Competition Law Project on

“Competition in Search Engine Markets”

Project submitted to: Project submitted by:

Ms. Adya Pandey Ayushi Dwivedi
(Faculty, B.A. LL.B. (Hons.)
Competition Law) Semester VII , Roll No. 47

DATE OF SUBMISSION- 26/09/2016

HIDAYATULLAH NATIONAL LAW UNIVERSITY,

RAIPUR (CHHATTISGARH)
 ACKNOWLEDGEMENTS

First and foremost, I take this opportunity to thank Ms. Adya Pandey, Faculty,
Competition Law, HNLU, for allotting me this topic to work on. She has been very kind in
providing inputs for this work, by way of suggestions.

I would also like to thank my parents, colleagues and friends in the University, who have
helped me with ideas about this work. I would also like to thank all the authors, writers,
columnists and social thinkers whose ideas and works have been made use of in the
completion of this project. Last, but not the least I thank the University Administration for
equipping the University with such good library and I.T. facilities, without which, no doubt
this work would not have taken this shape in correct time.

Ayushi Dwivedi
Semester VII, B.A. LL.B. (Hons.)
Roll no. 47

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 TABLE OF CONTENTS

Acknowledgements ......................................................................................................................... ii

Introduction .................................................................................................................................... iv

Research Objectives and Research Method .................................................................................... v

Hypothesis, Research Questions and Mode of Citation................................................................. vi

Scope and Limitation and Review of Literature ........................................................................... vii

Chapter I: Description of the web search industry ...................................................................... 1

Organic web search ................................................................................................................. 2

Search-based advertising ......................................................................................................... 2

Chapter II: Determining Dominant Position ............................................................................... 3

Relevant markets ..................................................................................................................... 3

Market Share of Search Engine Markets ................................................................................. 4

Drivers of market Concentration ............................................................................................. 5

Concentration and Contestability ............................................................................................ 6

Chapter III: Abuse of Dominant Position ................................................................................... 6

Abuse in organic search ........................................................................................................... 6

Higher revenues from advertising: .......................................................................................... 8

Stronger market position of own products: ............................................................................. 8

Abuse in advertising: Inhibit competitors from advertising .................................................... 8

Leveraging market power into other markets .......................................................................... 9

Chapter IV: Suggestions.............................................................................................................. 9

Conclusion .................................................................................................................................... 12

Bibliography ................................................................................................................................. 13

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 INTRODUCTION

Search engines hold the key to helping consumers access the wealth of information on the web.1
Web search engines have become very important for users and online advertisers since their rise
in the early 1990s. Search engines are popular with users, as they offer ordered access to the
continuously increasing amount of available web content. Search engines are also highly valued
by advertisers, as they offer targeted access to users by matching advertisements to the key
words of search queries. This concept has proven to be extremely successful and search engines
have developed into a billion dollar business. The growth of the search engine business has been
concurrent with a strong market concentration process. Today there are only a few big players
left. Google, the largest search engine, receives 62 percent of search queries worldwide. Yahoo!,
the second largest player, accounts for 10 percent. The rapid development of only a very few big
firms that dominate the market gives rise to fears about potential abuse of market power.2 With
these concerns in mind, this paper analyzes the forces that determine competition among web
search engines and evaluates the possible outcomes for the market.

In this project, I examine the evolution of and competition in the internet search engine market. I
model the search engine market as a two-sided markets model and analyze the industry structure
and competition of the search engine market. First, I present a mathematical model for a general
search engine two-sided market. I also explain how Google, a latecomer in the search market,
could become the leading search engine, and how Google has strengthened its leading position.
In the end, I propose some strategies on how search engine market leaders could maintain and
strengthen their leading positions. I also find that the provider might abuse its position at the
expense of advertisers, e.g. by hindering competitors from advertising on its web sites or by
leveraging its market power into other areas of the online advertising business.

