Thinking strategically about platforms

Digital platforms have been very much a focus of policy attention of late, with reports on the problems and challenges they raise published by the UK (several, including the Furman Review), Australia, Germany, European Commission & others. The platforms these various reports discuss are the big ones, and the concerns range from competition policy to employment practices to online harms.

A terrific new book by Michael Cusumano, Annabelle Gawer and Devid Yoffie, The Business of Platforms, points out though that most of the digital platforms that are not big are dead: four in five fail. The book is aimed at people running or starting platforms, offering advice on (as the subtitle puts it). “Strategy in the Age of Digital Competition, Innovation and Power).” The book very nicely links business strategy to the underlying economic characteristics of digital, and I think is probably in this respect the best tech business book since Shaprio and Varian’s (now old, 1998) Information Rules.

It starts by pointing out that there is nothing inevitable about network effects (direct and indirect) kicking in: they have to be nurtured: “Companies and governments have to make the right srategic and policy decisions in order to drive strong network effects.” These can include technical standards, for example, or ensuring competition thrives at the right times and points. The book also distinguishes between two types of platform, requiring different strategies (although there are a groing number of hybrids). Innovation platforms create value by enabling third parties to develop products or service on top of the platform, while transaction platofrms create value by matching different sides of a market.

Key challenges for all, though, involve solving the ‘chicken and egg’ problem (because different sides of the platform depend on each other) by appropriate pricing and cross-subsidy, and figuring out a business model. (And in my view the dependence of so many on advertising is a major weakness & can’t be sustained). The book uses the framework to explore the many platform failures. It also has a chapter on how non-platform incumbents can respond to the digital challenge (it’s tough…), and looks briefly at issues such as the use and governance of data, and also the importance of working with regulators rather than against them and recognizing the responsibilities that come with (market and other) power. “Every major company we cited in this book has been the subjject of government investigations, local regulatory oversight, and intense media scrutiny.”

All in all, highly recommended. If you know the economics, the case studies and management literature covered will be informative, and if you know the business details, the economic framework should be useful. I very much enjoyed reading it.

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The limits of technocracy in competition policy

For reasons I needn’t go into, I spent much of today reading The Anti-trust Paradigm: Restoring a Competitive Economy by Jonathan Baker. It’s a very lawyerly in style and US-focused book. With that caveat, it’s actually a good overview of the current debate about competition policy, and the Chicago School versus neo-structuralist (aka ‘hipster’) clash going on in the US at the moment. One of its strengths is that it’s pretty even-handed. Although the book argues for sticking with an economics-based anti-trust policy, focused on consumer welfare, it also argues that the Chicago School goes too far beyond this with its set of presumptions (for instance, that vertical mergers are basically always fine, or that false positives preventing mergers that are not anti-competitive are far more costly than false negatives that let anti-competitive mergers go ahead).

The book sets the scene with the evidence on increasing concentration in US markets, and the adverse implications decreasingly vigorous competition has for the economy. What I particularly like about the book though is that it sets competition policy in its political context, making the case for a technocratic approach – to avoid the dangers of political capture and cronyism – but within the boundaries of a broader political settlement. Baker argues that for much of the post-war period, US anti-trust policy was shaped by the consensus about the form of American capitalism, delivering widely shared benefits including through the welfare system. Never explicit, this nevertheless set the climate for the decisions made by regulators and judges. He portrays the crumbling of this settlement, the growth of market power across the economy, as the backdrop for the decreasing consensus about anti-trust policy. In this situation, technocratic enforcement cannot function.

There is a section on digital markets, which I was interested in of course; it essentially briefly sums up the state of debate in a growing literature. And a final chapter advocating a more forceful American anti-trust policy (the US gets compared unfavourably to Europe) but one that abandons the cul-de-sac of the pure Chicago School. Although the application of anti-trust policy in America has diverged considerably from Europe, despite being underpinned by the same economic analysis, this is a useful book to understand the present US debate – and also why its conclusions are not very relevant to this side of the Atlantic.

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Too big, full stop

No sooner has summer ended than it’s almost Christmas – how has this happened? In between meetings and paper-writing, I have managed to read a few things. Two thrillers on journeys to and from a family visit last week, John Le Carre’s A Legacy of Spies and one of the outstanding Mick Herron Jackson Lamb series, Spook Street – highly recommended if new to you.

