The EU Investigates Google — Is Google Really the Victim?

I am not totally convinced that Google is a victim in the EU investigation (see MSNBC for background).  While industry concentration is (by itself) largely unimportant as an antitrust concern, conduct and performance do matter.  When there is an absence of effective competition or the presence of barriers to entry, a dominant firm can exercise market power, enabling it to raise prices on its customers and reap unreasonable profits.  This appears to be the case for Google.  The fact is that Google is enormously profitable, has its few competitors in retreat and may be using its search engine dominance to diminish traffic to its competitors, or at least that is the charge made by some.  Let’s look at the facts.
 
Analysis by others, including the work of former FCC chief at the Common Carrier Bureau, Dr. Larry F. Darby, shows that Google is (by multiples) more profitable than any other major IT firm and is the largest IT firm in terms of market capitalization in the entire world.  High profits are not a bad thing, but they should always lead to increased market entry, at least in competitive markets.  However, in the face of very high profits, search market competition has declined – the exact opposite of well-accepted microeconomic theory.  For example, about one year after its IPO, Google’s search engine market share reached 36.9%, and by June 2006 share rose to 44.7% (ComScore, IR, July 18, 2006), but today its approaching 90% worldwide (NetMarketShare, Nov. 2010).
 
We can glamorize Google’s growth as innovation-based and demand-driven, but its growth was largely achieved through accretion with the notable acquisitions of DoubleClick, YouTube and others (see this list of 80+ acquisitions).  In fact, when you use competitive search sites, like AOL.com’s search or Ask.com’s search, you are actually using Google’s search engine.  That reminds me, Ask.com is exiting the market, conceding that it could not compete with Google.  Now, Google plans to buy ITA software and may soon control the travel database used by the major online providers, which means you may soon be buying your online travel tickets from Google. 
 
A number of experts have conceded that the market may well have tipped, meaning that Google’s scale advantage and dominant position present a barrier to entry for would-be competitors. This is supported by separate claims by Kinderstart, Search King and Foundem (in their FCC filing) that Google manipulated its search results to guide traffic from competitive sites.  There are also claims that Google has manipulated its ad placement for similar gains.  And, whatever happened to MapQuest and I wonder why their website never seems to pop up ahead of Google Maps?  Since Google admits to winning its own “key words” for its search engine, it could direct consumers to any website it wants and show them whatever ads it chooses.    
 
In summary, because high profits are not leading to increased market entry, that leaves barriers to entry as the culprit.  The barrier is that the market has tipped to give a competitive advantage to a search firm that influences, to some extent, what consumers find, read and buy online.  For good or for worse, that is why the EU is concerned and why U.S. policymakers should be too.
  
Steve Pociask, president of the American Consumer Institute, a 501c3 educational and research institute.  For more information see www.theamericanconsumer.org.

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