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The Google search case in Europe: tying and the single monopoly profit theorem in two-sided markets

European Journal of Law and Economics volume 47, pages 15–42 (2019)Cite this article

Abstract

This paper provides an economic and legal theory of harm applicable to the case against Google in Europe over search bias. So far, no clear legal and economic theory has yet been delineated by the European Commission, nor consensus in the literature has emerged with regard to the theory of foreclosure that could support the case, or with regard to the specific form of abuse of dominance applicable under European law. The paper shows that the law and economics of tying applies to search bias. From a legal standpoint, it is not necessary to rely on the more formalistic elements of Article 102 TFEU, or to characterize Google as an essential facility, in order to find a valid legal theory of harm. We show that Google’s conduct of linking its proprietary vertical (or specialized) search platforms to its horizontal (or general) search platform through visual prominence, as it has done with Google Shopping, fits within the legal boundaries of tying under European law. From an economic perspective, we show that the two-sided nature of both horizontal and vertical search provides compelling reasons why foreclosure of competition may be profitable, and why the single monopoly profit theorem may fail in this context. As we show in the paper, by tying vertical search to general search through visual prominence, Google can attract additional advertisers on its vertical search platform that would have possibly advertised on competing vertical search platforms without a tie. The effect of tying is a restriction on competition in vertical search that deserves antitrust scrutiny.

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Notes

  1. http://europa.eu/rapid/press-release_IP-17-1784_en.htm.

  2. http://europa.eu/rapid/press-release_IP-10-1624_en.htm?locale=en.

  3. http://europa.eu/rapid/press-release_IP-18-4581_en.htm. COMP/40.009, Google (Android), IP/15/4780.

  4. http://europa.eu/rapid/press-release_IP-16-2532_en.htm.

  5. https://www.ftc.gov/news-events/press-releases/2013/06/ftc-consumer-protection-staff-updates-agencys-guidance-search; Statement Of The Federal Trade Commission Regarding Google’s Search Practices, In The Matter Of Google, Inc., Ftc File Number 111-0163, 3 January 2013.

  6. http://europa.eu/rapid/press-release_MEMO-15-4781_en.htm.

  7. Case AT.39740, Google Search (Shopping), June 27, 2017 [hereinafter Google Search].

  8. Ibid, at 7.3.

  9. Ibid, at 345–358; 512.

  10. http://europa.eu/rapid/press-release_IP-17-1784_en.htm.

  11. Supra, note 3.

  12. Guidance on the Commission's Enforcement Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings (2009/C 45/02) [Guidance Paper]. The 2005 Discussion Paper adopted explicitly a consumer welfare standard, stating that the objective of Article 102 with regard to exclusionary abuses was “the protection of competition on the market as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources. See Discussion Paper of December 2005 on the Application of Article 82 EC to Exclusionary Abuses, at 4. Available at: http://ec.europa.eu/competition/antitrust/art82/discpaper2005.pdf [Discussion Paper]. The same principle was reiterated in the final 2009 Guidance Paper on Exclusionary Conduct.

  13. Case 322/81 NV Nederlandse Banden-Industrie Michelin v Commission [1983] ECR 3461; Case IV/D-2/34780/1999 Virgin/British Airways CFI, 2003; Case T-286/09 Intel Corp v Commission EU:T:2014:547. Recently, the ECJ in the Intel case required a more effects-based approach to rebates, and clarified that the case law in this area of dominance requires the Commission to assess all the circumstance of the case and avoid the formalistic approach often reiterated in the past that may stand in the way of efficiency. See: https://curia.europa.eu/jcms/upload/docs/application/pdf/2017-09/cp170090en.pdf. For a commentary, see Petit (2018).

  14. With regard to exclusionary conduct, European Courts have often adopted a formalistic approach, aimed at protecting market structures and competitors rather than promoting consumer welfare, (often conflating anticompetitive objectives with anticompetitive effects), concerned with discriminatory behaviour and the ‘special responsibility’ of dominant firms toward the competitive process. See for instance Re Continental Can Co Inc [1972] CMLR D11; Case T-203/01, Manufacture Francaise des Pneumatiques Michelin v Commission [2003] ECR II-4071, para 241; Case 85/76, Hoffmann-La Roche & Co AG v Commission [1979] ECR 461; Michelin v Commission supra note 13, para 57.

