Facebook and the Platform Monopoly
This blog was based on the following article:
Whilst reading the article is not required for understanding the blog, it will help further an appreciation of the key arguments. The blog itself is fairly detailed, so I will include periodic recap sections to help readers keep up. I have also written under the assumption the reader will be a Facebook user. Apologies if this is not the case.
Why are we discussing this?
In Economics we study the allocation of resources. Facebook can therefore be seen as highly relevant, for two simple reasons. Firstly, it is a gargantuan company making a huge sum of money (a fundamental resource), and exploring how it achieves this is a perfect means to apply some basic microeconomic theory. Secondly, for many people Facebook has become a common way to spend time (which is of course an even more fundamental resource, and is much more important to spend wisely!), which allows us to explore some very interesting avenues concerning how it makes its money.
For now, just remember that Facebook involves a firm making one resource (money) and individuals spending a different resource (time). Exploring the relationship between these two facts with basic economic principles is the central point of this blog.
Now, let’s assume you’ve at least read the title of the above article. As a Guardian article on nationalisation doesn’t exactly scream ideological neutrality, it’s important to remember that we are not here to either support or refute the political views implied in the article, we are focusing solely on Economic analysis.
So, what’s up with Facebook?
Whilst the article mentions several giant companies, I’m going to focus on Facebook. The basic premise is that data-based companies such as Facebook are amassing a large amount of market power; what this means in simple terms is that firms that rely on generating large amounts of computer data are becoming very dominant in their respective markets (e.g. Google).
This dominance of a market is referred to as monopoly power, and is viewed by economists as sub-optimal (bad) because monopolies can use their power to charge a higher price than the free market equilibrium (the price that would be achieved if buyers and sellers had equal power). This in turn means the market would not clear at the equilibrium price, and as a result the optimal allocation of resources is not achieved. The only winner is the producer, who makes extra profits through charging a higher price.
If these terms are relatively new to you, just think that (theoretically speaking) when a market is not competitive (i.e. buyers or sellers have too much power), there will not be as much benefit from production of goods and services within that market as there would be if the market was competitive. In a competitive market, a sort of ideal (referred to as equilibrium) price in terms of benefitting society is reached.
Let’s recap these basic points:
1. Facebook is a monopoly
2. Monopoly is bad for markets
But there are many monopoly firms. Why are we so focused on Facebook?
Now we get to the interesting part. The expressed idea is that Facebook effectively represents a new kind of monopoly, referred to as a ‘platform monopoly’ by the article. This refers to the idea that its power arises out of the way it provides a ‘platform’ for users to interact through. I think, based on my own knowledge and information from the article, there are a couple of very important ways this can be said to be true.
Firstly, Facebook is reliant on users, as pointed out in the article. This is perhaps like any other business, but the global reach of the internet and the prevalence of social media mean that once a single company can get enough users it acquires an extraordinary amount of power compared to pre-internet firms. Think about this. As the good Facebook sells is not actually sold to the users (more on that in the second point), there is no risk of a cheaper alternative arising. In other words, because Facebook et al are free for you to use, you are unlikely to switch due to a cheaper alternative arising. Additionally, because it is a platform that connects users, you are unlikely to switch whilst the majority of users still choose Facebook. If you saw your friends all leaving, for example, this would give you the only real incentive to switch to a different company. However, the catch is of course that your friends are as unlikely to leave as you are! So, these features of a platform monopoly help Facebook maintain a huge degree of market power.
Secondly, the way the relationship between you and Facebook makes the company money is brilliant. Remember that the good you consume (using Facebook) is not what makes the company money, it is not sold to you. What makes the firm their dollar is that your use of the platform provides data to Facebook; what you like, who your friends are, what your behavioural profile is, to provide but a few examples1. This data is then sold to companies who want information on consumers, for example all the companies ever. This is Facebook’s actual key product: data. Data that is acquired from your use of the platform, data you provide for free, data that is sold on to the actual consumers (companies) for profit. The point here is that the users are different from the customers2. Facebook provides the platform (Facebook.com) for users (you) to create the product (data) that is sold to the customer (companies).
So, in essence, Facebook is a new kind of monopoly, in the sense that it is very difficult to dislodge from its position due to its huge number of users, and is using the data generated through this to make a lot of money. Both of these are obviously made possible by recent technological and social changes, hence the new tag of ‘platform monopoly’.
So, to recap this more complex set of points:
1. Facebook is certainly a monopoly
2. Regular monopoly is bad for markets
3. Platform monopoly with global market is probably worse
4. Platform monopoly with global market and a critical mass of users is probably worse
5. Platform monopoly with a global market, critical mass of users, and a product that is acquired from users for free (in their leisure time no less), is probably even worse
6. I don’t know where the world is heading anymore
We’ve established Facebook is a scary monopoly. Where does this leave us?
