Effects of Monopolies of Large Tech Firms in the Digital Platform Markets

Over the last decade, the influence of digital platforms has generated great progress. Large tech firms (Apple, Amazon, Facebook, and Google) have changed people’s lifestyles by providing services. These services, often free of charge, have changed the way people communicate and interact with others, shop, and find information. There are many advantages to such large digital platforms, however, they have also gained considerable control of consumer information, which reinforces their market power. This has caused concern not only in terms of competition but also in consumer protection and privacy. Therefore, this paper analyses the effects of monopolies of large tech firms in the digital platform markets. This paper is outlined in three main parts. Firstly, it demonstrates why market power and monopolies are likely to emerge in the digital economy. Secondly, this paper displays the concerns about monopolies in the digital economy. Further, it explains what can be done to prevent the potential issues that can arise from monopolies in the digital platform markets. Finally, the paper ends with a conclusion summarizing the main points of this research.

Market Power and Monopolies in the Digital Economy

The most extreme form of market power is a monopoly. A monopoly is an industry in which only one company provides a good or service that cannot be replaced by another. The digital economy has a natural market power which occurs when a firm obtains market power through barriers to entry created by the firm itself. In this case, having a big network is a natural barrier for others. It makes entering the digital market difficult because the smaller firms will have issues establishing against a big network, like GAFA (Google, Apple, Facebook, Amazon: the 4 largest tech firms). The natural barrier of digital economy is also the principal key of resources. Its network size can only provide value to users when it attracts the largest number of consumers. Its value increases due to network externalities which occur when the value of a product increases as more consumers begin to use it. Due to the network effect, market power and monopolies are more likely to emerge in the digital economy because of the increasing desire of people wishing to register on a digital platform and share with as many people as possible or be seen by as many people as possible. They have no interest in going to a smaller platform that has fewer users, which means less potential virtual friends. For example, Facebook has monopoly power in the social networking market and owns as a key resource that millions of users log in daily. Therefore, Facebook has a greater value than other social networking, such as Myspace, because it has more people using it. Subsequently, Facebook will always gain more subscribers and then more market power than Myspace or other platforms and therefore, a monopoly on the social networking market is more likely to appear. The same process for e-commerce platforms occurs where sellers and buyers are more likely to go on the platform with the most users to have the biggest chance to sell or to buy the products they want. Big firms will always get bigger. For example, the more people use Google Search, the more Google Search will increase its performances, the more people will use Google Search. When a lot of people use a platform, it creates a lot of data on users that the digital platform can monetize from advertisers and make revenues to invest in the platform. Therefore, they can improve the platform’s algorithm that generates more users. It is a vicious cycle, called feedback loops, that prevents small new businesses from developing and therefore prevents competition in the digital economy.

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Competition Issues in the Digital Economy

As the largest tech firms’ market power is growing, strong concerns are rising too. Platforms benefiting from significant network effects and which are likely to lock a market because of their great market power are called ‘gatekeepers’.

Giant tech firms like GAFA, are ecosystems in the economy, they expand fast and in a lot of different domains. They may have a monopole in one service, but they still want to expand and be present on other platforms. Google proposes in 2020 several kinds of different products and services to its users. Google was first only a search engine, but now offers operating systems, G Suite productivity, devices, search and web browsing, specialized search, streaming, and navigation. Facebook also expended its services and products by offering social media, retail, devices, and streaming platforms. It makes them able to observe, collect, and combine even more data on users. These ecosystems make the competition in the digital economy more difficult because firms such as Google and Facebook already have more data on consumers than small firms. So, they start one step ahead of new companies that would like to enter the new market at the same time as big companies do. Over the last decade, Facebook made more than 60 acquisitions. Selling out young firms to a giant tech firm provides economic advantages: a generous pay-out, faster and more broadly technological advantages. However, the acquisition of young promising firms reduces the chance of potential competitors.

