Classroom Companion: Business

13.2 · Formation of Monopolies

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A contributing cause of formation of de facto monopolies in the digital econ-
omy is the increased gap between value and cost as more and more users adopt a 
digital service. This is illustrated in 
.
Fig. 
13.2
 for digital services with strong 
network effects obeying Metcalf’s law (see 
7
Chap. 
9
). As explained earlier, many 
digital services and goods have zero marginal cost. This implies that the cost curve 
approaches zero as the production volume (n) (e.g., the number of users in social 
media) increases. On the other hand, the value of the digital service—and, hence, 
the revenues of the company offering the service—increases linearly as a function 
of the number of users (Metcalf ’s law). The result is a big gap—a value surplus—
between value and cost, as depicted in 
.
Fig. 
13.2
. The value gap increases as the 
production volume increases and gives companies with large n a strong financial 
position. This can be seen in, for example, the profit margins of many companies 
producing digital services, which often range from 25% to 50%—well above the 
normal industry standard. Digital companies may use this profit margin for more 
growth; for example, developing and improving existing services, creating new ser-
vices, and/or acquiring competing or supplementary businesses.
Units produced (n)
Value/cost per unit/consumer
Difference between
value and average cost
Value added per user
Cost per user
. Fig. 13.2 Difference in value as a function of units produced. (Authors’ own figure)
 Case Study 13.1 Creation of a Monopoly: Facebook
The forerunner for Facebook, the web-
site Facemash, was created in 2003 at 
Harvard University. The website was 
first only available for students at 
Harvard College but expanded to other 
universities in 2004. In 2008 after almost 
5 years, it became a universally available 
website on the international market 
where users could form and participate 
in social groups exchanging experiences, 
news, comments, views, pictures, and 
other information. Already in 2009, it 
had surpassed Myspace in the number 
of users, exceeding 500 million users in 
July 2010 (Zuckerberg makes it official: 
Facebook hits 500 million members, 
2010
). The company had then become a 
monopoly in the social services business: