Bottlenecks on the Internet and Platform Competition

Susan Athey, Stanford University and Microsoft Research

Disclosure: The author consults for Microsoft.

Questions How do data and information affect platform

competition and create competitive “bottlenecks”? What is the role of economies of scale and network

effects?

Does platform competition among firms, each of which has a substantial market share in some products, eliminate the importance of bottlenecks?

What are the motivations for vertical integration in platform competition?

How do the big internet device, search and online advertising platforms affect internet publishing, innovation, and the markets for online services?

Device Platforms Multi-sided markets

Referrals and bottlenecks

Vertical integration

Platform Competition and Innovation

Online Services & Content

Device

OS

Apps

Search

Browser

Search

Antitrust and the Browser Wars, Revisted

Mobile Platforms

Online Services & Content

Device

OS

Apps

Browser

Search

Search

Google Services, Cloud, App Store

Apps

Device

OS

Browser

Search

Search

iTunes; iCloud; App Store

Apps

Device

OS

Browser

Search

Search

Retail/Content/App Stores;

Cloud storage

Case Study: Internet Search Multi-sided markets Economies of scale and data Referrals on the internet and bottlenecks

Search: Multi-sided markets, economies of scale and competition

More innovation,better user experience

More innovation,

more investment, more users

More traffic and revenue for ecosystem partners

More advertisers

More relevant

ads, higher

revenue per search

More relevant algorithmic results

More data

More syndication

partners

More data, better

publisher-side

algorithms

10

Advertisers

Publishers

Partners and

Websites

Search users

Worldwide

+

90.5%

8%

Other1.5%

Search is Concentrated

*March 2011 comScore figures (includes search partners) 11

United States

70.4%

29.6%

+

* March 2011 Statcounter global statistics (includes search partners)

Query Volume Share

Paid Search is Concentrated (U.S.)

12

U.S. Paid Search Share

Google Yahoo!

Microsoft

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

US

Paid

Sea

rch

Reve

nue

Sha

re

Google Yahoo! Microsoft Other (Overture) Other (Overture)

Device UI: PC,

Mobile, Tablet,

Gaming, TV

Browser

Online Content

Cloud Services

UsersAdvertiser

s

Travel

Bottlenecks, Referrals, and Vertical Integration

Manipulation and Innovation Defensive Strategies

for Dominant Firm Vertical integration Make your own

service the winner through prominence

Strategies for Competing Firm Partner with others Always choose the

best partner to improve your user experience

Innovate in verticals Impact on Industry

Incentives for entrepreneurship and innovation