University of Calgary PRISM: University of Calgary's Digital Repository Graduate Studies The Vault: Electronic Theses and Dissertations 2019-08-28 Google’s Antitrust Woes and Google Shopping White, Adam Joseph White, A. J. (2019). Google’s Antitrust Woes and Google Shopping (Unpublished master's thesis). University of Calgary, Calgary, AB. http://hdl.handle.net/1880/110865 master thesis University of Calgary graduate students retain copyright ownership and moral rights for their thesis. You may use this material in any way that is permitted by the Copyright Act or through licensing that has been assigned to the document. For uses that are not allowable under copyright legislation or licensing, you are required to seek permission. Downloaded from PRISM: https://prism.ucalgary.ca UNIVERSITY OF CALGARY Google’s Antitrust Woes and Google Shopping by Adam Joseph White A THESIS SUBMITTED TO THE FACULTY OF GRADUATE STUDIES IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS GRADUATE PROGRAM IN ECONOMICS CALGARY, ALBERTA AUGUST, 2019 © Adam Joseph White 2019 2 ABSTRACT In 2017, Google was fined 2.7 billion USD by the European Commission for its abuse of dominance when it promoted its Google Shopping service above rival comparison shopping services on Google’s results page. Comparison shopping services suffered from the conduct as they received less traffic as users selected Google’s prominently placed Google Shopping service. This thesis will question whether Google’s conduct was anticompetitive, or were they incorrectly fined for pro-competitive conduct? Additionally, Canada’s Competition Bureau and the United States’ Federal Trade Commission exonerated Google for the same activity in past years, so why would these agencies with similar goals and legislation come to different opinions regarding Google’s conduct? This thesis concludes that Google’s conduct is pro-competitive and that the United States and Canada were correct in their decision to cease the investigation. This thesis also identifies three reasons why the European Commission could have legally justified fining Google, even if it was not economically justified. The analysis conducted in this thesis could give guidance to other similar cases which Google is being investigated for, such as the investigation into Google Flights and Google Maps. i ACKNOWLEDGEMENTS I owe much to many people who have helped me get to where I am today. I’d first like to thank the Economics Department at the University of Calgary, and specifically, Dr. Church, who has been nothing but supportive and guiding during the past three years. Without Dr. Church, I would not be an inch of where I am today, and I owe him a great deal. Next, I would like to thanks my fellow graduate students and faculty of the Department of Economics as they have been nothing but supportive and helpful during my time there. I’d also like to thank my family for their constant support and encouragement, which I am very grateful for. Finally, I’d like to thank Jill for her sacrifices and willingness to give feedback about any arcane idea that pops out my mouth. I would not be where I am today without her. ii DEDICATION To Jill iii Table of Contents ACKNOWLEDGEMENTS........................................................................................................ ii DEDICATION .......................................................................................................................... iii Chapter 1: Introduction ...............................................................................................................1 Chapter 2: Facts of the Case ........................................................................................................7 2.1 Chapter Introduction ..........................................................................................................7 2.2 How Google Works ...........................................................................................................8 2.3 Unique Economics of Google .......................................................................................... 13 2.4 Vertical Search ................................................................................................................ 18 2.5 Overview of the Allegations Against Google ................................................................... 20 Chapter 3: Case Theories .......................................................................................................... 25 3.1 Chapter Introduction ........................................................................................................ 25 3.2 Market Definition ............................................................................................................ 26 3.3 Standard for Harm ........................................................................................................... 27 3.4 Barriers to Entry and Economies of Scale ........................................................................ 30 3.5 Network Effects and Externalities .................................................................................... 33 3.6 Theories of Self-Preferencing .......................................................................................... 36 3.6.1 The Economics of Raising Rivals Costs or Reducing Rivals Revenue........................ 36 3.6.2 Discrimination Theory. .............................................................................................. 41 3.6.3 Refusal to Deal Theory. ............................................................................................. 43 3.6.4 Tying Theory............................................................................................................. 47 Chapter 4: The Facts Found by the European Commission ........................................................ 53 4.1 The EC’s Document Regarding Their Decision in Google Shopping ................................ 53 4.2 EC’s Market Definition .................................................................................................... 53 4.3 EC’s Statements to do with Barriers to Entry ................................................................... 57 4.4 The European Commission and Network Effects ............................................................. 60 4.5 The EC and Google’s Self Preferencing ........................................................................... 61 Chapter 5: Comparison Between the Facts Found in this Thesis and The EC ............................. 70 5.1 Chapter Introduction ........................................................................................................ 70 5.1.1 Barriers to Entry in Search Engines. .......................................................................... 73 5.1.2 Network Effects in Search Engines. ........................................................................... 77 5.2 Market Definition ............................................................................................................ 81 iv 5.3 Theories of Self-Preferencing in Search ........................................................................... 86 5.3.1 Raising Rivals Cost and Search. ................................................................................ 86 5.3.2 Discrimination Doctrine in Search. ............................................................................ 93 5.3.3 Refusal to Deal in Search. ......................................................................................... 96 5.3.4 Tying in Search. ...................................................................................................... 100 5.4 Comparison Between Findings of EC and This Thesis ................................................... 107 5.5 General Comments about the EC Decision ..................................................................... 108 5.5 What’s Next for Google and the EC ............................................................................... 117 Chapter 6: Conclusion ............................................................................................................. 121 References .............................................................................................................................. 125 v Chapter 1: Introduction On June 27, 2017, the European Commission (EC), the European Union’s competition authority fined Google USD 2.7 billion for their abuse of dominance in promoting its Google Shopping service. The strangest thing about this fine was not the fact that it happened, it was that the United States’ Federal Trade Commission (FTC), along with the Department of Justice (DOJ) and the Competition Bureau in Canada, decided that Google’s conduct was not anticompetitive a few years earlier. Was Google’s conduct anticompetitive? Also, why would these antitrust agencies with similar legislation and goals both come to different conclusions with regards to this case? The why behind the difference of opinions between these agencies is the question this thesis will hope to explore and analyze. This thesis concludes that Google should not be found guilty for promoting Google Shopping and that the United States and Canada were correct in their decision to exonerate Google. Larry Page and Sergey Brin launched their search engine in 1998 facing down incumbents like Yahoo! and AltaVista. Nowadays, Google handles over five billion searches a day (Sullivan, 2017), with profits reaching over 26 billion USD (Molla, 2017).