Facebook, Welfare, and Natural Monopoly: A Quantitative Analysis of Antitrust Remedies

Abstract

This Article advances a novel theoretical model for assessing policy interventions against Facebook. As prosecutors barrel forward against digital platforms, soon it will fall upon courts and, eventually, regulators to devise remedies. We argue that any sensible solution must include quantification of the welfare effects on the platform’s various constituents. Our model prioritizes the effects upon total societal welfare—or, in economists’ terms, social welfare. Applied to Facebook, the model calculates social welfare as the sum of four components: (i) consumer welfare; (ii) advertising profits; (iii) tax revenues; and (iv) the value of a large user base.

Drawing on surveys of over 57,000 Facebook users, the model captures the nuances of demand for the social network to predict the consequences of reforms such as taxes, divestitures, and user rebates. This approach is based on the theoretical and empirical literature on multi-sided platforms from economists, including most prominently the Nobel laureate Jean Tirole. We find that breakups which undercut the platform’s network effects are among the most damaging solutions. By contrast, properly designed taxes and user-unionization might raise the total surplus of the platform, even without creating more competition. We also canvass other interventions, gauging their abilities to maximize the benefits to consumers of engaging with Facebook.

This Article’s primary contribution is to ground debates over digital platforms in tangible, quantifiable terms rather than grand, open-ended aspirations. Each of the estimates in our formulation of welfare is subject to pushback, but by embracing quantification, we aim to elevate the theoretical discourse in antitrust. Ultimately, we hope that our model forces remedy designers to confront—and publicize—how they quantify welfare effects upon consumers and, more broadly, society.

Keywords: Facebook, policy interventions, regulation, social welfare, digital platforms, antitrust

JEL Classification: K2, K20, K21