When Demotion is Competition: Algorithmic Antitrust Illustrated

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On the 27th of June 2017, the European Commission fined Google €2.42 billion for ‘abusing dominance as search engine by giving illegal advantage to own comparison shopping service’. Allegedly, Google has algorithmically manipulated the search results of products in order to promote its own platform, Google Shopping, at the expense of competitors. According to the European Commission, it has infringed Article 102 TFEU because it i) ‘has systematically given prominent placement to its own comparison shopping service’ and ii) ‘has demoted rival comparison shopping services in its search results’.

In a nutshell, the European Commission blames Google on two different grounds for the same thing: promotion of its own services, and demotion of its competitors’ services. But, demotion – meaning, the reduction in the ranking of some things or some individuals – is merely the exact opposite of promotion – meaning, the enhancement in the ranking of other things or other individuals. From an economic perspective, both conducts are equivalent since increasing the prices to rivals’ products is similar to lowering the prices to one’s own products. Therefore, the case is essentially a case against self-promotion.

In objection, Google has filed an appeal on the 11th of September 2017 on the grounds of six pleas. According to Google, the European Commission erred: i) ‘in finding that Google favoured a Google comparison shopping service by showing grouped products results’; ii) ‘in finding that Google favoured a Google comparison shopping service by showing grouped products ad; iii) ‘in finding that the alleged abusive conduct diverted Google search traffic; iv) ‘in finding that the alleged abusive conduct is likely to have anticompetitive effects; v) ‘by treating quality improvements that constitute competition on the merits as abusive; vi) ‘in imposing a fine’.

No current antitrust infringement has clearly helped the Commission in its ambition of fining Google: only recourse to dubious regulatory principles in disguise (II) and the misconception of self-promotion in algorithm-driven strategies (III) have enabled the Commission to impose an innovation-deterring fine.

Towards a dubious principle of ‘search neutrality’?

There is no exclusionary abuse by Google, otherwise the Commission could have simply named it and the classic application of this type of market abuse would not have triggered the current controversy surrounding the Commission’s fine. Market foreclosure is inapplicable here since, not only there is no refusal to deal by Google with Google Shopping’s competitors, but most importantly there is no upstream/downstream markets between Google search engine and shopping comparison services because of the multi-sided nature of the numerous platforms available (e.g. search engines’ results, websites, digital apps, …).

Given the absence of market foreclosure and of any exclusionary conduct to be evidenced against Google, the Commission needed to have recourse to a quasi-essential facility doctrine applied to Google search engine, ultimately reinforcing its dominant position on search engine market while weakening its outsider position on the shopping services market. A facility is ‘essential’ whenever a facility is, cumulatively, ‘unique’and ‘absolutely necessary’ to anyone wishing to enter the relevant market. Antitrust analysis challenges the Commission position when the different relevant markets are considered. Google search engine is neither unique nor absolutely necessary (alternative search engines exist) to online shopping services (alternative selling services exist such as mobile applications and websites). Furthermore, having not refused to reference rival shopping services (and therefore no refusal to deal can be evidence), Google has only increased the costs of rival shopping services via algorithm-driven strategies.

Considering Google search engine as essential facility is both economically wrong and competitively flawed. Indeed, the policy chosen by Google to promote Google Shopping services at the top of its search results may very well end up being a bad strategy for consumers as they could prefer a different ordering of search results – namely without shopping results being promoted. Therefore, alternative search engines may, from a competitive viewpoint, emerge as credible substitutes for a shopping-free search engine.

Also, it would reinforce the status quo regarding the dominance of Google’s search engine. Indeed, the Commission is de facto giving Google’s search engine the status of the essential platform (or ‘internet gateway’) by which most online sales must be fairly referenced. A more dynamic and evolutionary perspective would have considered that customers, by finding search results being algorithmically biased towards Google products at the expense of other interesting competitors’ products, would have either swapped to alternative search engine free of algorithmic manipulations or swapped directly to digital applications offering shopping services (e.g. Amazon app; Ebay app, etc…). Therefore, it is doubtful that the European Commission can have recourse to a quasi-essential facilities doctrine since such doctrine hinders the competitive process on the upstream market without tangible benefit on the downstream market.

