Google Monopolization Ruling May Not Hold Up On Appeal

A federal district trial court in the District of Columbia held on August 5 that Google engaged in illegal monopolization of internet “general search services” and “general text search advertising.” This decision, dubbed “an historic win for the American people” by Attorney General Merrick Garland, may face tough sledding on appeal.

The very conduct that Google engaged in enhanced its internet general search engine (GSE) quality, a reality at odds with a finding of anticompetitive monopolization. What’s more, there is no good reason to believe that such behavior significantly affected consumer GSE choice. To the contrary, by improving GSE quality, that behavior likely raised consumer welfare, which the Supreme Court has deemed the overarching goal of antitrust enforcement.

A federal appeals court may (but is not certain to) overturn the trial court’s decision on liability. In addition, the trial court still needs to address the appropriate remedy for the antitrust violation it found.

The Trial Court Decision

The Holding On Liability

The Justice Department sued Google in October 2020 for maintaining an illegal monopoly in internet search and search advertising markets, in violation of the Sherman Antitrust Act. DOJ alleged that Google had “us[ed] [its] monopoly profits to buy preferential treatment for its search engine on devices, web browsers, and other search access points, creating a continuous and self-reinforcing cycle of monopolization.” The suit focused on Google’s exclusivity agreements, involving payments by Google, to web browsers and to device manufacturers such as Apple. Those agreements forbade preinstallation of any competing search service, but did not in any way prevent consumers from accessing other internet search engines.

The presiding judge, Amit Mehta, issued a 277-page opinion on August 5, holding that Google’s actions had monopolized markets for “internet searches” and for “general search text advertising.”

As the Wall Street Journal pointed out in a critical August 7 op-ed, Judge Mehta’s ruling is problematic. Most significantly, the Judge conceded that Google’s innovation and business decisions created “the industry’s highest quality search engine, which has earned Google the trust of hundreds of millions of daily users.” What’s more, consumers can easily switch GSEs.

So what is the antitrust issue? The court held that Google’s revenue sharing payments prevented other GSEs (such as Bing) from gaining sufficient scale to compete effectively. Specifically, according to the court, by maintaining a dominant GSE share, Google obtained more and more data. This enabled Google to continue innovating and improving its search quality and ad targeting. Thus consumers would keep on patronizing Google’s GSE, rather than competitors’ inferior products.

But simply being a monopolist is perfectly legal, as Judge Mehta himself acknowledged. What’s more, obtaining and preserving a monopoly through conduct that benefits consumers is not an antitrust violation.

The conduct described by Judge Mehta, that brings forth and steadily improves a superior product desired by consumers, is procompetitive, not anticompetitive. That is because the Supreme Court has long recognized that the touchstone of antitrust policy is the promotion of consumer welfare, not the protection of particular competitors. Judge Mehta’s opinion does not adequately come to grips with this legal reality.

Furthermore, Dr. Greg Werden, retired chief economic counsel for DOJ’s Antitrust Division, explains at Truth on the Market why the payment arrangements Judge Mehta condemned had nothing to do with Google’s maintaining its monopoly:

“[Judge Mehta] suggested that Google should have contracted for a “non-exclusive default” status but did not explain how that would have worked. Judge Mehta probably meant an arrangement under which Google’s partners would have gotten a revenue share only if they exercised an option to use Google as the default GSE. But the partners surely would have done that, because Google [according to the court] had ‘no true competitor.’ Nothing in Judge Mehta’s opinion explains how the contractual terms that he condemned contributed to the maintenance of a monopoly.”

Google’s payments made economic sense because they would ensure initial access to “marginal internet browsing consumers” (say, some iPhone users) who have no particular search engine preference. Those consumers would benefit from using the highest quality search engine. Google’s payments were akin to economically efficient “slotting allowances,” in which producers pay for prime access to supermarkets’ shelves.

The judge’s failure to appreciate the economic rationale for Google’s payments is unfortunate, but not surprising. Nobel Laureate in Economics Ronald Coase famously pointed out in 1972 that:

“[I]f an economist finds something—a business practice of one sort or other—that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be very large, and the reliance on a monopoly explanation, frequent.”

Finally, the widely cited 2021 U.S. v. Microsoft monopolization decision does not support Judge Mehta’s holding, as Dr. Werden explains:

“Judge Mehta drew analogies to the Microsoft case, while neglecting a critical difference. The [Microsoft case] evidence showed that the Windows operating-system monopoly faced an existential threat from new technology, which Microsoft thwarted through every available means. But Google faced no such threat. And when regulators in Europe barred Google from making distribution deals on any terms, the company retained its dominant market position.”

The Upcoming Judicial Hearing on Remedy

Judge Mehta’s opinion did not address the remedy for Google’s allegedly anticompetitive conduct. A separate time-consumer “remedy hearing” will be required.

His recognition of the efficiencies created by Google counsels against any “breakup” or reorganization of the company. Notably, in the Microsoft case, the appeals court flatly rejected a structural dissolution of Microsoft as a remedy to its illegal monopolization.

Furthermore, a bar on exclusivity agreements would not necessarily significantly change search engine market shares. Indeed, there is no evidence that rewriting Google’s contracts would make consumers better off.

A judicial redoing of contracts that have made consumers better off, absent a practical understanding of market dynamics “on the ground,” would likely have bad economic consequences. It would involve what eminent economist Harold Demsetz dubbed the “nirvana fallacy,” the incorrect assumption that government experts can craft “perfect” solutions to “imperfect” market mechanisms that have worked fairly well.

In short, any trial court remedy decision may be expected to face a tough and potentially skeptical evaluation on appeal.

What Comes Next

Google has a reasonable chance of succeeding on appeal to the District of Columbia Circuit Court. Nevertheless, success is far from certain, given the meticulous detailed nature of Judge Mehta’s opinion. An appeal to the Supreme Court by the losing party also is a strong possibility. This process could drag on for years. During the interim, Google would have to tread carefully and thus might forgo introducing economically beneficial innovations. And the final result of litigation is uncertain.

What’s more, Google has additional U.S. antitrust problems. It faces a September 2024 trial in a separate monopolization case brought by DOJ, dealing with “digital advertising technology products.” More generally, DOJ and the Federal Trade Commission continue to focus their enforcement resources on all of the leading high tech American digital firms, including Amazon, Facebook, and Apple.

U.S. trustbusters should carefully reassess whether it makes sense to continue zealously to pursue large digital firms that have bestowed enormous economic welfare benefits on U.S. consumers and the American economy. Such a policy emphasis in a time of growing international competition will likely cause American tech leaders to pull their punches and innovate less. This will tend to reduce innovation-led American economic growth and diminish, not enhance, American consumer welfare.