Regulating Digital Platform Monopolies: The Case of Facebook

Abstract

Although they often offer services to consumers for low prices, or even freely, many digital platforms are thought to have significant market power due to their network effects and supply side economies of scale. However, the existence and magnitude of this harm to social welfare, and the distributional impact of possible antitrust remedies to ameliorate it, are disputed. We construct and analyze a general model of digital platforms, determining conditions under which government interventions raise welfare. We calibrate our model for the case of Meta's Facebook using a survey of over 57,000 US Internet users. Facebook creates $14 billion in surplus per month, concentrated among female and older users. We simulate six proposed policy interventions. We find a 3% tax on Facebook's ad-revenue raises welfare by 1.1%, by shifting Meta's incentives towards maintaining a larger platform. Achieving perfect competition, while preserving network effects, would raise surplus from Facebook by 4.8%. On the other hand, a horizontal or vertical breakup of Facebook that failed to maintain interoperability or promote competition could decrease social surplus by up to 84.7%. Finally, a ``data-dividend'' rebate of profits to users would increase surplus by 30.3%.

Keywords: Multi-Sided Platforms, Network Effects, Taxation, Regulation, Social Media, Facebook