The map of commerce: Internet search, competition, and the circular flow of information

Journal of Competition Law and Economics

Volumn 5, Issue 4, 2009, Pages 633-682

  Spulber, Daniel F ^a  

^a NORTHWESTERN UNIVERSITY   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 77749341266     PISSN: 17446414     EISSN: 17446422     Source Type: Journal    
DOI: 10.1093/joclec/nhp011     Document Type: Article

References (154)

1. See Friedrich A. Hayek, Notes on the Evolution of Systems of Rules of Conduct, in STUDIES IN PHILOSOPHY, POLITICS, AND ECONOMICS 66 (1967).
2. Hayek observes that "a mutual adjustment of the spontaneous activities of individuals is brought about by the market."
3. FRIEDRICH A. HAYEK, THE CONSTITUTION OF LIBERTY 159 (1960).
4. See Eugene Garfield, Citation Indexes to Science: A New Dimension in Documentation through Association of Ideas, 122 SCI. 108 (1955).
5. See also Eugene Garfield, History and Meaning of the Journal Impact Factor, 295 J. AM. MED. ASS'N 90 (2006).
6. See D.J. de Solla Price, Networks of Scientific Papers, 149 SCI. 510 (1965).
7. See also D.J. de Solla Price, A General Theory of Bibliometric and Other Cumulative Advantage Processes, 27 J. AM. SOC'Y INFO. SCI. 292 (1976).
8. See Bronwyn H. Hall, Adam Jaffe & Manuel Trajtenberg, Market Value and Patent Citations, 36 RAND J. ECON. 16 (2005).
9. JESSICA LIVINGSTON, FOUNDERS AT WORK: STORIES OF STARTUPS' EARLY DAYS (2007).
10. Id. at 128.
11. See JOHN BATTELLE, THE SEARCH: HOW GOOGLE AND ITS RIVALS REWROTE THE RULES OF BUSINESS AND TRANSFORMED OUR CULTURE 75, 82 (2005). Interestingly, Page's article was rejected on its first submission in 1998.
12. The generally cited article is Larry Page, Pagerank: Bring Order to the Web (Stanford Digital Library, Working Paper, 1997)
13. See also Larry Page, Sergey Brin, Rajeev Motwani & Terry Winograd, The PageRank Citation Ranking: Bringing Order to the Web (Stanford InfoLab, Jan. 1998), available at http://ilpubs.stanford.edu:8090/422/1/1999-66.pdf [hereinafter Page et al.].
14. Sergey Brin and Larry Page, The Anatomy of a Large-Scale Hypertextual Web Search Engine. (Seventh International World-Wide Web Conference, Brisbane, Australia), Apr. 14-18, 1998, available at http://dbpubs.stanford.edu:8090/pub/1998-8.
15. Page et al., supra note 8, at 3.
16. Id., at 2.
17. BATTELLE, supra note 7
18. Trellian: Competitive Intelligence, http://ci.trellian.com/index.html (last visited June 5, 2009).
19. Wordtracker: Academy, http://www.wordtracker.com/academy (last visited June 5, 2009).
20. Wordtracker: Keyword, http://www.wordtracker.com/academy/keyword-basics-part-2-discoveringthe-keyword-matrix (last visited June 5, 2009).
21. Google: Business Solutions, http://www.google.com/intl/en_us/services/var_1.html (last visited June 5, 2009).
22. Keywordiscovery: Industry Keywords, http://www.keyworddiscovery.com/tour-directory.html (last visited June 5, 2009).
23. The North American Industry Classification System (NAICS) was adopted in 1997 and it replaced the earlier Standard Industrial Classification (SIC) system. The NAICS is used by the U.S. government agencies to classify business establishments for data collection.
24. See U.S. Census Bureau, North American Classification System, http://www.census.gov/eos/www/naics/index.html (last visited June 6, 2009).
25. In 1999, the statistical agencies of Canada, Mexico, and the United States began work on demand-oriented product classification, known as the North American Product Classification System (NAPCS)
26. see U.S. Census Bureau, North American Product Classification System, http://www.census.gov/eos/www/napcs/napcs.htm (last visited June 6, 2009).
