The combined stock market capitalization of Facebook, Amazon, Apple, Microsoft and Google (FAAMG) accounts for around 22 percent of the value of the entire S&P 500 index. The relative dominance of Big Tech is a reflection of the modern American economy. The pandemic may have reinforced and amplified Big Tech’s role in our society as we increasingly depend on their services to communicate, shop, educate and entertain. The ever-expanding role and the extraordinary market power of Big Tech has generated legitimate legal, political, social and business concerns.
Policymakers face a dilemma as they try to corral the tech giants. They need to address certain fundamental questions first. Is the rise of Big Tech driven by market forces or by other factors? Has the rise of Big Tech given rise to anti-competitive behavior and hindered the pace of innovation in the U.S. economy? Are the interests of consumers being compromised by the growing dominance of Big Tech in the digital marketplace? Economic insights can help policymakers better grasp the complexities involved in tackling these sorts of questions.
The existence of network effects is often touted as an underlying driver of market concentration in the technology arena. The logic of network effects is based on the notion that the value of certain products (classic examples include the fax machine and Microsoft Office software) is dependent on the size of the userbase. In essence, the product becomes more valuable as the number of users increases. An additional aspect associated with network effects is related to today’s Big Tech companies acting as major platform providers. The ability to attract a large number of buyers and sellers (Amazon) or viewers and content providers (YouTube) creates a self-reinforcing mechanism as new buyers/sellers and viewers/content generators are more likely to flock to the dominant platforms rather than try to experiment with new entrants or small-scale competitors. Network effects also explains the global smartphone market converging to just two operating systems (Apple’s iOS and Google’s Android) and two gatekeepers of app purchases/downloads (Apple’s App store and Google Play store).
While network effects clearly influence the market structure of the technology sector, it is important to realize that they do not guarantee persistent dominance of incumbent leaders. (At one point in time, Blackberry, Yahoo and AOL appeared to be dominant and powerful enterprises with bright futures.) Preferences can change and new platforms can completely upend old models. The technology sector is also increasingly global in nature, and overseas competitors may offer popular alternatives in the future.
So, if limiting the “natural monopoly power” arising from network effects is not an overriding priority, are there other issues related to Big Tech that are greater sources of concern?
There are actually several troubling aspects associated with the current dominance of FAAMG. First, Big Tech’s acquisition spree in recent years is starting to hinder innovation. Recent research suggests that when Big Tech acquires a startup or app, it creates a kill zone and stifles further innovation in the area. This can be detrimental to the long-term strength and vibrancy of the innovation economy.
Second, in an increasingly digital-centric economy, the enormous concentration of data in the hands of a few firms poses serious threats on multiple fronts. Big Tech firms engage in vast data collection operations (even cloud computing is dominated by Amazon, Microsoft and Google), and this gives them a head start in the race to develop new technologies (machine learning and artificial intelligence) that are highly dependent on access to big data. Furthermore, the potential for misuse (surveillance or infringement of civil liberties) of Big Tech’s data hoard poses a serious risk.
Third, there is clear evidence that business dynamism (including in the high-tech sector) has been on the decline in the U.S. in recent decades. A primary cause of this trend appears to be patent hoarding by already dominant firms that limits knowledge diffusion between the leaders and the laggards.
Finally, the competitive landscape increasingly appears tilted by the presence of Big Tech. Given that they are often participants in as well as owners of the platform, tech giants such as Amazon can create an uneven playing field. The asymmetric power dynamic between the tech giants and their customers leads to lop-sided negotiations and less competitive outcomes.
Though there are some defenders of the status quo, the consensus appears to be shifting towards taking steps to boost competition and reduce market concentration in the digital space. There are, however, certain nuances that policymakers and regulators need to appreciate. Robert Bork’s influential work is often credited with shifting antitrust regulators’ attention away from market concentration/industry dominance considerations and towards the goals of enhancing economic efficiency and consumer welfare.
Recently, critiques of this approach have highlighted its weakness, especially when it comes to dealing with Big Tech. Policymakers need to be cognizant of the fact that when it comes to the tech world, data is the primary currency, and they need to ensure that Big Tech is not harming consumer interests by either gathering excessive or unnecessary information or collecting data without proper consent or compensation.
Furthermore, instead of rushing to break-up the tech giants, lawmakers may want to consider restricting new acquisitions of startups or promising young firms. Reforming the patent system and forcing compulsory licensing terms may also boost innovation and create new challengers.
Vivekanand Jayakumar is an associate professor of economics at the University of Tampa.