A Nobel-Winning Economist’S Lead To Taming Tech Monopolies

From Quartz:

Jean Tirole is an intellectual giant inwards the economic science world. The Frenchman is the foremost thinker on marketplace mightiness too regulation, too won the Nobel prize inwards 2014 for his operate inwards this area.

His insights are peculiarly relevant today, equally large tech firms grow e'er larger too to a greater extent than powerful. Advances inwards technology scientific discipline has generally made our lives better, but equally privacy concerns rising too faux intelligence spreads, nosotros are starting to encounter the downside of giving tech companies generally unchecked power. In the past, regulators could bargain alongside this past times breaking upward firms or making them world utilities. That hasn’t happened alongside the tech giants, fifty-fifty though many people too policymakers experience similar something should endure done—but what?

Tirole’s recent book, Economics for the Common Good, offers merely about answers. The terminal 3rd is a handbook on how to intend most the ways technology scientific discipline is changing the economy, too what nosotros tin strength out do most it. Quartz asked him merely about of the to a greater extent than pressing questions of the day.

Quartz: The early on days of tech promised a ruthlessly competitive marketplace house where fifty-fifty pocket-sized players could accomplish billions at piffling cost. Instead, it seems nosotros ended upward alongside less competition. What happened?
Tirole: There is a feel inwards which tech has delivered. Small firms withdraw hold been empowered inwards many ways. They tin strength out avail themselves of inexpensive back-office too cloud services; they tin strength out easily connect alongside consumers; they tin strength out fine-tune their advertising rather than engage inwards blind majority advertising; their access to borrowing is facilitated past times AI-driven lenders, equally is the instance for the to a greater extent than than seven 1000000 Chinese pocket-sized too medium-size firms financed past times Ant Financial. And, importantly, they tin strength out to a greater extent than easily construct their ain reputation. Influenza A virus subtype H5N1 taxi driver relied on the taxi company’s reputation; today, through ratings, the driver tin strength out withdraw hold his or her ain reputation on a ride-hailing platform.

But at the platform level, competition confronts the beingness of large returns to scale and/or network externalities, leading to natural monopoly situations too a winner-take-all scenario. Network externalities tin strength out endure direct: I am on Facebook or Twitter because you lot too are; I volition exercise Uber or Lyft if many drivers do so. Network externalities tin strength out too endure indirect: We may non assist straight most the presence of other users on the platform, but that presence leads to improved services, equally inwards the instance of many apps or delivery services. For example, I desire to exercise Google’s search engine or Waze if you lot too exercise them, equally the character of predictions improves alongside the publish of users.

Natural monopoly situations Pb to widespread marketplace power, too a concomitant willingness to lose coin for a long fourth dimension to “buy” the prospect of a time to come monopoly position—think of Amazon or Uber.

Are tech firms similar Google, Amazon, too Facebook monopolies?
Here nosotros demand to distinguish betwixt statics too dynamics, or betwixt a transient monopoly too a permanent one. Large economies of scale equally good equally substantial network externalities imply that nosotros frequently withdraw hold monopolies or tight oligopolies inwards the novel economy. The fundamental termination is that of “contestability.” Monopolies are non ideal, but they deliver value to the consumers equally long equally potential competition keeps them on their toes. They volition too then endure forced to nowadays too perhaps fifty-fifty to accuse depression prices thence equally to save a large installed base of operations too seek to instruct inwards hard for the entrants to dislodge them.

But for such competition to operate, 2 atmospheric condition are necessary: Efficient rivals must, first, endure able to come inwards and, second, come inwards when able to. In practice, they may detect it hard to come inwards a market. And if they successfully enter, they may detect it to a greater extent than profitable to endure swallowed upward past times the incumbent rather than to compete alongside it. In economic science parlance, such “entries for buyout” create rattling piffling social value equally they are mainly a machinery for the entrant to appropriate a slice of the dominant firm’s rent.

Ten years agone it seemed similar Walmart had monopoly mightiness when it came to retail, but the marketplace brought us Amazon. Is it possible that today’s tech monopolies volition too facial expression rigid competition 1 day?
Yes, too let’s non forget that Google replaced AltaVista inwards the search engine marketplace too Facebook dislodged MySpace inwards the social network segment....MORE

And allow us non forget Friendster.