In 1911, the U.S. Supreme Court ordered Standard Oil Company to be broken up into 34 separate operations on the grounds that it was an ‘unreasonable monopoly’. This was the first major enforcement of competition regulation in history and is perhaps the most eminent to this day.
Oil and energy are classical 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 bounds placed on the prices they can charge to their dependent customers.
This gets to the heart of the principle on which competition regulation operates: the consumer welfare standard. The guiding principle of regulators is to prevent activity that will harm consumers with higher prices or deteriorated product quality. Technology firms, particularly ‘platform models’, pose an existential threat to the usage of this criteria as well as classical regulatory approaches.
Facebook, Google, Amazon, and Uber among others have amassed billions of users by charging little to nothing for the provision of platforms that are enhanced by larger user bases. Take Facebook or Twitter; they’re very useful for me because everyone else uses them and I don’t need to enter my card details. Subsequently, it would take a lot for me to ditch these platforms and their path to monopoly has avoided regulatory attention.
The upfront costs of developing platforms 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 aim of acquiring a large user base. This is because every user and every click is bargaining power. Firstly, it is leverage over the advertisers and vendors looking to reach large pools of potential customers that only the dominant platforms have. Additionally, it is a hidden form of control to lock in users as other platforms get comparatively worse, due to the masses converging onto one platform and our data being used to enhance the product itself. Bandwagon effects have made the products of digital firms practically irreplaceable for users, giving them enormous power.
Big tech provides us with useful products at little to no cost, so what is the problem? Besides the concerns with the massive concentration of wealth (and thus influence) in the hands of a few corporations and individuals, big tech’s market concentration creates other issues.
A 2019 report by the Competition and Markets Authority found that the market concentration in advertising held by Facebook and Google contribute to higher costs for firms that are eventually passed on to households. Platforms like Deliveroo and Uber wield huge power over their drivers and vendors and they use this to extract as much from them as possible. Home delivery has become so common that restaurateurs have little choice but to join delivery platforms to stay afloat. However, the same platforms cut the already razor-sharp restaurant industry margins even further. Drivers toiling for long hours are treated punitively for any misstep by algorithms who dictate their every move; this is not a sustainable model, but the drivers and vendors have little other option.
Along with the masses of users comes data that these firms have sequestered from each and every one of us, and the acceptability and legality of this must be properly questioned. It is undeniable that this data is power: it is used not only to sell ads and to tailor their existing products to each of us, but also to make decisions on how to expand their offerings (think Amazon Basics or Uber’s e-bikes). Firms can then give them unfair, preferential treatment on their own platforms.
I would also contend that the incentives created by the profits to be had in social media are creating distortions. Even the social media tycoons would find it difficult to cogently argue that figuring out ways to increase watch time or more accurately target advertisements is the most productive of endeavours to improve the human condition. Despite this, money talks and vast amounts of human ingenuity of the brightest minds in society are working on these ‘issues’, rather than trying to add real value to people’s lives.
The symptoms of this power are not trivial. They are damaging and big tech is rightly starting to attract the attention of regulators.
The European Union has been the most aggressive front on the regulation of big tech and data protection rules. They have regularly fined some of the biggest players billions. With the upcoming Digital Markets and Services Acts they are seeking to ban the bundling of products, enforce firms to inform users of competitor’s offerings as well as regulate content published on their platforms.
The U.S. as well as China for a long while have had a lighter touch. There are substantial benefits to having the largest firms in the world headquartered in your country. Perhaps they have taken the view that monopolies are a small price to pay for the dominant firms to be domestic champions and potential sources of power. However, the tone from Washington and Beijing suggests that big tech’s lobbying may now be falling on deaf ears. Biden has spearheaded the establishment of a global minimum tax that big tech would not be able to avoid, while Xi considers social media a social ill and is cracking down to divert resources to ‘hard tech’ like semiconductors.
Taxes, breakups, and merger prevention are the traditional tools of competition regulators. The EU among others are exploring some more innovative approaches as mentioned above, but for all the motivation to regulate, policy makers need to be willing to be radical to be effective in the digital age.
As long as a firm controls a digital platform, they will benefit from the flywheel effects that have made Google, Amazon and Facebook so successful. These business models challenge standard economic assumptions, exhibiting extreme increasing returns to scale and diminishing marginal costs. The natural result of a digital platform is monopoly and the mass accumulation of customers, data, and potentially distortive power. The nature of the model results in monopoly, power and profits not arising from the superiority of the platform but rather from bandwagon effects.
I see some potential solutions, varying in radicality. One approach would be to aggressively target the other operations of the platform firms: ban them selling on their own platform and enforce price controls on the ads they sell or fees they take from their vendors. The aim is to make the monopoly benign; the unintended effect is that they may end up charging the consumer more or the quality of the platforms may fall.
The other solutions lie beyond the set of classical competition regulation. Digital platforms are essentially public goods and so public provision of social media, search and online marketplaces would allow governments to provide value while alleviating the distortive power that comes with private business controlling platforms. In reality, questions about quality and data privacy of citizens would need to be answered. I would also advocate for the allocation of data rights to individuals although our propensity to ‘accept all cookies’ and hand over details online at a whim suggests 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 amp up the pressure on big tech. The digital economy confronts and upends many of our assumptions. If we judge the status quo to be unsatisfactory and if we wish for change to occur, we need regulators to be emboldened and coordinated to take radical steps.