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Pearlstein on Google

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Steven Pearlstein writes in the December 14 issue of The Washington Post that the antitrust authorities should not allow Google to make any more acquisitions.  His argument seems to be that Google is too successful and too big and therefore we need to slow it down and allow others to catch up.

Pearlstein’s approach is at odds with antitrust economics and antitrust history and would likely harm both consumers and innovation.

Pearlstein notes that “It is worth remembering that aggressive enforcement of the antitrust laws has been a crucial part of the history of technological innovation in this country, enforcement that allowed AT&T to be supplanted by IBM, IBM by Microsoft and Microsoft by Google.” This is a nice sounding sentence, but there’s no evidence that it is true.

A recent paper by Robert Crandall of Brookings and Charles Jackson of The George Washington University prepared for the Technology Policy Institute’s project on Antitrust and the Dynamics of Competition in High-Tech Industries examined in detail the major high-tech monopolization cases of the last half of the twentieth century:  IBM, AT&T, and Microsoft.  In each case, “the ultimate source of major changes in the competitive landscape appears to have been innovation and new technology – technology that was apparently not unleashed by the antitrust litigation.”

  • IBM lost its dominance because of the advent of personal computers, something the government never envisioned when it filed its suit in 1969.  Thirteen years later, the government asked the court to dismiss the suit because it was “without merit.”  Since then, IBM has transformed itself from a computer equipment manufacturer into the service company that it largely is today.
  • AT&T was never supplanted by IBM.  The Justice Department’s antitrust decree and the FCC’s regulatory actions shaped the competitive landscape in telecommunications.  More important, however, was the development of high-speed Internet access and platform-based competition from wireless and cable TV, which occurred long after the consent decree.
  • Finally, whatever the merits of the Microsoft case, it likely had little effect on the emergence of Google.  Microsoft remains dominant in desktop operating systems, but faces competitive threats from emerging technologies – smartphone operating systems, cloud computing, and virtual appliances.

Pearlstein suggests “it would probably be counterproductive to prevent Google from using its money and talent to expand into new areas.”  He believes, however, that the government should not allow “Google to buy its way into new markets and new technologies.”  In another paper prepared for the TPI project, Bruce Owen of Stanford (and former chief economist for the Antitrust Division) notes that while “the law distinguishes ‘organic’ (internal) integration from integration by acquisition…from an economic point of view there is no good reason for the distinction.”  He also points out that “Empirical evidence that vertical integration is harmful is weak, compared to evidence that vertical integration is beneficial – even in cases where market power appears to be present.”

Finally, according to Pearlstein, “by swooping in and buying these promising firms, Google forecloses on the possibility that they might be purchased by companies such as Microsoft or Facebook, which could use them to mount a serious challenge to Google’s dominant position.”  It would be news to learn that Microsoft and Facebook don’t have the financial wherewithal to compete with Google in the marketplace for acquisitions.  Indeed, such bidding wars can be very beneficial to innovation by increasing the return that entrepreneurs realize on their investment.  The $750 million price that Google paid for AdMob resulted from a bidding war between Google and Apple.  An antitrust policy that takes the biggest players out of the market for small companies would reduce the potential returns to innovation and therefore would reduce the amount of innovation.  Competition to acquire innovative new companies is a major aspect of competition that the antitrust authorities should take into account when deciding whether to challenge these acquisitions.