Absent any exclusionary conduct by Google and insidiously treating Google as a quasi-essential facility, the Commission needed (from her prosecuting perspective) to elaborate a tailor-made antitrust infringement by Google: rivals’ demotion. What are the policy objectives of this newly created antitrust infringement on ‘rivals’ demotion’ in search results? In the absence of any market foreclosure and in the inappropriateness of an overtly expressed essential facility doctrine, the Commission needed to construe ‘rivals’ demotion’ as a regulatory mean to achieve a policy goal: search neutrality.

Similarly to the long-lived and indefinable principle of net neutrality, the emerging and also undefined principle of ‘search neutrality’ is evidenced by the requirement of ‘equal treatment’ laid down by the Commission in its press release as a justification for fining Google. There should be, according to the Competition Commissioner, an equal treatment given by Google to Google Shopping’s competitors in the search results. This quest is both disturbingly naïve and regrettably unrealistic. Forcing Google search engine to give non-discriminated access to Google Shopping’s competitors would be a red herring from an antitrust perspective’ since the placement in search results placement is a price.

The complex and innovative algorithms on which Google search results are based is the key of Google’s success because it corresponds to the qualitative listings wanted by consumers. There lies the reason for Google’s early competitors loss of market shares: Yahoo! and AOL failed to match consumer needs of qualitative search results. Consequently, the very manipulation of search results via innovative algorithms is both desired by Google’s consumers as illustrated by internet history and is essential to Google’s current success. Non-manipulated algorithms, according to what could be ‘search neutrality’, have never existed nor have ever been innovative. Indeed, complete search neutrality with Google giving ‘equal treatment’ with absent algorithm-manipulated search results as requested by the Commission decision would resemble…Yellow Pages listings! There was the time when objective, unbiased, non-algorithmically manipulated results were listed with some well-classified ads.

Innovation is unstoppable. Algorithmic innovation is inevitable: should Google provide an illusory ‘equal treatment’ and therefore reinforce its dominant position as essential facility at the expense of any algorithmic innovation and at the detriment of consumer experience? Or should Google invest in algorithm design so that consumer needs are constantly considered and competition in ancillary markets is increased by Google acting as new entrant? A positive answer would be tantamount to endorse a slippery slope towards regulatory micro-management of platforms. Indeed, should Amazon treat equally its end-products and its delivery services with those of competitors in its search results? To extrapolate further, why not therefore forcing Uber, the dominant ride-hailing platform, to treat equally Uber Eats drivers (the food delivery services) with its competitors (such as Deliveroo) on the Uber general platform because Uber app would have become the dominant (and inevitable) platform for delivery services? Such prospects, desperately legitimized by the dubious concept of ‘search neutrality’, would provide no competition benefits but only innovation costs.

Algorithmic governability shall come to the fore in antitrust investigations and economic considerations since data is the currency in algorithmic antitrust. Nevertheless, algorithmic innovation should not be stifled since it would be the overall dynamic efficiency of markets, reaped out by innovation, which shall be lessened together with the level of competition. Search neutrality must therefore be precluded from materialising in the fascinating and emerging world of algorithm-driven companies, of unmapped artificial intelligence, and of captivating blockchain technologies.

Why demoting is competing over the merits

In the world of algorithmic antitrust, much behaviour can easily be seen as a novelty for restricting competition whereas such behaviour once compared with traditional corporate strategies, are non-detrimental from an antitrust perspective. To what extent does the ‘prominent placement’ given by Google Inc. to Google Shopping services differ from the one given by, say, Tesco Inc. to Tesco food products on end aisle displays? To no extent. It is traditional corporate strategy of a parent company to favour its own products that have, through a time-and-error evolutionary process, emerged as a reward of the economic efficiency of the original distributing services. Fining by-products and the ‘prominent placement’ parent companies can grant to these by-products is tantamount to the prohibition of end aisle displays for products manufactured by the parent distributing company.

Rivals’ demotion is illustrative of the Commission’s underpinning antitrust theory. ‘Demotion’ is a word that comes from human resources management – the fact of downgrading the title or the rank of an employee. ‘Rivals’ refer to individual companies rather than to the general concept of competition. Consequently, rivals’ demotion is an illustrative expression used by the Commission which reveal its concern on the harm caused on identifiable individual companies rather than the general theory of harm to the consumers or to the lessening of level of competition. It is explanatory of the Commission’s approach to its available evidence: whereas no harm to consumers or to the competitive process can be evidenced, the entire evidence pertains to the harm caused onto competitors. Indeed, following the alleged abuses of demoting rivals’ products and/or promoting own products, the European Commission considered that the harm was evidenced by the ‘sudden drops’ of the use of competitors’ shopping services together with an increase in Google Shopping services traffic.

