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In which market structures do web-only firms operate? And what are the implications?

There are many market structures in which firms trade[1]: perfect competition in which many firms sell an identical product; monopolistic competition in which a large number of firms compete with slightly different products, leading to differentiation; oligopoly where a small number of firms compete; and monopoly in which one firm produces a unique good or service, e.g. utility suppliers.

Perfect competition

Perfect competition gives rise to a situation in which economic profit induces entry into the market by firms, which in turn eliminates profit. And economic loss induces exit, which in turn eliminates the loss. When profit and loss have been eliminated and entry and exit has stopped, a competitive market is in long-term equilibrium. But this is a rare state to maintain.

Monopolistic competition

Monopolistic competition results in many product innovations, to achieve differentiation, which are cost-efficient to produce so not significant.  It differs from perfect competition in that there is excess capacity and the prices are higher.

Oligopoly

An oligopoly has a small number of interdependent firms resulting from natural barriers to entry. It is distinguished from monopolistic competition by measuring the market ownership of the 5 largest firms compared to the next 10 largest firms, with 60% market ownership by largest firms giving the oligopoly. It is studied using game theory.

Monopoly

A monopoly has 2 key features: there is no close substitute and there are barriers to entry which deter potential competitors. The 3 types of barrier are: natural in which economies of scale enable one firm to supply the entire market at the lowest cost; the ownership barrier if one firms owns the major portion of a resources; and a legal barrier if a firm is granted a monopoly franchise, government licence, patent or a copyright.

Web-only firms operate in a mix of all 4 market types. There is the monopoly in search services and SEO advertising by Google; the oligopoly-duopoly of Google and Facebook in platforms for user-generated social content and dependent applications; the monopolistic competition of other topic or media based dependent social networks (e.g. SoundCloud, Myspace, Youtube, Vimeo, Goodreads etc); the perfect competition of free knowledge sites with professionally created or user-generated content (e.g. Wikipedia, online periodicals, Quora, Stackoverflow etc).

Are the Freemium business model permutations, including indirect revenue streams, the most economically viable models? Are they supported or undermined by the mixed market environment? The next instalment follows…