The case against google

Tim Wu of Columbia has recently published a study with Micheal Luca of HBS on how Google is violating antitrust rules. (See new coverage here and here). While one can debate about the shortcomings of the study, some critics of the study obviously failed to understand both the law and the study. After all, on internet times, not everyone would leisurely read through such a "long" study. I hope to summarize the findings here.

What is the central claim?

The claim is Google has downgraded its search result in local searches to consumers' harm in its attempt to extend its monopoly power from general search to more specialized search.

Backgrounds

Just as Google's general search displaced directory services (as provided by portals like Yahoo), it began to face challenges from specialized search, that is search engines that aims to provide information on a specific category of information. For example, Yelp specialized information on restaurants and Kayak on flights. To deal with such challenges, after some failures to clone such specialized searches, Google leveraged its dominant position in general search to exclude its competitors from its search results. The tool for this tactic is called "universal search": once Google detects that a natural search returns a specialized competitor like Yelp as a leading result, it automatically turns on OneBox (see Figure 1), which exclusively shows results from its own specialized search services.

Figure 1: Google search results displays sponsored ads as the first result, followed by its OneBox, which is powered by both Google+ and Zagat (acquired by Google)

The authors showed that by extending OneBox's source to include its competitors like Yelp and ZocDoc, and ranking the results using Google's own algorithm, consumers experienced an improved product (as measured by click-through rate). The design shows that Google has the capacity to improve its product (its own algorithm works) and could easily improve its product by abandoning exclusivity. Yet, it insists on exclusivity at the cost to consumers.

 Why should we be concerned?

It is Google's page, so it should be able to do whatever it wants right? Usually the answer is yes. But "no" in this case. The rational is the following: Google has achieved a monopoly in general search. Fine, this is because it has delivered an excellent product and this monopoly is likely to perpetuate because this industry is a natural monopoly. However, it is unlawful for Google to extend its market power from general search to specialized search. An analogy here. Microsoft has achieved its monopoly power in operating system because of its innovation. However, it violated antitrust laws when it tried to use its market power to get rid of Netscape, an internet browser. Yes, it is on Microsoft's operating system, but it cannot just do what it wants. Note that, many times in technology sector, innovation takes place by creating new markets or changing the paradigm--Google created the market for general search, so did specialized search engines. If we allow such thins to happen, then a company that happened to achieve monopoly in one market can essentially block innovation in emerging adjacent market.

What are the actual laws?

In cases arising under Section 2 of Sherman Antitrust Act, the so called "Rule of Reason" shall be applied: The law acknowledges that sometimes for efficiency reasons, exclusion might benefit consumers.  It is necessary to examine intent and motives and assess its overall impact on the market.  Courts have have isolated several cases where exclusion violates the law.

Naked Exclusion

 "Exclusion of competitors is not justified by any real efficiencies or benefits for consumers". The authors claim that in local search the specific implementation of OneBox  (exclusively drawing from Google's specialized searches not its competitors) is naked exclusion.

Neglect of less restrictive alternatives

 "A dominant firm forgoes  an obvious, less restrictive alternative course of conduct that would be equally, or more effective in serving the pro-competitive goals articulated". That is even if the exclusion could be justified on efficiency grounds, there is an obvious way to achieve the same efficiency, but being less exclusionary. In here, Google might justify the need of OneBox on the grounds that univeral search that returns information directly rather than returning links to the information is a useful innovation. Nevertheless, this could be done in a less exclusive way.

sacrifice of product quality

"The sacrifice of profit or product quality so as to damage competitors".  The authors demonstrated that consumers preferred a universal search that is inclusive. 

Final thoughts

Google obviously can argue that this study has flaws---the experiment participants might not match the actual users of Google. Click-survey might not tell the whole story. Nevertheless, I deem this study as  a proof of concept---that Google's claim that its exclusionary behaviour is efficient, can be scrutinized. Such A/B testing could be carried out on Google, and used as evidence in antitrust trials. Even short of that, this study, or more accurately the plug-in tool the study used--Focus on the User Local, demonstrated that there is less restrictive way to implement OneBox.

Am I fully convinced by the study? I am convinced of what it claims, but beyond that, I could still believe that there is some efficiency reasons for exclusion. One might wonder, is it really efficient to have that many specialized search engines owned by different companies? Maybe as the internet evolves, one company owning both general search and specialized search could make bigger innovations possible. After all, there is multiple equilibria problem in markets with network effects, and for review website that relies on user-generated content, network effect is huge. Such an exclusion by Google simply moves the equilibria--in the interim, there might be some efficiency loss, as users readjust, but once they readjust, they might reach an equally efficient equilibrium. With all search engines owned by one firm, there might potentially be synergies.

Admittedly, I am too much an idealist and central planner in writing the previous paragraph. Without punishing such exclusion, innovation will be stymied. Without innovation putting on a competitive pressure, incumbents will have no incentive to innovate. Despite all the great potentials for synergy, innovation will not happen. Alternatively, even if we believe in the very best of incumbents that wish to innovate, it simply might not be innovate quickly enough. The literature of crowd-sourcing demonstrated the power of the crowd vs. the established elites. With more brains trying to innovate, it is more likely that there will be some entrepreneurs that come up with a better plan. Without laws to protect them from being ostracized by exclusionary behaviours of the incumbent, they will not innovate, leaving us with a slow-moving incumbent behemoth.