Online advertising: Defining relevant markets

Journal of Competition Law and Economics

Volumn 6, Issue 3, 2010, Pages 653-686

  Ratliff, James D ^a   Rubinfeld, Daniel L ^b,c  

^a Oakland CA ^*  (United States)

^b UNIVERSITY OF CALIFORNIA   (United States)

^c NEW YORK UNIVERSITY   (United States)

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[No Author keywords available]

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EID: 77956924881     PISSN: 17446414     EISSN: 17446422     Source Type: Journal    
DOI: 10.1093/joclec/nhq011     Document Type: Article

References (100)

1. Lower-case-i "internet" originally referred to any network of networks. See DEBRA LITTLEJOHN SHINDER, COMPUTER NETWORKING ESSENTIALS 37 (Cisco Press 2001). Upper-case-I "Internet" refers to "the global information system that is logically linked together by a globally unique address space based on the Internet Protocol (IP)." Federal Networking Council, FNC Resolution: Definition of "Internet" (Oct. 24, 1995), available at http://www.nitrd.gov/fnc/Internet_res.html. Usage has been moving in the direction of using lower-case-i internet to refer to the global network (for examples.
2. see Internet Capitalization Conventions, in WIKIPEDIA, http://en.wikipedia.org/wiki/Internet_capitalization_conventions).
3. The benefits of advertising can also be achieved when information about the business appears on the list of "organic results" displayed by the search engine
4. Market definition is a means to an end-to a competitive analysis of a merger or of a nonmerger activity. As a result, a market definition exercise outside the merger context will sometimes deviate substantially from the exercise that would be undertaken if there was a merger.
5. J.C.R. Licklider, Man-Computer Symbiosis, HFE-1 IRE TRANSACTIONS ON HUMAN FACTORS IN ELECTRONICS 4 (1960), available at http://groups.csail.mit.edu/medg/people/psz/Licklider.html.
6. J.C.R. Licklider & Welden E. Clark, On-line Man-Computer Communication, in AFIPS JOINT COMPUTER CONFERENCES, Proceedings of the May 1-3, 1962, Spring Joint Computer Conference (1962), available at http://portal.acm.org/citation.cfm?id=1460847.
7. J.C.R. Licklider & Robert W. Taylor, The Computer as a Communication Device, SCI. & TECH., 76, 21-41 (1968), available at http://www.utexas.edu/ogs/lectures/taylor/licklider-taylor.pdf.
8. Leonard Kleinrock, Information Flow in Large Communication Nets, RLE Q. PROGRESS REP. (1961), available at http://dspace.mit.edu/handle/1721.1/53595.
9. Barry M. Leiner, Vinton G. Cerf, David D. Clark, Robert E. Kahn, Leonard Kleinrock, Daniel C. Lynch, Jon Postel, Larry G. Roberts & Stephen Wolff, A Brief History of the Internet, INTERNET SOC'Y, Dec. 10, 2003, available at http://www.isoc.org/internet/history/brief.shtml [hereinafter Leiner et al. (2003)].
10. Worldwide Web Consortium (W3C), A Little History of the World Wide Web, http://www.w3. org/History.html.
11. J.R. OKIN, THE INFORMATION REVOLUTION: THE NOT-FOR-DUMMIES GUIDE TO THE HISTORY, TECHNOLOGY, AND USE OF THE INTERNET (Ironbound Press 2005).
12. Neither Gopher nor WAIS used hypertext. WAIS connected only search engines together. Gopher's prospects were damaged when the University ofMinnesota announced it would charge a license fee for Gopher to certain classes of users. TIM BERNERS-LEE & MARK FISCHETTI, WEAVING THE WEB 72-74 (HarperCollins 1999).
13. For the story of the development of the World Wide Web. To avoid the mistake made with Gopher, CERN pledged that the Web protocol and code would be available free of charge to all users and uses.
14. The Netscape browser was "free but not free." It was free for students and educators and theoretically $39 for all others, though this was not enforced. Internet Pioneers, Marc Andreesen, http://www.ibiblio.org/pioneers/andreesen.html.
