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A public policy blog from AEI
The denizens of Silicon Valley (and Seattle) have picked up a slew of nicknames: GAFA (for Google, Apple, Facebook, and Amazon); FAANG (add Netflix in there); or, most ominously, the Frightful Five (sub out Netflix, sub in Microsoft). The central charge is these firms are monopolizing their respective markets, and have achieved such dominance that their market positions are now unchallengable. The side effects may include dampened innovation, reduced labor power, and any number of democracy-is-in-peril concerns.
But my guest this episode, antitrust expert Nicolas Petit, argues against this alarmist case against the tech titans. Drawing from his 2016 paper, “Technology Giants, the Moligopoly Hypothesis and Holistic Competition: A Primer,” as well as new research from a forthcoming book, Petit makes the argument these “Frightful Five” firms engage in cutthroat competition with one another, benefiting the economy as a whole — and so government regulation against these companies is premature.
What follows is an abbreviated transcript of our conversation (find the complete version here). You can download the episode by clicking the link above, and don’t forget to subscribe to my podcast on iTunes or Stitcher.
The main reason I brought you was because of a 2016 paper called “Technology Giants, the Moligopoly Hypothesis, and Holistic Competition: a Primer” in which you argue that looking at these big technology companies in a traditional antitrust and consumer welfare standard is an incomplete way to look at them. Can you tell me what you mean by holistic competition and what a moligopoly is?
So it seems to me that these FAANGS are just not all the same companies. When you read about them and what people say about them and when you look at the numbers, you cannot really compare a company like Netflix and Apple; they’re drastically different companies.
So I went to other types of research done on these companies to try to understand the nature of competition around them. And when you read about them in other types of documents and analysis what you should really understand is that where the antitrust people tend to see monopoly everywhere, the business people and the financial people and the tech community tends to see oligopoly everywhere, oligopoly competition.
So these companies are very often in competition against each other, even though they are not operating in the same market. Google is in search, Facebook is in social networks, Amazon is in online retail, but the three companies tend to exert a competitive restraint on the other and against each other — even though in antitrust we don’t see that, we just see a very large dominant company.
And so it’s interesting that there is a distinction in terms of how people with sophisticated analytical tools cast a different name on these companies. The antitrust people and the press often talk about monopoly, but the people working in financial markets or the people in tech would say there’s intense oligopoly rivalry in those markets.
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And so I try to say maybe both are right. There is a certain sense in which there is some moligopoly competition. So what I try to do in the paper, and I’m writing a book about this now, is understand how much competition these tech companies at the firm level take from other companies. And so what you can see in a nutshell is companies take competition from companies that basically do the same types of products. So you could say Google takes competition from Microsoft. When Google provides its search engine, Microsoft has Bing — so maybe it’s not much competition, but there’s competition there.
But what’s more important is that a company like Google in its moligopoly faces competition from more distant sources. So for instance you could think a company like Google is starting to take on competition from companies like AT&T which initially were not really search or internet companies. Also these companies take a lot of competition that is not really seen, in the sense that they are basically competing against something that I call the non-consumption. They’re basically trying to discover new products and new services all the time. They’re trying sometimes really crazy things. I mean, Google has been reported to work on things to extend the longevity of life, but they are also doing stuff in driverless cars. So there’s a ton of competition there in products which do not yet exist. That competition exists, and a lot of people in areas other than antitrust say that represents a big constraint on the way the company today operates in its business line.
And last but not least, I want to add another environment in which these companies take on a lot of competition and that’s something which is completely underappreciated in my community: competition inside the company. If you think of an organization like Google, Google has several projects which work on competing products. So for instance Waze, the navigation assistance service, competes to some extent with Google Maps.
And so there is an embedded rivalry inside those organizations. Not in all of them, but some of them have that. And if we were really serious about trying to understand whether this company is a monopolist, we would need to look in all those dimensions and environments to bring that competition to inform the process of applying antitrust or regulation.
Specifically then, is the consumer welfare standard, which is how we currently look at antitrust, insufficient?
