Factors Enabling Google to Become a Natural Monopoly - Research Paper Example

Running Header: Economics Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: Introduction Managers make decisions in regard to the prevailing conditions in the economic environment. This implies that the process that managers employ to arrive at specific decisions is influenced by the type of market under which a firm operates in. One such type of a market structure is a monopoly. According to Markiw, Gregory and Taylor (2011, p. 310) a firm is a monopoly if it is the only seller or distributor and its products do not have close substitutes. This is the case with Google which has continued to control the global search market and the mobile search market thereby becoming a natural monopoly. Katz (2012) states that Google has become a monopoly due to its massive market share as well as its ability to generate large revenues. Google is the most popular search engine all over the world with its annual revenue being larger than a combination of the economies represented by the 28 poorest nations in the world. Objective and Scope The aim of this essay is to analyse how Google has become a natural monopoly as well as how it makes its pricing decisions. The report will concentrate on an economics news article by the Wall Street journal titled ‘Google’s Monopoly and Internet Freedom’ by Katz in order to determine how the company has become a monopoly and how it makes its pricing decisions. Research Questions 1. What factors enable Google to become a natural monopoly? 2. How does Google use its position in order to maintain its control in the search market? 3. How does Google Price its products and maximize its profits? Significance of the Study The significance of the study is to analyse the factors that have assisted Google to become a natural monopoly as well as to evaluate how it makes its pricing decisions in order to maximize profits. Managers prefer to operate where they have a high monopoly power in order to maximize their profits. This is because in a competitive market profits for individual firms are small. Thus, this study will be important to managers as it will assist them to identify factors that can enable their firms to become monopolies and how to price their products. Additionally, this study will be essential to academicians because it will contribute to the existing literature in this field and act as an incentive for further studies. Discussion and Analysis Natural Monopoly A natural monopoly arises when a single firm is able to supply a good or service to the whole market at a lower price than other firms in the same market (Mankiw, Gregory & Taylor 2011, p. 311). Therefore, a firm becomes a natural monopoly where there are economies of scale over the relevant range of production. Factors that have enabled Google to become a natural monopoly According to Katz (2012), Google displays the most prominent results because companies pay it for that privilege. Additionally, Google search algorithm favours those companies that are able to pay the company a large amount of funds for advertising. This has enabled the company to reduce its operating cost. Arnold (2010, p. 289) notes that a natural monopoly is capable of producing goods and services that are desired by customers at a lower cost than its competitors because of its low operating cost. Furthermore, the large amount of services that Google offers to its customers has aided it to reduce its cost due to economies of scale. The company has monopolized every means through which companies can reach their online customers by controlling web searches, email, advertisements and mobile browsers. Thus, other companies are forced to use Google hence making it to offer a huge amount of services. Therefore, Google average total cost curve has continuously declined due to the payments that it receives from other companies and because of the large amount of services and products that it offers. This has in turn enabled it to become a natural monopoly. A Graph Showing How Google Employs Economies of Scale in order to become a Monopoly Source: Mankiw, Gregory and Taylor (2011, p. 312). The increase in the amount of services that Google offers has enabled the company to benefit from economies of scale thereby making it to reduce its average total cost. How Google uses its Position in Order to maintain its Monopoly Power Katz (2012) notes that Google uses its position in the market so as to bend rules. This has helped it to maintain its online power. In addition, it uses complicated algorithms that are weighted in favour of its own services and products at the expense of other search results that are most significant to its customers. The monopolistic power that Google possess has influenced it to violate antitrust laws so as to maintain its control in the market. However, this has made the European Union to compel the company to change its business practices or face charges for violating the antitrust laws. Google uses its power in the market to make adjustments to its systems in order to punish its competitors (Katz 2011). The company uses its search engine in order to market its products more than those of its competitors. According to Mankiw, Gregory and Taylor (201, p. 312) a natural monopoly is concerned with maintaining its monopoly position. This is because the monopolist profits attract new entrants in the market. Thus, Google makes changes to its search algorithms in order to protect itself from competitors. This has enabled it to fight off competition and to increase its customers as well as its market share. Furthermore, Google uses its major real estate which is inferior and less relevant so as to promote its own services and products. This prohibits other companies from buying its superlative advertisements. Accordingly, by controlling which companies to expose and by maintaining its adverts, Google has been able to become a superior brand in the market thereby making it a monopoly in the internet. Google Price Setting The demand curve of a monopoly is the demand curve in the market. This implies that a monopoly can alter the price of its products and services because of the fact that it is the sole producer. However, if it raises the price of its products, customers will buy less (Mankiw, Gregory & Taylor 201, p. 313). Thus, for Google to sell more of its products and services it sets a lower price for its output. A Graph Showing Demand and Marginal Revenue Curve for Google Source: (Mankiw, Gregory and Taylor 2011, p. 316). The figure above shows how the quantity affects the price of goods and services offered by Google. For the company to increase its profits it lowers the prices of its products and services in order to attract a higher demand hence this makes it to benefit from the economies of scale. By charging a lower price, Google is able to increase the quantity of its output as well as its services. This makes the company marginal revenue to be less than the price of its products and services. Google Profit Maximization According to Arnold (2010, p. 490), a monopoly maximizes its profits by producing at a quantity of output at which marginal revenue is equal to marginal cost (MR=MC). This means that the intersection of the MC and MR curves determines the equilibrium level of output of a monopoly. Thus, Google determines the price of its products and services that can enable it maximize its profits by analysing the demand curve in the market. This is because the demand curve indicates the amount of products and services that customers are willing to purchase at a given price. Therefore, Google finds its output level at a point where it maximizes its profits (MC=MR). At this point it charges the highest price that buyers are able and willing to pay for that level of services and output thereby maximizing its profits. A a b d c The area ABCD represents the profits of Google. Q represents the maximum output at which MR=MC. If Google increases its output above Q, MC will be greater than MR. At this point the company can only increase its profits by reducing its output. On the other hand, an output lower than Q will make the company MC to be less than MR. This would force the company to increase its output in order to increase its profits. Conclusions Google has been able to monopolize the internet and this has made it to become a natural monopoly. The company provides a large volume of services and products thereby making it to benefit from economies of scale. This enables Google to reduce its operating cost. However, the company uses its position in the market to violate antitrust laws in order to maintain its control in the market. To maximize its profits, the company sets its prices at a point where MC=MR and this allows it to charge a maximum price for its output. This essay shows how a monopoly can be able to maintain its power in the market through the use of both legal and illegal practices. In addition, it indicates how monopolies can be able to maximize their profits. Research should be carried out to determine other means that Google uses to maintain its monopolistic powers. In addition, future researchers should identify the effects of Google’s monopoly on internet freedom. References Arnold, R 2010, Microeconomics, Cengage Learning, Mason. Katz, J 2012, Google’s Monopoly and Internet Freedom, Wall Street Journal, Viewed 7 March 2013,< http://online.wsj.com/article/SB10001424052702303830204577448792246251470.html>. Mankiw, G, Gregory, N & Taylor, M 2011, Microeconomics, Cengage Learning, Mason. Read More