Wednesday, September 17, 2008

Monopsonist and Monopoly

Google’s power in advertising. The man who runs complained to the Justice Department after Google found that his site didn’t live up to its standards and raised the rates on him (Google’s way of shooing away sites it doesn’t approve of). The implication is that Google can wield too much power as a monopoly.

Google is both a Monopoly and also a Monopsonist.

It is the sole (or close to sole) seller of advertising placement on the web (i.e., a monopoly). It has gained that advantage through economy of scales. If Google's monopoly power is restricted, advertisers are not going to gain lower prices. Instead, they are going to lose the price advantages that come with dealing with a company that has an advantage over its competitors due to economies of scale.

It is also the sole (or close to sole) purchaser of advertising hosting placement on the web (i.e., a monopsonist). Generally, monopsonist have an incentive to pay a rate that causes dead weight loss. However, in Google's case, because the marginal revenue produced from each ad placement is essentially flat, and because the marginal cost of an extra ad placement is zero or close to it, Google should actually pay a rate that would result out of perfect competition.

Google may have non competitive market advantages, but the market that Google is dealing in should force it to pay for its products and buy its products at a competitive rate.