete in neighboring markets, utilizing their existing expertise, has matured into an existential question that plagues and polarizes the antitrust community. Perhaps the most famous and debated case is the EC’s 2017 decision in Google Shopping, where it concluded that Google’s preferential placement of its comparison shopping results in a special box at the top of its search pages constituted an abuse of a dominant position under Article 102 TFEU. The EC found that such prominent placement, coupled with the denial of access to the box for rival price comparison websites, had the effect of driving traffic to Google’s own shopping site, depriving Google’s rivals of user-traffic. Google is strongly contesting both the facts and theory underpinning this decision in its appeal, the hearing for which took place in February. Meanwhile, complaints in relation to Google’s similar treatment of its other ancillary services, such as vacation rentals, have followed suit. Similar allegations have been made against Apple (see e.g. here), Amazon (see e.g. here) and Facebook (see e.g. here) for the way they design their platforms and organize their search results.[KS1] 

What links these cases, investigations and accusations is the doctrine of leverage, i.e. the practice of exploiting one’s market power in one market in order to extend that power to an adjacent market. Importantly, leveraging is not a standalone theory of harm in antitrust law: it is more appropriately regarded as a category of conduct where competitive effects are felt in a neighboring market (think tying, refusals to deal, margin squeeze, etc.). Examples of such conduct in the platform context could include platform owners: promoting their own adjacent products/services in search result pages; bundling, tying or pre-installing their adjacent products/services with platform software code; shutting off access to Application Programming Interfaces or data to third parties to decrease the relative interoperability of their rivals’ products/services; or generally reducing the compatibility of third-party products/services with the platform as a means of distribution.

This post examines various proposals that have been put forward to solve the alleged prevalence of anticompetitive leveraging in digital platform markets, namely:

  1. blocking platform owners from also owning adjacent products/services;
  2. prohibiting “favoring” or “self-preferencing” behavior (i.e. enforcing a non-discrimination standard); and
  3. reversing the burden of proof so that dominant platform firms bear the burden of showing that such conduct does not harm competition.

Each of these proposals would abrogate the “consumer welfare standard” baked into antitrust law, which permits exclusionary behavior as long as it constitutes “competition on the merits”, i.e. that the conduct ultimately benefits consumers. As Judge Frank Easterbrook has mercilessly held, “injuries to rivals are byproducts of vigorous competition, and the antitrust laws are not balm for rivals’ wounds.” Antitrust law maintains a distinction between pro- and anti-competitive leveraging because consumers frequently benefit from the conduct outlined above. Conversely, implementing any of the above proposals would decrease or negate entirely the ability of platform owners to show that such conduct benefits consumers.

This post then examines whether protecting competition in adjacent markets is important enough to sacrifice the consumer benefits that flow from pro-competitive leveraging. Empirical criteria that have been present in comparable instances of such intervention, such as bottleneck power over distribution, evidence of widespread harm to competition in neighboring markets, static product boundaries, and a lack or unimportance of integrative efficiencies, are not satisfied in the current context. Absent some proof that they are, the consumer welfare framework under antitrust law should prevail without recourse to more intrusive intervention.

Proposals to regulate the activities of digital platform owners in neighboring markets

1.      Structural separation

Some scholars, such as Lina Khan, propose to implement “[s]tructural remedies and prophylactic bans [to] limit the ability of dominant platforms to enter certain distinct lines of business.” Senator Warren has echoed this proposal, calling forlarge tech platforms to be designated as ‘Platform Utilities’ and broken apart from any participant on that platform.” Under this proposal, Amazon would be unable to act both as an online marketplace and a seller on its own marketplace, Google would be unable to act as both a search engine and a mapping provider, and Apple and Google would be unable to act as both producers of mobile operating systems and apps that run on those operating systems. Meanwhile, Facebook would be unable to operate both its core social media platform and separate services, such as dating, local buy-and-sell, and other businesses like Instagram and WhatsApp. Khan posits that such separation is the primary method of “prevent[ing] leveraging and eliminat[ing] a core conflict of interest currently embedded in the business model of dominant platforms.”

