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Last week the editorial board of the Washington Post penned an excellent editorial responding to the European Commission’s announcement of its decision in its Google Shopping investigation. Here’s the key language from the editorial:

Whether the demise of any of [the complaining comparison shopping sites] is specifically traceable to Google, however, is not so clear. Also unclear is the aggregate harm from Google’s practices to consumers, as opposed to the unlucky companies. Birkenstock-seekers may well prefer to see a Google-generated list of vendors first, instead of clicking around to other sites…. Those who aren’t happy anyway have other options. Indeed, the rise of comparison shopping on giants such as Amazon and eBay makes concerns that Google might exercise untrammeled power over e-commerce seem, well, a bit dated…. Who knows? In a few years we might be talking about how Facebook leveraged its 2 billion users to disrupt the whole space.

That’s actually a pretty thorough, if succinct, summary of the basic problems with the Commission’s case (based on its PR and Factsheet, at least; it hasn’t released the full decision yet).

I’ll have more to say on the decision in due course, but for now I want to elaborate on two of the points raised by the WaPo editorial board, both in service of its crucial rejoinder to the Commission that “Also unclear is the aggregate harm from Google’s practices to consumers, as opposed to the unlucky companies.”

First, the WaPo editorial board points out that:

Birkenstock-seekers may well prefer to see a Google-generated list of vendors first, instead of clicking around to other sites.

It is undoubtedly true that users “may well prefer to see a Google-generated list of vendors first.” It’s also crucial to understanding the changes in Google’s search results page that have given rise to the current raft of complaints.

As I noted in a Wall Street Journal op-ed two years ago:

It’s a mistake to consider “general search” and “comparison shopping” or “product search” to be distinct markets.

From the moment it was technologically feasible to do so, Google has been adapting its traditional search results—that familiar but long since vanished page of 10 blue links—to offer more specialized answers to users’ queries. Product search, which is what is at issue in the EU complaint, is the next iteration in this trend.

Internet users today seek information from myriad sources: Informational sites (Wikipedia and the Internet Movie Database); review sites (Yelp and TripAdvisor); retail sites (Amazon and eBay); and social-media sites (Facebook and Twitter). What do these sites have in common? They prioritize certain types of data over others to improve the relevance of the information they provide.

“Prioritization” of Google’s own shopping results, however, is the core problem for the Commission:

Google has systematically given prominent placement to its own comparison shopping service: when a consumer enters a query into the Google search engine in relation to which Google’s comparison shopping service wants to show results, these are displayed at or near the top of the search results. (Emphasis in original).

But this sort of prioritization is the norm for all search, social media, e-commerce and similar platforms. And this shouldn’t be a surprise: The value of these platforms to the user is dependent upon their ability to sort the wheat from the chaff of the now immense amount of information coursing about the Web.

As my colleagues and I noted in a paper responding to a methodologically questionable report by Tim Wu and Yelp leveling analogous “search bias” charges in the context of local search results:

Google is a vertically integrated company that offers general search, but also a host of other products…. With its well-developed algorithm and wide range of products, it is hardly surprising that Google can provide not only direct answers to factual questions, but also a wide range of its own products and services that meet users’ needs. If consumers choose Google not randomly, but precisely because they seek to take advantage of the direct answers and other options that Google can provide, then removing the sort of “bias” alleged by [complainants] would affirmatively hurt, not help, these users. (Emphasis added).

And as Josh Wright noted in an earlier paper responding to yet another set of such “search bias” charges (in that case leveled in a similarly methodologically questionable report by Benjamin Edelman and Benjamin Lockwood):

[I]t is critical to recognize that bias alone is not evidence of competitive harm and it must be evaluated in the appropriate antitrust economic context of competition and consumers, rather individual competitors and websites. Edelman & Lockwood´s analysis provides a useful starting point for describing how search engines differ in their referrals to their own content. However, it is not useful from an antitrust policy perspective because it erroneously—and contrary to economic theory and evidence—presumes natural and procompetitive product differentiation in search rankings to be inherently harmful. (Emphasis added).

We’ll have to see what kind of analysis the Commission relies upon in its decision to reach its conclusion that prioritization is an antitrust problem, but there is reason to be skeptical that it will turn out to be compelling. The Commission states in its PR that:

The evidence shows that consumers click far more often on results that are more visible, i.e. the results appearing higher up in Google’s search results. Even on a desktop, the ten highest-ranking generic search results on page 1 together generally receive approximately 95% of all clicks on generic search results (with the top result receiving about 35% of all the clicks). The first result on page 2 of Google’s generic search results receives only about 1% of all clicks. This cannot just be explained by the fact that the first result is more relevant, because evidence also shows that moving the first result to the third rank leads to a reduction in the number of clicks by about 50%. The effects on mobile devices are even more pronounced given the much smaller screen size.

This means that by giving prominent placement only to its own comparison shopping service and by demoting competitors, Google has given its own comparison shopping service a significant advantage compared to rivals. (Emphasis added).

Whatever truth there is in the characterization that placement is more important than relevance in influencing user behavior, the evidence cited by the Commission to demonstrate that doesn’t seem applicable to what’s happening on Google’s search results page now.

Most crucially, the evidence offered by the Commission refers only to how placement affects clicks on “generic search results” and glosses over the fact that the “prominent placement” of Google’s “results” is not only a difference in position but also in the type of result offered.

Google Shopping results (like many of its other “vertical results” and direct answers) are very different than the 10 blue links of old. These “universal search” results are, for one thing, actual answers rather than merely links to other sites. They are also more visually rich and attractively and clearly displayed.

Ironically, Tim Wu and Yelp use the claim that users click less often on Google’s universal search results to support their contention that increased relevance doesn’t explain Google’s prioritization of its own content. Yet, as we note in our response to their study:

[I]f a consumer is using a search engine in order to find a direct answer to a query rather than a link to another site to answer it, click-through would actually represent a decrease in consumer welfare, not an increase.

In fact, the study fails to incorporate this dynamic even though it is precisely what the authors claim the study is measuring.

Further, as the WaPo editorial intimates, these universal search results (including Google Shopping results) are quite plausibly more valuable to users. As even Tim Wu and Yelp note:

No one truly disagrees that universal search, in concept, can be an important innovation that can serve consumers.

Google sees it exactly this way, of course. Here’s Tim Wu and Yelp again:

According to Google, a principal difference between the earlier cases and its current conduct is that universal search represents a pro-competitive, user-serving innovation. By deploying universal search, Google argues, it has made search better. As Eric Schmidt argues, “if we know the answer it is better for us to answer that question so [the user] doesn’t have to click anywhere, and in that sense we… use data sources that are our own because we can’t engineer it any other way.”

Of course, in this case, one would expect fewer clicks to correlate with higher value to users — precisely the opposite of the claim made by Tim Wu and Yelp, which is the surest sign that their study is faulty.

But the Commission, at least according to the evidence cited in its PR, doesn’t even seem to measure the relative value of the very different presentations of information at all, instead resting on assertions rooted in the irrelevant difference in user propensity to click on generic (10 blue links) search results depending on placement.

Add to this Pinar Akman’s important point that Google Shopping “results” aren’t necessarily search results at all, but paid advertising:

[O]nce one appreciates the fact that Google’s shopping results are simply ads for products and Google treats all ads with the same ad-relevant algorithm and all organic results with the same organic-relevant algorithm, the Commission’s order becomes impossible to comprehend. Is the Commission imposing on Google a duty to treat non-sponsored results in the same way that it treats sponsored results? If so, does this not provide an unfair advantage to comparison shopping sites over, for example, Google’s advertising partners as well as over Amazon, eBay, various retailers, etc…?

Randy Picker also picks up on this point:

But those Google shopping boxes are ads, Picker told me. “I can’t imagine what they’re thinking,” he said. “Google is in the advertising business. That’s how it makes its money. It has no obligation to put other people’s ads on its website.”

The bottom line here is that the WaPo editorial board does a better job characterizing the actual, relevant market dynamics in a single sentence than the Commission seems to have done in its lengthy releases summarizing its decision following seven full years of investigation.

The second point made by the WaPo editorial board to which I want to draw attention is equally important:

Those who aren’t happy anyway have other options. Indeed, the rise of comparison shopping on giants such as Amazon and eBay makes concerns that Google might exercise untrammeled power over e-commerce seem, well, a bit dated…. Who knows? In a few years we might be talking about how Facebook leveraged its 2 billion users to disrupt the whole space.