27. See Business.com: Directory, http://www.business.com/directory/ (last visited June 6, 2009).
28. See Yahoo!: Everything, http://everything.yahoo.com/ (last visited June 6, 2009).
29. See Yahoo!: Directory, http://dir.yahoo.com/Business_and_Economy/ (last visited June 6, 2009).
30. See Yahoo!: Business & Economy Directories, http://dir.yahoo.com/Business_and_Economy/Directories/Companies/ (last visited June 6, 2009).
31. Open Directory Project, www.dmoz.org/.
32. See eBay: All Categories, http://shop.ebay.com/allcategories/all-categories?_trksid=m38 (last visited June 6, 2009).
33. Gandal studies early entrants into search (for the years 1998 and 1999) and finds that any first-mover advantage that may have existed declined over time. Gandal suggests that the search market is characterized by low barriers to entry and fierce competition and that consumers have been primarily interested in obtaining the most relevant hits for their queries.
34. See Neil Gandal, The Dynamics of Competition in the Internet Search Engine Market, 19 INT'L. J. INDUS. ORG. 1103 (2001).
35. See also Steve Lawrence & C. Lee Giles, Searching the World Wide Web, 280 SCI. 98 (1998).
36. Steve Lawrence & C. Lee Giles, Accessibility of Information on the Web, 400 NATURE 107 (1999).
37. Xavier Druze & Francois-Xavier Hussherr, Internet Advertising: Is Anybody Watching?, 17 J. INTERACTIVE MARKETING 8 (2003).
38. See Benjamin Edelman, Michael Ostrovsky & Michael Schwarz, Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords, 97 AM. ECON. REV. 242 (2007) [hereinafter Edelman et al.].
39. See Search Engine History: Homepage, http://www.searchenginehistory.com/ (last visited June 6, 2009).
40. These included AllTheWeb, Altavista, AskJeeves, Hotbot, IWon, Lycos, Teoma, MSN, and Yahoo!
41. See Andrew Ellam, Overture and Google: Internet Pay-Per-Click (PPC) Advertising Auctions (Case Study CS-03-022, London Business School), Mar. 2003.
42. U.S. Patent No. 6,269,361 (issued July 31, 2001).
43. See Search Engine History, supra note 32
44. See Stefanie Olsen, Google, Yahoo Bury the Legal Hatchet, CNET News, Aug. 9, 2004 available at http://news.cnet.com/Google,-Yahoo-bury-the-legal-hatchet/2100-1024_3-5302421.html.
45. In 2008, Google search and content had about 75 percent of Internet advertising expenditures, Yahoo! search and content had 20 percent, and Microsoft less than 5 percent, see Efficient Frontier, U.S. Search Engine Performance Report Q4 2008 (White Paper, Jan. 2009).
46. See Ryan Blitstein, Microsoft, Google, Yahoo in Online Ad War, SAN JOSE MERCURY NEWS, May 19, 2007
47. According to a report on March 24, 2009, search engine market shares in terms of usage are as follows: Google-Global 81.57 percent, Yahoo-Global 10.07 percent, MSN-Global 2.97 percent, AOL-Global 1.89 percent, Microsoft Live Search 1.74 percent, Ask-Global 0.95 percent, AltaVista-Global 0.07 percent, Excite-Global 0.03 percent, All the Web-Global 0.01 percent, and Lycos-Global 0.01 percent
48. see Market Share: Search Engine Market Share, http://marketshare.hitslink.com/search-engine-market-share.aspx?qprid=4 (last visited June 6, 2009)
49. Market Share: Top Search Engine Share Trend, http://marketshare.hitslink.com/search-engine-market-share.aspx?qprid=4 (last visited June 6, 2009).
50. Dawn Kawamoto & Anne Broache, FTC Allows Google-DoubleClick Merger to Proceed, CDNET NEWS, Dec. 20, 2007, available at http://news.cnet.com/FTC-allows-Google-DoubleClick-merger-to-proceed/2100-1024_3-6223631.html.
51. See Statement of Federal Trade Commission Concerning Google/DoubleClick, 5 (Dec. 20, 2007), FTC File No. 071-0170, available at http://www.ftc.gov/os/caselist/0710170/071220statement.pdf.
