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Posted at 1:40 PM ET, 12/16/2010

Pearlstein hits back at Google on antitrust

By Cecilia Kang

Google picked apart a column by The Post's Steven Pearlstein about growing antirust concerns swirling around the search giant.

Post Tech wanted to hear more and asked Pearlstein to respond. Here's his take:

Google has done a good job at reciting the predictable antitrust lawyer talking points (efficiency, good for consumers) to support the proposition that it should be allowed to buy any company not in their core business area. The problem for Google is that it is so good it now has what, for all intents and purposes, amounts to a monopoly in the key Internet portal market for web search. That means the law requires that it be treated differently. Not true in the case of many of the other acquirers it cites. Is this unfair? Does this punish a successful company? Yes and yes. But the basic premise of the anti-trust law is that this degree of unfairness is a reasonable price to pay to maintain robust competition in other markets. In the short run, consumers may be denied the benefits of the new products or the lower prices that might result from such a non-horizontal merger. But that does not end the conversation in the case of a monopoly buyer, because there is a larger issue involved -- one that goes well beyond the competitive dynamic of the small market niche of the acquired company, which is the limit of most Hart-Scott-Rodino analyses. The point of the column was to suggest the proper analysis is now the larger market for Internet search and services, for which Google is a dominant portal.

Google in its posting essentially admits that there are synergies that come from these non-vertical acquisitions. One plus one equals three. And this benefit accrues not only to consumers, as Google would like you to believe, but also to the competitive benefit of Google in both its core business and in the new business it is entering. We have lots of examples of this, but Google cites one that makes the point magnificently: Google's entry into the mapping space that eventually brought us Google Maps. It’s a wonderful service and we all appreciate it. But it would be hard, as a factual matter, to argue that this has not helped to strengthen Google's search monopoly. And the fact that Google Maps was able, rather quickly, to blow past MapQuest, the previous dominant firm in that space, is a pretty good indication of what is likely to happen in any adjacent market that Google wants to enter.

For the moment, I'm not proposing that Google be prevented from entering these adjacent markets -- as I said, I think the industry is so dynamic and fast-changing that this kind of structural remedy is unwise, at least at this point. But I do believe a less onerous structural remedy -- preventing Google from buying its way into an adjacent market -- is reasonable, if for no other reason than it forecloses the possibility that another major player might acquire the company in order to achieve the scale and scope necessary to challenge Google. As Google's lawyers know full well, foreclosure is a well-recognized argument in assessing the competitive impact of a merger, particularly one done by a monopolist.

This posting tells me that Google is not yet interested in joining a serious discussion of what the rest of us should do about its legally obtained monopoly. The company wants to grow and produce great new products and services and make more money -- all perfectly legitimate and healthy instincts. From an economy and industry-wide perspective, however, it would be better to let some other companies grow and some other companies come up with these great new products. Google's aggressive acquisition strategy, combined with its dominance, makes this unlikely. The tipping point has now been reached.

Related story:
Time to loosen Google's grip?

By Cecilia Kang  | December 16, 2010; 1:40 PM ET
Categories:  Antitrust, Google  
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I'm not sure where Pearlstein is getting his understanding of antitrust law. But it is wrong.

More specifically I can't square his statement that the law requires a monopolist to be treated differently when it makes acquisition with his assertion that the HSR process is somehow limited to considering "niche markets."

The HSR Act is purely procedural. It requires notification and observation of a waiting period to allow DOJ and the FTC to conduct an investigation into whether the transaction will substantially lessen competition or tend to create a monopoly. Where that is the case, those agencies can sue under that Clayton Act.

Pearlstein notes that in addition to horizontal effects, vertical transaction can also raise competition issues (in my opinion rarely), but the agencies regularly consider that possibility, and have challenged transactions on that basis.

What the agencies don't do (at least in this country) is what Pearlstein suggests in his original column: they don't challenge transactions based on "conglomerate effects." That is they don't object to the combination of unrelated businesses because it is more convenient for customers to deal with one supplier and non-integrated competitors might be disadvantaged. This is because the trade off that Pearlstein suggests - that customers should be harmed in order to protect competitors - is simply not what U.S. antitrust law is about.

As to Google Maps, one can choose to believe that it blew MapQuest out of the water because it was integrated with Google search. Or one can compare the two products and realize how vastly superior for customers Google Maps is. Integration might have helped, but in my view the innovation was the key.

Posted by: amiller5 | December 17, 2010 11:12 AM | Report abuse

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