The public option

I’m on my way to a workshop at The New Institute in Hamburg, where I will talk about the scope for a public option in (especially) digital markets. As preparation, I’ve read a recent short (and moderately technical) book surveying the literature on ‘mixed oligopoly’ by Joanna Potoygo-Theotoky; these are oligopolistic markets with a mixture of private and public provision, where the public competitor has a broader objective function than profit maximisation – such as social welfare broadly, or ESG motivations, or universal service obligations. The basic idea is that by having a different objective function, the presence of the public provider acts as a regulatory function; private firms will choose a lower price/higher quantity or will select to compete on a different level of quality.

I’m most interested in the latter area, where the formal results can go both ways. Public firms can either decide to offer a ‘basic’ package to deliver universal service or can offer a higher quality package than the private sector. Think of public schools vs private schools providing great sports fields and additional subjects in the former case, or public broadcasters ensuring provision of children’s programmes or religious programmes in the latter case. Given the concentration in digital markets and the limited tools governments other than the US and China have to affect the behaviour of Big Tech, provision of a public option in some domains is worth thinking about.

The book, Mixed Oligopoly and Public Enterprises, is a very nice survey and introduction to the mixed oligopoly literature, much of it focused on the price and quantity decisions and the optimal mixture of private and public, but covering some more recent literature on issues like R&D, quality and ESG standards. It also ends outlining a fascinating research agenda – introducing issues of motivation of employees, and even wider objectives such as creating jobs and reducing inequality.

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De-gilding the age

I’ve been reading Mordecai Kurz’s The Market Power of Technology: Understanding the Second Gilded Age, in between more summer-holiday type books (half way through Paul Murray’s excellent The Bee Sting now). Kurz’s underlying argument is one I find plausible: Technical innovation by corporations (on a platform of publicly-funded basic scientific research) drivers growth, but corporations translate innovation into monopoly power and rents. Policy alternates between lax and tough competition enforcement, the latter limiting the period of monopoly power. In between, there have been gilded ages.

The book distinguishes the return to capital productively employed from wealth, the accumulation of those rents. It argues that “all intangible assets are just different forms of monopoly wealth” – clearest for IP assets that explicitly guarantee firms’ monoplies. The book argues for prevention of tech mergers, break-up of vertically integrated parts of big corporations, and limitations on the granting of patents and copyright. Tech-based market power cannot be avoided but it should be contained.

The book combines economic and business history with an extended formal model of Kurz’s approach (and this means it is probably not a book for the general reader). The formal modelling is actually the part I found least compelling – particularly in Chapter 5, which for example assumes the monopoly producer has a constant returns to scale production function. This chapter estimates that monopoly power led to delays of 12-15 years in the diffusion of electricity in the US, but – unless I missed a key step –  the calculation seems not to take account of the impact of scale effects, which would shorten those estimates.

The previous chapter has an intriguing chart (4.9): the 50s-late 70s are reported as a period of high monopoly profits – like the 20s and the 2000s on – yet were obviously a period of strong productivity growth and rising living standards. Kurz explains these decades as not being designated a gilded age because policy ensured rising real wages and high employment. But actually if monopoly wealth brings about rapid growth through self-reinforcing technological innovation, it would be nice to have more of that. The policy lesson seems to be more about redistribution and labour market policies than about competition enforcement to limit the monopoly rents. The periods of low welath and low market power in this historical chart were periods of weak growth or worse.

I’d also like to have had more about countries other than the US, and indeed some other examples – is Walmart a tech monopoly? Or Nike? Few other countries span as much of the technology frontier as the US, so diffusion becomes the more important issue, and market power protected by IP and other tactics can be deployed anywhere. But wealth inequality is high in many countries – are all characterised by companies garnering monopoly rents and if so how?

Still, the book does set in a coherent theoretical framework the many recent books that have addressed the issue of market concentration and particularly big tech. It’s an interesting framing of current growth challenges, and one I broadly agree with. And Kurz’s call for tougher competition policy echoes many others. We will see whether it will translate into tougher enforcement and an ened to this second gilded age.

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Spreading the thriving

Jan Eeckhout’s The Profit Paradox: how thriving firms threaten the future of work is a very good read. It’s a game of two halves (yes, someone in my household is permanently watching the football at the moment).

The first half (in fact parts 1 and 2) is a nice synopsis of the reasons the economy (mainly the US but others are covered) tend towards a) concentration across many markets and hence b) diverging fortunes of companies and their employees, and the places where people live. This covers the features of digital technology, superstar phenomena, agglomeration economies – these are familiar to anyone who has been keeping up with the literature, but I applaud how well the book is written. Hooray for an economist who can write so engagingly. This section documents the evidence on concentration and mark-ups, the growing divergence between companies in terms of productivity and profits, and the corresponding decline in the labour share as outsourcing of routine occupations (call centres, cleaners, admin) has progressed. Eeckhout argues that there is assortative matching such that pay and conditions are polarising between people with high value jobs in frontier firms and people with low value added jobs in their contractors.