52. Google: Google Business Solutions, http://www.google.com/intl/en_us/services/var_1.html (last visited June 6, 2009).
53. The concept of the product space is introduced by Harold Hotelling, Stability in Competition, 39 ECON. J. 41 (1929).
54. The basic idea of representing the features of products is extended by Kelvin J. Lancaster, A New Approach to Consumer Theory, 74 J. POL. ECON. 132 (1966).
55. See also Michio Morishima, The Problem of Intrinsic Coinplementarity and Separability of Goods, 11 METROECONOMICA: INT'L REV. ECON. 188 (1959).
56. See Vincent P. Crawford & Joel Sobel, Strategic Information Transmission, 50 ECONMETRICA 1431 (1982).
57. Crawford and Sobel study a strategic game of information revelation in which the sender chooses to send a noisy signal to the receiver. In equilibrium, the sender "partitions the support of the probability distribution of the variable that represents his private information and, in effect, introduces noise into his signal by reporting only which element of the partition his observation actually lies in. This represents S's optimal compromise between including enough information in the signal to induce R to respond to it and holding back enough so that his response is as favorable as possible." Id.
58. See Joseph Farrell & Matthew Rabin, Cheap Talk, 10 J. ECON. PERSP. 103 (1996).
59. Some analyses of cheap talk consider an intermediary who can make sure that each player discloses his information to receive the other player's information. Id at 117. The introduction of an intermediary who serves as an expert can improve the outcome of a cheap talk game.
60. See Wouter Dessein, Authority and Communication in Organizations, 69 REV. ECON. STUD. 811 (2002)
61. Vijay Krishna & John Morgan, The Art of Conversation: Eliciting Information from Experts Through Multi-Stage Communication, 117 J. ECON. THEORY 147 (2004)
62. Chirantan Ganguly & Indrajit Ray, On Mediated Equilibria of Cheap-Talk Games (University of Birmingham, Working Paper, May 2008)
63. Ganguly and Ray provide conditions under which a mediator does not improve the outcome of the two-person game. In their setting, the sender sends a signal to the mediator who chooses an action that he recommends to the receiver.
64. 1/(2H)(v-th)dh-HK
65. See Michael Spence, Job Market Signaling, 87 Q. J. ECON. 355 (1973).
66. See Edelman et al., supra note 31.
67. For an overview of the auction literature, see VIJAY KRISHNA, AUCTION THEORY (2002). The basic second-price auction corresponds to the Vickrey-Clarke-Groves (VCG) auction mechanism.
68. See William Vickrey, Counterspeculation, Auctions, and Competitive Sealed Tenders, 16 J. FIN. 8 (1961)
69. Edward H. Clarke, Multipart Pricing of Public Goods, 11 PUB. CHOICE 17 (1971)
70. Theodore Groves, Incentives in Teams, 41 ECONOMETRICA 617 (1973)
71. The VCG mechanism can be used to allocate multiple objects. However, as Edelman et al. observe, the VCG mechanism for multiple objects does not correspond to charging bidders the amount of the next highest bid.
72. Edelman et al. consider the generalized English auction that corresponds to the GSP and show that it has a unique equilibrium with the same payoffs to all players as the dominant strategy equilibrium of VCG.
73. For a survey of the literature on position auctions, see Ute S. Lahaie, Amin Saberi, David Pennock & Rakesh Vohra, Sponsored Search, in ALGORITHIC GAME THEORY (Noam Nisan, Tim Roughgarden, Eva Tardos & Vijay V. Vazirani eds., Cambridge University Press, 2007).
74. On multiunit auctions, see Gabrielle Demange, David Gale & Marilda Sotomayor, Multi-Item Auctions, 94 J. POL. ECON. 863 (1986).
75. On position auctions, see Hal R. Varian, Position Auctions, 25 INT'L. J. INDUS. ORG. 1163 (2007).
76. On matching problems, see Vincent P. Crawford & Elsie M. Knoer, Job Matching with Heterogeneous Firms and Workers, ECONOMETRICA 437 (1981)
77. Gabrielle Demange & David Gale, The Strategy Structure of Two-Sided Matching Markets, 53 ECONOMETRICA 873 (1985)
78. For a rule allocating positions based on the advertising budget of the seller, see Aranyak Mehta, Amin Saber, Umesh Vazirani & Vijay Vazirani, AdWords and Generalized On-line Matching, 54 J. ASS'N COMPUTING MACHINERY 1 (2007), available at http://doi.acm.org/10.1145/1284320.1284321.
