Tag Archives: competition

My damp Scandinavian view of the world

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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

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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.[amazon_link asins=’0140801723′ template=’ProductAd’ store=’enlighteconom-21′ marketplace=’UK’ link_id=’edb16024-9ea0-11e7-b1d5-99a0f6c2bc29′](I note the Amazon price for this book is algorithmically weird – original cover price was 40p.)

Digi-trust-busting

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As someone who spent eight years on the Competition Commission, the changing shape of competition in the digital world is a question of compelling interest to me. Mainly, I blocked mergers, but the exceptions were retail inquiries where the growing competition from online retailers (especially Amazon) was, to me, a clear constraint on merging high street chains (some of my colleagues were less convinced – this was 2001-2009). Looking more recently at the literature on digital platforms, it is clear that economists have to step up and deliver new, practical analytical tools for competition authorities. As Jean Tirole and his co-authors famously established, the old tools of market definition and SSNIP tests are inadequate for assessing competitive conditions. And when the dynamics of competing for versus in the market, and the evolution of ecosystems, are so important now, the longstanding failure of competition economics to deliver a systematic way of thinking about static versus dynamic impacts of mergers really matters.

This is a long-winded preamble to mentioning Virtual Competition: the promise and perils of the algorithm-driven economy by Ariel Ezrachi and Maurice Stucke. The authors clearly are concerned about the failure of competition policy tools in the new context, and although it tries to be even-handed the book paints a picture of a world of increasing market power, to the detriment of consumers and citizens.

The most interesting thread in the book from an economist’s perspective is the reflection on the role of information in markets. Reductions in search costs should improve consumer and economic welfare, make markets more competitive. However, the greater availability of information in the online world is illusory because there is a staggering imbalance. Digital platforms have an extraordinary amount of extra information about us – and there are very interesting chapters covering the struggle between platforms, advertisers, app developers etc to gather and aggregate the personal information. However, the information we consumers get about the goods and services we’re looking to purchase is diminishing. The book raises the question as to whether the use of cookies and geo-tracking is enabling ever-better price discrimination by platforms and online sellers; there has been no systematic evidnce that this is so, but then it would be hard to gather the data to test this properly.

At the start of the internet era, there was great optimism that this was a technology for empowering consumers with more nearly perfect information, allowing easy price and product comparisons. In fact, it may be returning us to the era of the bazaar, with reducing transparency of information about prevailing market prices and conditions. “In a market that is in reality controlled by bots and algorithms, what power does the invisible hand posess?” Instead, maybe we have a digitalized hand, determining the specific market price in any given context. As others have done (Francis Spufford in Red Plenty – not cited – and Eden Medina in Cybernetic Revolutionaries – which is cited here), the book notes that in the limit a profit-maximizing market with perfect information and a social-welfare maximising central planner similarly well-informed would reach the same prices and allocations (although contrasting distributions).

The book does a good job of describing the changing dynamics of competition in digital markets, and why there is every reason to be concerned. Written by two lawyers, it is frustrating that it hardly mentions the economic research literature, which is proliferating even if not yet reaching policy-ready conclusions. The authors also over-do some of their critique of digital businesses – for example, they include a section on the use of framing and choice architecture to manipulate consumer choice, but that dates back to the pre-digital days of Mad Men. Still I share their view that we are in an age similar to those of the giant industrial trusts, and some digi-trust-busting is going to be needed.

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When everything is a platform

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Sometimes it seems like nobody wants to set up a business these days; it has to be a platform. These come in different flavours of course, from sharing economy start-ups to existing online social or other networks. Whatever, the platform concept has become ubiquitous. Like many ubiquitous concepts, its definition is a bit fuzzy and its exact characteristics variable, but the basics are well-understood: an entity enabling value-creating interactions between different groups of people; with the value coming from network effects (across the sides of the platform) and often also the improved matching of transacting parties enabled reduced information/transaction costs. Thus Ebay provides sellers with lots of buyers and vice versa, and enables people to sell or buy niche items.

