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Large returns to scale and network externalities do not automatically mean that firms (like Facebook) are “locked in” forever
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By Adam Thierer and Jennifer Huddleston of Mercatus. Excerpt:
"It is hard to see how Facebook can be considered a monopoly or
essential facility when so many people do not need or use its service.
While many Americans do use the site, 30 percent of people aren’t on Facebook at all. Meanwhile, according to Pew Research, younger users are deleting Facebook or using other platforms
such as Snapchat and YouTube. Even if every American was on Facebook,
it is hard to argue that it is a life-essential utility on par with
water or electricity that one would be unable to survive without.
Even if one thinks intervention is needed, it is still difficult to
determine what the relevant market is for antitrust purposes. If broadly
defined as social media, it is easy to identify other large and
successful market competitors like Twitter. Similarly, even more narrow
services like encrypted messaging offered by Facebook-owned WhatsApp
have significant competitors like Signal and Telegram.
In many cases, these substitutes show that using Facebook is a
consumer choice for reasons of familiarity and convenience, but users
can and will make other choices. For example, Telegram reported three million new signups when WhatsApp and Facebook experienced outage and connectivity problems in March. Similarly, 43 percent of adults surveyed
had left a social media platform at some point, and the number is even
higher for younger demographics. Many others are “on” Facebook and count
as users, but rarely use the service after signing up. What is clear
is, however it is defined, this market is volatile, constantly-evolving,
and “contestable” in economic terms.
Some critics might respond that Facebook’s combination of social
media with advertising market power makes it a monopoly. But Google has a
bigger share
of the online advertising market, Microsoft’s LinkedIn also fuses
social media with advertisement, and many other smaller players also
provide both advertising and social media services. Further,
“advertising” is also a large, diverse market made of up of many older
firms and mediums—billboards, radio and television spots, print ads,
mobile ads, and more. Moreover, a heated debate continues over whether online advertising is as effective as other means of reaching audiences.
It is difficult, even for courts, to identify the appropriate market
in these multifaceted technologies. For example, some have pointed out
that the Supreme Court’s recent decision in Apple v. Pepper neglected to consider whether the app market was an integrated market. As Geoff Manne and Kristian Stout point out,
“If the decision in Apple v. Pepper hewed to the precedent
established by Ohio v. Amex it would start with the observation that the
relevant market analysis for the provision of app services is an
integrated one, in which the overall effect of Apple’s conduct on both
app users and app developers must be evaluated. A crucial implication of
the Amex decision is that participants on both sides of a transactional
platform are part of the same relevant market, and the terms of their
relationship to the platform are inextricably intertwined.”
These complications in determining the relevant market for newer
technology like Facebook show it is not as easy to figure out as it was
for companies that were once considered monopolies in more settled,
well-established sectors like oil or railroads. As Nobel-winning
economist Jean Tirole explains:
“In the past, we have broken up Standard Oil, AT&T, railroad,
and electricity systems. Regarding internet platforms, we need to give
it more thought. First, it takes time to implement divestitures.
Railroads and electricity, and to a large extent telecoms in 1984, were
simple and stable technologies. By contrast, the current platforms are
rapidly evolving. We must make sure that the intervention is not
obsolete by the time it is implemented.”
In a recent University of Chicago Stigler Center report,
a group of antitrust experts reached a similar conclusion. “Pinpointing
the locus of competition and therefore the relevant market in which
technology platforms compete can also be challenging because the markets
are multisided and are often ones with which economists and lawyers
have little experience,” they noted. “This complexity can make market
definition another hurdle to effective enforcement.” For such reasons,
Tirole concludes, it is likely that an antitrust-related remedy for any
digital media operator might be “obsolete by the time it is
implemented.”
These remedies can also get locked in and last much longer than needed. For example, the Department of Justice is just now ending its oversight in
earlier antitrust cases, including not only the infamous Standard Oil
case, but also markets for player pianos and horseshoes.
Nonetheless, like Facebook critics, Tirole claims that “the existence
of large returns to scale and/or network externalities, [are] leading
to natural monopoly situations and a winner-take-all scenario” in
digital markets. There is no doubt Facebook and other large digital
firms benefit from returns to scale and/or network externalities, but
that does not mean that innovation is not occurring or that new entry is
not possible. That criticism lines up with neither the history of
modern tech markets nor the way most Americans view these platforms. In
fact, according to at least one survey, fewer than 16 percent of Americans believe that a better product or service couldn’t replace today’s popular tech platforms.
In that regard, it is worth remembering that “monopoly” claims were
heard during earlier generations of search and social media sites.
Around the turn of the 21st century, AOL-Time Warner was
considered the dominant player of its era despite competition from
CompuServe, Prodigy, Geocities, Lycos, and others. Of course, the merger
of AOL-Time Warner turned out to be an epic boondoggle and the deal fell apart almost as quickly as it came together.
Those other first generation services mostly disappeared, too, but
were replaced with new social networking platforms like Six Degrees,
Friendster, Live Journal, and especially MySpace. MySpace quickly became
a supposedly unstoppable force in the field, leading a Guardian columnist to famously ask in 2007, “Will MySpace Ever Lose Its Monopoly?” Other market analysts insisted that, “MySpace Is a Natural Monopoly.” Of course, MySpace proved nothing of the sort and, while it is still around today, it is mostly the butt of jokes.
The lesson here is that large returns to scale and network
externalities do not automatically mean that firms are “locked in”
forever. Competition comes from unexpected sources and innovation often
changes the very nature of the markets that once seemed impenetrable.
Thus, Facebook is not a monopoly, at least not in the traditional
understanding of the term."
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