The Google Case: First Comments by Haucap, Kersting, Podszun
After Fan Wu gave a first introduction to the Google decision here, we continue our blogging on the “mother of all antitrust battles” today with three first comments: An economist, Justus Haucap from DICE, and two lawyers, Christian Kersting and Rupprecht Podszun from the University of Düsseldorf, give us their first impressions on the Google case. Please bear in mind that none of them has yet read the decision – the Commission is currently blackening trade secrets of the companies involved. All quotes relate to the Commission’s Press Release on the matter.
Why the European Commission’s decision against Google is in many respects dubious, at best
Two days ago, the European Commission has fined Google €2.42 billion for allegedly breaching EU antitrust rules. According to the European Commission, “Google has abused its market dominance as a search engine by giving an illegal advantage to another Google product, its comparison shopping service.” While a number of commentators, especially from outside the antitrust world, have celebrated that Europe is stretching its muscles, a more detailed analysis shows that there are quite a number of critical and decisive assumptions, which are fairly problematic at second sight.
But first things first, what is the case really about? As the European Commission puts it, “Google has systematically given prominent placement to its own comparison shopping service” and it has “demoted rival comparison shopping services in its search results”. As Google Shopping is much more visible to consumers than typical comparison shopping services, the European Commission is of the view that “Google’s practices amount to an abuse of Google’s dominant position in general internet search by stifling competition in comparison shopping markets.” What are the problems with this analysis?
- First, the Commission assumes that there is a distinct market for comparison shopping services where consumers do not actually shop, but only compare offers. In the Commission’s eyes, Google Shopping, idealo.de, ladenzeile.de etc. are active in this particular market, while market places such as Amazon and eBay or online retailers such as Zalando are not. To put it differently, the Commission assumes that most consumers do not choose between, say, Amazon and Google when they want to compare offers for new sports shoes, electronic consumer goods or other products. In the Commission’s view, eBay or Zalando are not relevant alternatives for consumers either, but only true product comparison sites where consumers cannot shop are in the same market.
This assumption is, as far as I am aware, not based on any study or evidence of consumer behaviour, but on the mere insight that Google Shopping does not offer products for sale, but only links to other webpages, which offer products for sale. This also implies that the market definition would change once Google Shopping would introduce “One Click Shopping” or vertically integrate into retailing products itself or develop into a market place in its own. To ignore Amazon, eBay, Zalando and the like as competitors for Google Shopping without studying actual consumer behaviour is risky, at best. If I ask my students, for example, where they start shopping for products, many start immediately at Amazon or eBay and it is not implausible that many consumers shop this way. Neglecting true consumer behaviour, however, is rather problematic.
- The Commission’s analysis also ignores that Google Shopping is very clearly labelled as advertising. Hence, it is questionable whether many consumers expect Google Shopping to be an encompassing comparison shopping site. Moreover, it is even explained that Google is paid for these advertisements, which is by far less clear on other comparison shopping sites. Hence, it is not clear how many consumers really expect a “neutral” listing of Google Shopping results, given that it is labelled as advertising. Put differently, Google Shopping does not portray itself as a neutral metasearch engine, as some competing comparison shopping sites do. Quite possibly advertising platforms (such as Google Shopping) and metasearch engines are regarded as substitutes by consumers, and I even believe that it is the case for many consumers. But it still remains speculative without any evidence on consumer behaviour.
Similarly, the Commission simply assumes that a market for general search exists. Whether such a distinct product market exists is rather unclear, however. Consumers typically have specific rather than general questions. They look for information on books, people, the weather, sports results, hotels, flights, share prices, restaurants, sports shoes and so on. Most of this information can be searched for on Google, but it can also be searched at Amazon (books, sports shoes), LinkedIn and Wikipedia (people), specialised weather and sports sites, Booking (hotels), Yelp and Foursquare (restaurants) and so on. While it is true that many of these sites do not directly provide links to third party webpages (even so many also do), people typically do not search for links, but for information. For almost every specific question that Internet users have there are more options than searching on Google. Taking books as an example, I would assume that Amazon is the world’s leading search engine for books where people want to find new books or information about certain books. Is Amazon, therefore, the dominant book search engine that may not favour its own offers?
- Given that Google does not charge users who search and, hence, Google’s price (of zero) on this side of its market does not vary, we know close to nothing about potential consumer responses to potential price increases. This also implies that we do not know whether a market for general search does exist at all or whether there are many, many markets for specific searches and it just happens that Google is active in all of these markets. Again, completely neglecting consumer behaviour does not strengthen the Commission’s case.
