For some technology firms, the source of market power is untraditional.
Even though firms such as Facebook and Microsoft may not be natural
monopolies created by economies of scale, the nature of their products
create what in Chapter 10 we called network effects, where the benefits
to any individual user increase with growth in the total number of users.
In such situations, once a critical mass of users is reached, the product
becomes a “standard,” and it is then almost impossible for competing
firms to break in to the market. Network effects can thus become a potent
entry barrier and a source of tremendous market power.
In the face of rising market power due to strong network effects,
policymakers confront a difficult challenge. Consumers clearly benefit
from the standardization of Microsoft Word or Excel, yet may have to pay
higher prices than would be available in a more competitive market.
Policymakers must therefore be careful to recognize that the high profits
being earned by large technology firms may not be the sign of
uncompetitive behaviour; instead they may reflect the enormous value
that users place on innovative products, despite being available only in a
concentrated oligopolistic industry.
Applying Economic Concepts 12-1 discusses the growing concern of rising
corporate concentration and draws the comparison between today’s
technology giants and the industrial giants of the late eighteenth century,
which spurred the creation of antitrust (competition) policy. We now turn
to a brief examination of Canadian competition policy.