Monopolies, Like Google, Are Innovators, Which Is Good for Consumers

Last week, the European Commission brought new antitrust charges against Google, alleging the company unfairly favors its own services on smartphones running its Android operating system. In a separate European case, Google stands accused of manipulating its search engine to harm rival firms. Both cases rest on the assumption that Google’s dominant position creates a monopoly that merits exacting government regulation to prevent the company from trampling competition. But this premise overestimates regulators’ abilities — and understates the resiliency of dynamic markets.

Sectors dominated by one or two firms tend to stagnate, or so goes the conventional wisdom. But real-world experience belies this view. The world’s Web users have preferred Google to other search engines since the early 2000s, and Android smartphones to all other phones since 2010. In this time, search results have moved far beyond a series of blue links. For many queries, users now get an actual answer, rather than a list of web pages to investigate. Meanwhile, today’s smartphones are much bigger and faster than their predecessors from six years ago, offering desktop-like multitasking and even virtual reality experiences.

Google is no stranger to overtaking dominant firms by entering new markets. When Google launched Android in 2008, most smartphone buyers opted for an iPhone or BlackBerry. While the iPhone remains popular among affluent consumers, Android is now on top — especially in the developing world, where Android devices are much more affordable.

Does Android’s success mean it should be illegal for Google to promote its other services on Android devices? Not at all. Were Google to exert too much control over the Android ecosystem, it would risk alienating independent developers of Android apps — and, in turn, consumers who value alternatives to Google’s own apps.

To antitrust regulators, competition suffers when too few viable firms exist in a market. Yet even a hyper-dominant incumbent won’t rest on its laurels while enjoying monopoly profits if doing so will attract newer, nimbler entrants. In fact, Google’s risky bet on Android could be seen as an attempt to prevent rivals like Microsoft and Apple from dominating the fast-growing smartphone market. Competitive discipline comes from many angles, and dreary monopolies are not born simply because they lack head-to-head rivals.

Some economists dismiss the threat of competition as effective in deterring harmful behavior only in markets with minimal entry barriers and sunk costs, but this presumes that would-be entrants focus on markets as they exist today. For example, when Uber upended the local transportation market, it didn’t need to buy an automobile fleet or get permission from city taxi commissions. Had taxi companies foreseen the vulnerability of their business model, cabs might have flocked to smartphone apps and electronic payments years ago.

Even some of the European Commission’s antitrust counterparts recognize the pitfalls of going after Google. Canada dropped a multiyear probe of the company just last week, while the United States Federal Trade Commission accepted modest concessions from Google in 2013 to settle a wide-ranging investigation. In American competition law, determining whether a dominant firm has harmed consumers in a particular case is rarely clear-cut. Wrongly punishing a company for beneficial conduct, however, is far more dangerous than letting it get away with anticompetitive behavior, as U.S. Court of Appeals Judge Frank Easterbrook explained in a seminal 1984 article.

How should governments react to successful, disruptive firms as they seek to reap the fruits of their innovation? This question will only grow in importance as technology advances. As PayPal co-founder Peter Thiel has observed, the best entrepreneurs look to escape competition, not defeat it. Creating new markets, or reinventing existing ones, is the path to riches that Google, Facebook and Apple all have followed. Some fear that this winner-take-all trend portends less innovation and greater economic inequality. But this pessimism ignores humans’ limitless capacity to desire “more” — to create unforeseen opportunities to supply us with products and services we never knew we wanted.

Yes, meeting this demand makes some people incredibly rich, but it enriches consumers in ways that conventional metrics struggle to measure. If governments reward such success with a regulatory straitjacket, we will pay a steep price.

Originally posted at the New York Times's Room for Debate.