Application of multi-sided platforms: Google Monopoly Power in Internet advertising industry
Creators: name: Milosevic, Darko
Publisher: name: figshare
Year: 2020
Subjects: subject: 80607 Information Engineering and Theory
subject: FOS: Computer and information sciences
subject: FOS: Computer and information sciences
subject: 80609 Information Systems Management
subject: Theoretical Computer Science

description: <b>RESEARCH METHODS</b>Our approach to modeling advertisers side of the market is compared to Edelman et al (2007), Varian (2007), Ellison and Ellison (2004), Chen and He (2006), Athey and Ellison (2011), or White (2008). The economic models relating to Mobile multi-sided platforms requires the presence of due or more economic agents and interaction with common platform that connects between all parties by creating a higher value. Two types of multi-sided platforms: physical and software platforms. The physical platforms where markets served as a meeting point between the merchants, whose purpose was to sell their wares, and buyers who provide a wider choice concentrated in a limited space. More modern forms of physical platforms, in ways similar to the search engine markets, are the online booking hotels that make available beds and rooms using Mobile applications and services. A key element of economic models is represented by network economies or indirect network externalities, where platform increases in value when increases the number of agents. To understand fully the workings behind the models of multi-sided platforms it is crucial to focus on the price structure because it explains how to maintain balance in various contractors.<br>The first of the two conditions recalled the condition of Lerne Index (1946) summarizing the operation of the equilibrium price in a monopoly in relation to the elasticity Ei of the application. The second condition implies that there is a direct proportionality between the demand and its elasticity.<br><b>The Monopoly Model</b>The methodology is structured according to theory approach and worked with Google case study to create a holistic comprehension of Market power. The iterative process consisted literature review and (empirical) data analysis. We present here the analysis for a Market power platform in order to focus on the possible threat of abuse of dominant position by Google in the internet search engine market. Motchenkova et al. (2013) in the more technical paper extend the model to an asymmetric oligopoly setting, which allows to also analyze the interplay between market dominance, network effects, and incentives to innovate in the search engine market.<br>In the case of search engines, in theory, there are two different prices p<sub>A</sub> and p<sub>U</sub>, first applied to advertisers and second to users. The initial assumptions about the price, in a formal way turn out to be: p<sub>A</sub> &gt; 0 and p<sub>U</sub> = 0. The main difference with the basic model developed by Lianos and Motchenkova, for considering the incremental costs incurred by the platform in that they consider only the marginal cost to attract another advertiser in the platform, strictly positive as to serve new advertisers is necessary to support the additional costs c<sub>A</sub> &gt; 0. The marginal costs instead of attracting new users are considered equal to zero. The hypothesis is based on the idea that customers marquee are very valuable to the platform to take advantage of the strong network economies that can develop due to the increase of users on the platform. To make sure that there is a growing number of users who use the platform we need to consider the marginal costs of users strictly positive c<sub>U</sub> &gt; 0. As we can see Google costs for R&amp;D increasing over time, so model contains company investments to innovate in the field. In the function αA is the benefit that advertisers are derived from the interaction with users, or network externalities, and in this case is strictly positive, because more are users who will see advertisements the greater the utility derived for advertisers. Assumptions of this model function of welfare considers the surplus user group.<br><b>Maximizing monopoly profit</b>Maximizing the profit function of the company expressed as monopolistic utility function in equation, we get the price charged to advertisers market equilibrium.<br>The price charged is a function of the marginal cost to attract additional advertisers modified to some parameters that can be analyzed separately:- the disutility that an extra group of advertisers leads to the group of users, so the company needs to be calibrated for the price especially considering this component. As defined above it it is assumed that αU is negative and therefore this component is positive and is added to the marginal cost of increasing its value, then p<sub>A</sub> &gt; c<sub>A</sub>.- the marginal cost of the users in the price of the final balance. If C<sub>U</sub> necessarily increase the price charged to advertisers will increase, as the company should consider in its function even more money to get back the costs, although incurred to attract members of the other group.- the elasticity of participation of the members of group A, which leads to increase in equilibrium price.<br><b>Maximization of total welfare</b>When it maximizes the function of welfare, instead of solely that of profit, the equilibrium solutions are slightly different, in favor of the members of the two groups and not only of the platform.<br><b>DATA COLLECTION</b>For the construction of model was chosen as the dependent variable the annual series on the shares issued by the industry leader, Google Inc. The stock prices were taken from series of the financial data NASDAQ Yahoo Finance, Statistica and Google for period 2005 – 2015. The minimum point corresponds to the first month of listing the company with a value of 129.60 per share and then have an overall increasing trend with a peak reached in February 2014 totaled 608.43. Although the overall trend is positive. Apple Inc. mobile search engine is the main competitor of Google, and significantly contributed to the growth of high-tech industry in recent time. Performance of the shares of Apple is always growing. The minimum number amounted to 7.68 was reached in June 2006, while the peak of 126.59 was achieved in June 2015. The performance of the shares of the Microsoft, during the observed period, had same growing trend in the series. <br>Minimum point had been reached in 2009 with a value of 18.94 per share, while reached peak in June 2015 is 46.09. Yahoo is the main competitor of Google basic search engine, and vertical online search advertising. Yahoo had two different periods of growth. First period of the course of actions is decidedly negative and second period from last quarter of 2012 begins with slow recovery. Today Yahoo value per share is 40.51. The Nasdaq Industrial has been selected to benchmark manufacturing sector, listed on stock exchange where Google and other companies was previously analyzed. The performance of the actions of this title, are strictly increasing. After the crisis period where value reaching its minimum of 1,021.35 in February 2009, from mid-2010 began the second half of the field touching a peak of 2,595.40 in December 2012. Latest data available for analysis is June 2015 with value of 4,141.20.<br>The last independent variable represents Google's annual revenue related to online advertising. The performance of Google's revenue is growing, with the low point recorded in the first observation and the peak for the last observation.<br>The first dummy variables, or binary variables (take the value 0 or 1) is constructed to be a negative. This variable was not significant in any of the models built. The second variable concerns the innovations and the acquisitions made over the years. This could be caused by the many similar operations carried out by Google that impact stock prices.