I have no qualms against the consumer welfare standard as a principle, if it was applied seriously. The problem is that in modern antitrust or regulatory application the consumer welfare standard across the world has not been applied consistently.
The consumer welfare standard can be applied basically two ways and two ways I don’t like. On the one hand some organizations, advocates, and policymakers take a very strict view of the consumer welfare standard and they would say the goods come for free so there’s no consumer welfare harm. There’s actually a lot of consumer benefits and hence there should be no regulation, no antitrust, nothing. So it’s an illusory way to say the goods are free, output expands, let’s just not look into that. And of course the problem with that vision is that if there is something very special about these companies, something completely new, we’re missing it because by definition we have excluded it by relying on an old-fashioned tool which basically only looks at price and output as proxies for welfare. That’s one way to do it.
The other way is the way the Europeans have done it, which is basically saying we believe in consumer welfare, we apply the consumer welfare standard, but in fact the way they operate is really not consumer welfare compliant. So basically we have today decisions by the European Commission which say things like Google has abused the dominant position in the market for search and licensable operating systems like Android. But in the official name of the consumer welfare standard this is of course wrong and to some extent it is delusional because the launching of Android is basically the most massive competitive attack ever attempted against Apple’s closed ecosystem.
And so that product, Android, is basically a very pro-competitive thing which at the high level of first-order principles benefited consumers. And today under the name of the consumer welfare standard, you see a major competition agency in the world saying this is a bad thing. You can’t really square the Google-Android European decision with any first-level consumer welfare narrative. So I think there is a problem here.
Do you think that in any meaningful way these companies are suppressing innovation?
There are two things I want to say about that. So one of them relates to the history of the computer industry. A lot of people say that the Microsoft cases back in the day in the US and Europe did a lot of good and promoted competition and innovation. But there is also a narrative which is quite strong which we’ve not looked enough into in scholarship and in policy, which is the extent to which in fact the existence of Microsoft’s monopoly created by its very structure and it’s very strong entrenchments incentives for people to innovate around it and create all the good things that we have today, which are software-as-a-service, mobile telephony, and social networks and search engines.
And so if you think of this idea of the platform economy, the benefits of the platform economy comes from innovators which try to actually disrupt the paradigm and not try to create within the paradigm. In the economy you need to sustain a certain degree of monopoly to make the really good and disruptive innovation possible. I think we lose track of that narrative. There is some strength to it, and we should think about it.
They call these companies forever companies. Can you imagine there ever being a real threat to Apple and Google and Facebook and Amazon?
We tend to look at companies as things which are one thing, but when you think about Google and say they are going to be there again in 10 years and in 20 years, and the same for Amazon and so on and so forth — well, maybe Google in 10 or 20 years is a completely different company from the company it is today. Maybe it’s no longer a search engine. Maybe it’s basically a driverless company. Maybe Amazon is no longer a massive retail giant; maybe it’s just a cloud or infrastructure or computing service company.
And so the people who say in 20 years we are going to be stuck with Google and Amazon and they are forever companies, this misses the point. Maybe these companies are going to change so much that they are going to reinvent themselves and that’s a good thing. It doesn’t matter whether the company is called Google today and called Google again in 20 years if the company has performed in ways which are more competitive than anti-competitive.
And that’s what I say in my paper and in my book: This discussion is driven by old ideas and old symbols, things like General Electric or Standard Oil — companies which have been there for four decades and stayed in the same line of business. We are seeing here companies which are much more nimble and mobile across industries. If you think of a company like Microsoft for instance, Microsoft is no longer the company that it was 20 years ago.
Last question: Very rarely when I hear about competition in the technology space from people who are very interested in breaking them up do I hear a lot about China. Aren’t there a lot of very powerful competitors arising in China that at least if you’re thinking about regulating US companies you should acknowledge?
That’s right. It’s always a bit complicated to assess their degree of technological sophistication in China, but it is indeed true that these companies in China seem to have very sophisticated technological capabilities combined with probably less impediments to collect data at a scale which makes sense for these types of technologies.
So indeed we need to be careful here and we need to look at that. I’m not too sure that here in Silicon Valley for instance people are really awakened to the notion that these companies can represent a competitive threat.
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