Google Search Practices under Investigation[1]

"Google has come up with many innovative products that have made a difference to our lives. But that doesn't give Google the right to deny other companies the chance to compete and innovate."

-Margrethe Vestager, European Commissioner for Competition, July 2016[2]

Google

Google is well known as the leader in online search and advertising, making it the second largest company in the world in terms of market capitalization. Although it doesn't report search statistics, it is estimated that Google handled over 2 trillion searches in 2015.

The worldwide leader in search, Google's market share in general Internet search is estimated to be greater than 60% in the United States, and greater than 90% in the European Union.

Google was founded in 1996, and went public in 2004. In 2015, they reorganized the company into a conglomerate under the name of Alphabet, Inc. While they have a large and varied number of business enterprises, website advertising and search still make up a huge percentage of Google's more than $77 billion in revenue. Google's mission statement from the beginning was "to organize the world's information and make it universally accessible and useful." Its unofficial slogan was "Don't be evil".

Google Search Practices

Google is known as a "horizontal" (or general purpose) search engine as it seeks to return search results over the complete Internet. This type of search is considered separate from "vertical" search engines, which focus on returning results from distinct websites in a narrow category, such as shopping or travel. A travel comparison site would be a vertical search engine, but serves as a substitute product for Google for consumers who are searching for travel deals.

Price comparison websites are another form of vertical search site, where consumers can search among many options for purchasing products from a wide range of retailers. Price comparison sites (e.g. NexTag.com) relied on Google (and other horizontal search engines) search results and advertising to drive consumers to its website. From there, consumers could compare prices on thousands (or even millions) of products, and click through to retailers to make purchases. Each click-through would then generate revenue for the price comparison site.

In 2008, Google launched Google Shopping as a competing price comparison option. When consumers used Google to search for commonly purchased products on the Internet, some of the top search results (both in terms of advertised results and organic search results) were for Google Shopping. As these results were displayed at the top of the search results pages, results for competing price comparison sites were often moved to lower on the page, or even to a second or third page. Since there is a strong relationship to location on the page and number of consumer click-throughs, the result is that competing price comparison sites received fewer visitors and reduced revenue.

Anticompetitive Allegations

As a result of complaints about the change in practices, both the United States Federal Trade Commission (FTC) and the European Commission (EC) opened investigations to determine whether Google's search practices are potentially harmful to competitors and/or consumers.

The FTC launched the first investigation, looking into several related claims. Specifically, they investigated the following claims:

"...that Google unfairly promoted its own vertical properties through changes in its search results page, such as the introduction of the "Universal Search" box, which prominently displayed Google vertical search results in response to certain types of queries, including shopping and local. Prominent display of Google's proprietary content had the collateral effect of pushing the "ten blue links" of organic search results that Google had traditionally displayed farther down the search results page. Complainants also charged that Google manipulated its search algorithms in order to demote vertical websites that competed against Google's own vertical properties.[3]"

In addition to the FTC investigation, the EC filed a Statement of Objections, which is a procedure that leads to a formal investigation by the Commission.

An April, 2015 press release outlined the concerns raised by European Commission:

"More specifically, the preliminary conclusions are:

Google systematicallypositions and prominently displaysits comparison shopping service in its general search results pages,irrespective of its merits. This conduct started in 2008.

Google does not apply to its own comparison shopping service thesystem of penalties, which it applies to other comparison shopping services on the basis of defined parameters, and which can lead to the lowering of the rank in which they appear in Google's general search results pages.

Froogle, Google's first comparison shopping service, did not benefit from any favourable treatment, and performed poorly.

As a result of Google'ssystematic favouring of its subsequent comparison shopping services"Google Product Search" and "Google Shopping", both experiencedhigher rates of growth, to the detriment of rival comparison shopping services.

Google's conduct has anegative impact on consumers and innovation. It means that users do not necessarily see the most relevant comparison shopping results in response to their queries, and that incentives to innovate from rivals are lowered as they know that however good their product, they will not benefit from the same prominence as Google's product.