The Commission dismisses this argument in its Factsheet:

The Commission Decision concerns the effect of Google’s practices on comparison shopping markets. These offer a different service to merchant platforms, such as Amazon and eBay. Comparison shopping services offer a tool for consumers to compare products and prices online and find deals from online retailers of all types. By contrast, they do not offer the possibility for products to be bought on their site, which is precisely the aim of merchant platforms. Google’s own commercial behaviour reflects these differences – merchant platforms are eligible to appear in Google Shopping whereas rival comparison shopping services are not.

But the reality is that “comparison shopping,” just like “general search,” is just one technology among many for serving information and ads to consumers online. Defining the relevant market or limiting the definition of competition in terms of the particular mechanism that Google (or Foundem, or Amazon, or Facebook…) happens to use doesn’t reflect the extent of substitutability between these different mechanisms.

Properly defined, the market in which Google competes online is not search, but something more like online “matchmaking” between advertisers, retailers and consumers. And this market is enormously competitive. The same goes for comparison shopping.

And the fact that Amazon and eBay “offer the possibility for products to be bought on their site” doesn’t take away from the fact that they also “offer a tool for consumers to compare products and prices online and find deals from online retailers of all types.” Not only do these sites contain enormous amounts of valuable (and well-presented) information about products, including product comparisons and consumer reviews, but they also actually offer comparisons among retailers. In fact, Fifty percent of the items sold through Amazon’s platform, for example, are sold by third-party retailers — the same sort of retailers that might also show up on a comparison shopping site.

More importantly, though, as the WaPo editorial rightly notes, “[t]hose who aren’t happy anyway have other options.” Google just isn’t the indispensable gateway to the Internet (and definitely not to shopping on the Internet) that the Commission seems to think.

Today over half of product searches in the US start on Amazon. The majority of web page referrals come from Facebook. Yelp’s most engaged users now access it via its app (which has seen more than 3x growth in the past five years). And a staggering 40 percent of mobile browsing on both Android and iOS now takes place inside the Facebook app.

Then there are “closed” platforms like the iTunes store and innumerable other apps that handle copious search traffic (including shopping-related traffic) but also don’t figure in the Commission’s analysis, apparently.

In fact, billions of users reach millions of companies every day through direct browser navigation, social media, apps, email links, review sites, blogs, and countless other means — all without once touching Google.com. So-called “dark social” interactions (email, text messages, and IMs) drive huge amounts of some of the most valuable traffic on the Internet, in fact.

All of this, in turn, has led to a competitive scramble to roll out completely new technologies to meet consumers’ informational (and merchants’ advertising) needs. The already-arriving swarm of VR, chatbots, digital assistants, smart-home devices, and more will offer even more interfaces besides Google through which consumers can reach their favorite online destinations.

The point is this: Google’s competitors complaining that the world is evolving around them don’t need to rely on Google. That they may choose to do so does not saddle Google with an obligation to ensure that they can always do so.

Antitrust laws — in Europe, no less than in the US — don’t require Google or any other firm to make life easier for competitors. That’s especially true when doing so would come at the cost of consumer-welfare-enhancing innovations. The Commission doesn’t seem to have grasped this fundamental point, however.

The WaPo editorial board gets it, though:

The immense size and power of all Internet giants are a legitimate focus for the antitrust authorities on both sides of the Atlantic. Brussels vs. Google, however, seems to be a case of punishment without crime.

Regardless of the merits and soundness (or lack thereof) of this week’s European Commission Decision in the Google Shopping case — one cannot assess this until we have the text of the decision — two comments really struck me during the press conference.

First, it was said that Google’s conduct had essentially reduced innovation. If I heard correctly, this is a formidable statement. In 2016, another official EU service published stats that described Alphabet as increasing its R&D by 22% and ranked it as the world’s 4th top R&D investor. Sure it can always be better. And sure this does not excuse everything. But still. The press conference language on incentives to innovate was a bit of an oversell, to say the least.

Second, the Commission views this decision as a “precedent” or as a “framework” that will inform the way dominant Internet platforms should display, intermediate and market their services and those of their competitors. This may fuel additional complaints by other vertical search rivals against (i) Google in relation to other product lines, but also against (ii) other large platform players.

Beyond this, the Commission’s approach raises a gazillion questions of law and economics. Pending the disclosure of the economic evidence in the published decision, let me share some thoughts on a few (arbitrarily) selected legal issues.

First, the Commission has drawn the lesson of the Microsoft remedy quagmire. The Commission refrains from using a trustee to ensure compliance with the decision. This had been a bone of contention in the 2007 Microsoft appeal. Readers will recall that the Commission had imposed on Microsoft to appoint a monitoring trustee, who was supposed to advise on possible infringements in the implementation of the decision. On appeal, the Court eventually held that the Commission was solely responsible for this, and could not delegate those powers. Sure, the Commission could “retai[n] its own external expert to provide advice when it investigates the implementation of the remedies.” But no more than that.

Second, we learn that the Commission is no longer in the business of software design. Recall the failed untying of WMP and Windows — Windows Naked sold only 11,787 copies, likely bought by tech bootleggers willing to acquire the first piece of software ever designed by antitrust officials — or the browser “Choice Screen” compliance saga which eventually culminated with a €561 million fine. Nothing of this can be found here. The Commission leaves remedial design to the abstract concept of “equal treatment”.[1] This, certainly, is a (relatively) commendable approach, and one that could inspire remedies in other unilateral conduct cases, in particular, exploitative conduct ones where pricing remedies are both costly, impractical, and consequentially inefficient.

On the other hand, readers will also not fail to see the corollary implication of “equal treatment”: search neutrality could actually cut both ways, and lead to a lawful degradation in consumer welfare if Google were ever to decide to abandon rich format displays for both its own shopping services and those of rivals.

Third, neither big data nor algorithmic design is directly vilified in the case (“The Commission Decision does not object to the design of Google’s generic search algorithms or to demotions as such, nor to the way that Google displays or organises its search results pages”). In fact, the Commission objects to the selective application of Google’s generic search algorithms to its own products. This is an interesting, and subtle, clarification given all the coverage that this topic has attracted in recent antitrust literature. We are in fact very close to a run of the mill claim of disguised market manipulation, not causally related to data or algorithmic technology.

Fourth, Google said it contemplated a possible appeal of the decision. Now, here’s a challenging question: can an antitrust defendant effectively exercise its right to judicial review of an administrative agency (and more generally its rights of defense), when it operates under the threat of antitrust sanctions in ongoing parallel cases investigated by the same agency (i.e., the antitrust inquiries related to Android and Ads)? This question cuts further than the Google Shopping case. Say firm A contemplates a merger with firm B in market X, while it is at the same time subject to antitrust investigations in market Z. And assume that X and Z are neither substitutes nor complements so there is little competitive relationship between both products. Can the Commission leverage ongoing antitrust investigations in market Z to extract merger concessions in market X? Perhaps more to the point, can the firm interact with the Commission as if the investigations are completely distinct, or does it have to play a more nuanced game and consider the ramifications of its interactions with the Commission in both markets?

Fifth, as to the odds of a possible appeal, I don’t believe that arguments on the economic evidence or legal theory of liability will ever be successful before the General Court of the EU. The law and doctrine in unilateral conduct cases are disturbingly — and almost irrationally — severe. As I have noted elsewhere, the bottom line in the EU case-law on unilateral conduct is to consider the genuine requirement of “harm to competition” as a rhetorical question, not an empirical one. In EU unilateral conduct law, exclusion of every and any firm is a per se concern, regardless of evidence of efficiency, entry or rivalry.

In turn, I tend to opine that Google has a stronger game from a procedural standpoint, having been left with (i) the expectation of a settlement (it played ball three times by making proposals); (ii) a corollary expectation of the absence of a fine (settlement discussions are not appropriate for cases that could end with fines); and (iii) a full seven long years of an investigatory cloud. We know from the past that EU judges like procedural issues, but like comparably less to debate the substance of the law in unilateral conduct cases. This case could thus be a test case in terms of setting boundaries on how freely the Commission can U-turn a case (the Commissioner said “take the case forward in a different way”).

