Google – a natural monopoly?

I. Introduction

In the vast landscape of technology, Google stands out as a global giant, operating the world’s largest search engine, Google Search. The sheer influence and market power of this tech behemoth has sparked debates over whether Google qualifies as a natural monopoly, which would mean that it could be subjected to ex-ante, utility-like regulation combined with separation. This contribution delves into the ongoing discourse surrounding Google’s classification as a natural monopoly, analyzing contrasting perspectives, exploring potential regulatory approaches, and analyzing their impact on enforcement. The argument built below leans on an in-depth literature review to offer insights into the complex realm of regulating a tech giant like Google. Finally, for its analysis, this contribution focusses on Google Search as it is Google’s main service and the debate on the classification of Google as a natural monopoly has been related to this service specifically.

It is important to note at the outset that Google, and its ‘core platform service’ (CPS) Google Search, is already regulated in Europe by the Digital Markets Act (DMA). This landmark piece of legislation requires gatekeepers, like Google, to adhere to a list of obligations to achieve fair and contestable markets. For Google, the most significant among these obligations are restrictions on self-preferencing outlined in article 6(5) and data-sharing requirements for search engines specified in article 6(11). These obligations focus on preventing the incentive of Google to foreclose competitors adjacent to its Search service. This adjacency can be either vertical, like the Google Shopping unit running on top of Google Search, or horizontal – Google Search vis-à-vis rival search engines. The self-preferencing obligation prohibits foreclosure activities in vertically related markets – i.e. Google prioritizing its own shopping service via its proprietary search engine. The data-sharing requirement creates a level playing field in the search market by giving rival search engines access to Google’s vast amount of data, which may otherwise prove to be a barrier to entry.

Although the DMA already addresses some antitrust concerns as discussed above,  authors maintain that it may be insufficient to fully curb competitive harms. Therefore, this contribution evaluates the necessity for regulation of Google beyond the DMA, in the form of separation and other utility-like regulatory measures.

II. Regulating public utilities

II.1 The natural monopoly framework

As mentioned in the Introduction, this contribution focusses on the natural monopoly rationale for instituting ex-ante regulation and hence asks whether Google Search can be seen as a natural monopoly.

The ‘natural monopoly’ theory posits that a single firm is most efficient in producing specific outputs considering the following conditions are present: large fixed costs, decreasing average costs, and a single firm capable of meeting the entire market demand. The critical test is whether a single firm is the most cost-effective producer, known as the concept of subadditivity, which is affected by factors like economies of scale and scope.

III. Applying the natural monopoly framework to Google search

III.1 Business model of Google Search

Google Search, as a flagship service of the tech industry titan Google, operates as a unique entity in the digital space. While offering its search engine service free of charge to users, Google generates revenue through its online advertising limbs AdWords and AdSense, creating a multi-sided market with network externalities. The primary cost structure involves data-related fixed costs associated with IT infrastructure and data centers, along with expenses related to traffic acquisition and research and development.

III.2 Debate on Classification

There has been an extensive debate on whether Google Search can be considered a natural monopoly. First, some authors argue that Google Search should not be viewed as a natural monopoly but rather as an essential facility, which could be addressed through competition law means. Second, the existence of commercially viable rival search engines may prove that Google Search is not a natural monopoly. In addition, according to this view, the very existence of anti-competitive practices, like self-preferencing, prove that Google Search is not able to price competitors out of the market through regular, above-cost, pricing. 

However,  this post’s author believes that the latter may also be explained through product differentiation, strategic market presence or user inertia. Product differentiation may exist for search engines like DuckDuckGo which differentiates itself by increased privacy. This type of differentiation creates new product markets. End users and advertisers in this new product market are more likely to stick with DuckDuckGo over Google Search despite increased prices because the products are less substitutable. Even though Google may be cheaper, DuckDuckGo is more private, which some end users may value above the reduced prices. Moreover, Bing’s sustained presence may be attributed to the substantial financial backing from Microsoft, ensuring a strategic foothold in the market. Lastly, the inertia of users of Microsoft Edge who may find it convenient to stick with Bing as the standard browser in that search engine could contribute to its resilience against Google’s potential pricing actions.

Another scholarly view contends that Google Search does not fit the natural monopoly model due to the rapidly evolving nature of digital markets, suggesting that the static conditions upon which the natural monopoly framework relies may not endure amidst dynamic technological advancements. According to this perspective, while Google Search may currently display characteristics of a natural monopoly, the relevance of this classification is transient, as it is expected to evolve in the near future.