  15. Commentators have taken a variety of views on the applicable legal theory of harm, ranging from those that see the essential facility doctrine as the only possible characterization applicable to Google (Vesterdorf 2015), to those that envisage multiple available avenues, including structural abuses based on the more formalistic elements of Article 102’s text and jurisprudence (Lianos and Motchenkova 2013; Petit 2015); to others believing that Google’s conduct does not fit under any established category or type of abuse (Nazzini 2015).

  16. Jones and Sufrin (2014), at 538. The focus of the provision, therefore, is the protection of the customers of the dominant firm, and not its competitors. See Geradin and Petit (2006), at 487.

  17. For instance, in British Airways, Article 102(c) was applied to different conditions to the different bonus schemes and commission rates applied by British Airways to competing travel agents in the UK. See Case 95/04 P, British Airways v Commission [2007] ECR I-2331.

  18. For instance, the provision has been applied to a port operator that charged different prices for pilotage services depending on whether the vessels were sailing between two domestic ports or were on an international route. See Case C-18/93, Corsica Ferries Italia Srl v Corporazione dei Piloti del Porto di Genova [1994] ECR I-1783; a rail operator that charged different prices for traffic via domestic ports and traffic via non-domestic ones Case T-229/94, Deutsceh Bahn AG v Commission [1997] ECR II-1689; bonus and commission schemes applied by airlines that discriminated between travel agents by placing them at a competitive disadvantage between one another, as a standalone concern separate from the exclusionary effects of such schemes, see Case T-219/99, British Airways v Commission [2003] ECR II-5917.

  19. Google Search at 331 and 336.

  20. Google Search at 332 at 339.

  21. Citing Case C-280/08 P, Deutsche Telekom v Commission, EU:C:2010:603, para 175.

  22. Early case law such as Continental Can has affirmed that “any commercial practice” damaging the maintenance of an effective competitive structure would be prohibited, especially in cases of very concentrated markets.

  23. See for instance C-209/10, Post Danmark A/S v. Konkurrencerådet, judgment of 27 March 2012, para 22.

  24. CJ, Joined Cases 6 and 7/73 R Istituto Chemioterapico Italiano and Commercial Solvents v Commission [1973].

  25. Guidance Paper, at para 75.

  26. C-7/97, Oscar Bronner GmbH & Co KG v Mediaprint Zeitungs- und Zeitschriftenverlag GmbH & Co KG, [1998] ECR I-7791, at 41.

  27. Guidance Paper, at para 81.

  28. Objective necessity is often interpreted as the presence of an alternative source of supply capable of exerting a competitive constraint and the ability for the rivals to effectively duplicate the input produced by the dominant firm in the foreseeable future.

  29. This condition is analyzed by taking into account the market share of the dominant firm in the downstream market, the capacity-constraints of the dominant firm relative to competitors downstream; the substitutability between the dominant firm’s output and that of its competitors downstream; the proportion of competitors affected in the downstream market; the portion of demand that could be served by the foreclosed competitors that is diverted away from them to the advantage of the dominant undertaking. See Guidance Paper, at para 85.

  30. This means considering the negative consequences of the refusal to supply in the relevant market on consumers vis-à-vis the negative consequences of imposing an obligation to supply. See Guidance Paper, at 86.

  31. For example, Ducci argues that issues of shareability are not fatal to the application of the essential facility doctrine, suggesting that competitors could have access to OneBox on a statistically even basis with Google across searches, even if not in every search. See Ducci, Natural Monopolies in Platform Markets. SJD thesis, University of Toronto Faculty of Law (unpublished work in progress).

  32. Beyond the general emphasis on behaviour that restrict access to markets for competitors (see para 339) and the Commission’s conclusion there are no realistic alternative source of traffic to Google for competing comparison shopping services (see para 542).

  33. Google Search, at 651.

  34. http://europa.eu/rapid/press-release_MEMO-17-1785_en.htm.

