The New Monopolies - By Daniel Altman | Foreign Policy

Twenty-nine years ago, on Jan. 1, 1984, the Bell Telephone Company ceased to exist, having been broken up into smaller firms by the U.S. government. Bell had controlled the American telephone network since its inception, and this control gave it an unfair advantage in selling a variety of goods and services used for communication. Fast-forward to today: If the same were true for a global Internet giant like Facebook or eBay, could consumers still be protected?

Only a few Internet companies have reached a scale that raises questions about competition, but each has at least 100 million customers. So far, legal authorities in the United States and elsewhere have scrutinized them mainly when they have pushed into markets on the fringes of their own business, as in Facebook's attempt to prevent other software from complementing its own system or Google's use of its search engine to influence consumers' purchasing decisions. Last week, the United States decided that Google's behavior did not discourage competition.

But Google is different from Facebook and eBay. The usefulness of Google's search engine depends only indirectly on how many other people are using it; for Facebook and eBay, the network of other users is of central importance and can guarantee customers' loyalty, even when they feel mistreated. Despite this potential drag on competition, however, the companies' market shares in their core lines of business have not come into question.

That's unusual, since they have been completely dominating their markets. Depending on how you measure, Facebook may account for as much as 95 percent of the time Americans spend using online social networks. As of a few years back, eBay had 90 percent of the online auction markets in the United States and Europe. With that market locked up, it's now competing with Amazon for regular retail sales.

A simple reason for the companies' free pass may be that they charge very little or nothing for their services. Facebook's famous pledge "It's free (and always will be)" may help to insulate it from antitrust claims. And indeed, one of economists' primary concerns about dominant firms is that they will gouge consumers, or at least raise prices in a way that pushes some buyers out of the market. But economists also worry that a dominant firm will erect barriers to keep other companies out of its primary market.

The lack of competitors hurts consumers, too, by blocking the introduction of new and potentially better products -- for example, a social networking site that gives users easier control of their content and privacy. Clearly, promising to offer a service for free does not solve this problem. If it finally becomes clear that Facebook's network is so enormous that no other social network can break into the market, then its own business may become a target for regulators.

In Facebook's case, such action may be premature. After all, Friendster and Myspace were apparently strong incumbents before being quickly supplanted. Other companies, like eBay, may not escape so easily. Like Facebook, eBay has an enormous network of registered users, but it does charge for its services. It has not faced any serious competition during most of its existence, and its global presence is growing, with more than three dozen markets so far totaling almost $2 billion in quarterly revenues. The question is whether regulators will see online auction services as a discrete market, rather than just one of many ways of selling stuff.

Source: http://www.foreignpolicy.com/articles/2013/01/07/the_new_monopolies

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