1
Neil Gandal, The Dynamics of Competition in the Internet Search Engine Market, UC Berkeley: Competition
Policy Center (2000), available on <https://escholarship.org/uc/item/8jk0904s> accessed on 16th September,
2016.
2
Dr Ferdinand Pavel, Competition in the web search market: A report for Microsoft (7 July 2009), available at
<http://download.microsoft.com/download/d/c/d/dcd25a8e-c99d-4092-8253-25504b563c9d/studie_diwecon_wet
tbewerb_suchmaschinenmarkt_engl.pdf> accessed on 17th September, 2016.

iv | P a g e
 RESEARCH OBJECTIVES

1. To understand the description of Web Search industry into various kinds.

2. To determine the factors responsible for making a search engine dominant in a relevant
market.

3. To check the abuse of dominant position by search engine industry and suggest the ways
to overcome with the problem of anti-competitive practice of search engine markets.

RESEARCH METHODOLOGY AND SOURCES OF DATA

The scope of this topic is to study, discuss and analyze the Concept of Competition in
Search Engine Markets and its relevance especially in the light of present market conditions.
This project has been done after a after a thorough research based upon intrinsic and extrinsic
aspects of the project.

The present study is based on Analytical and Descriptive research. It has focused on
qualitative methods of research. Further, this research is doctrinal in nature. Both, primary and
secondary resources have been largely used to gather information and data about the topic.
Secondary resources include the Articles, books, Journals and website while primary resources
include the regulations and its bare provisions.

Various documents have been collected through different websites, and different books
have been analyzed accordingly, so as to reach to a particular conclusion.

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 HYPOTHESIS

The goal of my analysis is to examine whether early entrants benefit in the long-run from their
first mover position in internet markets and how these search engine markets abuse their position
after they hold a dominant position. I find that while early entrants (Yahoo, Lycos, Excite,
Infoseek, and Altavista) still have an advantage, the pure ‘brand effect’ advantage has been
declining over time. The success of a wave of recent new entrants suggests that entry barriers are
still quite low in the internet search engine market.

RESEARCH QUESTIONS

1. What are the various factors responsible for determining a search engine market to

acquire a dominant position in relevant market?

2. How search engine markets can abuse its dominant position?

3. How the problem of abuse of dominant position can be cured to achieve free competition?

MODE OF CITATION

A uniform mode of citation has been used throughout this research project. All citations in the
Research Project are made using the OSCOLA (The Oxford University Standard for Citation of
Legal Authorities) format (4th edn, Hart Publications, 2012). A free PDF copy of the OSCOLA
guidelines is available at: www.law.ox.ac.uk/published/OSCOLA_4th_edn.pdf.

vi | P a g e
 SCOPE AND LIMITATION

The present research is limited to theoretical aspects of the subject. Only published and
secondary data is used to define and explain the interpretation of the legislation.

There is further scope of descriptive study by taking into consideration various practical
situations involved while dealing with the present issue. To achieve the same, few examples and
reports have been referred in order to draw an analogy between the present theoretical study and
practical aspects of the subject.

REVIEW OF LITERATURE

The Review of Literature mainly includes the secondary sources of materials primarily
consisting of Articles, Reports and Research Papers. The major part of the content of the whole
project has been taken from various articles which are available on the internet. Other than that
Microsoft Report titled “Competition in the web search market” by Dr. Ferdinand Pavel has been
used to substantiate the content of the chapters.

Besides, the relevant material has been taken from the research work of Neil Gandal,
‘The Dynamics of Competition in the Internet Search Engine Market’. Other than that the
literature was also taken from various other Articles.

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 “COMPETITION IN SEARCH ENGINE MARKETS”

With the rise of the internet since the beginning of the 1990s, the amount of information on the
web has increased dramatically. Access to this information has become increasingly important.
Consequently, web search engines have experienced rapid growth. While initially, only a small
number of tech-savvy people used search engines, today nearly 600 million searches are
conducted every day.3 The rise of internet search went along with a boom of online advertising.
The boom of internet search and advertising was also concurrent with a tendency of increasing
market concentration. Only a few firms emerged as winners.4 The three big global players

Google, Yahoo!, and Bing (former MSN) control about 78 percent of the market worldwide.5
Google the market leader reached a market capitalization of more than 140 billion US-Dollars in
2009. Both Google and Yahoo! are among the most valuable brand names worldwide.6

