3 Key Takeaways from Google Search: Competition Corner
Issue #30
G’day,
Satya Marar here. Welcome to the newly revamped Competition Corner from the Mercatus Center at George Mason University. In this month’s edition, we look at 3 key takeaways from the recent District of Columbia federal District Court’s 275-page Google Search decision. Judge Amit Mehta held that Google violated Section 2 of the Sherman Act by illegally maintaining its monopoly in the general search services and general text advertising product markets through “exclusive distribution agreements.” Specifically, by paying operators of mobile and computer web browsers like Apple’s Safari and Mozilla’s Firefox a share of the billions in annual revenue that its search engine generates to make it the default search engine, until and unless users change their browser settings.
Relying heavily on the DC Circuit Court of Appeals’ landmark 2001 Microsoft ruling, Mehta noted that Google had gained its 90%+ share of web search inquiries through a better product that consumers prefer. However, he still held that the company maintained this monopoly through excluding other search engines, like Microsoft’s Bing, from achieving the scale (user base) necessary to compete- a search engine’s utility being primarily a function of the effectiveness of its algorithm, and its ability to ‘learn’ from pooled user data. A future ruling on the relevant remedy is expected, and Google also plans to appeal the decision.
3 Key Takeaways
Google Search departs from Microsoft’s causation standard: In Microsoft, the court held that in Section 2 monopolization cases, once a government plaintiff proves that the defendant’s conduct affected a nascent (that is, potential albeit realistic) competitive threat, and that the conduct has anticompetitive effects, it would no longer have to show that anticompetitive harm would not have flowed but-for the defendant’s allegedly exclusionary conduct. The rationale behind lessening the plaintiff’s causation burden in such cases is that dynamic and rapidly-evolving markets (like tech) make it virtually impossible for the plaintiff to construct a hypothetical world where an anticompetitive practice never happened, since any number of factors besides the anticompetitive effects of the defendant’s conduct could have also stopped the competitive threat from materializing. Under this standard, the DOJ in Google Search still bears the burden of showing that Google’s contracts with web browsers to become their default search engine had an anticompetitive effect, and that (absent these agreements) Microsoft’s Bing could have reached the minimum efficient scale necessary to become a realistic competitive threat to Google.
Conversely, Judge Mehta relieved the DOJ of having to show causation after asking whether Google’s distribution agreements were “reasonably capable of significantly contributing to maintaining [Google’s] monopoly power in the relevant market.” This dispenses with the need to demonstrate that Microsoft could realistically have become a competitive threat to Google. As noted by Geoffrey Manne from the International Center for Law and Economics, “[i]f all that were required to win such a case were the reasonable capability of an agreement to contribute to a dominant firm’s competitive position, then no exclusive or quasi-exclusive agreement would ever be legal.”
The court heard that absent Google’s agreements, Apple would still have elected to make their search engine the default on the Safari browser, as consumers prefer it. Firefox developer Mozilla expressed similar sentiments in a letter to the DOJ. When European regulators blocked Google from making distribution agreements there, its search engine kept its market dominance. These facts suggest that competition to become the default search engine on a web browser, including through contracts, is a form of “competition on the merits” that precludes a finding of monopolization under Section 2. It also makes it highly questionable whether Bing could have become a competitive threat to Google but-for Google’s distribution agreements- a question that the DOJ bears the burden of proving under Microsoft, and one that could prove fatal to Judge Mehta’s ruling on appeal.
Competition and innovation in web browsers and mobile phones are likely to suffer: As my Mercatus Center colleague Greg Werden notes in his analysis of the DOJ’s case against Google, “[t]he development of both browsers and search engines is supported by search advertising, which in 2023 generated US revenue of $88.8 billion.” Default agreements provide an opportunity for web browsers to share this revenue, which is generated by the search engine. In 2021 alone, Google paid out $26.3 billion to its partners under distribution agreements. Apple received $20 billion in 2022 and Mozilla received $150 million (or around 80% of its revenue) in 2020. If it’s upheld on appeal, the Google Search ruling could massively undercut browser revenue and investment in developing browsers by barring these agreements. Browsers would still choose or provide a mechanism for choosing search engine defaults and evidence indicates that they’re still likely to favor Google. They just won’t be able to monetize that decision in the same way.
A similar story is likely to follow for mobile phones. At trial, Google’s witness gave evidence that the monies that Apple receives from Google under the distribution agreements don’t drive a significant increase in its profit margins- indicating that the revenue is likely reinvested in the business or passed on in some other way. Consumers benefit where the funds are passed on to improve product quality, production cost-efficiency, or to invest in future innovation. In the case of Apple, this could mean that a source of investment in developing Safari, iPhones, or any number of their other products could evaporate without distribution agreements.
Google is unlikely to get broken up: The District of Columbia Circuit Court has previously ruled that antitrust remedies must be crafted to avoid benefiting a particular competitor, and that they should be narrowly tailored to deny the offender the “fruits of its violation.” The most likely remedy is thus an injunction against the illegal distribution agreements alongside guardrails to prevent the parties from evading the injunction by recreating the agreements in other forms. It’s also possible that given the relatively narrow share of “foreclosure” achieved by the default browser agreements (as opposed to an agreement that would have prevented browser users from switching defaults or using other search engines), and given the implications for revenue loss for browser and mobile phone ecosystem development, Judge Mehta might favor permitting Google to have narrower distribution agreements that lower this supposed foreclosure share to a level that is no longer considered anticompetitive exclusion. “Modern antitrust decrees are not perpetual,” meaning that any injunctive relief against these types of deals is likely to not be permanent, although it is still likely to run for 5-10 years. It is also possible that Mehta may bar Google from being the default on Mozilla and Apple’s browsers even without agreements, which would certainly benefit Microsoft’s Bing, which is arguably most likely to replace Google as the default search engine as the closest competitor. [AA1] Ironically, any remedy that bars Google’s distribution agreements may result in Google largely maintaining its market share as it did in Europe, as consumers switch default settings to Google or browsers choose to still make Google the default search without receiving payments for it. This would make the remedy for the supposed antitrust injury in the case (maintenance of Google’s monopoly through rivals being unable to reach minimum efficient scale to compete) entirely ineffective whilst depriving web browser and mobile phone operating system companies of revenue.
