Congressional panel investigates the market power of the ‘Big Four’ online platforms
Representatives from the “Big Four” online platform companies—Amazon.com Inc., Apple Inc., Facebook.com Inc., and Alphabet Inc.’s Google unit—are scheduled to testify on July 16 before the House Judiciary Committee’s antitrust subcommittee about competition in online markets, amid heightened U.S. congressional and regulatory scrutiny of increased concentration in this key digital economic arena. A second panel, composed of experts including Equitable Growth grantee Fiona Scott Morton, will provide their views on online competition.
Google, Facebook, Amazon, and Apple have faced varying degrees of growing and wide-ranging criticism about their business practices. The upcoming hearing—the second in the antitrust subcommittee’s investigation into high-tech companies—will focus on innovation and entrepreneurship.
The role that large online companies play in fostering or blocking innovation and entrepreneurship merits serious examination. A growing body of literature finds related broader trends in the U.S. economy: Some studies document the decline in business start-ups and venture capital funding in high-tech industries. This hearing will provide an opportunity to explore the causes of these trends.
Scott Morton, who is the Theodore Nierenberg Professor of Economics at Yale University, recently collated much of the recent research in this area into an interactive database and analysis for Equitable Growth. Her database includes key papers on these trends, both overall and specifically in technology industries, that members of Congress and committee staff may find helpful. Among them are:
- “On the Formation of Capital and Wealth: IT, Monopoly Power and Rising Inequality,” by Stanford University economist Mordecai Kurz
- “Information Technology and Industry Concentration,” by Boston University School of Law’s James Bessen
- “Declining Competition and Investment in the U.S.,” by German Gutierrez and Thomas Philippon
- “Antitrust in an Age of Populism,” by Carl Shapiro at the University of California, Berkeley’s Haas School of Business
These and many other papers can be searched for and accessed at Equitable Growth’s interactive database.
The open question is the cause of those trends. The four companies testifying operate in different ways. Google and Facebook earn revenue through advertising; they compete for people’s attention by offering services they value in order to maximize the opportunity to sell ads. Apple has a very different model: It sells products (smartphones, tablets, etc.), as well as services such as Apple Music that operate on those products, ideally giving consumers sufficient confidence in their unique qualities to purchase them. In many ways, Amazon looks more like a hybrid. It sells its own products and services (like Kindles and video streaming), similar to a traditional retailer, and also operates a marketplace that connects third-party sellers with customers, where it also competes with some of those sellers.
An issue that cuts across all four companies is whether such platforms can stifle, or are stifling, innovation and entrepreneurship. If an internet platform, having reached the top of the economic success ladder, can pull the ladder up behind it, a serious threat to competition exists. In contrast, if an internet platform’s position is tenuous and can be maintained only by providing ever-increasing value, rivals are more likely to be able to succeed. Ease of entry means there is unlikely to be a competitive problem.
Therefore, a key focus of this hearing should be what economists call “barriers to entry” and whether a platform’s growing dominance allows it to raise those barriers. Barriers to entry are costs that a new entrant faces to enter a market and compete successfully. These can be inherent in the business (such as the need to build an expensive factory) or created by the incumbent exactly to keep out the entrant (such as an exclusive contract). For an internet firm, inherent entry barriers can include the need to acquire significant data, to have access to a platform, to overcome consumers’ tendencies to focus on only the first few results of an online search or to simply accept a site’s default settings.
Recently, multiple reports have concluded not only that such barriers exist but also that a dominant platform can intentionally raise them. An expert panel, led by Equitable Growth Steering Committee member Jason Furman of the Harvard Kennedy School, produced “Unlocking digital competition” for the United Kingdom. The European Commission released “Competition Policy in the Digital Era,” and a group of scholars led by Scott Morton produced a report on digital platforms for the Stigler Center.
The common theme among these reports is that internet markets tend to be winner-take-all (also referred to as a market subject to tipping), which means that, after a period of fierce competition, one company becomes the dominant player. Competition mainly occurs in the initial phase. Of course, that “initial” competition is re-ignited when new paradigms arise and new markets open. For example, multiple companies today are working on innovation in home pods and artificial intelligence. Because competition occurs only periodically, it is critical to protect new competitors and potential competition.
As the Stigler Center report explains, once a platform wins a market, it has an incentive to make it as difficult as possible for a new challenger to arise. It can acquire potential new entrants. Or it can use its data from other services to make its product better than the entrant’s and crush the innovator before it is sustainable. Or it can condition access to its platform in ways that prevent a new company from developing into a threat. In short, the very strategy of a dominant platform would be to stifle entrepreneurship and innovation.
Skeptics of these concerns see a different competitive dynamic and argue that these concerns are transitory. At this moment, a given platform may seem unassailable and entry barriers may seem high, but the technology landscape is always in flux. IBM, Microsoft, AOL, and Yahoo all once seemed invincible, possessing monopolies with seemingly strong entry barriers, but each fell from its perch—and relatively quickly. In the skeptics’ view, today’s dominant firms can maintain their position only by continuing to offer better products and services.
The House hearing sets the stage for a debate over the necessity of increased antitrust enforcement and regulation in the technology field. By focusing on whether a dominant firm can raise entry barriers to future competition, Congress can help answer the question of how successful internet companies affect innovation and entrepreneurship.