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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.]

The U.S. Department of Justice’s (DOJ) antitrust case against Google, which was filed in October 2020, will be a tough slog.[1] It is an alleged monopolization (Sherman Act, Sec. 2) case; and monopolization cases are always a tough slog.

In this brief essay I will lay out some of the issues in the case and raise an intriguing possibility.

What is the case about?

The case is about exclusivity and exclusion in the distribution of search engine services; that Google paid substantial sums to Apple and to the manufacturers of Android-based mobile phones and tablets and also to wireless carriers and web-browser proprietors—in essence, to distributors—to install the Google search engine as the exclusive pre-set (installed), default search program. The suit alleges that Google thereby made it more difficult for other search-engine providers (e.g., Bing; DuckDuckGo) to obtain distribution for their search-engine services and thus to attract search-engine users and to sell the online advertising that is associated with search-engine use and that provides the revenue to support the search “platform” in this “two-sided market” context.[2]

Exclusion can be seen as a form of “raising rivals’ costs.”[3]  Equivalently, exclusion can be seen as a form of non-price predation. Under either interpretation, the exclusionary action impedes competition.

It’s important to note that these allegations are different from those that motivated an investigation by the Federal Trade Commission (which the FTC dropped in 2013) and the cases by the European Union against Google.[4]  Those cases focused on alleged self-preferencing; that Google was unduly favoring its own products and services (e.g., travel services) in its delivery of search results to users of its search engine. In those cases, the impairment of competition (arguably) happens with respect to those competing products and services, not with respect to search itself.

What is the relevant market?

For a monopolization allegation to have any meaning, there needs to be the exercise of market power (which would have adverse consequences for the buyers of the product). And in turn, that exercise of market power needs to occur in a relevant market: one in which market power can be exercised.

Here is one of the important places where the DOJ’s case is likely to turn into a slog: the delineation of a relevant market for alleged monopolization cases remains as a largely unsolved problem for antitrust economics.[5]  This is in sharp contrast to the issue of delineating relevant markets for the antitrust analysis of proposed mergers.  For this latter category, the paradigm of the “hypothetical monopolist” and the possibility that this hypothetical monopolist could prospectively impose a “small but significant non-transitory increase in price” (SSNIP) has carried the day for the purposes of market delineation.

But no such paradigm exists for monopolization cases, in which the usual allegation is that the defendant already possesses market power and has used the exclusionary actions to buttress that market power. To see the difficulties, it is useful to recall the basic monopoly diagram from Microeconomics 101. A monopolist faces a negatively sloped demand curve for its product (at higher prices, less is bought; at lower prices, more is bought) and sets a profit-maximizing price at the level of output where its marginal revenue (MR) equals its marginal costs (MC). Its price is thereby higher than an otherwise similar competitive industry’s price for that product (to the detriment of buyers) and the monopolist earns higher profits than would the competitive industry.

But unless there are reliable benchmarks as to what the competitive price and profits would otherwise be, any information as to the defendant’s price and profits has little value with respect to whether the defendant already has market power. Also, a claim that a firm does not have market power because it faces rivals and thus isn’t able profitably to raise its price from its current level (because it would lose too many sales to those rivals) similarly has no value. Recall the monopolist from Micro 101. It doesn’t set a higher price than the one where MR=MC, because it would thereby lose too many sales to other sellers of other things.

Thus, any firm—regardless of whether it truly has market power (like the Micro 101 monopolist) or is just another competitor in a sea of competitors—should have already set its price at its profit-maximizing level and should find it unprofitable to raise its price from that level.[6]  And thus the claim, “Look at all of the firms that I compete with!  I don’t have market power!” similarly has no informational value.

Let us now bring this problem back to the Google monopolization allegation:  What is the relevant market?  In the first instance, it has to be “the provision of answers to user search queries.” After all, this is the “space” in which the exclusion occurred. But there are categories of search: e.g., search for products/services, versus more general information searches (“What is the current time in Delaware?” “Who was the 21st President of the United States?”). Do those separate categories themselves constitute relevant markets?

Further, what would the exercise of market power in a (delineated relevant) market look like?  Higher-than-competitive prices for advertising that targets search-results recipients is one obvious answer (but see below). In addition, because this is a two-sided market, the competitive “price” (or prices) might involve payments by the search engine to the search users (in return for their exposure to the lucrative attached advertising).[7]  And product quality might exhibit less variety than a competitive market would provide; and/or the monopolistic average level of quality would be lower than in a competitive market: e.g., more abuse of user data, and/or deterioration of the delivered information itself, via more self-preferencing by the search engine and more advertising-driven preferencing of results.[8]

In addition, a natural focus for a relevant market is the advertising that accompanies the search results. But now we are at the heart of the difficulty of delineating a relevant market in a monopolization context. If the relevant market is “advertising on search engine results pages,” it seems highly likely that Google has market power. If the relevant market instead is all online U.S. advertising (of which Google’s revenue share accounted for 32% in 2019[9]), then the case is weaker; and if the relevant market is all advertising in the United States (which is about twice the size of online advertising[10]), the case is weaker still. Unless there is some competitive benchmark, there is no easy way to delineate the relevant market.[11]

What exactly has Google been paying for, and why?

