As the Google Search antitrust trial enters its remedy phase, the Department of Justice’s (DOJ) potential request for remedies could have far-reaching consequences for consumers and the broader economy. At a time when technology has become a critical source of American economic growth, some of the remedies being considered in this case could raise costs for consumers and small businesses, while exacerbating concerns around inflation.
While we do not have all the necessary data to make a definitive economic assessment, it is important for the court to be aware of the potential impact of proposed remedies and to assess economic evidence. Our initial economic estimates show that the price of smartphones could rise, under some scenarios, by up to $87 per device, and the annual cost of some digital services could rise by up to $80 per person. Any remedies in this case should be carefully assessed for their impact on consumers and broader consequences for the American economy.
Potential Section 2 remedies that DOJ Antitrust may pursue, if one assumes that the DOJ’s assertions about liability were correct and are upheld on appeal:
- Behavioral Remedies: The more likely behavioral remedy proposal would prohibit Google from paying browser developers, device manufacturers, or wireless carriers for making Google the default search engine. Behavioral remedies have been favored over structural remedies in recent decades, especially in cases alleging violations of Section 2 of the Sherman Act.
- Structural Remedies: Whether in the form of divestitures, breakups, line of business restrictions, or spin-offs, the end result would be separation, i.e., services and business lines currently available as part of Google’s suite of offerings would be split among two or more separate companies and no longer part of the same “ecosystem” from the perspective of users. This would be an extreme remedy, as a breakup has not been awarded in a Section 2 case since the breakup of the Bell System that resulted from United States v. AT&T, a case filed by the Ford Administration in 1974. Prior to the breakup of the Bell System, the last major breakups awarded under Section 2 cases were the 1911 Standard Oil and 1911 American Tobacco cases. Seeking a remedy granted only three times in prominent Section 2 cases since 1911 would be a remarkable leap by DOJ Antitrust.
The potential negative impact on consumers and market dynamics from such remedies should be considered carefully.
Behavioral Remedies: Increased Prices and Fewer Choices for Consumers
One of the most straightforward remedies DOJ Antitrust might propose is a behavioral restriction preventing Google from engaging in distribution agreements with browser developers, device manufacturers, or wireless carriers to set Google Search as the default option on their devices. Judge Mehta’s August 2024 ruling in the case concluded that “Google’s distribution agreements are exclusive and have anticompetitive effects[,]” and so a DOJ Antitrust behavioral remedy proposal that prohibits Google from engaging in such distribution agreements might seem reasonable. Setting aside for the moment many valid questions about whether Judge Mehta’s ruling reached the correct conclusions, there are a number of potential costs arising from such a remedy that must be taken into account even by those who agree with the ruling.
Google’s distribution agreements with device makers and browser developers subsidize a significant fraction of the cost of devices. For example, one device maker and browser developer is estimated to have received around $20 billion from Google in 2022 alone for a search engine default distribution arrangement. While we do not know all the terms of the agreement, from public information, that company sold around 230 million smartphones in that same year, meaning Google’s distribution agreement was in effect likely subsidizing each smartphone by nearly $87. From what we know, if those distribution agreements were prohibited, it would be akin to an increase of $87 per device. If the company passed some or all of those costs on to consumers, price increases in a time of elevated inflation would be noticed by consumers. For instance if a device manufacturer passes on only 50% of costs to consumers, prices to consumers would increase by $43.50. In an already high-priced premium smartphone market, such price increases could harm consumers, making devices less accessible and reducing choices available to many consumers given their budget constraints.
Moreover, the behavioral remedy’s impact would not be limited to just one device manufacturer, browser developer, or wireless carrier. Many other companies that currently receive payments under distribution agreements would be similarly affected if the agreements were prohibited. Research regarding analogous circumstances has found that many impacted companies would seek to recoup some or all of the lost revenue via price increases on consumers. In turn, the price of affected devices and wireless services across the board could increase, hurting consumers who are already grappling with inflation and economic uncertainty.
Not all entities party to distribution agreements with Google could simply increase their costs to consumers, however, and their responses may be even worse for certain consumers. For example, Mozilla offers free software like Firefox browser to consumers, supported by search distribution agreements with Google that contributed $510M out of $593M, comprising 86% of Mozilla’s 2021-22 revenue. In the absence of distribution agreements with Google, it is unlikely that other potential distribution partners like Microsoft’s Bing would offer amounts remotely close to Google’s offer if they knew they did not have to bid against Google for such an agreement. In other words, a prohibition on Google engaging in distribution agreements would reduce competition for distribution agreements, leaving entities like Mozilla with few parties bidding on such agreements. Prices received by entities like Mozilla would fall significantly as a result.
