Market Structure for Internet Search Engines

Journal of Management Information Systems, Vol. 21, No. 2, pp. 137-160, 2004

Posted: 30 Nov 2005

See all articles by Rahul Telang

Rahul Telang

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management

Tridas Mukhopadhyay

Carnegie Mellon University - David A. Tepper School of Business

Uday Rajan

Stephen M. Ross School of Business, University of Michigan

Abstract

The Internet search engine market has seen a proliferation of entrants over the last few years. While Yahoo! was the early market leader, there has been entry by both lower quality engines and higher quality ones (such as Google). Prior work on quality differentiation requires that low quality products have low prices, in order to survive in a market with high quality products. However, the price charged to users of search engines is typically zero. Therefore, consumers do not face a trade-off between quality and price. Why do lower quality products survive in such a market? We develop a vertical differentiation model which explains this phenomenon. The quality of the results provided by a search engine is inherently stochastic, and there is no charge to using an engine. Therefore, users who try out one engine may consult a lower quality engine in the same session. This "residual demand" allows lower quality products to survive in equilibrium. We then extend our model to incorporate horizontal differentiation as well and show that residual demand leads to higher quality and less differentiation in this market. Engines want to attract competitors' customers and therefore have a strong incentive to be "similar" to each other.

Keywords: Search Engine, Residual Demand, Quality, E-Commerce, Product Differentiation, Economic Analysis, Vertical differentiation, Brand loyalty

JEL Classification: D4, L1

Suggested Citation

Telang, Rahul and Mukhopadhyay, Tridas and Rajan, Uday, Market Structure for Internet Search Engines. Journal of Management Information Systems, Vol. 21, No. 2, pp. 137-160, 2004. Available at SSRN: https://ssrn.com/abstract=855764 or http://dx.doi.org/10.2139/ssrn.263963

Rahul Telang (Contact Author)

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )

4800 Forbes Ave
Pittsburgh, PA 15213-3890
United States
412-268-1155 (Phone)

Tridas Mukhopadhyay

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-2307 (Phone)

HOME PAGE: http://web.gsia.cmu.edu/display_faculty.aspx?id=102

Uday Rajan

Stephen M. Ross School of Business, University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-764-2310 (Phone)

HOME PAGE: http://webuser.bus.umich.edu/urajan

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