Steve Salop explores the basis for warranting strong remedies in the Google Search case and the set of remedies Judge Amit Mehta might consider for restoring competition in the search market by jump-starting the competitive process.
For more than a decade, Google has paid firms such as Apple and Mozilla to set Google Search as the default search engine on their web browsers. The company has also required mobile phone developers who use Google’s Android operating system to pre-install Google’s products, including Google Chrome and Search. On August 5, Judge Amit Mehta found this behavior violated Section 2 of the Sherman Act as constituting exclusionary conduct to maintain monopoly power. Judge Mehta now must investigate and mandate a remedy to restore competition. This will be a daunting endeavor because his performance in setting the remedy will be remembered for a long time. Consider Judges Harold Greene in AT&T and Thomas Penfield Jackson in Microsoft. I do not envy the pressure on him. In this short note, I analyze some of the alternatives that Judge Mehta can choose along with my comments and recommendations.
Legal and Policy Considerations
In U.S. v. Microsoft Corp., the court stated four objectives: unfetter a market from anticompetitive conduct; terminate the illegal monopoly; deny to the defendant the fruits of its statutory violation; and ensure that there remain no practices likely to result in monopolization in the future. In this monopoly maintenance case (including where the conduct enhanced the defendant’s monopoly power), the goals are similar. However, the strength of a reasonable remedy for the anticompetitive conduct depends on the degree to which the actual and potential rivals disadvantaged by the anticompetitive exclusionary conduct would have substantially reduced or eliminated the monopoly power of the defendant.
Stated slightly differently, the remedy in the Google Search case must restore the intensity of the competitive process that would have occurred but for the years of anticompetitive conduct. Judge Mehta will need to decide if an effective remedy requires affirmative efforts that go beyond simply enjoining the specific illegal conduct. To this end, Judge Mehta will surely look to the formative Microsoft case settled at the turn of the century, as he did in his ruling finding Google in breach of Section 2.
In his analysis and critique of the Microsoft remedy some years after testifying for the states on remedy, Professor Carl Shapiro explained his remedial framework that “[r]estoring competition requires taking affirmative steps to lower the barriers to entry” to prevent the monopolist from continuing to profit from its anticompetitive conduct. He further explained that “lowering entry barriers does not mean picking winners or engineering the market; it means imposing conditions that make it easier for potential entrants to overcome those barriers.” Shapiro’s article also notes that Professor Kevin Murphy (testifying on behalf of Microsoft) made a similar point, stating there that “[t]o the extent that past illegal acts have injured competition, the remedies should work to restore the prospects for consumer welfare to the level that would have existed absent the illegal acts.” Craig Romaine and I framed this remedial approach in our analysis of Microsoft as “jump starting” competition.
In short, the remedy must go beyond simply enjoining the anticompetitive conduct. It should include provisions to reignite the competitive process sufficiently to more quickly and surely restore effective competition. It also is important to recognize that there are degrees of monopoly power. And if he finds that the long duration of Google’s conduct increased its monopoly power over time, that fact calls for an even stronger remedy.
To conceptualize this relationship with a simple hypothetical example, suppose that a monopolist has maintained and enhanced its monopoly power with exclusionary conduct that has created and maintained prohibitive barriers to entry over (say) a ten-year period. Suppose further that absent the exclusionary conduct, there would have been (say) a 10% independent probability in each year that there would have been entry which would have successfully substantially reduced or eliminated the monopoly power. Given this 10% probability, the likelihood there would have been such successful entry within 10 years is about 65%. Thus, the likelihood that the monopolist would still have had monopoly power by the tenth year is only about 35% absent the conduct.
Not only would this result be sufficient for finding liability, but it also would suggest a remedy to rapidly allow entry competition to restore the competitive process to likely undo that monopoly. Moreover, if the exclusionary conduct over time entrenched the monopolist’s monopoly power and decreased the likelihood of entry below 10% in later years, then a remedy that creates even a 65% probability of successful entry in each future year would be insufficient.
