Google earned its dominance on merit, not by abusing antitrust law

Posted by Market Watch

Google earned its dominance on merit, not by abusing antitrust law

By Pascal Salin 

The European Union’s regulatory bodies seem to be particularly hostile to Alphabet GOOG, +0.54% . In June 2017, the European Commission fined the company €2.42 billion ($2.75 billion) for breaching EU antitrust rules, after concluding that, “Google has abused its market dominance as a search engine by giving an illegal advantage to another Google product, its comparison shopping service.”

Then, last month, the Commission went after Google again, fining it €4.34 billion ($4.94 billion) for “illegal practices regarding Android mobile devices.” Google had made agreements with mobile-device manufacturers and network operators “to pre-install the Google Search app and browser app (Chrome).” Moreover, it seems that the European Parliament and several EU member states would like to dismantle Google by separating its search engine from other possible revenue sources.

There is no doubt that Google holds a unique position on the internet. In terms of search activity, it has commanded around 90% of the market for over a decade, leading many soi-disant defenders of competition to denounce it for “abusing” its “dominant position.” But most of these attacks are driven by a mix of misconceptions and questionable claims of harm by Google’s competitors.

Google’s critics would define a monopoly as any firm that has a 100% market share, or at least a share large enough to make credible competition seem impossible. Traditional economic theory holds that a monopoly can take advantage of consumers by imposing higher prices than would otherwise be possible under conditions of “pure and perfect competition.”

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By this simple reasoning, legislators and judges must rein in monopolistic “despoilers” by imposing heavy fines, or by breaking them up, as has happened many times throughout history.

But to follow to this line of thinking, one must ignore a fundamental distinction between two kinds of monopolies: those that emerge from the free operation of the market; and those that are a result of state coercion. Traditionally, “pure and perfect competition” is taken to mean that many firms are producing the same good with the same techniques. But this definition takes a static approach, measuring market outcomes at a single point in time, even though the economy itself is dynamic.

Consider the case of a firm that is launching an innovative product. By definition, its market share will be 100%, at least for a while. The firm owes its “dominant position” to merit, and to the fact that consumers appreciate its product.

As this scenario demonstrates, competition should not be defined by some arbitrary number of producers, but by whether other firms are free to enter the market. Ultimately, market entry is the key prerequisite of innovation. If the state imposes constraints on that freedom in such a way as to establish or maintain a single private or public producer’s market dominance, then it has created a harmful monopoly, by severely limiting opportunities for innovation.

In the case of Google, no one has prevented others from entering the internet-search market. Google thus owes its reputation in this area to talent and ingenuity. When it entered the market, it was not the first search engine, and any firm around the world had the freedom to pursue the same opportunity. Google prevailed because it provided a better service than anyone else, and it did so early.

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