Question

Case on Oligopoly-Big Tech

The heads of four of the U.S.’s biggest technology companies — Alphabet Inc., Apple Inc. Facebook Inc. and Amazon.com Inc. — appeared before Congress to respond to criticism that they have too much market power. The hearing showed that lawmakers are beginning to understand what is and isn’t important when it comes to regulating these large businesses. And it also showed an increased focus on the most important area of antitrust policy — mergers and acquisitions and whether regulators have exercised enough vigilance. In recent years, big tech has become ever more important to the U.S. economy and U.S. financial markets. The five biggest tech companies (the four that testified, plus Microsoft Corp.) now represent more than one-fifth of the market In a few companies get this big and dominant, it makes sense to think about how they might be using their size to unfairly control markets. One typical defense against such allegations is that tech companies are not monopolies. Whether this is true depends on how markets are defined -- for example, Google is overwhelmingly dominant among search engines, but has only about a third of digital ad revenue. Facebook Chief Executive Officer Mark Zuckerberg argued that his company faces intense competition in many markets, especially from the other top tech companies. But focusing on whether a company is a monopoly misses the point. Oligopolies, where a few big companies dominate the market, also tend to wield some degree of market power. In theory, that can allow powerful players to jack up consumer prices, underpay workers and squeeze suppliers. In the case of Big Tech, consumer prices are generally not the issue. Services provided to consumers by Google and Facebook tend to be free, while Apple’s fat margins stem mostly from consumer willingness to pay a lot for the brand value of an iPhone. Wages are a slightly bigger concern. Big tech companies have already been caught and fined for colluding to hold down engineers’ salaries, and there bigger worry concerns suppliers. Platform companies depend on a network of third-party companies -- merchants who sell on Amazon, websites that run Google ads, app developers who sell on Apple’s App Store and so on. The platforms’ size potentially allows them to extract a lot of value from these smaller companies, demanding a larger share of their revenue or even creating and then favoring their own competing offerings. In the long run, as tech publisher Tim O’Reilly has argued, big tech companies would probably ossify and ultimately lose out from cannibalizing their own third-party ecosystems, but there’s always the danger that short-term profits will prove too tantalizing. Thus, it’s a good thing that Congress focused some of its attention on the need to maintain fair relationships between platforms and suppliers Another concern is the prices that online service companies charge advertisers. By some estimates, more than half of digital ad spending now goes to either Google or Facebook, with the fastest-rising competitor being Amazon. Advertisers are the true paying customers for free online services for consumers. This is a reason that legislators are worried about platforms buying out the competition. Ultimately, that could raise prices for advertisers, if Facebook properties are the only way for them to reach social-media users. Those sorts of buyouts and buyout threats could also have a chilling effect on startup formation and economic dynamism because even the threat of competition from a dominant company can deter new entrants. Columbia Law School professor Timothy Wu has argued that such bio if

there’s any case for antitrust action against Big Tech right now, it probably has to do with the acquisition of upstart competitors. Unlike most of the issues surrounding Big Tech, which are complicated and confusing because of the way online network effects change the economics of size, concern over anticompetitive mergers that jack up prices is very old and very common.

In any case, it’s a very good thing that Congress is beginning to pay more attention to the problems of industrial concentration and oligopoly in the U.S. economy. Big Tech is obviously the most well-known and popular case, but with concentration rising across most industries, these hearings will hopefully be a jumping-off point for a broader re-examination of the value of mega-mergers and huge, dominant companies.

Answer the following questions

Explain with reference to the case what is meant by collusive oligopoly?

Which way are the Big tech companies abusing their dominance (monopoly) power?

Explain the behavior of a dominant(Price leader) firm with a diagram? Does this concept relate to the case in any way?

Answer 1

1. In the case of collusive oligopoly the competing firms collude in order to reduce the uncertainties cropping out of the inherent rivalries among them. The colluding firms are usually bound by agreements whereby they seek to maximise the joint profit of the group. OPEC is an example of such type of collusion. he five biggest tech companies (the four that testified, plus Microsoft Corp.) now represent more than one-fifth of the market In a few companies get this big and dominant, it makes sense to think about how they might be using their size to unfairly control markets.

2. Oligopolies, where a few big companies dominate the market, also tend to wield some degree of market power. Services provided to consumers by Google and Facebook tend to be free, while Apple’s fat margins stem mostly from consumer willingness to pay a lot for the brand value of an iPhone. Wages are a slightly bigger concern. Big tech companies have already been caught and fined for colluding to hold down engineers’ salaries, and there bigger worry concerns suppliers. Advertisers are the true paying customers for free online services for consumers. This is a reason that legislators are worried about platforms buying out the competition. Ultimately, that could raise prices for advertisers.

3.

In this model it is assumed that there is a large dominant firm which has a considerable share of the total market, and some smaller firms, each of them having a small market share. The market demand (DD in figure 10.9) is assumed known to the dominant firm.

It is also assumed that the dominant leader knows the MC curves of the smaller firms, which he can add horizontally and find the total supply by the small firms at each price; or at best that he has a fair estimate, from past experience, of the likely total output from this source at various prices. With this knowledge the leader can obtain his own demand curve as follows.

At each price the larger firm will be able to supply the section of the total market not supplied by the smaller firms. That is, at each price the demand for the product of the leader will be the difference between total D (at that price) and the total S₁. For example, at price P₁ the demand for the product of the leader will be zero, because the total quantity demanded (D₁) is supplied by the smaller firms.

As price falls below P₁ the demand for the leader’s product increases. At P₂ the total demand is D₂; the part P₂ A is supplied by the small firms and the remaining AD₂ is supplied by the leader. At P₃ total demand is D₃ and the total quantity is supplied by the leader since at that price the small firms do not supply any quantity. Below P₃ the market demand coincides with the leader’s demand curve.

Having derived his demand curve (d_L in figure 10.10) and given his MC curve, the dominant firm will set the price P at which his MR = MC and his output is 0x. At price P the total market demand is PC, and the part PB is supplied by the small firms followers while quantity BC = 0x is supplied by the leader.

The dominant firm leader maximises his profit by equating his MC to his MR, while the smaller firms are price-takers, and may or may not maximise their profit, depending on their cost structure. It is assumed that the small firms cannot sell more (at each price) than the quantity denoted by S₁. However, if the leader is to maximise his profit, he must make sure that the small firms will not only follow his price, but that they will also produce the right quantity (PB, at price P). Thus, if there is no tight sharing-the- market agreement, the small firms may produce less output than PB and thus force the leader to a non-maximising position.

in our case, we can see a dominant leadershio model. Google is a tech giant. We can say that Google guides the way for other firms to follow.