JURIST Guest Columnist Shanshan Liu, American University Washington College of Law Class of 2015 explores the legal analysis surrounding current antitrust litigation in regards to online search engines and monopolization…

The field of antitrust litigation has focused on the settlement between the world’s largest search engine, Google Inc. (Google) and the European Union Commission (EU Commission). The EU’s investigation of Google commenced in 2010 and was initiated by complaints filed by price comparison websites, alleging that Google has abused its dominant power over Internet searching. The settlement resulted in Google modifying its display results, allowing competitors like Yahoo and Bing to display their results on Google’s site, providing opt-out options for content providers and removing difficult conditions for advertisers to move campaigns to rival sites.

The settlement means that Google would escape a possible fine, as much as five billion dollars. This seems to be another victory for Google after its settlement with the Federal Trade Commission (FTC) earlier in 2013, though critics are concerned that Google’s concession would strengthen monopolization. Despite the brief statements provided by the FTC and the EU Commission, neither authority has provided a detailed economic framework analysis explaining the decision. Google’s case presents facts that shift away from the traditional antitrust analysis, and by choosing not to carry out further analysis, both decisions reflect a gap in both the US and EU antitrust regulators’ analysis and interpretation with respect to cyberspace marketplace.

The FTC’s Investigation of Google: Difficulties in Defining Market Power and Willful Acquisition

The US antitrust laws treat monopolization as a great harm to competition. Section 2 of the Sherman Act imposes severe penalties on any person “who shall monopolize, or attempt to monopolize…any part of the trade or commerce among the several States, or with foreign nations.” Both federal and state authorities can enforce the Sherman Act, and successful plaintiffs will be entitled to treble damages. Extending beyond the scope of the Sherman Act, Section 5 of the Federal Trade Commission Act (FTC act) prohibits “unfair methods of competition”, the statute empowers the FTC a broad discretion to “define and proscribe an unfair competition, even though the practice does not infringe either the letter or the spirit of the antitrust laws.”

The FTC chose to investigate Google under the broader FTC act. However, Google and rival companies’ business operation model differ greatly from traditional industries. Difficulties in analyzing and applying the unique facts to monopolization requirements were big hurdles to the FTC’s enforcement pathway.

Regardless of whether a charge is brought under the Sherman Act or the FTC act, to find monopolization two elements must be present. The first element is the possession of monopoly power, and the second element is the willful acquisition of the power, known as the bad act. The mere possession of monopoly power is not a violation. The monopoly power in a relevant market consists of both a product market and a geographic market. If a company has a large percentage of product market share, inferences can be drawn that the firm has certain amount of monopoly power. For analytical purposes, the US will be the geographic market for web search engines.

For a firm that engages in traditional manufacturing, inferring monopoly power from a large market share is relatively easy. Defining a proper product market for Internet service providers like Google is complex. Although Google controls over two thirds of the market share, due to the integration of multiple products, defining its operation as the “online search” or “search advertising” purely on market share is too narrow [PDF] for antitrust analysis purpose.

Another method of measuring market power is to consider the cross elasticity of demand, in which the rate of customers turn to one product in response to a price increase in the other product is measured mathematically. When it is difficult to measure market share, measuring entry barriers as an indication of market power occasionally serves as an alternative method. If there has been frequent entry in the past and the company’s productive assets can be easily converted to other uses, then the market cannot be monopolized regardless of market share.

However, all the methods described above are difficult to apply in Google’s case, primarily because search engines like Google, Yahoo and Bing are free of cost to customers, therefore no price is involved. It is also very difficult to measure entry barriers. One might argue that Google has used data to increase the quality of search to customers, presenting a barrier that other competitors cannot match. However, it cannot be ignored that other newly entrant search engines, like Bing and Yahoo, have also been successful in obtaining data to develop competitive offerings.

Perhaps a more accurate definition of monopoly power in Google’s case can be derived from customers’ inability to evaluate the quality [PDF] of search product they are receiving. If Google does not provide enough transparency in its search process, it likely that users will be unable to evaluate the search engine. Some scholars have suggested that if Google is able to manipulate search results shown to customers, such distortion can be anticompetitive, and can be used as direct evidence to prove market power. The FTC, however, ignored this issue in its investigation statement [PDF].