  35. Google Search, at 699.

  36. See infra, at page 24.

  37. We discuss the requirements of tying under European law in detail in the next section.

  38. See, for instance: Digital Undertaking, Commission’s XXVIIth Report on Competition Policy (1997), pp. 153–154; Coca-Cola Italia Undertaking (1989), Commission’s XIXth Report on Competition Policy (Commission 1989), para 50 and Coca-Cola Undertaking [2005] OJ L253/21; Michelin II, OJ [2002] L 143/1, para 300; Tetra Pak II OJ [1992] L72/1; Eurofix-Bauco v Hilti, OJ [1988] L 65/19, para 75; Guidance Paper, at 47; Discussion Paper, at 55. See also Whish and Baley (2015), at 779–800.

  39. See infra, Section IV(c).

  40. Tying is also subject to Article 101 TFEU when it is part of an agreement concluded by a non-dominant supplier and buyer, subject to the safe when the market share of the supplier, on the market for both the tying and the tied products, and the market share of the buyer on the upstream market are below 30% market share. A tie by a firm with market share over 30% falls within Article 101(1)’s prohibition but can be justified under Article 101(3). However, most cases have been brought under Article 102.

  41. Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings issued in December 2008, [2009] OJ C45/7.

  42. For instance even when the products in question are connected by commercial usage, a situation not covered by paragraph (d)Case C-333/94 P Tetra Pak v. Commission [1996] ECR I-5951, para 37; Case T-201/04 Microsoft Corp. v Commission [2007] ECR II-3601.

  43. The position developed in the case law with regard to tying under Article 102 was for the most part incorporated in the Guidance on Article 102 Enforcement Priorities (published not long after Microsoft), with a few points of departure from the case law with regard to foreclosure, which is interpreted more narrowly in the Guidance paper, and coercion, which is not explicitly mentioned in the Guidance paper’s test.

  44. The test was originally developed in Case T-201/04, Microsoft Corp v Commission, [2007] ECR II-3601. The Guidance Paper incorporates this test with two major points of departure: first, the element of coercion is eliminated and conflated with the examination of ‘distinctiveness’ between tying and tied product; second, the Guidance Paper does not focus on the nature of tying in assessing foreclosure, but adopts an effect-based approach supported by economic analysis.

  45. Although, as it is explained below, this includes direct evidence of independent suppliers specializing in the tied good.

  46. The European courts have not fully embraced the shift toward a more effect-based approach endorsed by the Guidance paper and have remained partially concerned with the formal structure of competition and the impact on competitors. See Case T-201/04, Microsoft v Commission [2007] ECR II-3601; See also: Ahlborn and Evans (2008).

  47. See Guidance Paper, para 62; Case T-201/04 Microsoft Corp v Commission [2007] ECR II-3601, para 869, 1144.

  48. The undertaking should be dominant in the tying market, though not necessarily in the tied market. In bundling cases, the undertaking needs to be dominant in one of the bundled markets. In the special case of tying in after-markets, the condition is that the undertaking is dominant in the tying market and/or the tied after-market. See Guidance Paper, para 50, footnote 3.

  49. See Case 85/76, Hoffman La Roche, [1979] ECR 461, para 91.

  50. Google Search, at 271–315.

  51. Case T-201/04 Microsoft v Commission [2007] ECR II-3601, para 917, 921 and 922.

  52. Guidance paper, at para 51.

  53. Ibid.

  54. See also: Guidelines on Vertical Restraints, OJ 2000 C 291/1, 216; Case COMP/C-3/37.792 Microsoft Corp., Commission Decision [2004], at 803.

  55. Google Search, at 166.

  56. Ibid, at 171–172.

  57. In Hilti, for example, the fact that there was potentially no demand for acquiring cartridge strips without a complementary supply of compatible nails was irrelevant. Ibid.

  58. Case C-333/94, Tetra Pak Int’SA v Commission 1996 ECR I-5951, at 37.

  59. Case T-201/04 Microsoft Corp. v Commission [2007] ECR II-3601, at 922.

  60. Case C-333/94, Tetra Pak Int’SA v Commission 1996 ECR I-5951, at 36.

  61. Ibid, at 970.

  62. Ibid, at 832.

  63. Guidance Paper, para 50. The Guidance Paper notes that the anticompetitive effects of technical tying are likely to be greater than contractual tying since it may be costly to reverse and may reduce the opportunities for resale of individual components.

