Gary Reback: Google's anti-competitive behavior

Online shoppers see higher prices because of Google's tactics. Photo / 123RF

After an extensive investigation, the European Union found last week that Google has, for many years, violated European antitrust law by rigging its general search results to favor its own comparison shopping service over rivals.

But a recent Washington Post editorial faults the EU for imposing a US$2.7 billion fine on the company.

The editorial board questioned whether Google's conduct hurt either competitors (who were just "unlucky," according to The Post) or consumers. It claimed that users "may well prefer to see" Google's results first and that the fine "seems to be a case of punishment without crime."

This view ignores the facts. Google painstakingly executed a strategy to increase its search-ad revenue by making it both possible and necessary for merchants to raise prices to consumers, as a review of studies from the EU, the US Federal Trade Commission and others show. And as a result, Google's ad revenue has soared at the expense of its users.

Before 2007, if a user searched for a product on Google, other sites listing prices for that product would appear among the general search results, ranked in the order of their quality to users.

These "comparison shopping sites" were designed to identify merchants with the lowest prices. The more accurate and comprehensive their results, the higher they were ranked and the more traffic they generated.

But the more successful that comparison shopping sites became, the more they threatened Google's business plan. Google makes money by selling ads placed next to its free search results, and merchants could not be expected to bid for ad placement if the listings in comparison shopping sites on the same search undercut their prices.

To address this, Google developed a cunning plan, the first phase of which was documented in a report by the FTC. Portions of the report were published by the Wall Street Journal more than two years ago.

Quoting internal Google documents and emails, the report shows that the company created a list of rival comparison shopping sites that it would artificially lower in the general search results, even though tests showed that Google users "liked the quality of the [rival] sites" and gave negative feedback on the proposed changes.

Google reworked its search algorithm at least four times, the documents show, and altered its established rating criteria before the proposed changes received "slightly positive" user feedback. Internal Google documents predicted that the proposed changes would reduce rivals' user traffic up to 20 percent and subsequently reported producing the desired results once the changes were implemented.

At the same time, Google started putting the results from its own comparison shopping service at the top of search results. After these changes, the only source of low-price information readily available on Google's search platform came from Google's own comparison shopping service, known at the time as Google Product Search, which listed the lowest prices for products in its database at no charge to merchants.

Google's conduct certainly hurt its rivals, particularly after a second round of search-listing demotions documented by the European Union. Many companies have been forced to lay off all of their employees and even shut down operations.

In 2012, Google took the extraordinary step to kill Google Product Search, replacing it with Google Shopping. This new service did not display the lowest price (or even a low price) in the general search results; rather, it displayed ads at the top of the search results page in response to the user's search term. The ads were carefully placed by Google's algorithms to minimise price competition among merchants, by, for example, showing ads next to each other that featured different product models at different price points.

Google Shopping also permitted merchants to purchase ads on a separate shopping page. Merchants - no longer promoted in search results for having lower prices - now must pay for better placement. Not surprisingly, they have raised prices to cover these costs.

Google's competitors argued in a study, which I submitted to the European Commission a few years ago, that the prices in Google Shopping ads for specified products on search results pages were among the highest in Google's database. Google's displayed prices for everyday products, such as watches, anti-wrinkle cream and wireless routers, were roughly 50 percent higher - sometimes more - than those on rival sites. A subsequent study by a consumer protection group found similar results. A study by the Financial Times also documented the higher prices.

The Post's editorial board claimed that the online availability of large merchant sites might restrain Google's power over consumers. But those sites haven't stopped Google from executing its plan so far. There is no denying that Google eliminated services showing the lowest prices, free to merchants, and replaced them with high-priced ads.

Nor can consumers "quickly catch on" when Google skews its results. How could they if the rival services that would have provided the information necessary to "catch on" were forced to shut down?

Rather than invent justifications for Google's conduct, The Post should take note of the public record.

Gary Reback is Silicon Valley antitrust lawyer at Carr & Ferrell LLP. He represents one of the companies that filed a formal complaint against Google in the European Commission.