The paradox of oligopolies
- Global, South Africa
- Antitrust, FAANG, Facebook, Google, Oligopoly, Regulators, TikTok, Twitter, Uber, Winner takes all
- November 18, 2020
Capitalism. It’s a double-edged sword.
On one hand, people are rewarded for being innovative and hard-working, finding new solutions and improving our productivity, health and wealth as a species. On the other hand, greed and destructive competition often come into play, potentially enriching only a handful of people at the expense of others.
This is why regulation is important. As humans, we aren’t especially good at behaving well, at least not on a macro level.
Let’s consider professional sport as an excellent example. Without regulation, the nature of competition and the burning desire to win at all costs can send athletes into a frenzy that can involve performance-enhancing drugs. These drugs may not even be safe for human consumption, which we can all agree is not in the spirit of sport. Regulators therefore ban these drugs, creating a more level playing field.
Of course, it’s not level, is it?
Some are born taller, faster or stronger. Others have incredible natural talent, while some dread the thought of any sport whatsoever. Regulators should never aspire to remove competition but should put in place rules that enable the healthiest form of competition possible.
This is why competition authorities and market regulators exist. At the intersection of law and economics, we find statutory bodies that can make or break the future of an industry.
The “big tech” industry, dominated by a handful of incredibly powerful companies, is currently facing considerable scrutiny by US lawmakers. Similar regulatory noises are starting to come from China.
The issue isn’t around “too big to fail” which became a talking point of note during the Global Financial Crisis as governments honed-in on banks. The discussions are instead focused on “too big to be allowed to exist” – an entirely different point of departure.
Earnings growth over lockdown accelerated for most of the so-called FAANG companies (Facebook, Apple, Amazon, Netflix and Google), so the power of these firms has become even more concentrated.
These are interesting times, but what does this have to do with oligopolies?
Are oligopolies simply inevitable?
An oligopoly is a market controlled by only a handful of companies. It’s problematic for regulators.
In some cases, collusion by the leading players can be incredibly destructive for everyone else. In other markets, the established players are so powerful that they can either squash new entrants or simply buy them if they become too annoying.
Big tech has exhibited characteristics of a winner-takes-all market, although “all” in this case shouldn’t be interpreted in the extreme. There will always be fringe players in any market, but the bulk of economic profits may be earned by one or two firms.
A real-world example would be authors or musicians. Bestselling authors and musicians at the top of the charts make fabulous amounts of money. The also-ran authors and musicians struggle to pay the rent. Yet, the possibility of generating immense wealth is enough to keep attracting new hopefuls into these markets.
Winner-takes-all markets increase wealth disparity, as the payoff profile for participants isn’t evenly distributed.
In new or developing verticals (like the ride hailing market built by Uber), landgrab strategies are favoured where there is a possibility of winner-takes-all. Venture capitalists fund start-ups that burn cash at a frightening rate, in the pursuit of glory and super-profits once the leaders in the market are established and the landgrab strategy rolls off in favour of a monetisation focus.
In a world of platform businesses that exhibit powerful network effects, it begs the question: are oligopolies inevitable?
There’s no greater example of the network effect than the way in which Facebook beat Google+. Google launched Google+ as a social media platform to take the fight to Facebook. A few years later, Google gave up.
They had underestimated the network effect. If all your friends are on Facebook, why would you try something new?
What direction should the regulators take with Big Tech?
Regulating prices won’t help here: these apps are free for users. Breaking the companies up into smaller parts might help for a while, but the dynamics of the industry will see us back in the same position probably within a decade.
University of Chicago professors Luigi Zingales and Guy Rolnik suggested an alternative that sounds quite interesting: users should own their social data, rather than the platforms owning the data. In this way you take your data history with you when you switch platform, rather than leave it behind.
This could limit the power of the FAANG giants and companies like Twitter or TikTok to some extent, but it’s also worth asking whether regulators should be doing anything at all.
Market leaders come and go. Disruption is a reality. Google’s search revenue is under pressure as the company competes for eyeballs with the social media companies. Remember, Google was there first and is undoubtedly the market leader in search.
Google isn’t being hurt by other search companies. It’s being hurt in the great fight for attention by consumers. Even games are now competing with Google, able to generate income through innovative in-game models.
Will competition and disruption eventually cause a reshuffle of the tech firms at the top of the pile? If so, then regulators should perhaps just let the market take its course.
Before you feel too confident about the power of “Google it”, perhaps you should Google Myspace instead.
This article is a collaborative effort between The Finance Ghost and Arete Advisors – all rights reserved.