Sunday, 26 April 2015

Is competition policy outdated?

As the economy changes so should competition policy. But does it? The "new economy" or the "information economy" or the "knowledge economy" or whatever you want to call it has altered the way the economy works. Changes in technology, in particular information and communication technology (ICT), have become the major drivers of change in the economy and of economic growth. But has competition policy kept up with this change? May be not.

The European Commission’s antitrust case against Google is the latest in a series of attempts to prevent tech giants from "monopolising" EU markets, or so we are told. But it can be argued that past cases against Intel and Microsoft demonstrate the need review what may be an outdated competition policy in the EU. And not only in the EU.

The European Commission has formally charged Google with anti-competitive practices, the latest twist in a case that was first launched way back in 2010. The EU’s competition watchdog accuses the US tech giant of systematically favouring results from its own specialist search engine, Google Shopping, over competitors like Amazon and eBay. And this, it is alleged, has had an adverse impact on competition and consumer well-being.

Diego Zuluaga has been looking at the case and argues, in an article at, that,
Superficially, it would indeed seem that Google holds a dominant position online, with a 92 per cent share of the EU market for general (known as ‘organic’ or ‘horizontal’) search. Google has also been expanding its offering of specialist (a.k.a. ‘vertical’) search engines for items like flights and consumer products. Does this mean that competition online is being undermined, and that regulatory authorities should intervene to put it right?
It could of course be that they are dominant simply because they are better than the competition.

Zuluaga goes on to say that the answer to his question is, Not necessarily.
The test for any antitrust investigation must be whether competition, not individual competitors, are being harmed. And by any available measure, competition and specialisation in online search services is thriving. New players focusing on specific market niches, from SkyScanner for flights to DuckDuckGo for greater privacy, have emerged in recent years. In the specific case of comparison shopping which the Commission is worried about, it does not look like Google Shopping is catching on, despite the tech giant’s best efforts: In three key EU markets – Germany, France and the UK – Google’s own product search engine is a marginal player, with Amazon, eBay and local competitors (Idealo in Germany, Fnac in France) boasting multiple times the number of user visits of Google Shopping. What is more, the gap between Google’s own service and its leading competitors is growing, if anything.

Intuitively, this makes sense. If I want to purchase Malcolm Gladwell’s latest bestseller, I am much more likely to browse for it on Amazon, as the latter is reputed for its excellent catalogue, user reviews and related recommendations. Rather than search for it on Google and then look for the best result, I will go to the Amazon website directly. The same goes for flights, hotels, restaurants and any other topic where there is a wealth of specialist search services. Even for those who tend to go through Google, competing options are still there – one only need scroll down to see them. This makes it hard for Google to divert large amounts of traffic to its own services – and it helps explain why Google Shopping has not taken off, as we might have expected it to.
A question one could ask is, Have past actions by competition authorities in previous digital cases been appropriate? May be not, just think of the Intel and Microsoft cases.
In 2009, the Commission fined chip-maker Intel more than €1bn for offering ‘predatory discounts’ to computer manufacturers, which allegedly harmed Intel’s competitors. Yet, by all measures, competition in the chip sector was fierce during the period of Intel’s anti-competitive behaviour. Chip prices declined by up to 75 per cent, while performance grew tenfold. Far from increasing at the expense of competitors, Intel’s market share remained stuck at 80 per cent, and the fluctuations in its share are strongly correlated with new product launches, both by itself and by rivals like AMD.

How about the other previous high profile digital probe, the 2004 ruling against Microsoft? Commission officials worried at the time that the company founded by Bill Gates was strengthening its grip on all PC-related products and services, thanks to its dominance of computer software. Barely a decade later, it is astonishing how things have changed: Microsoft still provides software for a lot of the world’s PCs, but the rise of smartphones – where Google’s Android and Apple’s iOS prevail – has made its share of the overall software market (for smartphones, tablets as well as PCs) shrink to as low as 20 per cent, according to Goldman Sachs research from 2012. Innovation killed the software star.

Both the Intel and Microsoft cases illustrate the shortcomings of EU competition policy when it comes to the digital sector: Despite Intel’s large market share in the chip market, competition was no less aggressive, and consumers still benefited from steadily dropping prices and ever better performance. And even though Windows was the dominant player in software in 2004, innovation outside the PC market – which no one, least of all Microsoft, foresaw – has turned it into one among several competitors in a much larger market.
Aa obvious point is that competition policy rulings should be grounded in sound economic analysis. It is not clear that they have been.
DG Competition has enormous powers to intervene in the internal market, acting as judge, jury and enforcer of antitrust proceedings in the EU. This makes it imperative that its rulings be rooted in sound, convincing economic analysis. Such analysis seems to be lacking in the case of Google Shopping, as it was in the Intel and Microsoft rulings. The digital economy lies at the heart of economic growth in the 21st century, so getting antitrust wrong in this sector will have a longstanding negative impact on innovation and growth in Europe.
A lesson from this is that the new technology underlying the new economy has changed the way companies do business in all sorts of sectors, and competition policy, in all countries, must evolve with it. Is not clear that it has in many countries, including New Zealand.

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