In Microsoft, the court concluded that evidence showing Microsoft engaged in anticompetitive conduct to squash a nascent competitor was sufficient for liability, but counseled that it was insufficient to justify the structural remedy (like breaking up the company) requested by the government. The court opined that “[a]bsent some measure of confidence that there has been an actual loss to competition that needs to be restored, wisdom counsels against adopting radical structural relief.” As the court further explained, “In devising an appropriate remedy, the district court also should consider whether plaintiffs have established a sufficient causal connection between Microsoft’s anticompetitive conduct and its dominant position in the OS market.”
Judge Mehta will need to determine whether the evidence at trial in the Google Search case shows this causal connection. In doing so, he can rely on the evidence that Google’s exclusionary defaults likely substantially reduced the likelihood of competition and investment by rivals that would have reduced or eliminated Google’s monopoly power. This evidence rebuts the claim that if Google failed to purchase any default status over the period, device and browser makers nonetheless would have voluntarily made Google Search the default, indeed even if rivals had offered compensation to be the default.
This claim seems to be embracing the Marx Brothers’ line that you should believe them rather than your own eyes. The most telling evidence is the fact that Google was willing to pay huge revenue shares to Apple and others to prevent rivals from getting a larger foothold from which they could grow. If Google would have been so likely to be the default for free, then why did it pay so much for them? The answer is that Apple (for example) otherwise would have supported a different browser or entered itself, either of which would have weakened Google’s monopoly.
Judge Mehta’s opinion explains how Google’s exclusionary defaults and revenue sharing agreements (RSAs) substantially reduced rivals’ ability and incentives to invest to increase scale. Moreover, Judge Mehta can point to substantial evidence that Google’s exclusionary defaults affected the share of search usage, even when the default search engine was lower quality from having lower scale.
Among other evidence presented in his testimony, Professor Michael Whinston compared the relative share of queries obtained by Google and Bing on Apple MacOS and Microsoft Windows non-mobile computers. On MacOS computers, where Google was the purchased default, Google search obtained substantially close to 100% of search queries on the preinstalled Safari browser. By contrast, on Windows computers, where Microsoft made Bing the default search engine, Google obtained only about 22% of queries on the preinstalled Edge browser. It makes no sense to assume that Google’s share of MacOS queries would have been nearly the same if it had never purchased default status and Bing had an equal opportunity to compete and gain scale on MacOS during the entire period. Judge Mehta’s opinion also reports Mozilla’s experiment, where it shifted the default search engine away from Google Search to Bing. Google’s share fell to 65-80% on Mozilla’s browser from more than 90%. This higher Bing share would begin to restart the competitive process. Absent Google’s RSAs, Bing’s scale-driven quality would also improve, making it a stronger competitor going forward.
Carl Shapiro’s article explained that “Restoring competition requires taking affirmative steps to lower the barriers to entry. Merely prohibiting the illegal tactics already used would not be sufficient to achieve this end.” Applied to the Google Search case, where competition by established competitors also was stifled, a remedy to restore competition would lower barriers to competition by established competitors as well as entry barriers for future entrants.
This conceptual framework explains why Judge Mehta can conclude that a remedy limited to a choice screen clearly would be insufficient to restore competition in a reasonable time frame. Instead, a stronger remedy is needed to jump start and restore an effective competitive process to reduce or eliminate Google’s monopoly power that was maintained and likely enhanced by its long-term anticompetitive conduct.
Achieving an Effective Remedy
As explained in United States v. Ford Motor Co., the remedy must “pry open to competition a market that has been closed by defendants’ illegal restraints.”‘ Only in this way can the remedy “cure the ill effects of the illegal conduct,” “ensure that there remain no practices likely to result in monopolization in the future,” and “deny to the defendant the fruits of its statutory violation” over the longer run. To achieve this goal of restoring the competitive process, I recommend that the remedy will need to go beyond simply enjoining the exclusionary conduct and include additional affirmative restrictions or duties on Google’s conduct.
There is a large list of potential remedies, individually or in combination, that Judge Mehta could mandate to restore competition. These possibilities cover a broad range.
A narrow remedy that simply prohibits Google from demanding exclusionary defaults likely would be insufficient, given the long history of its anticompetitive conduct (Google and Apple first agreed to set Google Search as the default search engine on Safari in the aughts). A more likely effective remedy would prohibit Google from requiring or paying to be the pre-installed default for any or all search access points on devices, independent browsers and other apps in an open-bidding process. This is necessary because today Google has the ability and incentive to bid more than do competitors. This is because its profits from preserving monopoly profits exceed the rivals’ profits from a competitive market, a result consistent with economic theory and the evidence.