I’ll quote a paragraph directly from the article here, as I could not put it any better myself:
“These companies’ power over our reliance on data adds a further twist. Data is quickly becoming the 21st-century version of oil – a resource essential to the entire global economy, and the focus of intense struggle to control it. Platforms, as spaces in which two or more groups interact, provide what is in effect an oil rig for data. Every interaction on a platform becomes another data point that can be captured and fed into an algorithm. In this sense, platforms are the only business model built for a data-centric economy”
So, the problem is that this monopoly power may be the standard of the future; as the economy becomes more data-driven, platform companies that mine data may attain similar monopoly positions in other industries (the article mentions both manufacturing and agriculture for example). If you think back to our introduction as to why Economist’s view monopoly as bad, this is a scary proposition. Whilst I am simplifying massively here, for the purpose of both time and clarity, we would expect this to create a large issue because markets would be too uncompetitive to benefit society as much as they could. To draw this right back to the basic economic problem, we would not satisfy as many of societies wants with our scarce resources as we could be.
This isn’t even to mention the ethical and societal implications of the product being created here; data is basically information, and what is being produced and traded on a global scale is therefore information (on you, on me, on everyone!). There is a lot of room for abuse there, especially when such large companies have control of the data.
So how about that nationalisation then?
This whole discussion on platform monopoly power and its downsides brings us round to the article idea that these platforms should be nationalised (bought and run by the government). The three key reasons I see for this are as follows:
Firstly, to avoid the exploitation of data and possibly consumers by platform monopoly firms
Secondly to prevent these large monopolies swallowing up competitors (e.g. Facebook and Instagram/WhatsApp) and becoming even more powerful
Thirdly because AI developments on the horizon and things are just going to get more complicated thereafter!
The idea is that government control would prevent the first two problems and help control the third.
I think we’ve covered the article argument nicely thus far, we know why and how Facebook can be considered a new and special form of monopoly, and we know why this means nationalisation may be useful, but let us end, like all good Econ students, with some evaluation.
Questioning the notion of nationalisation
In a nutshell, I think the writer does a much better job of identifying the problem than justifying a solution. Consider the following arguments, which I have tried to contain within a paragraph as we might be expected to do in an exam.
Firstly, the author does not explore in much detail the actual reason for his answer of nationalisation; he justifies it simply by saying that we have approached monopolies in the past this way so we should do it again now. My issue with the argument (although one he briefly acknowledges) is that he himself highlights the fact that this is a new kind of monopoly problem emerging in a new kind of economy. Surely, therefore, we need new approaches rather than recycled old ones?!
Additionally, he does not consider that nationalisation can come with its own problems, which should be familiar on a basic level to most A2 students. For example, without the motive of making profit governments may not run Facebook as well as it run by a private company… in what can only be described as a severe loss of welfare for society (I am being a little sarcastic here).
Furthermore, he fails to account for the fact that Facebook is a truly global company with more users than any country has citizens. Which country nationalises it? How can the UK government nationalise an American company that operates across the world? For the new data-based companies of the future, which countries ultimately have jurisdiction? An even simpler detail he has excluded is whether the government could even afford to buy Facebook! Either taxes would surely have to increase, or a lot of school/hospital budgets would have to be cut.
Finally, he points out that past candidates for nationalisation have been those that serve the common good. Health, education, railways and electricity for example, all have clear positive externalities (positive benefits to society). The government nationalises such industries to try and ensure that monopoly power doesn’t prevent enough education or healthcare being produced. My point is that with Facebook I’m not so sure this is the case. I don’t see the government spending billions to nationalise it so that we can continue talking to our buddies and posting holiday pics. Imagine the following for example:
MAN: Doctor, please help me, I’m in need of immediate surgery!
DOCTOR: Soooo… yeaaah… look friend, I’m really sorry but our surgery ward was closed recently. The hospital budget was cut so that the government could buy Facebook and prevent it using our data to control the illuminati. Or something.
MAN: But… my spleen is literally hanging out onto the floor.
DOCTOR: Yeah that’s a real shame. Hope you get that fixed. Can’t help you here I’m afraid, I’ve got a spin class in a few minutes as well. The important thing, in all of this woe, is that you can still complain about the NHS cuts to your Facebook friends, without worrying about how Facebook might abuse your data.
MAN: Cheers doc, other than the growing cavity in my chest I do feel much better now.
Whilst this is a rather silly example, it does hopefully serve to demonstrate that the government probably has more pressing concerns at this juncture in time. Arguably neither the benefits or costs Facebook might respectively bring or cause to society are large enough for intervention, unlike say healthcare.
So, whilst I do see the economic argument that Facebook and the like have a scary amount of power in the modern economy, I definitely do not agree with the overall article conclusion that nationalisation is the obvious answer to this. Partly this is because the economic analysis of nationalisation was not strong enough within the article.
However, I do think it is very important to question whether the data that Facebook generates is a good thing for society, and whether the government should indeed work to control or regulate the extraction of this data. I think the case is certain, whether you agree or disagree with the answer of nationalisation, that we need some very smart people thinking very hard about where we all go from here.
And of course, if you liked my blog, don’t forget to share it on Facebook!
2 What does that make the users? Well, normally when individuals sacrifice their free time in order to make or achieve something that makes another party money, we call that a job. The beauty of the data-driven platform monopoly is that they have us all working for them, for free.