Economic Growth and the Design of Search Engines

34 Pages Posted: 18 Feb 2009

See all articles by Gilles Saint-Paul

Gilles Saint-Paul

University of Toulouse I - GREMAQ-IDEI; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Date Written: February 2009

Abstract

The Internet plays a growing role in the economy. This paper extrapolates this trend and analyses a world where most transactions take place in cyberspace. We ask the following question: how does the design of the search engine affect the incentives to innovate and the economy's long run growth rate? This is done in the context of a qualitative model where growth occurs because the number of varieties grows and consumers select a shrinking fraction of the available goods, of growing quality. They must use a search engine to locate goods. The search engine affects the market size of a good over its life cycle, and thus the incentives to innovate. Its structure has two conflicting effects. A visibility effect by which a greater hit score increases market size. A selection effect by which consumers are more picky and select higher quality goods, thus reducing the life span of any given good.While these two effects on growth cancel out for simple specifications, that is no longer the case if a firm's score is variable along its life cycle or if he search process uses resources. It is shown that the discount effect of gradual recognition of popularity tends to reduce growth. Hence, growth is enhanced if the search engine is less sensitive to popularity. Also, growth is lower when the search engine rewards web page quality better because of the resources diverted away from R and D into advertising. But these mechanisms generate opposite level effects on the average quality selected by consumers. As a result the net effect on welfare is ambiguous.

Keywords: Advertising, Endogenous Growth, Internet, Quality Ladders, R and D, Search Engines, Selection

JEL Classification: O3

Suggested Citation

Saint-Paul, Gilles, Economic Growth and the Design of Search Engines (February 2009). CEPR Discussion Paper No. DP7154. Available at SSRN: https://ssrn.com/abstract=1345680

Gilles Saint-Paul (Contact Author)

University of Toulouse I - GREMAQ-IDEI ( email )

Manufacture des Tabacs
21 Allees de Brienne
Toulouse, 31000
France
+33 5 6112 8544 (Phone)
+33 5 6122 5563 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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