In this Mint article, Research Director and Senior Fellow Niranjan Rajadhyaksha analyses the functioning of corporate monopolies in the digital age, raising static and dynamic policy questions. Excerpts:
"Regulators world over are concerned about the power of digital economy giants such as Facebook. Economists have revived the old question about whether market structure deepens inequality. These are valid concerns. The policy question is whether market power should be seen in a static or dynamic sense. Is a monopoly temporary or permanent? Neither Nokia nor Premier Automobiles could sustain their market power in the face of innovation and structural change.
The key then is not just the size of the firm but also barriers to the entry of new firms. Take a look at the digital economy, where network externalities create natural monopolies: I am on Facebook because my friends are on Facebook. Jean Tirole knows more about economics of digital platforms such as Facebook. He spoke in a recent interview about the need to distinguish between transient and permanent monopolies: “Large economies of scale as well as substantial network externalities imply that we often have monopolies or tight oligopolies in the new economy. The key issue is that of ‘contestability’. Monopolies are not ideal, but they deliver value to consumers as long as potential competition keeps them on their toes…. But for such competition to operate, two conditions are necessary: efficient rivals must, first, be able to enter and, second, enter when able to"..."
Read the whole article here.