Today I published an article in The Daily Signal bemoaning the European Commission’s June 27 decision to fine Google $2.7 billion for engaging in procompetitive, consumer welfare-enhancing conduct.  The article is reproduced below (internal hyperlinks omitted), in italics:

On June 27, the European Commission—Europe’s antitrust enforcer—fined Google over $2.7 billion for a supposed violation of European antitrust law that bestowed benefits, not harm, on consumers.

And that’s just for starters. The commission is vigorously pursuing other antitrust investigations of Google that could lead to the imposition of billions of dollars in additional fines by European bureaucrats.

The legal outlook for Google is cloudy at best. Although the commission’s decisions can be appealed to European courts, European Commission bureaucrats have a generally good track record in winning before those tribunals.

But the problem is even bigger than that.

Recently, questionable antitrust probes have grown like topsy around the world, many of them aimed at America’s most creative high-tech firms. Beneficial innovations have become legal nightmares—good for defense lawyers, but bad for free market competition and the health of the American economy.

What great crime did Google commit to merit the huge European Commission fine?

The commission claims that Google favored its own comparison shopping service over others in displaying Google search results.

Never mind that consumers apparently like the shopping-related service links they find on Google (after all, they keep using its search engine in droves), or can patronize any other search engine or specialized comparison shopping service that can be found with a few clicks of the mouse.

This is akin to saying that Kroger or Walmart harm competition when they give favorable shelf space displays to their house brands. That’s ridiculous.

Somehow, such “favoritism” does not prevent consumers from flocking to those successful chains, or patronizing their competitors if they so choose. It is the essence of vigorous free market rivalry.  

The commission’s theory of anticompetitive behavior doesn’t hold water, as I explained in an earlier article. The Federal Trade Commission investigated Google’s search engine practices several years ago and found no evidence that alleged Google search engine display bias harmed consumers.

To the contrary, as former FTC Commissioner (and leading antitrust expert) Josh Wright has pointed out, and as the FTC found:

Google likely benefited consumers by prominently displaying its vertical content on its search results page. The Commission reached this conclusion based upon, among other things, analyses of actual consumer behavior—so-called ‘click through’ data—which showed how consumers reacted to Google’s promotion of its vertical properties.

In short, Google’s search policies benefit consumers. Antitrust is properly concerned with challenging business practices that harm consumer welfare and the overall competitive process, not with propping up particular competitors.

Absent a showing of actual harm to consumers, government antitrust cops—whether in Europe, the U.S., or elsewhere—should butt out.

Unfortunately, the European Commission shows no sign of heeding this commonsense advice. The Europeans have also charged Google with antitrust violations—with multibillion-dollar fines in the offing—based on the company’s promotion of its Android mobile operating service and its AdSense advertising service.

(That’s not all—other European Commission Google inquiries are also pending.)

As in the shopping services case, these investigations appear to be woefully short on evidence of harm to competition and consumer welfare.

The bigger question raised by the Google matters is the ability of any highly successful individual competitor to efficiently promote and favor its own offerings—something that has long been understood by American enforcers to be part and parcel of free-market competition.

As law Professor Michael Carrier points outs, any changes the EU forces on Google’s business model “could eventually apply to any way that Amazon, Facebook or anyone else offers to search for products or services.”

This is troublesome. Successful American information-age companies have already run afoul of the commission’s regulatory cops.

Microsoft and Intel absorbed multibillion-dollar European Commission antitrust fines in recent years, based on other theories of competitive harm. Amazon, Facebook, and Apple, among others, have faced European probes of their competitive practices and “privacy policies”—the terms under which they use or share sensitive information from consumers.

Often, these probes have been supported by less successful rivals who would rather rely on government intervention than competition on the merits.

Of course, being large and innovative is not a legal shield. Market-leading companies merit being investigated for actions that are truly harmful. The law applies equally to everyone.

But antitrust probes of efficient practices that confer great benefits on consumers (think how much the Google search engine makes it easier and cheaper to buy desired products and services and obtain useful information), based merely on the theory that some rivals may lose business, do not advance the free market. They retard it.

Who loses when zealous bureaucrats target efficient business practices by large, highly successful firms, as in the case of the European Commission’s Google probes and related investigations? The general public.

“Platform firms” like Google and Amazon that bring together consumers and other businesses will invest less in improving their search engines and other consumer-friendly features, for fear of being accused of undermining less successful competitors.

As a result, the supply of beneficial innovations will slow, and consumers will be less well off.

What’s more, competition will weaken, as the incentive to innovate to compete effectively with market leaders will be reduced. Regulation and government favor will substitute for welfare-enhancing improvement in goods, services, and platform quality. Economic vitality will inevitably be reduced, to the public’s detriment.

Europe is not the only place where American market leaders face unwarranted antitrust challenges.

For example, Qualcomm and InterDigital, U.S. firms that are leaders in smartphone communications technologies that power mobile interconnections, have faced large antitrust fines for, in essence, “charging too much” for licenses to their patented technologies.

South Korea also claimed to impose a “global remedy” that imposed its artificially low royalty rates on all of Qualcomm’s licensing agreements around the world.

(All this is part and parcel of foreign government attacks on American intellectual property—patents, copyrights, trademarks, and trade secrets—that cost U.S. innovators hundreds of billions of dollars a year.)

 

A lack of basic procedural fairness in certain foreign antitrust proceedings has also bedeviled American companies, preventing them from being able to defend their conduct. Foreign antitrust has sometimes been perverted into a form of “industrial policy” that discriminates against American companies in favor of domestic businesses.

What can be done to confront these problems?

In 2016, the U.S. Chamber of Commerce convened a group of trade and antitrust experts to examine the problem. In March 2017, the chamber released a report by the experts describing the nature of the problem and making specific recommendations for U.S. government action to deal with it.

Specifically, the experts urged that a White House-led interagency task force be set up to develop a strategy for dealing with unwarranted antitrust attacks on American businesses—including both misapplication of legal rules and violations of due process.

The report also called for the U.S. government to work through existing international institutions and trade negotiations to promote a convergence toward sounder antitrust practices worldwide.

The Trump administration should take heed of the experts’ report and act decisively to combat harmful foreign antitrust distortions. Antitrust policy worldwide should focus on helping the competitive process work more efficiently, not on distorting it by shacking successful innovators.

One more point, not mentioned in the article, merits being stressed.  Although the United States Government cannot control a foreign sovereign’s application of its competition law, it can engage in rhetoric and public advocacy aimed at convincing that sovereign to apply its law in a manner that promotes consumer welfare, competition on the merits, and economic efficiency.  Regrettably, the Obama Administration, particularly in the latter part of its second term, did a miserable job in promoting a facts-based, empirical approach to antitrust enforcement, centered on hard facts, not on mere speculative theories of harm.  In particular, certain political appointees lent lip service or silent acquiescence to inappropriate antitrust attacks on the unilateral exercise of intellectual property rights.  In addition, those senior officials made statements that could have been interpreted as supportive of populist “big is bad” conceptions of antitrust that had been discredited decades ago – through sound scholarship, by U.S. enforcement policies, and in judicial decisions.  The Trump Administration will have an opportunity to correct those errors, and to restore U.S. policy leadership in support of sound, pro-free market antitrust principles.  Let us hope that it does so, and soon.

Since Brussels has ordered Ireland to recover 13€ billion from Apple, much ink has been spilled on the European Commission’s (EC) alleged misuse of power and breach of the “rule of law.” In the Irish Times, Professor Liza Lovdahl-Gormsen wrote that the EC has been “bending” competition law to pursue a corporate taxation agenda in disguise. Former European Commissioner Neelie Kroes went so far as to suggest that the EC was attempting to rewrite international tax rules.

Conspiracy stories sell well, all the more so when the EC administration is on display. Yet, the claim that the Apple case is not a genuine competition case is a trick often used to deride enforcement — one that papers over an old lesson of mainstream economics: that monopolists are particularly good at “acquiring” public interest legislation. Nobel Prize winner George Stigler once wrote that “the most obvious contribution that a group may seek of the government is a direct subsidy of money.”  

While this basic economic teaching is not the narrative behind the EC decision against Ireland, there are clear signs that Apple is a textbook monopolist, and that rent-seeking theory could thus assist the EC in the forthcoming appeal. Let us look closer. Year after year, Apple sits atop the rankings as the most successful company of the 21st century. It has been the world’s largest company by market capitalization for some time. It is also the most profitable company in the history of the modern economy. Its flagship product, the iPhone, is the most expensive mass-market smartphone ever sold. On each device, Apple’s earns a 69% gross margin. Last year, industry analysts were taken aback when Apple outsold Samsung.