15. WebCrawler Facts, WebCrawler Timeline, http://www.thinkpink.com/bp/WebCrawler/History.html.
16. JOHN BATTELLE, THE SEARCH: HOW GOOGLE AND ITS RIVALS REWROTE THE RULES OF BUSINESS AND TRANSFORMED OUR CULTURE ch. 4 (Penguin Books 2005).
17. Press Release, comScore, comScore Releases September 2009 U.S. Search Engine Rankings (Oct. 14, 2009), available at http://www.comscore.com/Press_Events/Press_Releases/2009/10/comScore_Releases_September_2009_U.S._Search_Engine_Rankings.
18. Analyzing the Bing Effect, EMARKETER, Sept. 29, 2009, http://www.emarketer.com/Article. aspx?R=1007297.
19. "The first internet advertising appeared in 1993, not 1996. I know, because I did it, under special dispensation from the National Science Foundation, on our pioneering web portal, GNN, or the Global Network Navigator. GNN was sold to AOL in 1995 and soon withered away there, but it was the first commercial, ad-supported web site, and launched the first web ads in late 1993." Posting of Tim O'Reilly (Mar. 8, 2007), Comments of Paul Kedrosky, Updated: The First Decade of Internet Advertising (Mar. 7, 2007), http://paul.kedrosky.com/archives/2007/03/07/the_first_decad.html.
20. See also Tim O'Reilly: Official Bio, O'Reilly, http://oreilly.com/oreilly/tim_bio.csp ("1993. O'Reilly's Global Network Navigator site (GNN, which was sold to America Online in September 1995) was the first web portal and the first true commercial site on the World Wide Web."). Wikipedia more specifically claims that the first Internet banner ad was sold by GNN to Heller Ehrman LLP. Global Network Navigator, in WIKIPEDIA, http://en.wikipedia.org/wiki/Global_Network_Navigator.
21. BARBARA K. KAYE & NORMAN MEDOFF, JUST A CLICK AWAY: ADVERTISING ON THE INTERNET (Allyn and Bacon 2004) (cited by David S. Evans, The Online Advertising Industry: Economics, Evolution, and Privacy, 23 J. ECON. PERSP. 38 (2009)).
22. GoTo renamed itself to Overture Services in 2001 and was acquired by Yahoo! in 2003. Danny Sullivan, GoTo Makes Overture to New Name, SEARCHENGINEWATCH.COM, Oct. 2, 2001, http://searchenginewatch.com/2164231.
23. Press Release, Yahoo!, Yahoo! To Acquire Overture (July 14, 2003), available at http://docs.yahoo.com/docs/pr/release1102.html.
24. Jeff Pelline, Pay-for-placement Gets Another Shot, CNET NEWS, Feb. 19, 1998, http://news.cnet.com/Pay-for-placement-gets-another-shot/2100-1023_3-208309.html.
25. Danny Sullivan, GoTo Going Strong, SEARCHENGINEWATCH.COM, July 1, 1998, http://searchenginewatch.com/2166331.
26. An alternative is a "second-price auction"-related to the auctions run by Google and Yahoo! today-in which the highest bidder wins the auction but, instead of paying its own bid, the winner pays the second highest bid
27. 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. 246 (2007).
28. Press Release, Google, Site Targeting (Apr. 25, 2005), available at http://www.google.com/press/annc/sitetargeting.html.
29. Susan Wojcicki, Making Ads More Interesting, THE OFFICIAL GOOGLE BLOG (Mar. 11,2009), http://googleblog.blogspot.com/2009/03/making-ads-more-interesting.html.
30. Alex Kenin, Here Comes Mobile, GOOGLE ADSENSE BLOG (Sept. 17, 2007), http://adsense.blogspot.com/2007/09/here-comes-mobile.html.
31. Susan Wojcicki, Announcing the AdSense for Mobile Applications Beta, THE OFFICIAL GOOGLE BLOG (June 24, 2009), http://googleblog.blogspot.com/2009/06/announcing-adsense-formobile.html.
