Lawsuits Endanger Google, and By Extension Harm All of Us

On September 27, Google announced concessions it has made to resolve charges by the European Union’s regulatory authorities that it unfairly rigged its search engine to favor its own online shopping service over those of rival companies in Europe.

The announcement came just in time. Had Google not submitted a compliance plan by the following day, its parent company Alphabet would have faced fines of up to 5 percent of its average daily global revenue. Those penalties would have been on top of the record fine of 2.4 billion euros ($2.8 billion) that the European Commission levied in June.

Google’s concessions will be implemented immediately. The company’s price-comparison unit, Google Shopping, the target of complaints from similar search engines, such as Germany’s Idealo and Netherlands-based Vergelijk.nl, will operate as if it were a stand-alone enterprise. Its business practices will be subject to ongoing review by the European Commission.

Should online shoppers in the 28 EU-member countries celebrate the commission’s action? Probably not.

Although competition policy in Europe has much in common with antitrust policy in the United States, European law focuses on “market dominance.” In other words, a large market share by itself often triggers an investigation into possible anticompetitive conduct, especially under the current commissioner, Margrethe Vestager, who has aggressively targeted big American high-tech companies. Microsoft, Apple, and Facebook have been or now stand in the European Commission’s cross-hairs. Google itself is facing at least two other EU investigations related to its Android operating system for smart phones.

To be sure, domestic political pressures have something to do with the commission’s emphasis on “market dominance” at a time when the names of some American firms have become nouns and verbs (“I googled that”). More troubling, however, is the concept itself. A company can become a market leader either because it has engaged in unfair practices that take sales away from rivals or because it serves customers well, offering products or services that deliver desirable features at prices people are willing to pay. The trick for competition law enforcers is to distinguish between those two paths to dominance so as not to punish innovative firms that rise to the top by expanding consumer choice and thus making everyone (but their rivals) better off.

In practice, the ambiguity of “market dominance” worsens the problem of special-interest politicking. In the absence of evidence of consumer harm, the assumption that “big is bad” invites law enforcement actions instigated at the behest of rivals hoping to win in courtrooms and regulatory proceedings what they are unable to win in competitive marketplaces.

That possibility certainly is not confined to Europe: it is a problem that plagues U.S. antitrust law enforcement as well. Readers of a certain age may remember that a major late-1990s’ antitrust case against Microsoft, alleging that the software giant unfairly leveraged its monopoly of Intel-based computer operating systems to favor its Internet Explorer on PC desktops, was launched not following complaints by computer users, but by its chief rival in the browser wars: Netscape.

“Monopoly” is another term commonly used much too loosely. Both now and in the past, actual monopolies are much more likely to be found in the public than in the private sector.

The history of high-technology markets is not one of perpetual market domination by a single large company, but rather of “serial monopoly”: One company (or technology) achieves a large market share for a time and then is displaced by another offering superior (in the minds of consumers) features. Eight-track audio tapes gave way to cassette tapes, which gave way to CDs, which gave way to iPods. Betamax, though the first video recording and playback technology introduced to the market, was displaced by VHS, which was displaced by DVDs, which were displaced by Blu Ray disks and online streaming.

The pace of technological change is far too rapid for government regulators to possibly keep up with. The danger of vigorous law enforcement is that in trying to protect rivals from today’s dominant company, innovation will be chilled as the “monopolist” is forced to defend itself from lawsuits rather than working to stay ahead of the gale of creative destruction that constantly threatens its temporarily large market share.