5. Internet-based services such as Facebook, Instagram and Twitter have moderate

Question

5. Internet-based services such as Facebook, Instagram and Twitter have moderate fixed costs of production and extremely low average and marginal costs. These cost structures typically lend themselves to highly competitive markets with many firms and low prices and profits. Is that the case for these services? Specifically, are there many firms competing in the market, are prices low and are profits competed away? Would you describe these markets as competitive? If not, is there a case for regulatory action to address any market power? What is best for total surplus? a.

Explanation / Answer

The internet based services whether it is facebook, instagram or twitter we cannot directly consider them as a competitive market as most of the features of competitive market are hardly exist.These services are oligopoly in Nature where it sets price and output based partly on the strategic consideration regarding the behaviour of its competitors. Thus they have competition among the few. Any changes of its price and output makes a direct impact on the fortune of its rivals. They cannot able to charge monopoly prices for their services as it leads to attract new entrants.So they need to modearate their fixed cost of production and extremely low average and marginal cost to earn profit .They can earn more surplus if they organise themselves and set a uniform price-output policy by recognising their mutual interdepence. And by doing so, they become collusive or co-oriented oligopoly. Which can be of two type-Cartel ( where they jointly set their price and output policy through agreement) and by price leadership (where one firm sets the price and other firms just follow that price). So managing an oligopolistic firm is complicated because pricing ,output ,advertising and investment decision involve important strategic consideration and resistance by the established firms through price cutting. Thus it is obvious that they need to compete by choosing mostly the price rather than quantities.

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