The 21st century welcomed a new gilded age spurred by the commercialization of the internet. In the past decade, new start-up companies have been able to establish monopolies in certain segments of the new digital economy. In the article, “Everybody wants to rule the world”, from the special Briefing part of the print edition of The Economist, the magazine’s editors examine whether the rise of powerful, monopolistic internet companies poses a threat to the competitive marketplace. Much of the article thus deals with whether the largest digital companies – companies like Google, Amazon or Facebook – should be considered monopolies. In doing so, the editors provide arguments for and against characterizing the companies as monopolies, but ultimately conclude that they are monopolies. Once they establish the companies’ dominance, the editors then examine whether these internet giants should face more intensive regulatory pressures and new anti-competitive legislation. While the current internet giants have not yet abused of their monopolies, the editors end the article with a warning: if the digital monopolies, like Google, continue to grow even more dominant, then they will likely suffer the same fate as Standard Oil, which was eventually broken up into 34 separate businesses to promote competition (The Economist). In dealing with the role of the dominant players in the digital marketplace, the authors raise valuable arguments related to microeconomics, such as the concepts of barriers to entry and incentives.
Barriers to entry are closely related to monopolies since they are what allow monopolies to exist. These barriers exist when certain factors, either natural or legal, prevent other firms from participating in certain economics activities, thus resulting in monopolies when the barriers to entry are high. Natural barriers – for example, high start-up costs – arise when a service or product reaches the market more efficiently – at a lower price – when only one firm is producing it, rather than when several firms are supplying it (Terekhov 147). On the other hand, legal barriers are the result of legal restrictions that prevent firms from entering a competitive marketplace – examples of such restrictions include patents, copyrights, licenses or the ownership of a key resource (147). In the context of the article, the concept explains why certain digital companies, like Google, should be considered monopolies. According to the editors, digital monopolies benefit from a barrier called the “network effects”, which occurs when an internet-based company’s members attract new members and then these new members attract even more members in a self-perpetuating cycle (The Economist). The barrier is partly responsible for Facebook’s monopoly in social networking; Facebook has so many members that new members will join Facebook, rather than one of its competitors, to be part of Facebook’s larger network, which then makes Facebook’s network even larger and makes even more people join. The article also deals with another natural barrier: high start-up costs. To compete with the digital giants, new start-up companies would need to build “global networks of data centers and dedicated fibre-optic cables”, which are prohibitively expensive to build (The Economist). If the new companies do have enough money, then they face another barrier to entry since they will “struggle to fill [their systems] with data and algorithms” (The Economist). As a result of these barriers to entry, the current established digital giants, like Google and Amazon, are able to enjoy the status of internet monopolies.
Furthermore, the editors examine the role that incentives play for digital monopolies. Incentives play a critical role in daily human interactions since people respond to incentives (Terekhov 10). They can take various forms, and they serve to nudge people into behaving in desired ways; for example, performance-related bonuses are a common type of incentive that encourages people to work better. As the editors of the article point out, incentives are relevant for monopolies in determining whether they will abuse of their market power. For example, the editors explain that Google has an incentive to behave properly because otherwise people can easily change which search engine they use, which would harm Google’s market share and bottom line. Conversely, the article also presents incentives that could lead internet monopolies to behave inappropriately. As publicly traded companies, the internet giants are constantly subject to the pressure of shareholders who want increasing profits. To meet these expectations and boost their profits, the internet monopolies could therefore be incentivized to abuse their market power and even bully smaller companies. In fact, the enormous profits that come with having a monopoly serve as an incentive for large digital companies to further solidify their monopolies and to create new ones. The impacts of such an incentive are twofold. On the one hand, the ability to command the enormous profits of a monopoly is an incentive that could cause companies to abuse of their power in trying to drive competitors out of the marketplace, like Microsoft tried to do with Netscape. On the other hand, the same incentive can also spur innovation, as Peter Thiel suggests in the article, since companies will always want to be at the forefront of new technological innovations to maintain their monopolies (The Economist).
In conclusion, the rise of the internet has led to the creation of new monopolistic companies, which are able to dominate specific segments of the digital world. In the digital marketplace, many barriers to entry prevent the development of a competitive marketplace and allow certain digital companies, like Google and Amazon, to solidify their dominant market power. As monopolies, these large companies respond to incentives that could lead them to either abuse of their power or continue to innovate further. The next few years will prove critical in determining the future of the world’s new monopolies. Will the barriers to entry prevent firms from ever toppling Google’s, Amazon’s or Facebook’s dominance? Will the incentive of monopoly profits cause these companies to exploit consumers? The answers to these questions could determine whether the current digital monopolies suffer the same fate as Standard Oil.
*Please Note the article is a review of and based on an article written by The Economist on digital monopolies.
" Everybody wants to rule the world." The Economist. The Economist Newspaper Limited, 29 Nov. 2014. Web. 12 Nov. 2015.