In ECON100 (and ECON110) we recognise that monopolies use their market power to raise the price above the price that would prevail in a more competitive market. This higher price causes fewer consumers to purchase the product, and reduces economic welfare compared with the more competitive market. This is one of the reasons for considering anti-trust legislation – to prevent the formation of monopolies in the first place, and thus increase total welfare.
However, one aspect of market power I didn’t discuss in class was the case where firms leverage their market power in one market to increase their profitability in other markets. We’ll talk about strategic aspects of pricing between markets in class this week, but leveraging market power in one market to achieve increased profits in another market is something else. For instance, the anti-trust case against Microsoft in the late 1990s/early 2000s was essentially about whether Microsoft used its dominant position in the market for operating systems to force rivals out of the market for internet browsers, by automatically bundling the Internet Explorer browser with the Windows operating system. This results in fewer choices for consumers and makes them worse off as a result.
The Europeans have taken similar issue with some of the activities of Google, and Google may now face a €3 billion fine as a result of their activities. MSN.com explains:
It is understood that the European Commission is aiming to hit Google with a fine in the region of €3bn, a figure that would easily surpass its toughest anti-trust punishment to date, a €1.1bn fine levied on the microchip giant Intel…
It will mark a watershed moment in Silicon Valley’s competition battle with Brussels. Google has already been formally charged with unlawfully promoting its own price comparison service in general search results while simultaneously relegating those of smaller rivals, denying them traffic…
Margarethe Vestager, the Competition Commissioner, on Friday raised the possibility of further charges in other specialised web search markets such as travel information and maps.
So Google has been using its dominance of the search engine market to increase profits from its price comparison service (and likely travel, and maps). It’s probably even worse than the Europeans believe – I’ve written before about the market power of price comparison websites, especially if one firm came to dominate the ‘price comparison market’ (which was no doubt Google’s intention). We shouldn’t be surprised to see firms taking advantage of their market power in this way. This is exactly the reason why we have organisations like the European Competition Commission, to ensure the activities of firms with market power are kept in check.