# United States v. Google/Conclusions of Law/Section 6B

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    B. The Exclusive Agreements Allow Google to Profitably Charge Supracompetitive Prices for Text Advertisements.
The trial evidence firmly established that Google’s monopoly power, maintained by the exclusive distribution agreements, has enabled Google to increase text ads prices without any meaningful competitive constraint. There is no dispute that the cost-per-click for a text ad has grown over time. UPFOF ¶¶ 629–637, 652–676; FOF ¶ 186. Google has used various “pricing knobs” to drive these increases, often between 5% and 15% at a time, without a significant shift in advertiser spending to GSE competitors. FOF ¶¶ 243–267. Ad experiments consistently showed Google achieving a “stickage” rate of 50% for its pricing knob adjustments, meaning half of post-launch revenue increases translated into long-term gains. FOF ¶¶ 252, 254–255. Google also tweaked the pricing knobs when needed to achieve periodic revenue targets. FOF ¶¶ 257–260. ​Google did so successfully, as its ad revenues have grown consistently at a rate of 20% or more year over year. FOF ¶ 259.
What’s more, there is no evidence that any rival constrains Google’s pricing decisions. In fact, Google admits it makes auction adjustments without considering Bing’s prices or those of any other rival. See Epic Games, 67 F.4th at 984 (recounting among the district court’s anticompetitive effects findings that “Apple has for years charged a supracompetitive commission” on App Store transactions that it set “without regard” to anything “other than legal action”) (Section 1 case). The only apparent constraint on Google’s pricing decisions are potential advertiser outcry and bad publicity. FOF ¶¶ 263–265. Google, however, has managed to avoid those pitfalls by ramping up its pricing incrementally, which has allowed advertisers “to internalize prices and adjust bids appropriately[.]” UPX519 at .003. Many advertisers do not even realize that Google is responsible for the changes in price. FOF ¶ 266. Thus, through barely perceptible and rarely announced tweaks to its ad auctions, Google has increased text ads prices without fear of losing advertisers.
Unconstrained price increases have fueled Google’s dramatic revenue growth and allowed it to maintain high and remarkably stable operating profits. FOF ¶ 289 (citing UPX7002.A); cf. Microsoft, 253 F.3d at 50 (“High profit margins might appear to be the benign and necessary recovery of legitimate investment returns . . ., but they might represent exploitation of customer lock-in and monopoly power when viewed through the lens of network economics. . . . The issue is particularly complex because, in network industries characterized by rapid innovation, both forces may be operating and can be difficult to isolate.”); McWane, 783 F.3d at 838 (considering monopolist’s profit margins when analyzing anticompetitive effects, specifically supracompetitive ​pricing). Google in turn has used these monopoly profits to secure the next iteration of exclusive deals through higher revenue share payments. Supra Sections IV.A & V.A.2.b.
Google’s counter to this pricing evidence is to focus not on the nominal price increases of text ads, but on their quality-adjusted prices. See In re Qualcomm Antitrust Litig., 328 F.R.D. 280, 309 (N.D. Cal. 2018) (“The economic term ‘quality-adjusted prices’ captures both the nominal price and total quality of a particular product.”). Even a monopolist can increase prices to reflect improvements in quality without running afoul of the antitrust laws. See Harrison Aire, Inc. v. Aerostar Int’l, Inc., 423 F.3d 374, 381 (3d Cir. 2005) (“Competitive markets are characterized by both price and quality competition, and a firm’s comparatively high price may simply reflect a superior product.”); In re HIV Antitrust Litig., No. 19-cv-02573 (EMC), 2023 WL 3089820, at *7 (N.D. Cal. Mar. 7, 2023) (“[O]ne product may have the same price as another product. However, if the first product is of better quality than the second, then [the] first product is actually cheaper than the second.”). Google insists that as text ads prices have grown, so too has their effectiveness.
Google says that its quality-adjusted price in fact has decreased over time. GFOF ¶¶ 1131–1143. As proof, it points to the increase in click-through rate (i.e., how often an ad is clicked) as a proxy for ad quality, assuming that “higher-quality ads are more likely to be clicked on by users[.]” Id. ¶ 1133; Tr. at 8554:22–8555:20 (Israel) (comparing click-through rate in 2011 of only 10% to click-through rate of over 30% in 2021) (discussing DXD29 at 121); see also Areeda ¶ 403b n.2 (“Better products and other innovations do benefit consumers even though motivated by a firm’s desire for monopoly.”). Plaintiffs dismiss this evidence as irrelevant because it does not speak directly to whether the click resulted in a conversion. See UPRFOF ¶ 2269 (“Absent an increase in conversion rates per click, increased CPCs reduce advertiser value.”). But Plaintiffs ​are too dismissive. It is not an unreasonable inference that more ad clicks might correspond to better results for advertisers.
That said, the evidence that Google’s quality-adjusted ads prices have remained steady, let alone decreased, is weak. Google has long recognized the inherent difficulty in determining the value of an ad to its buyer. FOF ¶ 228 (advertisers struggle to quantify ROI). Its ad launch and experiments reflect as much. FOF ¶¶ 251, 253. Instead, what they show is the company, largely through trial and error, attempting to capture the “headroom” between an ad’s purchase price and its value to the buyer. FOF ¶¶ 254–255; UPX507 at .026 (Google admitting that that it had “no way to say what formats should cost”). This evidence does not reflect a principled practice of quality-adjusted pricing, but rather shows Google creating higher-priced auctions with the primary purpose of driving long-term revenues. FOF ¶¶ 257–265.
Dr. Israel’s charting of the increased click-through rate onto the upward trend of CPCs is only so informative. See Tr. at 8569:5–8570:8 (Israel) (discussing DXD29 at 129). While there is arguably some correlation between click-through rate and ad quality, the strength of the connection is far from certain. There are other obvious contributors to the increased click-through rate that are wholly unrelated to ad quality. Such factors include the dramatic expansion of the online marketplace, the shift towards more online purchasing, and the emergence of mobile search. The most the court can conclude from Dr. Israel’s mapping of the click-through rate onto the text ads price index is that both have directionally trended upwards.
But even if Google’s ads have increased in quality, that by itself would not establish the absence of anticompetitive pricing effects. “[O]nce monopoly has been achieved and assuming significant entry barriers, the monopolist can set a profit-maximizing price without excessive concern about the behavior of other firms in the market.” Cf. Areeda ¶ 727d (discussing pricing ​power following price predation to drive out competitors). That is precisely how Google has approached its ad pricing. Consider the following hypothetical (in whole numbers). Say, an advertiser values an ad at $10. That advertiser would be willing to pay up to $9 for the ad. A second-price auction, however, could result in a final price that is lower, say $5, because the runner-up has capped its price at that amount. Google has endeavored through the years to capture the “headroom” between the ad’s value ($10) and its price. FOF ¶¶ 254–255. It has done that by using its tuning knobs to adjust the auction formula so that, in this hypothetical case, it would push the final ad price to upwards of $9. Google simply could not take this approach in a competitive market. If it did so, a rival could adjust its auction to charge the advertiser less for the same ad, say, $7. In the competitive market then, Google still could earn a profit from the sale of an ad, but it could not achieve the monopoly profits that it does presently in the absence of rivals.
This is an anti-competitive price effect, irrespective of Google’s ad quality.