RBB Economics
927 JUNE NOVEMBER 2008 2008 ANDREA LOFARO
Google/DoubleClick: The search for a theory of harm
2008 ACE Conference, Budapest RBB Economics
OVERVIEW
1. Background on Google’s activities ANDREA LOFARO ANDREA
2 2. Background on DoubleClick’s activities
3. Unilateral effects without foreclosure?
4. Conclusions BUDAPEST, 27 Nov. 2008 Nov. 27 BUDAPEST, RBB Economics
1.1 Background – What Does Google Do?
• Google Sells ad space ANDREA LOFARO ANDREA
3 1. On its own search results pages BUDAPEST, 27 Nov. 2008 Nov. 27 BUDAPEST, RBB Economics
1.2 Search advertising (sold directly) on Google.com ANDREA LOFARO ANDREA
4 BUDAPEST, 27 Nov. 2008 Nov. 27 BUDAPEST, RBB Economics
1.3 Background – What Does Google Do?
• Google Sells ad space ANDREA LOFARO ANDREA
5 1. On its own search results pages
2. On third party publishers’ websites – through its ad network
– Ad networks are intermediaries that “pool” ad space made available for sale by publishers and sell this space to
BUDAPEST, 27 Nov. 2008 Nov. 27 BUDAPEST, advertisers
– Google’s ad network (mainly) offers intermediation services for two kinds of ad
• search advertising • contextual advertising RBB Economics 1.4 Search advertising (sold via intermediation) on a partner’s website ANDREA LOFARO ANDREA
6 BUDAPEST, 27 Nov. 2008 Nov. 27 BUDAPEST, RBB Economics 1.5 Contextual advertising (sold via intermediation) on a partner’s website ANDREA LOFARO ANDREA
7 BUDAPEST, 27 Nov. 2008 Nov. 27 BUDAPEST, RBB Economics
2.1 Background – What Does DoubleClick Do?
• DoubleClick does not sell ad space
ANDREA LOFARO ANDREA • DoubleClick sells ad serving technology for display advertising 8 to advertisers and publishers
• Once ad space has been sold by a publisher, display ad serving technology is used to deliver a display ad from the advertiser to the ad space BUDAPEST, 27 Nov. 2008 Nov. 27 BUDAPEST, • Display ad serving technology also plays various other supporting roles
– e.g. monitors where a user went after seeing an ad RBB Economics
2.2 Example of sale of Display advertising
• Land Rover (advertiser) pays MSN (publisher) for ad space – $2 per 1000 impressions ANDREA LOFARO ANDREA
9
LONDON, 13 Nov. 2008 BUDAPEST, 27 Nov. 2008 Nov. 27 BUDAPEST,
• Land Rover pays advertiser-side ad serving provider (DoubleClick) – 4 cents per 1000 impressions • MSN pays publisher-side ad serving provider (not necessarily DoubleClick) – 4 cents per 1000 impressions RBB Economics
3.1 Unilateral effects without foreclosure?
• No straightforward horizontal overlap between the parties • Ad serving and ad space are complementary products – must lie in separate markets ANDREA LOFARO ANDREA
10 • BUT this does not imply that unilateral effects concerns cannot arise (at least in theory)
• Advertisers and publishers see text advertising and display advertising as substitutes
BUDAPEST, 27 Nov. 2008 Nov. 27 BUDAPEST, • Commission agreed with this but left open whether substitutability is enough to justify their inclusion in same market
• Complainants alleged that this created a “diagonal” relationship between Google and DoubleClick • This would make post-merger unilateral price increases profitable RBB Economics 3.2 Possible impacts of diagonal relationships: Merger between a steel and a zinc provider ANDREA LOFARO ANDREA Copper Zinc Iron Coal etc. 11 BUDAPEST, 27 Nov. 2008 Nov. 27 BUDAPEST,
Brass Steel RBB Economics 3.3 Possible impacts of diagonal relationships: Merger between a steel and a zinc provider
• For a merger between a steel and a zinc provider to give rise to unilateral effects, three conditions need to be satisfied : ANDREA LOFARO ANDREA 1. Zinc must represent a relatively important cost in the production of 12 brass
2. The zinc provider should not face effective competition from other zinc providers BUDAPEST, 27 Nov. 2008 Nov. 27 BUDAPEST,
3. Brass and steel should be close substitutes RBB Economics
3.4 Effects of diagonal relationship in Google/DoubleClick
