Network Externalities

We conceptualize the search engine as offering network benefits to both users and content providers i.e., the overall value of the search engine to users increases in the total number of content providers), and the value to content providers increases in the number of users. Considering first the users' valuation function, this means that 2#2 is an increasing function in qsince q represents the index of content providers. For convenience we assume that this function is 6#6. Similarly, the value to content providers 7#7 is an increasing function of the search engine's market coverage or user base 8#8. We write the provider valuation function as 9#9. The search engine's generates revenues on the basis of its user base, including revenues from third-party firms such as advertisers and fees for licensing their information retrieval technologies. Advertisers are interested in exposure to users of the search engine, hence advertising revenues are a function of the search engine's user base. Firms that license the search engine technology pay a ``per-click-through'' fee, hence these revenues are also a function of the user base. For simplicity in exposition, we denote all user-based revenues as advertising revenues. Let a represent the advertising value per user, so that the search engines revenues equal

10#10