79. This formulation follows that of Edelman et al. They observe that repeated bidding tends to reveal additional information to bidders and the auctioneer. Athey and Ellison consider an auction model in which advertisers bid for positions on a search engine. Advertisers' value from a position depends on sales to consumers who make rational inferences about product quality and search across advertisers
80. see Susan Athey & Glenn Ellison, Position Auctions with Consumer Search (Harvard University, Working Paper, June 2008)
81. This follows from order statistics arguments because the greater the sample size, the larger will be the expected value of the highest observation
82. For a discussion of the choices made by advertisers, see Efficient Frontier, Algorithms and Optimization (White Paper, Dec. 2008).
83. To highlight the features of the seller's overall advertising problem, suppose that the seller's only costs are advertising. Putting aside the seller's bidding strategy, suppose that the schedule c( j) represents the expected cost per order at position j, and q( j) is the number of orders received in position j. Letting p be the return per unit of sales for the advertiser, expected profits from a particular keyword at a particular position j equal Π(j)=(p-c(j))q(j). With many keywords i, and many positions, j, c(i, j) is the expected cost of keyword i at position j, and q(i, j) is the number of orders received from keyword i in position j. For example, suppose that there are two keywords and the advertiser chooses position j for keyword 1 and position j0 for keyword 2. Then, the advertiser allocates a given level of advertising expenditure, A, across various keywords and positions, A = c(1,j)+c(2,j'). The advertiser then can obtain a schedule of expected units sold on the basis of its choice of keywords, Q(A)=q(1,j)+q(2,j').
84. To maximize the net returns from its advertising expenditures, represented by pQ(A)2 A, the firm chooses its level of expenditures such that the marginal revenue from advertising equals the additional advertising expenditure, pdQ(A)/dA=1
85. Two-sided markets are studied by Abdullah Yavas: Abdullah Yavas, Marketmakers versus Matchmakers, 2 J. FIN. INTERMEDIATION 33 (1992)
86. Abdullah Yavas, Middlemen in Bilateral Search Markets, 12 J. LAB. ECON. 406 (1994)
87. Abdullah Yavas, Economics of Brokerage: An Overview, 2 J. REAL. EST. LITERATURE 169 (1994)
88. Abdullah Yavas, Search and Trading in Intermediated Markets, 5 J. ECON. &MGMT. STRATEGY 195 (1996)
89. See also Bernard Caillaud & Bruno Jullien, Chicken & Egg: Competition among Intermediation Service Providers, 34 RAND J. ECON. 309 (2003)
90. Marc Rysman, Competition between Networks: A Study of the Market for Yellow Pages, 71 REV. ECON. STUD. 483 (2004)
91. Geoffrey Parker & Marshall Van Alstyne, Two-Sided Network Effects: A Theory of Information Product Design, 51 MGMT. SCI. 1494 (2005)
92. Daniel F. Spulber, Firms and Networks in Two-Sided Markets, in HANDBOOK IN INFOMATION SYSTEMS 1, 137-200 (Terrence Hendershott ed., 2006).
93. See Thomas Gehrig, Intermediation in Search Markets, 2 J. ECON MGMT. STRATEGY 97 (1993)
94. Daniel F. Spulber, Market Making by Price Setting Firms, 63 REV. ECON. STUD. 559 (1996)
95. DANIEL F. SPULBER, MARKET MICROSTRUCTURE: INTERMEDIARIES AND THE THEORY OF THE FIRM (1999)
96. Daniel F. Spulber, Market Microstructure and Incentives to Invest, 110 J. POL. ECON. 352 (2002)
97. John Rust & George Hall, Middlemen versus Market Makers: A Theory of Competitive Exchange, 111 J. POL. ECON. 353 (2003).
