US versus Google - what's it all about?

How might Google’s dominance in the search engine arena be remedied or regulated, asks Ananish Chaudhuri.

Google sign istock

Opinion: In 2020, the US Department of Justice charged Google with maintaining a monopoly in the market for general information searches as well as the market for search advertising (advertisements that come up when searching for information using Google).

Currently, three search engines, Google, Microsoft’s Bing, and DuckDuckGo dominate the scene in the Western world. While searches may start with a web browser such as Edge, Safari, Chrome or Firefox, increasingly they may also originate from access points such as Apple’s Siri.

Globally, Google now accounts for 88 percent of internet searches, Bing around 10 percent and DuckDuckGo around two percent.

Google has gone to extraordinary lengths to maintain this dominance. In 2021, the search giant paid companies including Apple approximately US$26 billion to guarantee that it would be the default search engine.

Google is also a dominant presence on Android phones produced by the likes of Nokia, LG and Samsung. Google created the Android operating system, which is available for free. However, it makes Android producers agree to an “anti-forking” device designed to prevent “fragmentation” of the operating system. This severely limits the ability of Android phone manufacturers to develop or provide access to other applications or operating systems based on the Android platform. Google ensures this by getting manufacturers to sign a compatibility agreement.

The manufacturers of Android devices are unwilling to walk away for fear of losing the ad revenue they get from people clicking on Google advertisements. But more importantly, they lose advertising revenue, not only on new devices, but on all existing devices.

Furthermore, a key feature of Android phones is Google Play, the official store for Android media including apps, games, and ebooks. Any producer who walks away loses access to Google Play, which would effectively render their device useless.

Google insists that all Android devices come pre-loaded with Google Play, Chrome, Google Search, Gmail, Google Maps and YouTube. These applications can’t be deleted, and as a result, impinge on a phone’s memory. This limits the user’s ability to create more space for an app they might prefer.

Ananish Chaudhuri
Ananish Chaudhuri, Professor of Experimental Economics at the University of Auckland Business School

Google’s counter-arguments and their validity
Google argues that its practices do not harm consumers; that Google is the dominant search engine because it’s just that good and is preferred by manufacturers; and that its dominance is the result of “network externalities”.

Consumers are harmed in, at least, three ways. First, the fact that Google collects an incredible amount of information about its users and monetises that information by selling it to other businesses. This raises significant privacy issues, though Google will argue that consumers willingly and routinely waive any privacy concerns.

Second, Google’s monopoly in the search market allows it to decide what information is displayed and what’s not. This gives Google power to censor information on the internet.

Third, the fact that Google is a monopoly allows it to charge exorbitant fees to those who want to advertise on its platforms. Those high costs will eventually affect the prices of the goods featured.

Network externalities
Google’s argument that it makes sense to have one great search engine rather than numerous low-quality ones has some merit.

The fact that Google provides high-quality search results is because of its resources, including a complex and regularly updated algorithm that produces fast and relevant results. There are significant scale economies here and more dominant search engines will generate better search results. This is the idea behind network externalities; people post information where others look, and others look where people post information. But as the product grows in popularity, eventually it’s going to become a monopoly by driving others out. Furthermore, bundling different applications together makes it easier for customers to move seamlessly from one to the other.

What are the policy options?
While there’s no doubt that Google adopts aggressive practices to preserve its monopoly status, the policy options may be limited. Curbing Google’s power is not automatically going to create healthy competition. It’s most likely to lead to two dominant search engines, Google and Microsoft’s Bing. Though this may eventually make it easier for others like DuckDuckGo to enter and expand. The key problem here is that to provide a high-quality search experience, one needs scale economies, meaning that the search engine will need to be very big. An entrant will need to invest billions to be competitive.

Microsoft office istock

Where does that leave us?
The case against Google is reminiscent of the one against Microsoft in the late 1990s.

One option floated is to break Google up into two companies, one dealing with search and the other with search advertising. But this will create two monopolies, one upstream and one downstream, leading to double marginalisation where each monopolist charges a large mark-up over the underlying cost of production. In such vertically integrated markets, it’s cheaper to have one monopolist rather than two.

A second option is to allow Google to operate as a monopoly but to regulate it. Public utilities (think Watercare or electricity and gas producers) are allowed to operate as monopolies. In turn the government exercises discretion over prices via what is known as “fair rate of return” regulation. The idea is to guarantee the business a “fair” return on its investment without allowing it to charge excessively high prices. But this approach may be limited by technological constraints. Google does not charge individual consumers, and what it charges to advertisers is a closely guarded secret. It may not be possible to force Google to reveal this. Regulated monopolies operate in very different markets and regulating digital products with network externalities pose entirely new challenges.

The third option is the one most likely to come about. This outcome would involve the use of some type of “consent decree” to prevent Google from entering into anti-forking agreements with manufacturers of Android phones, allowing manufacturers to install other applications. This is similar to what happened in the Microsoft case. A consent decree may also involve putting curbs on Google’s ability to collect and monetise user data.

By Ananish Chaudhuri, Professor of Experimental Economics, Business School.

This was first published by the New Zealand Herald. The opinions are those of the author and not necessarily of the University of Auckland.

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