Jean Tirole is an intellectual giant in the economics world. The Frenchman is the foremost thinker on market power and regulation, and won the Nobel prize in 2014 for his work in this area.
His insights are particularly relevant today, as large tech firms grow ever larger and more powerful. Advances in technology has mostly made our lives better, but as privacy concerns rise and fake news spreads, we are starting to see the downside of giving tech companies mostly unchecked power. In the past, regulators could deal with this by breaking up firms or making them public utilities. That hasn’t happened with the tech giants, even though many people and policymakers feel like something should be done—but what?
Tirole’s recent book, Economics for the Common Good, offers some answers. The final third is a handbook on how to think about the ways technology is changing the economy, and what we can do about it. Quartz asked him some of the more pressing questions of the day.
Quartz: The early days of tech promised a ruthlessly competitive market place where even small players could reach billions at little cost. Instead, it seems we ended up with less competition. What happened?
Tirole: There is a sense in which tech has delivered. Small firms have been empowered in many ways. They can avail themselves of cheap back-office and cloud services; they can easily connect with consumers; they can fine-tune their advertising rather than engage in blind mass advertising; their access to borrowing is facilitated by AI-driven lenders, as is the case for the more than 7 million Chinese small and medium-size firms financed by Ant Financial. And, importantly, they can more easily build their own reputation. A taxi driver relied on the taxi company’s reputation; today, through ratings, the driver can have his or her own reputation on a ride-hailing platform.
But at the platform level, competition confronts the existence of large returns to scale and/or network externalities, leading to natural monopoly situations and a winner-take-all scenario. Network externalities can be direct: I am on Facebook or Twitter because you also are; I will use Uber or Lyft if many drivers do so. Network externalities can also be indirect: We may not care directly about the presence of other users on the platform, but that presence leads to improved services, as in the case of many apps or delivery services. For example, I want to use Google’s search engine or Waze if you also use them, as the quality of predictions improves with the number of users.
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.And let us not forget Friendster.
Ten years ago it seemed like Walmart had monopoly power when it came to retail, but the market brought us Amazon. Is it possible that today’s tech monopolies will also face stiff competition one day?
Yes, and let’s not forget that Google replaced AltaVista in the search engine market and Facebook dislodged MySpace in the social network segment....MORE