Granted, high prices and large profits do not a monopolist make. So let us consider other metrics: among tech’s frightful five, Apple is the slacker when it comes to investing in innovation: It spent about 3.5% of its revenue on research and development in 2016. By way of comparison, Alphabet (Google) spent 16%, Microsoft spent 14%, and Facebook spent a whopping 27%. Apple didn’t even feature in the EU ranking of the top 50 highest R&D-intensive companies, trailing behind a host of less-glitzy manufacturers of telecoms infrastructure equipment like Nokia and Ericsson and even “mundane” suppliers of cars, chemicals, and agricultural products. At such low levels of R&D investment, it is even questionable that Apple can be called a “high tech” company (the minimum to be part of that league is 5-7.5%). 

Apple also features as the world champ payer of dividends and purchaser of its own shares in financial analysts’ recommendations. Instead of retaining earnings to devote to internal R&D projects as a patient capitalist, Apple returns comparatively more profits to shareholders than any of its peers. It also sits atop a mountain of unproductive capital.

Beyond financial numbers, Apple’s body language also denotes behavioural signs of monopoly power. In his best seller, “Zero to One,” Peter Thiel writes that “monopolists lie to protect themselves.” Apple is a grandmaster at this game. In a bid to reduce the prices it pays for certain inputs, Apple has routinely claimed to be an antitrust victim in proceedings in the US, the EU, and Asia, accusing upstream component suppliers and innovators such as Qualcomm and Nokia, but also rivals such as Samsung, of unlawful monopolization. To assist it, Apple enlisted the help of a former European Commission official who spent over ten years spearheading the EU’s assaults on Intel, Microsoft, Google and other high-tech firms. To the trained observer, this should come as no surprise. For monopolists, the ends justify the means – including efforts to instrumentalise the regulatory process. 

With such facts in mind, it is now much less obvious that the EC Apple tax case is not plain vanilla competition policy, and much more clear that Apple behaved as a textbook rent-seeking monopolist when it secured 13€ billion from the Irish Government. 

That monopolists expend vast resources in rent-seeking, unproductive activities aimed at capturing rents from governments is a fundamental teaching of modern economic theory.  Like theft, corruption or bribery, those resources – and those invested by governments to counter rent-seeking strategies – are pure waste; they generate no socially valuable production. The EC would be well advised to keep this narrative in mind when defending its case against allegations of unlawful tax harmonization before the EU courts. As I often tell my students, forget the legalese; go for the big picture.

Since the European Commission (EC) announced its first inquiry into Google’s business practices in 2010, the company has been the subject of lengthy investigations by courts and competition agencies around the globe. Regulatory authorities in the United States, France, the United Kingdom, Canada, Brazil, and South Korea have all opened and rejected similar antitrust claims.

And yet the EC marches on, bolstered by Google’s myriad competitors, who continue to agitate for further investigations and enforcement actions, even as we — companies and consumers alike — enjoy the benefits of an increasingly dynamic online marketplace.

Indeed, while the EC has spent more than half a decade casting about for some plausible antitrust claim, the online economy has thundered ahead. Since 2010, Facebook has tripled its active users and multiplied its revenue ninefold; the number of apps available in the Amazon app store has grown from less than 4000 to over 400,000 today; and there are almost 1.5 billion more Internet users globally than there were in 2010. And consumers are increasingly using new and different ways to search for information: Amazon’s Alexa, Apple’s Siri, Microsoft’s Cortana, and Facebook’s Messenger are a few of the many new innovations challenging traditional search engines.

Advertisers have adapted to this evolution, moving increasingly online, and from search to display ads as mobile adoption has skyrocketedSocial networks like Twitter and Snapchat have come into their own, competing for the same (and ever-increasing) advertising dollars. For marketers, advertising on social networks is now just as important as advertising in search. No wonder e-commerce sales have more than doubled, to almost $2 trillion worldwide; for the first time, consumers purchased more online than in stores this past year.

To paraphrase Louis C.K.: Everything is amazing — and no one at the European Commission is happy.

The EC’s market definition is fatally flawed

Like its previous claims, the Commission’s most recent charges are rooted in the assertion that Google abuses its alleged dominance in “general search” advertising to unfairly benefit itself and to monopolize other markets. But European regulators continue to miss the critical paradigm shift among online advertisers and consumers that has upended this stale view of competition on the Internet. The reality is that Google’s competition may not, and need not, look exactly like Google itself, but it is competition nonetheless. And it’s happening in spades.

The key to understanding why the European Commission’s case is fundamentally flawed lies in an examination of how it defines the relevant market. Through a series of economically and factually unjustified assumptions, the Commission defines search as a distinct market in which Google faces limited competition and enjoys an 80% market share. In other words, for the EC, “general search” apparently means only nominal search providers like Google and Bing; it doesn’t mean companies like Amazon, Facebook and Twitter — Google’s biggest competitors.  

But the reality is that “general search” is just one technology among many for serving information and ads to consumers online. Defining the relevant market or limiting the definition of competition in terms of the particular mechanism that Google happens to use to match consumers and advertisers doesn’t reflect the substitutability of other mechanisms that do the same thing — merely because these mechanisms aren’t called “search.”

Properly defined, the market in which Google competes online is not search, but something more like online “matchmaking” between advertisers, retailers and consumers. And this market is enormously competitive.

Consumers today are increasingly using platforms like Amazon and Facebook as substitutes for the searches they might have run on Google or Bing. “Closed” platforms like the iTunes store and innumerable apps handle copious search traffic but also don’t figure in the EC’s market calculations. And so-called “dark social” interactions like email, text messages, and IMs, drive huge amounts of some of the most valuable traffic on the Internet. This, in turn, has led to a competitive scramble to roll out completely new technologies like chatbots to meet consumers’ informational (and merchants’ advertising) needs.

Properly construed, Google’s market position is precarious

Like Facebook and Twitter (and practically every other Internet platform), advertising is Google’s primary source of revenue. Instead of charging for fancy hardware or offering services to users for a fee, Google offers search, the Android operating system, and a near-endless array of other valuable services for free to users. The company’s very existence relies on attracting Internet users and consumers to its properties in order to effectively connect them with advertisers.

But being an online matchmaker is a difficult and competitive enterprise. Among other things, the ability to generate revenue turns crucially on the quality of the match: All else equal, an advertiser interested in selling widgets will pay more for an ad viewed by a user who can be reliably identified as being interested in buying widgets.

Google’s primary mechanism for attracting users to match with advertisers — general search — is substantially about information, not commerce, and the distinction between product and informational searches is crucially important to understanding Google’s market and the surprisingly limited and tenuous market power it possesses.

General informational queries aren’t nearly as valuable to advertisers: Significantly, only about 30 percent of Google’s searches even trigger any advertising at all. Meanwhile, as of 2012, one-third of product searches started on Amazon while only 13% started on a general search engine.

As economist Hal Singer aptly noted in 2012,

[the data] suggest that Google lacks market power in a critical segment of search — namely, product searches. Even though searches for items such as power tools or designer jeans account for only 10 to 20 percent of all searches, they are clearly some of the most important queries for search engines from a business perspective, as they are far easier to monetize than informational queries like “Kate Middleton.”

While Google Search clearly offers substantial value to advertisers, its ability to continue to do so is precarious when confronted with the diverse array of competitors that, like Facebook, offer a level of granularity in audience targeting that general search can’t match, or that, like Amazon, systematically offer up the most valuable searchers.

In order to compete in this market — one properly defined to include actual competitors — Google has had to constantly innovate to maintain its position. Unlike a complacent monopolist, it has evolved to meet changing consumer demand, shifting technology and inventive competitors. Thus, Google’s search algorithm has changed substantially over the years to make more effective use of the information available to ensure relevance; search results have evolved to give consumers answers to queries rather than just links, and to provide more-direct access to products and services; and, as users have shifted more and more of their time and attention to mobile devices, search has incorporated more-localized results.

Competitors want a free lunch

Critics complain, nevertheless, that these developments have made it harder, in one way or another, for rivals to compete. And the EC has provided a willing ear. According to Commissioner Vestager last week:

Google has come up with many innovative products that have made a difference to our lives. But that doesn’t give Google the right to deny other companies the chance to compete and innovate. Today, we have further strengthened our case that Google has unduly favoured its own comparison shopping service in its general search result pages…. (Emphasis added).

