Online Search Engine Competition with First-Mover Advantages, Potential Competition and a Competitive Fringe: Implications for Data Access Regulation and Antitrust

Abstract

Are dominant online search engines monopolies enjoying low contest-ability, due to high barriers to entry, or innovative first-movers? This paper argues that dominant online search engines maintain their leadership through an “innovation feedback loop”: a process whereby increasing R&D expenses allow dominant online search engines to maintain superior quality and achieve greater earnings over time, which in turn allow them to further increase R&D expenses to maintain leadership. Dominant online search engines use the innovation feedback loop to maintain their first-mover advantages, as entry barriers in the form of either economies of scale, switching costs or network effects do not protect their rents from technological discontinuities by potential or fringe competitors. Furthermore, first-mover advantages are also maintained via entry into adjacent markets, through either acquisition or organic growth. This allows dominant online search engines to increase advertising monetization, through collecting differentiated user data, and to improve their position against entry from potential competitors and competition from the fringe. We argue that when dominance is derived from first-mover advantages and innovation feedback loops, rather than high and non-transitory barriers to entry, competition policy and regulation should avoid undermining first-mover advantages through access regulation, as this is likely to result in trade-offs on innovation by all market players. We support instead a focus on prohibiting exclusionary behavior by first movers to avoid leadership derived from anti-competitive foreclosing abuses rather than from competition on the merits.