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Monopoly Definition and General Characteristics

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A monopoly refers to a sector or industry dominated by one corporation, company or entity. A monopoly is a market that has one seller and but a lot of buyers. Monopolies can be considered a result of free-market capitalism in that absent any regulations, a single firm or group becomes big enough to own all or almost all of the market (goods, supplies, commodities, infrastructure and assets) for a specific type of product or service.

As the one and only producer of a product, a monopolist is in a unique position. If the monopolist decides to raise the price of the product, it need not worry about competitors who, by changing lower prices, would capture a larger share of the market at the monopolist’s expense so in this market the monopolist controls the amount of output offered for sale.

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Under monopoly, the price is considered to be higher, and consumers are considered to buy less. Because of the higher price, those consumers who buy the good lose surplus of an amount given by rectangle A. Those consumers who do not buy the good at price Pm but who would buy at price Pc also lose surplus—namely, an amount given by triangle B. The total loss of consumer surplus is therefore A + B.

The problem is that Facebook isn’t merely a social network: it’s a triangular market consisted of users, content suppliers, and advertisers and whereas the idea of Facebook’s dominance is within the network effects that come back from connecting all those users. Content suppliers square measure a clear example: Facebook passed Google because the prime traffic driver back in 2015, and as of last fall drove over four-hundredth of traffic for the typical news website, even once Associate in Nursing rule amendment that reduced publisher reach. we have a tendency to square measure {in a|during a|in Associate in Nursing exceedingly|in a very} state of affairs wherever there’s not a transparent price: no content supplier pays Facebook to post a link (although they will clearly create aforementioned link into an advertisement). However, Facebook will, a minimum of indirectly, create cash from that content: the a lot of users notice aforementioned content participating, the longer they’ll pay on Facebook, which suggests the a lot of ads they’ll see.

This is why Facebook Instant Articles gave the look of such a superb idea: on the one aspect, readers would have a far better expertise reading content, which might keep them on Facebook longer. On the opposite aspect, Facebook’s proposal to assist publishers legalise — publishers may sell their own ads or, enticingly, Facebook may sell them for a half-hour commission — wouldn’t solely support the content suppliers that square measure one aspect of Facebook’s triangular market, however additionally lock them into Facebook with revenue they couldn’t get elsewhere. The market in good competition would have looked one thing like this:

However, Instant Articles haven’t clad the approach it absolutely was expected: the patron advantages square measure there, however Facebook has fully born the ball once it involves monetizing the publishers victimization them or, to place it differently, Facebook unbroken most of the excess for itself.

In this case, it’s not that Facebook is setting a better value to maximize their profits; rather, they’re sharing less of their revenue; the result, though, is that the same — maximized profits. This approach isn’t doable in competitive markets: were there really competitors for Facebook once it came to inserting content, Facebook would need to share a lot of revenue to make sure aforementioned content was on its platform. In truth, though, Facebook is therefore dominant once it involves attention that it doesn’t need to do something for publishers in any respect (and, if aforementioned publishers leave Instant Articles, well, they’ll still place links, and therefore the users aren’t going anyplace regardless).

There is also similar proof — that Facebook in an exceedingly position|is ready} to scale back provide in a approach that will increase value and so profits — rising in advertising. during a dead competitive market, the value of advertising would seem like this. Facebook, though, can presently be limiting amount, or a minimum of limiting its growth. corporate executive Dave Wehner had aforementioned that Facebook would stop increasing ad load (i.e. Facebook has been increasing the amount of ads relative to content within the News Feed for an extended time, however would stop doing so). during this context the costs can in all probability rise, which might mean that Facebook’s ads square measure differentiated specified Facebook will probably increase profits by limiting provide

Note that Facebook has already aforementioned that revenue growth can slow owing to this change; that, though, isn’t inconsistent with having monopoly power. Monopolists get to maximise profit, not revenue. Alternately, it may merely be that Facebook is disturbed regarding the user experience; it’ll be fascinating to examine however the company’s bottom line shifts with these changes.

Another case that demonstrates the noncompetitive characteristic of Facebook and its negative implications in client surplus derives from the knowledge flow between Facebook and customers. Facebook controls data flows between agents during a social learning setting. Agents on the network choose among merchandise of competitory companies of unknown quality. Facebook sells advertising to companies. We have a tendency to think about display advertising, that is customary firm-to-consumer advertising, and social advertising, IN which agents who purchased that firm’s product square measure highlighted to their friends. We highlight that in equilibrium, data is unbiased relative to a setting with no advertising. However, the network reduces the content agents see regarding others’ purchases, since this will increase advertising revenue. Thus, client welfare is not up to the first-best situation.

Still, notwithstanding Facebook will have monopoly power once it involves content discovery and distribution and in digital advertising, is that actually an issue for users? would it possibly be a decent thing? In a static world, a monopolist is simply a rent collector. If you corner the marketplace for one thing, you’ll bring up the price; others can haven’t any other option but to buy from you…But the planet we live is not static: there is possibility to create new and higher things. Constructive monopolists offer customers a lot of decisions by adding entirely new classes of abundance to the world. Constructive monopolies aren’t simply good for the rest of society; they’re powerful engines for shaping them for the better.

The dynamism of recent monopolies itself explains why previous monopolies don’t strangle innovation. With Apple’s iOS at the forefront, the increase of mobile computing has dramatically reduced Microsoft’s decades-long software system dominance. Before that, IBM’s hardware monopoly of the ’60s and ’70s was overtaken by Microsoft’s software system monopoly. AT&T had a monopoly on public-service corporation for many of the twentieth century, however currently anyone will get an inexpensive mobile phone set up from any variety of suppliers. 

If the tendency of monopoly businesses were to carry back progress, they might be dangerous, and we’d be right to oppose them. However, the history of progress could be a history of better monopoly businesses replacing incumbents. Monopolies drive progress as a result of the promise of years or perhaps decades of monopoly profits provides a robust incentive to innovate. Then monopolies will keep innovating as a result of profits alter them to form the semipermanent plans and to finance the formidable analysis comes that corporations fastened in competition can’t dream of.

The problem is that the mentioned examples refute the Facebook case: decades-long monopolies like those of AT&T, IBM, and Microsoft certain appear to be a foul issue. Sure, they were eventually toppled, however not once extracting rents and, a lot of painfully, stifling innovation for years. Indeed, it’s arduous to think about any examples that established monopolies created technology that wouldn’t have been created by the free market; Facebook board members wrong blend the drive of new firms to form new monopolies with the proper of previous monopolies to do as they please.

This, ultimately, is why the last keynotes of Facebook were so unsatisfactory. There was no vision, simply a promise of shifting to a lot of privacy-focused products and a few interface enhancements that never bothered to tell a story of why they really mattered for Facebook’s users. Therefore, some new products like shopping apps and dating platforms are not new (wechat and Tinder have already their products there) and it is not clear how they can be differentiated. It will work, at least for a while, but make no mistake, Facebook is the only winner. 

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