Question

Make an argument that Facebook is indeed a monopoly. In developing your argument make sure to address relevant ideas such as competition, conditions for emergence of a monopoly, profit maximization and the like. Discuss the potential consequences of a Facebook monopoly and what, from a public policy perspective might be done about it?

Answer 1

A monopoly is defined as a market structure characterized by a single seller who is selling a unique product. In this market structure, there is only a single seller and he faces no competition as his product is unique with no close substitutes. Also, due to barriers to entry, natural or otherwise, the entry of a new firm in the market is also difficult.

Now, lets analyse facebook based on the characters of the monopoly described above.

1. A monopoly sells a unique product with no close substitutes: When it comes to facebook, it is mostly a platform where you connect with people, share photos, text based statuses, videos, send private messages, stream live videos, create pages to interact with like-minded people, create commercial pages for companies where they can directly sell products and market their product. With the talks about cryptocurrency, it will clearly be one of a kind social network with no close substitutes.There are no other social media networks who provide all these facilities in one place.

2. Competitors: When it comes to connecting with people, the other apps on the top are facebook messenger, instagram, whatsapp. Interestingly all these are owned by facebook itself. Thus these are not really competition to facebook. Facebook has 2.13 billion active users making it the largest social network followed by youtube with 1.5 billion active users. However they operate in different domains as youtube only deals with videos rather than social connections. Moreover Instagram ranks ahead of Youtube in Photos and video category in terms of downloads. Clearly, there is no close competition to facebook. Whatever there was, Instagram and Whatsapp, Facebook ended up buying them increasing it,s market power.

3. Revenues: When it comes to earning revenues, Facebook uses targeted ads. Its total number of ads rose just 15% in 2017, compared to 50% in 2016, however its average price per ad had surged 29% in 2017 compared to 5% in 2016. Clearly Facebook has a huge pricing power in ad market, and even if the ad growth are slower, it can be offset easily by increasing prices.

4. Barriers to Entry: Facebook plays on the taste and convenience of people. Once people get hooked on to an app, it gets difficult to change the perception, break the habit and encourage people to shift to another app. Due to addictiveness of facebook, it gets difficult for any other app to attract customers and persuade them to shift to the new app. Thus it becomes a barrier to entry. Also, if any company even comes close to grabbing facebook ends up buying them, case in point - Instagram and Whatsapp.

With facebook being unregulated and so much information being exchanged on a daily basis, the company is free to do anything with that information, including selling them to big companies for analytics. There is also this huge danger of leakage of private information which materialized recently. This has huge political consequences as its violates privacy of citizens and it is the government's prerogative to protect it's citizens.

The most of the market is captured by Facebook, Instagram, Whatsapp. Thus from a public policy perspective, the power of facebook should be reduced starting with regulating what can be done on the platform and breaking up Facebook , Instagram and Whatsapp as separate entities.