Google monopoly ruling may not hold up on appeal

A federal district court in the District of Columbia ruled Aug. 5 that Google illegally monopolized “general search services” on the Internet and “general text search advertising.” The decision, called “a historic victory for the American people” by Attorney General Merrick Garland, could face steep hurdles on appeal.

Exactly the same behavior that Google did improved the quality of its Internet search engine (GSE)reality contrary to the finding anti-competitive monopolizationMoreover, there is no reason to believe that such behavior significantly influenced consumers’ choice of GSE. On the contrary, by improving the quality of GSE, such behavior probably increased consumer welfarewhat the Supreme Court has found to be the primary purpose of antitrust enforcement.

The federal court of appeals may (but does not guarantee) reverse the trial court’s decision on liability. In addition, the trial court must still address the appropriate remedy for the antitrust violation it found.

Decision of the Court of First Instance

Responsibility for maintenance

The Justice Department sued Google in October 2020 for maintaining an illegal monopoly on internet search and search advertising, in violation of the Sherman Antitrust Act. The Justice Department alleged that Google “used its monopoly profits to buy preferential treatment for its search engine on devices, web browsers, and other search access points, creating a perpetual and self-reinforcing cycle of monopolization.” The lawsuit focused on Google’s exclusivity agreements, which included payments made by Google to web browsers and device manufacturers such as Apple. These agreements prohibited pre-installation of any competing search service but did not prevent consumers from accessing other internet search engines.

Presiding Judge Amit Mehta issued a 277-page opinion on August 5 in which he found that Google’s actions had resulted in the monopolization of the “internet search” and “general search text advertising” markets.

As the Wall Street Journal noted in a critical August 7 editorial, Judge Mehta’s ruling is problematic. Most importantly, the judge acknowledged that Google’s innovations and business decisions have created “the highest-quality search engine in the industry, which has earned Google the trust of hundreds of millions of daily users.” Moreover, consumers can easily switch GSEs.

So what’s the antitrust issue? The court found that Google’s revenue-sharing payments prevented other GSEs (such as Bing) from gaining enough scale to compete effectively. Specifically, the court found, by maintaining a dominant share of the GSEs, Google gained more and more data. That allowed Google to continue to innovate and improve the quality of its search and ad targeting. In this way, consumers would continue to patronize Google’s GSEs over its competitors’ inferior products.

But being a monopolist is perfectly legal, as Justice Mehta himself acknowledged. Moreover, obtaining and maintaining a monopoly through conduct that benefits consumers is not a violation of antitrust law.

The conduct described by Judge Mehta that produces and continually improves a better product that consumers desire is procompetitive, not anticompetitive. This is because the Supreme Court has long recognized that the touchstone of antitrust policy is to promote consumer welfare, not to protect particular competitors. Judge Mehta’s opinion does not adequately reflect this legal reality.

Moreover, Dr. Greg Werden, retired chief economic counsel for the Antitrust Division of the Department of Justice, explains in Truth on the Market why the payment arrangements that Judge Mehta condemned had nothing to do with maintaining Google’s monopoly:

“(Judge Mehta) suggested that Google should have entered into an agreement for ‘nonexclusive default’ status, but he did not explain how that would work. Judge Mehta probably had in mind an agreement under which Google’s partners would receive a share of the revenue only if they exercised their option to use Google as their default GSE. But the partners would certainly have done so, because Google (according to the court) ‘had no real competitor.’ There is nothing in Judge Mehta’s opinion to explain how the terms he condemned contributed to maintaining a monopoly.”

Google Payments made economic sense because it provided initial access to “marginal consumers browsing the web” (say, some iPhone users) who have no particular search engine preferences. These consumers would benefit from using a top-quality search engine. Google Payments was akin to economically efficient “seating allowances,” where manufacturers pay for the best access to supermarket shelves.

The judge’s failure to appreciate the economic justification for Google’s payments is unfortunate but not surprising. Nobel Prize-winning economist Ronald Coase famously noted in 1972 that:

“(W)hen an economist finds something—a business practice of one kind or another—that he does not understand, he looks for a monopoly explanation. And because we are so ignorant in this field, the number of practices that are not understood tends to be very large, and the reliance on the monopoly explanation frequent.”

Finally a widely quoted 2021 United States v. Microsoft The monopoly decision does not support Judge Mehta’s ruling, as Dr. Werden explains:

“Judge Mehta drew parallels with the Microsoft case while missing a crucial difference. The evidence (in the Microsoft case) showed that the Windows operating system monopoly faced an existential threat from a new technology that Microsoft had prevented by any means necessary. But Google faced no such threat. And when regulators in Europe barred Google from entering into distribution agreements on any terms, the company retained its dominant market position.”

Upcoming Court Hearing on Remedies

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

His appreciation of the efficiency created by Google discourages any “breakup” or reorganization of the company. Significantly, in Microsoft In this case, the court of appeals roundly rejected Microsoft’s structural solution as a remedy for its unlawful monopoly.

Moreover, banning exclusivity agreements would not necessarily significantly change search engine market shares. Indeed, there is no evidence that rewriting Google’s agreements would improve the consumer situation.

Judicial rewriting of contracts that made consumers better off without a working understanding of the market dynamics “on the ground” would likely have bad economic consequences. This would include what the eminent economist Harold Demsetz called the “Nirvana fallacy,” the mistaken assumption that government experts could create “perfect” solutions to “imperfect” market mechanisms that worked quite well.

In short, it can be expected that any first-instance decision on an appeal will have to be subjected to a strict and potentially sceptical review on appeal.

What happens next?

Google has a reasonable chance of winning an appeal in the District of Columbia. However, success is far from certain, given the detailed nature of Judge Mehta’s opinion. An appeal to the Supreme Court by the losing side is also very likely. That process could drag on for years. In the meantime, Google would have to proceed with caution, and thus might forgo commercially beneficial innovations. And the ultimate outcome of the litigation is uncertain.

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

American trustbusters should carefully evaluate whether it makes sense to continue to zealously pursue large digital companies that have brought enormous economic benefits to American consumers and the American economy. Such political pressure at a time of increasing international competition will likely cause American technology leaders to hold back and innovate less. This will tend to limit innovation-driven American economic growth and reduce, not increase, American consumer welfare.