U. S. v. Google: A Tough Slog, But Also an Intriguing Possibility: Did Google pay billions of dollars for the "inertia" of mobile device owners, or for something else?

• Author: White, Lawrence J.

The U.S. Department of Justice's antitrust case against Google, filed in October 2020, will be a slog. It is being brought under Section 2 of the Sherman Act, which prohibits "monopoliz[ing] any part of the trade or commerce," and monopolization cases are always a tough slog. In this brief essay I will lay out some of the issues in the case and raise an intriguing possibility about what Google was pursuing in its business deals with Apple, which are some of the arrangements under scrutiny in the case.

WHAT IS THIS CASE ABOUT?

The case is about exclusivity and exclusion in the distribution of search engine services. Google paid substantial sums to Apple and the manufacturers of Android-based mobile phones and tablets, and also to wireless carriers and to web browser proprietors--in essence, to distributors--to install the Google search engine as the exclusive pre-set (installed), default search program.

The suit alleges that Google thereby made it more difficult for other search engine providers (e.g., Microsoft's Bing, Duck-DuckGo) to obtain distribution for their search engine services. That, in turn, made it difficult for the other search providers to attract users and to sell the online advertising that is associated with search-engine use and that provides the revenue to support the search "platform" in this "two-sided market" context.

Relatedly, this practice allowed Google to gain greater search user volume, which allowed it to learn more about its users and their behavior. That enabled it to provide better search results to users and better-targeted (higher-value) advertising to its advertisers. Conversely, Google's search-engine rivals were deprived of that volume, with the mirror-image negative consequences for those rivals. This is just another version of the standard "learning-by-doing" and the related "learning curve" (or "experience curve") concepts that have been well understood in economics for decades.

Exclusion can be seen as a form of "raising rivals' costs." Equivalently, exclusion can be seen as a form of non-price predation. Under either interpretation, the exclusionary action impedes competition.

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

WHAT IS THE RELEVANT MARKET?

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

This is one of the important places where the DOJ's case is likely to turn into a slog. How to delineate the relevant market for alleged monopolization cases is a largely unsolved problem for antitrust economics. This is in sharp contrast to the issue of delineating relevant markets for the antitrust analysis of proposed mergers. For the latter category, the paradigm of the "hypothetical monopolist" and the possibility that this hypothetical monopolist could prospectively impose a "small but significant non-transitory increase in price" has carried the day for the purpose of market delineation.

No such paradigm exists for monopolization cases, in which the usual allegation is that the defendant already possesses market power and has used exclusionary actions to buttress that power.

To see the difficulties, it is useful to recall the basic monopoly diagram from Microeconomics 101: A monopolist...