Another consequence of such a large market power is that companies can abuse their dominance by imposing excessive fees on consumers, tough contract conditions, or worsening the privacy terms and data collection offered to consumers. Monopolies mean no competitors, which means costumers cannot chose another product, thus the organization can raise their prices or change their terms because consumers depend on them. For advertisers to be able to advertise, they almost always must go through a digital platform like Google or Facebook, the gatekeepers, that controls advertisers' access to users of their service. This is when abuse or exploitation can occur. The digital platforms will set excessive prices or set conditions for the use of the platform which are not clear or which are discriminatory. For example, in France, Google France was condemned because its Google Ads advertising platform had rules that were not transparent.

Even though there are a lot of negative consequences of monopolies for small new tech firms, there are some positive consequences for the users. By selling users’ personal data, consumers get many services for free (e.g., Facebook, Google) and get more choice because of their larger data base. Their dominant position in the digital market gives them more opportunities to invest in the research and development, which gives the users continue technological innovations.

Prevention Against Potential Issues from Monopolies in the Digital Platform Markets

In the United States of America, there is a law called antitrust law. This law has been in existence for more than a century. Its purpose is to regulate the conduct and organization of commercial companies and generally aims to promote competition for the benefit of consumers. This law is mainly composed of three acts: the Sherman Act (1890), the Clayton Act (1914), and the Federal Trade Commission Act (1914). The functions of these acts are the prohibition of price-fixing and the operations of cartels, the restriction of mergers and acquisitions of organizations, and the prohibition of abuse of monopoly power.

Although the antitrust law exists, this did not prevent the formation of monopolies in the digital economy. Certain digital platforms developed into monopolies due to the underenforcement by privacy and data protection regulators and by antitrust enforcers.

In June 2019, the Subcommittee on Antitrust, Commercial, and Administrative Law directed an investigation into the state of competition online and wrote a rapport in 2020. In this report, Congress relied on a wide range of guidelines to ameliorate the conditions necessary for fair competition. The report proposes as solutions to break certain dominant platforms apart from the companies’ other businesses and activities and demands that the platforms provide all users with equal terms for equal products and services. The report also calls for laws to be changed to impose a higher bar for approving future tech industry mergers and acquisitions and requests Congress to boost the enforcement powers of antitrust regulators, such as the Federal Trade Commission, and to increase the budgets of the Federal Trade Commission and the Justice Department’s Antitrust Division.

Conclusion

This paper has demonstrated that the market power and monopolies are likely to emerge in the digital economy because digital economy has a natural barrier, its size. The size of a digital platform is particularly important as its value increases due to network externalities. People want to be on the digital platform with the most users to have more potential virtual friends, buyers or sellers. And when digital platforms are getting more users, they are also getting more users data which they can sell to advertisers. With these revenues, large tech firms can expand even more, and make it difficult for smaller firms to compete. The fact that that dominant tech firms are getting too big and too powerful raises concerns. Large tech firms are acquiring smaller ones and are spending on other platform markets which reduces the chance of potential competitors. Moreover, certain dominant tech firms abuse their monopoly by imposing unfair conditions to their customers. There is already an American law that promotes competition in the markets called the antitrust law. But due to the underenforcement by privacy and data protection regulators and by antitrust enforcers, large tech firms developed into monopolies. That is why the regulators and enforcers want to reinforce the antitrust law and proposes multiple solutions to solve the lack of competition in the digital economy; for example, separation of certain large tech firms and ask firms to propose fair and equal conditions for their products and services to their consumers.

Monopolies in the digital economy have many negative effects for firms who want entry to the online market because of the winner-takes-all situation and the fact that dominant firms take advantages of their ‘gatekeepers’ status. On the other hand, a monopoly can have a positive effect for the consumer. It offers to the consumer a broader choice and as the giant firms are comparable to ecosystems, it makes finding a product or a service easier for users. However, due to missing competitors, monopolies tend to lower their quality, because users cannot choose another product.

Large tech firms should give the other new firms a chance to rise in the market. They should not acquire them just to become bigger and to have a larger power on the market. Furthermore, dominant platforms should not take advantage of their position by imposing unfair conditions to its consumers and they should be more transparent. It is understandable that it is challenging for authorities to manage such large firms, because they innovate and grow extremely fast. However, authorities should review the laws governing digital platforms, because it is a fairly new market that we still do not know everything about and that grows extremely fast.

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