Market Power and Intermediaries: The Case of Google

Transcription

1 Market Power and Intermediaries: The Case of Google Mark R. Patterson Fordham University School of Law Pluralism and competition in the regulation of new media European University Institute November 11, 2011

2 Market Power of Information Intermediaries Two-sided markets For Google, searchers and advertisers Price and quality relationships are complicated and interrelated One product may be provided for free If so, quality is the measure of power But quality of information is difficult to assess

3 Power Over and Conduct Regarding Information In antitrust, a unilateral violation typically involves exclusionary act by firm with dominant market share Conduct and power (share) are distinct For information intermediaries, unilateral violation can be distortion of information The distortion is both the exclusionary act and the evidence of power Complicates the assessment of power

4 Google and Market Power The discussion here focuses only on Google s power, not its conduct References to possible manipulation of search results are hypothetical Although Google has been alleged to have manipulated search results, I take no position on those allegations

5 Google and Market Share Google s market share is significant: 65% in U.S., 85% in Europe Antitrust often uses market share as proxy for power because it often reflects ability to act without regard to competition Unilateral: Competitors may not have capacity to respond Coordinated: Competitors may follow market leader

6 For Information Intermediaries, Market Share Is Wrong Measure Market leader s unilateral power is limited, because capacity expansions are easy for competitors May be some server limitations, but probably not very significant Coordinated effects are unlikely, because products are heterogeneous and pricing is not transparent

7 Competition is a click away. So says Google But it is not clear what this slogan means One possibility: Google s market share does not give it long-lasting power So competitors can easily take away Google s customers if it fails This picture is incomplete

8 Is Effective Competition Only a Click Away? Supply-side issues Although competitors are not capacitylimited, Google has other advantages Demand-side issues Switching costs Is there a cost to clicking? Information costs Can user determine when to click?

9 Supply-Side Issues Experience-curve effects De facto standardization Both effects impose costs on competitors that were not borne by Google

10 The Search-Engine Experience Curve The development of a search algorithm requires a database of searches Search engine must learn what user is seeking when user enters keywords Google s greater volume of past searches gives it an advantage

11 Competing with Google s Experience Competitors cannot begin to approach Google s level of search experience unless their shares exceed Google s Even then, the disadvantage would persist for a long time Is the search database an essential input? Natural monopoly? Regulation? Disclose database?

12 De Facto Standardization The data web sites on which search engines operate are not exogenous to the search algorithm Sites are optimized for Google, because it is the market leader To some extent, web site design is standardized for Google s algorithm

13 The Usual Standards Problem The Google standard might not be optimal Competitors must create not the best algorithm, but the best algorithm for Google-optimized web sites It is possible that an algorithm that would be better than Google s on un-optimized sites would not be so on optimized sites

14 An Unusual Standards Problem The Google standard is a moving target Google says it makes 500 algorithm changes per year When Google changes, web sites respond with new optimization techniques

15 Google s Standards Advantage Competing search engines must work with data web sites that change when Google s algorithm changes So must Google, in a sense, but Web sites cooperate by themselves trying to change to match Google Google has a head start to the extent that it can anticipate changes

16 Demand-Side Issues Switching costs and information costs Can also be characterized as supply-side issues Consumers switching costs give Google a cost advantage over competitors Consumers information costs could perhaps be overcome by competitors, but only by incurring discovery and communication costs

17 Switching Costs Can consumers freely switch to other search engines? There is no cost to entering a new URL There is some cost to using a different search engine while using other Google products (gmail, etc.) But this cost is probably small

18 Search Technique Lock-In Because search engine algorithms differ, users must adopt new techniques Keywords that produce the desired results with Google might not do so with other search engines Partly because sites are optimized for Google, partly because we are Significance of this effect is unclear

19 Information Costs Can users determine whether there is an advantage to switching to a competing search engine? Could Google provide lower-quality search results without causing users to switch to other search engines? If so, it could profit directly and exclude potential competition (Foundem, etc.)