A rule that prohibits entry into neighboring markets will certainly catch all instances of harmful leveraging, but it will inevitably also condemn all instances of leveraging that are in fact beneficial to consumers (see below for examples). Moreover, structural separation would also condemn efficiencies stemming from vertical integration that do not depend on leveraging behavior, e.g. elimination of double marginalization. As Bruce Owen sums up, such intervention “is not necessary, and may well reduce welfare by deterring efficient investments,” in circumstances where “[e]mpirical evidence that vertical integration or vertical restraints are harmful is weak, compared to evidence that vertical integration is beneficial.”

2.      Non-discrimination principles

Other scholars seek a prohibition on leveraging, i.e. a “non-discrimination” or “platform neutrality” standard whereby platform owners cannot treat third-party products/services differently to how they treat their own. Though framed as a regulatory regime operating in parallel to antitrust law, such regulation would have the effect of supplanting antitrust in favor of a standard that blocks all leveraging behavior, whether pro- or anti-competitive. For example, Apple and Google could still produce both apps and software platforms, but they would be unable to bundle them together, even if doing so improves the user experience (or benefits app developers).

This proposal also disregards the distinction between pro- and anti-competitive leveraging (albeit in a less intrusive manner than structural separation). It would, however, appear to maintain efficiencies stemming solely from vertical integration, as long as said benefits do not result in preferential treatment of the platform owner’s products/services.

3.      Reversing the burden of proof

Though not regulatory in nature, it is also worth including the proposal in the EC’s expert report on “competition in the digital era” of recalibrating the legal analysis of leveraging conduct by “err[ing] on the side of disallowing potentially anti-competitive conducts, and impos[ing] on the incumbent the burden of proof for showing the pro-competitiveness of its conduct.” Under this proposal, once a plaintiff establishes that leveraging conduct exists (without having to establish that it satisfies pre-existing legal criteria), the defendant would bear the burden of showing that its conduct did not have long-run anti-competitive effects or that the conduct had an overriding efficiency rationale.

As Dolmans and Pesch point out, proving that conduct does not have a long-term impact on competition may be nigh on impossible, as it involves proving a negative. This proposal would therefore bring non-discrimination in by the back door and return antitrust law to form-based rules that neglect the actual effects of conduct on competition or consumers. Moreover, making it unduly difficult for dominant firms to show that their conduct is in fact pro-competitive, despite any exclusionary effects, would similarly collapse an effects-based model for leveraging conduct into blanket non-discrimination. The report’s authors admit as much, citing for their proposal a report by the French telecoms regulator which advocates “a principle of ‘net neutrality’ for smartphones, tablets and voice assistants” (i.e. a non-discrimination standard).

Consumer vs. small-business welfare: which should prevail in digital markets?

Each of the above proposals would, to varying degrees, dissolve the distinctions between pro- and anti-competitive leveraging and (in the case of structural separation) pro- and anti-competitive vertical integration, significantly curtailing the ability of firms to legitimately out-compete their rivals in neighboring markets. All leveraging would be presumptively harmful to competition and, by extension, consumers.

The question then becomes whether we should ignore the incentive to innovate and compete in platform markets and turn our societal interests to competition within platforms. It has long been the case that “the primary purpose of the antitrust laws is to protect interbrand competition.” However, in certain circumstances, it can be preferable to shift the focus from inter- to intra-brand competition (often through legislation). Take, for example, must-carry provisions imposed on cable operators in the US or net neutrality regulation (repealed in the US, but prevailing in the EU). In circumstances such as these, society willingly foregoes benefits of continued innovation and competition in the inter-brand market because it has concluded, for one reason or another, that bolstering competition in the intra-brand market is more important. This can entail tolerating counterfactually higher prices or reduced quality as a byproduct of protecting interests deemed to be more important, such as maintaining a pluralistic downstream market. In line with the above proposals, there is a growing belief that such an inversion of the goals of competition policy is exactly what is needed in digital markets. This section examines the empirical criteria that one would expect to be verified before shifting the focal point of competition policy from inter-platform competition to intra-platform competition.

