Good and bad monopolies: the case of Google

In what sense does Google “hold back” its products?

Well, at least at a first glance, consumers get everything for free (if you don’t count being shown adverts). One can’t say that Google artificially restricts access to, for instance, Google Calendar for its potential consumers. It seems to be rather the opposite: they encourage consumers to use all these services by dishing them out for free. Obviously this is not how Google makes its money. How does Google make most of its money? They do this by auctioning off list spots after searches (see e.g., here and here for how the Google ad auction system works). All this is automatized, but whenever you or anyone else searches for something, let’s say “red sofa cheap”, you get a bunch of companies competing for first spot (or at least first page) on the list that appears on your screen. This way, probably billions of auctions are run each day. And this is where Google has some monopoly power. You, the searcher, are actually not Google’s customer, the companies outbidding each other to get your attention are Google’s actual and paying customers. These companies vying for your attention cannot control where you search for stuff online and if you choose Google then the only way to affect your choice (well, not quite the only way, but a very direct way) is that they “influence” Google (by bidding on list spots) as to what they show you. Now as Google is used for 70% or more searches, Google has a monopoly on very many searches and, thus, a monopoly on a bit of the attention of very many searchers.

How does Google use this monopoly power? What is the product that they “hold back” and price too highly? It is your attention for certain products in the form of what, after your search, you will most likely be looking at. Google, “artificially” structures their search page in such a way that there is a clear first option, a second one, and so on. The perhaps most crucial design feature is a first and then a second and then further pages. Remember, if you can, the old fashioned phone books. There everything was in super small print, but all companies were treated more or less equally. Well, actually, at least in those phone books that I remember, companies could also pay for a bigger mention in the phone book. I am just trying to say that one could imagine different formats of how to show searchers information and some other forms may lead to a more efficient result.

One could argue, and I believe Google does argue this way, that their bidding system is likely to lead to the best ranking of websites (or ads) for the searchers. But this is, of course, not necessarily true. It would be somewhat of a coincidence if the result of the companies’ bidding produces exactly the ranking of websites that you, the searcher, want.

If somehow Google could be forced to have many firsts spots there would be less competition for the bidding companies and they would all pay less. I am not sure this could be so easily done, but this, I believe, is the sense in which Google “holds back” its products (of list spots) to sell them at a higher price.  In that sense there might well be an inefficiency in the way Google pre-sorts websites and adverts for you the searcher and final consumer.

2 thoughts on “Good and bad monopolies: the case of Google

  1. Google is one of my examples how economics made the world a better place. The auctioning algorithm that makes Google possible is the product of decades of research in auction theory (plus a little bit of computer science I guess).

    Once you recognize that the market Google is actually operating in is the market for online ads, it becomes obvious that Google doesn’t have monopoly power in the usual sense. If you want to advertise online you can choose from a variety of platforms: Facebook, Pinterest, Snapchat, Twitter, Instagram and others. Plus, Google also faces competition from traditional advertisement. If I want to advertise a concert of my choir in Notre Dame, my first choice will be the Observer (the local student newspaper) rather than Google.

    I see no evidence whatsoever that the social media companies are in some form of collusion to artificially restrict the output of online ads or that they are charging exorbitant prices for these ads. And even to the extent that Google does get monopoly rents, I would consider that a fair reward for their costly efforts to improve online search engines.

  2. I think, a very crucial point has to be added: the user does not get the service “for free” and looking at ads is not the only ‘price’ he or she pays. In exchange for use the user gives these platforms one of their most important production factors: data, personal one. This data allows for better targeted and thereby more cost efficient advertisement. The latter may serve the argument mentioned above, that the ranking also somehow considers the users preferences. In turn, however, lower marginal costs for clicks achieved by an advertisement also means a higher margin at any given price. Thereby, you may just think of the Lerner index for monopolistic competition and consider the high profit rate of firms like Google and Facebook to get an idea of the market power they obviously have – probably in several markets they are active in: as sellers of ads, as buyers of data,…

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