New firms are increasingly getting outclassed by the likes of Google and Facebook
An exponential rise of Big Tech firms in market share, including corporations such as Facebook, Amazon, Apple, Netflix and Google, or the so-called FAANG companies, is increasingly redefining pre-existing economic wisdom around regulation, competition policy and general applications of law and economics.
Recently, in India, the introduction of a proposal to impose digital tax in the range of 30-40% on user data and revenue is cited as a step to extract state revenue from the rising business and market share of Big-Data firms. While such a step may drive up revenue for the state over time, it is difficult to see the effects of this step in dealing with some of the more fundamental problems emerging from the disruptive rise of Big Tech firms—visible in terms of their rising market-share and increasing oligopolistic controls.
Taking a step back, it is critical to understand the scale of disruption caused by the global rise of such firms. From the data on annual rate of initial public offerings and growth of new market players within market segments across major economies, one can see a steep fall in both the entry and exit of firms. New firms are increasingly getting outclassed by the likes of Google, Amazon, and Facebook, as responding to likely competition from any new company offering a new product or service, they can collude and resort to coopetition (that is, cooperating with one another to compete with a new entrant).
One may argue that the current trend of rising concentration of Big Tech firms cannot merely be seen as a reflection of rising market power (in financial terms), but also as a result of the centripetal effects of monopolizing markets, where such firms often benefit from monopolizing the use of better management skills and appear more innovative to get the best talent in becoming super-capable and efficient.
Some of these aspects must make most “econocrats" (economists working as bureaucrats) and scholars ask: how tangibly productive are these firms? Or, how can policies redefine productivity in economies captured by the growth of firms like FAANG?
In consumer-driven firms, say, in sectors such as fast-moving consumer goods, productivity gains are much more evident and consumers benefit immensely from a wider choice of architecture in terms of products and services. This is good news for consumers. The problem, however, lies more in areas of citizen-driven services, in healthcare and education, where the role of private firms imposes greater challenges to citizens in terms of affordability (as private firms can’t sell products for minimal pricing unless subsidized), and lack of efforts in ensuring better physical proximity (it is advantageous to set up service centres in areas where willingness to pay for healthcare and education is higher viz-a-viz rural areas).
The other challenge is coopetition. Bigger firms, including FAANG, rely extensively on cooperative agreements with other firms, thereby crowding out new entrants. Increasing mergers and acquisitions, and joint pricing contracts are a few coopetitive strategies to ensure this. Others include assimilating products, differentiating them as per the competitor’s (or a new firm’s) prototype. One can already see these patterns in behaviour quite clearly in the areas of pharmaceuticals, automotive segments and telecommunications.
Jean Tirole’s and Patrick Rey’s work on analysing the impact of price-caps (agreed upon by industry participants) is insightful to understand such behaviour. As they argue, shortages of reliable price and demand data make it extremely difficult to analyse the extent to which cooperative agreements reduce competition within market segments.
Further, as patterns of substitutability or complementarity for products are dynamically changing within or across market segments, where firms cooperate to compete with new players, it makes it more complex, yet imperative, to understand these dynamic network-effects better before regulating.
For example, product A may be seen as a complement to product B today, but may turn out to become a substitute over time. This is relevant when we look at the Microsoft cases dealing with abuse of dominance. Enriching the antitrust toolbox with new and less information-sensitive regulatory instruments holds the key, where measures like price-capping (voluntary or involuntary) may work well for consumer welfare as against the effect of mergers and coopetition.
At this point, I still think we do not have a clear answer to some of the problems identified here. The trends present a strong case for robustness of antitrust laws and regulatory regimes, especially in India where the general understanding about antitrust laws remains weak.
Econocrats and academic scholars need to take a hard look at the rising implications of intellectual property law, cooperative agreements and proprietary agglomerations of data in stifling competitive behaviour and mobility of new firms. Aggregating more information on firm-level growth narratives and better information dissemination (for researchers) will help analyse firm-level productivity impacts on market growth and overall industrial productivity levels over time.
With the rise of FAANG and a limited lens of self-interest maximizing neoclassical economics, as analysts, we remain quite incapable of ensuring welfare-maximizing outcomes at both the market and social levels.
Deepanshu Mohan is assistant professor of economics, at O.P. Jindal Global University.