04/19/2011 01:48 pm ET Updated Jun 19, 2011

The Need to Focus on the Correct Issues in Google, Power, and Antitrust

A proper discussion of the benefits and limitations of the recent Consent Decree between the Department of Justice and Google, concerning Google's acquisition of ITA, needs to begin with a discussion of appropriate measures for consumer welfare, the ultimate objective of antitrust regulation, and with a discussion of the relationship between protecting the current competitive process and future consumer welfare.

Misconceptions About Google and Antitrust

The discussion of Google and antitrust has shifted in recent weeks from relevant market (is Google 65% of paid search, 32% of online advertising, or 3% of all advertising?) and anticompetitive behavior (is Google engaging in "preemptive line extensions," unfairly squeezing out competition by pricing its non-search offerings below cost, or unfairly listing its own offerings above those of competitors?) to consumer happiness and consumer convenience. Mainstream publications have adopted the consumer happiness argument.

Indeed, the consumer happiness argument has not only been adopted, but twisted out of all recognition. Bill Gurley writes about the unstoppable Android Freight Train, and describes how Adwords provides Google with an unassailable set of "Castles and Moats," generating huge cash surpluses, which can then be used to destroy all competition by offering products free:

One might yearn to suggest that there is a market unjust here that should be investigated by some government entity, but let us not forget that the consumer is not harmed here - in fact far from it. The consumer is getting great software at the cheapest price possible. Free. The consumer might be harmed if this activity were prevented. And as we just suggested above, the market is finally driving towards software pricing that represents "perfect competition."

How can the absence of competition be perfect competition?

And yet, why should we care if the public does not understand competition or competition law? Antitrust really is about consumer welfare, right? It's not about corporate welfare, right? How could consumers be happier than they are now, when they are getting great stuff free? And if consumers are happy now, shouldn't regulators be happy as well? If consumers are happy, is there even a need for regulation?

Mainstream publications have also argued that consumers are well informed and better able to counter monopolistic behavior than any regulatory agency. Harry McCracken at Time Magazine recently claimed: "Consumers, in other words, tend to be pretty good at figuring out what's good for consumers. I trust their take on Google and its competitors more than that of any government agency."

There are three problems with this analysis:

  1. Consumers are not always the best judges of their own welfare.
  2. Happiness and convenience are not always the best measures of welfare.
  3. Current happiness and convenience are not always the best measures of long-term future welfare.

It should be obvious that consumers are not always the best judges of their own welfare, and it should be obvious that consumers have extreme difficulty judging whether actions will improve their welfare if the results follow from complex interactions, occur after a significant delay, or both. The argument that government should help consumers through regulation sounds paternalistic, but if consumers were always the best judges of their long-term welfare, we would not have problems with smoking or obesity.

We know that consumers often make bad decisions when an experience is immediately pleasurable and when harm is deferred or the relationship between cause and effect are complex and not immediately visible. Free software is pleasurable. This free software is funded through excessive charges imposed on companies that need to pay to be found through search; consumers cannot readily observe the harm that comes from these excessive charges because the complex mechanisms by which these charges are passed along to consumers are not directly observable.

Again, it should be clear that consumer convenience not always best metric of consumer welfare. Fast food is convenient, but consumers who indulge excessively in fast food incur substantial medical problems and regulators are now arguing against easy access to fast food in public schools. Regulators can and do intervene when consumers over-value convenience and under-estimate the costs to themselves resulting from convenience. Michael Jacobson's indictment of McDonald's in the Huffington Post may seem a bit harsh, noting that "McDonald's has coarsened our palates, expanded our waistlines, clogged our arteries, and brainwashed our children with toy-based marketing" and connecting it to the fact that we now spend over $270 million annually on heart disease; still our national love-affair with fast food suggests that we are not always the best judges of our own welfare, and that we do not always do the best job balancing immediate convenience with long term harm.

Finally, it may not be obvious, but short-term consumer gains can still represent long-term harm to the competitive process and long-term harm to consumers. Indeed, antitrust laws are concerned with harm to the competitive process, not merely harm to consumers. Courts have long recognized this discrepancy and rejected any arguments that current consumer happiness is a valid measure of future antitrust concerns, or indeed that current consumer happiness is even a valid measure of present antitrust dangers.1

Free or subsidized offerings can appear to offer additional choice, but they often kill competition, harming the competitive process. This inevitably reduces consumer choice, which often reduces the new player's incentive to innovative and allows the new player to charge substantially higher prices. After Microsoft's offerings destroyed Word Perfect, consumers were left only with Word, with some features (like footnoting and outlining) that remained bug-ridden and inferior for years; the absence of competition also allowed Microsoft to convert Office into a major cash cow.

This is not merely an abstract discussion of future power, but a discussion of abuses that are already possible. Likewise, it is not an abstract discussion of consumers being unable to detect harm to the competitive process, but an example of undetected harm already occurring. Google's revision to its search engine, code-named Panda, substantially reduced the visibility of low quality sites, which is definitely a good thing. But the Panda release also seems to have slammed, a Microsoft-owned company, and a potential competitor as a pricing comparison site, which had been leading an EU competition case against Google. Reductions in visibility of between 81% and 94% have been report for since the update. Not surprisingly, Google claims it is "almost absurd" that the reduction in visibility could have been rigged, although a convincing alternative explanation seems to be lacking. As importantly, as damaging as the changes may be to competitors and ultimately to consumers, consumers do at present appear pleased with the changes.

Consumers are happy. And they are being harmed. While current consumer happiness is important, it is not and indeed cannot be the sole measure of antitrust abuse.


1 - See e.g., Fisherman v. Estate of Wirtz, 807 F.2d 520, 536 (7th Cir. 1986) ("The antitrust laws are concerned with the competitive process, and their application does not depend in each particular case upon the ultimate demonstrable consumer effect. A healthy and unimpaired competitive process is presumed to be in the consumer interest"); Key Enterprises of Del., Inc. v. Venice Hosp., 919 F.2d 1550, 1560 (11th Cir. 1990) ("A court must consider the effect on competition and not simply the effect on the ultimate consumer.")

This is the first installment in a three-part series on the Department of Justice, Google, and the Consent Decree. Read part two here.

Eric Clemons is the founder and Project Director for the Wharton School's Sponsored Research Project on Information: Strategy and Economics, within the Program For Global Strategy and Knowledge Intensive Organizations, which supports his research. Microsoft has recently agreed to participate in the Project. Nehal Madhani is an attorney in New York. Previously, he founded an online classifieds service for college students and advised small businesses and nonprofits on legal and strategic considerations.