The United States is living through an “antitrust moment,” with vocal and persistent concerns that unchecked tech monopolists roam the land unfettered by effective antitrust enforcement.
One of the central creeds of this faith is that Facebook is a monopolist, albeit one that offers its service to consumers for free. But Facebook’s critics, including the FTC, have been unable to identify persuasively the market that Facebook allegedly monopolized. This is because the critics are using the wrong model of competition, one systematically biased toward finding monopoly power where none exists.
Competition in technology industries characterized by dynamic, innovation-based rivalry operates through successive waves of disruptive innovation. In these markets, firms compete by bringing groundbreaking new technologies to market rather than through marginal improvements to existing products. New entrants compete not with yesterday’s technology but with tomorrow’s, offering consumers new ways to create or consume. Commercial success in this technological arms race lasts only until the next wave of innovation, which is often only months or years away.
While Facebook attracts substantial usage today, that tells us only that Facebook offered a service that its current customers found attractive. This is unsurprising, given the research showing that free access to Facebook is worth as much as $40 to $50 per month per user, a rather impressive exercise in value creation. But more to the point, when assessing monopoly power (to the extent Facebook has any) in a dynamically competitive industry, it is not today’s competitive landscape that matters most, but tomorrow’s.
Internal Facebook documents leaked from within the company show how competition in a dynamic market emerges at inflection points, when a new cohort of consumers enter the market and make new consumption decisions. One document notes that younger users are migrating from Instagram to TikTok, and that teens are not migrating as quickly as hoped from Instagram to Facebook.
Another document explains that “We see app-declines happen faster between cohorts than within cohorts (at least for U.S. teens).”
For Facebook to have monopoly power, it would need to have the ability to staunch these share losses among the younger users whose consumption choices will decide the future of competition in this market. But no such power is alleged by the FTC, or observed in reality. TikTok’s rapid entry and expansion, particularly among younger users, cannot be easily squared with Facebook’s alleged monopoly power.
The FTC contends that Facebook is a monopolist in a market for “personal social networking services,” one that does not include TikTok. Given that the UK Competition and Markets Authority in its market study defined a broader market, as have most industry participants, and included TikTok as a competitor of Facebook, along with other social networks including Twitter and LinkedIn that are excluded by the FTC, we are left wondering whether the FTC’s market definition is as inclusive as it should be.
The FTC’s market definition is based on a comparison of the functional characteristics of social networking services. Although both Facebook and TikTok are used to create and share videos, and despite the clear evidence that TikTok is competing effectively for the attention of Facebook’s customers, the FTC claims they do not compete because videos shared on TikTok are allegedly intended for a broader audience than those shared on Facebook.
This market definition, and the understanding of competition that lies behind it, is a mistake. The fact that consumers switch from Facebook to TikTok when it offers a new service they enjoy means the two compete for user time and attention, regardless of whether each checks all of the same boxes on the FTC’s list of cherry-picked functionalities.
Firms in dynamic markets compete by differentiating themselves and offering consumers new choices. When firms compete with differentiated services, rote comparisons of functional characteristics are a poor way to measure market power, and will tend to both systematically understate the intensity of market competition and to find monopoly power where none exists. TikTok’s strategy of offering consumers a form of social engagement different than Facebook’s is precisely the way a threatening new entrant would grow, compete and contest the future of this market. The government has misdiagnosed vibrant, innovation-based rivalry fueled by product differentiation as stagnant monopoly.
By focusing myopically only on those firms that offer services exactly similar to those offered by Facebook today, while ignoring rapidly growing firms that threaten to unseat Facebook tomorrow with the next generation of consumers, the government is re-enacting the streetlight effect, a form of observational bias where solutions are sought where looking is easy rather than where real solutions may be found. This is no way to define markets, to identify monopoly power, or to enforce the antitrust laws.