Implicit in this statement is the remarkable assertion that by favoring its own comparison shopping services, Google “den[ies] other companies the chance to compete and innovate.” Even assuming Google does “favor” its own results, this is an astounding claim.

First, it is not a violation of competition law simply to treat competitors’ offerings differently than one’s own, even for a dominant firm. Instead, conduct must actually exclude competitors from the market, without offering countervailing advantages to consumers. But Google’s conduct is not exclusionary, and there are many benefits to consumers.

As it has from the start of its investigations of Google, the EC begins with a flawed assumption: that Google’s competitors both require, and may be entitled to, unfettered access to Google’s property in order to compete. But this is patently absurd. Google is not an essential facility: Billions of users reach millions of companies everyday through direct browser navigation, apps, email links, review sites and blogs, and countless other means — all without once touching Google.com.

Google Search results do not exclude competitors, whether comparison shopping sites or others. For example, 72% of TripAdvisor’s U.S. traffic comes from search, and almost all of that from organic results; other specialized search sites see similar traffic volumes.

More important, however, in addition to continuing to reach rival sites through Google Search, billions of consumers access rival services directly through their mobile apps. In fact, for Yelp,

Approximately 21 million unique devices accessed Yelp via the mobile app on a monthly average basis in the first quarter of 2016, an increase of 32% compared to the same period in 2015. App users viewed approximately 70% of page views in the first quarter and were more than 10 times as engaged as website users, as measured by number of pages viewed. (Emphasis added).

And a staggering 40 percent of mobile browsing is now happening inside the Facebook app, competing with the browsers and search engines pre-loaded on smartphones.

Millions of consumers also directly navigate to Google’s rivals via their browser by simply typing, for example, “Yelp.com” in their address bar. And as noted above, consumers are increasingly using Google rivals’ new disruptive information engines like Alexa and Siri for their search needs. Even the traditional search engine space is competitive — in fact, according to Wired, as of July 2016:

Microsoft has now captured more than one-third of Internet searches. Microsoft’s transformation from a company that sells boxed software to one that sells services in the cloud is well underway. (Emphasis added).

With such numbers, it’s difficult to see how rivals are being foreclosed from reaching consumers in any meaningful way.

Meanwhile, the benefits to consumers are obvious: Google is directly answering questions for consumers rather than giving them a set of possible links to click through and further search. In some cases its results present entirely new and valuable forms of information (e.g., search trends and structured data); in others they serve to hone searches by suggesting further queries, or to help users determine which organic results (including those of its competitors) may be most useful. And, of course, consumers aren’t forced to endure these innovations if they don’t find them useful, as they can quickly switch to other providers.  

Nostalgia makes for bad regulatory policy

Google is not the unstoppable monopolist of the EU competition regulators’ imagining. Rather, it is a continual innovator, forced to adapt to shifting consumer demand, changing technology, and competitive industry dynamics. And, instead of trying to hamstring Google, if they are to survive, Google’s competitors (and complainants) must innovate as well.

Dominance in technology markets — especially online — has always been ephemeral. Once upon a time, MySpace, AOL, and Yahoo were the dominant Internet platforms. Kodak, once practically synonymous with “instant camera” let the digital revolution pass it by. The invincible Sony Walkman was upended by mp3s and the iPod. Staid, keyboard-operated Blackberries and Nokias simply couldn’t compete with app-driven, graphical platforms from Apple and Samsung. Even today, startups like Snapchat, Slack, and Spotify gain massive scale and upend entire industries with innovative new technology that can leave less-nimble incumbents in the dustbin of tech history.

Put differently, companies that innovate are able to thrive, while those that remain dependent on yesterday’s technology and outdated business models usually fail — and deservedly so. It should never be up to regulators to pick winners and losers in a highly dynamic and competitive market, particularly if doing so constrains the market’s very dynamism. As Alfonso Lamadrid has pointed out:

It is companies and not competition enforcers which will strive or fail in the adoption of their business models, and it is therefore companies and not competition enforcers who are to decide on what business models to use. Some will prove successful and others will not; some companies will thrive and some will disappear, but with experimentation with business models, success and failure are and have always been part of the game.

In other words, we should not forget that competition law is, or should be, business-model agnostic, and that regulators are – like anyone else – far from omniscient.

Like every other technology company before them, Google and its competitors must be willing and able to adapt in order to keep up with evolving markets — just as for Lewis Carroll’s Red Queen, “it takes all the running you can do, to keep in the same place.” Google confronts a near-constantly evolving marketplace and fierce competition from unanticipated quarters; companies that build their businesses around Google face a near-constantly evolving Google. In the face of such relentless market dynamism, neither consumers nor firms are well served by regulatory policy rooted in nostalgia.  

Today’s Canadian Competition Bureau (CCB) Google decision marks yet another regulator joining the chorus of competition agencies around the world that have already dismissed similar complaints relating to Google’s Search or Android businesses (including the US FTC, the Korea FTC, the Taiwan FTC, and AG offices in Texas and Ohio).

A number of courts around the world have also rejected competition complaints against the company, including courts in the US, France, the UK, Germany, and Brazil.

After an extensive, three-year investigation into Google’s business practices in Canada, the CCB

did not find sufficient evidence that Google engaged in [search manipulation, preferential treatment of Google services, syndication agreements, distribution agreements, exclusion of competitors from its YouTube mobile app, or tying of mobile ads with those on PCs and tablets] for an anti-competitive purpose, and/or that the practices resulted in a substantial lessening or prevention of competition in any relevant market.

Like the US FTC, the CCB did find fault with Google’s use of restriction on its AdWords API — but Google had already revised those terms worldwide following the FTC investigation, and has committed to the CCB to maintain the revised terms for at least another 5 years.

Other than a negative ruling from Russia’s competition agency last year in favor of Yandex — essentially “the Russian Google,” and one of only a handful of Russian tech companies of significance (surely a coincidence…) — no regulator has found against Google on the core claims brought against it.

True, investigations in a few jurisdictions, including the EU and India, are ongoing. And a Statement of Objections in the EU’s Android competition investigation appears imminent. But at some point, regulators are going to have to take a serious look at the motivations of the entities that bring complaints before wasting more investigatory resources on their behalf.

Competitor after competitor has filed complaints against Google that amount to, essentially, a claim that Google’s superior services make it too hard to compete. But competition law doesn’t require that Google or any other large firm make life easier for competitors. Without a finding of exclusionary harm/abuse of dominance (and, often, injury to consumers), this just isn’t anticompetitive conduct — it’s competition. And the overwhelming majority of competition authorities that have examined the company have agreed.

Exactly when will regulators be a little more skeptical of competitors trying to game the antitrust laws for their own advantage?

Canada joins the chorus

The Canadian decision mirrors the reasoning that regulators around the world have employed in reaching the decision that Google hasn’t engaged in anticompetitive conduct.

Two of the more important results in the CCB’s decision relate to preferential treatment of Google’s services (e.g., promotion of its own Map or Shopping results, instead of links to third-party aggregators of the same services) — the tired “search bias” claim that started all of this — and the distribution agreements that Google enters into with device manufacturers requiring inclusion of Google search as a default installation on Google Android phones.

On these key issues the CCB was unequivocal in its conclusions.

On search bias:

The Bureau sought evidence of the harm allegedly caused to market participants in Canada as a result of any alleged preferential treatment of Google’s services. The Bureau did not find adequate evidence to support the conclusion that this conduct has had an exclusionary effect on rivals, or that it has resulted in a substantial lessening or prevention of competition in a market.

And on search distribution agreements:

Google competes with other search engines for the business of hardware manufacturers and software developers. Other search engines can and do compete for these agreements so they appear as the default search engine…. Consumers can and do change the default search engine on their desktop and mobile devices if they prefer a different one to the pre-loaded default…. Google’s distribution agreements have not resulted in a substantial lessening or prevention of competition in Canada.

And here is the crucial point of the CCB’s insight (which, so far, everyone but Russia seems to appreciate): Despite breathless claims from rivals alleging they can’t compete in the face of their placement in Google’s search results, data barriers to entry, or default Google search on mobile devices, Google does actually face significant competition. Both the search bias and Android distribution claims were dismissed essentially because, whatever competitors may prefer Google do, its conduct doesn’t actually preclude access to competing services.