For more insight on Google Search and its implications, check out expert commentary from Alden Abbott and Greg Werden in Forbes and Truth on the Market.
The DOJ’s battle against Google isn’t over! Check out Alden’s recent analysis of their upcoming suit against Google’s ad tech business.
Articles, Insights & What’s Hot in the World of Competition
Pharmaceutical Benefit Managers (PBMs)
PBMs have been under the spotlight due to allegations that these middlemen entities who negotiate with drugmakers and pharmacies on behalf of health insurers squeeze drugmakers and pharmacies to make a buck while leaving insured patients with more expensive drugs and less choice. A recent FTC interim report on PBMs laid out circumstantial evidence suggesting as much, though it has drawn criticism from dissenting FTC commissioner Melissa Holyoak for methodological flaws, speculative conclusions and insufficient quantitative analysis. Outcomes may vary in specific cases. However, economic evidence indicates that PBMs generally help keep insurance premiums low by taking advantage of the bulk-buying power of pooling patients across multiple insurers and health plans. The FTC will need to bring more evidence if it wants to win a future antitrust lawsuit against the nation’s 3 largest PBMs, as I argue in Truth on the Market, and in my recent letter to the editor at the Wall Street Journal. State legislators considering restrictions on PBMs, such as those in Wisconsin, should also consider how these could inadvertently harm patients and healthcare competition whilst benefiting vested interests, as I argue in the Center Square.
Artificial Intelligence
The DOJ and FTC recently joined the UK Competition and Markets Authority (CMA) and European Commission (EC) in releasing a joint statement on “competition in generative AI foundation models and AI products.” Unfortunately, the statement understates the competitive benefits of AI while overplaying risk of competitive harms, and could impede innovation and investment in these cutting-edge technologies as Alden Abbott argues in his analysis of the statement for Forbes. For instance, concerns around the role of “big data” in artificial intelligence and the ability and incentive for big tech firms investing in AI models to raise rivals’ costs and impede innovation by restricting access to the vast troves of user data that they own seem to be overstated, as I note in Discourse Magazine. For a deeper dive on AI and antitrust, check out my primer on the subject.
EU Draft Monopolization Guidelines
Newly issued European Union draft monopolization guidelines threaten innovative business practices that help drive high tech economic growth, drawing a stark contrast to the United States’ historic pro-innovation and pro-competition approach that has helped make it the global leader in tech. For an analysis of the draft guidelines’ implications for competition and innovation check out expert commentary from Alden Abbott in Forbes, as well as Greg Werden’s recent comments.
Nails in the Coffin for FTC’s Non-Compete Ban
Alden Abbott recently wrote on the Northern District of Texas’s recent decision that struck down the FTC’s rule banning non-compete agreements nationwide. The ruling comes as no surprise. We’ve long argued that, as a matter of law, the FTC lacks authority to adopt substantive rules on competition matters. Noncompete clauses can vary drastically in their scope and duration and could carry both potential pro and anti-competitive implications. That’s why Mercatus scholars Alden Abbott and Liya Palagashvili argue for a flexible approach that lets states to adopt their own approaches on regulating and enforcing these clauses, and that prioritizes transparency and informed consent for workers.
Big Antitrust Cases Heat Up: Kroger/Albertsons Merger & RealPage
Eight states and the DOJ recently sued RealPage Inc. for scheming to “decrease competition among landlords in apartment pricing and to monopolize the market for commercial revenue management software that landlords use to price apartments.” What a mouthful! Meanwhile, the FTC recently joined nine states to try to block the merger of supermarket giants Kroger and Albertson’s in a three-week federal district court trial that began in Los Angeles on August 26. To read more on these trials’ potential implications for the ability of businesses to set prices with algorithms, and for competition in the retail grocery sector, check out Alden Abbott’s Forbes column. Alden also recently appeared on Scripps News to discuss the Kroger/Albertson’s merger.
Mergers & Innovation
Antitrust enforcers increasingly presume that mergers and acquisitions of innovative firms will harm innovation by reducing competition. This is a flawed approach that is likely to lead to a range of beneficial, pro-innovation mergers being blocked or abandoned at the expense of consumers. In their recent policy brief, Alden Abbott and Mercatus MA Fellow Cody Taylor argue for a return to the ‘rule of reason’ approach based on economic analysis, which captures mergers that are likely to be anticompetitive whilst fostering innovation and competition by permitting those whose likely benefits outweigh their likely costs.
Intellectual Property & China
The Prohibiting Adversarial Patents Act (PAPA) seeks to punish China for its long history of abetting IP theft from Americans by singling out certain Chinese companies, like Huawei, to deprive them of the ability to register or enforce their patents in the United States. Unfortunately, this approach is likely to backfire by undermining the integrity of our world-leading IP regime, and by triggering reciprocal backlash against U.S. companies overseas. Conversely, there is much that policymakers could do to shore up America’s competitive advantage against China by fixing existing issues in upholding U.S. patent rights, as I argue in The Hill.
That’s all for now. See you next month!