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.

How to Make Money from Fraud---A Beginner's Guide

It is hard to do business. However, you can make life easier for you when you make fraud part of your business. You probably still cannot be as successful as the CEO of Goldman Sachs, but you can earn more money than a first year employee in Goldman. Sounds sweet? This blog will show you how.

Background
There has never been a more favorable environment for fraud. The legal breakthrough came after the landmark supreme court case of Ben Edelman vs. Ran Duan, which established as the supreme legal principle that in US, businesses operate under the court of public opinion, not rule of law. It is a huge triumph for us potential defrauders. Hurray.

Principles of Successful Fraud
1. Make it small
There is good economics behind it. When you defraud a small amount, you can count on being successful: 1)It is unlikely that your prey will notice it. 2)Even if he notices, he will correctly understand that it is not worth it to fight such a small amount. 3)Even if he is crazy and decides to fight it, the court of public opinion will deem him to be a cheapo and rule in your favor. This is bullet-proof.
2. Combine it with a small business
The key insight is that under the new legal paradigm, we operate with the court of public opinion, which is sympathetic towards small businesses. With a mom-and-pop fraud business, you have higher chance of success.
3. Target High-end consumers
This might sound weird, but it is full of wisdom. When you defraud a high-end customer, who should "have better things to do", it is less likely he would care. Even if he cares, remember, you are more likely to win, because think about it, how awful it sounds: a rich jerk (the court will impose that name for you) fight a small mom-and-pom fraud business for a small amount. Now you recognize that our three principles work all together right?  

FAQ
1. Would I make enough money from your scheme?
Absolutely. You need to realize that you make a kill from volume. The most successful fraud is never a grand one, it is "death by a thousand cuts". If you make it big, you will be transported to the normal court. Stay with the court of public opinion, it is your safe-harbour. I would like to perform the following calculation. Each time your defraud 4 dollars. Even in a small town of population around 6000, you can get about 100 people per day (see link). That adds up to 12K a month and 144K a year. Very decent money! That is more than a business school professor makes after spending so many years working harder than a slave as a graduate student, then as assistant professor.
2. How should I respond when my customer fight back?
This should be extremely rare. If one customer fight back, do offer to compensate him the amount over-charged, but nothing more. Be courteous (as this might be used as evidence in court). He will back off. Since this will be rare, it will not affect your profitability. Remember, your target is high-end customers, who are much less likely to fight back. If he demands more, turn it to the court of public opinion, like Boston.com.
3. Can you give some specific examples?
I would love to. Our most successful case involves a restaurant whose online menu shows lower price than actually charged. After customers look at price and put effort into choosing the food,  they would find it too costly to leave for another restaurant and remake the food decision. The case protagonist ingeniously posted "all prices subject to changes" and get immune from any legal charges, at least in the court of public opinion. Indeed the case was such a blast, that you can see more and more businesses are adopting similar tactics with huge success. In fact, I would like to point out that there is no reason to limit this to online menu. I advise you do the same with physical menu. After all, changing physical menu is more costly---you need to reprint the menu (so called menu cost). Just do add the line on your physical menu "All prices subject to change".

Conclusion
As I noted, there has never been a better than to build a business around fraud. You can do it and achieve your American Dream! But do remember the clock is tickling, and you should make your fortune before the public opinion swings. May the odds ever be in your favor.

Fighting Against Public Opinion

There is a reason we need laws---public opinion is so fickle and we cannot rely on it to make the correct judgement. an important characteristic of law is anonymity, that is regardless of who commits an action against whom, it is the action that determines whether it is legal, not the identity of the parties involved.

I blogged about the incident of Ben Edelman and the Sichuan Restaurant in my previous blog. As I check the matter this morning, it seemed to got worse than ever. Lots of media outlet reported this, and if they share anything in common, it is these media kept stressing the Harvard identity of Ben and family business nature of the restaurant. This is despicable behavior characteristic of "yellow journalism". In the realm of law, it does not matter whether it is a rich guy fraud a poor man, or a poor man fraud a rich person. It is fraud. The identity of the parties involved is irrelevant. Why the heck does those new media stress the identity so much?

the public likes to think of itself as a grand jury. It is laughable that it think it is capable of doing so when it exhibits such lack of understanding of what justice is. In course, a piece of evidence that is not probative (tend to prove the proposition for which it is proffered) is inadmissible, and the rules of evidence permit it to be excluded from a proceeding. In fact, even relevant evidence could be excluded if it causes unfair prejudice, are misleading, etc. If we look at the public court of this incident. It is close to a farce. Irrelevant evidence is being stressed and people get all excited about them. Sounds like a rogue attorney with a bunch of underqualified jury.

