This blog post examines why monopolies inevitably form in the platform industry and analyzes, using the Kakao case, why management and competition incentives are more important than dismantling.
Can Kakao’s monopoly be dismantled?
On October 15, 2022, a fire at the SK C&C data center caused internet service disruptions for related companies. Kakao suffered particularly severe damage. KakaoTalk, used by the majority of the population, was down for a significant period. This led to a widespread outage lasting many hours, affecting services like the portal site, email, and other services requiring Kakao account login.
As many people experienced major inconveniences, various opinions were proposed for problem resolution and prevention. Alongside technical solutions like server redundancy and DR (Disaster Recovery), voices questioning the monopolistic structure of the platform industry itself also emerged. Furthermore, the argument that the government should intervene more actively in companies providing services akin to national infrastructure gained traction. Monopoly clearly has harmful aspects. However, there are also clear reasons why monopoly inevitably exists.
The Reason for Monopoly’s Existence
According to economics, efficiency is maximized in a perfectly competitive market. Although equity is not guaranteed, the total value returned to society’s members is maximized. For a market to be perfectly competitive, several conditions are necessary. The most crucial condition is that there must be an infinite number of consumers purchasing goods and services and an infinite number of suppliers selling them.
To satisfy the condition of numerous suppliers, the market for a specific product must be divided among countless companies, and multiple small-scale enterprises must coexist simultaneously. For products with relatively simple production processes, meeting this condition is easier because production is possible with small-scale facilities. However, many industries in the modern economy do not meet these conditions.
A prime example is products like automobiles or mobile phones, which require complex production processes and high technological expertise. These industries demand enormous initial investment costs for technological development and production facility construction. Once the facilities are in place, however, increasing production volume becomes relatively easy. Consequently, only companies capable of large-scale investment remain in the market. This phenomenon corresponds to the traditional concept of ‘economies of scale’. Therefore, only a few suppliers exist in this type of industry. Producing one million vehicles is far more efficient with ten factories each producing 100,000 units than with five hundred factories each producing 2,000 units. Creating numerous small factories to achieve perfect competition in such industries is practically impossible, as it would cause significant losses in production efficiency and corporate competitiveness.
Furthermore, the value of goods provided by digital or platform companies increases as more users adopt them, driven by network effects. For example, the more people around you use KakaoTalk, the easier it becomes to utilize its features. Similarly, delivery service platforms offer consumers a wider range of choices when more suppliers use them.
The problem is that once a leading digital or platform company achieves sufficiently large market share, consumers become reluctant to sign up for other services with similar features. Consequently, new entrants find it difficult to enter the market, and it becomes hard for multiple similar services to coexist. In reality, markets for messenger services, SNS services, and platform services are dominated by a small number of players in most cases. Markets for goods and services with these characteristics cannot structurally become perfectly competitive markets and inevitably exist in monopolistic or oligopolistic forms.
Why is monopoly a problem?
So why is a monopolistic or oligopolistic market problematic? To understand this, we first need to distinguish between monopoly and oligopoly.
Monopoly refers to a state where a single supplier dominates the market, while oligopoly describes a state where only 2-3 or a small number of suppliers exist in the market.
In a monopoly market, the firm that uniquely supplies the good becomes the monopolist. The monopolist can reduce output and raise prices to maximize profits. Of course, the monopolist cannot secure profits indefinitely; depending on the characteristics of demand, there are limits to the scale of profits. However, compared to a perfectly competitive market, the firm’s profits increase, while consumers suffer greater losses. Therefore, considering the overall gains and losses for society, monopoly can be seen as a structure that reduces social welfare. The magnitude of the harm may vary depending on the characteristics of the market, but the fact that it causes harm to society is clear.
In an oligopolistic market, the impact on the market varies depending on how the few firms compete. If these firms choose to collude, the market becomes similar to a monopoly, causing significant harm to consumers. Conversely, if a few firms compete fiercely, consumer losses can be greatly reduced.
