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Search engine competition with network externalities

Listed author(s):
  • Argenton, C.

    (Tilburg University, School of Economics and Management)

  • Prüfer, J.

    (Tilburg University, School of Economics and Management)

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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Paper provided by Tilburg University, School of Economics and Management in its series Other publications TiSEM with number c76d07b9-7d86-42c4-9b47-c354c062d31b.

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Date of creation: 2012
Publication status: Published in Journal of Competition Law and Economics (2012), v.8, nr.1, p.73-105
Handle: RePEc:tiu:tiutis:c76d07b9-7d86-42c4-9b47-c354c062d31b
Contact details of provider: Web page: https://www.tilburguniversity.edu/about/schools/economics-and-management/

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  1. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
  2. Jean‐Charles Rochet & Jean Tirole, 2006. "Two‐sided markets: a progress report," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 645-667, September.
  3. Yongmin Chen & Chuan He, 2011. "Paid Placement: Advertising and Search on the Internet," Economic Journal, Royal Economic Society, vol. 121(556), pages 309-328, November.
  4. Pollock Rufus, 2010. "Is Google the Next Microsoft: Competition, Welfare and Regulation in Online Search," Review of Network Economics, De Gruyter, vol. 9(4), pages 1-31, December.
  5. Greg Taylor, 2013. "Search Quality and Revenue Cannibalization by Competing Search Engines," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(3), pages 445-467, September.
  6. Jean-Charles Rochet & Jean Tirole, 2007. "Introduction to the Symposium," CPI Journal, Competition Policy International, vol. 3.
  7. Song Yao & Carl F. Mela, 2008. "A Dynamic Model of Sponsored Search Advertising," Working Papers 08-16, NET Institute, revised Sep 2008.
  8. Song Yao & Carl F. Mela, 2011. "A Dynamic Model of Sponsored Search Advertising," Marketing Science, INFORMS, vol. 30(3), pages 447-468, 05-06.
  9. repec:oup:jcomle:v:6:y:2010:i:3:p:653-686. is not listed on IDEAS
  10. repec:oup:jcomle:v:5:y:2009:i:4:p:633-682. is not listed on IDEAS
  11. Anindya Ghose & Sha Yang, 2009. "An Empirical Analysis of Search Engine Advertising: Sponsored Search in Electronic Markets," Management Science, INFORMS, vol. 55(10), pages 1605-1622, October.
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