Is Google the next Microsoft? Monopoly, Competition, Regulation and Antitrust in Online Search

My paper Is Google the next Microsoft? Competition, Welfare and Regulation in Online Search has been published in the December issue of the Review of Network Economics.

• Local copy of the paper - extended version
• Slides from talk at Royal Economic Society Conference last year

With recent antitrust and competition authority interest in Google’s monopoly – such as the announcement on Nov 30th of an official probe of Google by the European competition authorities¹ – the paper’s publication could not come at a more appropriate time - and the first version of this paper was put out in 2008 so it has also proved reasonably prescient!

Overview

Beginning from nothing fifteen years ago, today online search is a multi-billion dollar business and search engine providers such as Google have become household names.

While search has become increasingly ubiquitous it has also grown increasingly dominated by a single firm: Google. For example today in the UK Google accounts for 90% of all searches and in many other countries Google has a similar lead over its rivals.

In the paper I investigate why the search engine market is so concentrated and what implications this has for us both now, and in the future. Concluding that monopoly is currently a likely outcome I look at how competition could be promoted and a dominant search engine regulated.

To summarize the main points:

(a) Search engines provide ordinary users with a `free’ service gaining something extremely valuable in exchange, namely ‘attention’. With attention in ever more limited supply – after all each of us have at maximum 24 hours available in each day – access to that attention is correspondingly valuable especially for those who have products or services to advertise. Thus, though web search engines do not charge users, they can retail the attention generated by their service to those are willing to pay for access to it.

(b) The search engine market is already extremely concentrated. In many countries a single firm (usually Google) possesses of market share an order of magnitude larger than its rivals. As stated, in the UK Google already holds over 90% market share as. However, it is also noteworthy that there are some marked variations, for example in China Google trails the leaders.

(c) Competition issues are likely to become more serious as this dominance becomes established. It is important to realise that while search appears ‘free’ we do pay indirectly via the charges to advertises – who must in turn recoup that money from consumers. A dominant search engine may have incentives to distort its ‘results’ in ways that increase it owns profits but harm society – for example by suppressing organic search results that would substitute for or harm associated ‘sponsored’ results (adverts). In the paper, this is one of two specific reasons we identify why a search engine like Google will act in ways that are anti-competitive and welfare-reducing:

• ‘Substitution’ effect: organic results substitute for paid ones. Because a search engine derives its revenue from paid search results (advertisements) it wants to make sure that organic search results do not “substitute” too much for its paid ones. This provides incentives to the search engine both to exclude organic results from competitors (which is anti-competitive) and to distort its own results to ensure that users click on ads. The former is welfare reducing because it will reduce quality for consumers and harm innovation. The latter is welfare reducing because a) consumers get a less good experience) b) money is spent on ads that need not be which is socially wasteful. As an example: imagine you search for ‘buy shoes’. If a search engine is able to display ‘ads’ relevant to users’ search intentions, it is highly likely that the search engine is also able to display organic search results that are relevant. In this case, the advertisements and the search results are substitutes in the sense that better search means less need to click on advertisements (and vice versa). As such, improving search quality, by improving the search results the user receives for a given query, must necessarily reduce the likelihood of the user clicking on the advertisements (‘sponsored’ links) presented alongside. This creates strong incentives for the search engine to distort its organic results to benefit its ads.
• ‘Antagonism’ effect: organic results may provide information that deter people from using paid ones. Consider the hypothetical example where a query for ‘vitamin supplements’ generates both ‘organic’ search results as well as advertisements to firms which supply such supplements and further suppose that there is new research out that demonstrates that such supplements are of no value (or even harmful). Displaying such a result high up (perhaps at the top of the search results) may increase quality for users but may well reduce the likelihood a given user clicks on advertisement. As such by making this information prominent one reduces the amount of advertising revenue generated from that query.

(d) There are a number of approaches that regulators and policy-makers could take to protect against these adverse consequences. For example, policy-makers could look at ways to separate the ‘software’ and ‘service’ parts of a search engines activity, or less dramatically, they could set up a regulatory body to review search result rankings and choices.

Conclusion: it will be increasingly necessary for there to be some form of oversight, possibly extending to formal regulation, of the search engine market. In several markets monopoly, or near monopoly, already exists and there is every reason to think this situation will persist. Left unchecked by competition the private interests of a search engine and the interests of society as whole will diverge and, thus, left entirely unregulated, the online search market will develop in ways that are harmful to the general welfare.