China's digital monopolies are killing competition and need to be regulated

The government should step in and regulate digital monopolies because at the end of the day, healthy competition benefits all.

Monopoly is relatively new in the history of business—it only emerged some 100 years ago. And anti-monopoly policy makers have always been in an awkward position because the line between monopoly and free competition is oftentimes vague, and people’s attitude towards monopoly has been non-consistent.

One recent example of this inconsistency is how Google was treated differently in the US and the European Union (EU). Google enjoys 67 per cent market share in the search business and 75 per cent of search-related ad revenue in the US. The US Federal Trade Commission launched an anti-monopoly investigation against Google in 2012, but only concluded in January 2013 that there wasn’t sufficient evidence to support legal actions against the internet giant.

However, in April 2015, the EU filed an anti-trust lawsuit against Google, based on a five-year investigation. The core issue of the case lies in whether Google used its dominance to benefit its own comparison-shopping business by hampering competitors, which hurts consumers’ interests. A recent study by Michael Luca from Harvard Business School and Tim Wu from Columbia Law School found that Google’s way of displaying search results would lower the chances of consumers finding the product they need by one-third. One EU official even warned that the European economy will be at risk due to its overreliance on American internet companies such as Google. In China, the monopoly position of Baidu, Alibaba and Tencent is self-evident. After Google left in 2010, Baidu cornered 70 per cent of the revenue in the search business in China; in e-commerce, Alibaba takes up 80 per cent of the online shopping revenue; and Tencent has 500 million active WeChat users and 815 million QQ users—about 60 per cent of the country’s total population.

Internet monopolies

Compared with traditional industries, internet companies bear two traits that will magnify their chances of becoming monopolistic. The first one is externality, or demand-side economies of scale—it means that customers’ evaluation of one network largely depends on the number of users on that network. In other words, the more users one website has, the more likely new users will be attracted to it. This is why the “winner takes all” effect is particularly strong in the internet industry. The Metcalfe Law, a theory named after the founder of the Ethernet, vividly manifests externality by stating that a network’s value is proportional to the square of the number of its users.