Beef Up Your Competitor: A Model of Advertising Cooperation Between Internet Search Engines

We propose a duopoly model of competition between internet search engines endowed with dierent technologies and study the eects of an agreement where the more advanced …rm shares its technology with the inferior one. We show that the superior …rm enters the agreement only if it results in a large enough increase in demand for advertising space at the competing …rm and a relatively small improvement of the competitor's search quality. Although the superior …rm gains market share, the agreement is bene…cial for the inferior …rm, as the later …rm's additional revenues from a higher advertising demand outweigh its losses due to a smaller user pool. If the cooperation takes place it is in line with the advertisers'interests but is detrimental to users'welfare.