Abstract: In this paper I show how the market definition exercise cannot fulfill its role as an indicator of market power in the context of online search. Differentiation on the web is so high and the cost of switching between heterogeneous services is so low that the traditional delineator of relevant market boundaries, namely reasonable substitutability, cannot coherently be applied to establish a market for general search engines, the shares of which would accurately reflect Google’s ability to raise its price above or reduce its quality below the competitive level. Defining a market based on some concept of search, whether narrowly or broadly defined, would commit to the background of the case key factors influencing market power, such as network effects, prices and dynamic supply-side substitution online. However, defining the market more widely to include either the advertising side of Google’s business model or more firms on the search-side would complicate matters and dilute Google’s market share to the extent that antitrust scrutiny would be unwarranted, regardless of Google’s real level of market power. The only way to properly account for the nuanced factors affecting Google’s market power is to commit to a full market power analysis, to the exclusion of the market definition exercise in its entirety. An effects-based approach to unilateral conduct by dominant firms is better able to deal with alleged anticompetitive harm when the market definition exercise cannot perform its primary function.
JEL Classification: K21; L42; L41; L40; L86