Not-so-free markets

Thomas Philippon’s The Great Reversal: How America Gave Up On Free Markets, my pre-Xmas Day reading, deserves the positive reviews it’s been getting. It’s a highly accessible synthesis of Prof Philippon’s always-illuminating research into the empirics of US finance and competition. The argument is neatly summed up in the final part of the book: the US economy has become meaningfully less competitive, leading to higher prices, lower wages and lower productivity, and the main explanation is regulatory capture – the extraordinary (in scale and effectiveness) corporate lobbying in the US. The method of argument is set up near the beginning: all the possible explanations for the rise in concentration are listed:

  • there isn’t really an increase in concentration, it’s a data issue
  • competition has declined in lots of US industries
  • superstar firms are so successful they are organically gaining market share
  • technology is driving winner-take-all market structures
  • foreign competition means there has been domestic globalisation so it’s the overseas-adjusted concentration that matters
  • the growing importance of intangible assets explains concentration

The first part of the book explores these different hypotheses in the US data. The two left standing are decreased domestic competition with some – incomplete – mitigation from overseas competition. For my taste the book takes the available data on intangible assets far too seriously – they are highly incomplete and have limitations – but on the other hand part of the value of intangible assets is politically created (eg over-long copyright, scope for patent trolling). There is a ton of interesting evidence along the way – my favourite table is 13.2, the star companies over the decades; it shows that today’s tech stars are actually smaller in most ways (market cap, profitability and especially employment share) than star companies even of the 50s, 60s and 70s. There’s a very interesting section on how unintegrated they are with the rest of the US economy compared with the past.

Part 2 of the book is a compare and contrast between the US and EU, observing that the EU’s Single Market and enforcement by independent EU-level bodies means European markets are now notably more competitive than their US counterparts (not that Philippon sounds particularly impressed with other aspects of the EU economy). There is a neat political economy explanation for the independence of regulators: no individual country wants another country to dominate so independence is a Nash equilibrium.

The third part of the book covers campaign finance and lobbying in the US – no surprises – while the fourth part looks more closely at some individual sectors. The eye-opener is finance: despite extraordinary technological advances and innovation (after all, finance is one of the most ICT-intensive industries), the sector is no more efficient now than at the time of  the original JP Morgan. “Why is the non-financial sector transferring so much income to the financial sector?” Philippon asks. Lack of entry, and heavy-handed regulation (often a barrier to entry) are the culprits. I do constantly find it extraordinary that finance, having almost brought down the global economy and cost gazillions in lost output, is back to exactly where it was in the mid-2000s. We could go round the goldfish bowl again. This more than anything signals the political power of the finance lobby: the sector paid a negligible price for its actions.

So all in all, The Great Reversal is an important read. I also welcome one of the concluding points: Philippon writes, “I was surprised by the gap between economic research and policy,” in researching the book. I couldn’t agree more. Too few academics have any incentive to produce timely and policy-relevant research, as opposed to their strong incentive to produce narrow papers that will (slowly) get published in a small number of journals. Thank goodness for engaged academics like Prof Philippon.

41yQ9UYRbZL._SX336_BO1,204,203,200_

Share

Goliaths and populists

Matt Stoller’s Goliath: The 100 year war between monopoly and democracy ended up being a different book from the one I’d expected: I thought it was going to be about (lack of) competition in digital markets but in fact it’s a broader economic/political economy history of 20th century America in terms of the ebb and flow of the power of big business. Anti-trust policy is just one part of the story.

It’s an interesting story, one of the steady accumulation of economic and political power in a few hands, interrupted periodically by a decisive political, often populist, reset in favour of the small farmer or business (occasionally even the consumer). It’s also a story told from an anti-big business perspective, based on an analysis of the corruption of political power by accumulated money; which is fine, but it does make it a binary tale of heroes and villains. This includes one hero I hadn’t heard of before, Representative Wright Patman, a long-serving congressman on the side of the little people over the decades.

And some surprising villains. Chief among them is J.K. Galbraith, for his love of technocracy and big enterprises – after all it’s easier to direct an economy of big firms than little ones, and he was responsible for implementing price controls during the war. Galbraith wrote: There must be some element of monopoly in an industry if it is to be progressive.” He saw small firms and farmers as inherently conservative. Other public intellectuals such as Richard Hofstadter shared the perspective of small business being reactionary and inefficient, so the liberals become the corporatists – in contrast to the 1920s and 30s when those on the left (to be anachronistic about it) were standing up for the small guy. Thus, “Politics was no longer an avenue for structuring society but rather a means of ratifying what technologically driven organizations already saw as an optimal arrangement,” Stoller writes of the revival of corporatism in the 60s and 70s.

There are unsurprising villains too, of course, from Carnegie, Morgan and Mellon to Citibank’s Walter Wriston reviving the power of the financial sector by successfully unravelling the financial regulation that had been constraining the big banks since the Depression. Indeed, my big takeaway from the book was the need to constrain big finance, far more than big tech or big anything else.

One of the interesting things about the long-run perspective is the way it makes clear the pendulum in policy, from populist anti-big business to pro-big business phases in either oligarchic or corporatist modes. As a history of the US economy through this lens, Goliath is very stimulating. It is very US-centric, however – and this focus carries over into today’s debate about anti-trust or indeed other areas of economic policy. America matters, particularly in digital markets for obvious reasons, but it is also highly distinctive.

Trying to think through the extent to which the small guy/big business pendulum carries over to the UK or elsewhere in Europe, I concluded that it does to a degree. We had conglomeration in the 60s and 70s too. But in recent times European anti-trust practice has differed greatly from the US – I’m open to correction as this is a question of institutional history but I don’t think European competition authorities ever went the full Chicago School. (Just as inequality has increased everywhere but only the US is truly back to the Gilded Age.)

All this is by way of saying Goliath is well worth a read, bearing in mind its firmly – proudly – slanted perspective. It has all kinds of detail I didn’t know. I found its contrarian view about Galbraith, aligning him with Peter Drucker for example, absolutely fascinating & am still mulling over the relationship between technocracy and scale.

41kQYq9p2ZL._SX331_BO1,204,203,200_

Share

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.

41rS0XlCETL._SY346_

 

Share

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.

41VXxLuHKSL._SX327_BO1,204,203,200_The Antitrust Paradigm: Restoring a Competitive Economy

 

Share

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.

Share