When Judging Antitrust Claims Against Google, Look At Lock-In, Not Network Effects

from the low-barriers-to-entry dept

Bill Snyder has an article calling Google “Microsoft’s evil twin” because if it completes its merger with Yahoo it will have 90 percent of the advertising market and will be able to jack up the price of online ads. Snyder cites the concept of “network effects” and suggests that Google’s market share advantage will “weaken of Microsoft’s e-commerce infrastructure will further discourage competition and stifle innovation.” This argument is confused. Almost every business enjoys “network effects.” Wal-Mart, for example, is able to use its large base of customers to extract lower prices from suppliers, and is then able to use its lower prices to attract more customers. That’s a network effect, but it’s not a problem. What regulators have traditionally been worried about is not “network effects” in and of themselves, but network effects combined with technological lock-in.

In the Microsoft antitrust case, for example, the “network effects” argument was that various vendors had invested billions of dollars in research and development on technologies surrounding the Windows platform, and that these investments created an almost insurmountable barrier to entry for new operating system vendors: the creator of a new OS would have to persuade hundreds of companies to spend billions of dollars re-designing their products for a new platform. In contrast, the switching costs in the advertising market are extremely low. A small website owner selling inventory on one advertising network one week can easily switch to another the next. Larger sites might take a little longer but it’s still not a large investment. Switching costs are even lower for advertisers, who can advertise on multiple networks simultaneously and shift their allocations on a daily basis.

There are a ton of small advertising networks focusing on niche advertising markets. Without the risk of barriers to entry due to lock-in, there just isn’t much reason to worry about Google’s large market share. If advertisers and website operators become frustrated with Google’s advertising network, they can and will switch to another one. And Google, knowing how low the switching costs are, will still have plenty of incentive to treat its customers well.

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Companies: google, microsoft, yahoo

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Comments on “When Judging Antitrust Claims Against Google, Look At Lock-In, Not Network Effects”

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Anonymous Coward says:

The analysis is confused

Tim –

While your analysis is usually on point, in this case you’ve missed the boat by a mile. The “network effect” in advertising is essentially the same as “lock in”. A large ad network with many advertisers can better monetize the same impression than a small one with fewer advertisers. In other words, they are able to slice is available impression to a specific advertiser (who impose caps, targeting criteria and other limits). In aggregate they wind up paying higher PCM to the web-site publisher. In turn the publisher can not switch from a high paying network to a lower paying one. Here is your lock-in

bigpicture says:

Re: The analysis is confused

Advertising is a business choice, there is usually some percentage of business volume, of straight out dollar value budget assigned. Then there is the value assessment, if I spend this much on advertising, how much additional revenue/profit does this generate. Google makes it easy to relate these business decisions.

So all this crap about “lock-in” and “network effect”, in the end the business can decide not to spend the money, or spend it on TV adds. Where is the lock-in here????

But if all of my enterprise systems are MS, and I want to expand the systems, but cannot buy anything else that will inter operate, or read the propriety file systems, so I have to pay $MS whatever they ask to expand the system, now THAT”S LOCK-IN. MS even contemplated making a price fixing charge stick on Linux because it is free.

How much do you think Ford or GM pays for an advertising spot on the Superbowl, but that is a value decision, not a lock-in, it is “what result will I get in terms of dollars paid”? A simple business decision.

PaulT (profile) says:

Re: The analysis is confused

I disagree with that. The advertisers will go where the users are. The reason why many people (myself included) use Google’s search site instead of Microsoft’s is because it’s better. I do try other search engines, but always return to Google because I find it to be the least intrusive, easiest and most accurate search engine.

If a competitor were to bring out a competing product that’s better, users would go there, and the advertisers would follow. Microsoft only have their own shoddy product and reputation to blame if they’re not attracting advertisers.

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