Antitrust in the Digital Age — Google, Amazon, and What Follows
Five large tech companies — Apple, Google, Microsoft, Facebook, and Amazon—make up 22% of the S&P 500 index. As their market share has grown, so have antitrust concerns about monopolization and the abuse of monopoly power. In October 2020 the Department of Justice (DOJ) along with eleven states jointly filed a lawsuit charging Google with abusing its power to establish and maintain its near monopoly in violation of the Sherman Act and other antitrust laws. The DOJ has not ruled out structural actions, i.e., breaking Google up, as the remedy. This is the first major American antitrust prosecution of a “big tech” firm since the famous Microsoft case 20 years ago. In November 2020 the European Union (EU) formally objected to Amazon for its treatment of merchants selling on its website. The outcome of these cases will almost certainly have broader implications for the “big tech” companies.
The network effects, dual price structure, and informational advantages that characterize two-sided platforms complicate antitrust analysis.
- Exclusionary conduct is the main issue in the Google case. At its core, the Google case bears a strong similarity to DOJ’s successful prosecution of Microsoft twenty years ago. Indeed, the DOJ filing references the Microsoft case as a precedent. In that earlier case, Microsoft was found to have violated the antitrust laws because of its efforts to establish its Internet Explorer (IE) as the dominant web browser. These actions included the requirement that IE be the default browser on all office equipment using its Windows operating system, as well as Microsoft’s agreement with Apple that Mac computers would also have Internet Explorer as the default browser in return for Microsoft’s support in making its Office suite of applications available on Macs. In the court’s view, these and related tactics were aimed at preventing other browsers, notably Netscape, from emerging as platforms that might challenge Microsoft’s operating system dominance. The DOJ complaint alleges that Google has employed similar tactics. For example, it claims that its contracts with makers of mobile devices that license Google’s android operating system impose the Google search app as a default. Google Chrome, now the leading web browser, also sets Google as its default search engine. In fact, according to the complaint, Google has also paid Apple several billion dollars to insure that it is the default search engine on Apple’s Safari browser. In the DOJ’s view, the precedent established in the Microsoft case clearly implies that Google’s tactics are exclusionary efforts to preserve its monopoly power in violation of antitrust laws. The DOJ lawsuit further contends that these practices reduce the ability of innovative new companies to develop, compete, and discipline Google’s behavior.
- Anti-competitive use of “big data” is the main issue underlying the European allegations against Amazon. Amazon hosts over two million sellers on its website. As a result, Amazon has access to a vast amount of information regarding how many units each seller ships; how consumers respond to different prices and promotions; the effect of shipping fees; and so on. Yet, in addition to hosting other sellers, Amazon also sells goods itself under such brand names as Amazon Basics, Lark and Ro, and North Eleven. The EU has claimed that Amazon has used the private information gained from hosting third-party sellers to advantage its own product lines generally avoiding “the normal risks of retail competition."
- The nature of the two-sided platforms operated by Google, Amazon and other “big tech” companies tend to complicate antitrust analysis. Broadly speaking, platforms such as Google and Amazon serve two sets of clients. One is comprised of the consumers who use these platforms to find goods and services. The other is comprised of the firms that produce those goods and of advertisers that are trying to reach those consumers. Markets comprised of such two-sided platforms create three challenges for bringing successful antitrust suits. These are: 1) the natural tendency for such markets to be dominated by a few firms; 2) the need for platforms to set prices simultaneously to both sides of the market; and 3) the large amount of information that large, established platforms inevitably acquire and that can aid them in subsequent competition.
- Scale economies and the positive feedback of network effects that characterize two-sided platforms tend to lead naturally to concentrated markets. On the supply side, there are important scale effects in digital platform markets. Once Google, for example, has set up its search infrastructure, the cost of adding another search customer is trivial. Perhaps even more important though are the scale or network effects on the demand side. As more consumers use Google as their search engine, and in so doing provide personal information regarding interests and buying habits, more firms are willing to pay for keyword links and banner ads on Google’s search engine. Similarly, as more firms provide more and better product information, more consumers turn to Google to do their search. Together, these scale and positive feedback effects imply that only a few large platforms are likely to survive in any market. It is not easy then to determine whether the rise of a large, dominant platform is the result of a normal competitive process or the result of unlawful, anticompetitive tactics.
- Companies that operate two-sided platforms will set a price structure in which the prices to each side of the platform must be jointly determined. Often that structure will involve a very low price set to that side of the platform where the positive feedback is strongest. Thus, Google sets basically a zero price to searchers precisely because the large number of searchers this attracts allows Google to set a higher price to the companies selling products. Consequently, evaluation of a platform’s behavior must consider its overall impact across both sides of the platform. In its recent ruling in Ohio versus American Express, the Supreme Court has made clear that in the case of two-sided markets, dominant firm practices that hurt one side of the market (e.g. advertisers) may still be legal if they bring offsetting benefits to the other side (e.g., consumers).
