Some Simple Economics of the Google Antitrust Case

By Alex Tabarrok.

"The case is straightforward: Google pays firms like Apple billions of dollars to make its search engine the default. (N.B. I would rephrase this as Apple charges Google billions of dollars to make its search engine the default–a phrasing which matters if you want to understand what is really going on. But set that aside for now.) Consumers, however, can easily switch to other search engines by downloading a different browser or changing their default settings. Why don’t they? Because the minor transaction costs are not worth the effort. Moreover, if Google provides the best search experience, most users have no incentive to switch.

Consequently, any potential harm to consumers is limited to minor switching costs, and any remedies should be proportionate. Proposals such as forcing Google to divest Chrome or Android are vastly disproportionate to the alleged harm and risk being counterproductive. Google’s Android has significantly increased competition in the smartphone market, and ChromeOS has done the same for laptops. Google has invested billions in increasing competition in its complements. Google was able to make these investments because they paid off in revenue to Google Search and Google Ads. Kill the profit center and kill the incentive to invest in competition. Unintended consequences.

I argued above that consumer harm is limited to minor switching costs. The plaintiffs’ counter-argue that Google’s purchase of default-status “forecloses” competitors from achieving the scale necessary to compete effectively. This argument relies on network effects – more searches improve search quality through better data. However, this creates a paradox: on the theory of the plaintiffs, two or three firms each operating at smaller scale is worse than one operating at large scale. For the plaintiffs’ argument to hold, it must be shown that we are at the exact sweet spot where the benefits of increased competition in lowering the price of advertising outweighs the efficiency losses to consumer search quality from reduced scale. Yet, there is no evidence in the case—nor even an attempt—to demonstrate that we are at such a sweet spot.

Or perhaps the argument is that with competition we would get even better search but that argument can’t be right because the costs of switching, as noted above, are bounded by some minor transaction costs. Thus, if a competitor could offer better search, it would easily gain scale (e.g. AI search, see below).

Traditional foreclosure analysis requires showing both substantial market closure and consumer harm. Given the ease of switching and the complex relationship between scale and search quality, proving such harm becomes challenging and my read is that the plaintiffs didn’t prove harm.

In my view, the best analogy to the Google antitrust case is Coke and Pepsi battling for shelf space in the supermarket. Returning to my earlier parenthetical point, Apple is like the supermarket charging for prime shelf placement. Is this a significant concern? Not really. Eye-level placement matters to Coke and Pepsi but by construction they are competing for consumers who don’t much care which sugary, carbonated beverage they consume. For consumers who do care, the inconvenience is limited to reaching to a different shelf.

To add insult to injury, the antitrust case is happening when Google is losing advertising share and is under pressure from a new search technology, Artificial Intelligence. AI search from OpenAI, Anthropic, Meta Llama, and xAI is very well funded and making rapid progress. Somehow AI search did manage to achieve scale! As usual, the market appears more effective than the antitrust authorities at creating competition. 

Addendum: Admittedly this is outside the remit of the judge, but the biggest anti-competitive activities in tech are probably government policies that slow the construction of new power generation, new power lines, new data centers, and deals between power generators and data centers. I’d prefer the government take on its own anticompetitive effects before going after extremely succesful tech companies that have clearly made consumers much better off."