Market Power and Switching Costs : An Empirical Study of Online Networking Market

In recent years, states have launched several antitrust investigations targeting digital platforms. A major difficulty involves demonstrating the market power of digital platforms. Market power is defined as the control of the output or the price without the loss of business to competitors. As will be explored below, market power is a critical component in the antitrust analysis.On several occasions, courts have adopted the switching costs approach in the analysis of market power. According to this approach, market power may be inferred when the costs of switching from one supplier to another are too high, thus, preventing users from switching. Yet, few studies have assessed this approach empirically in the context of digital platforms. This article aims to explore the application of the switching costs approach to the antitrust investigations involving digital platforms. The study concentrates on Facebook as an example. It explores whether the switching costs approach can show that Facebook has the market power in the online networking market. The first part of the study defines the switching costs approach and considers various analytical variables involved in the analysis. In the second half of the paper, the author conducts an empirical study which assesses the viability of the switching costs approach. Specifically, the study considers the manner in which users moved between major online networking platforms before and after the two privacy violations in 2011 and 2019. The study also analyzes advertising revenues during these periods to build a comprehensive understanding of the data.The study highlights that the switching costs approach is applicable in antitrust investigations involving online networking platforms. Furthermore, the empirical analysis highlights a change in the number of users who are active on Facebook. It also indicates significant changes in advertising revenues after the publication of Facebook’s privacy violations. These developments demonstrate the absence of substantial switching costs to locked-in users of Facebook. Based on the foregoing, it is proposed that under the switching costs approach, Facebook does not have the market power