98. See Harold Demsetz, Why Regulate Utilities?, 11 J.L. & ECON. 55 (1968).
99. For additional discussion, see DANIEL F. SPULBER, REGULATIONS AND MARKETS (1989).
100. See WILLIAM JAY BAUMOL, JOHN PANZAR & ROBERT D.WILLIG, CONTESTABLE MARKETS AND THE THEORY OF INDUSTRY STRUCTURE (1982)
101. SPULBER, supra note 67
102. See Caillaud & Jullien, supra note 65
103. This is consistent with Arrow's notion that the quality of information is measured by its precision, which is the reciprocal of its variance. There is greater precision with a finer partition
104. see Kenneth J. Arrow, The Economics of Information: An Exposition, 23 EMPIRICA 119 (1996)
105. Kenneth J. Arrow, Technical Information and Industrial Structure, 5 INDUS. & CORP. CHANGE 645 (1996).
106. For a general discussion of coordination and network effects, see Daniel F. Spulber, Consumer Coordination in the Small and in the Large: Implications for Antitrust in Markets with Network Effects, 4 J. COMPETITION L. & ECON. 1 (2008).
107. For a discussion of coordination and the adoption of technological innovations, see Daniel F. Spulber, Unlocking Technology: Innovation and Antitrust, 4 J. COMPETITION L. & ECON. 915 (2008).
108. See also Daniel F. Spulber, Solving the Circular Conundrum: Communication and Coordination in Two-Sided Markets. Northwestern University Law Review, forthcoming, 2009.
109. See Attila Ambrus & Rossella Argenziano, Asymmetric Networks in Two-Sided Markets, 1 AM. ECON. J.: MICROECONOMICS (forthcoming 2009).
110. See also Daniel F. Spulber, The Interplay between Social Networks and Private Networks (Northwestern University, Working Paper, 2009).
111. See Alexei Alexandrov, George Deltas & Daniel F. Spulber, Oligopolistic Competition between Intermediaries (University of Rochester, Working Paper, 2008).
112. Alan Davidson, Senior Policy Counsel and Head of U.S. Public Policy Google Inc., Apr. 4, 2008, "Public Comments of Google on the FTC's Proposed Privacy Principles for Behavioral Advertising", available at www.ftc.gov/os/comments/behavioraladprinciples/080404google.pdf-2008-04-04.
113. See Apr. 9, 2008, "Public Comments of the Coalition of Associations on the FTC's Proposed Privacy Principles for Behavioral Advertising." These associations include American Advertising Federation, American Association of Advertising Agencies, Association of National Advertisers, Consumer Bankers Association, Direct Marketing Association, Electronic Retailing Association, Interactive Advertising Bureau, Magazine Publishers of America, National Retail Federation, Retail Industry Leaders Association, Shop.org, U.S. Chamber of Commerce, see Apr. 9, 2008, "Public Comments of the Coalition of Associations on the FTC's Proposed Privacy Principles for Behavioral Advertising." FTC town hall, www.ftc.gov.
114. According to Google's privacy policy, "we ask you for personal information (such as your name, email address and an account password). For certain services, such as our advertising programs, we also request credit card or other payment account information which we maintain in encrypted form on secure servers. We may combine the information you submit under your account with information from other Google services or third parties to provide you with a better experience and to improve the quality of our services. For certain services, we may give you the opportunity to opt out of combining such information."
115. Google: Privacy Center, http://www.google.com/intl/en/privacypolicy.htmlinformation (last visited June 6, 2009).
116. "When you visit Google, we send one or more cookies - a small file containing a string of characters - to your computer or other device that uniquely identifies your browser. We use cookies to improve the quality of our service, including for storing user preferences, improving search results and ad selection, and tracking user trends, such as how people search. Google also uses cookies in its advertising services to help advertisers and publishers serve and manage ads across the web. We may set one or more cookies in your browser when you visit a website, including Google sites that use our advertising cookies, and view or click on an ad supported by Google's advertising services." Id.
