Abstract
Facebook and Google and other internet giants are multisided markets (MSM). The user-side of the market, prices are zero—“free.” On the other side of the market, Facebook’s and Google’s revenues are derived from advertising which appears when the users click on advertisers’ web sites. They can extract exorbitant prices for ads, since they are the only source that can target ads directly to potential customers with laser-like focus to produce enormous monopoly rents. This monopolistic aspect of the internet giants is addressed in the Chapter. Monopoly pricing is not well defined in multisided markets. The paper examines non-transactional multisided markets for their ability to create consumers’ harm. Estimates of Google’s and Facebook’s social cost in terms of consumers’ welfare loss are $54 and $33 billion, respectively, for a total cost of at least 87 billion dollars. The dominant internet platforms can create three major harms to consumers:
-
Increasing prices to consumers via added costs to the products being advertised,
-
Elimination (or non-emergence) of competition in markets to the products being advertised,
-
Increasing prices to consumers beyond the cost of advertising via the market power of the remaining firms in the market of the products being advertised.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Facebook, Amazon, Apple, Netflix, and Google are referred to by the acronym FAANGs. In Europe, Microsoft is added to the list and Netflix is eliminated. They are referred to as GAFAMs.
- 2.
Bork’s book has many critiques—among both economists and lawyers. See Khan (2017).
- 3.
That is not to say that these firms do not exhibit economies of scale and scope, but this is not their main competitive advantage.
- 4.
Other platforms have different business strategies, for example, Amazon (Khan 2017).
- 5.
For more details on the size, distribution, and other characteristics of the Internet Platform giants, see Alleman and Taschdjian (2019).
- 6.
Recall, Facebook owns Instagram, which ranks fifth in visits.
- 7.
The 2019 $5 billion settlement with Facebook was based on privacy violations, not economic issues (Kang 2019).
- 8.
- 9.
Bostoen (2019) surveys the economic and legal aspects of “zero-priced” markets.
- 10.
In contrast to Amazon’s announced increase in the price on Amazon Prime by nearly twenty percent (Stewart 2018).
- 11.
The “front page” is the first screen the viewer sees.
- 12.
To understand how the AdWords auction works see https://www.wordstream.com/articles/what-is-google-adwords or https://blog.tryadhawk.com/google-adwords/how-google-adwords-works/. From the source, see https://ads.google.com/home/.
- 13.
Google, for example, holds auctions continually, to set the price paid for advertising (Varian 2019). Thus, it can extract the greatest revenue out of this side of the market on an ongoing basis. It is practicing first-degree price discrimination on a continuous basis. This is the best of all possible worlds for a monopolist.
- 14.
Positive network effect shifts the derived demand for advertisers to the right, that is as more subscribers are added to the platform, the more valuable the platform is to the advertisers.
- 15.
In perfect competition (and other conditions), the pricing at marginal cost gives the best possible outcome for the society (if perfect competition ever existed except in the minds of the economists); hence the “welfare maximizing” price. The issue is more complicated when economics of scale and scope exit. See Alleman and Rappoport (2006).
- 16.
Discussion with John Korbel, a StoreMe director, 9 April 2019. StoreMe is an on-demand luggage storage start-up serving the major cites on the east coast. See https://getstoreme.com.
- 17.
See Kwoka (2014) for how past mergers retarded innovation and other deleterious non-price effects.
- 18.
Alphabet’s net income was $30.7 billion, but it had an EU fine of $5.1 in 2018. This was added to the income, since, presumably, it was unanticipated.
- 19.
The authors recognize that this is a crude estimate, but a low estimate. Since profits are “hidden” by a variety of tax avoidance schemes, these are under-estimates of the loss. Google’s dynamic pricing algorithm may also lead to an under-estimation of the calculation. On the other hand, because Google only makes 96% of its revenue from advertisements this may overestimate the loss. Nor does this estimate account for a “normal” return on assets, which would lower the estimate. Nevertheless, it provides a rough order of magnitude of the problem and suggests further investigation.
- 20.
See Singer (2018) for the several violations of regulatory rules by Facebook and Google.
- 21.
HHI is the sum of the squares of the market share of the largest firms in the market, namely, HHI = Ʃs2i where s is the market share of the ith firm. The United States Department of Justice would consider this to be “moderately concentrated” (HHI 1500 to 2000). The threshold for “highly concentrated” is 2500 in the United States (DOJ 2010).
- 22.
User is used here to denote the suppliers of their data to the GAFAMs. The United States Congress is beginning to recognize the value of the data (Lohr 2019).