The True North strong and free [of meritless competitor complaints]

Exclusionary conduct must, well, exclude. But surfacing Google’s own “subjective” search results, even if they aren’t as high quality, doesn’t exclude competitors, according to the CCB and the other regulatory agencies that have also dismissed such claims. Similarly, consumers’ ability to switch search engines (“competition is just a click away,” remember), as well as OEMs’ ability to ship devices with different search engine defaults, ensure that search competitors can access consumers.

Former FTC Commissioner Josh Wright’s analysis of “search bias” in Google’s results applies with equal force to these complaints:

It is critical to recognize that bias alone is not evidence of competitive harm and it must be evaluated in the appropriate antitrust economic context of competition and consumers, rather [than] individual competitors and websites… [but these results] are not useful from an antitrust policy perspective because they erroneously—and contrary to economic theory and evidence—presume natural and procompetitive product differentiation in search rankings to be inherently harmful.

The competitors that bring complaints to antitrust authorities seek to make a demand of Google that is rarely made of any company: that it must provide access to its competitors on equal terms. But one can hardly imagine a valid antitrust complaint arising because McDonald’s refuses to sell a Whopper. The law on duties to deal is heavily circumscribed for good reason, as Josh Wright and I have pointed out:

The [US Supreme] Court [in Trinko] warned that the imposition of a duty to deal would threaten to “lessen the incentive for the monopolist, the rival, or both to invest in… economically beneficial facilities.”… Because imposition of a duty to deal with rivals threatens to decrease the incentive to innovate by creating new ways of producing goods at lower costs, satisfying consumer demand, or creating new markets altogether, courts and antitrust agencies have been reluctant to expand the duty.

Requiring Google to link to other powerful and sophisticated online search companies, or to provide them with placement on Google Android mobile devices, on the precise terms it does its own products would reduce the incentives of everyone to invest in their underlying businesses to begin with.

This is the real threat to competition. And kudos to the CCB for recognizing it.

The CCB’s investigation was certainly thorough, and its decision appears to be well-reasoned. Other regulators should take note before moving forward with yet more costly investigations.

This blurb published yesterday by Competition Policy International nicely illustrates the problem with the growing focus on unilateral conduct investigations by the European Commission (EC) and other leading competition agencies:

EU: Qualcomm to face antitrust complaint on predatory pricing

Dec 03, 2015

The European Union is preparing an antitrust complaint against Qualcomm Inc. over suspected predatory pricing tactics that could hobble smaller rivals, according to three people familiar with the probe.

Regulators are in the final stages of preparing a so-called statement of objections, based on a complaint by a unit of Nvidia Corp., that asked the EU to act against predatory pricing for mobile-phone chips, the people said. Qualcomm designs chipsets that power most of the world’s smartphones, licensing its technology across the industry.

Qualcomm would add to a growing list of U.S. technology companies to face EU antitrust action, following probes into Google, Microsoft Corp. and Intel Corp. A statement of objections may lead to fines, capped at 10 percent of yearly global revenue, which can be avoided if a company agrees to make changes to business behavior.

Regulators are less advanced with another probe into whether the company grants payments, rebates or other financial incentives to customers in returning for buying Qualcomm chipsets. Another case that focused on complaints that the company was charging excessive royalties on patents was dropped in 2009.

“Predatory pricing” complaints by competitors of successful innovators are typically aimed at hobbling efficient rivals and reducing aggressive competition.  If and when successful, such rent-seeking complaints attenuate competitive vigor (thereby disincentivizing innovation) and tend to raise prices to consumers – a result inimical with antitrust’s overarching goal, consumer welfare promotion.  Although I admittedly am not privy to the facts at issue in the Qualcomm predatory pricing investigation, Nvidia is not a firm that fits the model of a rival being decimated by economic predation (given its overall success and its rapid growth and high profitability in smartchip markets).  In this competitive and dynamic industry, the likelihood that Qualcomm could recoup short-term losses from predation through sustainable monopoly pricing following Nvidia’s exit from the market would seem to be infinitesimally small or non-existent (even assuming pricing below average variable cost or average avoidable cost could be shown).  Thus, there is good reason to doubt the wisdom of the EC’s apparent decision to issue a statement of objections to Qualcomm regarding predatory pricing for mobile phone chips.

The investigation of (presumably loyalty) payments and rebates to buyers of Qualcomm chipsets also is unlikely to enhance consumer welfare.  As a general matter, such financial incentives lower costs to loyal customers, and may promote efficiencies such as guaranteed purchase volumes under favorable terms.  Although theoretically loyalty payments might be structured to effectuate anticompetitive exclusion of competitors under very special circumstances, as a general matter such payments – which like alleged “predatory” pricing typically benefit consumers – should not be a high priority for investigation by competition agencies.  This conclusion applies in spades to chipset markets, which are characterized by vigorous competition among successful firms.  Rebate schemes in dynamic markets of this sort are almost certainly a symptom of creative, welfare-enhancing competitive vigor, rather than inefficient exclusionary behavior.

A pattern of investigating price reductions and discounting plans in highly dynamic and innovative industries, exemplified by the EC’s Qualcomm investigations summarized above, is troubling in at least two respects.

First, it creates regulatory disincentives to aggressive welfare-enhancing competition aimed at capturing the customer’s favor.  Companies like Qualcomm, after being suitably chastised, may well “take the cue” and decide to avoid future trouble by “playing nice” and avoiding innovative discounting, to the detriment of future consumers and industry efficiency.

Second, the dedication of enforcement resources to investigating discounting practices by successful firms that (based on first principles and industry conditions) are highly likely to be procompetitive points to a severe misallocation of resources by the responsible competition agencies.  Such agencies should seek to optimize the use of their scarce resources by allocating them to the highest-valued targets in welfare terms, such as anticompetitive government restraints on competition and hard-core cartel conduct.  Spending any resources on chasing down what is almost certainly efficient unilateral pricing conduct not only sends a bad signal to industry (see point one), it suggests that agency priorities are badly misplaced.  (Admittedly, a problem faced by the EC and many other competition authorities is that they are required to respond to third party complaints, but the nature of that response and the resources allocated could be better calibrated to the likely merit of such complaints.  Whether the law should be changed to grant such competition authorities broad prosecutorial discretion to ignore clearly non-meritorious complaints (such as the wide discretion enjoyed by U.S. antitrust enforcers) is beyond the scope of this commentary, and merits separate treatment.)

A proper application of decision theory and its error cost approach could help the EC and other competition enforcers avoid the problem of inefficiently chasing down procompetitive unilateral conduct.  Such an approach would focus intensively on highly welfare inimical conduct that lacks credible efficiencies (thus minimizing false positives in enforcement) that can be pursued with a relatively low expenditure of administrative costs (given the lack of credible efficiency justifications that need to be evaluated).  As indicated above, a substantial allocation of resources to hard core cartel conduct, bid rigging, and anticompetitive government-imposed market distortions (including poorly designed regulations and state aids) would be consistent with such an approach.  Relatedly, investigating single firm conduct, which is central to spurring a dynamic competitive process and is often misdiagnosed as anticompetitive (thereby imposing false positive costs), should be deemphasized.  (Obviously, even under a decision-theoretic framework, certain agency resources would continue to be devoted to mandatory merger reviews and other core legally required agency functions.)

A basic premise of antitrust law (also called competition law) is that competition among private entities enhances economic welfare by reducing costs, increasing efficiency, and spurring innovation.  Government competition agencies around the world also compete, by devising different substantive and procedural rules to constrain private conduct in the name of promoting competition.  The welfare implications of that form of inter-jurisdictional competition are, however, ambiguous.  Public choice considerations suggest that self-interested competition agency staff have a strong incentive to promote rules that spawn many investigations and cases, in order to increase their budgets and influence.  Indeed, an agency may measure its success, both domestically and on the world stage, by the size of its budget and staff and the amount of enforcement activity it generates.  That activity, however, imposes costs on the private sector, and may produce restrictive rules that deter vigorous, welfare-enhancing competition.  Furthermore, and relatedly, it may generate substantial costs due to “false positives” – agency challenges to efficient conduct that should not have been brought.  (There are also costs stemming from “false negatives,” the failure to bring welfare-enhancing enforcement actions.  Decision theory indicates an agency should seek to minimize the sum of costs due to false positives and false negatives.)  Private enforcement of competition laws, until recently largely relegated to the United States, brings additional costs and complications, to the extent it yields ill-advised lawsuits.  Thus one should cast a wary eye at any increase in the scope of enforcement authority within a jurisdiction, and not assume automatically that it is desirable on public policy grounds.

