It won’t have escaped your attention that rather large numbers of people are calling for the regulation of the tech companies. The Amazon, Google, Facebook (Apple and Microsoft often added, just because they’re large) nexus have lots of power over markets and thus therefore – well, therefore something. My own prejudice here is that certain people just cannot look at centres of power and or money without insisting that they, the complainers, should be the ones exercising that power and determining the disposition of that money. Thus much of the drive for “democratic” regulation of the economy more generally, the self proclaimed democrats being the ones who would end up with the power. The advantage of this analysis being that it does describe reality, the same people do end up making the same arguments about different companies over time. Mere prominence brings the demand for control.
The economist on this subject is Jean Tirole. His Nobel was for exploring this very subject, tech companies and the two sided market. Google, for example, sells the search engine to us and us to the advertisers. The tech here is different, obviously, but the underlying economics is the same as that of the free newspaper.
Tirole’s a new book out and there are a number of interesting points to be had from it:
Yes, on the whole consumers tend to get a good deal, because we use wonderful services—like Google’s search engine, Gmail, YouTube, and Waze—for free. To be certain, we are not paid for the valuable data we provide to the platforms, as for example Eric Posner and Glen Weyl remind us in their recent book Radical Markets. But on the whole, our living standards have substantially improved thanks to the digital revolution.
From which we can extract a few points. We’re richer, we really are. Substantially richer and yet in a manner that normal economic statistics entirely fail to capture. As Hal Varian has pointed out, GDP doesn’t deal well with free. Near all of those benefits of the digital revolution are coming to us for free and so aren’t recorded in that GDP. So, we’re richer yet the numbers say we’re not. In that is much of the explanation of slow economic growth these days, even of slow real wage growth. We’re just not counting what is happening to our living standards.
But we can and should go further than that. If the above is true then we’re very much less unequal than we’re recording. Stuff that’s free is, obviously enough, distributed rather more evenly among the population than extant monetary incomes. You, me and Bill Gates all have access to exactly the same amount of Facebook at the same price. We’re entirely equal in that sense. Bill’s actually poorer concerning search engines, stuck for emotional reasons with Bing as he is while we get to use Google or DuckDuckGo. Our standard measures of inequality are wrong both because of the undermeasurement of new wealth and also the extremely equitable pattern of the distribution of that new wealth.
There’s actually a measurement out there – a reasonable one not that we’d go to the barricades for its accuracy other than to an order of magnitude – that the simple existence of search engines is worth $18,000 a year to each of us. You’re going to change the Gini rather a lot by adding that to each and every income in the country.
This is also good:
Overall, public utility regulation does not seem an option.
OK, good to put that to rest. Exactly the global technological change which creates these giants in the first place means that we cannot – as all too many currently demand – then regulate them as public utilities. There are those out there arguing that we need to bring back something like the Texas Railroad Commission, which regulated the oil industry for many decades. They can be told to go boil their heads.
But it’s this which is the most interesting:
Natural monopoly situations lead to widespread market power, and a concomitant willingness to lose money for a long time to “buy” the prospect of a future monopoly position—think of Amazon or Uber.
Are tech firms like Google, Amazon, and Facebook monopolies?
Here we need to distinguish between statics and dynamics, or between a transient monopoly and a permanent one. Large economies of scale as well as substantial network externalities imply that we often have monopolies or tight oligopolies in the new economy. The key issue is that of “contestability.” Monopolies are not ideal, but they deliver value to the consumers as long as potential competition keeps them on their toes. They will then be forced to innovate and possibly even to charge low prices so as to preserve a large installed base and try to make it difficult for the entrants to dislodge them.
But for such competition to operate, two conditions are necessary: Efficient rivals must, first, be able to enter and, second, enter when able to. In practice, they may find it difficult to enter a market. And if they successfully enter, they may find it more profitable to be swallowed up by the incumbent rather than to compete with it. In economics parlance, such “entries for buyout” create very little social value as they are mainly a mechanism for the entrant to appropriate a piece of the dominant firm’s rent.
People will be willing to lose money for a long time to try and corner the market. It’s only if they do corner it that consumers might suffer, he consumers benefiting from the money loss while it happens. Even then, they’ve got to try to exploit that cornering for consumers to even potentially suffer. In fact, they’ve got to succeed in exploiting that monopoly position. Which means preventing market entry. So, our regulatory task becomes rather simple. Make sure we keep market entry open, possible, and we’re done.
As long as a DuckDuckGo can be launched we don’t have to worry about a Google monopoly of search. Pretty simple, eh?