As many critics of the DOJ’s case have pointed out, it is extremely easy for users to switch their default search engine. If internet search were a normal good or service, this ease of switching would leave little room for the exercise of market power. But in that case, why is Google willing to pay $8-$12 billion annually for the exclusive default setting on Apple devices and large sums to the manufacturers of Android-based devices (and to wireless carriers and browser proprietors)? Why doesn’t Google instead run ads in prominent places that remind users how superior Google’s search results are and how easy it is for users (if they haven’t already done so) to switch to the Google search engine and make Google the user’s default choice?

Suppose that user inertia is important. Further suppose that users generally have difficulty in making comparisons with respect to the quality of delivered search results. If this is true, then being the default search engine on Apple and Android-based devices and on other distribution vehicles would be valuable. In this context, the inertia of their customers is a valuable “asset” of the distributors that the distributors may not be able to take advantage of, but that Google can (by providing search services and selling advertising). The question of whether Google’s taking advantage of this user inertia means that Google exercises market power takes us back to the issue of delineating the relevant market.

There is a further wrinkle to all of this. It is a well-understood concept in antitrust economics that an incumbent monopolist will be willing to pay more for the exclusive use of an essential input than a challenger would pay for access to the input.[12] The basic idea is straightforward. By maintaining exclusive use of the input, the incumbent monopolist preserves its (large) monopoly profits. If the challenger enters, the incumbent will then earn only its share of the (much lower, more competitive) duopoly profits. Similarly, the challenger can expect only the lower duopoly profits. Accordingly, the incumbent should be willing to outbid (and thereby exclude) the challenger and preserve the incumbent’s exclusive use of the input, so as to protect those monopoly profits.

To bring this to the Google monopolization context, if Google does possess market power in some aspect of search—say, because online search-linked advertising is a relevant market—then Google will be willing to outbid Microsoft (which owns Bing) for the “asset” of default access to Apple’s (inertial) device owners. That Microsoft is a large and profitable company and could afford to match (or exceed) Google’s payments to Apple is irrelevant. If the duopoly profits for online search-linked advertising would be substantially lower than Google’s current profits, then Microsoft would not find it worthwhile to try to outbid Google for that default access asset.

Alternatively, this scenario could be wholly consistent with an absence of market power. If search users (who can easily switch) consider Bing to be a lower-quality search service, then large payments by Microsoft to outbid Google for those exclusive default rights would be largely wasted, since the “acquired” default search users would quickly switch to Google (unless Microsoft provided additional incentives for the users not to switch).

But this alternative scenario returns us to the original puzzle:  Why is Google making such large payments to the distributors for those exclusive default rights?

An intriguing possibility

Consider the following possibility. Suppose that Google was paying that $8-$12 billion annually to Apple in return for the understanding that Apple would not develop its own search engine for Apple’s device users.[13] This possibility was not raised in the DOJ’s complaint, nor is it raised in the subsequent suits by the state attorneys general.

But let’s explore the implications by going to an extreme. Suppose that Google and Apple had a formal agreement that—in return for the $8-$12 billion per year—Apple would not develop its own search engine. In this event, this agreement not to compete would likely be seen as a violation of Section 1 of the Sherman Act (which does not require a market delineation exercise) and Apple would join Google as a co-conspirator. The case would take on the flavor of the FTC’s prosecution of “pay-for-delay” agreements between the manufacturers of patented pharmaceuticals and the generic drug manufacturers that challenge those patents and then receive payments from the former in return for dropping the patent challenge and delaying the entry of the generic substitute.[14]

As of this writing, there is no evidence of such an agreement and it seems quite unlikely that there would have been a formal agreement. But the DOJ will be able to engage in discovery and take depositions. It will be interesting to find out what the relevant executives at Google—and at Apple—thought was being achieved by those payments.

What would be a suitable remedy/relief?

The DOJ’s complaint is vague with respect to the remedy that it seeks. This is unsurprising. The DOJ may well want to wait to see how the case develops and then amend its complaint.

However, even if Google’s actions have constituted monopolization, it is difficult to conceive of a suitable and effective remedy. One apparently straightforward remedy would be to require simply that Google not be able to purchase exclusivity with respect to the pre-set default settings. In essence, the device manufacturers and others would always be able to sell parallel default rights to other search engines: on the basis, say, that the default rights for some categories of customers—or even a percentage of general customers (randomly selected)—could be sold to other search-engine providers.

But now the Gilbert-Newbery insight comes back into play. Suppose that a device manufacturer knows (or believes) that Google will pay much more if—even in the absence of any exclusivity agreement—Google ends up being the pre-set search engine for all (or nearly all) of the manufacturer’s device sales, as compared with what the manufacturer would receive if those default rights were sold to multiple search-engine providers (including, but not solely, Google). Can that manufacturer (recall that the distributors are not defendants in the case) be prevented from making this sale to Google and thus (de facto) continuing Google’s exclusivity?[15]

Even a requirement that Google not be allowed to make any payment to the distributors for a default position may not improve the competitive environment. Google may be able to find other ways of making indirect payments to distributors in return for attaining default rights, e.g., by offering them lower rates on their online advertising.

