Why Does The European Union Consult Microsoft On How Google Should Operate?

Tim WorstallContributorOne of the things that it’s very difficult for a free market zealot like myself to understand is why the European Union allows Microsoft MSFT +1.41% (and some 17 other such companies in the search space) to try and influence how Google GOOGL +0.76% operates in the EU. Free marketry always rather presupposes that companiescompete with each other,  not insist that their competitors must act so as to make them greater profits. And we generally think that people who are losing such competition and then run to the politicians to “regulate” the market are indulging in more than a little bit of rent seeking.

That’s what makes it so difficult to understand what the European Union is doing here:

The core of the deal between Google and Mr. Almunia, announced in February, is a system that would more prominently display rivals’ search services — for finding hotels and shopping, among others — when people conduct Google searches. Rival companies have lambasted the proposal, saying it would do little to help them compete more effectively inEurope, where Google powers more than 90 percent of searches in many countries.

Europe opens a formal antitrust investigation into accusations that Google has abused its dominance in online search, exposing the company’s zealously guarded technology to unwelcome scrutiny.

 In a study conducted over the course of nearly three weeks in April, Microsoft engineers modified the publicly available search page of its own search site, Bing, to operate like a Google search page under the terms of the proposed European settlement.

In monitoring the way that Bing users conducted searches for hotels and restaurants, Microsoft said, it found that people would mostly ignore the parts of the modified page supposedly dedicated to competitors. Instead, Microsoft found that users were 99 times more likely to click on the area of the page that Google would dedicate to its own services.

Why on earth should Google’s page be set up so as to favour Microsoft’s offerings? The two companies are competing in the search space, correct? Well, go compete then instead of whining to the politicians.

Unfortunately I understand all too well what is going on here. Which is that across continental Europe no one really believes in free markets in the first place. And we shouldn’t really be blaming Microsoft or any of those others (like Foundem and so on) for taking advantage of the strange beliefs of the politicians.

The free market approach is that even if someone is indeed a monopoly (and Google isn’t but it’s close) that’s not a good enough reason to regulate how the company operates. Because the important point is not monopoly but whether that monopoly is contestable. For if a monopoly is contestable then if someone tries to use their monopoly power (as, arguably, the Chinese did in the rare earths space) to raise prices or otherwise rook consumers then competition will arise to contest that monopoly. A contestable monopoly is only stable if it continues to act as if it isn’t a monopoly. Thus there’s nothing we need to do about companies that have very large market shares, as long as it is possible for others to enter that market. As long as there’s contestability we can rely upon that threat of future, possible, competition to make sure that the monopoly isn’t exploited.

But that’s a bit of free marketry that the Continentals don’t really believe in. They take the view that anyone who is a market leader needs to be regulated. Partly because they genuinely don’t understand this idea of a contestable monopoly and partly because that’s just not the way the Continental political classes work. They see themselves as the natural regulators of the economy: the bureaucracy, if not the politicians, should be deciding who gains what out of the market. Unalloyed market activity just isn’t something that they really believe can actually happen, everything requires that there is regulation.

This is actually there in the basics of business (or civil) law as well. This isn’t quite true but it’s close enough, in the Anglo Saxon world you can do anything you want as long as there’s no law against it. In the Continental (or Roman Law) system nothing is really legal until there’s a law of regulation telling you how you can do it. We can see how this is going to colour attitudes to markets. And the Anglo jurisdictions we’re quite happy just letting everyone compete as they wish and only stepping in when there’s obvious problems. But if you come from a world where the bureaucracy and politics always decides how anyone may do anything then that’s not a world view you’re likely to embrace. To say nothing of any bureaucracy or politician ever believing that the world will carry one quite happily without their advice or interference.

But that is, really and at heart, what is going on here. The EU is deciding how Google should display its search results, in collusion with all of Google’s competitors, simply because not one single one of the Continentals can believe in a system where politics was not involved in determining such things. Whereas we in the Anglo Saxon world find their actions absurd. If we consumers don’t like the way Google is doing things there’s any number of competitors out there we can switch to and if we really don’t like what Google is doing we will. This is something that the market can sort out on its own.

Agreed, I’m predisposed to think that the EU is a ridiculous idea in the first place but this is one of those reasons. They’re simply trying to tie together economies that have wildly different ideas of when and where politics should determine matters economic. Trying to impose one order on such disparate systems just isn’t going to work.