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Search engine competition with network externalities

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  • Argenton, C.

    (Tilburg University, School of Economics and Management)

  • Prüfer, J.

    (Tilburg University, School of Economics and Management)

Abstract

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 of 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 well the empirically observed developments since 2003. We find that there is a strong tendency toward 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.
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Suggested Citation

  • Argenton, C. & Prüfer, J., 2012. "Search engine competition with network externalities," Other publications TiSEM c76d07b9-7d86-42c4-9b47-c, Tilburg University, School of Economics and Management.
  • Handle: RePEc:tiu:tiutis:c76d07b9-7d86-42c4-9b47-c354c062d31b
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    References listed on IDEAS

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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.
    2. Prüfer, Jens & Schottmuller, C., 2017. "Competing with Big Data," Discussion Paper 2017-006, Tilburg University, Tilburg Law and Economic Center.
    3. Justus Haucap & Ulrich Heimeshoff, 2014. "Google, Facebook, Amazon, eBay: Is the Internet driving competition or market monopolization?," International Economics and Economic Policy, Springer, vol. 11(1), pages 49-61, February.
    4. Federico Etro, 2012. "Leadership in Multi-sided Markets and Dominance in Online Advertising," Chapters, in: Joseph E. Harrington Jr & Yannis Katsoulacos (ed.), Recent Advances in the Analysis of Competition Policy and Regulation, chapter 11, Edward Elgar Publishing.
    5. Maximilian Schäfer & Geza Sapi & Szabolcs Lorincz, 2018. "The Effect of Big Data on Recommendation Quality: The Example of Internet Search," Discussion Papers of DIW Berlin 1730, DIW Berlin, German Institute for Economic Research.
    6. Sang-Gun Lee & Chang-Gyu Yang & Sin-Bok Lee & Jae-Beom Lee, 2015. "A study on the antecedents and consequences of satisfaction and dissatisfaction in web portal usage," Service Business, Springer;Pan-Pacific Business Association, vol. 9(3), pages 567-586, September.
    7. Alexandre de Cornière & Greg Taylor, 2014. "Quality Provision in the Presence of a Biased Intermediary," Working Papers 14-06, NET Institute.
    8. de Bas, Patrick & Batura, Olga & Yagafarova, Anastasia & van Gorp, Nicolai & Kesler, Reinhold & Laitenberger, Ulrich & Bertschek, Irene & Pichler, Eva, 2017. "Business-to-Business relations in the online platform environment. FWC ENTR/300/PP/2013/FC-WIFO: Final report," ZEW Expertises, ZEW - Leibniz Centre for European Economic Research, number 170570.
    9. Bertschek, Irene & Briglauer, Wolfgang & Hüschelrath, Kai & Krämer, Jan & Frübing, Stefan & Kesler, Reinhold & Saam, Marianne, 2016. "Metastudie zum Fachdialog Ordnungsrahmen für die Digitale Wirtschaft: Im Auftrag des Bundesministeriums für Wirtschaft und Energie (BMWi)," ZEW Expertises, ZEW - Leibniz Centre for European Economic Research, number 147040.
    10. van Gils, Freek & Müller, Wieland & Prüfer, Jens, 2020. "Big Data and Democracy," Other publications TiSEM ecc11d8d-1478-4dd2-b570-4, Tilburg University, School of Economics and Management.
    11. Jan KRÄMER & Michael WOHLFARTH, 2015. "Regulating Over-the-Top Service Providers in Two-Sided Content Markets: Insights from the Economic Literature," Communications & Strategies, IDATE, Com&Strat dept., vol. 1(99), pages 71-90, 3rd quart.
    12. Emanuele Tarantino, 2012. "A Note on Vertical Search Engines’ Foreclosure," Chapters, in: Joseph E. Harrington Jr & Yannis Katsoulacos (ed.), Recent Advances in the Analysis of Competition Policy and Regulation, chapter 8, Edward Elgar Publishing.
    13. Lianos, I. & Motchenkova, E., 2012. "Market dominance and quality of search results in the search engine market," Discussion Paper 2012-036, Tilburg University, Tilburg Law and Economic Center.
    14. Tarantino, Emanuele, 2013. "A simple model of vertical search engines foreclosure," Telecommunications Policy, Elsevier, vol. 37(1), pages 1-12.
    15. Justus Haucap & Torben Stühmeier, 2016. "Competition and antitrust in Internet markets," Chapters, in: Johannes M. Bauer & Michael Latzer (ed.), Handbook on the Economics of the Internet, chapter 9, pages 183-210, Edward Elgar Publishing.
    16. Etro, Federico, 2013. "Advertising and search engines. A model of leadership in search advertising," Research in Economics, Elsevier, vol. 67(1), pages 25-38.
    17. Graef, Inge & Wahyuningtyas, Sih Yuliana & Valcke, Peggy, 2015. "Assessing data access issues in online platforms," Telecommunications Policy, Elsevier, vol. 39(5), pages 375-387.
    18. Krämer, Jan & Wohlfarth, Michael, 2018. "Market power, regulatory convergence, and the role of data in digital markets," Telecommunications Policy, Elsevier, vol. 42(2), pages 154-171.
    19. Haucap, Justus, 2018. "Big Data aus wettbewerbs- und ordnungspolitischer Perspektive," DICE Ordnungspolitische Perspektiven 96, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    20. Maximilian Schäfer & Geza Sapi, 2020. "Learning from Data and Network Effects: The Example of Internet Search," Discussion Papers of DIW Berlin 1894, DIW Berlin, German Institute for Economic Research.
    21. Ji, Sung Wook & Choi, Young-jun & Ryu, Min Ho, 2016. "The economic effects of domestic search engines on the development of the online advertising market," Telecommunications Policy, Elsevier, vol. 40(10), pages 982-995.
    22. Haucap, Justus & Heimeshoff, Ulrich, 2017. "Ordnungspolitik in der digitalen Welt," DICE Ordnungspolitische Perspektiven 90, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    23. Haucap, Justus, 2021. "Mögliche Wohlfahrtswirkungen eines Einsatzes von Algorithmen," DICE Ordnungspolitische Perspektiven 109, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

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    More about this item

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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