- 23.
A long and extensive literature exists on the problems with this and price-caps methods of regulation.
References
Abernathy, Nell, Darrick Hamilton, and Julie Margetta Morgan. 2019. New Rules for the 21st Century: Corporate Power, Public Power, and the Future of the American Economy. A Roosevelt Institute Report, April.
Alleman, J., and P. Rappoport. 2006. Optimal Pricing with Sunk Cost and Uncertainty. In The Economics of Online Markets and ICT Networks, ed. R. Cooper, G. Madden, A. Lloyd, and M. Schipp. Contributions to Economics. Physica-Verlag HD. https://link.springer.com/chapter/10.1007/3-7908-1707-4_10 (24.04.2019).
Alleman, J. 2018. The Threat of Internet Platforms: Facebook, Goggle, etc. Proceedings of ITS European Conference 2018, Aug 1–3, Trento, Italy. https://ideas.repec.org/p/zbw/itse18/184926.html (24.04.2019).
Alleman, James and Martin Taschdjian. 2019. Antitrust Failure: Internet Giants. Working Paper.
Bork, Robert. 1978. The Antitrust Paradox. New York, NY: The Free Press.
Bork, Robert. 1993. The Antitrust Paradox, 2nd ed. New York, NY: The Free Press.
Bostoen, Friso. 2019. Online Platforms and Pricing: Adapting Abuse of Dominance Assessments to the Economic Reality of Free Products. Computer Law & Security Review 35: 263–280. https://www.itsworld.org/wp-content/uploads/2019/05/Friso-Bostoen.pdf (3.06.2019).
eMarketer. 2017. Google and Facebook Tighten Grip on US Digital Ad Market, September 21. https://www.emarketer.com/Article/Google-Facebook-Tighten-Grip-on-US-Digital-Ad-Market/1016494 (22.05.2019).
European Commission. 2015. Antitrust: Commission Sends Statement of Objections to Google on Comparison Shopping Service; Opens Separate Formal Investigation on Android. Brussels, April 15. europa.eu/rapid/press-release_IP-15-4780_en.htm (22.05.2019).
Evans, D.S., and M.D. Noel. 2008. The Analysis of Mergers That Involve Multisided Platform Businesses. Journal of Competition Law and Economics 4 (3): 663–695.
Evans, D.S., and R. Schmalensee. 2012. The Antitrust Analysis of Multi-Sided Platform Businesses. Coase-Sandor Institute for Law and Economics Working Paper No. 623.
Feld, Harold. 2019. The Case for the Digital Platform Act: Market Structure and Regulation of Digital Platforms. Roosevelt Institute. Public Knowledge, May. http://bit.ly/2QEexkR (17.05.2019).
Financial Times. 2018. WPP Squeezed by Advertisers and Disruption. March, 3–4, p. 12. Grow Your Business with Google Ads. https://ads.google.com/home/ (24.04.2019).
Internet Retailer. 2019. Ecommerce Represented 14.3% of Total Retail Sales in 2018…, March 13. https://www.digitalcommerce360.com/article/us-ecommerce-sales/https://www.digitalcommerce360.com/article/us-ecommerce-sales/ (29.05.2019).
Kang, Cecilia. 2019. F.T.C. Approves Facebook Fine of About $5 Billion. New York Times, June 12. https://nyti.ms/2XHcVc4 (18.07.2019).
Khan, Lina M. 2017. Amazon’s Antitrust Paradox. The Yale Law Journal, January. https://www.yalelawjournal.org/pdf/e.710.Khan.805_zuvfyyeh.pdf (6.11.2017).
Khan, Lina M. 2018. The New Brandeis Movement: America’s Antimonopoly Debate. Journal of European Competition Law & Practice 9 (3): 131–132. https://doi.org/10.1093/jeclap/lpy020 (18.07.2019).
Kwoka, John. 2014. Mergers, Merger Control, and Remedies: A Retrospective Analysis of U.S. Policy. Cambridge, MA: MIT Press.
Lohr, Steve. 2019. Calls Mount to Ease Big Tech’s Grip on Your Data. New Your Times, July 25. https://nyti.ms/2YwENUU.
Nicas, Jack and Karen Weise. 2019. Anger at Big Tech Unites Noodle Pullers and Code Writers. Washington Is All Ears. New York Times, June 10. https://nyti.ms/2WpldVr.
