Welfare Analysis of Monopoly Platform Driving Internet Traffic

The growth of the platform economy in China has accelerated notably,with its influence on broader economic and societal progress becoming increasingly discernible. As internet traffic underpins the platform economy,its relationship therewith necessitates immediate scholarly inquiry. This study initiates with an overview of the historical trajectory of China's platform economy and the evolution of its regulatory framework. Subsequently,it investigates the consequences of monopolistic platforms' traffic-driving strategies on social welfare,focusing on the decision-making processes of diverse market participants within the platform economy. Utilizing a Hotelling-based model of platform monopoly,the research reveals several insights. In the proposed model,two pivotal design elements are instantiated: firstly,the platform facilitates the generation of traffic by means of deploying advertisements pertaining to enterprises' commodities,thereby directing novel users to the firms; secondarily,the platform can set the price for user traffic. We solve for the equilibrium conditions of the model within a specific parameter space and examine the manner in which the platform's pricing mechanisms and the strategic behavior of firms are modulated by the level of market segmentation. We find that,in scenarios where monopolistic platforms employ “paid traffic-driving” as a strategy,prospective market entrants opt to remunerate the platform for marketing services thereby enabling market access,and the platform generates positive revenue. In instances where the level of market segmentation is low,the equilibrium of the model consistently exhibits a state of relative stability,with the firm's marketing strategy—specifically,the ratio of consumers reached through Internet traffic driving via the platform—remaining constant. Conversely,in scenarios characterized by a high degree of market segmentation,the firm's marketing strategy intensifies correspondingly with the progressive fragmentation of the market,resulting in a monotonic increase in the percentage of consumers exposed to advertising for products. Subsequently,the paper delves into the welfare economics implications of the model by incorporating the concept of a central planner and the definition of the “first-best” scenario. The analysis reveals that monopoly platforms manifest the fundamental characteristics with respect to welfare outcomes: monopoly platform fosters market competition and enhances consumer welfare,albeit partially,as the platform showing unsuitable goods to consumers counteracts welfare improvements. In barely segmented markets,variations in segmentation do not impact consumer welfare-related efficiency losses. However,in highly segmented markets,the monopolistic platform's actions result in more substantial efficiency detriments which increase with the degree of segmentation. The analysis of consumer welfare in this paper uncovers a more profound source of efficiency loss attributable to the platforms Internet traffic monetization practices based on traffic driving. Within the model proposed herein,consumers,who are inherently the suppliers of their traffic,lack the capacity of pricing; instead,it is the platforms or firms that retain the authority to set prices. Given that the cost of user traffic acquisition for platforms and firms is negligible (as no transfer payments are made to users),the optimal price of user traffic from the perspective of consumer welfare maximization should also be zero. From this perspective,the monopoly of the firm in the primary market can be decomposed into two parts: the firm initially secures a monopoly over traffic and monetizes it through commodity sales,then bars competitors from the market by setting the price of traffic driving at positive infinity. The emergence of platforms altered this. The platform achieves traffic monopolies and monetizes its traffic through traffic driving,thereby reducing the price of user traffic to a relatively lower level,which,in turn,enhances consumer welfare when compared to the scenario of complete monopoly by firms. Nevertheless,efficiency losses persist as the price of user traffic has not been restored to a reasonable level. These findings suggest that if consumers are precluded from pricing their own traffic,then Internet traffic should function to augment consumer welfare by disrupting monopolies and fostering competition among firms,rather than serving as a conduit for profit for those entities wielding traffic pricing power. In response to these findings,the paper suggests a regulatory approach aiming to mitigate the adverse effects of monopolistic traffic driving,which implements interventions based on the distinctive attributes of the markets,for instance,the level of market segmentation,in which platforms operate.