20 Can Users Evaluate Are search results Search goods? Search Results? Experience goods? Credence goods? Probably a mix of all three For some results, at least, it is difficult to evaluate quality, because one does not know how good the results could be

21 Evaluating Search Results Compare search results to Wikipedia Incorrect facts are recognized Incorrect search results? Product ratings and reviews Products get used and accuracy of reviews tested

22 Does Competition Force Google to Maintain High Quality? Difficult to evaluate directly Google s power is not unlimited Google made changes last week to make its search results more timely For broad classes of search, where comparisons (for timeliness, Twitter) exist, consumers can assess relative quality But can consumers make similar assessments for individual searches?

23 Can Google Manipulate Search Results? A narrower question: Can individual search results be manipulated without causing users to go elsewhere? Difficult to evaluate directly An indirect indicator: search engine optimization

24 Search Engine Optimization (SEO) There is an active market for optimization of web sites to improve their position in search results According to Google, much of this SEO results in lower-quality search results Can we use SEO to infer anything about users ability to evaluate search results?

25 SEO and Google Does SEO affect quality of search results for all search engines equally? The primary target of SEO is Google, so it is likely that SEO disproportionately affects Google s results If so, can we infer from SEO s effects on Google anything about the possibility of the possibility of result manipulation?

26 Black Hat v. White Hat Black hat SEO: Use of SEO deceptively, or in ways that search engines disapprove Google seeks to adjust its algorithm to minimize black hat SEO Still, given the amount of money spent on SEO, the effects likely are significant White hat SEO: Use of SEO to more accurately present site to algorithm Google helps web sites, or at least those that advertise, optimize

27 Black Hat SEO To the extent that SEO makes Google s search results worse, it demonstrates that lower quality, at least if not dramatic, need not cause users to switch Google s results are probably distorted more than others, since it s the target Google might be so much better that even its worsened results are better than others If so, that would allow it to manipulate

28 White Hat SEO To the extent that SEO makes Google s search results better, it demonstrates that lower quality did not prevent Google from becoming the market leader Maybe Google is so much better that even its un-optimized results are better than others If so, that would allow it to manipulate

29 SEO and Market Power SEO likely has significant effects, with little response by consumers So it seems unlikely that minor degradations in search-result quality cause significant losses in user share Yet there is profit potential in manipulating results Ability to profit from reducing quality is market power

30 Significant Market Power? But antitrust has an independent power requirement for unilateral violations in part to protect against overdeterrence It would be undesirable to limit conduct by any but dominant firms SEO shows that Google might have some power, but enough for dominance? How to measure degree of power?

31 Search-Result Placement and Market Power Suppose that SEO or Google could move a site up or down several spots in search results without consumer response: Would that show significant market power? How do we compare value of search positions? One possibility: Use prices for AdWords placement

32 Value of Result Placement Organic Search Results Ads 50 /click 40 /click

33 Calculating Placement Market Power Suppose that for AdWords the price drops 20% for placement two spots lower If a site were pushed down two spots in organic results, is the value 20% lower? U.S. Merger Guidelines: price increase of 5%-10% shows a significant loss of competition Quality decrease is equivalent

34 Calculating Placement Market Power If Google (or SEO) had the ability to move Bizrate down several spots in the results, with little or no reaction by consumers, would that show market power?

35 Other Intermediaries: Factual Distinctions Google provides a baseline unbiased search and such a baseline will not always be available Suppose intermediary says, We ll provide consumers what we want to. What is the analogy to manipulating search results? None: manipulation is the baseline

36 Other Intermediaries: Theoretical Distinctions Google s commitment to unbiased search is a commitment not to use power Allows evaluation of search conduct independently of advertising Makes a two-sided market one-sided Analysis is much more difficult when intermediary makes no such commitment Is demand for pluralism a demand for such a commitment?

37 Summary There is evidence from which one might derive a measurement of Google s power The significance of that evidence depends at least in part on Google s commitment to unbiased search For other intermediaries, there is often No objective baseline Two-sided interdependence