CHAPTER I: DESCRIPTION OF THE WEB SEARCH INDUSTRY

The purpose of web search engines is to make the information on the web available to their
users.
Google, for instance, states as its mission: “[…] to organize the world’s information and make it
universally accessible and useful.”7 By submitting a search query, users reveal private
information about their current interests. This information enables advertisers to precisely target
advertisements to users’ needs. Thus search engines operate in a two sided market, providing a

3
S Rashtchy, The user revolution: The new advertising ecosystem and the rise of the internet as mass medium,
(2007)155, available at <http://people.ischool.berkeley.edu/~hal/Courses/StratTech07/Lectures/Google/Articles
/user-revolution.pdf> accessed on 17th September, 2016.
4
An overview about the history of search engines and their relationship can be found at Bruce Clay Inc.
available at <www.bruceclay.com/searchenginerelationshipchart.htm> accessed on 17th September, 2016.
5
ComScore, Baidu ranked third largest worldwide search property in December 2007, ComScore Press Release,
(24 January 2008), available at <www.comscore.com/Press_Events/Press_Releases/2008/01/Baidu_
Ranked_Third_Largest_World_Wide_Search_Engine/(language)/eng-US> accessed on 17th September, 2016.
6
Interbrand, Best global brands (12 June 2008) available at <www.interbrand.com/best_global_brands.aspx>
accessed on 17 September 2016.
7
Google Annual Report 2007, available at < https://investor.google.com/pdf/2007_google_annual_report.pdf>
accessed on 16th September 2016.
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connecting platform for searches and advertisers,8 that they perform both activities in rather
similar ways. The distinguishing characteristic of such a two sided platform is that customers on
both sides (users and advertisers) need one another but lack a means of connection. The platform
helps customers to get connected and thereby creates value for both sides. The fact that only the
advertisers side of the market is charged for using platform services indicates how highly
advertisers value this access to users’ attention.9

Organic web search

The central function of web search engines is to provide the most relevant links to a query based
on the content available on the web. The central portion of content provided to the user of a
search engine are organic search results, which are the results generated through a search
engine’s own information sorting processes. These organic results should be distinguished from

paid search results (advertising).10

Search-based advertising

The online advertising market can be separated into search-based and non-search-based
advertising markets.11Whereas search-based ads are displayed next to organic search results on a
given provider’s interface, non-search ads are placed on a specific publisher’s site.

Thus, all major providers have structured their main activities – web search and search-based
advertising – as two-sided markets, and that they perform both activities in rather similar ways.
Nevertheless, there are significant differences in the quality and accessibility of different web

8
M Armstrong, Competition in two-sided markets, 37 (3) RAND Journal of Economics (2006) 668; See also D S
Evans and R Schmalensee, The industrial organization of markets with two-sided platforms, NBER Working
Paper, (2005), available at <www.nber.org/papers/w11603.pdf > accessed on 17th September, 2016.
9
Ferdinand Pavel (n 2).
10
Eric Schmidt, The Power of Google: Serving Consumers or Threatening Competition?, 112th Cong 5 (21
September 2011) (testimony of Eric Schmidt, Executive Chairman, Google Inc.) available at
<www.judiciary.senate.gov/download/testimony-of-eric-schmidt-pdf> accessed on 18th September 2016.
11
EU Commission, Guidance on the Commission's enforcement priorities in applying article 82 EC treaty to
abusive exclusionary conduct by dominant undertakings, Official Journal of the European Union, 2009/C 045/02
(24 February 2009), available at <http://eur-lex.europa.eu/legal-
content/FR/TXT/PDF/?uri=CELEX:52009XC0224 (01)andfrom=EN> accessed on 17th September, 2016.

2|Page
search engines. In particular, these differences reflect different levels of regional and temporary
web coverage as well as a varying depth of information on past user behavior and personal
preferences of individual users. Both are major factors to determine the quality of web search
engines. In addition, the specific cost structure of the industry (with substantial levels of fixed
costs for RandD as well as for maintaining the necessary server infrastructure) is likely to cause
significant differences in the performance of different search engines.