• Complainants alleged that an increase in the price of DoubleClick’s ad serving solution (zinc) would increase the ANDREA LOFARO ANDREA total cost of display advertising (brass) 13
• Since display advertising is a substitute for text advertising (steel), there would be some diversion of demand to Google BUDAPEST, 27 Nov. 2008 Nov. 27 BUDAPEST, • This diversion would be internalised by the new entity, leading to an increase in the price of display ad serving RBB Economics
3.5 Effects of diagonal relationship in Google/DoubleClick
Advertisers ANDREA LOFARO ANDREA Advertiser-side 14 display ad server (e.g. DoubleClick)
Display advertising Text advertising e.g. direct negotiation offered by between Land Rover and MSN e.g. Google’s Network BUDAPEST, 27 Nov. 2008 Nov. 27 BUDAPEST,
Publisher-side display ad server (e.g. DoubleClick)
Publishers RBB Economics
3.6 Effects of diagonal relationship in Google/DoubleClick
Advertisers ANDREA LOFARO ANDREA Advertiser-side 15 display ad server (e.g. DoubleClick)
Display advertising Text advertising e.g. direct negotiation offered by between Land Rover and MSN e.g. Google’s Network BUDAPEST, 27 Nov. 2008 Nov. 27 BUDAPEST,
Publisher-side display ad server (e.g. DoubleClick)
Publishers RBB Economics
3.7 Effects of diagonal relationship in Google/DoubleClick
• Three conditions need to be satisfied in order for the concern put forward by complainants to materialise: ANDREA LOFARO ANDREA 1. Ad serving must represent a significant portion of the total cost 16 of display advertising
2. DoubleClick should not face strong competition within the markets for display ad serving BUDAPEST, 27 Nov. 2008 Nov. 27 BUDAPEST,
3. Text and display advertising should be close substitutes RBB Economics 3.8 Ad serving represents a small part of the total cost of display advertising
• Consider the cost to Land Rover of buying 1000 impressions on MSN before and after a 10% increase in the price of ad
ANDREA LOFARO ANDREA serving
17 Before 10% ad serving price After 10% ad serving price increase increase Cost of ad space $2 $2 Cost of ad serving $0.04 $0.044 Total cost $2.04 $2.044 BUDAPEST, 27 Nov. 2008 Nov. 27 BUDAPEST,
• 10% increase in the price of ad serving would lead to an increase of only 0.2% in the total cost of display advertising
• Difficult to see how this could trigger significant switching to text advertising RBB Economics 3.9 DoubleClick faces intense competition in ad serving markets
• Display ad serving prices have fallen massively over the last 5 years ANDREA LOFARO ANDREA • DoubleClick is forced to offer both advertisers and publishers 18 large price reductions at the point of renewing their contracts
• DoubleClick lost customers despite offering large price reductions BUDAPEST, 27 Nov. 2008 Nov. 27 BUDAPEST,
• Any increase in the price of DoubleClick’s products would likely trigger switching to rival products and not to text advertising RBB Economics 3.10 Google’s solution and display advertising are not particularly close substitutes
• Google sells text ads, DoubleClick provides tools for display ads ANDREA LOFARO ANDREA
19 • While these forms of advertising are substitutable, they are clearly differentiated to some extent
• Therefore, Google’s solution and a display advertising solution that included DoubleClick’s technology would unlikely be BUDAPEST, 27 Nov. 2008 Nov. 27 BUDAPEST, considered as particularly close substitutes
• Unilateral effect concern is unjustified RBB Economics
4 Conclusions
• Google/DoubleClick is an important and well reasoned decision • Commission listened to the large number of complaintsb(both
ANDREA LOFARO ANDREA horizontal and non-horizontal), but it did not endorse them uncritically 20 • Instead, it specified clearly those plausible theories of harm that could not be dismissed a priori
• Challenge was to identify the key empirical questions that would
BUDAPEST, 27 Nov. 2008 Nov. 27 BUDAPEST, allow the theories to be tested against the facts
• Google/DoubleClick shows that the Commission is prepared to take a robust stance in mergers subject to strong opposition from third parties