Thus, when a market adopts a monopolistic or oligopolistic structure, corporate profits increase while consumers suffer harm, resulting in greater negative impacts on society as a whole. For this reason, governments gain justification to intervene in monopolistic or oligopolistic market structures. While government intervention in a market economy achieving efficiency is justified solely on grounds of equity, monopoly and oligopoly represent cases where the market economy fails to achieve efficiency. Therefore, the fundamental position in economics is that the government can appropriately intervene to enhance efficiency.
Regulation or Efficiency?
Governments make various efforts to improve monopolistic market structures. The most fundamental principle of government intervention in monopolies is to regulate to prevent specific companies from achieving monopoly status or approaching monopoly, and to monitor oligopolistic firms to prevent collusion. For this reason, when companies seek to increase their scale through mergers and acquisitions, they must undergo review by the Fair Trade Commission. Global companies must undergo reviews in all major countries where their market dominance extends; the merger of Korean Air and Asiana Airlines, which underwent reviews by the EU and the US, is an example of this.
However, there are fundamental limitations to government regulation of monopolies and oligopolies. This stems from the structural characteristics of industries discussed earlier. In certain industries, the proliferation of small-scale businesses drastically reduces production efficiency. A situation where multiple messengers or SNS services are provided separately actually causes significant inconvenience to consumers. Over time, only a few service providers naturally remain, and the companies that win in competition grow in scale, evolving into large, market-dominant players. As a result, a monopoly structure forms naturally.
For this reason, artificially splitting companies to prevent monopolies from forming is unlikely to be a fundamental solution. Corporate breakups imply reduced efficiency, and companies with diminished efficiency often struggle to survive in the market after being split. While corporate breakups involve the right of companies to make their own decisions, they also tend to cause losses in terms of overall societal efficiency. Although the necessity of corporate breakups is sometimes discussed in certain industries like finance, in many cases, breakups actually cause greater harm.
State-run monopolies are also proposed as an alternative. Industries requiring public enterprise management, such as public goods production, certainly exist. However, in other industries, leaving only nationalized monopolies eliminates inter-firm competition, weakening incentives to enhance efficiency and improve services. Consequently, production costs rise, prices increase, and consumers again face inconvenience.
How should competition be encouraged?
Ultimately, the core of this issue lies in preventing situations where consumer harm is particularly severe, such as collusion among monopolies or oligopolies, while simultaneously encouraging intense competition among oligopolistic firms. Since the presence of numerous small firms reduces efficiency, the formation of oligopolistic markets with a few large firms is inevitable. Therefore, promoting competition is more desirable than breaking them up.
When oligopolistic firms compete rather than collude, product prices decrease and consumers enjoy greater benefits. Of course, excessive competition may lead to problems like unfair competition. Nevertheless, a structure where companies strive to earn higher profits through competition aligns more closely with an ideal economic model.
When KakaoTalk experienced a prolonged service outage, many users turned to alternatives like Line and Telegram, prompting these messengers to launch aggressive promotions. By fostering competition between the market leader and other players, facilitating new entrants, and encouraging foreign companies to enter the domestic market, we can reduce the harm caused by monopolies and expand consumer benefits through competition.
Some emphasize the public nature of messenger services, arguing for nationalization or the need for a state-run messenger service. However, the utility of the messenger service created by Kakao is extremely high, making it realistically difficult to replace with a state messenger. Furthermore, there are numerous cases where direct entry by the state or local governments into various platform industries has yielded limited results. While public goods are appropriately produced by the state, Kakao Messenger does not qualify as a public good in the economic sense.
If KakaoTalk’s market position is deemed strong and its public nature significant, stronger government intervention through appropriate regulation would suffice. This principle is similar to how government regulation operates strongly in industries like finance, where corporate risk management is particularly critical. As demonstrated by the recent Kakao incident, platform and IT companies must absolutely secure redundancy and backup systems to prepare for disasters like fires. The government, too, must continuously implement appropriate policy measures to foster competition and prevent the expansion of harm caused by monopolistic practices.
