The Economics of Internet Search

Abstract

Search engines are one of the most widely used Internet applications. Not only are search engines widely used, they are also highly profitable. Their primary source of revenue comes from selling advertisements that are related to the search queries. Since users tend to find these ads to be highly relevant to their interests, advertisers will pay well to place them. Furthermore, the marginal cost of an addition query is very low for search engines, so profit margins tend to be high. The fixed costs of entering and running a search engine were at one time substantial since the entrant was required to build or lease a data center. Nowadays, those fixed costs have become variable costs due to the availability of cloud computing services. This has enabled the proliferation of special purpose search engines that focus on particular types of searches such as travel and shopping. The most important economic factor determining search engine success is learning-by-doing. Because of the low user switching costs, search engines have to continually invest in improving both their search and their monetization. Though this could be said to be true of virtually any product, continuous improvement is particularly important in online products since pace of experimentation and implementation is particularly rapid.