Further, if the ultimate goal is an efficient outcome in search, it is unclear how far restrictions on Google’s bidding behavior should go. If Google were forbidden from purchasing any default installation rights for its search engine, would (inert) consumers be better off? Similarly, if a distributor were to decide independently that its customers were better served by installing the Google search engine as the default, would that not be allowed? But if it is allowed, how could one be sure that Google wasn’t indirectly paying for this “independent” decision (e.g., through favorable advertising rates)?

It’s important to remember that this (alleged) monopolization is different from the Standard Oil case of 1911 or even the (landline) AT&T case of 1984. In those cases, there were physical assets that could be separated and spun off to separate companies. For Google, physical assets aren’t important. Although it is conceivable that some of Google’s intellectual property—such as Gmail, YouTube, or Android—could be spun off to separate companies, doing so would do little to cure the (arguably) fundamental problem of the inert device users.

In addition, if there were an agreement between Google and Apple for the latter not to develop a search engine, then large fines for both parties would surely be warranted. But what next? Apple can’t be forced to develop a search engine.[16] This differentiates such an arrangement from the “pay-for-delay” arrangements for pharmaceuticals, where the generic manufacturers can readily produce a near-identical substitute for the patented drug and are otherwise eager to do so.

At the end of the day, forbidding Google from paying for exclusivity may well be worth trying as a remedy. But as the discussion above indicates, it is unlikely to be a panacea and is likely to require considerable monitoring for effective enforcement.

Conclusion

The DOJ’s case against Google will be a slog. There are unresolved issues—such as how to delineate a relevant market in a monopolization case—that will be central to the case. Even if the DOJ is successful in showing that Google violated Section 2 of the Sherman Act in monopolizing search and/or search-linked advertising, an effective remedy seems problematic. But there also remains the intriguing question of why Google was willing to pay such large sums for those exclusive default installation rights?

The developments in the case will surely be interesting.


[1] The DOJ’s suit was joined by 11 states.  More states subsequently filed two separate antitrust lawsuits against Google in December.

[2] There is also a related argument:  That Google thereby gained greater volume, which allowed it to learn more about its search users and their behavior, and which thereby allowed it to provide better answers to users (and thus a higher-quality offering to its users) and better-targeted (higher-value) advertising to its advertisers.  Conversely, Google’s search-engine rivals were deprived of that volume, with the mirror-image negative consequences for the rivals.  This is just another version of the standard “learning-by-doing” and the related “learning curve” (or “experience curve”) concepts that have been well understood in economics for decades.

[3] See, for example, Steven C. Salop and David T. Scheffman, “Raising Rivals’ Costs: Recent Advances in the Theory of Industrial Structure,” American Economic Review, Vol. 73, No. 2 (May 1983), pp.  267-271; and Thomas G. Krattenmaker and Steven C. Salop, “Anticompetitive Exclusion: Raising Rivals’ Costs To Achieve Power Over Price,” Yale Law Journal, Vol. 96, No. 2 (December 1986), pp. 209-293.

[4] For a discussion, see Richard J. Gilbert, “The U.S. Federal Trade Commission Investigation of Google Search,” in John E. Kwoka, Jr., and Lawrence J. White, eds. The Antitrust Revolution: Economics, Competition, and Policy, 7th edn.  Oxford University Press, 2019, pp. 489-513.

[5] For a more complete version of the argument that follows, see Lawrence J. White, “Market Power and Market Definition in Monopolization Cases: A Paradigm Is Missing,” in Wayne D. Collins, ed., Issues in Competition Law and Policy. American Bar Association, 2008, pp. 913-924.

[6] The forgetting of this important point is often termed “the cellophane fallacy”, since this is what the U.S. Supreme Court did in a 1956 antitrust case in which the DOJ alleged that du Pont had monopolized the cellophane market (and du Pont, in its defense claimed that the relevant market was much wider: all flexible wrapping materials); see U.S. v. du Pont, 351 U.S. 377 (1956).  For an argument that profit data and other indicia argued for cellophane as the relevant market, see George W. Stocking and Willard F. Mueller, “The Cellophane Case and the New Competition,” American Economic Review, Vol. 45, No. 1 (March 1955), pp. 29-63.

[7] In the context of differentiated services, one would expect prices (positive or negative) to vary according to the quality of the service that is offered.  It is worth noting that Bing offers “rewards” to frequent searchers; see https://www.microsoft.com/en-us/bing/defaults-rewards.  It is unclear whether this pricing structure of payment to Bing’s customers represents what a more competitive framework in search might yield, or whether the payment just indicates that search users consider Bing to be a lower-quality service.

[8] As an additional consequence of the impairment of competition in this type of search market, there might be less technological improvement in the search process itself – to the detriment of users.

[9] As estimated by eMarketer: https://www.emarketer.com/newsroom/index.php/google-ad-revenues-to-drop-for-the-first-time/.

[10] See https://www.visualcapitalist.com/us-advertisers-spend-20-years/.

