Google Thwarted in Proposed Advertising Deal with Chief Rival Yahoo!

question 128

Essay

Google Thwarted in Proposed Advertising Deal with Chief Rival Yahoo!

A proposal that gave Yahoo! an alternative to selling itself to Microsoft was killed in the face of opposition by U.S. government antitrust regulators. The deal called for Google to place ads alongside some of Yahoo!'s search results. Google and Yahoo! would share in the revenues generated by this arrangement. The deal was supposed to bring Yahoo! $250 million to $450 million in incremental cash flow in the first full year of the agreement. The deal was especially important to Yahoo!, due to the continued erosion in the firm's profitability and share of the online search market.

The Justice Department argued that the alliance would have limited competition for online advertising, resulting in higher fees charged to online advertisers. The regulatory agency further alleged that the arrangement would make Yahoo! more reliant on Google's already superior search capability and reduce Yahoo!'s efforts to invest in its own online search business. The regulators feared this would limit innovation in the online search industry.

On November 6, 2008, Google and Yahoo! announced the cessation of efforts to implement an advertising alliance. Google expressed concern that continuing the effort would result in a protracted legal battle and risked damaging lucrative relationships with their advertising partners.

The Justice Department's threat to block the proposal is a sign that Google can expect increased scrutiny in the future. High-tech markets often lend themselves to becoming "natural monopolies" in markets in which special factors foster market dominance by a single firm. Examples include Intel's domination of the microchip business, as economies of scale create huge barriers to entry for new competitors; Microsoft's preeminent market share in PC operating systems and related application software, due to its large installed customer base; and Google's dominance of Internet search, resulting from its demonstrably superior online search capability.
-In what way might the Justice Department's actions result in increased concentration in the online search business in the future?

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Definitions:

Adam Smith

An 18th-century Scottish economist and philosopher, best known for his theories on free market economics and the 'invisible hand' concept.

Self-sufficiency

The ability of an individual, household, or country to meet all their needs without external assistance or international trade.

Economic Endeavors

Various activities or efforts aimed at the production, purchase, or sale of goods and services in an economy.

Trade Deficits

A scenario where the value of a nation's imports surpasses the value of its exports within a specified period, indicating a net outflow of domestic currency to foreign entities.