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Advertising and search engines. A model of leadership in search advertising

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  • Etro, Federico

Abstract

We analyze the role of leadership in a multi-sided market as search advertising, assuming quantity competition and different entry conditions (with barriers to entry or endogenous entry). The model can be microfounded taking into account network effects, multi-homing on the advertising side and scale in search. If there are barriers to entry and the network effects are strong, there is an incentive for the leader to exploit them and attract more consumers to monopolize advertising. Under barriers to entry, the leading platform has also a strategic incentive to exploit scale in search, to manipulate search results to divert search traffic from other platforms, and to introduce limits to multi-homing, with the aim of expanding its market share and deny scale to competitors.

Suggested Citation

  • Etro, Federico, 2013. "Advertising and search engines. A model of leadership in search advertising," Research in Economics, Elsevier, vol. 67(1), pages 25-38.
  • Handle: RePEc:eee:reecon:v:67:y:2013:i:1:p:25-38
    DOI: 10.1016/j.rie.2012.10.001
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    References listed on IDEAS

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    1. Federico Etro, 2006. "Aggressive leaders," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 146-154, March.
    2. Susan Athey & Glenn Ellison, 2011. "Position Auctions with Consumer Search," The Quarterly Journal of Economics, Oxford University Press, vol. 126(3), pages 1213-1270.
    3. Nicholas Economides & Evangelos Katsamakas, 2006. "Two-Sided Competition of Proprietary vs. Open Source Technology Platforms and the Implications for the Software Industry," Management Science, INFORMS, vol. 52(7), pages 1057-1071, July.
    4. Hiroaki Ino & Toshihiro Matsumura, 2012. "How Many Firms Should Be Leaders? Beneficial Concentration Revisited," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1323-1340, November.
    5. Federico Etro, 2010. "Endogenous market structures and antitrust policy," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 57(1), pages 9-45, March.
    6. Federico Etro, 2010. "Endogenous Market Structures and Contract Theory," Working Papers 181, University of Milano-Bicocca, Department of Economics, revised Mar 2010.
    7. Cédric Argenton & Jens Prüfer, 2012. "Search Engine Competition With Network Externalities," Journal of Competition Law and Economics, Oxford University Press, vol. 8(1), pages 73-105.
    8. Arijit Mukherjee, 2012. "Social Efficiency of Entry with Market Leaders," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(2), pages 431-444, June.
    9. Federico Etro, 2008. "Stackelberg Competition with Endogenous Entry," Economic Journal, Royal Economic Society, vol. 118(532), pages 1670-1697, October.
    10. Chakravorti Sujit & Roson Roberto, 2006. "Platform Competition in Two-Sided Markets: The Case of Payment Networks," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-25, March.
    11. Jean-Charles Rochet & Jean Tirole, 2014. "Platform Competition in Two-Sided Markets," CPI Journal, Competition Policy International, vol. 10.
    12. Benjamin Edelman & Michael Ostrovsky & Michael Schwarz, 2007. "Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords," American Economic Review, American Economic Association, vol. 97(1), pages 242-259, March.
    13. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
    14. Etro, Federico, 2011. "Endogenous market structures and contract theory: Delegation, principal-agent contracts, screening, franchising and tying," European Economic Review, Elsevier, vol. 55(4), pages 463-479, May.
    15. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, vol. 16(1), pages 8-37, March.
    16. Pauline Affeldt & Lapo Filistrucchi & Tobias J. Klein, 2013. "Upward Pricing Pressure in Two‐sided Markets," Economic Journal, Royal Economic Society, vol. 123(11), pages 505-523, November.
    17. Varian, Hal R., 2007. "Position auctions," International Journal of Industrial Organization, Elsevier, vol. 25(6), pages 1163-1178, December.
    18. Hiroaki Ino & Toshihiro Matsumura, 2010. "What role should public enterprises play in free-entry markets?," Journal of Economics, Springer, vol. 101(3), pages 213-230, November.
    19. Luchetta, Giacomo, 2012. "Is the Google platform a two-sided market?," 23rd European Regional ITS Conference, Vienna 2012 60367, International Telecommunications Society (ITS).
    20. Roberto Roson, 2012. " Competition between Multiproduct Firms with Heterogeneous Costs," Working Papers 2012_14, Department of Economics, University of Venice "Ca' Foscari".
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    22. repec:rje:randje:v:37:y:2006:3:p:668-691 is not listed on IDEAS
    23. Nikhil Agarwal & Susan Athey & David Yang, 2009. "Skewed Bidding in Pay-per-Action Auctions for Online Advertising," American Economic Review, American Economic Association, vol. 99(2), pages 441-447, May.
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    Cited by:

    1. Burguet, Roberto & Caminal, Ramon & Ellman, Matthew, 2015. "In Google we trust?," International Journal of Industrial Organization, Elsevier, vol. 39(C), pages 44-55.

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