To make the remedy more likely effective, Judge Mehta should also prohibit Google Search from being the default for Chrome and other Google apps, which in combination account for a substantial share of search queries. Otherwise, Google can require or pay for Chrome to be the default. The remedy also should prohibit Android or other Google licensees from designating Google Search as the pre-installed default. While Google is the only defendant, the ability of non-defendants (e.g. Apple, Samsung, Android licensees, rival browsers and other app developers) to pre-install Google Search as the default can be prevented by mandating that Google include that restriction in both its mobile application distribution agreement (MADA) and all licenses for its search engine and apps. Of course, users would be permitted to change the defaults. In order to speed this competitive process and increase its likelihood of success, Judge Mehta also should require Google to share its recent historical search data and search index with rivals for a period of time to speed the recovery in general search.
While Google would not be permitted to offer RSAs or otherwise pay for pre-installed defaults or placements, other search engines would be permitted to do so. This would encourage Apple and others to choose as defaults search engines other than Google Search, including the possibility of Apple entering, which would facilitate restoration of competition. Judge Mehta’s order can relax or eliminate these provisions after the competitive process is functioning effectively to restore competition. Because the appropriate time duration cannot be well predicted in advance, this should not be a fixed time period but should be based on all market performance. Judge Mehta also should retain the ability to modify the order in the future if it is not achieving its intended goals.
Judge Mehta will face the question of whether the remedy should prohibit Google from obtaining any pre-installed defaults or only restrict the number or share it can purchase. If Google obtained so few defaults that its search market share would remain below the monopoly power range, that might not destroy the competitive process. Specifying and justifying the exact number will be challenging and must take account for the fact that Google’s search share will substantially exceed its share of defaults, at least until rivals gain substantial scale. Thus, the permissible number might best begin at zero or some very low number and then increase over time as the restoration process succeeds.
This recommendation is based on a general view that the remedy should lean heavily on the side of caution in relaxing any of the prohibitions because the “error costs” are highly asymmetric. Being overly permissible can permanently prevent restoration of competition, whereas being overly restrictive of Google only requires users to change their defaults to Google or suffer some reductions in search efficiency until the market self-corrects. Google cannot say that competition is “just a click away” while simultaneously bemoaning a remedy that does not allow it to be the default.
Judge Mehta also must be careful to avoid permitting limited defaults to become a glaring loophole. For example, suppose Google Search were permitted to be pre-installed on (say) the Mozilla browser, and Google then requires all Android and Gmail licensees to pre-install and favor Mozilla. Google also might link its own apps to Mozilla. And suppose Mozilla then pays revenue shares to device makers or apps. Tactics like these could allow Google indirectly to sidestep the remedy and protect its monopoly power. It would be important for Judge Mehta to tightly close this type of loophole if any Google defaults or revenue sharing is permitted. More generally, payments even indirectly tied to use of Google’s search engine should violate the order.
There is also the question of whether the remedy also should require divestiture of the Android operating system. This issue will arise in the context of the general skepticism of divestitures of unitary companies in monopoly maintenance cases expressed by the Microsoft court. In response, the Department of Justice likely will argue that Google acquired Android to begin with (in 2005) and that the Android team is not so deeply integrated with the search team, thereby reducing two of the usual impediments to divestiture. If this divestiture is mandated, it would be important also to include restrictions on agreements between the new AndroidCo. and Google that involve tying or favoring Google Search or other exclusionary restrictions. Otherwise, re-integration by contract could sink competition. The DOJ will also need to explain why it would be substantially easier for the court to monitor and enforce these restrictions when between independent companies rather than within a single company.
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The bottom line is that Judge Mehta’s Google decision sent a strong message on liability, following Google’s serious and sustained anticompetitive conduct. He should not allow this case to be like Microsoft and numerous mergers where an insufficient remedy prevented the market from recovering.
Author Disclosure: Steve Salop is Professor of Economics and Law Emeritus, Georgetown University Law Center and Senior Consultant, Charles River Associates. He consulted with Epic in its cases against Apple and Google.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
