miscellaneous factZ – The online home of Rufus Pollock

Last Tuesday I was at the RES Annual Conference to present my paper “Is Google the Next Microsoft? Competition, Welfare and Regulation in Internet Search”. I’ve uploaded my slides from the talk here and below is a recently prepared overview. The full paper can be online on the SSRN site at:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1265521

Overview

Beginning from nothing twelve years ago, today online search is a multi-billion dollar business and search engine providers such as Google and Yahoo! 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 this paper I investigate why the search engine market is so concentrated and what implications this has for us both now, and in the future. I also look at whether search engines will require regulation and if so in what form. In doing so we also give a detailed explanation of the how the search engine market works, its history, and how it has come to be such a lucrative, and important, activity.

To summarize the main points:

(a) Though search engines provide ordinary users with a `free’ service they gain something very valuable in exchange: attention. Attention is an increasingly valuable good, being in ever more limited supply — after all each of us have a maximum of 24 hours of attention available in any one day (and usually much, much less). Access to that attention is correspondingly valuable especially for those who have products or services to advertise. Thus, while 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, online search will develop in ways that are harmful to the general welfare.

It is therefore important that policy-makers begin now to develop their strategy in relation to this key area of the knowledge economy. The power rapidly accumulating in the hands of a few major search providers is a great one. It behoves to ensure that it is used in a way that brings the greatest benefit to society as a whole.