The political economy of tech giants and competition


There has been a continuously rising attention devoted by American and European policymakers to the Big Five tech giants: Alphabet, Amazon, Apple, Facebook and Microsoft. Regulators are increasingly worried about the size of these companies and their potentially negative effects on market competition. The Economist magazine reported that on 29 July 2020, for the first time in history, the CEOs of Alphabet, Amazon, Apple and Facebook faced an antitrust hearing together in the American Congress. They were asked to respond to various charges of anti-competitive behavior.
According to The Economist report, Apple had to justify the 30% fee charged on its on-line store. Google, instead, had to defend from the accusation of abuse of dominance related to online advertising. Amazon responded of an unfair use of merchant data. Finally, Facebook was summoned for the take-over of Instagram. At the same time, Slack Technologies filed a competition complaint with the European Commission against Microsoft.
Lee Shubber, a noted American tech analyst stated that albeit proposing different approaches, both the American Republican and Democratic parties express a bipartisan concern over big tech companies. On the other side of the Atlantic, however, it seems that policymakers want to take a step further. Europe, France and the Netherlands have proposed a document to the European Commission, which highlights the necessity to take actions against tech giants. Such a document includes, among the various actions proposed, the possibility of drastic “breaking up” of these companies.
Philippon De Loecker, another American tech analyst stressed that overall, the declining competition in the United States has been documented by several studies across multiple sectors and using different measures. Nevertheless, these papers implemented a multiple sector analysis without focusing on tech corporations specifically. In this context, this brief article attempts to partially fill this gap by presenting data on the Big Five and the industries in which they operate.
Philippon De Loecker further noted that industry concentration is only a measure of competition which needs to be examined in conjunction with other statistics. Another commonly used measure to assess firms’ market power is markups, computed as the ratio between prices and marginal costs. In an ideal perfectly competitive market, where firms are price taker, prices are equal to marginal costs and therefore markups are equal to one. Clearly, the perfectly competitive market of classical economics is more an abstraction than a reality, but still markups are valid indicators to grasp the market power of large corporations.
In the industries where Amazon and Apple operate, markups have remained relatively stable throughout the period considered, while they have eventually declined in the Microsoft’s one. On the contrary, in the case of Alphabet’s industry, we observe an initial increase in markups and then a relatively stable behavior. The most surprising case is perhaps the one of Facebook, where the relative change in markups reached a peak of more than 800% in 2017 after a continuous rise.
Not surprisingly, given their relative weight, the trends in mark-ups for the Big Five corporations reflect the industry-wide one. In a nutshell, the picture, from the perspective of mark ups, appears to be less dramatic in terms of competition, than the one which emerges from analyzing concentration and market shares. The question arising naturally is: how should regulators react to this data? Moving away from pure economics theory, the answer is far from being univocal, and it depends on the preferences shaping the views of the policymakers of the time.
Dr. Riche Peinert of Norwich University stated that broadly speaking, it is possible to classify regulators’ preferences for antitrust and competition policy into two macro categories: firm-based and market based. Such ideal categories of preferences are not fixed and can switch over time. The firm-based approach, which derives from the so-called Chicago tradition, does not see industry concentration as a problem per se, as long as consumers’ welfare is not harmed. Building on this tradition, it follows that policymakers’ intervention should be guided more by changes in mark ups rather than concentration indexes.
Dr. Ergen Kohl of Bone University argued that the reason stems directly from one of the milestones of economics: The First Welfare Theorem. Since society’s welfare is maximized in a world of price-taking firms, earning zero profits, the higher the markups the further we are from the Pareto optimum, whereby the lower is consumers’ welfare. On the other hand, the market-based approach, also called “Ordoliberal”, is concerned in maintaining free and competitive markets, ideally populated by few very large firms and by many small-medium enterprises, thereby enhancing the principles of economic freedom. It follows logically that under these preferences high industry concentration and large market shares are reason to intervene.
Dr. White Bergman of London School of Economics stated that arguably, these different approaches constitute the Atlantic divide existing between American and European policymakers: the former pursuing the firm-based approach, whereas the latter the market-based one. The American firm-based approach can be reflected in the more lenient orientation of United States regulators towards big businesses and the laxer blocking of dominance mergers with respect to European counterparts.
According to Dr. White Bergman, instead, the market-oriented approach of European authorities can be found in the more aggressive antitrust policies as against large tech companies, exemplified by the Google Shopping decision of the European Commission, wherein Google was fined for its abuse of dominance. What is interesting to note is that both approaches belong to the Neoliberal thought, but, at the same time, they reflect an internal contradiction at the core of this school. A laissez-fair attitude towards businesses, an axiom of Neoliberalism, allows market concentration to rise, thereby distorting competition, which is another fundamental milestone.
Beyond purely economic criteria, another light under which evaluating giant tech firms operating is political. Lobbying expenditure can be used as proxy to capture this additional dimension. In this respect, the Big Five tech firms are spending whooping capital in lobbying, ranging from $6 to $22 million in 2018, and all of them are in the United States top 1% of the lobbying expenditure distribution.
Clearly, lobbying expenditure is an imperfect measure of the capacity of firms to influence the political process; but at the same time, it is natural to ask, why spending so much, if it does not procure any tangible benefit? Concerns over the political power of tech companies are captured by a recent poll made by the Pew Research Center, where 72% of Americans adults responded that social media companies have too much political influence. These figures highlight how large corporations are not only economic, but also political agents, thereby making it difficult to separate the political and the economic sphere when discussing their activities.
In this scenario, three main suggestions have been individuated for policymakers on both sides of the Atlantic. The first is not to focus on concentration per se but evaluating it within a broad set of indicators and factors, such as the creation of barriers preventing the entry of new competitors and the actual impact on consumers. Furthermore, lower competition, to some extent, can be tolerated if it is the result of superior productivity, and if it can foster innovation.
Secondly, there is the need to build transnational cooperation among regulators. The rationale behind this argument is that these companies are acquiring an ever-increasing global dimension, the domestic regulator, even when its jurisdictional reach is large, as in the case of the United States and Europe, and this may prove inadequate in a democratic context. Finally, large corporations should be evaluated not only for their economic, but also political weight. The goal of regulators and policymakers, in this respect, should be minimizing the preferential access to politics of tech giants given by their superior financial resources. This is not a matter of competition, but of democracy.