In Economics 101, there is the theory of supply and demand, which says that as a product becomes more successful and its demand goes through the roof, it will attract more competition because others would want to have a slice of that lucrative pie.
But this does not seem to be working as well in the world we live in today – let’s call this the new world. In many new businesses such as e-commerce and social media, what we end up with are winner-takes-all types of dynamics. A highly successful product would not have many competitors.
That is because in platform-businesses such as e-commerce and social media, they can gain economies of scale and a network effect. (The latter is used to describe the following phenomenon: As users of a platform increase, the platform can attract more users because more people are using it, and they want to use the services together with their friends and family).Ultimately, we probably will only need a handful of social media platforms to connect with our friends. We probably need just a handful of messaging service to talk to people, and we might only need one or two e-commerce websites to shop for everything we need.
Here’s an interesting question: Does this mean that e-commerce and social media companies are monopolies? In the traditional sense, monopolies are companies that can raise prices, and users would still not be able to do anything about them. In new world businesses, that is not really the case. There may be only one or two social media or e-commerce sites that we are using, but these sites are also the lowest cost providers for their particular services. Why is this the case?
That is because many of these platform companies are not charging their users to earn revenue. They work as an advertising avenue for other companies and advertisers to reach users. So, in fact, they can charge advertisers more and more over time to gain access to their users, but the users would still enjoy free or low-prices on the platforms.
In the old world, successful products attract a lot of competition, while monopolies raise prices for users. In the new world, it is hard for competition to arise for successful products, and even when the successful products become entrenched, prices are not raised for users. These are how new world economics differ from the old world.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.