1.      Strategic bottleneck power over distribution

In past instances of “access regulation” or structural separation of vertically integrated firms, there have been concerns that the targeted firms had strategic “bottleneck” power over the distribution of some downstream product or service, i.e. the firms sat between a set of suppliers and consumers and, through the control of some vital input or method of distribution, controlled access between the two. Strategic bottleneck power was present in the must-carry provisions imposed on cable operators in the US, the non-discrimination principles enshrined in § 616 of the US Communications Act, and net neutrality regulation. The same applies to structural separation: when the District Court approved the consent decree structurally separating AT&T’s long-distance arm from its local operating companies, it was motivated by the fact that “the principal means by which AT&T has maintained monopoly power in telecommunications has been its control of the Operating Companies with their strategic bottleneck position.”

Do GAFA possess strategic bottleneck power? Take Google Search, for example. In the EC’s decision in Google Shopping, it found that referrals from Google Search accounted for a large proportion of traffic to rival comparison shopping websites and that traffic could not be effectively replaced by other sources. However, firms operating in neighboring markets have many more routes to consumers that flout discovery through a search engine. As John Temple Lang observes, they can access consumers through “direct navigation, specialized search services, social networks such as Facebook and Pinterest, partnerships with PC and mobile device markets, agreements with other publishers to refer traffic to each other, and so on.” Apple’s iOS and Google’s Android, on the other hand, compete against each other and thus neither firm, by definition, can possess the degree of strategic bottleneck power required to consider abandoning their respective incentives to innovate. As for Amazon: in 2019 it was estimated that Amazon accounted for 38% of all online sales in the US. This may seem like a staggering volume, but it in fact shows that distributors can – and do – bypass Amazon’s platform to reach consumers, with great success.

Insofar as GAFA possess strategic bottleneck power over particular categories of goods (i.e. in particular neighboring markets), this would not justify shifting the focus to intra-platform competition across all product categories. The market power element of traditional antitrust analyses serves to guard competition in these circumstances by carving a remedy around conduct that illegitimately hampers the ability of competitors in neighboring markets to compete.

2.      Widespread harm in adjacent markets

To ban platform owners from leveraging anti- and pro-competitively, one would expect there to be cogent evidence of harm to competition across a multitude of adjacent markets that depend on the platforms for access to consumers. However, as Feng Zhu and Qihong Liu note, there is a dearth of empirical evidence on the effects of platform owners’ entry into complementary markets. Even studies that support the proposition that such entry dampens or skews innovation incentives of firms in adjacent markets conclude that the welfare effects are ambiguous, and that consumers may actually be better off (see e.g. here and here). Other studies show that third-party producers can benefit from platform entry into adjacent markets (see e.g. here and here). It is therefore clear that this criterion, which should also be a prerequisite to imposing blanket regulation to control the behavior of platform owners, has not been satisfied.

3.      Discernible and static product boundaries

In prior cases of access regulation, the input that firms in neighboring markets have depended on to access consumers has been clearly distinguishable from their own products. Although antitrust literature commonly refers to “platforms” and “applications” as if these are perceptibly different products, the reality is much different: both platforms and their complementary applications are composed of individual components and, as Carl Shapiro notes, “the boundary between the ‘platform’ and services running on that platform can be fuzzy and can change over time.” Any attempt to freeze the definitional boundary of a platform would negate platform owners’ incentive to build upon and improve their platforms, to the detriment of consumers and (in the case of software platforms) app developers. If Apple were prevented from vertically integrating, what would iOS look like? Could it even have a voice-call function? Alternatively, under non-discrimination regulation, what would a new iOS device look like? Would it just be a blank screen where the user is then forced to choose between various alternatives?

The problem with proposing to separate platforms from adjacent products is that any platform component can theoretically be modularized and opened to competition from third-parties. Because integration of complementary components is an essential part of inter-platform competition, imposing the proposed interventions could destroy the very ecosystems that the competitors that critics seek to protect depend on, and prevent the next popular digital platform from emerging.