The book’s focus is on the implications of market power for people as workers, rather than as consumers – although it also notes the excess pricing power too. In sum, it reduces wages, both directly through monopsony power in individual labour markets and also because of the the macroeconomic consequences: with so many people in contingent work with low pay, aggregate demand is inadequate. (Some) firms are doing well but the economy isn’t. And this is the heart of Eeckhout’s argument: “The effect of the tide of market power is lowering wages across the economy.” I find this link persuasive. While there are many economists looking at the elements of this story, the way they are combined here is enlightening.

The second half turns to the much harder question of what to do, starting with an affirmation that for all the disruption the new technologies are a good thing (this chunk reminded me a bit of my own Paradoxes of Prosperity, which first came out in September 2001 and not surprisingly was hardly noticed).

The recommendations boil down to: enforce labour standards; mandate more data openness; and beef up anti-trust policies. In particular (under the last heading) stop big tech making more acquisitions, regulate them rather than break them up (so as not to lose beneficial network economies), and assess market impacts in the round rather than firm by firm. (Tricky to implement but I do remember that in my days on the Competition Commission, as it then was, we often had to include a section of the report on ‘Features of the market’ – problems in concentrated markets do often spread beyond an individual transaction).

I’d agree with all these suggestions in the book but they add up to a meta-suggestion: find the political will to change the institutional architecture so that it delivers fairer outcomes. The technological tides won’t retreat but the effects depend on what institutions confront them. Is Lina Khan’s appointment in the US a sign of lasting change?

 

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Banks versus business

The latest in my catch-up reading has been British Business Banking: The Failure of Finance Provision for SMEs by Michael Lloyd. This is obviously a bit niche but of great interest as the vacuum in finance for growing businesses has often been identified as one of the reasons for the UK’s weakness in translating an excellent research base into lasting commercial success and eventually productivity gains. The stock of bank lending to SMEs in the UK was £166bn at the end of 2018, according to an OECD survey. (It will perforce have increased signigicantly in 2020.) If this sounds a lot, it was only about one tenth the stock of their residential mortgages. The UK banking sector just doesn’t do much business lending.

I’ve long thought lack of competition is a key part of the story. The commercial banking sector has consolidated steadily over the decades – I’m old enough to remember some of those swallowed up, like Williams and Glyns and National Provincial. In this book Michael Lloyd argues that while the development of an oligopoly might have been part of the cause of the SME finance gap, introducing more competition won’t be part of the cure now. There has been some new entry such as Santander, but the newcomers are not interested in the SME sector either.

He anyway sees the gap as a quasi-cultural one, linked to the “free market” philosophy embraced more eagerly in the UK even than in the US, and in the centralisation of banking decisions. He advocates a restoration of relationship banking spearheaded by a state Investment Bank. What we are getting instead is a National Infrastructure Bank – needed, but unlikely to do a lot for SMEs around the country. However, I find the relationship argument persuasive: I’d see it in terms of a vast loss of information that has come about through bank mergers and centralisation. Automated decisions are based on too little information, whereas old-fashioned bankers in boots would have a wealth of information about local SMEs.

It’s a hard problem to solve even with a government willing to have a go. Still, this is an interesting book for those worrying at the issue, well worth a read.

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Big Tech – the contrarian view

There’s a torrent of material to read about competition (lack of) in digital markets, which of course goes much wider than economics and law. Indeed, I’ve contributed to the many pages written, including in the form of being a member of the Furman Review team. The general theme is that Big Tech does indeed pose a challenge for competition policy, with the individual conclusions running from ‘some adjustment within current framework is needed’, all the way to ‘destroy them’.

What makes Big Tech and the Digital Economy by legal scholar Nicolas Petit so refreshing is its absolutely contrarian perspective. He has coined the phrase ‘moligopoly’ to describe Big Tech, and argues that while there has certainly been increasing competition in digital markets, there is also vigorous competition unremarked by all the commentators. I’d describe what he calls competition as oligopolistic rivalry, but the book does document the ways in which the GAFA and others compete with each other.

Some of the emprical evidence is rather interesting. For example, the book looks at what the big companies describe as the major risks facing them in their SEC filings and all but Facebook claim competition is their 1st or 2nd biggest threat – they would say that of course, but it intrigues me that Facebook doesn’t bother (number 4 or 5 in its ranking). The others do all see each other as their main rivals. Among the book’s other evidence is their high rate of spending on R&D – but I’d like to know about what it is they’re researching, though.

The ultimate question is not about current competitors, however, but about potential competitors. If you believe digital markets tend to winner-takes-all because of network effects, and you can live with concentration because of the large consumer benefits, then what matters is whether new rivals with great technology and products can take the current Big Tech markets. In that case, moligopolistic rivalry along various dimensions is not only fine but anyway inevitable.

The book didn’t win me over in the sense that I concluded there is no reason to be concerned about digital competition. Without intervention, it’s hard to see anybody rivalling Google in search, or Apple and Android in mobile operating systems. To be fair, the author doesn’t argue that there’s no cause for concern, quite. He is issuing a useful warning that we should think carefully and in detail about what harms we believe Big Tech is causing. This book is a distinctive corrective against the current tendency toward groupthink on this subject. As we said right at the start of the Furman Review, Big Tech has brought many benefits, and there is growing evidence about how much people value its products. Anyone certain they know Big Tech needs fixing should read this more nuanced argument with an open mind.

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