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The Economic Effects of Domestic Search Engines on the Development of the Online Advertising Market

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The Economic Effects of Domestic Search Engines on the Development of the Online Advertising Market Telecommunications Policy 40 (2016) 982–995 Contents lists available at ScienceDirect Telecommunications Policy URL: www.elsevier.com/locate/telpol The economic effects of domestic search engines on the development of the online advertising market Sung Wook Ji a, Young-jun Choi b, Min Ho Ryu c,n a Media Communication Division, College of Social Sciences, Hankuk University of Foreign Studies, Seoul, South Korea b Department of International Business and Trade, Kyung Hee University, South Korea c Internet Research Team, Naver Corp., South Korea article info abstract Article history: A few global search engine platforms, notably Google and Yahoo!, have achieved world- Received 7 October 2015 wide dominance in the search engine market. However, some domestic search engine Received in revised form platforms, such as Naver in South Korea and Baidu in China, have come to dominate their 7May2016 domestic markets in competition with global search engine platforms. This study quan- Accepted 24 May 2016 tified the economic effects of domestic search engines on the development of the online Available online 10 June 2016 advertising market. Using a country-level dynamic panel of 46 countries from 2009 to Keywords: 2013, we investigated the change in the size of the online advertising market caused by Domestic search engine the existence of a domestic search engine. The results show that the development of a Online advertising market domestic search engine may lead to an increase in the size of the online advertising Two-sided market market: A country with its own domestic search engine platform(s) may have an average of 0.018% more online advertising intensity—which is defined as online advertising spending/GDP—than one without this type of platform. The reasons behind these results and the policy implications are also discussed. & 2016 Elsevier Ltd. All rights reserved. 1. Introduction The Internet has grown rapidly since the early 1990s, and from online shopping and banking to news and even social networking, the Internet has completely transformed how people search for and utilize information. In this era, the im- portance of search engines as a means of gaining access to information is growing. Users typically spend a large amount of their time online using search engines to look for information. One industry report estimated that the global gross value created by Internet searches was $780 billion in 2009 (Bughin et al., 2011), and in 2013, the world search engine advertising market of 53 countries reached $48.4 billion (PricewaterhouseCoopers, 2014). As search engines have become the primary means of finding information, they play a critical role in disseminating information on the Internet. Furthermore, because search engines such as Google are among the most frequently visited Web sites, they have become attractive options for online advertising and target marketing. There were several competing search engines at the beginning of the Internet era, but the entrance of Google sig- nificantly altered the landscape of the search engine market. Founded in 1998, Google effectively deployed its advanced search technology to surpass others such as Yahoo! , and it has established itself as the world's predominant player since n Corresponding author. E-mail addresses: [email protected] (S.W. Ji), [email protected] (Y.-j. Choi), [email protected] (M.H. Ryu). http://dx.doi.org/10.1016/j.telpol.2016.05.005 0308-5961/& 2016 Elsevier Ltd. All rights reserved. S.W. Ji et al. / Telecommunications Policy 40 (2016) 982–995 983 2002 (Netmarketshare, 2014). After becoming the market leader in the U.S., Google aimed for international expansion and succeeded in penetrating search engine markets around the world. It currently occupies approximately 70% of the global search engine market, processing over 100 billion monthly searches (Webcertain, 2011, 2012, 2013, 2014). While Google has established its dominant position in most of the Western hemisphere, it faces opposition from certain local competitors in other parts of the globe, especially in China, Russia, and South Korea (Webcertain, 2014). According to one industry source (2014 Webcertain Global Search and Social Report), Google has already lost its monopoly of the global search engine market due to its insignificant share in China, the world's largest Internet market. Baidu, China's primary search engine, now captures more than 16% of the global search engine market, thanks to its domination of the Chinese market. In South Korea, the local market leader Naver has a market share of over 60% while Google only has 4%. Another notable development in the global search engine market has been the advance of the Russian search leader Yandex. The recent comScore qSearch data reveals that Yandex has surpassed Bing and has become the fourth largest search engine after Google, Baidu, and Yahoo! (Kerr, 2013). As of 2013, five of the 53 countries in our analysis—namely, China, South Korea, Japan, Russia, and the Czech Republic—possess their own domestic search engines, which, on average, take more than 50% of the domestic market share (Webcertain, 2013). Thus, at least in the cases of countries possessing their own domestic search engines, Google has not achieved dominance and is presently competing against its domestic counterparts. The present study examines the competition among domestic and global search engines, concentrating particularly on the development of the online advertising market. Despite the recent development of online search engine technologies, studies have provided surprisingly little empirical evidence concerning the social and economic effects of these technolo- gies. A few studies have modeled search platform competition and relevant policy issues based on the concept of a two- sided market structure, which was recently developed in the field of economics (Argenton & Prüfer, 2012; Etro & Iurkov, 2013; Etro, 2013; Jeon, Jullien, & Klimenko, 2012; Lianos & Motchenkova, 2013; Zhang, Levä, & Hämmäinen, 2013). Others have examined how these domestic search engines have been able to survive alongside global search engines, and have tried to find the reasons for local search engines’ success in their own country-based markets (Kim & Tse, 2012, 2014a, 2014b; S. Choi, 2010; Zhao & Tse, 2011).1 However, to the best of our knowledge, there is virtually no empirical evidence concerning the ways in which the development of a search engine changes the relevant online market. This study uses the unique set of available industry data compiled by PricewaterhouseCoopers, which tracks the revenue and size of the online advertising market of individual countries, in order to investigate the relationship between the development of a domestic search engine and the size of a country's online advertising market. Our goal is to empirically demonstrate how domestic search engines positively affect the development of a country's online advertising market. We constructed a country-level dynamic panel of 46 countries based on industry and government sources, which included each country's economic and cultural status from 2009 to 2013 along with the trends of their online advertising markets, broadband Internet penetration, and other indexes indicating the development of information and communication tech- nologies. We then quantified the economic effects of domestic search engines on the resulting increase in online advertising revenue. The next section reviews the background literature on the development of the search engine market. In Sections 3 and 4, respectively, we present an empirical model concerning the effect of domestic search engines on the online advertising market and describe the data used. Section 5 presents the empirical results and a general discussion of the results follows in Section 6. 2. Background 2.1. Search engines as a two-sided market The search engine market is characterized as a two-sided (or multi-sided) market, which includes things such as credit cards, television channels, operating systems (e.g., Windows and Android), and shopping malls. In such a market there is an interaction between two (or multiple) groups through a platform, such that an increase in the number of users in one group can benefit from the users in the other group(s); as a result, both sides’ price, product quality, and output relationships are interrelated (Armstrong, 2006; J.P. Choi, 2010; Rochet & Tirole, 2003; Schmalensee & Evans, 2007). This interrelationship makes it inappropriate to consider two or more markets in isolation. In the search engine market, for example, search platforms such as Google, Yahoo!, and others attract Internet users (the first group) and advertisers (the second group) who wish to advertise their products to these Internet users. A search platform indexes the Web pages of Internet content providers (the third group). The better and more relevant search results a search engine provides, the more users it attracts, which increases the effectiveness of advertising campaigns on that search platform, thereby increasing advertising revenue. Previous literature has examined the search engine market based on the recently developed two-sided market frame- work. Etro (2013) modeled the tendency of a search engine with an initial advantage to monopolize the market by collecting log data from past searcher experiences. Etro and Iurkov (2013) analyzed a two-sided multi-homing market framework and found that the price paid by advertisers to a search engine platform depends directly on the
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