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.
With recent antitrust and competition authority interest in Google — 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 (the first version of this paper was put out in 2008 so it has also proved reasonably prescient).
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 ddominant 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).
(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.