Short Project: ‘Is It Time to Break Up Google?’
Article Summary:
The focus of this article is to explain the effects that monopolies have within the market and whether the government should regulate them or if they should be broken up so that the market is more contestable, which was written by Jonathan Taplin (2017) in an article in the New York Times. This article analysis big companies such as; Google which is considered a monopoly due to the lack of competition in web search engine. Also, the author makes an interesting point as to whether these companies e.g. Google, are natural monopolise which I will discuss further in the essay. I this essay, I will analyse the effectiveness of monopolise and to what extent they should be regulated and how it affects consumers in the long-run.
Economic Analysis:
Monopoly is a market structure where there is one dominant firm within the market. In the UK a firm would be considered a monopoly if it had over 25% market share e.g. Google which has 88% of search engine traffic. Within this market structure there are high barriers to entry (technological as well as legal) as there are no close substitutes for the commodity the company produces so therefore, monopolies are price makers. As stated in the article, Facebook owns 77% of mobile social traffic and Amazon has a 74% share in the e-book market. This shows that these companies are monopolies as they own significant share within the market which affects smaller companies as they are not able to compete so they exit the market.
This diagram illustrates that monopolists e.g. Google produces the good or service where they will get the maximum profit at the point where MR=MC. It restricts the quantity at Xm to raise prices at Pm compared to a competitive industry so that they can make supernormal profits illustrated by the shaded (black) region. Under monopoly, firm’s demand curve constitutes the industry’s demand curve. Since the demand curve of the consumer slopes downward from left to right, the monopolist faces a downward sloping demand curve. It means, if the monopolist reduces the price of the product, demand of that product will increase. In the article it states that “in a democratic society the existence of large centres of private power is dangerous to the continuing vitality of a free people.” This shows that the author is against monopolies due to their market dominance, ability to restrict output and its inefficiencies. A monopoly is allocatively inefficient because in monopoly (at Pm) the price is greater than MC. In a competitive market, the price would be lower and more consumers would benefit from buying the good. A monopoly results in dead-weight welfare loss indicated by the blue triangle (e). Furthermore, companies like Facebook may be x-inefficient as a monopoly has less incentive to cut costs due to the high barriers to entry which restricts competition.
On the other hand, monopolies can also be beneficial to the economy as they can be dynamically efficient as they can reinvest their supernormal profit into research & development. This is important for industries like pharmaceutical companies or tech giants e.g. Google and Microsoft where they must continuously innovate and develop new advanced technologies to meet consumer demand. In many industries which require substantial investment – a competitive industry with many small firms would be unsuitable.
Furthermore, they benefit from lower average costs due to significant economies of scale. This can lead to lower costs for consumers. This diagram illustrates that if a monopoly produces at output Q2 (10,000) then average costs P2 (£8) are much lower than if a competitive market had several firms producing at a lower quantity and higher price. This is particularly important for natural monopolies – industries where the most efficient number of firms is one.
The author claims that companies like Google can be viewed as natural monopolies. This can be related to the utilities industry e.g. National grid or Thames water. With a natural monopoly the economies of scale available to the largest firms mean that there is a tendency for one business to dominate the market in the long run, as shown in the diagram above (figure 2). Furthermore, in my opinion I think it is essential that we have natural monopolies within certain sectors e.g. utilities as it would save costs in the long-run. Also, if there was more than one company then it may lead to a price war (oligopolistic competition) as if one company reduces prices, so will the other.
A good point raised in the article is the policies that the government can put in place to regulate monopolies. ‘supernormal returns on capital’ has led to increased economic inequality due to their market dominance so the government can prevent one big company from acquiring or merging with another major firm e.g. Facebook acquiring Snapchat. In doing this, it can effectively allow the market to remain competitive and contestable which increases consumer surplus as there will be no deadweight loss (as shown in figure 1 where the firm operates at a lower price of p* and increased output of X*).
The government can also set a price ceiling (figure 3). This therefore puts a cap on how much the monopoly can charge consumers for the good or service. The price is set below the market equilibrium for it to be effective as it is now cheaper for consumers so demand increases. However, prolonged application of a price ceiling can lead to black marketing and unrest in the supply side.
The article did do well in explaining different ways to regulate monopolies and to identify any consequences of such policies e.g. regulatory capture. However, I do not agree with the point that in the future monopolies will be so big that the only option is to break them up as they are also beneficial to the economy. A better solution would be for the office of fair trade to investigate the abuse of monopoly power, e.g. collusion as well as predatory pricing. Subsidise can be provided to smaller firms and government can increase tax for the larger firms e.g. windfall tax. However, there will always be consequences of government action as there is an opportunity cost involved of providing a subsidy as it means less can be spent elsewhere. Also, there are unintended consequences as regulation may hinder innovation due to rising costs for firms which negatively impacts economic growth.
References:
“Is it Time to Break Up Google?” by J. Taplin, The New York Times, April 22, 2017
Available at: https://www.nytimes.com/2017/04/22/opinion/sunday/is-it-time-to-break-up-google.html [Accessed 7 Mar. 2018]
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