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Our Tech Regulation Problem – Monopolies With Network Effects Benefit Consumers

There are, of course, a number of different ways in which we can approach antitrust. One might be that any time anyone gains economic power then government should step in and take over. On, presumably, the grounds that it’s better if the people with all the guns are also the people with all the money.

That might not appear so attractive put that way. Another method might be that OK, some people will indeed gain significant economic power. Different ways of doing this, innovation, simply being s**t hot at running things, maybe there’s a government provided and enforced monopoly there, technological innovation, different paths to this. But we’re not going to go off and regulate mere economic power. We’re going to add two more steps before the trigger is pulled. Firstly, that this economic power gets exercised, secondly that when it is consumers are the people who lose from it. That’s a rather tougher set of tests to pass before action is taken and it’s also largely how antitrust law works in reality these days.

Do note what happens here. Standard Oil would not have been broken up under such a dispensation. For Standard Oil most definitely bettered consumers. Yes, they had economic power, yes they exercised it. But the people who lost out were the people who owned competitors. The one thing that Standard never did do is raise prices again once they had vanquished opponents. The greater efficiency of the company – and it was, very much so, more efficient – fed through into lower prices to consumers.

Which brings us to the tech companies of today:

Big Tech May Be Monopolistic, But It’s Good for Consumers

Quite so, thus no antitrust actions should or need be taken.

At the first level there’s the simple point that Facebook, Google a little less, Microsoft, e-Bay, they benefit from network effects. The more people who use them the more attractive they become to the next user. Meaning that size, in and of itself, creates yet more size. That’s just what we mean by network effects.

In turn that also means that the efficient size of an organisation here is that global monopoly. It isn’t true in most cases because there are diseconomies of scale a well as economies of it, but another way to describe network effects is just that we’re insisting that the -economies outweigh the dis- at scales up to and including 7 billion people.

In that first reading of antitrust that would mean they gain economic power and thus government must step in. In our second reading that’s not enough.

Firstly, the monopolists must exercise that economic power they have. Something not greatly in evidence as just having power doesn’t mean it can be exercised. For when you do try to, say, raise prices can someone come in and try to undercut you? If so you’ve got contestable economic power, or even a contestable monopoly. As an example, think the Chinese and rare earths. They were producing some 97% of the world’s supply. So, they decided to play silly buggers, exercise that power. It took a couple of years but two new mines opened, China’s share of rare earths fell and prices halved, below their original point. People contested that Chinese economic power when China tried to exercise it. China didn’t win either.

If Google tried to raise the price of adverts then business would flow away from them. If Facebook started charging for access then there wouldn’t be a Facebook. They’ve got contestable monopolies.

But further than that, even when they do have this economic power, they are monopolies, are they harming consumers? Well, if the efficient size is a monopoly because of network effects then not necessarily, no:

For the past half century, the U.S. government has followed the best standard that economists and legal scholars have come up with to define anticompetitive behavior: Are these companies threatening or reducing the welfare of consumers as determined by the prices, quality of products and services, and choices consumers face and the benefits of economic innovation that consumers enjoy?

This is the right standard. Another standard that could be used in antitrust enforcement is essentially “big is bad” — the presumption that large and powerful companies should be suspect because of the political and economic influence they wield. This vague, fuzzier standard is inferior. It ignores the good things that come from size, including the ability to produce output at lower cost. It also invites regulatory mischief. And it weakens the focus on the benefits competitive markets offer to consumers.

By the standard of consumer welfare, big tech is a blessing. I have been using Gmail every day for over a decade. It operates flawlessly. And its search feature is so good that it acts as a virtual diary, allowing me to revisit correspondence from years ago with just a few keystrokes. Google, the creator and operator of Gmail, has charged me exactly zero dollars for this fantastic product. Amazon is pushing prices so low that some believe it is reducing the rate of price inflation for the overall economy.

Sure, we should keep a wary eye open and if the consumer is being gouged then we could and should do something. But while we’ve got efficient companies, monopolies or not, benefiting consumers then the correct response is to get the hell out of the way.

Unless you’re a politician who simply wants to expand the powers politicians have over society – something which explains most politicians – but then we can tell them to go boil their heads. Only the exercise of economic power to the disbenefit of consumers justifies intervention.

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3 years ago

“Only the exercise of economic power to the disbenefit of consumers justifies intervention.” No. One also needs to ensure that the “intervention” actually helps consumers, i.e., it passes the cost-benefit test.

3 years ago
Reply to  Rob

Why wouldn’t the consumer decide that? especially as we recently discussed how “we” think the consumer is under-valuing the personal information he discloses to Facebook and Google.

3 years ago

Yes, bigness is a benefit in its own right, at some points. Computing once had a hundred vendors, all with their own processors and operating systems. A lucrative priesthood documented and enhanced them, but the consumer could only be an expert at one or a few of them, interconnection and exchange of information required manuals, and training and retraining consumed wasteful amounts of time. The Intel processors and MS-DOS were not the best at everything, but they were a lingua franca, and the advance into the Windows user interface meant you could finally edit without learning a command language. Microsoft… Read more »

bloke in spain
bloke in spain
3 years ago

Funny how the people who bitch about private sector monopolies have so little problem with government monopolies. In the UK, the NHS dominates healthcare because the compulsory taxation to pay for it makes private provision unaffordable for most. Again, it’s the compulsory TV licence tax enables the BBC to dominate broadcast TV.
Let’s be honest. The subject under discussion has FA to do with economics & is about politics & control.

Quentin Vole
Quentin Vole
3 years ago

Who is the ‘consumer’? Isn’t it the businesses buying advertising from these behemoths? We, the people, aren’t the customer (because we’re not paying for it), we’re the product being sold – but we do ‘consume’ services from them.

Bloke on M4
Bloke on M4
3 years ago

The best example is probably Unisys throwing their power around with the GIF patent, which led to lots of people getting together to create the PNG format

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