I went to Yelp. And as expected, tons of people went to give raving reviews just to support the restaurant. When I checked, there are 20 reviews created just in response to this incident (I know they are in response to this event because they either mentioned "Edelman" or "Harvard", or both, and are created after 12/9/2014). Of course, all but 1 give 5 start review. Unfortunately, even with the flood of biased reviews, the overall rating of the restaurant is still only 3.5. (I took screenshots).

This really made me suspect the intention of the restaurant owner. First, he broke the law. Instead of abiding by the law and compensate for only 12 dollars, he tried to make up excuses to pay less. Second, he tried to and successfully hijacked the public opinion. This is much more unacceptable for me. I saw too many jerks and nations trying to take the moral high ground to cover up their selfish dealings.

Finally, I want to point out, when it comes to fraud, regardless of the amount, it is always a crime. As I pointed out before, small amounts do add up. Online advertising fraud, always involve much smaller amounts (like 20 cents), add up to millions. In fact, that is what Ben Edelman usually go after. I see nothing inappropriate that he gets upset by similar tactics in the offline world.

Long live true justice. Short live public opinion.

Time to Let Logic to Replace Empathy and some game theory

As I wrote, the web is pretty excited about the story of a harvard business school professor Ben Edelman got legalistic with a Chinese restaurant that over-charged him $4. I get it. It seems no one can get over with the sympathy they feel for that poor restaurant owner. As I mentioned in my previous blog, empathy, the very attributes we seem to think so highly of, lead to awful judgement errors.

Many businesses take it as a strategy to "mistakenly" over-charge customers. Since the amount is small, most people will not complain other than frowning at it. These little sums, when coupled with volume, accumulates to a big number. 4 dollars is no big deal, but do this to 100 customers a day, that will lead to 12K a month. Pretty good money, I would say. In fact, those stupid banks do it all the time. This charge and that charge. When you call their customer service, you wait half an hour on the line, and got told that it is a "mistake" and get refunded. Sure, I can get refunded, but how many of us will get around to do it. I still remember TDbank over-charged me 12 bucks that I meant to call them for. But it has been a year and I have not called them yet.  Telecommunication companies like AT&T also employ this ploy.

When it comes to banks, we feel we are justified to be angry. Because banks are jerks. The very same act, when committed by seemingly innocent restaurant owner, we blame Ben. How logical is that? Take this to the next logical step, empathy is the rule upon which we judge. We need no laws.

I am a selfish guy. When this happens, I do the cost benefit analysis, and mostly just get over with it and never pursue it further. In economics, we call it "Rational Inattention". It is the optimal strategy for each one of us. However, when taken collectively, we sow the seeds for businesses to take advantage of us and incentivize them to be dishonest "incrementally". In the end, we all got worse off. This is the well-known "prisoners' dilemma". It is because there are "irrational" agents who are willing to go after such jerks who abuse our rational inattention that puts such behavior in check. In fact, I wish everyone is like Ben, so that I can free-ride on that vigilance---as it becomes unprofitable for businesses to be dishonest.  How does that help? When enough people refuse to let it go, business's revenue from such fraud diminishes, and they have less incentive to be dishonest. Furthermore, if each time a customer stands out like Ben, the business incurs a loss, the expected profit for being dishonest will go negative. This is when business no longer wishes to be dishonest. In fact, that is why the law requires the business to suffer a penalty larger than the amount of the overcharge. Gary Becker got this a long time ago---when enforcement is costly, we will make punishment higher.

Friend or Foe, it is a question of logic, not empathy.

Empethetic Sociapath

Check out Financial Times' latest read on Net Neutrality:

Net neutrality: Strife in the fast lane

The main idea is that the Internet Service Providers (ISP) abuse their monopolistic power and hence created the digital divide which is described by FT as

the gulf between those who have access to the internet and those who do not – has become one of the flashpoints in the fierce battle over US broadband policy.

While this is an important issue, it is sad, almost disheartening that this becomes the focus. Politicians take this issue as their goal: "Mr Obama has often spoken of his desire to close the gap between the digital haves and have-nots". It seems to them as long as we can close this gap, it is all good.

Nothing could be farther from the truth.

Those ISP are monopolies in their respective markets. They abuse their monopoly power.  The so-called digital divide is merely one symptom of such abuse. A good policy should aim at the root of the problem instead of working at one symptom, which is typical of what politicians do. Abusing its monopoly power, ISP like Comcast has charged unreasonable price for all internet users, and most of us simply surrender and pay the price. For the unlucky ones, they simply chose not to. In an economic sense, those who purchased internet suffered more from having a monopoly than those who simply could not afford internet (Econ 101).

