Market Power and Monopoly of Power
Market power is the ability of a firm to increase and sustain the price above the marginal cost and still make a profit. Therefore, market power can get defined as the strength of a firm to dominate and influence a particular market. This market power or dominance can get determined by structural analysis of the market which involves calculation of the shares in the market and evaluation of other products of the same kind or substitute products. The exercise of market power by a firm in rising and maintain the price of the product above the level that will interfere with the competition capacity of the substitute product is known as a monopoly of power (Karier 2016, p. 12). This exercise of market power causes a reduction in the output and loss of economic prosperity. In 2015, the European Union accused Google of misusing its dominant market position by requiring smartphone manufacturers to preinstall the Google search and Google Chrome browser on Android devices. Also, the union accused Google of systematically favoring its comparison shops in search results, their relevance notwithstanding (Mirani 2015, par. 3-4). These actions, according to the European Union, denied the consumer a variety of mobile internet applications to choose from in inferring with the market competition which in turn affected the internet technology business in Europe. This paper tries to argue that, Google has abused its market power by interfering with the market competition and innovation.
Measurement of Market Power
Although economists find it easy to define market power, there is no actual conventional measurement of market power. Different economist uses different approaches and theories to determine the market power of a firm is a particular market. The commonly used approaches are the Lerner Index, which is used to determine the degree to which the price goes above the marginal cost. However, substitution of average variable rate can often get used as an alternative due to the complexity involved in measuring the marginal cost empirically. Another commonly used approach is to measure the price elasticity of demand of a particular firm as it relates to the profit margin of the firm and its ability to increase prices (Karier 2016, pp. 46-52).
Google's Abuse of Dominant Market Power
The action by the European Union to charge Google for abusing the dominant market power of the Android mobile operating system opened a very significant debate on the field of the economy on the matter. The argument by the European Union antitrust controllers was that the demand by Google to the manufacturers of smartphones to preinstall Google Chrome Browsers and the Google Search as default Google play app was detrimental to other companies (Mirani 2015, par.5-7). The union regarded this as a deliberate effort by the United States technology company to stifle innovation, deny the consumers variety of mobile apps to choose from, and was inferring with the market competition of substitute apps (Edelman 2015, p. 379). Thus this demand of Google to the mobile phone manufactures, not only interfered with the right of choice for internet consumers but also with the business in Europe which would otherwise be promoted by competitive mobile internet technology.
The Leverage Theory of Tying in Two-sided Market
This theory is concerned with the issue of whether a firm enjoying monopoly power in one market, has any reason to influence another market using this power through monopolization of good with another good that is facing competition (Iacobucci & Francesco 2018, p. 8). In the case of Google, the European Union argued that because Google is the primary licensed operating system of smartphone and distributor of apps for the android device, it is responsible for trying to extend its dominant market power to other markets such as internet where competition exists. The concept of leverage theory of tying can be founded on the theorem of single monopoly profit. According to the theorem, if the products of the competing monopoly power are inferior to that of the substitute company, a firm as no motivation to expand its market power by tying its products (Edelman 2015, p.397). This is because if consumers are forced to buy the inferior product by the company by tying the products, the company is required to compensate consumers from the profit earned from the monopoly power thus reducing its total profit. However, this theorem does not hold in the case of Google because most of its applications found in the Google play store, are free, and thus consumers do not incur any cost, but the company benefits from advertising which increases its profit. Thus, according to this theory as applied in the context of the Google monopoly case, indicate that the expansion of market power by Google prevents other mobile internet firms the qualitative benefit to increase consumers. Therefore, Google benefits more because when consumers use the search engine and the browser, they can get data that the creators of Google can use to create improved algorithms.
How Google has maintained and abused its Dominant Market Power
As a leading technology giant, Google has maintained its market power through large-scale production of the merchandise and service provision. Economies of scale help to reduce the cost of production while ensuring an increase in output (Haucap & Stühmeie 2016, p. 186). Such a realization helps to expand the market for the product at the advantage of potential competitors. For example, when Google asked the smartphone makers to pre-install Google apps in the Android devices, it was taking advantage of other internet service providers through this strategy of production.
Google maintains its market position through limit pricing where the price of the product gets reduced below the average. Such an act is meant to scare away new investors on the product due to fear of loss. Most Google Apps found in Google Play is usually free to the consumers while the company uses them to advertise other products. Doing so is an advantage to Google because the apps are usually installed on the android devices and due to the facts that they are free, the consumers do not bother to research or install others from competitors but instead use the already installed apps, a fact that drives the consumers away from other competing products as Iacobucci & Francesco (2018, p.17) argue.