CHAPTER II: DETERMINING DOMINANT POSITION

Relevant markets

Generally, defining relevant antitrust markets in a two-sided framework requires the use of
special methods that consider the externalities between the two sides of the market. In particular,
one needs to take into account the effects of a one-sided hypothetical price increase on each side
of the market. This analytical exercise should be carried out separately for hypothetical price
changes on each side of the market.12

It is often noted in economic literature that in two-sided markets it is the structure of prices on
both sides that matters, not the particular price level on each side. However, search engines do
currently not charge users for search and it is unlikely that this practice will change in the
foreseeable future. Therefore, the effect of the price structure seems to be of little relevance. It
appears reasonable to instead consider the substitutability of search engines from the perspective
of users and advertisers in order to define the relevant antitrust markets.

The users’ side

Users rely on the use of search engines to get access to ordered web content. Since there is no
alternative way for users to access a wide range of organized web content on a global scale, it is
therefore reasonable to assume that web search is not substitutable by other online or offline

12
DS Evans, Two-Sided Market Definition, ABA Section of Antitrust Law, Market Definition In Antitrust: Theory
And Case Studies, Forthcoming (11 November 2009), available at <http://ssrn.com/abstract=1396751> accessed
on 17th September, 2016; See also David S Evans and R Schmalensee, Industrial Organization of Markets with
Two-Sided Platforms, (2007) 3 Competition Pol’y Int’l 150, 152.

3|Page
services. Hence, online web search constitutes a relevant antitrust market from the perspective of
users.

The advertisers’ side

Advertising can be online and offline. The online advertisement market can be divided into search-
based and non-search advertisement. advertisers in the search-based market buy ad-space from web
search engines to place targeted advertisements to consumers. In the non-search market, advertisers
place ads on publisher websites, which are either related to the context of the website (contextual
advertisements) or not (non contextual advertisements). Here, web search engines and their
respective ad networks typically act as intermediaries for contextual ads between advertisers and
publishers, where they can use similar ad-matching tools as in search-based advertisement.

The definition of relevant markets for advertisers depends mainly on the degree to which advertisers
can substitute search-based ads by other types of online or even offline advertisement.13
A common conclusion is that advertisements in offline markets like print media, TV, or radio are
substantially different from online advertisements, since advertisers cannot target their
campaigns as precisely and effectively as they can with online advertising. Hence, both EU and
US antitrust authorities see online and offline advertisements as no or very limited substitutes.
Concerning the geographical separation, both the FTC as well as the EU Commission base their
analysis on market shares in their respective region, which is similar to the geographical
separation of markets previously described for the users side.14

Market Share of Search Engine Markets

In cases under Sherman Act Sec 2 and Art 102 TFEU, the usual measure of market power is market
share.15 Statistic shows the desktop global market share of leading internet search engines. In

13
EU Commission, Declaring a concentration to be compatible with the common market and the functioning of the
EEA Agreement, Case No COMP/M.4731 (11 March 2008).
14
RW Hahn and HJ Singer, An antitrust analysis of Google's prospect acquisition of DoubleClick, AEI-Brookings Joint
Center for Regulatory Studies (September 2007) 07-24, available at <www.brookings.edu
/~/media/research/files/papers/2007/9/useconomics-hahn/09useconomics_hahn.pdf> accessed on 17th September,
2016.
15
United States v Aluminum Corp of America, 148 F.2d 416 (2d Cir. 1945); Hoffmann-La Roche and Co AG v
Commission, Case 85/76, 1979 ECR 461 ¶ 39 (“The existence of a dominant position may derive from several

4|Page
September 2015, 10.67 percent of worldwide internet users searched the web with online search
engine Bing. During the same month, Chinese search engine Baidu had a market share of 8.13
percent.

Ever since the introduction of Google Search in 1997, the worldwide market share of all search
engines has been rather lopsided. Google has dominated the search engine market, maintaining an
67.49 percent market share as of the second quarter of 2015. The majority of Google revenues are
generated through advertising. The company has also expanded its services to mail, productivity
tools, enterprise products, mobile devices and other ventures. As a result, Google earned one of
the highest tech company revenues in 2014 with roughly 66 billion U.S. dollars. Yahoo constitute
the market share of 10.77 percent. The rest market share is hold by AOL, Ask, Lyol and others.16

Drivers of market Concentration

The strong concentration process in both web search as well as search-based advertising can well
be explained by the technical features of the industry. Overall, two main industry characteristics
are particularly strong drivers for the observed concentration process:
The cost structure of the search engine business; and
The prevalence of network effects on both sides of the market.

