Google: Case Digest
What is the nature of network effects in paid search markets? Do you expect Google to sustain its present domination in this market?
The paid search market is a two-sided market where the advertisers form the “money” side and the end users who are searching the information form the “subsidy” side. The paid search listings are essentially “context” based advertisements that appear either adjacent to the search results or are interspersed with the search results. Advertisers pay for these advertisements to reach out customers who are searching for related information. A search engine like Google, Microsoft Bing or Yahoo returns the information to the users that are searching for the information and at the same time it provides a platform for the advertisers to target these users based on the key word they are searching. The advertisers can benefit from advertising on the chosen search engine if that search engine attracts high volume of users. Hence it makes sense for any search engine to subsidize the users in order to attract more eyeballs since the users are so highly valued by the “money” side of the paid search market. Attracting large number of users further generates “cross-side” network effects since more users mean more advertisers willing to pay to reach out to them. In the reverse direction too the network effect holds. Since, more advertisers means that the users can have information on larger number of products/services that are being advertised through the paid search market.
Another crucial factor that contributes to the network effects dynamics in the paid market search is how “Cost per click” or CPC bid rates are used for showing relevant advertisements to the users. Google weights CPC bid rates and thus ranks paid listings by using the ratio of the ad’s actual click-through rate (CTR) to the expected click-through rate (CTR). This weighting ensures that only the most relevant ads are shown in the most prominent...
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