The Map of Commerce: Internet Search, Competition, and the Circular Flow of Information

Networks, the Internet, and Cloud Computing, Internet and Search and Advertising

Article Snapshot


Daniel Spulber


Journal of Competition Law & Economics, Vol. 5:4, pp. 633-682, 2009


This paper looks at how consumers, search engines, and sellers of goods use information.

Policy Relevance

Having a dominant search engine like Google might harm consumers.

Main Points

  • Online buyers and sellers each reveal continuously updated information about themselves through search services, the middleman. Online searches affect offline commerce as well.

  • Helping sellers and buyers find each other benefits everyone. Search engines help sellers (advertisers) by letting them bid on keywords to show ads. Search engines give buyers one central place to search; this tends to lead to a dominant firm, Google.

  • Ads targeted to the most likely buyers work best, but targeting is costly. Broadcasting reaches many people, but targeting is hard. Print media is targeted, but reaches fewer people. The Internet allows targeting to individuals while also reaching many people.

  • Revealing information and buying and selling are not separable activities. Buyers reveal otherwise private information through behavior, beginning with their choice of keywords and by clicking. 

  • In negotiating, one side can gain by “screening,” revealing partial or “noisy” information at first, encouraging the other side to share more in exchange. Buyers’ use of keywords is “noisy.”  

  • Search services like Google use “second price auctions” to place ads, discouraging misleading bids.

  • Search services compete on quality (vertical differentiation); if one search algorithm gives better results, one firm tends to dominate, like Google. Search services also compete in specialization (horizontal differentiation). Some focus on searching books, journal articles, or different kinds of products.

  • A search firm’s market power affects how much consumers benefit from online exchanges, and can also affect privacy. Advertisers can use information to introduce price discrimination, and may prefer a dominant search engine.

  • Behavioral advertising is tracking a consumer’s online activities over time to deliver ads targeted to the individual.  More competition between search firms would encourage firms to reveal how they are tracking consumers.

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