Cost structure in the search engine market is characterized by high fixed costs for RandD as well
as hard- and software infrastructure, while the variable costs of providing services to searchers
and advertisers are almost zero.17 In economic theory, a network effect (or network externality)
describes a situation where the value of a good or service for individual consumers changes with
the total number of consumers.18

factors which, taken separately, are not necessarily determinative but among these factors a highly important one
is the existence of very large market shares”).
16
Net market share, Desktop Search Engine Market Share, available at <www.netmarketshare.com/search-engine-
market-share.aspx?qprid=4andqpcustomd=0andqptimeframe=M> accessed on 17th September, 2016.
17
DS Evans (n 12).
18
David S Evans, The Economics of the Online Advertising Industry, Review of Network Economics, Vol 7 No 3,
(September 2008) 354-391, available at <http://ssrn.com/abstract=1086473> accessed on 18th September 2016.

5|Page
Concentration and Contestability

Today’s web search industry is characterized by very strong levels of concentration. The
development can be explained by fundamental economic forces. Both the cost structure of
operating a search engine as well as several network effects on both sides of the market are likely
to create a winner-takes-it all competition where a single firm eventually wins the market. This
development is even strengthened by an over-proportional rise in revenue of the dominant firm,
enabling it to invest significantly larger amounts in RandD and server infrastructure and thereby
further strengthening its dominant position. Furthermore, this dominant position is increasingly
noncontestable. Significant fixed costs for entrants as well as switching costs for users impose
significant entry barriers, while network effects diminish the chances for smaller firms to catch
up with their leading competitor.

With strong concentration and low contestability in the search engine market, abuse of market
power is a realistic threat. To develop a better understanding of the consequences this is likely to
have, the following chapter analyses the various channels through which a dominant search
engine provider could extract rents from users and advertisers.19

CHAPTER III: ABUSE OF DOMINANT POSITION

Abuse in organic search

With search services being free of charge, searchers are primarily interested in the quality of the
results they receive. Hence, we focus on the incentives of a dominant search engine to not
provide the best-possible search results, even if doing so would be costless. We identify two
channels through which the under-provision of quality allows a firm to extract rents by abusing
its dominant position:
 Higher revenues from advertising, and a
 Stronger market position of its own products.

19
Ferdinand Pavel (n 2).

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The level of information asymmetry in the search market is not given exogenously but rather
depends on the following circumstances:


If users conduct searches for the same query using different search engines, they are able
to compare the results across search engines. The larger the share of users who conduct
searches at different search engines (multi-homing) the less severe the information

 asymmetries. However, multi-homing in web search seems to be rare.

If users view search results critically they are less likely to suffer from the negative
consequences that could arise from information asymmetry. However, users seem to be
rather naive and appear to trust the quality of search results. For example, more than two
third of the users in the US (68 percent) state that search engines are a fair and unbiased

 source of information while only 19 percent claim not to trust search engines.20

Users who search for generally known information such as navigating to a certain web
site or institution are able to judge the quality of their search results well. Hence, the
larger the share of users looking for unknown information the higher the level of

information asymmetry.21

Given the high level of informational queries, the trust of searchers in the quality of search
results and the small share of searchers using more than one search engine, the information
asymmetries between searchers and search engine are likely to be significant. Clearly, a
dominant search engine could misuse this and distort search results without having users realize
that they are provided with suboptimal search results.

20
D Fallows, Search Engine Users: Internet searchers are confident satisfied and trusting – but they are also
unaware and naïve, Pew Internet and American Life Project (January 2005), available at
<www.pewinternet.org/files/old-media/Files/Reports/2005/PIP_Searchengine_users.pdf.pdf> accessed on 16th
September 2016.
21
BJ Jansen and DL Booth, Determining the user intent of web search engine queries, Paper presented at the 16th
International World Wide Web Conference, Banff (Canada) (8-12 May 2007), available at
<www2007.org/posters/poster989.pdf> accessed on 17th September, 2016.

