Google Ads is Google’s advertising platform on which users bid to display advertisements. In 2017, Facebook considered developing its own platform in competition with Google. In a deal called “Jedi Blue,” Google offered Facebook a low price to use Google Ads in return for Facebook not creating its own platform.—The New York Times
How do Google and Facebook (owned by Meta) generate revenue?
Google and Facebook generate revenue by selling online advertising services.
Why do providers of internet advertising have market power like a monopoly?
Providers of internet advertising have market power like a monopoly because they have economies of scale. Figure 1 illustrates the extreme case in which a single firm can meet demand where its average total cost, ATC, is falling.
What would be the outcome in online advertising without Jedi Blue?
If the Jedi Blue agreement had not been made and Facebook had developed its own online advertising platform, competition between the two firms would have driven the price of an advertisement down and, in the extreme, competition would have eliminated economic profit. Figure 2 illustrates this outcome and shows the consumer surplus that it would have generated.
What is the outcome in online advertising with Jedi Blue?
With the Jedi Blue agreement, Google can maximize monopoly profit and share some of it with Facebook. If Google operated as a single-price monopoly, it would restrict the quantity of advertising to that at which marginal revenue, MR, equals marginal cost, MC. Figure 3 shows this outcome and the small amount of consumer surplus it leaves.
But Google can do better by price discriminating and Figure 4 shows the outcome with perfect price discrimination. Google captures the entire consumer surplus as producer surplus. Google also increases the amount of advertising to the quantity at which the lowest price equals marginal cost, which is the efficient quantity.
Most likely, the outcome is between the two cases shown in Figures 3 and 4. And remember, Google doesn’t get to keep all the profit. It shares it with Facebook through the favorable price in the Jedi Blue agreement.
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