[11] And, again, if we return to the du Pont cellophane case:  Was the relevant market cellophane?  Or all flexible wrapping materials?

[12] This insight is formalized in Richard J. Gilbert and David M.G. Newbery, “Preemptive Patenting and the Persistence of Monopoly,” American Economic Review, Vol. 72, No. 3 (June 1982), pp. 514-526.

[13] To my knowledge, Randal C. Picker was the first to suggest this possibility; see https://www.competitionpolicyinternational.com/a-first-look-at-u-s-v-google/.  Whether Apple would be interested in trying to develop its own search engine – given the fiasco a decade ago when Apple tried to develop its own maps app to replace the Google maps app – is an open question.  In addition, the Gilbert-Newbery insight applies here as well:  Apple would be less inclined to invest the substantial resources that would be needed to develop a search engine when it is thereby in a duopoly market.  But Google might be willing to pay “insurance” to reinforce any doubts that Apple might have.

[14] The U.S. Supreme Court, in FTC v. Actavis, 570 U.S. 136 (2013), decided that such agreements could be anti-competitive and should be judged under the “rule of reason”.  For a discussion of the case and its implications, see, for example, Joseph Farrell and Mark Chicu, “Pharmaceutical Patents and Pay-for-Delay: Actavis (2013),” in John E. Kwoka, Jr., and Lawrence J. White, eds. The Antitrust Revolution: Economics, Competition, and Policy, 7th edn.  Oxford University Press, 2019, pp. 331-353.

[15] This is an example of the insight that vertical arrangements – in this case combined with the Gilbert-Newbery effect – can be a way for dominant firms to raise rivals’ costs.  See, for example, John Asker and Heski Bar-Isaac. 2014. “Raising Retailers’ Profits: On Vertical Practices and the Exclusion of Rivals.” American Economic Review, Vol. 104, No. 2 (February 2014), pp. 672-686.

[16] And, again, for the reasons discussed above, Apple might not be eager to make the effort.

[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.]

As one of the few economic theorists in this symposium, I believe my comparative advantage is in that: economic theory. In this post, I want to remind people of the basic economic theories that we have at our disposal, “off the shelf,” to make sense of the U.S. Department of Justice’s lawsuit against Google. I do not mean this to be a proclamation of “what economics has to say about X,” but merely just to help us frame the issue.

In particular, I’m going to focus on the economic concerns of Google paying phone manufacturers (Apple, in particular) to be the default search engine installed on phones. While there is not a large literature on the economic effects of default contracts, there is a large literature on something that I will argue is similar: trade promotions, such as slotting contracts, where a manufacturer pays a retailer for shelf space. Despite all the bells and whistles of the Google case, I will argue that, from an economic point of view, the contracts that Google signed are just trade promotions. No more, no less. And trade promotions are well-established as part of a competitive process that ultimately helps consumers. 

However, it is theoretically possible that such trade promotions hurt customers, so it is theoretically possible that Google’s contracts hurt consumers. Ultimately, the theoretical possibility of anticompetitive behavior that harms consumers does not seem plausible to me in this case.

Default Status

There are two reasons that Google paying Apple to be its default search engine is similar to a trade promotion. First, the deal brings awareness to the product, which nudges certain consumers/users to choose the product when they would not otherwise do so. Second, the deal does not prevent consumers from choosing the other product.

In the case of retail trade promotions, a promotional space given to Coca-Cola makes it marginally easier for consumers to pick Coke, and therefore some consumers will switch from Pepsi to Coke. But it does not reduce any consumer’s choice. The store will still have both items.

This is the same for a default search engine. The marginal searchers, who do not have a strong preference for either search engine, will stick with the default. But anyone can still install a new search engine, install a new browser, etc. It takes a few clicks, just as it takes a few steps to walk down the aisle to get the Pepsi; it is still an available choice.

If we were to stop the analysis there, we could conclude that consumers are worse off (if just a tiny bit). Some customers will have to change the default app. We also need to remember that this contract is part of a more general competitive process. The retail stores are also competing with one another, as are smartphone manufacturers.

Despite popular claims to the contrary, Apple cannot charge anything it wants for its phone. It is competing with Samsung, etc. Therefore, Apple has to pass through some of Google’s payments to customers in order to compete with Samsung. Prices are lower because of this payment. As I phrased it elsewhere, Google is effectively subsidizing the iPhone. This cross-subsidization is a part of the competitive process that ultimately benefits consumers through lower prices.

These contracts lower consumer prices, even if we assume that Apple has market power. Those who recall your Econ 101 know that a monopolist chooses a quantity where the marginal revenue equals marginal cost. With a payment from Google, the marginal cost of producing a phone is lower, therefore Apple will increase the quantity and lower price. This is shown below:

One of the surprising things about markets is that buyers’ and sellers’ incentives can be aligned, even though it seems like they must be adversarial. Companies can indirectly bargain for their consumers. Commenting on Standard Fashion Co. v. Magrane-Houston Co., where a retail store contracted to only carry Standard’s products, Robert Bork (1978, pp. 306–7) summarized this idea as follows:

The store’s decision, made entirely in its own interest, necessarily reflects the balance of competing considerations that determine consumer welfare. Put the matter another way. If no manufacturer used exclusive dealing contracts, and if a local retail monopolist decided unilaterally to carry only Standard’s patterns because the loss in product variety was more than made up in the cost saving, we would recognize that decision was in the consumer interest. We do not want a variety that costs more than it is worth … If Standard finds it worthwhile to purchase exclusivity … the reason is not the barring of entry, but some more sensible goal, such as obtaining the special selling effort of the outlet.

