The Microsoft case suggests that a sufficiently powerful player could act as a barrier to entry. It is not right to dispense with competition regulation in the economy.
Old habits die hard. While this maxim is no doubt true for individuals, it is perhaps an even more accurate behavioural sketch of firms and governments. Show me a firm that would not want to preserve or extend its market share and, in the process, muscle rivals out of the market. And, if it has the resources to do so, it would also erect steep entry barriers to deter potential competition from entering the market. Because no firm, as economics repeatedly reminds us, likes competition. And likewise, show me a government, in this case, a competition authority, which would not like to either break or undermine the monopoly of a firm even if it is a ‘good’ monopoly. Believe it or not, the latter do exist outside of Chicago textbooks. This cat and mouse game of constant pursuit, attempted escapes and proving dominance is playing out currently between Google and the European Union (EU) in Brussels.
Chicago School economists left a defining legacy of free market principles on the design of competition policy, particularly in the US. First, they declared that governments should stop worrying about size and ask only whether a firm can exert market power. Second, even if a firm gains market power, the effect will usually be temporary, because high profits will attract new competitors. Hence, markets will erode most monopolies more quickly and effectively than will governments.
Let us judge the current EU order against Google versus the exalted standards of the Chicago School. But, first the order. The European Commission has fined Google a record $5 billion for abusing its market power. The Commission claims Google exploited ownership of its Android mobile operating system to reinforce dominance in search. Specifically, Google forced Android handset and tablet manufacturers to pre-install the Google Search app and its own web browser Chrome as a condition for allowing them to offer access to its Play Store app. Moreover, Google made payments to large manufacturers and mobile network operators that agreed to exclusively pre-install the Google Search app on their devices. The case against Google is built around what competition law calls ‘exclusionary conduct’.
This strategy of Google has an uncanny and eerie resemblance to the one used by Microsoft almost two decades ago. In one of the most celebrated antitrust cases of its time in the US, Microsoft was accused and found guilty of using its considerable muscle in the operating system (OS) market to effectively destroy Netscape Navigator in the browser market. Microsoft did this by bundling its own browser, Internet Explorer, with its Windows OS and ‘refused to deal’ with any computer hardware manufacturer who dealt with the now defunct Netscape. Microsoft’s almost complete dominance of the OS market at that time meant that no serious hardware manufacturer had the nerve to challenge Microsoft. Or, arguably, the inclination to do this, since Windows had become the de facto industry standard and computer sales had never been so good. Following on the heels of the US ‘cease and desist’ order against Microsoft, the EU, too, found Microsoft guilty and imposed hefty fines on it for bundling Internet Explorer and Windows media player with the Windows OS, thereby suppressing competition and consumer choice.
All this is now public information and has been well known to Google and all other players in the market for long. So, a question that naturally arises is, what makes firms like Google and Microsoft (and others) engage in ‘exclusionary conduct’ when they know it will raise the hackles of competition authorities with attendant costs in penalties and litigation? Would one not expect a firm that enjoys disproportionate market share, and therefore market power, to be cautious about the manner in which it exercises it? We know from economic theory that in dynamic markets like information technology, that are characterised by pervasive network effects, there is a natural bias in favour of largeness for winners. Accordingly, one would expect Google to eschew actions that further entrench its monopoly power.
That is, if it wishes to remain compliant with the law. But, as we say, old habits die hard. An alternative explanation could be that Google fully understands the consequences of its exploits and has already internalised the costs of its actions. After all, Microsoft today continues to enjoy over 80% market share in the Windows desktop OS market, although its internet explorer is no longer the leading browser. Microsoft won the battle for desktop OS and became the dominant standard because of its quality. It is in this position now even after having been subjected to abortive attempts to break up the company—the so called “structural solution” and a series of “behavioural remedies” that rightly dulled its ability to be coercive.
Some economists after the Chicago heart, however, contend that in the long run, markets will discipline errant firms much better than an antitrust remedy. Especially in the current innovation intensive ecosystem, where no one single entity is likely to dominate the way Microsoft did during its heyday. With Facebook, Amazon, Microsoft and Google itself jostling for dominance, the Chicago view may after all have a leg to stand on. So, is the EU’s order against Google over the top (OTT), pun intended?
Perhaps, if one assumes that Schumpeterian dynamics in the ‘new economy’ are quite different compared to those in the old brick and mortar economy. Because software technology requires huge fixed up-front investment, but involves trivial marginal costs, it is likely that Schumpeterian competition will result in “fragile monopolies” being created, with single companies dominating segments for a time, until they are toppled by rivals.
This is, of course, the Chicago view that privileges markets over antitrust action. At the same time, the notion that antitrust enforcement is not needed in the new economy rests on the assumption that technological change is exogenous, that is, independent of an industry’s structure. Yet, the Microsoft case suggests that a sufficiently powerful incumbent could act as a barrier to innovation. And, history is replete with examples of powerful incumbents buying start-ups to choke innovation. Although it may be desirable to wait and see if a monopoly proves only temporary before acting, it is not right to dispense with antitrust enforcement in the new economy. In fact, antitrust laws have a built-in premise that the wait can be too long if companies have market power combined with a willingness to exercise it. Antitrust action can thus reduce the exercise of market power and potentially improve the welfare impact.
What lessons, if any, can this case against Google provide for India, where the company has also been subject to litigation around its dominance in the operating system, search and search advertising? I feel the principal message for the Competition Commission of India (CCI) is hidden in the process followed by the European Commission to indict Google. A process that started in April 2015 and included careful building of evidence using considerable in-house expertise, complemented by outside capacity. CCI ought to invest in building a strong multidisciplinary team of resident experts for the new economy to combat abuse by dominant firms who have access to the best technical and legal advice. At the same time, intervention in the new economy should be well thought out, for, to be fair to the Chicago view, in the new economy, ‘uneasy lies the head that wears the crown’.