After you have studied Economics in the News on pp. 358–359, answer the following questions.

a. Why does the Department of Justice say that Google is misusing its monopoly power? Do you agree? Explain why or why not.

b. Explain why it would be inefficient to regulate Google to make it charge the same price per keyword click to all advertisers.

c. Explain why selling keywords to the highest bidder can lead to an efficient allocation of advertising resources.

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Google gets its revenue by selling advertisements associ- ated with search keywords. Google sells keywords based on a combination of will- ingness-to-pay and the number of clicks an advertise- ment receives, with bids starting at 5 cents per click. Google has steadily improved its search engine and refined and simplified its interface with both searchers and advertisers to make searches more powerful and advertising more effective. Figure 1 shows Google's extraordinary success in terms of its revenue, cost, and profit. Google could have provided a basic search engine with none of the features of today's Google. If Google had followed this strategy, people seeking information would have used other search engines and advertisers would have been willing to pay lower prices for Google ads. Google would have faced the market described in Fig. 2 and earned a small economic profit. Instead, Google improved its search engine and the effectiveness of advertising. The demand for Google ads increased. Figure 3 shows the consequences of Google's successful strategy. With perfect price discrimination, Google pro- duces the efficient quantity of search and advertising and maximizes producer surplus. But even if Google's strategy does not bring inefficiency, it might result in its having an unfair advantage over its competitors as alleged by the Justice Department. Revenue, cost, and profit (billions of dollars) 200 1750 150. 125. 100 75 50 25. 2000 2004 2008 Total revenue Profit 2012 Total cost 2016 2020