- Whether favouring its own services is an abuse is, at least from an economic perspective, also rather unclear. Given that Amazon and eBay have long dominated the market for shopping platforms, providing a powerful advertising platform for online shops may well have pro-competitive effects. The narrow focus on other price comparison websites is again misleading. Moreover, every firm has incentives to favour its own services. This can be a problem if consumers do not realise this and if they have no choices. Google Shopping, however, is clearly labelled as advertising and consumers have a choice of many platforms where they can compare and even purchase products.
- Finally, the size of the penalty also seems absurdly high. For a comparison: after MAN, Volvo/Renault, Daimler, Iveco and DAF fixed – without any doubts –truck prices in Europe for 14 years and handed a severe damage to the truck’s buyers the highest penalty for a single firm (Daimler) was about €1 billion. Now compared to the trucking and logistics industry online price comparison websites seem to be of minor economic significance. Moreover, it is completely unclear which harm has arisen for consumers due to Google’s alleged misbehaviour, while the harm done by fixing prices for 14 years is rather obvious. In addition, the evidence for misbehaviour is weak in the Google case while it is overwhelming in the truck cartel. Hence, handing a fine to Google of 2.4 times the size of the worst cartel offender involved in the truck cartel appears to be out of line.
As one colleague of mine today said, if we really want to start a trade war with the US, this is probably the way to travel. It does not quite look like sensible and reasoned competition law enforcement though. Moreover, if the Commission’s view prevails in the courts, this is a blank cheque for the Commission penalising any sort of large firm behaviour that makes life more difficult for competitors (such as competing aggressively), without producing proper evidence for how competition actually works in the market (and how markets should be, therefore, delineated) and whether there is actually any consumer harm. The effects based approach is completely dead in that case, at least with respect to abuse cases.
Five first thoughts on the Google decision
- The fine is huge and will be felt even by a company like Google. Does it, however, fit the crime? Should that not also reflect the harm done? The Commission addresses only perfunctorily the question of what harm has been done, mainly referring to Google denying consumers a genuine choice of services and the full benefits of innovation. To what extent is this in fact (also) a case of unfair competition rather than abuse of dominance? In other words: would we accept similar behaviour by a competitor who is not dominant?
- The Commission points to the possibility of civil damage claims. It will be interesting to monitor the development in this regard. It could be one of the first big cases regarding damages for abuse of dominance. However, the new rules on civil damage actions introduced by the transposition of the Cartel Damages Directive (2014/104/EU) will only apply to a small fraction of damages incurred. The onus of proof for claimants will be as heavy as ever.
- What about remedies? On the one hand, it is a good thing that the Commission does not prescribe the remedy itself. This safeguards Google’s freedom. On the other hand, by not even indicating how Google is supposed to act now and advertise Google Shopping, the Commission might be restricting Google’s freedom even more. As there is no safe harbour Google might feel compelled to opt for the safest option within the range of permissible options: Should they not advertise Google Shopping at all? Are they allowed to advertise it and provide free advertisement for their competitors as well by referring to them? As regards the ranking of other shopping comparison services it seems, at least, clear that Google may not demote them. But what is a demotion? An abstract answer could be that Google has to program its algorithm so that it does not take into account the fact that the other shopping comparison services are Google’s competitors. But what does that mean in practice? Even if this fact is not to be taken into account directly, there may be factors that will indirectly put competitors at a disadvantage. Where do you draw the line? Will the Commission now require Google to let it monitor changes to its algorithm?
- Regarding the definition of market it is questionable whether Amazon, Ebay and others should really be disregarded in this context. The mere fact that they do not only let consumers compare but also offer the opportunity to buy rather makes them stronger competitors. Their comparison is, however, limited to the products offered via their platform.
- As regards the question of dominance the Commission follows the approach that the number of users is all that matters and disregards Google’s argument that “competition is just one click away”. While this approach in general requires closer scrutiny, the argument has some merit in the present context. The question is not whether there is competition among search engines, but whether there is derivative competition via search engines. As regards the latter, the Commission’s argument that Google’s current high percentage of users is decisive, independently of the fact that competition is just one click away, has merit: as regards the question whether a comparison shopping service can be found, the current numbers of users matter.