32. See ROBERT PINDYCK & DANIEL RUBINFELD, MICROECONOMICS § 11.6 (7th ed., Pearson 2009) for an introductory discussion of the strategies involved in making advertising decisions.
33. Simon P. Anderson & Jean J. Gabszewicz, The Media and Advertising: A Tale of Two-Sided Markets, in HANDBOOK OF CULTURAL ECONOMICS (Victor Ginsburgh & David Throsby eds., 2006). Other examples of two-sided markets include credit-card networks (matching consumers bearing the network's cards with merchants that accept the network's card) and shopping malls (that match consumers wishing to make a variety of purchases with a variety of merchants wishing to sell their wares).
34. Jean-Charles Rochet & Jean Tirole, Platform Competition in Two-Sided Markets, 1 J. EUR. ECON. ASS'N 990 (2003).
35. The subsidy is necessary in such settings because the advertisements are often insufficient draws for consumers' eyeballs (or the ads are seen by the consumers as a negative that must be endured as part of the deal to receive desirable content for free). Of course, this is not always the case. For example, with "want ads," consumers seek out advertisements precisely to obtain the included information. Indeed, there are instances in which advertisers are willing to pay to have their ads displayed and consumers would be willing to pay to see those ads.
36. Here, clicks are an imperfect proxy for purchases, which represent the ultimate objective of the advertiser. We are implicitly assuming that purchases derived from the ad are proportional to the number of clicks on the ad.
37. There may be reasons, likely second order in importance, as to why an advertiser paying on a per-click basis might strictly prefer its ads be shown to a better-targeted audience. For a given textual message in the ad, a click by a less specifically targeted consumer might be a weaker signal of the consumer's propensity to buy the advertised product than would a click by a more targeted consumer; thus, a click by a better-targeted consumer would be more valuable. Some consumers may click on an ad out of curiosity, but with no interest in purchasing. It is possible that a better-targeted group of consumers would produce a lower incidence of curiosity-driven clicking.
38. An advertiser may need to broaden its net beyond highly targeted consumers to obtain more responses to its ad. For example, a retailer selling a seat back organizer for use on airplane flights bought search ads triggered by the query "airline seat back organizer" for a nickel per click. However, the retailer found that these ads produced few clicks because not enough consumers knew this product category existed. The retailer considered advertising in response to the more popular search phrase "travel accessories," but found that the higher per-click price to do so, $1.50 at that time, was prohibitive.
39. Darren Dahl, Real-Life Lessons in Using Google Ad Words, N.Y. TIMES, Oct. 14, 2009, available at http://www.nytimes.com/2009/10/15/business/smallbusiness/15adwords.html.
40. We are using the term "vehicle" more narrowly than the term "medium." For example, a medium might be magazines, but a vehicle might be a particular knitting magazine.
41. Advertisers ultimately care about profits. The optimal advertising strategy will satisfy that (1) the return on the chosen level of advertising expenditures is maximized by the choice of media and vehicles, and (2) the level of advertising expenditures is chosen at the level that maximizes profit, assuming that the choice of media and vehicles is optimal given that level of advertising expenditures.
42. As we explained earlier, the optimal advertising budget and the optimal allocation of that budget across media and vehicles are co-determined, rather than being separable decisions
43. The incremental profit per sale is unlikely to vary by the advertising vehicle. However, there could be differences in the goods a particular audience buys; for example, the same airline ad could generate on different vehicles a different mix of business class and tourist class ticket sales.
44. It is inappropriate to view the advertising budget as fixed; if a new media outlet or an improvement in the effective targeting within a particular media outlet increases the return on advertising, this should lead to an increase in the advertising budget. However, the decision-making process of buyers of advertising may not so closely approximate optimality. Thus, Silk, Klein and Berndt (2002) interpreted the relatively weak own- and cross-price elasticities between different media classes they found for the 1990s as being congruent with a media planning process that is a sequential one wherein intermedia and intramedia decisions are separated. Intermedia choices are often effectively preempted by judgments about the fit between message strategy and alternative media exercised in the early stages of a campaign's development, and prices are frequently a secondary consideration. If intermedia comparisons are undertaken at all, they are likely to be made informally on the basis of criteria of uncertain validity.