In order to cope with a massive reduction in revenues from distribution agreements, Mozilla would have to massively scale back its operations, and either cease offering many of its free software services or reduce the quality of its offerings going forward. Consumers would face either fewer choices or reduced quality of offerings as a result.
Structural Remedies: Breakups Hurt Consumers Even More
Another remedy the DOJ may advocate for is the structural separation of Google into at least two distinct companies, a move designed to reduce its perceived market power and create more competition in the search and digital advertising sectors. However, breaking up Google would come with substantial costs that will likely ultimately be borne at least partially by consumers.
A 2022 paper by Dippon and Hoelle found that breaking Google up would increase the operational costs of Google and any spun off companies by an estimated $44.28 billion to $55.35 billion annually. These costs could arise from inefficiencies that a breakup would create, such as duplicating services, re-establishing core infrastructures and distribution channels, and operating two or more distinct companies instead of one integrated entity. Assuming the 2022 Dippon and Hoelle estimates are correct, and assuming increased costs are distributed proportionally to revenues, American consumers could bear as much as $21.2 billion to $26.5 billion of this additional financial burden each year.
For consumers, cost increases may translate into higher prices for the services and products they use.
Particularly for products like a web browser or phone operating system that are offered to users for free, and are currently subsidized by Google’s other revenue streams, separating such services from the ecosystem that funds them will likely lead to costs that will inevitably be passed on to users. These costs could amount to between about $64 and $80 per person each year. While less than 100% of costs may be passed on to consumers, splitting Google services across a larger number of companies would undermine the ability to offer such services for free , and increase the likelihood that such cost will be passed-through to consumers. As such, significant pass-through of costs to consumers is likely in a “break Google into many pieces” scenario. Moreover, as the 2022 Dippon and Hoelle paper found, the costs increase more as the number of entities Google is split into grows–for example, there are fixed costs to operating an independent company that must be duplicated in each new company post-breakup.
Potential Unintended Consequences on Innovation
The remedies proposed by DOJ Antitrust could also have unintended consequences for innovation in the tech sector. Google is a leading player in artificial intelligence (AI), cloud computing, and other technological innovations that have shaped industries and markets globally. The company’s integrated business model allows it to reinvest profits from its search business into other innovative projects and technologies.
Splitting Google into separate entities could dampen this innovation engine. Without the financial strength that comes from its position in search and advertising, Google’s ability to fund high-risk, high-reward ventures could be curtailed. Fragmentation might slow the pace of technological progress and reduce the scale at which Google can develop new products. This loss of innovation would not only hurt Google but also ripple across the tech industry, reducing competitive pressure on rivals to innovate and potentially leading to stagnation in key areas of technological advancement.
Competition May Not Materialize
While the DOJ’s remedies would presumably aim to create a more competitive landscape, there is no guarantee that competition will flourish as intended. Breaking Google up might harm the services that it offers its users, but it does not guarantee that other competitors will be able to deliver the same value that Google does today. For instance, Google’s search algorithm and advertising tools are industry-leading due to years of development and refinement. Competitors, even with a weakened Google, may still struggle to offer comparable services at scale. Most of those connected economy competitors that would have the best chance to do so have already been targeted by antitrust enforcers with other inquiries or litigation, and it is unlikely that antitrust enforcers would celebrate those companies’ successful entry at scale into search and other services offered by Google. For example, Microsoft has a market capitalization 50% larger than Google’s parent company; it would be a curious development if antitrust enforcers considered it a win to help already-larger Microsoft grow even more.
Remedies Require Careful Calibration
The potential remedies being considered in the Google search case could carry unintended consequences for consumers and the broader market. Prohibiting Google from paying device manufacturers, browser developers, and wireless carriers does not only harm Google, it harms the consumers, developers and SMBs that benefit from its free products by making the economics of many free services more challenging. In addition to potentially breaking free services, such a prohibition may lead to higher device and service prices. A more extreme remedy such as splitting Google up could impose even more significant costs on consumers across North America, and would be even more likely to break free services.
Furthermore, these remedies may stifle innovation and fail to generate the competitive environment the DOJ hopes to create. Structural remedies could harm consumer welfare by reducing service quality or increasing prices, and potentially both outcomes at once if currently free to use services have to support themselves with an independent profit-and-loss. In some cases, services valued by consumers could disappear entirely, whether the risk to Mozilla’s Firefox from a behavioral remedy or downstream of structural separation for some currently free to use services offered by Google with unclear prospects of supporting themselves independently.As the trial progresses, it’s crucial that any remedies imposed are carefully calibrated to ensure that consumers, competition, and innovation are not harmed in the process. A nuanced approach that balances regulation with market realities is needed to ensure that the cure for Google’s leading market position does not end up being worse than the purported disease.
