Monopolies and Network Effects

The growth of a large business is merely a survival of the fittest. … The American Beauty rose can be produced in the splendor and fragrance which bring cheer to its beholder only by sacrificing the early buds which grow up around it. This is not an evil tendency in business. It is merely the working-out of a law of nature and a law of God. 

John D. Rockefeller, Jr. 

Monopoly Power

Monopoly power is efficient, enabling the monopolist to achieve economies of scale, invest long-term in both infrastructure and technology whilst also keeping costs affordable. This unique position can lead to anticompetitive behaviour by the monopolist. This can take the form of direct attacks on competitors, elastic pricing or restrictive agreements that undercut or effectively block others from the marketplace, whilst simultaneously maximising profits.

For digital consumers, monopolies can mean higher prices or reduced services. Consumers can also find departure difficult, with onerous costs to switch to another product or service: either in terms of financial cost, loss of service provision, or incompatibility with other products. There are also more abstract costs, such as the loss of contacts, images or documents stored on a particular site. Anticompetitive behaviour stifles innovation and affects the future of the economy. 

Network Effects

A network effect is the effect that an increasing number of users has on the value of the product or service. When network effects are present, the more people who use or contribute to the system, the more valuable the good or service becomes. Conventional examples of network effects are the telephone and the QWERTY keyboard. 

Digital network effects are similar, but their impact is more extreme. Digital growth is exponential, unlike the linear growth of physical goods, so it can achieve global scale at an unprecedented pace. The Internet is a fundamental infrastructure, in much the same way as electricity, water and transportation networks. But, unlike other monopoly utilities, it is unregulated. It also transcends borders, thereby enabling digital network effects to remain less conspicuous than if operated on a national scale. 

Winner-takes-all market concentration

There is growing reliance on digital platforms, which provide the convenience of interoperability, customer satisfaction and global connectivity. Whilst convenient for users in the short term, the problem with such digital platforms is that they result in winner-takes-all market concentration. These types of structures do not comply with current definitions of the ‘market’, making them hard to regulate, and besides, due to their global nature they are usually beyond any national anti-competition laws.

Once a platform has been established, an early first mover advantage simply intensifies with exponential growth, creatingever-increasing consumer ‘lock in’ and scale. This has often been done by giving away services in exchange for the long-term last mover advantage. Once ‘lock in’ is in place, there is almost no opportunity for any late starter to catch up, effectively stifling the likelihood of future competition. This comes with systemic risks, because business biodiversity has been replaced by a single technological giant platform and standard setter. Winner-takes-all dynamics also make the market increasingly asymmetric and non-competitive, and raises a critical question “How do those without early latecomers make it in a world in which winners take all?”

Next: Debt and the Social Contract