However, empathy drives people to the visible inequality, the digital divide, and completely blind to those who suffer in silence. Empathy, with the help of media, turns the have-nots and haves head on, when they are in fact both suffering from the common enemy---monopolistic ISP. These leads to myopic policy agenda as the one put forth by Mr. Obama. The true evil lies in the damn monopoly, and we need to kill it. Period. Give reasonable price to everyone, not just the poor.

Ominously, Comcast is taking advantage of the public empathy-oriented judgement, and is pre-empting legislative moves:

Comcast does offer a much cheaper plan – $9.95 a month – for families with children on free or cut-price school meals...

This seems like a great benevolent move, if our mind revolves around the stupid and narrow goal of closing the digital divide. In fact, this is what economists would call "price-discrimination"---charging everyone his willingness to pay, a typical move by monopolist. If you look at it, Comcast does not lose a dime in this "charity move". In fact, it collects money. The key to realize that internet service has very low marginal cost, almost zero, as long as it is within capacity limit (By the way, ISP like Comcast has deliberately limited its capacity to blackmail Content Providers like Netflix to build its fast lane with ISP) . Thus, offering this plan is like hitting two birds with one stone. First, Comcast sells more products at near zero marginal cost, with relatively low margin; Note that those who can afford internet service still pay the unreasonable price due to the design of this offer. Second, this is a great public relation move, especially for the empathetic crowd. This will probably takes the steam out of further regulatory moves.

Comcast is a complete empathetic socialpath---it understands how the public psychology works, and uses to its advantage, bringing hard to all in the name of charity.

If one has any doubt that the ISPs in US are destructive monopolies, check out the following two graphs---high price, low quality--typical of monopolies. ISPs have wielded their monopolistic power for too long, causing economic loss to all of us.



We are fighting a losing war. The public is diverted by empathy to the stupid digital divide. The regulatory agency is captured---Tom Wheeler, FCC's democratic chairman, lobbied for the cable and wireless industry before entering FCC via this "revolving door". Established Internet companies are more ambivalent. For one thing, lack of net neutrality means they might get blackmailed away some of their profits. On the other hand, that probably means, they could build fast lane to forestall any start-up intent on rising to their position. In this age of technological convergence, such preemption is certainly valuable. One could see that as long as ISP do not get too greedy, big Internet companies will be more than happy to pay a tribute to let ISP to serve as a guard against any innovative "disruptor".  In fact, google has been silent about the issue since 2006, and even when it broke its silence, it is more of a lukewarm support for net neutrality. I am not optimistic how long the current conflict between internet companies and ISP will genuinely last. We the paying consumers? Who cares? Those future innovators? LOL

How Can I give you something for Free?

This sounds like a crazy question, after all, is there anything simpler than giving things away for free? In fact, there is another question hidden behind: Why do I want to give things away for free? Why giving things away for free will determine how one should give away things for free.

Then why would a business want to give away things for free?

The answer is that the future demand for a particular good depends on whether the consumer is using this good in the current period. There are several reasons why current usage will determine future usage. The most common reason is "experience goods" that is, before trying this good, the consumer has no idea how good and how useful this good is. The rational motivates giving away samples for new products.

The second reason is network effect. For example, LinkedIn is only useful if there are many professional on this platform. However, if one charges a price to every professional, many professional will simply refuse to get on the Platform. By offering free basic services to all professionals, LinkedIn is able to increase its base dramatically. ¹

The third reason is addiction. I will delay the discussion in the specific example later.

With so many reasons to give things away for free, why would anyone not give things away for free? Duh, because blindly giving things away for free actually decreases consumers' willingness to pay, which is the opposite of our goal. Even a temporary free giving-away might anchor consumers' expectation. This has two consequence. It lead to stronger resistance when the firm transitions to paid services; It incentivize consumers to delay purchase and wait for free offers (eg. sales and discounts). In other words, it could self-canabalizing. I for example, whenever purchasing on Amazon, would look at its price trajectory, and figure out that I can expect that Amazon will discount it to price x with 90% confidence. I will set up an automatic alert when the price on Amazon does fall to or below x.

