Market dominance might be good for consumers

The phrases monopoly, duopoly and oligopoly typically rouse fear in the hearts of the public. They imply big, self-interested companies, with a purportedly unhealthy dominance of the market. Consumers will get ripped off, critics say. The barriers to entry are too high for new competitors to have a chance.

Such imagery is typical of the suspicion of big business, and the superlatives have been flowing in recent weeks as the Australian Competition and Consumer Commission continues its investigation into the dominance of Google and Facebook in Australia’s digital advertising market.

However, outside of price fixing and state supported market dominance, aren’t these major players just providing consumers with a superior product?

One of the greatest strengths of the private market is that companies are judged solely on how consumers value their goods and services. Offer something good and customers will come flocking. Offer something bad and bankruptcy beckons.

If a company has established market dominance, that suggests it is offering a product so good that the vast majority of shoppers prefer it to the competitors’ alternatives.

Google has certainly accomplished this. Who remembers Ask Jeeves? Who still searches the internet with Yahoo? Not many, is the answer. Back in the early 2000s Yahoo and Google were neck and neck. However, with its comprehensive search engine and wide range of complimentary products, Google won the battle for consumers’ hearts and minds.

Facebook has achieved similar feats. MySpace, Bebo and Google Hangouts were usurped for a reason — because people like Facebook’s offerings more.

As a result, the two companies have come to dominate the digital advertising market. They offer an advertiser’s dream: detailed information on billions of users, which can see promotions customised down to the individual level.

Even in the more congested US market, inferior competitors have lost their share (see graph). As an advertiser, why would you want to work with a secondary player when these two companies offer so much?

Market dominance is a good thing if it means that consumers get a superior, reasonably-priced product.