45. Alvin Silk, Lisa Klein & Ernst Berndt, Intermedia Substitutability and Market Demand by National Advertisers, 20 REV. INDUS. ORG. 339 (2002).
46. The concept of the "marketing funnel" is relevant here: with a marketing funnel, consumers are guided via various forms of advertising from the initial stages of product awareness and consideration to later stages, such as purchase and loyalty
47. See, e.g, Online Publishers Ass'n, Media Mix Study, at 14 (conducted in partnership with Millward Brown IntelliQuest, Mar. 2002), available at http://www.online-publishers.org/media/152_W_opa_media_mix_study_mar02.pdf.
48. In 2008, static-graphic display ads represented 39 percent of graphical ad-serving volume (measured by impressions), whereas simple Flash-animated ads accounted for 55 percent. "Rich media" ads, discussed next, accounted for the remaining 6 percent of graphical ad-serving volume. AdRelevance, 2008 (cited in DoubleClick & Dynamic Logic, The Brand Value of Rich Media and Video Ads 2 (June 2009), available at http://www.doubleclick.com/insight/pdfs/The_Brand_Value_of_Rich_Media_and_Video_Ads.pdf).
49. Shamim Samadi & Ari Paparo, What's a Rich Media Ad, Anyway?, THE OFFICIAL GOOGLE BLOG (Apr. 30, 2009), http://googleblog.blogspot.com/2009/04/whats-rich-media-ad-anyway. html.
50. To see the information, geographical and otherwise, that can be inferred from your IP address, browse to IP2Location, http://www.ip2location.com/.
51. The search terms are encoded into the URL of the request to the search engine. This URL is passed along to the destination Web site as the referrer field of the header of the HTTP request to the destination site.
52. When consumers register at a Web site, the site typically has access to information about the consumer's browsing habits on that site. That information can be expected to be at least as reliable as that provided by cookies in the absence of registration. For example, a user registered at NYTimes.com is recognized as that person whether the person visits the site from her home computer, her iPhone, her work computer, or the computer at a business center in the hotel where she stays on a business trip. In contrast, cookies would view an unregistered individual's visits from two different computers as if she were two different individuals. Conversely, two different unregistered individuals browsing under the same user account on the same computer would erroneously be interpreted as being the same person.
53. According to Yahoo!, its behavioral-targeting capability "goes beyond the more common rules-based segmentation or clustering of users by sites visited" to include as well searches and ad interactions. Yahoo!'s "sophisticated modeling technology" then predicts where a user sits in the "awareness-consideration-purchase funnel" to deliver the appropriate advertising message. Yahoo! Advertising, Behavioral Targeting, http://advertising.yahoo.com/adsolution#product=Behavioral.
54. The effectiveness of some offline advertising can be measured. For example, a manufacturer can monitor how many of its coupons are redeemed. A merchant can advertise "mention this ad to receive your discount."
55. A department-store merchant, John Wanamaker (1838-1922), is credited with having said: "Half the money I spend on advertising is wasted; the trouble is I don't know which half." See John Wanamaker, in WIKIPEDIA, http://en.wikipedia.org/wiki/John_Wanamaker#cite_note-10.
56. Note that paying per impression for an Internet ad may carry less uncertainty than paying per impression offline. If an advertiser pays for a display ad in a newspaper, the advertiser pays based on the newspaper's circulation and anticipated newsstand sales. However, the advertiser will not know on a given day how many of those subscribers or newsstand purchasers actually open their papers to the page on which the advertiser's ad is located. When a page view is served on the Internet, however, it is highly likely that the consumer explicitly requested it to read it.
