Power and the Potential for the Abuse of Power in Online Gateway Systems: An Analysis of Google

Abstract

In Chapter 6, we introduced the pattern associated with platforms and platform envelopment. Chapter 7 introduced two additional patterns, Mandatory Participation Third Party Payer Systems (MP3PPs) and online gateways, and showed how they combined for a unique form of power that was among the most important and most profitable innovations enabled by the Internet. Chapter 8 showed how these three patterns become intertwined online. We argued that the net has not reduced the power of online gateways that function as MP3PPs, but has actually increased their power. In this Chapter, we explore how dominant MP3PPs protect and extend their power, and how they make the transition from value creation to value harvesting. We explore the harm that this causes, and the inability of traditional forms of competition to correct this harm. When competition and the discipline of the market cannot limit abuses, regulation becomes necessary. Regulation of online activities must balance limiting harm from abuse of power against harm from premature or excessive regulation. We explore the conditions under which harm occurs, and under which regulation may be necessary. Historical precedents explain when regulation has been necessary in the past, and offer guidance for the form it should take now.

Appendix: Showing That There Is Monopoly Power in Search—How Would You Know?

There are standard measures of monopoly power. And it surely looks like monopoly power by those measures!

There are two measures that regulatory economists often use to determine if market power exists. In the USA, these tests are principally used to determine if mergers should be permitted or blocked, and they measure how much market power would be present if a merger occurred. By both measures, Google’s market power in search is way above the redline used in these tests. At present, Google’s market share in search globally is just over 90%.⁸ The level for a rebuttable presumption of monopoly power is anything over 2/3.⁹ While having 90% market share is not proof of monopoly power, it is a strong indicator. There is a second, more complex metric, the Herfendahl Hirschman Index (HHI) used to determine industry concentration and power. This measure is the sum of the squares of individual companies’ market share. If four companies each had an equal share of 25% the HHI would be 4 * (25 * 25) or 2500. If ten companies each had 10% the HHI would be 10 * (10 * 10) or 1000. The threshold used for monopoly power before a merger is to ensure that the HHI would not be over 1800.¹⁰ The HHI for concentration in search worldwide is over 8,000. Both of these metrics—simple market share and the HHI—would suggest significant concentration and significant monopoly power exist in search.

An additional standard measure of monopoly power is the ability to use excess profits to cross-subsidize additional businesses, and thus to extend the original monopoly . The argument is simple: If you have lots of money left over from one business, and can invest it in another, perhaps you are able to earn too much in the first business. Perhaps you have monopoly power in the first business. And if you can invest enough in another business, perhaps you can create a second monopoly. Google’s ability to create and subsidize Android , and to catapult it to a position of market dominance worldwide, could be taken as an indication that the market for search is not contestable, that is, no company can threaten to contest Google’s market share in search, and thus no company can exert pressure on Google to reduce the price of key words in search.

And, of course, there is both the theory and the history presented in the previous two chapters. As we have seen, Apollo’s 27% market share was sufficient for monopoly power in air travel search, and Google’s market share is much higher. Google’s profit margins provide clear indication that competition with Bing or DuckDuckGo is not limiting the prices of Google’s key words. Indeed, the prices themselves may be an indication that there is only limited competition. The most expensive cost per click, as of this writing, is <<best mesothelioma lawyer>>, at $935.71 per click.¹¹ Clearly, that price is in no way determined by Google’s costs to provide search , or by anything other than Google’s ability to charge whatever it wants in the absence of competition from other search providers.