It’s intriguing that for many people everything looks like a platform now. The economics of multi-sided platforms (or two-sided markets) dates back to the early 2000s. The well-known Rochet and Tirole paper was published in 2004 and had been circulating for a while before then, while Geoffrey Parker and Marshall Van Alstyne were publishing related work in 2000. In their new book [amazon_link id=”0393249131″ target=”_blank” ]Platform Revolution: How networked markets are transforming the economy and how to make them work for you[/amazon_link] Parker and Van Alstyne, joined by co-author Sangeet Paul Choudary argue that once platforms became possible, they became inevitable: “Platforms virtually always win… Pipelines [ie traditional businesses] rely on inefficienct gatekeepers. … The platform can grow to scale more rapidly and efficiently because traditional gatekeepers are replaced by market signals provided automatically by the entire community.” What’s more, platforms do not need the same investment in physical capital as a pipeline business and have no idle capacity – think Airbnb versus hotel chains. They do not need inventory. The community can even provide the quality control and certification.

[amazon_image id=”0393249131″ link=”true” target=”_blank” size=”medium” ]Platform Revolution: How Networked Markets are Transforming the Economy–and How to Make Them Work for You[/amazon_image]

The book is a very accessible introduction to the economics of multi-sided platforms, very much from the perspective of a business audience, people who might want to set one up. Introductory chapters describing platforms and the basic economic principles are followed by chapters on how to design a successful platform – how to provide value and set prices to balance both sides appropriately; how to acquire and use data; successful launch and growth strategies; monetization; growth; competition issues; and regulatory issues. There are helpful examples throughout – eight different cases of launch strategies that worked, for instance.

If you don’t know the economics literature, this book is a clear and practical guide to platforms. If you do know it – and I’ve now read a fair amount – the analysis will be familiar, albeit with lots of interesting and useful examples that still make it worthwhile.  I found the chapter on strategy the most interesting. It notes the challenges of getting to successful scale, although I think in fact underestimates them. It also discusses the complexity of competition (or as it’s sometimes called ‘convergence’ – everybody competing with everbody) and the advantages that go to those able to take a very long term view. The book’s main downside is apparent in this chapter too: it’s a Pollyanna view of platforms. I’d have liked a more challenging discussion of competition among the titans and the regulatory and even political questions this raises. (I set out my thoughts on this on the FT’s The Exchange blog.)

All in all, though, this book is a welcome addition to the still quite small non-technical literature on platforms, which is much needed given how complicated the academic literature on this subject has become.

Capitalism and the law

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My previous post – the ten books a well-educated social science student ought to have read – generated a lot of terrific comments with other suggestions, which I’ll mull over and compile into an alternative list at the weekend.

Meanwhile, I’ve read [amazon_link id=”0674504917″ target=”_blank” ]The Great Leveler: Capitalism and Competition in the Court of Law[/amazon_link] by Brett Christophers. I greatly admired his previous book, [amazon_link id=”1444338293″ target=”_blank” ]Banking Across Boundaries[/amazon_link], and this new one has the same compelling combination of analysis and historical detail. The theme this time is capitalism as a constant balance between competitive markets and market power, these two forces applied by laws and their enforcement. Anti-trust laws are enacted or enforced with greater rigour when monopoly power gets out of hand. Intellectual property laws are strengthened after periods of cut-throat competition. In contrast to those – often Marxist – writers who have seen a single direction of travel toward ever-greater monopoly power, Christophers argues here that there is a cycle. He cites [amazon_link id=”0853450811″ target=”_blank” ]Kalecki[/amazon_link], but also Marx’s dialectics: “Monopoly produces competition, competition produces monopoly,” Christophers quotes Marx as writing in a letter of 1846.

