Online Advertising and Antitrust: Network Effects, Switching Costs, and Data as an Essential Facility

In this paper, I discuss some of the traditional sources of market power grounded in economics, and how they apply to online advertising markets. I discuss the idea that digital advertising has evolved technologies that are intended to dismantle many early network effects in online advertising. I then discuss how new digital technologies have evolved to reduce switching costs for advertisers. Last, I discuss briefly the question of whether data can be thought of as an essential facility for advertising.

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Catherine E. Tucker¹

I. INTRODUCTION

One of the most rapid shifts in the digital economy has been a shift in the regulatory approach of many governments, from a focus on protecting consumers from false claims in advertising to considering digital advertising in the context of antitrust discussions and policy.²

Given the fact that online advertising companies are in the “crosshairs” of antitrust authorities, it is important to examine where their market power (if any) originates. Critics suggest that a combination of network effects, switching costs, and access to large amounts of data would give economics-based explanations for the rise of digital advertising platforms, and that the combination of these factors means that such markets will not “self-correct.”³ In this essay, I evaluate the extent to which such claims hold up from an economics perspective.

II. NETWORK EFFECTS IN ONLINE ADVERTISING MARKETS

Network effects occu