These considerations should be brought to bear in assessing the implications of the 2014 European Union (EU) Damages Actions Directive (Directive), which is expected to yield a dramatic increase in private competition law enforcement in the EU.  The Directive establishes standards EU nations must adopt for the bringing of private competition lawsuits, including class actions.  The 28 EU member states have until December 27, 2016 to adopt national laws, regulations, and administrative provisions that implement the Directive.  In short, the Directive (1) makes it easier for private plaintiffs to have access to evidence; (2) gives a final finding of violation by a national competition agency conclusive effect in private actions brought in national courts and prima facie presumptive effect in private actions brought in other EU nations; (3) establishes clear and uniform statutes of limitation; (4) allows both direct and indirect purchasers of overpriced goods to bring private actions; (5) clarifies that private victims are entitled to full compensation for losses suffered, including compensation for actual loss and for loss of profit, plus interest; (6) establishes a rebuttable presumption that cartels cause harm; and (7) provides for joint and several liability (any participant in a competition law infringement will be responsible towards the victims for the whole harm caused by the infringement, but may seek contribution from other infringers).

By facilitating the bringing of lawsuits for cartel overcharges by both direct and indirect purchasers (see here), the Directive should substantially expand private cartel litigation in Europe.  (It may also redirect some cartel-related litigation from United States tribunals, which up to now have been the favorite venues for such actions.  Potential treble damages recoveries still make U.S. antitrust courts an attractive venue, but limitations on indirect purchaser suits and Sherman Act jurisdictional constraints requiring a “direct, substantial and reasonably foreseeable effect” effect on U.S. commerce create complications for foreign plaintiffs.)  Given the fact that cartels have no redeeming features, this feature may be expected to increase disincentives for cartel conduct and thereby raise welfare.  (The degree of welfare enhancement depends on the extent to which legitimate activity may be misidentified as cartel conduct, yielding “false positive” damage actions.)

The outlook is less sanguine for non-cartel cases, however.  The Directive applies equally to vertical restraints and abuse of dominance cases, which are far more likely to yield false positives.  In my experience, EU enforcers are more comfortable than U.S. enforcers at pursuing cases based on attenuated theories of exclusionary conduct that have a weak empirical basis.  (The EU’s continued investigation of Google, based on economically inappropriate theories that were rejected by the U.S. FTC, is a prime example.)  In particular, the implementation of the Directive will raise the financial risks for “dominant” or “potentially dominant” firms operating in Europe, who may be further disincentivized from undertaking novel welfare-enhancing business practices that preserve or raise their market share.  This could further harm the vitality of the European business sector.

Hopefully, individual EU states will seek to implement the Directive in a manner that takes into account the serious risk of false positives in non-cartel cases.  The welfare implications of the Directive’s implementation are well worth further competition law scholarship.

Nearly all economists from across the political spectrum agree: free trade is good. Yet free trade agreements are not always the same thing as free trade. Whether we’re talking about the Trans-Pacific Partnership or the European Union’s Digital Single Market (DSM) initiative, the question is always whether the agreement in question is reducing barriers to trade, or actually enacting barriers to trade into law.

It’s becoming more and more clear that there should be real concerns about the direction the EU is heading with its DSM. As the EU moves forward with the 16 different action proposals that make up this ambitious strategy, we should all pay special attention to the actual rules that come out of it, such as the recent Data Protection Regulation. Are EU regulators simply trying to hogtie innovators in the the wild, wild, west, as some have suggested? Let’s break it down. Here are The Good, The Bad, and the Ugly.

The Good

The Data Protection Regulation, as proposed by the Ministers of Justice Council and to be taken up in trilogue negotiations with the Parliament and Council this month, will set up a single set of rules for companies to follow throughout the EU. Rather than having to deal with the disparate rules of 28 different countries, companies will have to follow only the EU-wide Data Protection Regulation. It’s hard to determine whether the EU is right about its lofty estimate of this benefit (€2.3 billion a year), but no doubt it’s positive. This is what free trade is about: making commerce “regular” by reducing barriers to trade between states and nations.

Additionally, the Data Protection Regulation would create a “one-stop shop” for consumers and businesses alike. Regardless of where companies are located or process personal information, consumers would be able to go to their own national authority, in their own language, to help them. Similarly, companies would need to deal with only one supervisory authority.

Further, there will be benefits to smaller businesses. For instance, the Data Protection Regulation will exempt businesses smaller than a certain threshold from the obligation to appoint a data protection officer if data processing is not a part of their core business activity. On top of that, businesses will not have to notify every supervisory authority about each instance of collection and processing, and will have the ability to charge consumers fees for certain requests to access data. These changes will allow businesses, especially smaller ones, to save considerable money and human capital. Finally, smaller entities won’t have to carry out an impact assessment before engaging in processing unless there is a specific risk. These rules are designed to increase flexibility on the margin.

If this were all the rules were about, then they would be a boon to the major American tech companies that have expressed concern about the DSM. These companies would be able to deal with EU citizens under one set of rules and consumers would be able to take advantage of the many benefits of free flowing information in the digital economy.

The Bad

Unfortunately, the substance of the Data Protection Regulation isn’t limited simply to preempting 28 bad privacy rules with an economically sensible standard for Internet companies that rely on data collection and targeted advertising for their business model. Instead, the Data Protection Regulation would set up new rules that will impose significant costs on the Internet ecosphere.

For instance, giving citizens a “right to be forgotten” sounds good, but it will considerably impact companies built on providing information to the world. There are real costs to administering such a rule, and these costs will not ultimately be borne by search engines, social networks, and advertisers, but by consumers who ultimately will have to find either a different way to pay for the popular online services they want or go without them. For instance, Google has had to hire a large “team of lawyers, engineers and paralegals who have so far evaluated over half a million URLs that were requested to be delisted from search results by European citizens.”

Privacy rights need to be balanced with not only economic efficiency, but also with the right to free expression that most European countries hold (though not necessarily with a robust First Amendment like that in the United States). Stories about the right to be forgotten conflicting with the ability of journalists to report on issues of public concern make clear that there is a potential problem there. The Data Protection Regulation does attempt to balance the right to be forgotten with the right to report, but it’s not likely that a similar rule would survive First Amendment scrutiny in the United States. American companies accustomed to such protections will need to be wary operating under the EU’s standard.

Similarly, mandating rules on data minimization and data portability may sound like good design ideas in light of data security and privacy concerns, but there are real costs to consumers and innovation in forcing companies to adopt particular business models.

Mandated data minimization limits the ability of companies to innovate and lessens the opportunity for consumers to benefit from unexpected uses of information. Overly strict requirements on data minimization could slow down the incredible growth of the economy from the Big Data revolution, which has provided a plethora of benefits to consumers from new uses of information, often in ways unfathomable even a short time ago. As an article in Harvard Magazine recently noted,

The story [of data analytics] follows a similar pattern in every field… The leaders are qualitative experts in their field. Then a statistical researcher who doesn’t know the details of the field comes in and, using modern data analysis, adds tremendous insight and value.

And mandated data portability is an overbroad per se remedy for possible exclusionary conduct that could also benefit consumers greatly. The rule will apply to businesses regardless of market power, meaning that it will also impair small companies with no ability to actually hurt consumers by restricting their ability to take data elsewhere. Aside from this, multi-homing is ubiquitous in the Internet economy, anyway. This appears to be another remedy in search of a problem.

The bad news is that these rules will likely deter innovation and reduce consumer welfare for EU citizens.

The Ugly

Finally, the Data Protection Regulation suffers from an ugly defect: it may actually be ratifying a form of protectionism into the rules. Both the intent and likely effect of the rules appears to be to “level the playing field” by knocking down American Internet companies.