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Higher revenues from advertising:

Search engines earn money every time a user clicks on an ad. In order to generate higher
revenues from advertisers a search engine could lower the quality of search results so that users
click more often on advertisements to find what they are looking for. For the web search industry
with its two-sided market structure, these results suggest that a dominant firm has incentives to
either:

(i) Lower the quality of organic results for informational queries in order to stimulate clicks
on advertisements, or to
(ii) Place sponsored links for informational queries in a suboptimal manner so that the most
relevant ones do not receive the top positions.

Stronger market position of own products: Given the ability of web search engines to allocate
users’ attention to sponsored links, search engines generally have an incentive to advertise their
own products more prominently. Since searchers perceive certain ad slots (such as the top three
of all sponsored links) as a sign of the quality of the search result, traffic to the search engine’s
own product sites could be increased by placing own product ads in top spots. With more traffic,
the search engine’s market position strengthens.

Abuse in advertising: Inhibit competitors from advertising: Although the major search
engine providers sell their ad-slots in auctions, they nevertheless maintain substantial impact on
prices by controlling relevant parameters22 which can be adjusted for strategic reasons. For
example, advertisement slots are allocated to advertisers based on their bid price as well as on a
quality score. The quality score is meant to reflect the number of times that a user is expected to
click on an ad. In this way, a search engine can improve the efficiency of its auction process,
thereby maximising its revenue and distinguishing itself from its competitors.

22
Benjamin G Edelman, Google-Yahoo ad deal is bad for online advertising, Harvard Business School Working
Knowledge (12 August 2008), available at <http://hbswk.hbs.edu/item/5995.html> accessed on 17th September,
2016.

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However, a dominant firm can also adjust the quality score – which is proprietary information and
unknown to advertisers – for strategic reasons, for example to block ads from its competitors.23

Leveraging market power into other markets

Major web search engines also operate ad networks which offer intermediation services for non-
search-based advertising, in particular context advertising. A search engine provider with a
dominant position in search-based advertisement can therefore also abuse its market power by
leveraging into other online advertising markets in order to strengthen its position in that market.
For example, to raise demand for the services provided by its own ad network, the firm can
punish advertisers who also use a competitor’s ad network. Alternatively, the search engine can
also reward advertisers who use its ad network or the services it provides by assigning them a
better position for their search-based ads.

CHAPTER IV: SUGGESTIONS

In response to the highly concentrated market structure and incentives for market abuse
described above, policy makers and regulators must follow a well-balanced approach: On the one
hand, they need to consider the great contribution on the part of search engines to the improved
accessibility of information available on the internet. On the other hand, it is unrealistic to
assume that a dominant firm will simply generate valuable services for internet users and
advertisers without abusing its position if it is profitable for them. As information products come
to constitute a larger portion of the market, and a larger portion of allegations regarding
anticompetitive conduct, competition law must develop techniques for addressing the special

problems posed by information.24

23
Ibid. (Edelman argues that not only the quality score can be used for strategic reasons. He states for example that
“Google's restrictions on export and copying of advertisers' campaigns, further hinder competition in Internet
advertising-without any countervailing benefit whatever”).
24
Mark R Patterson, Google and Search-Engine Market Power, Harvard Journal of Law and Technology (July
2013) available at <http://jolt.law.harvard.edu/antitrust/articles/Patterson.pdf> accessed on 17th September,
2016.

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Promoting further research on competition in the web search market

Any form of policy interventions should be based on sound theoretical and empirical evidence.
However, given that the industry itself is very young and relevant data are not readily available, a
number of relevant questions need to be further investigated. For example, very little is known about
the incentives of search engines to provide high quality search results and the question has received
surprisingly little attention in competition policy. Antitrust investigations involving search engines
have so far focused strongly on the advertisers’ side of the market while the users’ side has remained
largely neglected. Academic and legal research must address this imbalance.

Regulations to clearly separate advertisements from organic search results

Imposing mandatory rules on how organic search results and sponsored links have to be
separated from one another could be a first and rather modest regulatory intervention in line with
general consumer protection policies. While this will not per se prevent a dominant provider
from strategically altering the overall quality of search results or from displaying certain results
more prominently, it could still increase transparency for consumers and would especially
benefit inexperienced and less educated users, who may have trouble distinguishing organic
content from paid results.