My favorite example of giving things for free is Dropbox. Let us start with the basic. It is a freemium business, except it is different. Users are given some free space account when they sign up. The amount of free space is fixed, only nominally.  The capacity of the first disk drive, the IBM 350 disk storage unit, is only 3.75MB. The typical hard disk we use today, is probably around 1TB.² This is a a quarter million to one change, and mirrors the inflation of file size we experienced. I still remember those days in middle school when I would use a 3.5-inch floppy disk, which has accomodates about 1.5MB. Today, even if it is still compatible with my computer, I would find a floppy disk completely useless, because the real 1.5MB has been "inflated away". It is fair to say, in real terms, Dropbox is chipping away the size of free space every year. By inflating the free space away, it avoids the thorny problems of generating resistance or at least annoying consumers.

There is also wisdom in continuously and slowly inflating size away. When the size of free space is reduced in one stroke, one will have more incentive to find alternative storage services; however, when the consumer find himself just slightly above the limit every month or so, that incentive is greatly reduced, similar to the "boiling frog" story.  In addition, the asynchrony of hitting the limits among users poses a challenge to coordinate migrating to alternative platform.

What really brings my attention to Dropbox is actually an email from them, informing me due to a technical problem that have affected me (I was not even aware of it), they are giving me one year of Dropbox Pro for FREE, that is 1TB for free for one year:

We apologize for any inconvenience this may have caused. To thank you for bearing with us, we're giving you Dropbox Pro for free for one year starting today, October 10, 2014. If you have any questions, please reply to this message or email us at selectivesync@dropbox.com. We’re here to help.

This is excellent, maybe for me, but definitely for them. For one thing, they made it clear this is just a compensation, so it avoids anchoring consumers' expectation in any way---it is just my lucky day. More importantly, it could potentially convert me from a free riders to a paid customer. Here is why. First, the technical problem was Selective Sync. It is reasonable to expect that whoever uses that function derives more value from an average user and probably deal with larger data files. Good targeting. Second, addiction to a service is present here. There is a Chinese saying "It is easy to transition from a poor life to a rich one, but the reverse is much harder". There is some psychological cost to transition from knowing no limits to living under stringent limits. This cost, is often unanticipated by consumers.

Beyond the psychological aspect, there is a more rational or orthodox source of addiction.  It might seem weird to talk about addiction to an IT service/product, but it is very relevant in this area. Let me take the least consumer-facing product--VMware's ESX, a hypervisor technology. Swapping out ESX for alternatives are exactly hard, but many companies use the management tool designed for ESX, and they build their operations around that. These are the real switching costs.³ Dropbox is no different. When one is granted free access, the natural response is to use the heck out of it, after all, he reasons:"I probably will never get as lucky". He figures out all the bells and whistles of using Dropbox, what a fun! Dropbox is after all an extremely useful service, and everyone can find so many uses of it. From my perspective, I might want to use it to collaborate with other people on research. Imagine one year later, my pro service is over.  I still have a couple of collaboration in progress. No, I cannot leave Dropbox. How could I propose to my collaborator that we find an alternative despite its great performance and just because I am a cheapo? The bottom line is it is very hard to switch collaboration platforms. There is a psychological aspect to it: people tends to overly discount the future cost (of moving their files away and switching to another sync service when their account expire) vis-a-vis the utility they gain from using Dropbox in the current period (a phenomenon known as time inconsistency). In other words, I would think to myself that I will simply move all my files back to hard disk when my pro service expires, but when the time comes, I will instead choose to pay for continued pro service. This problem is exacerbated by the fact that people on average tend to underestimate the cost of making the transition back (planning fallacy).

I had to say, it is a most brilliant move. I am very impressed. The only sad ending to the story is that: knowing my time-inconsistency problem, I am not taking advantage of the free offering. I am only using 0.6% of the 1TB.⁴

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1 In this example, free basic services is a permanent feature for LinkedIn, but one can imagine a platform only provides free service during mobilization stage. For example, google search offered ad-free search in the beginning and then incorporated ads when it became dominant. In some sense, google started to charge us in terms of "attention fee".^↩

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3 http://en.wikipedia.org/wiki/History_of_hard_disk_drives^↩

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3 Yoffie, David, Andrei Hagiu and Michael Slind, “VMware, Inc., 2008,” HBS No. 9-709-435 (Boston: Harvard Business School Publishing, 2010), p.15^↩

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4 If this surprises you, here is a even more surprising story. In sophomore year, I was lucky to get a dingle---a double dorm room occupied only by me. What I did? I limited myself and belongs to only half of the room (using bookcase and bed to block my use of the other half), so that I 1)will not accumulate too many belongs that I have to get ride of later 2)will not get used to having a huge room and face the difficult transition of being confined to a much smaller room the next year.^↩