- Large dominant platforms have important information advantages. A search engine matches consumers with those companies selling the items they seek. The better the quality of the matches it provides, the more consumers will use that search engine. Likewise, firms are willing to pay more for keywords on a search engine that more likely leads to a good match and, consequently, to a sale. Making good matches though becomes easier as a firm gathers more information from past search histories and purchases. For an established firm like Google, this creates two incentives to increasing or maintaining its position. One is that it accumulates more information that permits it to improve the quality of its product. The other though is that by taking search activity away from rivals, it limits their ability to gain information and therefore to compete against Google more vigorously. A somewhat similar information issues arises in the case of Amazon. As a host to millions of sellers, Amazon obtains a vast amount of information unavailable to others regarding what products are “hot”, how consumers respond to different price promotions, and so on. Amazon can then use this information to improve the product offering of its own brands like Amazon Basics, North Eleven, and Lark and Ro. It can also use this information to favor companies that buy into other Amazon products such as its Prime service. Here again, the issue is complicated as Amazon’s exploitation of its vast information can be seen as either an effort to improve its products or an attempt to disadvantage competitors.
- Market definition is an important issue in resolving antitrust complaints. Google primarily operates a search platform that derives its revenues from firms bidding on advertising space (or keywords) on that platform. Amazon is an e-tailer offering the products of (mostly) other firms that pay to be carried on Amazon’s site. Increasingly though, consumers bypass Google to search directly on Amazon’s website. Whether or not that makes Amazon a search engine is an open question. Conversely, Google is primarily a search engine. But it is also the developer of the Android operating system used in many digital products, including Google’s own Pixel phone. Again, there is then some question as to what extent Google is a digital retailer. What is not in question though is that these two tech firms compete vigorously for advertising dollars. Additional competition for those advertising dollars comes from Facebook, which like Google also earns virtually all of its revenue from advertising even though it is a social network. Determining the extent to which these three and other firms are really competing with each other despite the underlying differences will be an important part of Google’s trial. So too will be the extent of competition from other search engines and other, narrower search services such as Expedia and TripAdvisor.
- The impact of market structure on innovation is an important thrust of the current antitrust efforts. Focusing on the role of competition on innovation recognizes that monopoly power can hurt consumers by suppressing the development of new products even if it is not forcing prices higher. Indeed, the success of the DOJ’s suit rests heavily on this point since, as noted above, the claim that Google’s behavior has raised consumer prices is difficult to sustain. There is increasing evidence that rival entry promotes innovative activity, especially in technologically advanced sectors. While not explicitly mentioned in the DOJ filing, the focus on innovation may also call attention to the role of mergers in acquiring firms that might have evolved into real competitors. For instance, Instagram may have developed into an independent rival to Facebook had not Facebook bought the firm in 2012. Similarly, Google may have eliminated a potential rival with its purchase of the DoubleClick software that connects platforms to exchanges in which advertising is bought and sold.
What this Means:
Concern about the power of “big tech” companies has clearly grown both in the United States and in Europe. The DOJ’s lawsuit against Google may therefore be just the first installment of a battle that will go a number of rounds. This may be one reason that DOJ framed its charge fairly narrowly by focusing on Google’s potentially predatory efforts to establish its search engine as the default on virtually all devices. Such a strategy may enable the DOJ to win a victory that can later be used as a foundation for pursuing other “big tech” cases. The DOJ will not win easily, however. Google can claim with some justification that in reality it faces a fair bit of competition from other platforms for specific search functions and for advertising dollars, undermining assertions about its monopoly power. Much as Microsoft did twenty years ago, Google can also counter arguments that it has stifled innovation, by arguing that all its actions have been made to improve the quality of its search engine by making it better-integrated with various devices and permitting it to build the search volume that allows it to learn from the billions of searches conducted each day. Even apart from such a claim, Google may still be able to argue that it has kept search prices very low and so, again, has acted in consumers’ interests. The outcome of the EU case against Amazon also remains unclear, as Amazon has vowed to fight the charges vigorously, arguing that “no company has done more to support small businesses over the past two decades than Amazon." The complexities in the economics of the “big tech” firms may call for new government agencies with the specialized expertise to oversee their behavior: These may be specialized courts or simply a federal digital authority. Such institutions might be best suited to establishing and enforcing a code of competitive conduct for digital platforms. They might be particularly well suited to establishing rules promoting data portability so that consumers have some ownership rights to the data they provide a company like Google every time they use its service.