The dominance of big tech might not always be such a bad thing

Economic concentration

The actual argument the IMF is making is that by some measures we can see rising economic concentration. It is true that larger companies seem to be making better profits and higher margins than they used to. This could be a sign of higher concentration.

The problem with a more concentrated economy is that we start to see the emergence of market power, such as monopolies or oligopolies. The problem there being that people with market power like to use it to rip off consumers to the benefit of their profit margins. So if we see rising profit margins at large companies, then maybe we’re seeing the creation of that undesired market power?

The logic does hold together. However, the IMF goes on to note, correctly, that there’s more than one possible explanation. For example, perhaps something has changed so that large companies are sucking profit-making away from smaller ones? If we survey only large companies, as has been done, then we’d not spot that total gouging of the consumer has stayed the same – or possibly even declined.

Consider this in retail – Amazon is now a behemoth, and it’s making very fine profits. Yet is that from our pocketbooks, or are we seeing a shifting from other retailers? The fact that half the high street is going bust would lead us to that second thought quite naturally.

The combined profits that Debenhams, House of Fraser, and whoever else has almost gone bust recently, were making from us might have been less than Amazon does now. We consumers are being made better off by this apparent concentration. If they’ve gone bust through Amazon’s competition, that is an indicator that we’re getting a better deal online after all.

Market power

This leads us to a philosophic debate about market power. One school says that the existence of it is bad and should be curbed – largely a left-wing view in US politics. The other says only if it is proven to be harming consumers need we do anything – largely the right wing. Both agree that if the respective tests are met then we should regulate, break up, do something to, that market power.

With big tech specifically, we get a clash between those two views. We’re all familiar with the idea of networks effects – we join Facebook because two billion other people are already there.

A new retailer will join Amazon Marketplace because that’s where half the population is already going to check what is available to buy. The more people in the network, the more valuable it is to each participant in it. This logically leads to winner-takes-all scenarios. That is, we see market concentration and perhaps market power where we have network effects.

Yet is this to the detriment of the consumer? The IMF agrees that it might not be but leaves open the question of whether it is. Other research in the US suggests an answer. What is the level of competition we need to worry about? Exactly what is a concentration of market power? What scale should we consider?

Use Amazon again. Whatever the numbers are, they’re huge – something like 70% of all Americans buy from them at some time in their lives, it’s 50% of online retail, maybe even 5% of all retail? The exact numbers don’t matter to the argument here, they’re huge. If we observe the economy at the macro level, then we’ll be seeing that power.

But what is the level that actually matters to the fundamental human economic unit – the household? Well, that’s rather different. They, or we, aren’t interested in what is happening at the economy wide, or macro, level. We’re interested in the micro view. How many potential suppliers do we have? 

At which point we have an entirely different view. Most towns have two, perhaps three, supermarkets. Is the existence of Amazon willing to deliver into every postcode in the country an increase or decrease in consumer choice? It’s quite obviously a decrease in market power in retail, isn’t it? As is the similar delivery offered by Ocado and all the other competitors out there.

That is, we can record at the economy level that Amazon is getting Oh My Big and fail to note that competition at the only important level is increasing, not being diminished. Which is what is happening, as that more detailed US research shows.

Freedom through competition

Leave aside the current day just for a moment and think of Britain a century ago. Then it was Littlewoods growing into a vast combine. But was that extension of catalogue shopping an increase in market concentration to the detriment of the consumer, or a freedom through competition from the grip of the local retailer?

Fortunately, as interesting as this fine distinction is, policy proposed in either case would and will be the same. As the IMF says, the solution to market concentration is to allow greater market competition – to ease barriers of entry into the marketplace by startups and would-be disrupters.

This means less regulation and bureaucracy of course, as they are a barrier. It’s the large companies already in the market who can afford to obey onerous and burdensome rules. We should also free up international trade as foreigners are a good source of that market-power-breaking competition. True, we don’t have to do all that if we’re already getting consumer benefit through this greater competition. But then it’s still all good policy anyway.

For, of course, if we are all gaining from new market entrants utilising those network effects to benefit us consumers, then we must already have rules that allow new market entrants. And the fact that many of them are American just shows we are allowing free trade in ideas and investments.

Sure, not everything is peachy in this or any other corner of the economy. But the concerns over big tech’s monopoly powers seem misplaced and even if they’re not then more markets is, as is so often true, the solution.