Wednesday, November 21, 2012
Posted by D. Daniel Sokol
Ioannis Lianos, University College London - Faculty of Laws and Evgenia Motchenkova, VU University Amsterdam - Department of Economics; TILEC describe Market Dominance and Quality of Search Results in the Search Engine Market.
ABSTRACT: We analyze a search engine market from a law and economics perspective and incorporate the choice of quality improving innovations by a search engine platform in a two-sided model of internet search engine. In the proposed framework we first discuss the legal issues the search engine market raises for antitrust policy through analysis of several types of abusive behavior by the dominant search engine. We also explore the possible consequences of monopolization of the search engine market for advertisers and users in the form of excessive pricing and deterioration of the quality of the search results. Second, in the technical analysis part we incorporate these considerations in a two-sided market model and analyze the rate of innovation, pricing, and quality choices by the dominant search engine. Our findings show that a dominant monopoly platform results in higher prices and under-investment in quality improving innovations by a search engine relative to the social optimum. More generally, we show that monopoly is sub-optimal both in terms of harm to advertisers in the form of excessive prices, harm to users in the form of reduction in quality of search results, as well as harm to the society in the form of lower innovation rates in the industry.