An opposing author contends that Google Search aligns with the natural monopoly classification, asserting that, akin to conventional network industries, the substantial fixed costs involved in developing a search algorithm and platform, coupled with negligible marginal costs for providing additional search services, create conditions favoring a cost structure that maximizes efficiency with a singular provider. Arguments have also been raised that externalities support this assertion. However, according to this framework on the need for regulation, externalities are a separate rationale for regulating a certain industry, rather than a supporting factor within the natural monopoly rationale.

 

See the above infographic for a visual overview of the arguments on a continuum.

III.3 Interim Conclusion

Within the natural monopoly framework, and based on the above literature review, it may be asserted that Google Search qualifies as a natural monopoly, considering its cost structure. Moreover, the existence of competitors may be explained by product differentiation, strategic market presence or user inertia aside from indicating that Google Search is not a natural monopoly. However, the unique features of digital markets, including multi-sided structures and constant technological changes, raise questions about the enduring nature of Google Search’s natural monopoly status. This means that ongoing evaluation of the applicability of the framework is required.

IV. Regulating Google: how?

IV.1 Regulatory Continuum

The debate on regulating Google involves exploring various enforcement approaches beyond existing models. The optimal regulatory strategy for Google Search is a nuanced topic, requiring perspectives from both advocates for and against intervention.

The authors cited above who believe  Google Search cannot be classified as a natural monopoly maintain that utility-like regulation is not a fit approach; they support the idea that competition law as it is, is sufficient.

Alternatively, some authors nuance the above argument by maintaining that Google Search might not require utility-like regulation, as competition law, based on cross-market oligopolistic competition, is sufficient. Such competition arises from ecosystems like Apple’s, which provides enough competitive pressure limiting the conduct of Google Search.

An opposing view supports the notion that platforms, like Google Search, are characterized by problems relating to entry barriers, conflict of interest, use and control over data and bargaining power imbalances. These challenges – notwithstanding the natural monopoly narrative – may necessitate reforms in competition law or the implementation of utility-like regulation.

The last line of thought contends that both the implementation of utility-like regulation and separation is necessary. This reasoning is based on the classification of Google Search as a natural monopoly leading to the necessity of preserving its cost-efficiency and preventing foreclosure problems. According to this view, Google Search should be separated from Google’s specialized services like YouTube, Waze, DoubleClick, Google Shopping, or Gmail.

See the above infographic for a visual overview of the arguments on a continuum.

IV.2 Interim Conclusion

There are different beliefs surrounding the need for regulatory intervention. However, it may be argued that platform separation could be most effective to eliminate incentives for anti-competitive practices, such as self-preferencing.  Specifically, given Google Search’s natural monopoly status, theory maintains that it must be the sole player in search markets to ensure cost efficiency. Consequently, regulated entry and price control, following separation between Google Search and Google’s specialized services, emerges as the most suitable regulatory measure, aligning with the natural monopoly classification.

V. Implications for enforcement: implementing separation

Implementing separation is intricate, requiring careful delineation of separation lines and vigilant elimination of foreclosure incentives. Understanding vertically related markets is crucial to this endeavor. Vertically related markets to the search engine market are specialized services which operate on the search market. For instance, in the case of Google, markets like YouTube or Google Shopping are accessed by searchers through the search engine. Recent legal cases underscore the significance of preventing Google from unfairly favoring its specialized services over competitors. Hence, it is sensible to advocate for vertical separation along these lines.

In the view of this blog’s author, in addition to the separation, Google must not be allowed to enter any other vertically related markets with new services. This ensures that Google refrains from anti-competitive foreclosure practices. Prophylactic bans, akin to Tim Wu’s separation principle, may be necessary to prevent entry into vertically related market segments. However, supervising Google’s operations and product development to prevent entry into vertically related markets poses several challenges, such as clearly identifying the markets where the ban applies. Additionally, one needs to consider the resource-intensive monitoring of all of Google’s new product lines.

VI. Conclusion

In the view of this blog’s author, Google Search can be classified as a natural monopoly due to its data-related fixed costs, declining average costs and capacity to serve the whole search market. Some critics have argued that the existence of competitors offers proof to the contrary. However, this may be explained due to other factors like product differentiation, strategic market presence or user inertia.

Regulating Google as a natural monopoly is a complex task. The most fitting approach involves separation along the lines of Search and the specialized services, and the application of traditional price and entry regulations. These measures would arguably effectively eliminate incentives for foreclosure and ensure optimal cost efficiency. Implementing and overseeing this regulatory approach presents significant hurdles, necessitating a balanced supervisory style to effectively enforce both separation and prophylactic bans.