It's official: Google launches 'Checkout' with predatory pricing model aiming to 'increase advertising spending'

Google’s new service enabling consumers to make purchases from online stores using payment and shipping information they keep on file with Google, officially launched with the name of Google Checkout, rather than the rumored GBuy.

Google Checkout, as reported by The New York Times, is priced at rates which undercut current credit card processing fees:

Google is charging merchants 20 cents plus 2 percent of the purchase price to process card transactions, less than most businesses pay for credit card processing. Banking industry executives say that credit card processors typically pay MasterCard and Visa a fee of 30 cents and 1.95 percent for every purchase, so Google will be subsidizing many transactions.

The specifics of Google's arrangements with credit card companies are unclear, however. Google Checkout handles transactions for four credit/ debit cards: Visa, MasterCard, American Express, Discover and is launching the service in partnership with Citi. According to Google:

Citi + Google Checkout = bonusAre you a Citi cardmember? If so, register your Citi credit card to get $5 or 1000 ThankYouSM Points the first time you use it with Google Checkout.

For Google advertisers, the Google subsidy is even more generous, according to The New York Times:

for every $1 a company spends on search advertising, Google will waive the fees on $10 worth of purchases. Factoring in the 2 percent fee, that represents a rebate of at least 20 percent of advertising spending.

Google CEO Eric Schmidt is quoted:

willing to lose money on transaction fees because it felt the package would increase advertising spending…The math works because we can have lower prices and higher volume

The Georgetown Law Journal paper, August 2001, “Predatory pricing and strategic theory” states:

Under market conditions actually observed, is predatory pricing the most plausible explanation for an episode of low prices? And just as important: Are these conditions distinguishable from legitimate competition in the market? Remember, if you are hunting for a predator and mistakenly shoot a competitor, you injure consumers…

A successful predatory pricing scheme must, after discounting, pay out more during the recoupment phase than it costs the predator during the preceding low-price phase. The longer the duration of the first phase and the greater the volume of sales during this phase, the greater must be the payoff during recoupment.

Will Google Checkout injure consumers in the long-run?

The Google announcement of Google Checkout follows a Google pre-release story in The Wall Street Journal, Tuesday, which indicated Google’s online payment mechanism would launch with mail-in rebates to spur consumer adoption.

Google is launching Google Checkout with a $10 off promotion to incentivize consumers to choose Google Checkout over competing payment processing options:

To get $10 off your order of $20 or more from these stores, enter the coupon code listed below during Google Checkout.

I postulated Tuesday that Google aimed to build valuable offline databases of consumer buying behavior information. According to The New York Times:

Google may get several additional benefits from the checkout service. It will encourage more users to register and give it personal data, allowing Google to display advertising based on specific attributes of the viewer. More broadly, the data the company gets from transactions could help it improve the way it chooses which advertising to show to which users.

SEE ALSO Google Checkout aims to takeover customer relationships, hinder merchant CRM strategies and Google Checkout to merchants: Give us your customers, and your advertising