Demotion of rivals is nothing different to the promotion of one’s own products. Nevertheless, the benefit of the expression ‘rivals’ demotion’ is its linguistic twist that encloses the necessary inquisitorial pitch for the elaboration of an ad hoc antitrust infringement. Yet, Google has succeeded in the new digital economy because it precisely pioneered the sector with the design of complex and innovative algorithms aimed at both improving consumer experience and, presumably, favouring its own products when Google Shopping was created. The competitive advantage obtained by Google, through a fair and transparent competitive process, in designing complex algorithm enables Google to enter (and even create!) other markets which improve customer experience on Google search engine. Indeed, by deploying other activities than the sole search engine, Google is progressively and innovatively becoming a general platform increasing thereof consumers’ satisfaction.

In the present case of Google search engine results having allegedly demoted rivals of the Google Shopping comparison service, such demotion of rivals is tantamount to bundling discounts. Indeed, by using Google search engine, consumers are incentivized through Google self-promote conduct, to use Google shopping when they shift from one relevant market where Google is dominant – namely, search engine market – to another relevant market where Google Shopping is not dominant – shopping comparison services market. Google bundles one market with another so that it can effectively compete with incumbent companies on shopping comparison market such as Amazon, eBay, Zalando, etc… The European Commission overlooks the absence of any dominance of Google Shopping on shopping online markets: digital applications platforms and other selling websites such as Amazon and eBay have much more established reputations on selling services markets.

Bundling discounts can either have pro- or anti-competitive effects. But, when it is carried out in targeted market where the company is not dominant, there cannot be an abuse of dominance according to Article 102 TFEU. In that respect, Google Shopping being not dominant in its own relevant market, Google’s bundling discounts granted to Google Shopping via ‘prominent placement’ of ads is a legitimate self-promote behaviour which fosters competition since Google Shopping is a new entrant facing powerful incumbents in the shopping comparison services market. Thereby, demotion – or alternatively self-promotion – in absence of market dominance strengthens competition.

Conclusion

Without expressly stating it, the European Commission condemns Google for having leveraged its dominant position in the search engine market onto the comparison shopping market. In a nutshell, leveraging by demoting. I have demonstrated that demotion is part of the competitive process. Consequently, the fine has a deterring effect by creating innovation costs.

Indeed, this record-breaking fine on Google imposes prohibitive innovation costs and undoubtedly lessens the competition level and inappropriately stifles innovation without providing competitors any substantial benefits. Antitrust analysis concludes to the presence of efficiency net benefits for society of demotion as competition strategy for new entrant as illustrated by Google Shopping, or by incumbents as illustrated by the widespread practice of Amazon’s placing prominently its own end-products on its platform’s search results. The Google decision is based on dubious conceptual principles – such as the implicit quest for search neutrality – and flawed perceptions of Google’s competitive strategies in different markets.

Furthermore, the Google decision is detrimental in light of the so-called ‘error-cost framework’. This framework helps understanding that the social cost of Type I errors (false positive) is always greater than the social cost of Type II errors (false negative): Type I errors (i.e. erring by committing flawed antitrust interventions) are more costly than Type II errors (i.e erring by omitting appropriate antitrust interventions) because market forces compensate for the latter error type (but not the former). From an error cost perspective which encapsulates the cost of error in curbing firms’ practices in expect of limiting anti-competitive behaviours, the cost of errors are clearly greater than the benefits derived from the future behaviour of Google in line with the Commission’s requirements.

To conclude, Google decision is fraught with zealous antitrust, fuelled by a politically-dictated (if not populist-driven) antitrust agenda rather than by sound economic reasoning and legal coherence. This decision is inevitably detrimental to innovation on search engines markets, comparison shopping websites, and more generally on digital platforms. Digital platforms are only a nascent market: this wrong-headed fine is undoubtedly imposed too early and too heavily. Such unfortunate decision, except providing the media numerous headlines, should be overturned in favour of a more economic and innovation-laden perspective during the coming litigation procedure.

 

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