Written by Vishal Wilde for The Cobden Centre.
‘Should digital monopolies be broken up?’ is the title of an article by the Economist in response to the proposals by the EU to break up Google’s monopoly over search engines. What is at stake here is not merely consumers’ current welfare or Google’s profits but the fact that the outcome of this will set a dangerous precedent for future digital monopolies.
Schumpeter argued, for several reasons, that there is nothing inherently wrong with monopoly – after all, via economies of scale, the monopolist can reduce costs and, via increased profits, the monopolist can invest in the research required for innovation; therefore, monopoly can be just as beneficial or, if not, even better for the consumer than perfect competition. Hence, there is no substantial argument from the perspective of economic efficiency that should lead us to value perfect competition over monopolies – especially if the monopoly occurs naturally.
The proposed legislation is intended to protect businesses that are supposedly disadvantaged by Google’s search engine since it, apparently, delivers results in a way that serves the commercial interests of the firm more than the users’. Google, through collecting and processing vast amounts of personal data as well as developing its hallmark search algorithm has, in recent years, reduced job search costs and labour market frictions. Start messing around with Google’s algorithms and people will feel the pain of frictional unemployment far more than otherwise. Let’s turn now to the social media giant that also makes its money from data mining, processing and targeted advertising – Facebook. Examining its potential to grow and essentially become a larger (though immensely beneficial) monopoly than Google is speculative but it envisions possibilities of immense benefit from unhindered technological progress and market consolidation, which will ultimately be better for preference-satisfaction.
On university campuses, it is often not through LinkedIn that students are informed of on-campus recruiting events, firms’ visits etc. but Facebook actually makes students aware of the fact via its well-targeted advertising. Facebook can do LinkedIn’s job better than LinkedIn since it has a far larger network (they simply need to make a career-focused appendage to the profiles) and, hence, it could potentially put it out of business; this would result in improving job search significantly since a larger firm, with superior capabilities and potential to invest could connect employers and prospective employees. In this case, Facebook would be a beneficial monopoly to everyone and, restricting it would be to the detriment of society.
Furthermore, telecommunications’ companies have seen some of their revenues dwindle due to instant messaging companies such as WhatsApp (which Facebook has purchased). Zuckerberg wants to connect the world to the internet (and in the first quote mentioned in that article, he even mentions telecommunications – though perhaps it’s only incidental) and, using both its pre-existing, massive, ever-expanding network and Wi-Fi infrastructure, if Facebook were to capture the majority (or even all) of the telecommunications services market (whose global revenues were $1.2 trillion in 2013), it would be one of the largest monopolist service providers ever known to mankind.
Sure, it would work to privilege itself in many ways for its own commercial interest, as it were, but it would make communications, job search and other functions of society far less costly for individuals than was previously thought possible. Those reduced costs enable further innovation and amelioration of living standards. In our information-technology era, breaking up digital monopolies will essentially and unnecessarily prolong the welfare losses that currently result from inefficiently asymmetric information.
Vishal Wilde is a finalist studying for a BSc (Hons) in Philosophy, Politics & Economics (Economics major) at the University of Warwick. He wishes to spend his life fighting for and defending freedom. He proudly serves Her Majesty in the Royal Naval Reserve, is a Freelance Journalist, he writes Poetry, Science-Fiction and Fantasy and conducts independent academic research in Economics, Political Science and Philosophy. He is also a Research Consultant for Fantain Sports, Pvt Ltd. (a tech startup based in India).