4.      Lack or unimportance of integrative efficiencies

Critics may counter that efficiencies stemming from leveraging are unimportant or non-existent, or do not depend on conduct that has exclusionary effects, and thus nothing is lost by shifting antitrust’s focus to the protection of competitors in adjacent markets. However, any iPhone user will testify to the consumer benefits flowing from technically integrating multiple platform components and features into a single package (e.g. voice-assistant technology and mapping functionality). In a similar vein, the UK CMA, in approving Google’s acquisition of mapping software company Waze, was prompted in part by the fact that “[i]ntegration of a map application into the operating system creates opportunities for operating system developers to use their own or affiliated services (for example search engines and social networks) to improve the experience of users.” Integrating Product A (the platform) and Product B (a component or the software code of an ancillary product/service) can facilitate the creation some new functionality or feature in the form of Product C that users value and, crucially, could not achieve by combining Products A and B themselves (from one or multiple firms). Another potential consumer benefit flowing from leveraging is a reduction in consumer search costs i.e. providing users with the functionality or end results that they seek more quickly and efficiently. Even though anti-competitive concerns can theoretically arise, it remains the case that, empirically, integration of software code is predominantly motivated by efficiency justifications and occurs in both competitive and concentrated markets.

Conclusion

Much of the impetus to enact the above proposals stems from the perception that antitrust law in its current form does not act quickly enough to restore competition in the market. Indeed, it can take over a decade for the dust to settle in big ticket antitrust cases, by which time antitrust remedies may be too little too late in those cases where the authorities get it right. To the extent that authorities can think of innovative ways to enforce existing standards more quickly and accurately, this would be met with widespread enthusiasm (but may be idealistic).

However, introducing more intrusive measures to protect competition in neighboring markets, and  undermining the consumer welfare standard that protects the ability of dominant firms to legitimately enter neighboring markets and compete on the merits, is not warranted. Intervention should remain targeted and evidence-based. If a complainant can adduce evidence that a platform owner is leveraging into a neighboring market and raising the complainant’s cost of doing business, and if the platform owner cannot show a pro-competitive justification for the behavior, antitrust law will intervene to restore competition under existing standards. For this, no regulatory intervention or other change to existing rules is necessary.

For a more detailed version of this post, see: Patrick F. Todd, Digital Platforms and the Leverage Problem, 98 Neb. L. Rev. 486 (2019).

Available at: https://digitalcommons.unl.edu/nlr/vol98/iss2/12.

Regardless of which standard you want to apply to competition law – consumer welfare, total welfare, hipster, or redneck antitrust – it’s never good when competition/antitrust agencies are undermining innovation. Yet, this is precisely what the European Commission is doing.

Today, the agency announced a €4.34 billion fine against Alphabet (Google). It represents more than 30% of what the company invests annually in R&D (based on 2017 figures). This is more than likely to force Google to cut its R&D investments, or, at least, to slow them down.

In fact, the company says in a recent 10-K filing with the SEC that it is uncertain as to the impact of these sanctions on its financial stability. It follows that the European Commission necessarily is ignorant of such concerns, as well, which is thus clearly not reflected in the calculation of its fine.

One thing is for sure, however: In the end, consumers will suffer if the failure to account for the fine’s effect on innovation will lead to less of it from Google.

And Google is not alone in this situation. In a paper just posted by the International Center for Law & Economics, I conduct an empirical study comparing all the fines imposed by the European Commission on the basis of Article 102 TFEU over the period 2004 to 2018 (Android included) with the annual R&D investments by the targeted companies.

The results are indisputable: The European Commission’s fines are disproportionate in this regard and have the probable effect of slowing down the innovation of numerous sanctioned companies.

For this reason, an innovation protection mechanism should be incorporated into the calculation of the EU’s Article 102 fines. I propose doing so by introducing a new limit that caps Article 102 fines at a certain percentage of companies’ investment in R&D.

The full paper is available here.

In recent years, the European Union’s (EU) administrative body, the European Commission (EC), increasingly has applied European competition law in a manner that undermines free market dynamics.  In particular, its approach to “dominant” firm conduct disincentivizes highly successful companies from introducing product and service innovations that enhance consumer welfare and benefit the economy – merely because they threaten to harm less efficient competitors.