For instance, the EU has long allowed flexibility for US companies operating in Europe under the US-EU Safe Harbor. But EU officials are aiming at reducing this flexibility. As the Wall Street Journal has reported:

For months, European government officials and regulators have clashed with the likes of Google, Amazon.com and Facebook over everything from taxes to privacy…. “American companies come from outside and act as if it was a lawless environment to which they are coming,” [Commissioner Reding] told the Journal. “There are conflicts not only about competition rules but also simply about obeying the rules.” In many past tussles with European officialdom, American executives have countered that they bring innovation, and follow all local laws and regulations… A recent EU report found that European citizens’ personal data, sent to the U.S. under Safe Harbor, may be processed by U.S. authorities in a way incompatible with the grounds on which they were originally collected in the EU. Europeans allege this harms European tech companies, which must play by stricter rules about what they can do with citizens’ data for advertising, targeting products and searches. Ms. Reding said Safe Harbor offered a “unilateral advantage” to American companies.

Thus, while “when in Rome…” is generally good advice, the Data Protection Regulation appears to be aimed primarily at removing the “advantages” of American Internet companies—at which rent-seekers and regulators throughout the continent have taken aim. As mentioned above, supporters often name American companies outright in the reasons for why the DSM’s Data Protection Regulation are needed. But opponents have noted that new regulation aimed at American companies is not needed in order to police abuses:

Speaking at an event in London, [EU Antitrust Chief] Ms. Vestager said it would be “tricky” to design EU regulation targeting the various large Internet firms like Facebook, Amazon.com Inc. and eBay Inc. because it was hard to establish what they had in common besides “facilitating something”… New EU regulation aimed at reining in large Internet companies would take years to create and would then address historic rather than future problems, Ms. Vestager said. “We need to think about what it is we want to achieve that can’t be achieved by enforcing competition law,” Ms. Vestager said.

Moreover, of the 15 largest Internet companies, 11 are American and 4 are Chinese. None is European. So any rules applying to the Internet ecosphere are inevitably going to disproportionately affect these important, US companies most of all. But if Europe wants to compete more effectively, it should foster a regulatory regime friendly to Internet business, rather than extend inefficient privacy rules to American companies under the guise of free trade.

Conclusion

Near the end of the The Good, the Bad, and the Ugly, Blondie and Tuco have this exchange that seems apropos to the situation we’re in:

Bloeastwoodndie: [watching the soldiers fighting on the bridge] I have a feeling it’s really gonna be a good, long battle.
Tuco: Blondie, the money’s on the other side of the river.
Blondie: Oh? Where?
Tuco: Amigo, I said on the other side, and that’s enough. But while the Confederates are there we can’t get across.
Blondie: What would happen if somebody were to blow up that bridge?

The EU’s DSM proposals are going to be a good, long battle. But key players in the EU recognize that the tech money — along with the services and ongoing innovation that benefit EU citizens — is really on the other side of the river. If they blow up the bridge of trade between the EU and the US, though, we will all be worse off — but Europeans most of all.

The precise details underlying the European Commission’s (EC) April 15 Statement of Objections (SO), the EC’s equivalent of an antitrust complaint, against Google, centered on the company’s promotion of its comparison shopping service (CSS), “Google Shopping,” have not yet been made public.  Nevertheless, the EC’s fact sheet describing the theory of the case is most discouraging to anyone who believes in economically sound, consumer welfare-oriented antitrust enforcement.   Put simply, the SO alleges that Google is “abusing its dominant position” in online search services throughout Europe by systematically positioning and prominently displaying its CSS in its general search result pages, “irrespective of its merits,” causing the Google CSS to achieve higher rates of growth than CSSs promoted by rivals.  According to the EC, this behavior “has a negative impact on consumers and innovation”.  Why so?  Because this “means that users do not necessarily see the most relevant shopping results in response to their queries, and that incentives to innovate from rivals are lowered as they know that however good their product, they will not benefit from the same prominence as Google’s product.”  (Emphasis added.)  The EC’s proposed solution?  “Google should treat its own comparison shopping services and those of rivals in the same way.”

The EC’s latest action may represent only “the tip of a Google EC antitrust iceberg,” since the EC has stated that it is continuing to investigate other aspects of Google’s behavior, including Google agreements with respect to the Android operating system, plus “the favourable treatment by Google in its general search results of other specialised search services, and concerns with regard to copying of rivals’ web content (known as ‘scraping’), advertising exclusivity and undue restrictions on advertisers.”  For today, I focus on the tip, leaving consideration of the bulk of the iceberg to future commentaries, as warranted.  (Truth on the Market has addressed Google-related antitrust issues previously — see, for example, here, here, and here.)

The EC’s April 15 Google SO is troublesome in multiple ways.

First, the claim that Google does not “necessarily” array the most relevant search results in a manner desired by consumers appears to be in tension with the findings of an exhaustive U.S. antitrust investigation of the company.  As U.S. Federal Trade Commissioner Josh Wright pointed out in a recent speech, the FTC’s 2013 “closing statement [in its Google investigation] indicates that Google’s so-called search bias did not, in fact, harm consumers; to the contrary, the evidence suggested that ‘Google likely benefited consumers by prominently displaying its vertical content on its search results page.’  The Commission reached this conclusion based upon, among other things, analyses of actual consumer behavior – so-called ‘click through’ data – which showed how consumers reacted to Google’s promotion of its vertical properties.”

Second, even assuming that Google’s search engine practices have weakened competing CSSs, that would not justify EC enforcement action against Google.  As Commissioner Wright also explained, the FTC “accepted arguments made by competing websites that Google’s practices injured them and strengthened Google’s market position, but correctly found that these were not relevant considerations in a proper antitrust analysis focused upon consumer welfare rather than harm to competitors.”  The EC should keep this in mind, given that, as former EC Competition Commissioner Joaquin Almunia emphasized, “[c]onsumer welfare is not just a catchy phrase.  It is the cornerstone, the guiding principle of EU competition policy.”

Third, and perhaps most fundamentally, although EC disclaims an interest in “interfere[ing] with” Google’s search engine algorithm, dictating an “equal treatment of competitors” result implicitly would require intrusive micromanagement of Google’s search engine – a search engine which is at the heart of the company’s success and has bestowed enormous welfare benefits on consumers and producers alike.  There is no reason to believe that EC policing of EC CSS listings to promote an “equal protection of competitors” mandate would result in a search experience that better serves consumers than the current Google policy.  Consistent with this point, in its 2013 Google closing statement, the FTC observed that it lacked the ability to “second-guess” product improvements that plausibly benefit consumers, and it stressed that “condemning legitimate product improvements risks harming consumers.”

Fourth, competing CSSs have every incentive to inform consumers if they believe that Google search results are somehow “inferior” to their offerings.  They are free to advertise and publicize the merits of their services, and third party intermediaries that rate browsers may be expected to report if Google Shopping consistently offers suboptimal consumer services.  In short, “the word will get out.”  Even in the absence of perfect information, consumers can readily at low cost browse alternative CSSs to determine whether they prefer their services to Google’s – “help is only a click away.”

Fifth, the most likely outcome of an EC “victory” in this case would be a reduced incentive for Google to invest in improving its search engine, knowing that its ability to monetize search engine improvements could be compromised by future EC decisions to prevent an improved search engine from harming rivals.  What’s worse, other developers of service platforms and other innovative business improvements would similarly “get the message” that it would not be worth their while to innovate to the point of dominance, because their returns to such innovation would be constrained.  In sum, companies in a wide variety of sectors would have less of an incentive to innovate, and this in turn would lead to reduced welfare gains and benefits to consumers.  This would yield (as the EC’s fact sheet put it) “a negative impact on consumers and innovation”, because companies across industries operating in Europe would know that if their product were too good, they would attract the EC’s attention and be put in their place.  In other words, a successful EC intervention here could spawn the very welfare losses (magnified across sectors) that the Commission cited as justification for reining in Google in the first place!

Finally, it should come as no surprise that a coalition of purveyors of competing search engines and online shopping sites lobbied hard for EC antitrust action against Google.  When government intervenes heavily and often in markets to “correct” perceived “abuses,” private actors have a strong incentive to expend resources on achieving government actions that disadvantage their rivals – resources that could otherwise have been used to compete more vigorously and effectively.  In short, the very existence of expansive regulatory schemes disincentivizes competition on the merits, and in that regard tends to undermine welfare.  Government officials should keep that firmly in mind when private actors urge them to act decisively to “cure” marketplace imperfections by limiting a rival’s freedom of action.

Let us hope that the EC takes these concerns to heart before taking further action against Google.