[amazon_image id=”0674504917″ link=”true” target=”_blank” size=”medium” ]The Great Leveler: Capitalism and Competition in the Court of Law[/amazon_image]

The book starts with three chapters setting out Christophers’ analytical framework and explaining in more detail the dynamic to and fro between more and less market power for businesses. It is very interesting to see an analysis of this kind in terms of the legal framework. While law has hardly been ignored by economists, this big picture, historical perspective provides much food for thought. As Christophers puts it in the introduction, modern political economy has tended to focus more on the sphere of production, whereas competition and IP law concern the sphere of exchange. Yet many of the flash points in public policy today concern exactly competition and intellectual property, precisely because the basic productive structure of the economy is being changed by technology. The two spheres meet.

This means [amazon_link id=”0674504917″ target=”_blank” ]The Great Leveler[/amazon_link] is an important contribution to understanding some of the most acute modern policy – and political – questions. The analysis of the first half is followed by two chapters looking at the historical experience of the US and UK from the late 19th century, and a final chapter on 21st century monopoly. Recent decades have seen the phase of the cycle where enforcement of competition diminishes and enforcement of IP protection increases. Christophers links this to the Chicago School of economics, with its powerful impact on public policy on both sides of the Atlantic. He sees little sign that this has changed even now: “Post-Chicago developments have certainly entailed meaningful changes in antitrust thinking and practice, but such changes ultimately amount to small beer compared to the changes that the Chicago revolution itself heralded.” The ‘post-Chicago’ work of economists such as Jean Tirole, Christophers argues, have concerned specific business practices or mergers rather than the framework of competition law as a whole.

As for policy approaches to intellectual property, there is little sign of any recent redressing of the balance, for all the forceful concerns many people – academics and regulators – have voiced about excessive protection, from the TRIPS clauses to copyright madness. Indeed, this chapter argues that strong IP protection was deemed pro-competitive by Chicago-flavoured thinkers (I’m afraid Christophers does use the adjective ‘neoliberal’, although it obscures rather than clarifies matters, given that so many non-economists use it to describe all economists, as if there were no differences of opinion or political philosophy in my professsion). He underlines the irony that ‘pro-market’ can mean either pro-competition (citing early Mont Pelerin economists such as Lionel Robbins) or ‘pro-business’ (ie anti-competition), as – he argues – many law-and-economics  ‘neoliberals’ are today.

The book concludes: “Political economy never sits still.” This is a terrifically interesting book, one for anybody interested in political economy, or just in the narrower canvas of law and economics.

There’s no doubt the plates are shifting again now, although who knows where they will take us – the political and economic forces undermining the post-1980s structure are powerful, yet there is no alternative intellectual framework, in contrast to the preparedness of the early Chicago School in the mid to late 20th century. I was much struck by Daniel Stedman Jones’s account in [amazon_link id=”0691161011″ target=”_blank” ]Masters of the Universe[/amazon_link] of the systematic preparation of that earlier generation of economists to change the public philosophy – decades-worth of research and influencing. It’s clear – especially after reading [amazon_link id=”0674504917″ target=”_blank” ]The Great Leveler[/amazon_link] – that the balance ought to tilt back now away from monopoly protection toward competition enforcement, as the dominant model of capitalism is self-undermining. But who knows how or whether that will come about? Christophers ends with Lenin’s prediction that the future is capitalist monopoly on the international stage, monopoly imperialism. I have more confidence in self-correcting mechanisms. We will see.

PS. Christopher May, much cited in The Great Leveler, is the author of [amazon_link id=”B00ZY8G016″ target=”_blank” ]The Rule of Law: The Common Sense of Global Politics[/amazon_link], published in paperback last year. I haven’t read it, but it offers an explanation of why global politics so often seems to turn on legal issues. “In accessible terms, Christopher May argues that we can no longer merely use the idea of the rule of law without question but rather must appreciate its multifaceted and contested character if we are to begin to understand how and why it is now seen as a ‘good thing’ across the political spectrum,” according to the blurb.

[amazon_image id=”B00ZY8G016″ link=”true” target=”_blank” size=”medium” ]The Rule of Law: The Common Sense of Global Politics by Christopher May (2014) Hardcover[/amazon_image]