  64. Coercion as a reduction of consumer choice is merged into the stage of determining whether tying and tied products are distinct and considered evidence that the products are distinct.

  65. See Case 85/76 Hoffmann-La Roche & Co. AG v Commission [1979] ECR 461, paragraph 111; Discussion Paper, at 55.

  66. Ibid, at 1042.

  67. Case T-201, at 963.

  68. Ibid, at 967–969.

  69. Ibid, at 831.

  70. Case T-201/04, Microsoft v. Commission [2007] ECR II-3601, at para 1052.

  71. See European Commission, Press Release, http://europa.eu/rapid/press-release_IP-18-4581_en.htm.

  72. Follow-up Questions for the Record of Eric Schmidt, Executive Chairman, Google Inc. before the Senate Committee on the Judiciary Subcommittee on Antitrust, Competition Policy, and Consumer Rights, September 21, 2011 (Response to Kohl, question 1.b).

  73. Google Search, at 372.

  74. Ibid, at 375.

  75. Ibid, at 386.

  76. Ibid, see respectively 453–457 and 397.

  77. Ibid, at 460.

  78. See for instance, Discussion Paper, at 182.

  79. Google Search, at 334, 342, 649. At 342, it explains how the conduct is “capable of extending Google’s dominant position in the national markets for general search services to the national markets for comparison shopping services and to protect Google’s dominant position in the national markets for general search service.”

  80. Ibid, at 349. The Commission also finds that the conduct is capable of protecting Google’s dominant position in the national markets for general search service.

  81. Ibid, at 591–597.

  82. This sections draws extensively from: Iacobucci (2014, unpublished).

  83. On a similar note, Iacobucci (2008) points out that warranties, which are a form of tying, may provide greater value to high-value customers than mere cash discounts, and thus allow subsidies in markets with significant lock-in and hence supra-competitive profits in aftermarkets without undesirable selection effects.

  84. The basic theory of why the single monopoly profit theorem may fail in two-sided markets was developed in Iacobucci (2014), while Choi and Jeon formalized the theory and correctly observed that it turns in important ways on the inability of an independent tied good seller to offer discounts on the price of the tied good to consumers; zero prices to consumers as in search markets cannot be discounted. See Choi and Jeon (2018), at 1.

  85. Citing Iacobucci (2014), Choi and Jeon formalize this insight and provide a formal analysis of tying, including cases where the non-negative price constraint is not binding. See Choi and Jeon (2018), at 7.

  86. If there were a positive price for search to searchers, the analysis would not necessarily hold: specialized search engines could offer discounts to searchers to compete with an attempted tie by a general search engine with market power: see Choi and Jeon (2018).

  87. There will be (potentially large) fixed costs of establishing the algorithms to provide search and advertising services, but the marginal cost of applying the relevant algorithms to any given search or advertisement is zero.

  88. See Iacobucci (2008) for discussion of the impossibility of negative prices, and consequential reliance on warranties.

  89. Google Search, at 7.2.3.

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Acknowledgements

The authors are grateful for comments on earlier versions from Michael Trebilcock and participants at the University of Chicago Law and Economics Workshop, the Siena-Toronto-Tel Aviv Law and Economics Workshop, and the Canadian Law and Economics Association’s Annual Meeting.

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  1. Faculty of Law, University of Toronto, Toronto, ON, Canada

    Edward Iacobucci & Francesco Ducci

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  1. Edward Iacobucci
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  2. Francesco Ducci
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Correspondence to Francesco Ducci.

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Iacobucci, E., Ducci, F. The Google search case in Europe: tying and the single monopoly profit theorem in two-sided markets. Eur J Law Econ 47, 15–42 (2019). https://doi.org/10.1007/s10657-018-9602-y

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Keywords

  • Tying
  • Two-sided markets
  • Single monopoly profit theorem
  • Abuse of dominance
  • Search bias
  • Article 102 TFEU

JEL Classification

  • K21
  • L10
  • L12
  • L41
  • L43