The ability of firms and individuals to enter new markets and compete with established players is one of the first principles of classical economic theory and one of the core advantages of capitalism over its competing socio-economic paradigms. The underlying logic is that new entrants take excess profits from those already established, a boon for both dynamic and allocative efficiency. Yet the concept of competition, and the regulatory and legal apparatus which underpin it, must be subject to extensive examination to ensure that policymakers and regulators alike have the appropriate analytical toolkit for the economy of the twenty-first century. At present, the failure of the legal and regulatory toolkit to account for and resolve the concentration of power brought about by the domination of the digital economy by so few is a serious indictment of our current intellectual framework. This underlines a broader conceptual failure which is yet to be articulated; namely, the inability to articulate what competition means in a digital economy.
To understand how and why we have arrived at the current mode of thinking about competition, one must consider not only economic history but the history of how economics developed as a discipline in the nineteenth century. To key observers, such as Alfred Marshall at the University of Cambridge in the late nineteenth century, competition was a logical extension of laissez-faire free enterprise. The principal concern of classical economics was growth and economic growth was to be promoted by a stable legal framework, the accumulation of capital for investment through saving and the expansion of markets through trade and exchange. Britain’s economy at this time was characterised by a multiplicity of small firms exporting their wares to the rest of the world. The British domination of export markets in key commodities of the time, namely coal, textiles and suchlike of the old staple industries meant that if Britain was to produce more, the entrance of new firms was key to doing so. Hence the importance of competition and curbing the power of monopolies, the only real role for the state envisaged by classical economics. The nineteenth century intellectual framework developed in parallel with this pattern of economic activity with its emphasis above all on production and the virtues of competition in facilitating and increasing production. To contemporaries, this was a successful economic model which led Britain to be the pre-eminent industrial economy at the turn of the twentieth century, with the City of London the pre-eminent financial centre. Dovetailed with that success was the writing of a rulebook on how to generate and protect that success.
That intellectual paradigm is still with us. Whether that is in regulating utilities in the UK today or the breakup of Standard Oil early in the twentieth century, the fundamental principle is that monopoly power ought to be prevented for its adverse effect on consumers today and potential lack of innovation tomorrow. This framework, however, becomes contorted when we consider what kind of economy we now have. If we consider FAAMA[1], enormously cash rich companies with equally wealthy founders and Chief Executives, their business model and the economic model of which they are the progenitors are impervious to conventional classical competition analysis. For example, in social media and search, services are provided free to consumers with no apparent limits to the quality and quantity of services provided. Of course, in reality, users’ data and time are monetized and privatised for the benefit of shareholders. Yet, according to conventional competitive analysis, consumer welfare is maximised and due to the extreme network effects that these platforms enjoy, the marginal utility of the platform grows with each additional user. This, then, leads us to a more profound point of the economics of the digital economy: in a world where price is no longer a signal of economic value, how should we judge the benefits or disbenefits of competition? Similarly, Amazon’s veritable monopolistic position in e-commerce has not led to the gouging of consumers or a lack of investment in order to innovate. It is a platform which provides ultra-cheap goods, sometimes at cost price, at extraordinary convenience to millions. Google’s services have, equally, become entrenched in the lives of billions so it is now, rather appropriately, a verb too. It is axiomatic that across a growing proportion of the services and products that consumers not only enjoy but increasingly rely upon, as COVID-19 has illustrated, what competition means in practice, and its putative benefits to those it seeks to serve, is more convoluted than classical theory contends. The nub of the problem is that, hitherto, defining what competition looks like has been conspicuously lacking, other than the near-tautology that it is whatever is good for consumers.
Even with these much-vaunted benefits, we instinctively know that it is not right, economically or morally, for so much power to be concentrated in the hands of so few. Morally, there is abundant evidence to suggest the harmful consequences of social media, from the deterioration to mental health to an increased sense of loneliness to providing a distorted reality.[2] Economically, there is equal evidence to suggest that such rapid power concentration has not only led to increased control over the economy today but could lead to adverse consumer outcomes and less innovation tomorrow.[3] This is to say nothing of the reality that these powerful firms are not simply platforms but have become the plumbing of the digital economy, meaning that they have become too difficult to dislodge, if or when policymakers decide that the time is nigh.
To be aware of the dangers that these tech firms play in our economy, in our democracy and in our lives more generally is simply to reflect on the reality of the world that we inhabit. To seek to maintain the status quo is to succumb to the illusion that the world can rely upon the tools of yesterday to fix the growing problems we face today and will face tomorrow. The Federal Trade Commission’s move recently is a positive one but still rests on a tired intellectual framework, the desire of which is to see ‘new entrants’ come and ‘compete’.[4] This, however, falls far short of the sea-change required so that we can address the intertwined issues of power, inclusion, privacy and inequality that the digital economy has produced.
[1] Shorthand for Facebook, Apple, Amazon, Microsoft and Alphabet
[2] On consequences of mental health, see https://publications.parliament.uk/pa/cm201719/cmselect/cmsctech/822/822.pdf - accessed 31st December 2020; on loneliness, see https://www.health.harvard.edu/blog/is-a-steady-diet-of-social-media-unhealthy-2018122115600 - accessed 31 December 2020; on distorted reality, see https://www.thechicagoschool.edu/insight/from-the-magazine/a-virtual-life/ - accessed 31 December 2020
[3] The Economist, 15 November 2018, https://www.economist.com/special-report/2018/11/15/technology-firms-are-both-the-friend-and-the-foe-of-competition - accessed 31 December 2020
[4] The Economist, 12 December 2020, https://www.economist.com/business/2020/12/12/a-formidable-alliance-takes-on-facebook - accessed 31 December 2020