The European Commission approved Microsoft's acquisition of Yahoo!'s search business, which gave Microsoft an exclusive 10-year license to Yahoo's search technologies and control over Yahoo's search and search advertising operations. The Commission found that the merger would reduce costs through economies of scale, but could also weaken competition by reducing consumer choice and degrading organic search quality. A post-transaction analysis found that while the merger increased Microsoft's market share in the short term, in the long run consumer surplus and welfare were unaffected.

1. Analyzing decision of the
European Commission
Microsoft | Yahoo! Search Business
Competition, Strategy, and Institutions Yulia AN | Yulia MIRONOVA

2. Decision of European Commission
Market overview
Positive effects
Negative effects
Post-transaction analysis
Conclusion

3. European Commission
Parties
Microsoft Yahoo!
−− Online web-wide algorithmic
search
−− Search advertising businesses
including online search
advertising platform Panama.
−− Internet search platform, Bing.
−− Online search advertising
platform, adCenter.
Online Services Business division

4. European Commission
Subject −− 10-year exclusive license to
Yahoo's search technologies.
−− Yahoo internet search and search
advertising staff.
−− Microsoft as the exclusive internet
search and search advertising
provider used by Yahoo.
−− 12% of the search revenues
generated on Yahoo’s and its
partners' websites during the first
five years of the agreement will
go to Mirosoft.
−− Rest 88% will go to Yahoo as a
traffic acquisition cost.

5. European Commission
Decision
Horizontal Merger approved

8. European Commission
Market overview
Positive effects
Negative effects
Post-transaction analysis
Conclusion

9. Organic
web search
Search-based
advertising
Non-search-based
advertising
Contextual
Text
Contextual Non-context
Text Display Display
Adapted from European Commission (2008)
Market overview

10. 0
10
20
30
40
50
60
2010 2011 2012 2013 2014
Paid search Display Classified
Source: ZenithOpen
Market overview

11. Advertisers
Users
Market overview

12. A
U
Zero-price consraint
Auction bidding:
Generalized Second-Price
Market overview

13. A
U
~ Single-homing
~ Multi-homing
Market overview

14. Market overview
Production costs Switching costs

15. Market overview
Production costs Switching costs
−− Highly specific fixed costs
−− Negligible variable costs
−− Sunk

16. Market overview
−− Hardware (USD 1 000 mln)
−− Human capital (USD 1 000 mln)
−− Server infrastructure
−− IP patents
−− Algorithm development
−− Algorithm update
−− R&D
Production costs Switching costs
−− Highly specific fixed costs
−− Negligible variable costs
−− Sunk

17. Market overview
Production costs Switching costs
High Low−− Highly specific fixed costs
−− Negligible variable costs
−− Sunk

18. Market overview
−− One click
away
Production costs Switching costs
High Low−− Highly specific fixed costs
−− Negligible variable costs
−− Sunk
−− Credence
good

19. Market overview
−− One click
away
Production costs Switching costs
High Low−− Highly specific fixed costs
−− Negligible variable costs
−− Sunk
−− Credence
good
Network externalities

20. Market overview
−− One click
away
Production costs Switching costs
High Low−− Highly specific fixed costs
−− Negligible variable costs
−− Sunk
−− Credence
good
Network externalities
High entry barriers

21. Market overview
−− One click
away
Production costs Switching costs
High Low−− Highly specific fixed costs
−− Negligible variable costs
−− Sunk
−− Credence
good
Network externalities
High entry barriers
High market concentration

22. Market overview
Google
Yahoo! Bing
Other
UK France Germany
Ireland Italy Spain
Digital Clarity. (2011).
Yahoo & Bing Search
Engine Merger. Available
at http://www.digital-
clarity.com/blog/search-
engines/yahoo-bing-
search-engine-merger/
92% 94,76% 95,69%
94,67% 97,54% 96,96%

23. European Commission
Market Overview
Positive effects
Negative effects
Post-transaction analysis
Conclusion

24. Microsoft Yahoo!
−− Economies of scale −− Reduction of costs
Positive effects

25. Microsoft Yahoo!
−− Economies of scale −− Reduction of costs
−− Rationalisation of operational costs
−− Stronger competitor to Google
−− Greater value to advertisors
Positive effects

26. European Commission
Market overview
Positive effects
Negative effects
Post-transaction analysis
Conclusion

27. Merger
Advertisers
Users
Publishers
Distributors

28. Merger
Advertisers

29. Merger
Advertisers
−− Increased cost per click (CPC)
−− increased bidder density for
particular keywords

30. Merger
Users

31. Merger
Users
−− reduction of variety of choice
−− degradation of organic search
−− unilateral effect

32. Merger
Publishers

33. Merger
Publishers
−− increased competition among publishers
−− reduced competition between the remaining
advertising platforms
−− lower prices paid for publishers’ web space

34. Merger
Distributors

35. Merger
Distributors
−− reduced competition between search platforms
for distribution agreements
−− increased Microsoft’s ability to leverage its market
power in areas other than online advertising

36. European Commission
Market overview
Positive effects
Negative effects
Post-transaction analysis
Conclusion

37. 0,00%
10,00%
20,00%
30,00%
40,00%
50,00%
60,00%
70,00%
80,00%
90,00%
100,00%
July 2009 April 2014
AOL, Inc.
Ask Network
Microsoft sites
Yahoo! sites
Google sites
Post-transaction analysis
64,7% 67,6%
19,3% 10%
8,9% 18,7%
Total U.S. search market
share – Home & Work
Locations (2009, 2014).
ComScore Explicit Core
Search Share Report.
comScore qSearch

38. Post-transaction analysis
10%
13%
22%
37%
-10%
14%
-20%
-10%
0%
10%
20%
30%
40%
Impressions Clickthrough
Rate
Cost-Per-Click
Yahoo! Bing Network Google
U.S. Percentage
change of the main
search market
indicators of Yahoo!
Bing Network and
Google on a year-
over-year basis (Q4
2011 – Q4 2012)
Marin Software. (2012).
Online Advertising
Report, October-
December 2012

39. Post-transaction analysis
Consumer
surplus under
normalized
network benefit
parameters
Iurkov, V. (2013).
Competition, mergers
and exclusive dealing in
two-sided markets with
zero-price constraints:
The case of search
engines. Universita
Ca’Foscari Venezia.

40. Post-transaction analysis
Total welfare
under
normalized
network benefit
parameters
Iurkov, V. (2013).
Competition, mergers
and exclusive dealing in
two-sided markets with
zero-price constraints:
The case of search
engines. Universita
Ca’Foscari Venezia.

41. Post-transaction analysis
A merger between two platforms leads to a slight
decrease in consumer surplus and total welfare, but
to an increase in total platform profits.
However, as t → ∞, consumer surplus and total
welfare tend to be equal under no merger and merger
configurations.
Iurkov, V. (2013). Competition, mergers and
exclusive dealing in two-sided markets with
zero-price constraints: The case of search
engines. Universita Ca’Foscari Venezia.

42. European Commission
Market overview
Positive effects
Negative effects
Post-transaction analysis
Conclusion

43. Discussion

44. References
Photography of Microsoft Office by Jeff Wong, www.jeffwongdesign.com/2013/10/microsoft-office-interior