Five first thoughts on the Google decision
- It struck me that Margrethe Vestager announced the Google findings a day after announcing the state-aid-approval to save Italian banks. Sure, these are busy days; you want to get your desk clean before going on holidays from Brussels. Yet, the timing also meant that those following DG Comp’s activities shifted focus to this much more gripping Google-case. The whole Italian affair goes somewhat unnoticed, at least in Germany. Those who gasped at the Google fine may take a look at the sums involved to save Banca Popolare di Vicenza and Veneto Banca, two small Italian banks. There will be cash injections of € 4.785 billion and state guarantees of up to € 12 billion. I guess we need many more Google fines to fix the financial sector…
- I was stunned by the Commission refraining from setting out how Google has to solve the problem. I see this as the magic stroke (and I find it pretty wicked to set a time limit of 90 days for compliance with some severe non-compliance fines after that). Had the Commission fumbled with algorithms or tried to design the internet that would have gone into the wrong direction. So, what Commissioner Vestager learned from the failure of her predecessor’s market tests was that designing remedies is impossible in this sector. Welcome back to straightforward prohibition decisions! I am very much in favour of such decisions because it leaves it to the market how to remedy the situation. That is a daunting task for Google now. For all others it will be a great show – this is what Friedrich von Hayek called a “discovery procedure”.
- Who will actually profit from the Commission’s decision? I have the impression that this decision primarily serves eBay and Amazon. If Google turns to a system where attractive places in the listing are sold by auction, this will make it easier for affluent companies with high marketing budgets to come out top. If Google turns to a system where attractive places are assigned according to more traditional search standards (such as popularity with others) this will also help the big players in the market. It seems to me that Google Shopping was somehow able to direct traffic to smaller online shops (but I may be wrong here). If my suspicion holds true, the Commission favours interbrand competition of the big players in the internet. In other words: We finally see the development that is so typical for all sorts of markets. Once these markets have reached a certain maturity small- and medium-sized enterprises will only be able to survive in niches. So, the Commission actually opens the market for a battle of the titans. Their equilibrium will probably last for a while. All those who hail the Commission’s decision as a step in favour of start-ups and the freedom of the internet from the so-called giants are probably mistaken. For the general regulation of platforms (not just under Art. 102 TFEU), this decision sheds some light on the guiding principle: Non-discrimination. I expect this principle to be the dominant feature of future platform regulation.
- Obviously, there is some reference to consumer behaviour in the decision, which at first sight seems like something new. Yet, I have the impression that the wording of the decision turns out to be not radical at all. My guess is that the decision will stick to a lot of traditional concepts. The press release even hints at the aim of protecting competitors, something that competition folks shied away from for years. Although, the Google case is the test case for forming competition in the digital world, this does not seem to be the advent of a new competition law in the making. Strategically, that is a wise choice: Why should the Commission take the risk that goes hand in hand with presenting new approaches in the most important case for years? It will probably develop new tools for market definition, new economic models and new theories of harm in less controversial cases, and avoid litigation on new things. For the courts in the Google case, it will be easier to swallow the decision if it is – formally – in line with the thinking established in other cases. Having said that: I still think that we need fresh approaches to competition law in the digital age, and I have called for a “more technological approach”. However, if even academics are still developing workable concepts, why should the Commission run the risk to confront the courts in this important matter with radical ideas?
- It took too long. Tooooooooo long! Fan Wu in his post here reminded me that the record-breaking Intel fine from 2009 is still under review. So, after 7 years of investigations at the Commission stage, we could expect another seven or so years litigating in the European courts plus damages claims at the Düsseldorf court etc. etc. The Google saga may still continue when Google’s attorneys have reached retirement age and need to explain to their successors what stone-age technology was at play in 2017. Dear Commissioner, once you return from holidays, please set up a task force on how to deal with cases more swiftly with less effort and quicker decisions.
Disclaimer: Christian Kersting and Rupprecht Podszun have provided expert opinions in an unrelated matter for Google in 2013/2014. They have not been involved in the case at issue here. Justus Haucap has never worked for Google or any other party involved in this case.
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7 thoughts on “The Google Case: First Comments by Haucap, Kersting, Podszun”
Ein wirklich gut gelungener, kritischer erster Blick auf die Entscheidung.
Die Zeit für die Lektüre ist auf jeden Fall gut investiert und zeigt, dass die Beurteilung des Falls alles andere als unproblematisch ist.