How trade promotions could harm customers

Since Bork’s writing, many theoretical papers have shown exceptions to Bork’s logic. There are times that the retailers’ incentives are not aligned with the customers. And we need to take those possibilities seriously.

The most common way to show the harm of these deals (or more commonly exclusivity deals) is to assume:

  1. There are large, fixed costs so that a firm must acquire a sufficient number of customers in order to enter the market; and
  2. An incumbent can lock in enough customers to prevent the entrant from reaching an efficient size.

Consumers can be locked-in because there is some fixed cost of changing suppliers or because of some coordination problems. If that’s true, customers can be made worse off, on net, because the Google contracts reduce consumer choice.

To understand the logic, let’s simplify the model to just search engines and searchers. Suppose there are two search engines (Google and Bing) and 10 searchers. However, to operate profitably, each search engine needs at least three searchers. If Google can entice eight searchers to use its product, Bing cannot operate profitably, even if Bing provides a better product. This holds even if everyone knows Bing would be a better product. The consumers are stuck in a coordination failure.

We should be skeptical of coordination failure models of inefficient outcomes. The problem with any story of coordination failures is that it is highly sensitive to the exact timing of the model. If Bing can preempt Google and offer customers an even better deal (the new entrant is better by assumption), then the coordination failure does not occur.

To argue that Bing could not execute a similar contract, the most common appeal is that the new entrant does not have the capital to pay upfront for these contracts, since it will only make money from its higher-quality search engine down the road. That makes sense until you remember that we are talking about Microsoft. I’m skeptical that capital is the real constraint. It seems much more likely that Google just has a more popular search engine.

The other problem with coordination failure arguments is that they are almost non-falsifiable. There is no way to tell, in the model, whether Google is used because of a coordination failure or whether it is used because it is a better product. If Google is a better product, then the outcome is efficient. The two outcomes are “observationally equivalent.” Compare this to the standard theory of monopoly, where we can (in principle) establish an inefficiency if the price is greater than marginal cost. While it is difficult to measure marginal cost, it can be done.

There is a general economic idea in these models that we need to pay attention to. If Google takes an action that prevents Bing from reaching efficient size, that may be an externality, sometimes called a network effect, and so that action may hurt consumer welfare.

I’m not sure how seriously to take these network effects. If more searchers allow Bing to make a better product, then literally any action (competitive or not) by Google is an externality. Making a better product that takes away consumers from Bing lowers Bing’s quality. That is, strictly speaking, an externality. Surely, that is not worthy of antitrust scrutiny simply because we find an externality.

And Bing also “takes away” searchers from Google, thus lowering Google’s possible quality. With network effects, bigger is better and it may be efficient to have only one firm. Surely, that’s not an argument we want to put forward as a serious antitrust analysis.

Put more generally, it is not enough to scream “NETWORK EFFECT!” and then have the antitrust authority come in, lawsuits-a-blazing. Well, it shouldn’t be enough.

For me to take the network effect argument seriously from an economic point of view, compared to a legal perspective, I would need to see a real restriction on consumer choice, not just an externality. One needs to argue that:

  1. No competitor can cover their fixed costs to make a reasonable search engine; and
  2. These contracts are what prevent the competing search engines from reaching size.

That’s the challenge I would like to put forward to supporters of the lawsuit. I’m skeptical.

[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.]

On October 20, 2020, the U.S. Department of Justice (DOJ) and eleven states with Republican attorneys general sued Google for monopolizing and attempting to monopolize the markets for general internet search services, search advertising, and “general search text” advertising (i.e., ads that resemble search results).  Last week, California joined the lawsuit, making it a bipartisan affair.

DOJ and the states (collectively, “the government”) allege that Google has used contractual arrangements to expand and cement its dominance in the relevant markets.  In particular, the government complains that Google has agreed to share search ad revenues in exchange for making Google Search the default search engine on various “search access points.” 

Google has entered such agreements with Apple (for search on iPhones and iPads), manufacturers of Android devices and the mobile service carriers that support them, and producers of web browsers.  Google is also pursuing default status on new internet-enabled consumer products, such as voice assistants and “smart” TVs, appliances, and wearables.  In the government’s telling, this all amounts to Google’s sharing of monopoly profits with firms that can ensure its continued monopoly by imposing search defaults that users are unlikely to alter.

There are several obvious weaknesses with the government’s case.  One is that preset internet defaults are super easy to change and, in other contexts, are regularly altered.  For example, while 88% of desktop and laptop computers use the Windows operating system, which defaults to a Microsoft browser (Internet Explorer or Edge), Google’s Chrome browser commands a 69% market share on desktops and laptops, compared to around 13% for Internet Explorer and Edge combined.  Changing a default search engine is as easy as changing a browser default—three simple steps on an iPhone!—and it seems consumers will change defaults they don’t actually prefer.

