Classroom Companion: Business

 
Chapter 13 · Digital Monopolies and Oligopolies

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13
13.3 
 Formation of Oligopolies
Mobile communications and streaming services are two examples of oligopolistic 
markets in digital economics.
In 1992, mobile communication was deregulated in Europe, and, stimulated by 
the governments, two or three operators in each country acquired license to offer 
GSM services. Competition was later enhanced by allowing resellers to buy bulk 
there were no real competitors that 
could match it in growth and market 
impact.
From 2008, the growth of Facebook 
has been governed by strong network 
effects creating lock-in with high barri-
ers for competitors to enter the same 
market. The barriers created by 
Facebook were not economic but psy-
chological. The major concern for the 
users is that they may lose all informa-
tion they have produced and collected, 
as well as being chopped off from the 
network of interactions with friends and 
other user they have built up.
The primary service of Facebook is 
free of charge for the users. This makes 
the entry barriers for competitors even 
higher: the competitors cannot provide 
the same service cheaper, leaving them 
with the alternatives to pay users for 
joining their platform to differentiate 
them on price or offer a better customer 
experience with less exploitation of per-
sonal data. This will require enormous 
efforts and ingenuity and is extremely 
expensive.
The platform is designed such that 
Facebook can extract enormous 
amounts of data about the users such as 
personal data (gender, age, geographic 
location, work, etc.), political prefer-
ences, network of friends and contacts, 
habits, motivations, cultural preferences, 
and so on and so forth. Facebook sells 
information based on this knowledge to 
marketers and other organizations uti-
lizing the information for statistics, 
trend analysis, sociological studies, lob-
bying, opinion shaping, surveillance, 
and other purposes. It is this sale of per-
sonal information that generates the rev-
enues of Facebook.
Facebook does not meet competi-
tion on its social networking platform: it 
has long ago become a de facto monop-
oly. The competition Facebook encoun-
ter is on advertisements. It turns out that 
it is a leading stakeholder in this respect 
also. As of January 2019, 94% of mar-
keters worldwide were using Facebook 
for advertising, and 74% were using its 
subsidiary Instagram. In contrast, 59% 
were using Twitter, 58% LinkedIn, and 
54% YouTube. All other social media 
combined were used by less than 50% of 
the marketers (Leading social media 
platforms used by marketers worldwide 
as of January 2019. Statista).
Social media earns money on adver-
tisements because of a strong cross-side 
network effect caused by the large num-
ber of users as explained in 
7
Chap. 
10
. 
This effect is particularly large for 
Facebook since it has the largest number 
of users and, perhaps most important, 
that it can discover and store more per-
sonal information about the users than 
other social media, facilitating market-
ers to target their advertisements pre-
cisely at individual users.