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Network Effects in the Search Engine Market

This article talks about search engines and the idea that they are a market between users and advertisers where advertisers also keep track of data and information (and provide them to the search engine to help the engine offer better service for its users). By getting the data, the search engine can offer more personalized and relevant results and ads to each of their users.

The first part of the article that relates to our class is the idea of advertisers having values for the ad slots that they can get from the search engine. Each advertiser has a certain price that they are willing to pay for an ad slot based on the demographic of the users that visit the search engine. Additionally, due to this network, everyone benefits. Not only do the advertisers get their products advertised to a bunch of users, the search engine also will get more users (because they’ll get more relevant results), and the users will have a great service to use.

The search engine with the best quality (more data and better algorithms) will be able to increase its market power (and be the more dominant one out of its competitors) due to this idea. We’ve seen the idea of power before in class, and it applies here as well. In this case, one engine has more power and will end up getting the most payoff or customers.

Finally, there are some indirect network effects in the search engine market. One effect mentioned in the article was that when more users use a platform, the revenue that the owners of the platform earn increases, and as a result, they are able to spend more money improving the platform (and thus increasing the value that the users get when they return to the platform). As a result, we can see a positive externality where the value that the users get correlates with the number of users that use the search engine.

Source: http://bruegel.org/2016/11/search-engines-big-data-and-network-effects/

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