Googling a better definition of competition

If you were to receive an excellent service, free of charge, would you mind if the company providing that service gained the loyalty of over 80% of consumers?

Well, according to government officials in Europe and the United States, you should in the case of Google.

Google is now mired in legal proceedings both in Europe and in the United States over alleged abuses of its large share of the Internet search engine and the online advertising markets. The logic is that large market shares by one company implies "market power," meaning the ability to impose higher prices or other forms of wrongdoing on consumers than those that would prevail if there were more competitors.

However, that vision of competition is hotly contested in academic circles. The threat of new entrants or – more importantly – new substitute products (think e-mail replacing snail mail) provides strong incentive for constantly innovating, reducing prices and satisfying consumers.

Economy historians have delved into famous historical cases of firms being accused of abusing their market power and they found that the accusations were ill-founded. In these cases, with constant innovation, prices fell while consumer satisfaction rose. Moreover, market shares declined with the arrival of competitors and when consumers felt that the service was not the best they could get.

Take the similar case of Microsoft. Without taking into account quality improvements, the inflation-adjusted price of the Windows programs provided to computer manufacturers fell by 18% during the six years before Microsoft was taken to court under the same logic now applied to Google. Microsoft's dominance also has gradually been eroded in many markets as other innovators produced better software than it did.

Between 2003 and 2005, Windows Media Player was the biggest multimedia player, followed by RealPlayer. Since then, both have lost huge market share to Apple's new products.

If a company ceases to innovate and produce high quality goods that consumers crave, it will disappear even after having been the dominant player. Think of IBM, AltaVista, AOL, RIM, Palm, Nortel, Polaroid and Sony's Walkman, all seen at one time as dominant players in their markets only to be replaced rapidly by new and better products.

In the case of Google, consumers have access to other free search engines and hence will be very sensitive to changes in the perceived quality of the results they get. The large market share of Google is the result of a decade-long effort to constantly innovate and offer an efficient and user-friendly search engine. If that was not the case, consumers would have flocked away to other alternatives and Google knows that.

The point is not to assert that Google is the best, it's about how consumers benefit. If they do not benefit from Google's services, they will abandon it. In fact, this already seems to be the case. In the United States, Twitter and Facebook are leading users to received their news from their own platforms rather than Google's news platform.

Judging competition by any other standards will most likely slow down innovation and harm consumers in the long run. Regulatory authorities should catch up with the academic literature on this. And they should also consider that perhaps Google is dominant simply because its free services satisfy consumers.

Michel Kelly-Gagnon is President and CEO of the Montreal Economic Institute. The views reflected in this column are his own.
* This column appears in Sun Media newspapers, published both in several of Canada's key urban markets (Toronto, Ottawa, Calgary, Edmonton, Winnipeg and London) and in its 28 community dailies.

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