57. See Google, Website Advertising, http://www.google.com/advertisers/online/website.html.
58. In other words, for the purposes of market definition, the relation "competes with" need not be reflexive
59. U.S. DEP'T OF JUSTICE & FED. TRADE COMM'N, HORIZONTAL MERGER GUIDELINES (revised Apr. 8, 1997), available at http://www.usdoj.gov/atr/public/guidelines/hmg.htm.
60. For discussions of the associated "cellophane fallacy," see, for example, Jonathan Baker, Market Definition: An Analytical Overview, 74 ANTITRUST L.J. 129, 162-65 (2007).
61. And Lawrence J. White, Market Power and Market Definition in Monopolization Cases: A Paradigm is Missing, in ISSUES IN COMPETITION LAW AND POLICY (Wayne D. Collins ed., A.B.A. Sec. of Antitrust Law 2008), available at http://www.usdoj.gov/atr/public/hearings/single_firm/docs/222104.pdf.
62. Here, the print category contains newspapers, custom publishing, consumer magazines, and B2B magazines, but not Yellow Pages
63. Here, TV consists of local and national spot TV, cable network TV, broadcast network TV, local and regional cable TV, and broadcast syndication TV
64. Online Ad Spending Slows but Grabs Market Share, EMARKETER, Sept. 21, 2009, http://www.emarketer.com/Article.aspx?R=1007283 (citing data from Jack Meyers, Advertising & Marketing Investment Forecast 1998-2012, Jack Myers Media Business Report (Sept. 14, 2009)).
65. To avoid any misunderstanding, this means that the share as a percent changed by almost 18 percent, not by 18 percentage points. In 2007, online advertising represented 9.0 percent of total U.S. advertising spending; in 2008, it represented 10.6 percent of total U.S. advertising spending. Thus from 2007 to 2008, online advertising's share of total U.S. advertising spending increased by almost 18 percent ((10.6-9.0)/9.0 percent).
66. When we refer to newspaper advertising or readership, we are referring to advertising in, or readership of, the traditional newsprint editions of newspapers; we are excluding newspapers' Web editions
67. Newspaper Death Watch, http://www.newspaperdeathwatch.com/.
68. Over that same period that newspaper advertising is forecasted to lose 6.6 percentage points, the share of online advertising is expected to increase by only 4.6 percentage points, from 9.0 to 13.6 percent. Therefore, other offline advertising categories are gaining at newspapers' expense.
69. PEW PROJECT FOR EXCELLENCE IN JOURNALISM, THE STATE OF THE NEWS MEDIA 2009: AN ANNUAL REPORT ON AMERICAN JOURNALISM (Mar. 15, 2010), available at http://www.stateofthemedia.org/2009/narrative_newspapers_audience.php (citing data from the Newspaper Association of America, "Trends and Numbers" at NAA.org. (See: http://www.stateofthemedia.org/2009/footnotes/narrative_newspapers_audience.html#6)).
70. Tim Arango, Fall in Newspaper Sales Accelerates to Pass 7%, N.Y. TIMES, Apr. 27, 2009, http://www.nytimes.com/2009/04/28/business/media/28paper.html. The figures reflect the 6-month period ending March 31, 2009, compared with the same period a year prior.
71. Reilly v. Hearst Corp., 107 F. Supp. 2d 1192 (N.D. Cal. 2000). Note, however, that the plaintiff was not alleging an advertising market, but rather a market for the provision of "daily newspaper news, features and opinion." Thus Judge Walker's dicta did not speak directly to whether online advertising competes with newspaper advertising. Reilly, 107 F. Supp. 2d at 1195.
72. Berlyn Inc. v. Gazette Newspapers, 73 Fed. Appx. 576, 582-83 (4th Cir. 2003). The Court also concluded that the alleged relevant market was too broad, because it combined legal advertising (notices) and commercial advertising in the same market.