On more serious matters, I’m half way through the handsome new Stripe Press edition of Mitchell Waldrop’s The Dream Machine. And I’ve finally read Tim Wu’s The Curse of Bigness. This is a very interesting, and commendably concise, history of US anti-trust legislation and enforcement. The argument in a nutshell is that anti-trust was born out of a power relations confrontation between the original trusts – Rockerfeller, Carnegie etc – and the US government: Theodore Roosevelt determined on trust-busting to establish the primacy of government power. To some extent this tradition continued after the second world war with landmark cases against AT&T and IBM. But, Wu continues, the Chicago school and especially Robert Bork defanged US anti-trust enforcement by embedding so thoroughly an economic test based on a consumer welfare standard as measured only by consumer prices. Today, with digital giants so often charging zero or low prices, this is less appropriate than ever. The time has come to reaffirm that the government, not rent-extracting monopolies, runs the country.

This is an interesting and persuasive account. It is also a specifically American one. Although the underlying economic analysis concerned crosses the Atlantic, there has never been such a narrow interpretation either of consumer welfare or of how to measure it in Europe. The test in UK law is a ‘substantial lessening of competition’ with reasonably wide discretion for the competition authority, and the guidance sets out other dimensions of welfare such as quality, range, innovation – although of course price is the easiest to measure. We have had prominent cases looking at monopsony power, such as the inquiry into supermarkets. Nor has there ever been on this side a routine acceptance that the benefits of vertical integration or horizontal merger can be assumed to be passed on to consumers – in my cases we always asked about the incentive as well as the scope for efficiencies to be passed on. And, as Wu notes at the end of the book, the UK’s market inquiry tool can be very powerful.

Having said all this – and cautioning against translating Wu’s account and other influential authors such as Lina Khan – to non-US contexts, this does not mean the question of monopoly power is not a pressing one here too. The UK has an inquiry into digital competition under way (chaired by Professor Jason Furman – I’m a member). In other markets from insurance/banking to pharma there are very powerful and profitable firms sustaining their position over long periods and scant sign that new entry is possible. As I’ve written in a forthcoming paper, the competition authorities need tools to assess dynamic, Schumpeterian competition as well as their everyday static toolkit.

Behind the technicalities, there is also the issue of political power highlighted by Wu’s book. Most economists would be hesitant to re-politicise competition policy after the dire experiences of big companies using their lobbying power to protect themselves before the present regime came into force. Two former DGs of the UK’s Office of Fair Trading, John Fingleton (here) and John Vickers, have rightly pointed to the vast expansion of arbitrary ministerial say-so over mergers in proposed UK legislation. This is a route sure to make consumers worse off.

At the same time, there are valid political questions. Some companies in a number of sectors have become simply too powerful. Paul Tucker’s recent book Unelected Power highlights these, arguing for a tilt in the balance away from technical economic analysis toward political choice. I’m not persuaded that the problem stems from the use of economics in competition policy, such that dethroning economic analysis would fix the pwer imbalance. However, there do seem to be some unresolved tensions between the economic standards for assessing competition in a market, the legal interpretations, and the politics.

Much food for thought in a short book. The Curse of Bigness is a great stocking filler for the economists and lawyers in your life.

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My damp Scandinavian view of the world

It’s the last full day of our holiday in Sweden and the weather has turned a bit wet, so in between the detective novels (the latest – Jill Paton Walsh’s Dorothy Sayers update, Thrones, Dominations) I read Robert Peston’s WTF. It’s as well-informed and full of insight about the present state of the world as you’d expect from such a distinguished journalist (although written in a slightly matey style which didn’t appeal to me). The book is mainly about Brexity UK – with a brilliant chapter on our last general election and the respective characters of Mrs May and Mr Corbyn – though it touches on parallel trends in Trumpland. I agree with his diagnosis that the issues contributing to the anti-establishment anger date back well before the financial crisis, to the deindustrialisation of the 80s and 90s, and the chasm between London/SE and the rest of the country. The book’s fundamental point is that the economy stopped working for an ever-growing number of voters, vast numbers of whom have seen no significant rise in living standards for well over a decade, and even longer for too many.

