Search Engines, Essential Facilities, and the New Economy

Opposing views on regulating search engines have emerged in recent years. On one hand, many believe that search engines do not exercise unjustified market power but rather stand at the forefront of economic and technical innovation. On the other hand, many fear that Google, with an allegedly dominant position in internet searching, will bias its search results in favor of sites with which it has a favorable relationship or leverage its dominance into other areas. Most of search engines’ supposedly anticompetitive behavior, both those alleged in legal complaints as well as in the academic literature, involve some sort of vertical foreclosure. For instance, some fear that search engines will bias their search results in favor of co-owned services or entities with which they have special financial relationships, essentially foreclosing other sites. Any challenge to these foreclosing practices will have to show (i) the search engine’s dominant market power and (ii) that the challenged practices lack any pro-competitive or other efficiency enhancing justification. Our research so far has concentrated on one aspect of this foreclosure story: any theory of anticompetitive behavior by search engines must examine why and how a given search engine gained dominance or exercises anticompetitive leverage of dominance lawfully acquired. And, again, naive observation suggests that something other than “pure” competitive forces come into play. Many still wonder what about Facebook rendered it superior to MySpace. We aim to provide an expanded understanding of network effects to provide an explanatory and theoretical framework for understanding the emergence of a dominant online search engine. We augment a network effects account by examining: (i) the “focal point”/coordination literatures associated with Thomas Schelling and (ii) the habit and neurological/ cognitive cost literature. (1) As Thomas Schelling showed, actors tend to coordinate behavior around psychologically “salient” focal points. These focal point can emerge for random and/or highly path dependent reasons. In real life, focal points tend to emerge around psychologically and cultural significant places Schelling’s research shows that if you tell peopleto meet somewhere in New York City, a remarkably high number will choose Grand Central Station. At first blush, many on-line services provide coordinating functions. YouTube coordinates those who wish to view videos with those who wish to display them. Flickr coordinates those who wish to view pictures with those who wish to show them. Similarly, search engines connect users with websites and consumers with advertisers. (2) Research in behavioral economics underscores the power of habit in driving consumer choice. We recognize that habit may play a particularly important role in cyberspace where individuals can “cement” their habits through default browser settings. We also believe that habit reinforces network effects by increasing switching costs. We are developing ways to incorporate habit into our model — as well as criteria to help regulators evaluate the competitive effects of habits in “habit prone” industries. Finally, if dominant search engines emerge due to focal points, the regulatory question becomes whether social benefits are greater if access to the focal point is controlled by a single firm/organization or whether it is made available to anyone. In addressing this question, we employ the integration of complementary externalities analytical framework (ICE) put forward by Farrell & Weiser (2003), to distinguish between situations in which welfare is maximized when a platform provider has the right to set the terms (including exclusion and demanding exclusivity) for elaborating a platform with contributions from independent suppliers of complementary products and services and conditions where the public interest is best serviced by limiting the platform provider’s right to restrict access to the platform.