New Antitrust Challenge Requires Bolder Solutions
In 1911, the United States Supreme Court ordered that the Standard Oil Company be split up into 34 separate operations on the grounds that it was an “unreasonable monopoly”. It was the first major application of competition regulation in history and it is perhaps the most significant to date.
Oil and energy are classic examples of “natural monopolies”, operations with high fixed infrastructure costs that require market power to be profitable. Today, utility companies like Thames Water are allowed to operate as monopolies, but with strict limits imposed on the prices they can charge their dependent customers.
This goes to the heart of the principle on which the regulation of competition operates: the standard of consumer welfare. The guiding principle of regulators is to prevent activities that will harm consumers with higher prices or deteriorated product quality. Technology companies, especially “platform models”, pose an existential threat to the use of this test as well as traditional regulatory approaches.
Facebook, Google, Amazon, and Uber, among others, have amassed billions of users by charging little or nothing for providing platforms enhanced by larger user bases. Take Facebook or Twitter; they are very useful to me because everyone uses them and I don’t need to enter my card details. Subsequently, it would take a lot for me to abandon these platforms and their path to monopoly avoided regulatory attention.
Initial platform development costs are high, but the marginal cost of an additional user is virtually zero. The model is to provide a public good at no monetary cost, with the goal of acquiring a large user base. Indeed, every user and every click is bargaining power. First, it is a leverage effect on advertisers and vendors looking to reach vast pools of potential customers that only mainstream platforms have. Moreover, it is a hidden form of control to lock users in while other platforms are getting worse comparatively, due to masses converging on one platform and using our data to improve the product itself. Train effects have made the products of digital companies virtually irreplaceable to users, giving them tremendous power.
Big tech provides us with useful products at little or no cost, so what’s the problem? In addition to concerns about the massive concentration of wealth (and therefore influence) in the hands of a few companies and individuals, the concentration of the big tech market creates other problems.
A 2019 report from the Competition and Markets Authority found that advertising market concentration held by Facebook and Google contributes to higher costs for businesses that are ultimately passed on to households. Platforms like Deliveroo and Uber wield enormous power over their drivers and suppliers and they use it to extract as much as they can. Home delivery has become so mainstream that restaurateurs have no choice but to join delivery platforms to stay afloat. However, the same platforms further erode the restaurant industry’s already steep margins. Drivers working long hours are punished for any missteps by algorithms that dictate their every move; it’s not a durable model, but drivers and salespeople have little choice.
With the masses of users comes the data these companies have sequestered from all of us, and the acceptability and legality of this must be properly questioned. There’s no denying that this data is power: it’s used not only to sell ads and tailor their existing products to each of us, but also to make decisions about how to expand their offerings (think Amazon Basics or the electric bikes from Uber). Companies can then give them unfair preferential treatment on their own platforms.
I would also say that the incentives created by the profits to be made in social media create distortions. Even social media moguls would struggle to argue convincingly that finding ways to increase watch time or more precisely target ads is the most productive effort to improve the human condition. Despite this, the big talk and copious amounts of human ingenuity of society’s brightest minds work on these “problems”, rather than trying to add real value to people’s lives.
The symptoms of this power are not insignificant. They’re damaging, and big tech is rightly starting to catch the attention of regulators.
The European Union has been the most aggressive front when it comes to big tech regulation and data protection rules. They have regularly imposed billions in fines on some of the biggest players. With upcoming Digital Markets and Services Acts, they seek to ban product bundling, require companies to notify users of competitors’ offerings, and regulate the content posted on their platforms.
The United States as well as China have long had a lighter touch. There are substantial advantages to having the headquarters of the world’s largest companies in your country. Perhaps they viewed monopolies as a small price to pay for dominant firms to be national champions and potential sources of power. However, the tone in Washington and Beijing suggests that big tech lobbying may now be falling on deaf ears. Biden spearheaded a global minimum tax big tech couldn’t avoid, while Xi views social media as a social evil and cracks down on diverting resources to ‘hard tech’ like semiconductors.
Taxes, breaks and merger prevention are the traditional tools of competition regulators. The EU, among others, is exploring more innovative approaches, as mentioned above, but for all the motivation to regulate, policymakers must be prepared to be radical to be effective in the digital age.
As long as a company controls a digital platform, it will benefit from the flywheel effects that have made Google, Amazon and Facebook successful. These business models challenge standard economic assumptions, exhibiting extreme increasing returns to scale and decreasing marginal costs. The natural outcome of a digital platform is monopoly and massive accumulation of customers, data, and potentially disruptive power. The nature of the model results in monopoly, power and profits that do not arise from platform superiority but rather from bandwagon effects.
I see potential solutions, more or less radical. One approach would be to aggressively target the platform companies’ other operations: prohibit them from selling on their own platform and impose price controls on the ads they sell or the fees they collect from their suppliers. The goal is to make monopoly benign; the unintended effect is that they may end up charging the consumer more or the quality of the platforms may drop.
The other solutions go beyond the traditional regulation of competition. Digital platforms are essentially public goods and therefore the public provision of online social media, search and marketplaces would allow governments to deliver value while mitigating the distortive power of platforms. control of private companies. In reality, questions about the quality and confidentiality of citizens’ data should be answered. I would also argue for assigning data rights to individuals, although our propensity to ‘accept all cookies’ and hand over details online on a whim suggests that this may be of little use.
The feasibility of these approaches is questionable, but traditional solutions may well not work as competition regulators try to increase the pressure on big tech. The digital economy confronts and overturns many of our assumptions. If we find the status quo unsatisfactory and want change to happen, we need regulators to be emboldened and coordinated to take drastic action.