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Tuesday, July 28, 2015

Is Google “Abusing” Its Monopoly? Should Government Fix It?

The EU says Google is abusing its market power

The European Union’s antitrust office has floated a list of demands to Google as part of an ongoing case against the search engine giant. Antitrust laws are supposed to support consumers, but the EU’s demands would simply replace consumer preferences with government control.

The European Union’s antitrust commissioner, Margrethe Vestager, alleges that Google’s search results give priority placement to Google Shopping when people perform e-commerce searches. Competitors say that fewer customers find their service as a result, even when their service is better than Shopping. The EU is considering demanding that Google change its algorithm to eliminate this self-promotion.

Let’s assume that the allegations are true. Ms. Vestager argues that this decision is about championing “consumer choice” in the search engine marketplace. But the EU’s corrective actions promise to trample consumer preferences.

Google says that consumers appreciate the service. If Google Shopping meets searchers’ needs better than competitors like eBay, then it’s actually a good thing for users to see that service pop up first. The EU would be violating consumers’ revealed desires by demanding that Google change its product.

But what if consumers don’t like the practice? Here, too, government action would override consumer preferences in the long run.

Responding to Consumers

In Europe, Google owns a hefty 90% of the search market, so it’s not as though consumers can easily leave Google for a competitor. But consumers have other ways of voicing their dissatisfaction. They can complain to Google or to third parties, like industry surveys or on websites like

All of those complaints become public knowledge, sending a signal to entrepreneurs that there’s a business opportunity. If users don’t like Google Shopping showing up at the top of their search results, then there’s potential profit in making a search engine that provides better results. If that search engine satisfies consumers well enough, it could grow to eclipse Google.

Advocates of anti-trust legislation claim this won’t happen, because networked monopolies like Google are too big to be taken down. Networks grow in value as the number of users grows; Facebook wouldn’t be valuable if it only had 10 members, but with 900 million daily users it becomes a social hub.

In the same vein, Google has millions of users feeding it data — in the form of clicks — about what search results they like and don’t like. This free information informs how Google crafts its algorithm, giving it a competitive advantage that grows with each new user it acquires. New networks, by contrast, often have few users and thus little to offer each one, meaning they have few means to attract new users and grow their value proposition.

But the network effect is hardly insurmountable. In the 1990s, Yahoo! dominated the search engine market. In the early 2000s, MySpace dominated social media. Both benefitted from network effects. Both were taken down, not by rival giants with networks of their own, but by a few college kids creating something more effective and desirable.

Nor are these cases outliers. In a paper for the Journal of Marketing Research, USC professor Gerard J. Tellis argues persuasively that “quality generally wins despite network effects.” One reason is that some people flock to new networks because they want to be the first to try something. If they see potential in that network, they’ll stick it out long enough for it to grow, and even help it along by telling their friends.

Quality is king in business. As long as entrepreneurs can improve on existing ideas, no big business is safe from tomorrow’s competition. In another ten years, Google could be the new Yahoo! Or even Ask Jeeves.

Admittedly, waiting for entrepreneurs to innovate around Google will take longer than a government anti-trust lawsuit. But by cutting that process off before it begins, the EU will merely be depriving consumers of the innovations they don’t even know about yet.

Consumers’ desires shift rapidly, from convenience yesterday to privacy today, from valuing affordability in a recession to demanding new product features in a boom. Matching their preferences requires a dynamic market. The EU’s demands threaten to limit that dynamism.

Freezing the Market

If Google is underserving its users, then that underservice is a golden opportunity. Google’s hold on its current users is weak: Entrepreneurs can capitalize on Google’s weakness, creating new search engines that steal away those dissatisfied customers with the promise of better service. This is the market in action, what Joseph Schumpeter called “creative destruction.”

We can already see this with Duck Duck Go, a search engine that taps into users’ desire for privacy by refusing to track them. Other search engines could emerge that respond to other flaws in Google, luring away customers.

These new search engines will be responsive to consumers’ needs, because they will be accountable to consumers and tuned in to their feedback. If they’re not constantly adapting to better meet users’ preferences, then they’ll be walking the same treacherous path as Google and in turn will be replaced.

If the EU forces Google to meet consumer demand for better e-commerce search results, then it shores up Google’s defenses. The next search giant might never be born for lack of a flaw in Google. Stepping in to “fix” Google’s self-promotion might help consumers today, but at the expense of the dynamism of the market that will serve them better tomorrow.

The EU’s actions could also create an environment where entrepreneurs have to worry more about pleasing Ms. Vestager’s office than about pleasing consumers. These two goals can be contradictory.

Today the EU antitrust office is going after a company’s promotion of its own products, but tomorrow it could crack down on mergers, on vertical integration, or on other practices that are sometimes harmful but usually help consumers. If it does, smart businesses will look to satisfy the antitrust office before they serve consumers, to the detriment of the latter.

The EU’s proposed actions, in short, could ensure that the search market in Europe is just as unsatisfying to consumers in five years as it is today.

Governments should respect consumers’ desires, which means leaving the path open for producers — both existing and new — to innovate to satisfy our wants.

Instead, the EU seems intent on substituting its own preferences for those of consumers.

  • Julian is a former political op-ed writer and current nonprofit marketer. His work has been featured in FEE, National Review, Playboy, and Lawrence Reed's economics anthology Excuse Me, Professor.