A second obvious weakness, related to the first, is that the government has alleged no facts suggesting that Google’s search rivals—primarily Bing, Yahoo, and DuckDuckGo—would have enjoyed more success but for Google’s purportedly exclusionary agreements.  Even absent default status, people likely would have selected Google Search because it’s the better search engine.  It doesn’t seem the challenged arrangements caused Google’s search dominance.

Admittedly, the standard of causation in monopolization cases (at least those seeking only injunctive relief) is low.  The D.C. Circuit’s Microsoft decision described it as “edentulous” or, less pretentiously, toothless.  Nevertheless, the government is unlikely to prevail in its action against Google—and that’s a good thing.  Below, I highlight the central deficiency in the government’s Google case and point out problems with the government’s challenges to each of Google’s purportedly exclusionary arrangements.   

The Lawsuit’s Overarching Deficiency

We’ve all had the experience of typing a query only to have Google, within a few key strokes, accurately predict what we were going to ask and provide us with exactly the answer we were looking for.  It’s both eerie and awesome, and it keeps us returning to Google time and again.

But it’s not magic.  Nor has Google hacked our brains.  Google is so good at predicting our questions and providing responsive search results because its top-notch algorithms process gazillions of searches and can “learn” from users’ engagement.  Scale is thus essential to Google’s quality. 

The government’s complaint concedes as much.  It acknowledges that “[g]reater scale improves the quality of a general search engine’s algorithms” (¶35) and that “[t]he additional data from scale allows improved automated learning for algorithms to deliver more relevant results, particularly on ‘fresh’ queries (queries seeking recent information), location-based queries (queries asking about something in the searcher’s vicinity), and ‘long-tail’ queries (queries used infrequently)” (¶36). The complaint also asserts that “[t]he most effective way to achieve scale is for the general search engine to be the preset default on mobile devices, computers, and other devices…” (¶38).

Oddly, though, the government chides Google for pursuing “[t]he most effective way” of securing the scale that concededly “improves the quality of a general search engine’s algorithms.”  Google’s efforts to ensure and enhance its own product quality are improper, the government says, because “they deny rivals scale to compete effectively” (¶8).  In the government’s view, Google is legally obligated to forego opportunities to make its own product better so as to give its rivals a chance to improve their own offerings.

This is inconsistent with U.S. antitrust law.  Just as firms are not required to hold their prices high to create a price umbrella for their less efficient rivals, they need not refrain from efforts to improve the quality of their own offerings so as to give their rivals a foothold. 

Antitrust does forbid anticompetitive foreclosure of rivals—i.e., business-usurping arrangements that are not the result of efforts to compete on the merits by reducing cost or enhancing quality.  But firms are, and should be, free to make their products better, even if doing so makes things more difficult for their rivals.  Antitrust, after all, protects competition, not competitors.    

The central deficiency in the government’s case is that it concedes that scale is crucial to search engine quality, but it does not assert that there is a “minimum efficient scale”—i.e., a point at which scale economies are exhausted.  If a firm takes actions to enhance its own scale beyond minimum efficient scale, and if its efforts may hold its rivals below such scale, then it may have engaged in anticompetitive foreclosure.  But a firm that pursues scale that makes its products better is simply competing on the merits.

The government likely did not allege that there is a minimum efficient scale in general internet search services because returns to scale go on indefinitely, or at least for a very long time.  But the absence of such an allegation damns the government’s case against Google, for it implies that Google’s efforts to secure the distribution, and thus the greater use, of its services make those services better.

In this regard, the Microsoft case, which the government points to as a model for its action against Google (¶10), is inapposite.  Inthat case, the government alleged that Microsoft had entered license agreements that foreclosed Netscape, a potential rival, from the best avenues of browser distribution: original equipment manufacturers (OEMs) and internet access providers.  The government here similarly alleges that Google has foreclosed rival search engines from the best avenues of search distribution: default settings on mobile devices and web browsers.  But a key difference (in addition to the fact that search defaults are quite easy to change) is that Microsoft’s license restrictions foreclosed Netscape without enhancing the quality of Microsoft’s offerings.  Indeed, the court emphasized that the challenged Microsoft agreements were anticompetitive because they “reduced rival browsers’ usage share not by improving [Microsoft’s] own product but, rather, by preventing OEMs from taking actions that could increase rivals’ share of usage” (emphasis added).  Here, any foreclosure of Google’s search rivals is incidental to Google’s efforts to improve its product by enhancing its scale.

Now, the government might contend that the anticompetitive harms from raising rivals’ distribution costs exceed the procompetitive benefits of enhancing the quality of Google’s search services.  Courts, though, have generally been skeptical of claims that exclusion-causing product enhancements are anticompetitive because they do more harm than good.  There’s a sound reason for this: courts are ill-equipped to weigh the benefits of product enhancements against the costs of competition reductions resulting from product-enhancement efforts.  For that reason, they should—and likely will—stick with the rule that this sort of product-enhancing conduct is competition on the merits, even if it has the incidental effect of raising rivals’ costs.  And if they do so, the government will lose this case.     