In addition to the possession of monopoly power, monopolization also requires the company’s bad act. In Google’s case, the conduct would be analyzed as non-predatory pricing, which consists of a three-factor economic framework: exclusion of rivals; harm to competition; and the harm outweighs the potential benefit. The requisite bad act must have “anticompetitive effect” that harms the competitive process, not merely one or more competitors. Courts allow the plaintiff to make prima facie case demonstrating anticompetitive effect, then the defendant makes precompetitive justifications, which are non-pretextual claims that its conduct is indeed a form of competition on the merits. The plaintiff may rebut the defendant’s precompetitive justification or demonstrate that the anticompetitive harm outweighs the precompetitive benefit.

If Google’s case had proceeded further, the ultimate question [PDF] would become, by placing the rivals search results on the second or the third page of its search results, is Google conducting a search bias, as to constitute an exclusionary, anticompetitive conduct? In addition, although “willful acquisition” requires intent–but intent is a very ambiguous term and has been formulated differently by courts–therefore it should not be placed with a greater weight in the analysis. Nonetheless, the FTC chose to put more weight on analyzing intent. Despite contentions that the nature of Google’s conduct is exclusionary and anticompetitive, the FTC decided to skip the analysis on the exclusionary act, and closed the investigation [PDF] based on the procompetitive justifications and Google’s intent.

The EU Commission’s Investigation of Google: Uncertainties in Competition Protection and Customer Benefits

The legal framework of monopolization under EU is Article 102 of the Treaty on the Functioning of the European Union (Art.102). It characterizes monopolization as the abuse of dominant position. Similarly to the US monopolization requirements, Art.102 does not prohibit companies from mere domination; the use of the market power in an abusive way is also required. The EU Commission would need to establish the following elements for making a successful case.

The first element is to define the dominant position, which is a position of economic strength that is enjoyed by a company, enabling it to behave free from the pressure of competition and independently of its competitors. Possession of high market shares is sufficient to establish the existence of a dominant position unless exceptional circumstances like rapid entry or a volatile market apply. A market share of 50 percent or more will be considered high and result in a presumption of dominance, and the burden is then shifted to the defendant to prove they are not dominant.

What makes the EU enforcement slightly different from the US approach is the broad embrace of entry barriers as a substitute of market share. The non-exhaustive entry barrier list gives the EU Commission more flexibility to condemn a company of possessing dominant market power. In other words, the EU’s enforcement is more stringent than the US. For instance, EU courts will consider a broad range of entry factors, such as national regulations, access to capital fund, essential facility and superior technology. In contrast, the US Supreme Court neither repudiates nor embraces the essential facility doctrine.

Art.102 also allows efficiency justifications to preclude the Commission from finding abuse of dominant position. The defendant must demonstrate efficiencies based on four conditions [PDF]: first, efficiency is realized as a result of the product concerned; second, the company’s conduct is indispensible to realize these efficiencies; third, efficiencies must benefit consumers; and fourth, there will be no elimination of competition in relation to the market.

Unlike the problems encountered by the FTC in defining Google’s monopoly power, Google has been holding market shares well above 90 percent in most European countries. The EU Commission’s primary concerns about Google’s practices are its specialized search, which makes the competitor’s results less visible to customers, its content usage without consent and exclusive agreements and restrictions to the advertisers. In particular, the EU Commission pointed out that Google “limits the ability of European users to find other search services competing with Google which contain information relevant to their query. Many such services might be potentially very innovative and Google’s practices could therefore be limiting European consumers’ opportunities to benefit from such innovative services.”

However, reading from the settlement agreement, it does not reflect the Commission’s strong intent to protect consumers. The actual effect on Google’s dominant position and the potential benefits to consumers brought by the changes are hard to predict. For example, Google agreed to display competitors’ search results, but place them in a shaded box on the search results page. Whether customers would perceive the results in shaded box as advertisements or proper alternative results from competitors remains unknown. The Commission’s denial of the market test, which allows competitors and customers to comment on the commitments, imposes uncertainties on monitoring Google’s future practice.

To conclude, both authorities chose to terminate the investigation, leaving many substantive legal issues unresolved. This may shadow the future complaints challenging the company’s position. However, it also opens opportunities for the legislative branch to detail the interpretation of requirements in monopolization, especially relating to legal issues arising from cyberspace.

Shanshan Liu received her BS in Chemistry from Imperial College, University of London and her MPA in International Development from Cornell University . She has interned with Baker & McKenzie in their Intellectual Property Practice and with the Copyright Protection Center of China.

Suggested citation: Shanshan Liu, Antitrust Analysis for Online Search Engines , JURIST – Dateline, Mar. 3, 2014, http://jurist.org/dateline/2014/03/shanshan-liu-google-antitrust.php