Google\'s Antitrust Behavior and the Benefits of Imperfect Competition

Antitrust Practices and Market Power: Google Antitrust Behavior

Economic theory expresses that competition contributes substantially to the efficient operations of markets, and hence to the improvement of a nation's wealth status. Antitrust laws seek to foster competition in the marketplace and to consequently ensure that the welfare of consumers is maximized through the provision of low-priced high-quality products. This the laws do by preventing the emergence of cartels and monopolies, which impede on competition by creating barriers to entry, with the help of which they are able to obtain market power and consequently drive market prices to favor them. Although monopolies may result from either government action or natural reasons, in which case they are referred to as government and natural monopolies respectively, most monopolies are formed through exclusivity contract arrangements, mergers, acquisitions, and collusion. Antitrust laws work at limiting these.

The Costs of Antitrust Behavior

A number of companies have engaged in anticompetitive practices in the past and found themselves having to part with substantial sums of money for running afoul of the law. Microsoft, for instance, had to pay up nearly $70 billion in fines and legal fees for bundling its Microsoft Windows product with Internet Explorer, because the antitrust division found the company's actions an impediment to competition, and a violation of the Sherman Act (Antitrust Laws, 2014).

Kodak, which once controlled more than 90% of the camera and film industry, was in 1954 accused of 'product-tying', and hence violation of the Clayton Act, by including a fee that covered the processing and delivery expenses in the pricing structure of its Kodacolor film (Antitrust Laws, 2014). The company was, as a result, forced to license such processing to third parties (Antitrust Laws, 2014).

More recently, Google was accused of abusing its search dominance by favoring its own products over those of competitors when displaying search results. Nextag Shopping Website and customer review website Yelp have repeatedly accused Google, which controls 67% of the market, of ranking its own products above those of competitors in search results. Google's rivals cite an example in which a Google search for 'Best New York Sushi' displays Zagat, a Google-owned restaurant review site, as the first result, though this is not the information the customer is searching for (Marrs, 2012). The Federal Trade Commission (FTC) investigated these accusations under the Sherman Act of 1914, which illegalizes any kinds of trade restraints, whether indirect or direct (Marrs, 2012). Although the case went in Google's favor, the company had to incur the direct costs of lobbying and private litigation, as well as the indirect opportunity costs of management time and deterrence of beneficial activities, totaling $25 million. I have included the relevant newspaper article in the references section of this text.

The Benefits of Monopolies and Oligopolies

Antitrust laws may create an image that pits imperfect market structures as bad for society. This is, however, not always the case. Such market structures are characterized by a small number of firms controlling a significantly large market. Inefficiency arises from the fact that the firms, being price makers, set their prices above competitive rates, and in so doing, go against the Pareto optimality condition that requires prices to be set at the point where MR=MC. The monopoly dead weight loss concept arises from this; since the firm enjoys market power, it makes supernormal economic profits from the high commodity prices, but a proportion of these profits cannot be accounted for (dead weight loss).

Despite their inefficiencies; i) oligopolies and monopolies are quite beneficial to society because with their large profit base, they are able to provide substantial revenue to the government in the form of taxes, which implies that more funds are channeled towards the betterment of society's well-being, and ii) Monopolies and oligopolies are not necessarily bad; Google for instance, has monopoly power over other search engines, but cannot be regarded as an inefficient company that does not seek innovation (Marrs, 2012).