Interestingly, in the light of the current fashion for saying the big economic problem is all about concentration and the exploitation of market power, Peston instead pins the blame for a dclining labour share of national income on the Reagan-Thatcher-led attack on union power from the mid-70s on. The press reports of the Jackson Hole discussions this year noted that debate there focused on the issue of concentration. When I expressed some doubt on Twitter that this was anything other than a US phenomenon (as the UK labour share looked from eyeballing an ONS chart to have been fairly stable), a couple of replies insisted I was wrong (one arguing I was looking at the wrong data, and the other claiming the IMF said it was a global phenomenon). Well, after my years on the Competition Commission, I’m a big fan of tough competition policy, and agree it has been lax in the US for some time. The US also has an issue with creeping occupation licensing as the Obama CEA pointed out. But, reading up on the IMF’s recent work on trends in the labour share makes plain the great diversity of national experiences – and indeed, they say the UK labour share has increased.

Well, whenever a phenomenon is so varied across countries, it tells you institutions are playing a big part. Combined with the fact that across countries the big decline in the labour share occurred from the mid-1970s to around 2000, surely labour market institutions played a key part – for all that it’s right to be concerned about concentration in some countries/sectors now. (And the IMF data goes only to 2014, so perhaps there has been a dramatic decline in the latest 3 years of data…)

Anyway, looking out at the rain, on now to proofs of the forthcoming book by Alan Greenspan and Adrian Wooldridge, which I’m going to be reviewing in due course – a history of capitalism in America, which is going to be fascinating, as I’m anticipating a defence. There has also on Twitter been some discussion about what books to put on the syllabus for a history of capitalism course (really, a history of thought course), in which I didn’t participate (& can’t find now), but noted with interest that all the books were critiques, from The Great Transformation on. Maybe the Greenspan/Wooldridge book could balance it out.

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Competition, competition, competition

Grazing along my bookshelf this morning, postponing getting to work, I found ‘Industrial Concentration‘ by M.A.Utton in the Penguin Modern Economics series – 1960s/70s paperbacks for the people providing overviews of different fields in the subject. This one was published in 1970 and it’s fascinating as a window on the historical evolution of competition policy.

One distinction it draws, certainly no longer valid, is between tough American anti-trust policy with a legacy dating back to the Sherman Act and relatively weak and new British competition policy based on 1948 legislation under the Monopolies Commission, which Utton describes as always willing to accept ‘public interest’ arguments for allowing mergers of big companies. American policy was far more willing to tackle the structure of an industry, he argues.

Hence UK business had become far more concentrated in the 1950s and 60s, although with effects mitigated by greater openness to foreign competition via trade than the relatively closed US economy. At the time of writing, the newish (1966) Industrial Reorganization Corporation (IRC) in the UK was busy promoting still more mega-mergers to create ‘national champions’, with the companies involved given a nod and a wink to say they would not be referred to the Monopolies Commission.
Interestingly, a recent Yale Law Journal article by Lina Khan argues for a return from the Chicago School emphasis on consumer welfare as measured by current prices to Sherman Act-inspired interventions in market structure, in the context of the digital giants. But it isn’t just the digital sector; there’s pretty convincing evidence of increasing concentration across the US economy, as The Economist recently summmarised.

The UK’s history of competition policy has been brighter recently thanks to the formation of the independent Competition Commission and now Competition and Markets Authority (with its excellent economists, including my son). There have been blips – notably the very bad decision during the financial crisis to make finance a sector exempt from the usual competition rules, in order to allow the Lloyds-HBoS merger. Still, the independence of the watchdog and the removal for the most part of vague ‘public interest’ considerations has been beneficial. However, vigilance is needed.

It isn’t only the challenge of ensuring the giant digital companies, with their giant network effects and economies of scale, continue to deliver for social rather than just private gain. The EU’s State Aid regime has been a massively important backdrop to domestic policy. If the Brexit train wreck continues, it will be essential to carry the regime over into domestic policy.

This is all the more important in the context of both the likely negative impact of Brexit on key sectors – there will be queues of badly affected businesses asking for special help or dispensations – and the aim of having a more strategic approach to economic policy, an industrial strategy. Nobody (in theory) wants a return to the ‘picking winners’ (ie losers) days of the IRC.

A really tough competition policy is the best way to avert this. It needs to include not just State Aid rules but also a rethink about the weak sector regulators in network sectors like water and telecoms. This is why we on the Industrial Strategy Commission have been putting so much emphasis on competition policy.(I note the Amazon price for this book is algorithmically weird – original cover price was 40p.)

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