From Quartz:
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.
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
And let us not forget Friendster.
