1. Economics RBB 9 JUNE 2008ANDREA LOFARO 13 NOVEMBER 2008ANDREA LOFARO Google/DoubleClick: The search for a theory of harm BIICL 7th Annual Merger Conference

2. Economics RBB 2 ANDREA LOFARO LONDON, 13 Nov. 2008 OVERVIEW 1.Background on Google’s activities 2.Background on DoubleClick’s activities 3.Unilateral effects without foreclosure? 4.Conclusions

3. Economics RBB 3 ANDREA LOFARO LONDON, 13 Nov. 2008 Google Sells ad space 1.On its own search results pages 1.1Background – What Does Google Do?

4. Economics RBB 4 ANDREA LOFARO LONDON, 13 Nov. 2008 1.2Search advertising (sold directly) on Google.com

5. Economics RBB 5 ANDREA LOFARO LONDON, 13 Nov. 2008 Google Sells ad space 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 advertisers – Google’s ad network (mainly) offers intermediation services for two kinds of ad search advertising contextual advertising 1.3Background – What Does Google Do?

6. Economics RBB 6 ANDREA LOFARO LONDON, 13 Nov. 2008 1.4Search advertising (sold via intermediation) on a partner’s website

7. Economics RBB 7 ANDREA LOFARO LONDON, 13 Nov. 2008 1.5Contextual advertising (sold via intermediation) on a partner’s website

8. Economics RBB 8 ANDREA LOFARO LONDON, 13 Nov. 2008 2.1Background – What Does DoubleClick Do? DoubleClick does not sell ad space DoubleClick sells ad serving technology for display advertising 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 Display ad serving technology also plays various other supporting roles – e.g. monitors where a user went after seeing an ad

9. Economics RBB 9 ANDREA LOFARO LONDON, 13 Nov. 2008 2.2Example of sale of Display advertising Land Rover (advertiser) pays MSN (publisher) for ad space – $2 per 1000 impressions 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 LONDON, 13 Nov. 2008

10. Economics RBB 10 ANDREA LOFARO LONDON, 13 Nov. 2008 3.1Unilateral effects without foreclosure? No straightforward horizontal overlap between the parties Ad serving and ad space are complementary products – must lie in separate markets 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 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

11. Economics RBB 11 ANDREA LOFARO LONDON, 13 Nov. 2008 3.2Possible impacts of diagonal relationships: Merger between a steel and a zinc provider Copper Zinc BrassSteel Iron Coal etc.

12. Economics RBB 12 ANDREA LOFARO LONDON, 13 Nov. 2008 3.3Possible 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 : 1.Zinc must represent a relatively important cost in the production of brass 2.The zinc provider should not face effective competition from other zinc providers 3.Brass and steel should be close substitutes

13. Economics RBB 13 ANDREA LOFARO LONDON, 13 Nov. 2008 3.4Effects of diagonal relationship in Google/DoubleClick Complainants alleged that an increase in the price of DoubleClick’s ad serving solution (zinc) would increase the total cost of display advertising (brass) Since display advertising is a substitute for text advertising (steel), there would be some diversion of demand to Google This diversion would be internalised by the new entity, leading to an increase in the price of display ad serving

14. Economics RBB 14 ANDREA LOFARO LONDON, 13 Nov. 2008 Advertisers Publishers Advertiser-side display ad server (e.g. DoubleClick) Display advertising e.g. direct negotiation between Land Rover and MSN Text advertising offered by e.g. Google’s Network Publisher-side display ad server (e.g. DoubleClick) 3.5Effects of diagonal relationship in Google/DoubleClick

15. Economics RBB 15 ANDREA LOFARO LONDON, 13 Nov. 2008 Advertisers Publishers Advertiser-side display ad server (e.g. DoubleClick) Display advertising e.g. direct negotiation between Land Rover and MSN Text advertising offered by e.g. Google’s Network Publisher-side display ad server (e.g. DoubleClick) 3.6Effects of diagonal relationship in Google/DoubleClick

16. Economics RBB 16 ANDREA LOFARO LONDON, 13 Nov. 2008 3.7Effects of diagonal relationship in Google/DoubleClick Three conditions need to be satisfied in order for the concern put forward by complainants to materialise: 1.Ad serving must represent a significant portion of the total cost of display advertising 2.DoubleClick should not face strong competition within the markets for display ad serving 3.Text and display advertising should be close substitutes

17. Economics RBB 17 ANDREA LOFARO LONDON, 13 Nov. 2008 3.8Ad 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 serving 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 Before 10% ad serving price increase After 10% ad serving price increase Cost of ad space$2 Cost of ad serving$0.04$0.044 Total cost$2.04$2.044

18. Economics RBB 18 ANDREA LOFARO LONDON, 13 Nov. 2008 3.9DoubleClick faces intense competition in ad serving markets Display ad serving prices have fallen massively over the last 5 years DoubleClick is forced to offer both advertisers and publishers large price reductions at the point of renewing their contracts DoubleClick lost customers despite offering large price reductions Any increase in the price of DoubleClick’s products would likely trigger switching to rival products and not to text advertising

19. Economics RBB 19 ANDREA LOFARO LONDON, 13 Nov. 2008 3.10Google’s solution and display advertising are not particularly close substitutes Google sells text ads, DoubleClick provides tools for display ads 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 considered as particularly close substitutes Unilateral effect concern is unjustified

20. Economics RBB 20 ANDREA LOFARO LONDON, 13 Nov. 2008 4Conclusions Google/DoubleClick is an important and well reasoned decision Commission listened to the large number of complaintsb(both horizontal and non-horizontal), but it did not endorse them uncritically 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 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