For example, the EC fined Microsoft 561 million euros in 2013 for its failure to adhere to an order that it offer a version of its Window software suite that did not include its popular Windows Media Player (WMP) – despite the lack of consumer demand for a “dumbed down” Windows without WMP.  This EC intrusion into software design has been described as a regulatory “quagmire.”

In June 2017 the EC fined Google 2.42 billion euros for allegedly favoring its own comparison shopping service over others favored in displaying Google search results – ignoring economic research that shows Google’s search policies benefit consumers.  Google also faces potentially higher EC antitrust fines due to alleged abuses involving android software (bundling of popular Google search and Chrome apps), a product that has helped spur dynamic smartphone innovations and foster new markets.

Furthermore, other highly innovative single firms, such as Apple and Amazon (favorable treatment deemed “state aids”), Qualcomm (alleged anticompetitive discounts), and Facebook (in connection with its WhatsApp acquisition), face substantial EC competition law penalties.

Underlying the EC’s current enforcement philosophy is an implicit presumption that innovations by dominant firms violate competition law if they in any way appear to disadvantage competitors.  That presumption forgoes considering the actual effects on the competitive process of dominant firm activities.  This is a recipe for reduced innovation, as successful firms “pull their competitive punches” to avoid onerous penalties.

The European Court of Justice (ECJ) implicitly recognized this problem in its September 6, 2017 decision setting aside the European General Court’s affirmance of the EC’s 2009 1.06 billion euro fine against Intel.  Intel involved allegedly anticompetitive “loyalty rebates” by Intel, which allowed buyers to achieve cost savings in Intel chip purchases.  In remanding the Intel case to the General Court for further legal and factual analysis, the ECJ’s opinion stressed that the EC needed to do more than find a dominant position and categorize the rebates in order to hold Intel liable.  The EC also needed to assess the “capacity of [Intel’s] . . . practice to foreclose competitors which are at least as efficient” and whether any exclusionary effect was outweighed by efficiencies that also benefit consumers.  In short, evidence-based antitrust analysis was required.  Mere reliance on presumptions was not enough.  Why?  Because competition on the merits is centered on the recognition that the departure of less efficient competitors is part and parcel of consumer welfare-based competition on the merits.  As the ECJ cogently put it:

[I]t must be borne in mind that it is in no way the purpose of Article 102 TFEU [which prohibits abuse of a dominant position] to prevent an undertaking from acquiring, on its own merits, the dominant position on a market.  Nor does that provision seek to ensure that competitors less efficient than the undertaking with the dominant position should remain on the market . . . .  [N]ot every exclusionary effect is necessarily detrimental to competition. Competition on the merits may, by definition, lead to the departure from the market or the marginalisation of competitors that are less efficient and so less attractive to consumers from the point of view of, among other things, price, choice, quality or innovation[.]

Although the ECJ’s recent decision is commendable, it does not negate the fact that Intel had to wait eight years to have its straightforward arguments receive attention – and the saga is far from over, since the General Court has to address this matter once again.  These sorts of long-term delays, during which firms face great uncertainty (and the threat of further EC investigations and fines), are antithetical to innovative activity by enterprises deemed dominant.  In short, unless and until the EC changes its competition policy perspective on dominant firm conduct (and there are no indications that such a change is imminent), innovation and economic dynamism will suffer.

Even if the EC dithers, the United Kingdom’s (UK) imminent withdrawal from the EU (Brexit) provides it with a unique opportunity to blaze a new competition policy trail – and perhaps in so doing influence other jurisdictions.

In particular, Brexit will enable the UK’s antitrust enforcer, the Competition and Markets Authority (CMA), to adopt an outlook on competition policy in general – and on single firm conduct in particular – that is more sensitive to innovation and economic dynamism.  What might such a CMA enforcement policy look like?  It should reject the EC’s current approach.  It should focus instead on the actual effects of competitive activity.  In particular, it should incorporate the insights of decision theory (see here, for example) and place great weight on efficiencies (see here, for example).

Let us hope that the CMA acts boldly – carpe diem.  Such action, combined with other regulatory reforms, could contribute substantially to the economic success of Brexit (see here).