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2020 | OriginalPaper | Chapter

14. Multisided Markets and Platform Dominance

Authors : James Alleman, Edmond Baranes, Paul N. Rappoport

Published in: Applied Economics in the Digital Era

Publisher: Springer International Publishing

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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.

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previous chapter Escalating Instability of Network Neutrality Policy in the U.S.

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.

Bork’s book has many critiques—among both economists and lawyers. See Khan (2017).

That is not to say that these firms do not exhibit economies of scale and scope, but this is not their main competitive advantage.

Other platforms have different business strategies, for example, Amazon (Khan 2017).

For more details on the size, distribution, and other characteristics of the Internet Platform giants, see Alleman and Taschdjian (2019).

Recall, Facebook owns Instagram, which ranks fifth in visits.

The 2019 $5 billion settlement with Facebook was based on privacy violations, not economic issues (Kang 2019).

For simplicity, the analysis is developed as a two-sided market, but more correctly they are multisided markets (MSM). See Evans and Noel (2008), Evans and Schmalensee (2012), Katz (2018), Katz and Sallet (2018), OECD (2018b).

Bostoen (2019) surveys the economic and legal aspects of “zero-priced” markets.

In contrast to Amazon’s announced increase in the price on Amazon Prime by nearly twenty percent (Stewart 2018).

The “front page” is the first screen the viewer sees.

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/.

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.

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.

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).

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.

See Kwoka (2014) for how past mergers retarded innovation and other deleterious non-price effects.

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.

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.

See Singer (2018) for the several violations of regulatory rules by Facebook and Google.

HHI is the sum of the squares of the market share of the largest firms in the market, namely, HHI = Ʃs_i² where s is the market share of the i^th 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).

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).

A long and extensive literature exists on the problems with this and price-caps methods of regulation.

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Title: Multisided Markets and Platform Dominance
Authors: James Alleman
Edmond Baranes
Paul N. Rappoport
Publisher: Springer International Publishing
Book: Applied Economics in the Digital Era
Print ISBN: 978-3-030-40600-4

Electronic ISBN: 978-3-030-40601-1

Copyright Year: 2020
DOI: https://doi.org/10.1007/978-3-030-40601-1_14

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