Competition between Internet Search Engines

Abstract

We develop a model of vertical differentiation in the Internet search engine market. A key property of the model is that users who try out one engine may be dissatisfied with the results, and consult another engine in the same session. This residual demand allows lower quality engines to survive in equilibrium. We consider a two-period game between an incumbent and an entrant who enters in the second period. Since users prefer to try out a higher quality engine first, the demand for an engine is discontinuous in quality, depending on whether the engine is a leader or a follower. We take into account brand loyalty for the incumbent. The interaction of brand loyalty and a cost advantage for the entrant determines which engine is the leader in equilibrium.

Keywords: Vertical differentiation, search engine, residual demand, brand loyalty

JEL Classification: D4, L1