Search Engine Competition with Network Externalities
The market for Internet search is not only economically and socially important, it is also highly concentrated. Is this a problem? We study the question whether "competition is only a free click away". We argue that the market for Internet search is characterized by indirect network externalities and construct a simple model of search engine competition, which produces a market share development that fits the empirically observed development since 2003 well. We find that there is a strong tendency towards market tipping and, subsequently, monopolization, with negative consequences on economic welfare. Therefore, we propose to require search engines to share their data on previous searches. We compare the resulting "competitive oligopoly" market structure with the less competitive current situation and show that our proposal would spur innovation, search quality, consumer surplus, and total welfare. We also discuss the practical feasibility of our policy proposal and sketch the legal issues involved.
Tuesday, May 17, 2011
Google & Competition Law IV
Just a quick addendum to last year's posts about Google's Competition Law problems: In a paper posted on SSRN last month, Argenton & Prüfer present some microeconomic analysis of the market for search engines. I'm not sure that I agree entirely with their analysis, but the basics are certainly worth while. Here is the abstract: