The Department of Justice (DOJ) has now filed its long-awaited case against Google, taking aim at the company for its “anticompetitive tactics to maintain and extend its monopolies in the markets for general search services, search advertising, and general search text advertising.” The primary focus of this case is narrower than expected, alleging that Google “entered into exclusionary agreements, including tying arrangements, and engaged in anticompetitive conduct to lock up distribution channels and block rivals.” This post explains the DOJ’s motivation for bringing a case against Google, the conspicuous gaps in the DOJ’s case, and then concludes with a look at what to expect.
Basics of the case
The real meat of the complaint begins on page 52 in paragraph 166, where the DOJ alleges, “Google has maintained unlawful monopolies in the general search services, search advertising, and general search text advertising markets through its many exclusionary agreements.” In other words, the complaint primarily focuses on Google’s exclusionary market power, through which the DOJ claims Google has either deprived competitors of needed inputs and access to markets, or raised their competitors’ costs, negatively affecting competition in the long run.
The exclusionary market power at issue in the DOJ complaint originates from contracts that Google maintains across the software and hardware ecosystem. For example, Google contracts with Apple, ensuring that Google is the default search provider for iPhones and iPads. For Android device manufacturers, in return for the free use of the Android operating system and their app store, Google maintains the Mobile Application Distribution Agreement (MADA). This ensures handset manufacturers don’t distribute devices powered by a non-standard version of Android. Google also manufacturers that are parties to the MADA the opportunity to enter into revenue sharing agreements (RSAs). Revenue sharing agreements also extend beyond handset manufacturers to both U.S. wireless carriers such as AT&T, T-Mobile, Verizon, and browser developers such as Mozilla, Opera, and UCWeb.
Between its exclusionary contracts, its owned properties (the Android operating system), and its operated properties (the devices that have Google set as the default search engine), the DOJ alleges Google has “dominance in 80 percent of the general search queries in the United States” and “has thus foreclosed competition for internet search.” According to the DOJ, the result is that “competitors are denied vital distribution, scale, and product recognition — ensuring they have no real chance to challenge Google.”
Allegation of harm
In short, the DOJ is alleging that Google locked up a variety of players in the ecosystem to ensure that its product was the default for search, which made it difficult for consumers to exercise choice. As a result, this had the effect of stifling innovation.
The intuition is sound; there is a lot of evidence that defaults matter. Johnson and Goldstein first demonstrated the massive effect default choices had when comparing countries by their organ donation practices. In countries where organ donation was a default choice that required people to opt-out of, the total number of people giving organs was significantly higher than in countries whose default was an opt-in policy. A year later, Benartzi and Thaler released results from the ‘Save More Tomorrow’ (SMarT) program, which used changes in defaults to increase employees’ savings rates. By shifting the default, they showed that the program was able to bump up the number of people saving from 3.5 percent to 13.6 percent over the course of 40 months. This paper, and the research that came from it, was pivotal in securing the Nobel Prize for Richard Thaler, one of the authors.
However, shifting defaults doesn’t always mean people will stay with that choice. In one study, Brown et al analyzed office employees’ reactions after researchers changed the default settings on office thermostats. The study showed that office employees who were more likely to adjust the office thermostat before the experiment were less likely to accept the research team’s default temperature. In a separate study of the influence of defaults, a group of low-income participants had their tax refund automatically invested in U.S. Savings Bonds as the default, requiring those participants to take additional action to choose another allocation method like direct deposit. In this study, it was found that there was little difference in the saving behavior of a similarly situated study group who were not subject to the default investment and the study group who was. As the authors explained, strong preferences can overwhelm the effect of the default. As one review of the literature summarized, defaults tend to be powerful only when options are numerous, have complex attributes, or are difficult to distinguish. That isn’t the case for web search, especially on mobile devices where switching search engines only takes a couple of taps in the settings menu.
By going after Google for these exclusive contracts, the DOJ asserts that these deals pushed companies to bypass consumer choice and choose Google over another, better choice. In the absence of Google, the DOJ’s assertion begs the question: what would have been consumers’ choice if Google was not the default? While there isn’t a large body of recent research on the subject, consumer preference has historically favored Google over other search engines. One randomized experiment in 2013 found that a majority of participants preferred Google search to Bing when presented with search results from both companies. Another study from 2013, conducted by SurveyMonkey, examined the influence of name recognition by switching the headers for Bing and Google search results. Again, in this study, consumer preference trended in favor of Google results.
The claim that these deals had a negative impact on innovation has a subtle suggestion, which might be called the shadow problem of monopolization. The DOJ is clear about the monopoly it aims to curb; there are too few search providers. But the shadow of this statement is just as important to consider. Since the monopoly is characterized as too few goods being produced in one sector, the implication is that there are too many goods being produced elsewhere. In this case, the DOJ wants to trade off the consumer surplus in handsets and Internet service for more choice in the search space.
Economists recognize that exclusive deals can support competition, and Google’s deals have been beneficial to consumers in other parts of the economy. Revenue sharing agreements likely reduced the cost of both Apple and Android handsets as well as wireless services, making them more affordable to consumers. Google’s deal with Firefox is a major source of income for the browser, which it uses to invest in better products and create new privacy tools. Cutting off these vital contracts would likely result in deep cuts for Firefox to the detriment of consumers, harming browser innovation globally in the long run.
Indeed, to see a glimpse into a world without these deals, one only needs to look at the European Union. After the European Commission (EC) forced Google to unbundle its search products and apps from the Android operating system, Google started charging manufacturers anywhere from $2.50 to $40 per device for use of Google’s apps. Through the act of unbundling, the EC forced Google to make the value in the contract into an explicit cost because the bargained for deal was no longer allowed to happen. At the end of the day, consumers bear the burden of these decisions.
Some oddities of the case and what’s next
What’s most striking about this complaint is its limited scope. The DOJ didn’t go after Google for their display ads, their presence in the ad tech industry, their Ad Mob/DoubleClick mergers, or self-preferencing in search, even though the recent report from the House Antitrust Subcommittee calls out each of these areas for closer scrutiny. If reports are true, this case might just be the first salvo. Countless states investigating the company declined to join the DOJ in the complaint, suggesting these states are holding out to bring their own, more expansive case against Google in the near future, probably in the coming weeks.
What’s more, even if Google’s exclusive deals with other companies are broken up, this could actually be a boon for Google. As JPMorgan explained in a new research note:
Ironically, if the court were to prevent Google from entering into agreements w/distributors & consumers were presented with the option to choose their preferred search provider, we believe Google would maintain its search dominance w/o needing to pay TAC [traffic acquisition costs], making the company far more profitable than it is today.
There are a lot of missing pieces to the DOJ’s complaint that will need to be uncovered in court. Chief among those missing pieces is what extent the DOJ believes Google’s deals have been detrimental to consumers, a piece that received little substantive discussion in the DOJ’s 194 paragraph complaint. If this case really is in consumers’ interest, the DOJ has a long way to go toward supporting their claims.