When Judging Antitrust Claims Against Google, Look At Lock-In, Not Network Effects
Date : 22 Jul 2008 Category : Business
TechdirtBill Snyder has an article calling Google "Microsoft's evil twin" because if it completes its merger with Yahoo it will have 90 percent of the advertising market and will be able to jack up the price of online ads. Snyder cites the concept of "network effects" and suggests that Google's market share advantage will "weaken of Microsoft's e-commerce infrastructure will further discourage competition and stifle innovation." This argument is confused. Almost every business enjoys "network effects." Wal-Mart, for example, is able to use its large base of customers to extract lower prices from suppliers, and is then able to use its lower prices to attract more customers. That's a network effect, but it's not a problem. What regulators have traditionally been worried about is not "network effects" in and of themselves, but network effects combined with technological lock-in.
In the Microsoft antitrust case, for example, the "network effects" argument was that various vendors had invested billions of dollars in research and development on technologies surrounding the Windows platform, and that these investments created an almost insurmountable barrier to entry for new operating system vendors: the creator of a new OS would have to persuade hundreds of companies to spend billions of dollars re-designing their products for a new platform. In contrast, the switching costs in the advertising market are extremely low. A small website owner selling inventory on one advertising network one week can easily switch to another the next. Larger sites might take a little longer but it's still not a large investment. Switching costs are even lower for advertisers, who can advertise on multiple networks simultaneously and shift their allocations on a daily basis.
There are a ton of small advertising networks focusing on niche advertising markets. Without the risk of barriers to entry due to lock-in, there just isn't much reason to worry about Google's large market share. If advertisers and website operators become frustrated with Google's advertising network, they can and will switch to another one. And Google, knowing how low the switching costs are, will still have plenty of incentive to treat its customers well.
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