Google has also maintained its market power through exclusive contracts and vertical integration (Carbaugh 2016, p. 36). For example, the firm signed a contract with mobile manufacturers to pre-install its apps thereby possessing the market so that its competitors have access to a limited share of the market for their products. Such is because of the reduced number of customers thereby reducing competition. The demand by Google to pre-install the Google Apps in the smartphones was a vertical integration technique that got achieved by the exclusive contracts with the smartphone manufactures. By limiting competition and trying to strangle its competitors, Google has abused its dominant market position.
Adverse Effects of Dominant Market Power
There exist some adverse effects of dominant market position for big firms like Google. Google’s primary aim is to increase their profit at a low cost, regardless of whether they meet the consumer needs or not. Therefore, market power reduces the consumer’s choice of products because the market and supply are controlled by the dominant firm in the marketplace, which in this case is Google (Carbaugh 2016, p. 86). For example, Google Apps have ruled the smartphone application market to the extent that the consumers are left with less choice to make on which browser or search engine to use because these apps are way above Google’s competitors in the internet sector like Apple and Microsoft.
The second negative influence of dominant market position is that it prevents innovation, which is usually a result of a competitive market situation. When Google takes control of the market, they restrict the output in the market to maintain the dominant position. The control of the internet sector by Google has led to reduced innovation by other internet firms creating asymmetric information where the knowledge on the internet services gets used to the disadvantage of the consumers as Haucap & Stühmeie (2016, p. 207) cite.
Google dominant market power has caused productive and locative inefficiencies. The situation is as a result of the lack of direct competition, so Google lacks the incentive to improve the quality of the product at a minimum cost. This also means that Google can set their own price substantially above the marginal cost because of the limited market share of its competitors thereby leaving customers with fewer options.
Merits of Dominant Market Power
Google has exercised its market power to grow by exploiting the economies of scale. The firm produces merchandises in large scale at a low cost and then passes the benefits to the consumer by pricing the products at a minimum cost. However, this can also be used to create barriers for potential competitors.
Google uses her influence to be dynamic efficient by increasing their innovation to achieve higher profits. For example, the operators of Google gather information from their customers that help them to improve their internet systems for higher benefits.
According to Tirole (2015, p. 1679), a dominant firm like Google generates income to the economy of the country. This is because of the benefit of economies of scale which help them develop cost-effective products for the country and export.
One of the common disadvantages of market power is the inability to regulate market thus causing a failure in the market (Tirole 2015, p. 1672). It is, therefore, imperative to regulate the market power of the firms to create fair competition in the market. The principal ways in which market dominance can get reduced is by banning mergers between firms and breaking up the dominant company into small firms. For example, Google can separate into two firms: the software firm and the operating systems.
In conclusion, Google has abused its dominant market position by reducing the consumer’s choice of product in the internet sector due to the poor competition in the sector. Google has done this through the tying of products and exercise to the economies of scale which reduce the innovation and competition ability of other firms. The action by the European Union on Google was to try and reduce the dominant power of Google in the internet market thus creating a competitive market for internet providers. Market dominance can prove useful for the firm but not necessarily good to consumers.
References
Carbaugh, R., 2016. Contemporary Economics: An Applications Approach. New York: Routledge.
Edelman, B., 2015. Does Google Leverage Market Power Through Tying and Bundling? Journal of Competition Law & Economics, vol. 11, no. 2, pp.365-400.
Haucap, J. & Stühmeier, T., 2016. Competition and antitrust in internet markets. Handbook on the Economics of the Internet. Edward Elgar: Cheltenham, pp.183-210.
Iacobucci, E., & Francesco, D., 2018. The Google Search Case in Europe: Tying and the Single Monopoly Profit Theorem in Two-Sided Markets. European Journal of Law and Economics, vol. 1, no.1, pp. 1-28.
Karier, T., 2016. Beyond Competition: Economics of Mergers and Monopoly Power: Economics of Mergers and Monopoly Power. New York: Routledge.
Mirani, L. (April 15, 2015). Europe has Formally Accused Google of Abusing Its Dominant Position. Quartz. [Online] Available at https://qz.com/384059/europe-has-formally-accused-google-of-abusing-its-dominant-position/ (accessed October 13, 2018)
Tirole, J., 2015. Market Failures and Public Policy." American Economic Review, vol. 105, no. 6, pp. 1665-82.