73. However, these advertisers might still be protected by the competition between offline and online advertising if sellers of advertising could not identify and price-discriminate against these advertisers' ads aimed at these discrete offline-only customers
74. In its investigation of Google's acquisition of DoubleClick, the European Commission declined to define a broad market for all advertising media in which the "internet would be just one of the several media channels-among which TV, newspapers, etc.-that can be chosen by advertisers wanting to promote their goods or services." The EC so found this "primarily because the market investigation revealed that offline and online advertising are perceived as separate markets by the majority of respondents." Additionally, the EC cites that "online advertising is used for specific purposes," can be better targeted, "has a unique reporting system" to better measure ad effectiveness, and has unique advantages of both the pay-per-impression and pay-per-click payment mechanisms. Comm'n of the European Communities, Decision of 11/03/2008 Declaring a Concentration to Be Compatible with the Common Market and the Functioning of the EEA Agreement, in Case No. COMP/M.4731 - Google/DoubleClick, Regulation (EC) No. 139/2004 Merger Procedure, Art. 8(1). C(2008) 927 final, at
75. 44-46 (Mar. 11, 2008). We note that these arguments by the EC suffer the same basic problem as the arguments of the FTC that we discuss below: merely identifying differences in characteristics between two products does not constitute a valid argument for placing them in separate relevant product markets. The EC leaves the central question unanswered: whether offline and online advertising are sufficiently close economic substitutes that each disciplines the prices of the other.
76. Avi Goldfarb & Catherine Tucker, Search Engine Advertising: Pricing Ads to Context (NET Institute, Working Paper No. 07-23, Sept. 2007), available at http://ssrn.com/abstract=1021451 [hereafter Goldfarb & Tucker (2007)].
77. Fed. Trade Comm'n, Statement of Federal Trade Commission Concerning Google/DoubleClick, FTC File No. 071-0170, at 3, 7 (Dec. 20, 2007) (citations omitted), available at http://www.ftc.gov/os/caselist/0710170/071220statement.pdf [hereafter FTC (2007)].
78. Search Engine Marketing Professional Organization, Executive Summary, The State of Search Engine Marketing 2008 (Feb. 2009), available at http://www.sempo.org/learning_center/research/2008_execsummary.pdf [hereafter SEMPO (2009)].
79. The other allowed responses were "[t]o sell products, services or content directly online;" "[t]o generate leads that we ourselves will close;" "[t]o drive traffic to our ad-supported web site;" "[t]o generate leads for a dealer [or] distributor network;" and "[t]o provide informational/educational content only."
80. Press Release, IAB & Nielsen//NetRatings, IAB Issues New Research from Nielsen//Netratings on Branding Value of Sponsored Text Advertising (July 15, 2004), available at http://www.iab.net/about_the_iab/recent_press_releases/press_release_archive/press_release/4742.
81. A cost per click can be translated into a cost per impression, and vice versa, by first estimating the ad's click-through rate. Indeed, advertisers make such a calculation when buying AdSense ads. We understand that Google also sells search ads using cost-per-impression pricing in China, since the complementary factors for pay-per-action advertising (credit cards and package delivery) are not as mature as in some other countries. We note, however, that the need for a tradeoff here only arises if there is some kind of advertising budget. Otherwise the change in the return of ad opportunity A should not change how much one spends on ad opportunity B (as long as the price of ad opportunity B does not change and the conversion rate of ad opportunity B is not affected by changes in the level of spending on ad opportunity A.) We previously discussed factors that could give rise to the existence of a budget, such as increasing costs or capacity constraints.
82. It also noteworthy that pay-per-click and pay-per-impression ads compete in the same ad auctions in Google's AdSense program
83. Jeff Sweat, Your Ads, Richer, YAHOO! SEARCH MARKETING BLOG (Feb. 18, 2009), http://www.ysmblog.com/blog/2009/02/18/your-ads-richer/.
84. The first factor (B/pI) is the number of impressions that B dollars can purchase. The second factor is the number of sales that result from each impression. The product of the first two factors is the number of sales that result from spending B dollars on the nonsearch ad. Multiplying by p yields the gross profit from spending B dollars on the nonsearch ad.
85. Before a seller of nonsearch advertising would be willing to adjust the per-click price of its inventory to compensate for any targeting deficit relative to search ads, the advertising seller would need to take into account the opportunity cost of selling its inventory on a per-click basis: the revenue it would forgo from the per-impression sale of the ads displaced. The judge in KinderStart v. Google rejected the plaintiff 's claimed search-ad market, saying that "there is no logical basis for distinguishing the Search Ad Market from the larger market for Internet advertising. Because a web site may choose to advertise via search-based advertising or by posting advertisements independently of any search, search-based advertising is reasonably interchangeable with other forms of Internet advertising. The Search Ad Market thus is too narrow to constitute a relevant market." KinderStart.com LLC v. Google, Inc., No. C 06-2057 JF (RS), 2007 WL 831806, *6 (N.D. Cal. Mar. 16, 2007).
86. Stephen Shankland, Google Addresses Antitrust Issue on Yahoo Ad Deal, CNET NEWS, May 8, 2008, http://news.cnet.com/8301-10784_3-9939473-7.html.
87. Who's Afraid of Google, THE ECONOMIST, Aug. 30, 2007, at 384 (2007) 9.
88. Our review has not found compelling evidence that search and nonsearch advertising do not compete; moreover, we have offered affirmative arguments suggesting that they in fact do
89. Benjamin Edelman, Google-Yahoo Ad Deal Is Bad for Online Advertising, HARV. BUS. SCH. WORKING KNOWLEDGE (Aug. 12, 2008), http://hbswk.hbs.edu/item/5995.html.
90. BENJAMIN EDELMAN & MICHAEL SCHWARTZ, OPTIMAL AUCTION DESIGN IN A MULTI-UNIT ENVIRONMENT: THE CASE OF SPONSORED SEARCH AUCTIONS (Harv. Bus. Sch. & Yahoo! Research, 2006).
91. Edelman and Schwarz (2006) show that minimum bids also affect the bids of higher-ranked advertisers (that is, advertisers whose bids absent the minimum would exceed that minimum). However, a search-ad seller also faces a constraint on the magnitude of the reserve price it sets, if an increase in the reserve price would dissuade potential bidders from participating.
92. Jeremy Bulow and Paul Klemperer (1996) show that the expected revenue from an auction with N+ 1 bidders and no reserve is at least as great as the revenue from the same auction with N bidders and the revenue-maximizing reserve price
93. Jeremy Bulow & Paul Klemperer, Auctions Versus Negotiations, 86 AM. ECON. REV. 180 (1996).
94. See also PAUL MILGROM, PUTTING AUCTION THEORY TO WORK § 4.4.2 (Cambridge Univ. Press 2004). Note, however, that the existence of a minimum bid can increase social welfare, notwithstanding an increase in revenue to the search engine.
95. Susan Athey & Glenn Ellison, Position Auctions with Consumer Search § 4 (Nat'l Bureau of Econ. Research, Working Paper No. w15253, May 2008).
96. Goldfarb and Tucker (2007), discussed above, also reported their analysis of a different natural experiment that arises from state-to-state variation in "ambulance-chaser" regulations, which, in some states, limit attorneys' contingency fees. Goldfarb and Tucker examined advertising prices paid by lawyers for 174 Google search terms in 195 different locations. They found that lawyers in areas where contingency fees were limited (and thus the value of a referral is presumably lower) paid approximately 17 percent less per click than lawyers in areas where contingency fees were not limited by regulation.
97. Esther Gal-Or & Mordechai Gal-Or, Customized Advertising via a Common Media Distributor, 24 MKTG. SCI. 241 (2005).
98. Yongmin Chen & Chuan He, Paid Placement: Advertising and Search on the Internet (NET Institute, Working Paper No. 06-02, Sept. 2006), available at http://www.netinst.org/Chen-He.pdf.
99. Asim Ansari & Carl Mela, E-Customization, 40 J. MKTG. RES. 131 (2003).
100. William J. Baumol & Daniel G. Swanson, The New Economy and Ubiquitous Competitive Price Discrimination: Identifying Defensible Criteria of Market Power, 70 ANTITRUST L.J. (2003) (emphasis in original).