117. According to the FTC, "A cookie is a small text file that a website's server places on a computer's web browser. The cookie transmits information back to the website's server about the browsing activities of the computer user on the site. This includes information such as pages and content viewed, the time and duration of visits, search queries entered into search engines, and whether a computer user clicked on an advertisement. Cookies also can be used to maintain data related to a particular individual, including passwords or items in an online shopping cart. In some contexts, such as where a number of separate websites participate in a network, cookies can be used to track a computer user across different sites. In addition to cookies, there are other devices for tracking online activities, including 'web bugs,' 'web beacons,' and 'Flash cookies.'" See FTC 2009, id. at 2.
118. See Self-Regulatory Principles for Online Behavioral Advertising, Feb., 2009, FTC Staff Report.
119. See also the "Town Hall" discussions on Ehavioral Advertising: Tracking, Targeting & Technology, at http://www.ftc.gov/bcp/workshops/ehavioral/71101wor.pdf,http://www.ftc.gov/bcp/workshops/ehavioral/71102wor.pdf.
120. See Self-Regulatory Principles for Online Behavioral Advertising, Supra note 82, at 46 (emphasis in original)
121. The FTC's definition does not apply to "'first party' advertising, where no data are shared with third parties, or contextual advertising, where an ad is based on a single visit to a web page or single search query." Id. (emphasis removed).
122. See Kawamoto & Broache, supra note 43, at 2
123. The FTC approved the merger on December 20, 2007 at the same time that it issued a statement of principles on behavioral advertising.
124. See DANIEL J. SOLOVE, THE DIGITAL PERSON: TECHNOLOGY AND PRIVACY IN THE INTERNET AGE (2004).
125. The sharing of information across databases is referred to as "information flows", which is distinct from the concept of the circular flow of information introduced here to refer to intermediated transactions. On the sharing of information across databases, see id.
126. Joel R. Reidenberg, Resolving Conflicting International Data Privacy Rules in Cyberspace, 52 STAN. L. REV. 1315 (2000).
127. Solov states that: "Even if we're not aware of it, the use of digital dossiers is shaping our lives. Companies use digital dossiers to determine how they do business with us; financial institutions use them to determine whether to give us credit; employers turn to them to examine our backgrounds when hiring; law enforcement officials draw on them to investigate us; and identity thieves tap into them to commit fraud." SOLOVE, supra note 85.
128. See DAVID H. HOLTZMAN, PRIVACY LOST: HOW TECHNOLOGY IS ENDANGERING YOUR PRIVACY (2006).
129. SPULBER, supra note 66
130. According to the SEC, "The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment before buying it, and so long as they hold it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security. Only through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions."
131. SEC, The Investor's Advocate: How the SEC Protects Investors, Maintains Market Integrity, & Facilitates Capital Formation, http:www.sec.gov/about/whatwedo.shtml (last visited June 6, 2009).
132. John H. Cushman, Jr., The High-Stakes Battle for Airline Reservations, N.Y. TIMES, June 18, 1989, available at http://www.nytimes.com/1989/06/18/business/the-high-stakes-battle-forairline-reservations.html?pagewanted=1.
133. The Civil Aeronautics Board adopted rules governing display bias in 1984. 49 FR 32540 (Aug. 15, 1984), aff 'd, United Air Lines v. CAB, 766 F.2d 1107 (7th Cir. 1985). The Department of Transportation readopted the rules 1992, 14 CFR Part 255, adopted at 57 FR 43780 (Sept. 22, 1992). See Department of Transportation, Office of the Secretary, 14 CFR Part 255 (Dockets Nos. OST-97-2881, OST-97-3014, OST-98-4775, and OST-99-5888), RIN 2105-AC65, Computer Reservations System (CRS) Regulations.
134. Cushman, supra note 92
135. DOJ Press Release, Yahoo! Inc. and Google Inc. Abandon Their Advertising Agreement (Nov. 5, 2008), available at http://www.usdoj.gov/atr/public/press_releases/2008/239167.htm.
136. According to an interview with Attorney Sanford Litvack, "We told them we were going to file the complaint at that time of day. Three hours before, they told us they were abandoning the agreement."
137. See Nate Raymond, Hogan's Litvack Discusses Google/Yahoo, AM. L. DAILY, Dec. 2, 2008, available at http://amlawdaily.typepad.com/amlawdaily/2008/12/hogans-litvack.html
138. DOJ Press Release, supra note 96