The Relevant Market Fallacy and Facebook’s Antitrust Cases

Facebook was hit by two separate antitrust complaints this week. One is from the Federal Trade Commission (FTC) and the other is from a group of attorneys general (AGs) from 46 states. As most antitrust complaints do, they both commit the relevant market fallacy. This is defining a company’s market unrealistically narrowly, so it looks more dominant than it is. The Justice Department also made this error in its recent Google complaint.

The FTC complaint slips up in its second paragraph, stating that “Facebook holds monopoly power in the market for ‘personal social networking services.’” The states’ complaint uses the same term, which they define starting on page 11.

If you’ve never heard the term “personal social networking services” before, you’re not alone. The FTC and attorneys general made it up just for their Facebook cases. And they both define it in such a way that excludes TikTok—a curious oversight. TikTok is a competing social network that is popular among the younger people Facebook is actively courting to freshen up its aging user base. Facebook is not only competing against other networks, it is also competing against demographics.

Facebook’s popularity with the over-40 crowd is a major reason for its unpopularity with teenagers. They generally prefer to be where their parents and teachers are not. Because younger people’s friend groups are malleable and still forming, and because typing a website’s name into a browser is so easy, the network effects argument the complaints rely on is not very strong. Network effects basically means that there is strength in numbers. People will tend to join networks where their friends already are, rather than try to cajole them into moving to a brand new network. But this theory does quite explain why many people are members of multiple networks. It is common for people on Facebook to also be active on Twitter, Discord, LinkedIn, and other networks.

While the network effects argument has some sway with older people, whose networks are long-established and for whom inertia is stronger, it is weaker with younger people. In the case of Facebook, its network effects among the gray-haired set may in fact be pushing younger people away.

This may be why a text search for “TikTok” turns up zero results in both the FTC’s and the states’ complaints—out of sight, out of mind. So even if Facebook holds a monopoly in “personal social networking services” as defined by the complaints, Facebook clearly does not hold a monopoly in its real-world relevant market. Because of that, consumer harm is almost impossible to prove—and proof of consumer harm is the threshold for antitrust enforcement.

But this concedes too much. Facebook almost certainly does not hold a monopoly even in the narrow “personal social networking services” market definition. One common test whether a company has a monopoly is to see if it is able to jack up prices, restrict supply, and still remain dominant. Extra-high monopoly profit margins naturally attract competitors; successfully keeping them out is a sign a company may have monopoly power.

Facebook does not charge its users, but it does charge advertisers. Has Facebook been able to raise ad prices and squeeze supply? It has not. Online advertising prices have gone down by about half over the last decade—precisely the period when Facebook became a major player. Over the same period, print advertising prices have been going up. Some newspapers have doubled their ad prices.

If Facebook has a monopoly and is acting to illegally maintain it, cutting its ad prices while competing ad sellers raise theirs is an unlikely way to go about it.

There are a lot of other arguments in play in the Facebook antitrust cases. But the relevant market fallacy is a major one, and it doesn’t look good for the FTC’s or the state AGs’ cases.

For more, see Iain Murray, Jessica Melugin, and Mario Loyola’s statement, Wayne Crews’s and my paper, “The Case against Antitrust Law,” and visit antitrust.cei.org.

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