Obliging providers to reveal the determinants of their quality score

An obvious means of abusing market power against direct competitors and advertisers is to
adjust the quality score that – together with an advertiser’s bid price – is used to allocate
advertisements to available ad slots. To limit the possibilities of abuse through strategic
adjustments of the quality index, the dominant provider could be obliged to reveal the criteria
and procedures it applies to compute the quality score to an independent third party such as an
accounting firm or a regulator. To maintain the proprietary nature of this information, the third
party should be obliged to maintain strict confidentiality, while it could still react on allegations
by advertisers and investigate into the correctness of assigned quality scores.

Mandatory third party auctions of ad inventory

Web search engines do not determine the prices for their online ad inventory, selling it through
auctions instead. However, providers still maintain a certain impact on the outcome of these

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auctions through several crucial parameters which they control. As a remedy, the provider could
be obliged to sell a part of its ad inventory through separate auctions which are conducted by a
third party. For example, the regulator could order the provider to sell selected ad-slots among
the displayed search results for selected keywords that typically attract high bidding prices.
These ad-slots could be sold through auctions which a third party conducts under the regulator’s
supervision. The outcome of this auction would be under the control of the regulator, ensuring
advertisers equal access to the leading provider’s search platform.

Unbundling of server infrastructure

So far, all suggested remedies do not fundamentally alter the structure of a dominant provider’s
business. However, provided there is evidence of ongoing abuses, an intervention could be made
that addresses the fundamentals of the market. This intervention could be based on schemes that
are typically used to regulate operations of natural monopolies such as energy utilities or the
providers of transportation and telecommunication services. In these sectors, the necessity to
provide services based on expensive infrastructure, which cannot easily be duplicated, imposes a
significant barrier to entry to new competitors and generates market power for the incumbent
firms. As a remedy, regulators typically unbundle the operation and maintenance of
infrastructure from the provision of services. While the former (e.g. the operation of an energy
grid or a rail network) is performed under strict regulation to ensure that all interested parties
have access to the infrastructure at equal terms, firms can freely compete on service provision

(e.g. energy retailing or transportation services).25

25
Dr Ferdinand Pavel (n 2).

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 CONCLUSION

Since its birth in the early 1990s, web search has become one of the most popular internet
services. Today, about half of all internet users visit search engines on a typical day to conduct
nearly 600 million searches. This rise in web search has been made possible by a strong
expansion of search-based advertisements, which has allowed web search providers to finance
their activities. Altogether, web search and online advertisements have become a billion dollar
business with Google and Yahoo! – the two leading providers – listed among the most valuable
brand names worldwide.

Although web search itself is typically provided free of charge, this paper has demonstrated that
a dominant provider has clear incentives to abuse its position by extracting rents from both users
and advertisers. For example, the provider can take advantage of substantial information
asymmetries by providing a lower quality of search results, directing users’ attention to
sponsored links. Similarly, the provider can place links to its own services more prominently
within the organic search results, such as in the case of a search for “email”. Moreover, a
dominant firm can hinder competitors from advertising on its site and leverage its market power
into other markets such as ad intermediation or display advertisements.

The analysis in this research shows that a dominant search engine provider has clear incentives
to abuse its market power at the expense of both users and advertisers. Due to significant
information asymmetries, organic search results might be distorted and users’ attention be
redirected to revenue-enhancing advertisements without users being able to realise this.
Furthermore, competition might be distorted by prominently displaying links to the search
engine’s own product sites within the organic search results. Overall, this gives rise to concerns
about the informational integrity of a web search provider that has established a dominant
position. In addition, a dominant search engine might also prevent competitors to advertise on its
sites and leverage its market power into other market segments such as ad intermediation and
provision of ad tools for contextual advertisement. Given this result, it seems that policy makers
and regulators should start developing strategies of how to constrain the market power of the
dominant firm and to prevent possible abuses.

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 BIBLIOGRAPHY

Treaties and Legislations

1. Sherman Act 1890.

2. Treaty on the Functioning of the European Union (TFEU) 2007.

Judicial Pronouncements

1. Declaring a concentration to be compatible with the common market and the functioning
of the EEA Agreement, EU Commission, Case No COMP/M.4731 (11 March 2008).
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1. Benjamin G Edelman, Google-Yahoo ad deal is bad for online advertising, Harvard

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Websites and Other Sources

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