Problems with the Government’s Specific Challenges

Agreements with Android OEMs and Wireless Carriers

The government alleges that Google has foreclosed its search rivals from distribution opportunities on the Android platform.  It has done so, the government says, by entering into exclusion-causing agreements with OEMs that produce Android products (Samsung, Motorola, etc.) and with carriers that provide wireless service for Android devices (AT&T, Verizon, etc.).

Android is an open source operating system that is owned by Google and licensed, for free, to producers of mobile internet devices.  Under the terms of the challenged agreements, Google’s counterparties promise not to produce Android “forks”—operating systems that are Android-based but significantly alter or “fragment” the basic platform—in order to get access to proprietary Google apps that Android users typically desire and to certain application protocol interfaces (APIs) that enable various functionalities.  In addition to these “anti-forking agreements,” counterparties enter various “pre-installation agreements” obligating them to install a suite of Google apps that use Google Search as a default.  Installing that suite is a condition for obtaining the right to pre-install Google’s app store (Google Play) and other must-have apps.  Finally, OEMs and carriers enter “revenue sharing agreements” that require the use of Google Search as the sole preset default on a number of search access points in exchange for a percentage of search ad revenue derived from covered devices.  Taken together, the government says, these anti-forking, pre-installation, and revenue-sharing agreements preclude the emergence of Android rivals (from forks) and ensure the continued dominance of Google Search on Android devices.

Eliminating these agreements, though, would likely harm consumers by reducing competition in the market for mobile operating systems.  Within that market, there are two dominant players: Apple’s iOS and Google’s Android.  Apple earns money off iOS by selling hardware—iPhones and iPads that are pre-installed with iOS.  Google licenses Android to OEMs for free but then earns advertising revenue off users’ searches (which provide an avenue for search ads) and other activities (which generate user data for better targeted display ads).  Apple and Google thus compete on revenue models.  As Randy Picker has explained, Microsoft tried a third revenue model—licensing a Windows mobile operating system to OEMs for a fee—but it failed.  The continued competition between Apple and Google, though, allows for satisfaction of heterogenous consumer preferences: Apple products are more expensive but more secure (due to Apple’s tight control over software and hardware); Android devices are cheaper (as the operating system is ad-supported) and offer more innovations (as OEMs have more flexibility), but tend to be less secure.  Such variety—a result of business model competition—is good for consumers. 

If the government were to prevail and force Google to end the agreements described above, thereby reducing the advertising revenue Google derives from Android, Google would have to either copy Apple’s vertically integrated model so as to recoup its Android investments through hardware sales, charge OEMs for Android (a la Microsoft), or cut back on its investments in Android.  In each case, consumers would suffer.  The first option would take away an offering preferred by many consumers—indeed most globally, as Android dominates iOS on a worldwide basis.  The second option would replace Google’s business model with one that failed, suggesting that consumers value it less.  The third option would reduce product quality in the market for mobile operating systems. 

In the end, then, the government’s challenge to Google’s Android agreements is myopic and misguided.  Competition among business models, like competition along any dimension, inures to the benefit of consumers.  Precluding it as the government is demanding would be silly.       

Agreements with Browser Producers

Web browsers like Apple’s Safari and Mozilla’s Firefox are a primary distribution channel for search engines.  The government claims that Google has illicitly foreclosed rival search engines from this avenue of distribution by entering revenue-sharing agreements with the major non-Microsoft browsers (i.e., all but Microsoft’s Edge and Internet Explorer).  Under those agreements, Google shares up to 40% of ad revenues generated from a browser in exchange for being the preset default on both computer and mobile versions of the browser.

Surely there is no problem, though, with search engines paying royalties to web browsers.  That’s how independent browsers like Opera and Firefox make money!  Indeed, 95% of Firefox’s revenue comes from search royalties.  If browsers were precluded from sharing in search engines’ ad revenues, they would have to find an alternative source of financing.  Producers of independent browsers would likely charge license fees, which consumers would probably avoid.  That means the only available browsers would be those affiliated with an operating system (Microsoft’s Edge, Apple’s Safari) or a search engine (Google’s Chrome).  It seems doubtful that reducing the number of viable browsers would benefit consumers.  The law should therefore allow payment of search royalties to browsers.  And if such payments are permitted, a browser will naturally set its default search engine so as to maximize its payout.  

Google’s search rivals can easily compete for default status on a browser by offering a better deal to the browser producer.  In 2014, for example, search engine Yahoo managed to wrest default status on Mozilla’s Firefox away from Google.  The arrangement was to last five years, but in 2017, Mozilla terminated the agreement and returned Google to default status because so many Firefox users were changing the browser’s default search engine from Yahoo to Google.  This historical example undermines the government’s challenges to Google’s browser agreements by showing (1) that other search engines can attain default status by competing, and (2) that defaults aren’t as “sticky” as the government claims—at least, not when the default is set to a search engine other than the one most people prefer.

