The Necessity of Ex-Ante Regulation of Internet Portals Focusing on Online-Search Advertising Service

In the process of rapid transition to an information society, Internet portals have an increasing importance and influence in many areas. Accordingly, the rationales and needs for regulation of Internet portals have been repeatedly debated. This paper addresses two questions: “Should the internet portal industry be regulated like the telecommunication industry?” and “What is the rational way to define the market of online-search service provided by Internet portals in order to assess their market power?” In industries where technical progress is very fast and market changes dynamically with innovation, we argue that regulation of dominant firms should be crafted more carefully than in other industries. Moreover, when market structure changes rapidly with innovation, applying of regulation may be subject to errors due to difficulties in defining markets for the assessment of market power, and due to the lack of generally established economic theory for identifying whether new practices are anti- competitive. Thus, we suggest that approaches based on evidence and analysis be applied before introducing new regulation. This approach can be implemented through an error-cost framework reflecting a belief that market mechanisms can achieve efficiency, and regulatory interventions may be erroneous and costly. Regarding market definition of online-search service, as Internet portals' main business, we emphasize that since Internet portals use a two-sided business model for online search consisting of both online-search service and search-based advertising, it is not appropriate to define their market as only consisting of online-search service and to assess market power in this business. Instead it is rational to consider Internet portals' potential competition in both service areas