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Topic of the month - January 2012: Horizontal and Vertical Search
Google is the dominant search engine in the world, with a global share of search traffic around 85 %, against 7 % for Yahoo! and 4 % for Bing, but with even higher market shares in Europe. Here, the EU antitrust authority is investigating possible abuses by the company of Mountain View in terms of manipulation of search results in the horizontal competition with other search engines and exclusionary agreements against competing vertical search engines. Even in asian countries where other search engines are leaders, as Yahoo! and Baidu respectively in Japan and China, dominance is pervasive and competition concerns are key. Another growing asian market as that of India is largely dominated by Google: according to an interesting research by the CUTS Institute for Regulation and Competition (2011), the Indian market for search concern less than a hundred milion users, most of which only know and use Google as a search engine and are unaware of the basic difference between natural and sponsored search (the empirical research is actually based on advanced users from big cities as Delhi, Mumbay and Jaipur). It is on this kind of consumers that manipulation of search results by a dominant firm can provide high returns.
Google dominates the lucrative business of placing text ads next to search engine results. Google AdWords accounts for more than 70 % of search advertising revenue worldwide. All these platforms choose a number of ads to be made available in a specific order for any search query. Given the space allocated to these sponsored links, an auction pins down the market clearing price for these advertisements. Contrary what is usually claimed, auctions do not necessarily add a competitive element to online advertising, but allow a dominant firm to adopt complex forms of price discrimination aimed at excluding competitors in search advertising or at extracting all the surplus from the bidders (or even both aims at the same time).
Horizontal competition and "learning by searching"
The structure of the market for search advertising depends on a particular form of network externality which is quite different from the one emerging in other markets of the New Economy. This is mainly due to technological reasons: network effects in search are combined with a form of learning by searching. Search engines find more relevant results for each query when there are more queries and the subsequent clicks of the users provide information on what were the most relevant websites associated with particular keywords. Through this feedback mechanism, the same users improve the algorithms that govern the search engine, and the impact is relatively bigger on tail queries (compared to the most common queries on which all search engines reach a relatively large scale of queries). Therefore, not only more search generates more demand for advertising (as in any market with network effects), but more search generates also the scale needed to improve the search technology and provide more relevant results and ads, which in turn generates more search. This is a key difference compared to other markets with network externalities, as those of other software platforms: on one side in traditional platforms the number of consumers determines the demand of application developers but does not affect the quality of the software platform for a given number of applications, on the other side the number of visitors of a search engine determines not only the demand of advertisers but also the (future) quality of the search engine (in terms of ability to reach the most relevant results). As a consequence of the importance of scale in search, for a platform to enter the search advertising market (or increase its market share) and compete with the leader it is crucial to rapidly gain scale and close the technological and information gap on the search queries (to provide more relevant results and conquer more visitors and advertisers). At the same time, for a leading platform to maintain its market power it is crucial to protect the information gained through searches and limit the scale of the rivals and their learning by doing. Any exclusivity agreement between the dominant firm and hardware or software distributors to install only its search-related product and services or between the dominant firm and advertisers to rely only on its platform may jeopardize any hope of the competitors to gain scale and compete on the merit. This may be the case of the exclusivity agreements on the Google toolbar or on the search default settings between Google and software vendors as Adobe, hardware vendors as Apple for the iPhone (and others adopting the Android operating system) or browser distributors as Firefox, Safari and Opera. Moroever, scale requires that any search engine must be able to have full access to all websites and "crawl" them to find new informations to be provided in search queries. Clearly, if the dominant platform obtains a privileged access to some relevant websites and limits the access of competitors, competition is penalized because raising rivals' costs may exclude some of these competitors (or accommodate market outcomes with high prices that are detrimental to advertisers). In this case, innovation by the followers is penalized as well. This is what may have happened since the acquisition by Google of YouTube, the main website for video contents, whose access for competing search engines does not appear to be as direct and immediate as for Google.
Vertical search engines
Besides general search engines, some search platforms focus on specific issues, as news, travel information, academic works, finance, videos, maps, and more: since these services offer a deeper information within particular fields, they are usually referred to as vertical search services. To be reached and used (as for any website) these vertical services rely on general search engines as Google. In the last years Google has also introduced new services, some of which raise serious concerns not only about antitrust, but also about copyright protection (Google Books) and privacy (Youtube and Google Maps with Street View, which emerged ignoring any privacy regulation). This is particularly evident in terms of predatory pricing or free riding against content providers, whose information is freely aggregated and displayed by Google News. On this front, the Italian and French competition authorities have obliged Google to guarantee that press publishers will be able to request and obtain exclusion from Google News, but without being de-listed from the general search. On the antitrust front, the new services of Google have rapidly gained success over competing vertical search services, but possibly with the help of manipulated ranking in the natural search of Google, which ends up marginalizing any competing vertical engine. As long as a dominant search platform gives priority to its own vertical services and diverts traffic away from its competitors, it is destined to reach leadership in any service provided, hurting competition on the merit. Moreover, alternative specialized search engines are the only entry constraints that Google could face in the short and medium run, and protecting their viability is crucial to protect competition.
Too know more about this market look at "Leadership in Multisided Markets"
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