Tuesday, May 17, 2011
Posted by D. Daniel Sokol
Cédric Argenton, Tilburg Law and Economics Center (TILEC), Tilburg University - Center and Faculty of Economics and Business Administration and Jens Prufer, TILEC and CentER, Department of Economics, Tilburg University discuss Search Engine Competition with Network Externalities.
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 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.