In short, there’s nothing anticompetitive about Google’s browser agreements, and enjoining such deals would likely injure consumers by reducing competition among browsers.

Agreements with Apple

That brings us to the allegations that have gotten the most attention in the popular press: those concerning Google’s arrangements with Apple.  The complaint alleges that Google pays Apple $8-12 billion a year—a whopping 15-20% of Apple’s net income—for granting Google default search status on iOS devices.  In the government’s telling, Google is agreeing to share a significant portion of its monopoly profits with Apple in exchange for Apple’s assistance in maintaining Google’s search monopoly.

An alternative view, of course, is that Google is just responding to Apple’s power: Apple has assembled a giant installed base of loyal customers and can demand huge payments to favor one search engine over another on its popular mobile devices.  In that telling, Google may be paying Apple to prevent it from making Bing or another search engine the default on Apple’s search access points.

If that’s the case, what Google is doing is both procompetitive and a boon to consumers.  Microsoft could easily outbid Google to have Bing set as the default search engine on Apple’s devices. Microsoft’s market capitalization exceeds that of Google parent Alphabet by about $420 billion ($1.62 trillion versus $1.2 trillion), which is roughly the value of Walmart.  Despite its ability to outbid Google for default status, Microsoft hasn’t done so, perhaps because it realizes that defaults aren’t that sticky when the default service isn’t the one most people prefer.  Microsoft knows that from its experience with Internet Explorer and Edge (which collectively command only around 13% of the desktop browser market even though they’re the defaults on Windows, which has a 88% market share on desktops and laptops), and from its experience with Bing (where “Google” is the number one search term).  Nevertheless, the possibility remains that Microsoft could outbid Google for default status, improve its quality to prevent users from changing the default (or perhaps pay users for sticking with Bing), and thereby take valuable scale from Google, impairing the quality of Google Search.  To prevent that from happening, Google shares with Apple a generous portion of its search ad revenues, which, given the intense competition for mobile device sales, Apple likely passes along to consumers in the form of lower phone and tablet prices.

If the government succeeds in enjoining Google’s payments to Apple for default status, other search engines will presumably be precluded from such arrangements as well.  After all, the “foreclosure” effect of paying for default search status on Apple products is the same regardless of which search engine does the paying, and U.S. antitrust law does not “punish” successful firms by forbidding them from engaging in competitive activities that are open to their rivals. 

Ironically, then, the government’s success in its challenge to Google’s Apple payments would benefit Google at the expense of consumers:  Google would almost certainly remain the default search engine on Apple products, as it is most preferred by consumers and no rival could pay to dislodge it; Google would not have to pay a penny to retain its default status; and Apple would lose revenues that it likely passes along to consumers in the form of lower prices.  The courts are unlikely to countenance this perverse result by ruling that Google’s arrangements with Apple violate the antitrust laws.

Arrangements with Producers of Internet-Enabled “Smart” Devices

The final part of the government’s case against Google starkly highlights a problem that is endemic to the entire lawsuit.  The government claims that Google, having locked up all the traditional avenues of search distribution with the arrangements described above, is now seeking to foreclose search distribution in the new avenues being created by internet-enabled consumer products like wearables (e.g., smart watches), voice assistants, smart TVs, etc.  The alleged monopolistic strategy is similar to those described above: Google will share some of its monopoly profits in exchange for search default status on these smart devices, thereby preventing rival search engines from attaining valuable scale.

It’s easy to see in this context, though, why Google’s arrangements are likely procompetitive.  Unlike web browsers, mobile phones, and tablets, internet-enabled smart devices are novel.  Innovators are just now discovering new ways to embed internet functionality into everyday devices. 

Putting oneself in the position of these innovators helps illuminate a key beneficial aspect of Google’s arrangements:  They create an incentive to develop new and attractive means of distributing search.  Innovators currently at work on internet-enabled devices are no doubt spurred on by the possibility of landing a lucrative distribution agreement with Google or another search engine.  Banning these sorts of arrangements—the consequence of governmental success in this lawsuit—would diminish the incentive to innovate.

But that can be said of every single one of the arrangements the government is challenging. Because of Google’s revenue-sharing with search distributors, each of them has an added incentive to make their distribution channels desirable to consumers.  Android OEMs and Apple will work harder to produce mobile devices that people will want to use for internet searches; browser producers will endeavor to improve their offerings.  By paying producers of search access points a portion of the search ad revenues generated on their platforms, Google motivates them to generate more searches, which they can best do by making their products as attractive as possible. 

At the end of the day, then, the government’s action against Google seeks to condemn conduct that benefits consumers.  Because of the challenged arrangements, Google makes its own search services better, is able to license Android for free, ensures the continued existence of independent web browsers like Firefox and Opera, helps lower the price of iPhones and iPads, and spurs innovators to develop new “Internet of Things” devices that can harness the power of the web. 

The Biden administration would do well to recognize this lawsuit for what it is: a poorly conceived effort to appear to be “doing something” about a Big Tech company that has drawn the ire (for different reasons) of both progressives and conservatives.  DOJ and its state co-plaintiffs should seek dismissal of this action.