The Statement of Objections takes the preliminary view that in order to remedy the conduct, Google shouldtreat its own comparison shopping service and those of rivals in the same way. This would not interfere with either the algorithms Google applies or how it designs its search results pages. It would, however, mean that when Google shows comparison shopping services in response to a user's query, the most relevant service or services would be selected to appear in Google's search results pages.[4]"

In July, 2016, the EC reaffirmed its ongoing investigation, while also outlining some additional practices by Google that were deemed to be in violation of EC antitrust law. In that statement, they summed up the charges against Google:

"The Commission considers that Google has a dominant position in providing general internet search services as well as in placing search advertising on third party websites throughout the EEA, with market shares above 90% and 80%, respectively. Dominance is, as such, not a problem under EU competition law. However, dominant companies have a responsibility not to abuse their powerful market position by restricting competition, either in the market where they are dominant or in neighbouring markets.[5]"

Google's Response

Not surprisingly, Google denies many of the claims being investigated by the FTC and the EC, highlighted by a few important observations.

First, Google has had an undeniable impact on online shopping. As Google notes in a response to the EC:

"The universe of shopping services has seen an enormous increase in traffic from Google, diverse new players, new investments, and expanding consumer choice. Google delivered more than 20 billion free clicks to aggregators over the last decade in the countries covered by the [European Commission], with free traffic increasing by 227% (and total traffic increasing even more).[6]"

Secondly, by looking only at shopping through search engines, the regulatory bodies mischaracterize the way that the majority of consumers go about online shopping. Citing a recent study of German online shoppers, Google notes that one third of consumers begin at Amazon while 14.3% go first to Google, and only 6.7% to price comparison sites. In the United States, 55% of consumers start shopping at Amazon, 28% on search engines, and 16% go straight to individual retailers. As a result, Google does not maintain a monopoly position in online shopping, rather it trails Amazon by a wide margin.

In addition, the incorporation of shopping more directly in the search results benefits consumers by improving the quality of the search results. They note: "showing ads based on structured data provided by merchants demonstrably improves ad quality and makes it easier for consumers to find what they're looking for.[7]"

While the change in Google's search results may have negatively impacted one set of competitors (i.e. price comparison sites), there is sufficient competition in online shopping to ensure that consumers are not harmed. Further, Google's attempts to improve its search model would ultimately benefit consumers, and help Google better compete against online retail websites such as Amazon and eBay. Online search and shopping are rapidly changing marketplaces. While some changes may have a detrimental effect on certain types of businesses, in general, the rapid pace of change benefits consumers and the market as a whole.

Finally, product design is an important dimension of how any company competes in the market. Google has a responsibility to design its "product" (i.e. search results) in the way that it best sees fit to serve the market. Otherwise, it could be at a competitive disadvantage and create opportunities for new search engines to take over market share from Google. As such, Google should be given wide latitude to design its products in the best way that it sees fit.

As a result, Google's actions with regards to search results are not harmful and should not be subject to investigation by the FTC or EC.

Determination

The FTC and the EC would rule separately based on the facts and the laws on whether Google's search practices constitute a violation of law and harmful to consumers and competition. While there were a number of claims, the major concern could be summarized that Google is using its dominant position in online search to give itself an unfair competitive advantage in online shopping, which would be potentially harmful to competitors and consumers. And if this were in fact the case, what remedies were necessary to prevent further harm.

Questions:

1. How has Google been effective in getting and maintaining monopoly power as a search engine? Is this sustainable?

2. Traditionally, monopolies are harmful because they lead to higher prices for consumers. However, using Google for search is free. Are there any potential harmful effects of Google's significant market power?

3. How is Google using its market power to benefit its Google Shopping platform?

4. Is this practice violating Google's unofficial slogan of "Don't be evil"?

Reference:

Baye, M. R., & Prince, J. (2021).Managerial Economics & Business Strategy. McGraw-Hill Education.