LStevensECON605FinalProject

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Feb 20, 2024

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Lauren Stevens Final Project ECON605 Fall 2023 1. The Stock Market & Department of Justice’s Case Against Google a. The Adjusted Closing Price summary chart provided in the project prompt highlights Alphabet/Google (GOOG), Amazon (AMZN), and the Nasdaq Composite index (^IXIC). If the market were worried about the DOJ’s inquiry, one would expect to see a significant dip in the Google adjusted closing price, as well as a potential dip in other Big Five firms who could be impacted by the outcome of the case, including Amazon and Apple. There could also be a spike in adjusted closing price for Google’s competitors. There are several factors which could cause investors to move money in the market, decreasing Google’s stock value. First and foremost, if the DOJ wins this case against Google, business in the tech industry could completely change. Investors may be concerned not only about Google’s ability to weather these changes – in no small part due to the enormous revenue hit they are likely to see as a result – but also about other Big Five firms, like Amazon and Apple, who would face the same changes and potentially be hit with similar DOJ suits. Additionally, the case could divert Google’s attention away from innovating to be competitive in the Artificial Intelligence (AI) arena. This could potentially result in a competitor with strong AI, such as Bing, gaining a strong foothold without much competition from Google. Finally, investors will be watching for signs that Google’s leadership is distracted by the suit as Microsoft’s was during the DOJ’s antitrust case against them in the 1990s. If Google leadership shows signs that the case is impacting operations, investors are likely to move their investments to other companies. b. I do not see evidence that GOOG’s share price has been significantly impacted by the DOJ’s inquiry. While the summary data does show some dips with timing that suggest some impact by the inquiry, those dips also correspond to dips in Amazon and the Nasdaq Composite suggesting other factors could be at play aside from the antitrust case. Case analysis by experts indicate that Google’s leadership has not faltered as a result of the trial and investors are still confident in Alphabet and Google’s leadership. Interestingly, a recent Yahoo Finance video also suggests that the concern by investors about Google isn’t that it “has too little competition, but that it has too much competition.” That said, analysts and investors still seem confident in Google’s ability to survive the DOJ case. 1

2. Google’s Alleged Anti-Competitive Behaviors as Identified by the Department of Justice The Department of Justice has accused Google of violating the Sherman Act sections 1 and 2 by engaging in multiple anti-competitive behaviors to create and maintain a “self- reinforcing cycle of monopolization.” Three main anti-competitive behaviors named in the DOJ’s case are: a. Exclusionary Agreements: Google holds agreements with majority of major device distributors. These agreements make Google the preinstalled, default search engine on these firm’s devices and disallow these firms from preinstalling any other search engines on their products. The DOJ alleges that these contracts are a barrier to entry for potential Google competitors, making it impossible or too difficult for other firms to get alternative search engines in front of users. While exclusionary agreements can be procompetitive in some cases, such as when they involve combining complements to benefit consumers, the DOJ alleges that these agreements are anti-competitive because of their specific terms. These terms include massive payouts to distributors for searches performed via Google on their devices, something potential competitors simply could not afford to do. There is also specific concern surrounding Google’s deal with Apple; Apple’s main competitor, Android, also has Google as its default setting, but because Android shares the same parent company (Alphabet) as Google, these deals could be seen as competitors agreeing to have the same feature. The DOJ asserts that these agreements create barriers to entry for potential rivals to stifle competition and negatively impact innovation because firms have little or no incentive to create a competing product because of these deals either because they cannot compete with the terms of the deals or because a firm, like Apple, benefits more from the deal with Google than they would from creating their own product. b. Tying: The DOJ further asserts that the agreements Google has in place to make its search engine the default on an estimated 80-90% of devices in the United States is a case of tying. Tying is an anticompetitive action in which users are forced to acquire one product when purchasing another product – in this case Google’s search engine with their device purchase. The DOJ alleges that this harms consumers and potential rival firms by removing user choice, ignoring user preference, and preventing competitors from getting their products in front of consumers. c. Acquiring competitors to monopolize the ad tech stack: In addition to device defaults, the DOJ alleges that Google illegally acquired competitors to monopolize the ad tech stack, putting the firm in a position to control the supply and demand sides of the market. They claim that these acquisitions allowed Google to “obtain control over key…tools used by website publishers to sell advertising space.” DOJ says that these acquisitions mean that Google now has control over all three major components of the digital advertising market: sell- side inventory, the ad exchange, and buy-side demand. The DOJ claims that 2

Google’s majority market share is monopolistic and has allowed Google to engage in additional anti-competitive behaviors, such as distorting auction competition and tying products to force adoption of Google’s advertising tools. The DOJ claims that these behaviors have prevented potential rivals from creating alternative options and hindered adoption of alternatives by publishers and advertisers. d. The Bottom Line: The DOJ alleges that Google has maintained its market share in the search engine and digital advertising spheres through illegally monopolistic, anti-competitive behaviors. 3. Google’s Response to the DOJ’s Allegations Regarding Anti-Competitive Behaviors a. Exclusionary Agreements: Google’s main defense is that these agreements are not, in fact, exclusionary. They assert that, while their service is preinstalled as a default, users are free to use alternative engines if they choose to do so and can even change the default if they wish. They have even cited the example that some users have used Google to search for other, alternative search engines such as Yelp and that this is not disallowed by the agreements they have in place. As such, Google says, there is room for competition. They also allege that payouts to partner companies are not anticompetitive. Google has compared these payments to the deals between grocery suppliers and grocery stores, saying they are simply paying these distributors to place their product in the same way a supplier would pay a grocery store for product placement. In other words, Google claims that the preinstallation and default setting is product placement they pay for as a competitive strategy to get in front of users. On the point of innovation, Google says that their vast amount of user data from their years of experience and user popularity is actually helping them – and the rest of the tech industry – innovate, creating better, more user-friendly, efficient products. b. Tying: Google denies that the preinstallation and default of their search engine on products is tying. In addition to their product placement argument mentioned in the previous section, Google asserts that users want their search engine and that the preinstallation and default settings are intended to efficiently provide users the product they want. Google also highlights that users are free to choose to use another product if they wish, meaning that device purchasers are not forced into using their product. Google also emphasizes that users can change the default settings on their device and switch to a competing product. This all boils down to one of Google’s main arguments: users have choice, so their strategy is neither tying nor anticompetitive because the arrangements with distributors do not guarantee that they will be the top competitor and leave room for rival firms to compete. c. Acquiring competitors to monopolize the ad tech stack: Google’s main argument against these allegations is that the acquisitions were legal and that their 3

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