OECD. 2018a. Tax Challenges Arising from Digitalisation—Interim Report 2018: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project. Paris: OECD Publishing. https://doi.org/10.1787/9789264293083-en (10.06.2019).
OECD. 2018b. Rethinking Antitrust Tools for Multi-Sided Platforms. www.oecd.org/competition/rethinking-antitrust-tools-for-multi-sided-platforms.htm (16.05.2019).
Ohio et al. v. American Express Co. et al. 2017. https://www.supremecourt.gov/opinions/17pdf/16-1454_5h26.pdf (7.05.2019).
Park, Jon. 2018. How Google AdWords Works [Infographic]: Paying Per Click (PPC), Impression (CPM), and Choosing How Much to Bid, July 16. https://blog.tryadhawk.com/google-adwords/how-google-adwords-works/ (24.04.2019).
Parker, Geoffrey and Marshall W. Van Alstyne. 2005. Two-Sided Network Effects: A Theory of Information Product Design. Management Science 51 (10): 1494–1504. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1177443 (9.06.2018).
Rubin, Ben Fox. 2018. Amazon Prime’s Price Went Up, But You Probably Won’t Leave, Amazon Increased the Fee for Annual US Prime members, Taking It From $99 to $119. Though Some Folks Are Squawking, They’ll Probably Pony Up Regardless, April 27. https://www.cnet.com/news/amazon-prime-price-went-up-but-you-probably-wont-leave-anyways/ (31.05.2019).
Satariano, Adam. 2019. Google Fined $1.7 Billion by E.U. for Unfair Advertising Rules. New York Times, March 20. https://nyti.ms/2UNmkxU (7.05.2019).
Securities and Exchange Commission (SEC), Alphabet. 2018. https://www.sec.gov/Archives/edgar/data/1652044/000165204419000004/goog10-kq42018.htm (28.05.2019).
Securities and Exchange Commission (SEC), Facebook. 2018. https://www.sec.gov/Archives/edgar/data/1326801/000132680119000009/fb-12312018x10k.htm#s3714AF39C3CC5682ADA657DA7DE15627 (28.05.2019).
Shapiro, Carl and Hal Varian. 1997. Information Rules: A Strategic Guide to the Network Economy. Boston: Harvard Business School Press.
Singer, N. 2018. Timeline: Facebook and Google Under Regulators’ Glare New York Times, March 24. https://nyti.ms/2G6quK0.
Statista. 2018. Social Media in the United States. https://www-statista-com.colorado.idm.oclc.org/study/40227/social-social-media-usage-in-the-united-states-statista-dossier/ (6.05.2018).
Stewart, James B. 2018. Amazon, the Elephant in the Antitrust Room. New York Times, May 3. https://nyti.ms/2FFVlMy (6.05.2018).
U.S. Department of Justice (DOJ). 2010. Horizontal Merger Guidelines (08/19/2010). August 19. https://www.justice.gov/atr/horizontal-merger-guidelines-08192010#5c.
Varian, Hal. 2019. Presentation “Internet Platforms’ Rising Dominance, Evolving Governance”, February 10–11. Silicon Flatirons, Boulder, CO.
Welch, Chris. 2019. Google Begins Shutting Down Its Failed Google+ Social Network. April 2. https://www.theverge.com/2019/4/2/18290637/google-plus-shutdown-consumer-personal-account-delete (22.05.2019).
Wikipedia. 2019a. https://en.wikipedia.org/wiki/List_of_mergers_and_acquisitions_by_Alphabet (1.06.2019).
Wikipedia. 2019b. https://en.wikipedia.org/wiki/List_of_mergers_and_acquisitions_by_Facebook (1.06.2019).
WordStream. https://www.wordstream.com/articles/what-is-google-adwords (24.04.2019).
Wu, Tim. 2016. The Attention Merchants: The Epic Scramble to Get Inside Our Heads. New York: Alfred A. Knopf.
Wu, Tim. 2020. The Master Switch: The Rise and Fall of Information Empires. New York: Alfred A. Knopf.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2020 The Author(s)
About this chapter
Cite this chapter
Alleman, J., Baranes, E., Rappoport, P.N. (2020). Multisided Markets and Platform Dominance. In: Alleman, J., Rappoport, P., Hamoudia, M. (eds) Applied Economics in the Digital Era. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-40601-1_14
Download citation
DOI: https://doi.org/10.1007/978-3-030-40601-1_14
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-030-40600-4
Online ISBN: 978-3-030-40601-1
eBook Packages: Economics and FinanceEconomics and Finance (R0)