How The Closed Nature of Social Networks Like Facebook Reinforces their Monopoly Power

Executive Summary

• Social networks are often closed systems or semi-closed systems.
• Facebook has enforced a high degree of system closeness, which increases barriers to entry for competitors.

Introduction

As Facebook faces a DOJ lawsuit for monopolistic behavior, what will happen is Facebook’s business model will be highlighted to more of a degree than before. Facebook has an enormous barrier to entry in that it is a closed system. This would make it very difficult to impossible for any new competitor to rise, reinforcing Facebook’s monopoly.

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Facebook’ Barrier of Entry Through its Closed System

Dina Srinivasan makes the point that one reason that Facebook has been able to escape anti-trust action for so long while being widely known as a monopoly is that Facebook does not charge its users.

But, there are entry barriers associated with Facebook’s closed communications protocol and over 2 billion users. When a communications network is closed, a user can only communicate with another user of the same network. This creates a powerful phenomenon known as direct network effects. Just as the utility of owning a phone in the late 19th century grew as phones became more accessible, so does the utility of a closed social network depend on how many other people use it. A new market entrant cannot easily get users to switch to a platform with less users.

Because the communications protocol is closed, and Facebook controls one’s social
graph, consumers face high switching costs and competitors face a significant barrier to entering the market.

Conclusion

Facebook is an absolute monopoly. It reinforces this monopoly power by making all communication occur through Facebook. Furthermore, Facebook tracks its users even after they have left Facebook. Secondly, Dina Srinivasan clearly demonstrates how Facebook has no real competitors.

Dina Srinivasan receives our score of 10 out of 10 for accuracy.