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Competition is the cure

  • Published at 10:55 pm September 28th, 2019
Should they be regulated? Bigstock

Less regulation is the answer, not more

A new report from the International Monetary Fund tells us that there might be an increasing concentration in the economy. 

That the large firms are getting larger, this increases their market power, and we might get to where that starts to actively damage prospects for all us consumers out there. It’s important to note that the actual report does really emphasize the word “might.”

This is not how the report has been received of course. Those who want to regulate the economy more have seized upon it as evidence that, well, they get to regulate the economy more. 

This is even more so when we think about Big Tech, for that’s where the potential market concentration is going on. That IMF report is a great deal more subtle about this than it’s being given credit for but then, of course, that’s what happens when political activists grasp upon a piece of scientific research. 

It always is going to be that they’ll say the report shows that the activists get to do more of what they already want to do, isn’t it?

We do have a specific problem with the large tech companies, Amazon, Facebook, Google, and so on. This comes from what we call network effects. 

The larger a company becomes, the more valuable it is for the next user to switch to that company. We’re all on Facebook because 2 billion other people are on Facebook, that it’s so large is the very thing which makes it so valuable to us.

So, having the one large company is of benefit to us but it also gives that one supplier market power which means that they can -- at least try to -- exploit us to our disbenefit. Working out what the balance is, is a bit tricky.

We want to know whether the average consumer is being taken advantage of. That’s always our worry when producers have market power after all. We thus need a different measurement.

This has been done for the US economy and when properly measured, we’re seeing the less economic concentration, not more. Think about it at the level of the household, the true human economic unit. 

If they can only go and buy food from the one place, then they face a monopoly provider. They might well be exploited by that provider. Someone out in a small town somewhere might well be in that situation, only the one small shop or trader. 

Now, we have one huge national company, which delivers to anyone, anywhere. Amazon might look, at that national level, as a concentration of economic power. But down at that household level, that’s now an increase in competition to supply that household. We’ve reduced the ability of a provider or producer to deal unfairly with the consumer.

That is, the existence of one or several large national suppliers could well be -- and is in fact -- a reduction in market power. It depends upon which scale we decide to do our measurements.

We can apply this to India -- Flipkart and Amazon are major players. The Indian retail market has long been small scale, much like that here in Bangladesh. So, having two vast national corporations can look like an increase in market concentration, of economic power. 

But if these two companies will now deliver to any village in India, then that’s an increase in competition, not a reduction. 

When we think that those two companies, Flipkart and Amazon, are in fact marketplaces, with tens of thousands of suppliers on each platform, then of course we’ve hugely, vastly increased consumer choice.

So, the idea that Big Tech is increasing market concentration looks to be wrong in the first place. But let’s say that’s wrong. Or not entire and whole. Imagine that there is still that increase in the ability of the capitalists to profit from us?

The IMF’s answer is that if this is so, then the answer is less regulation of the economy. Allow more trade across borders, reduce the difficulty of new suppliers entering the market. That is, the cure for monopoly is competition.

It’s almost certainly not true that Big Tech is reducing competition. But if it is, the answer is to allow more competition. That means less regulation, not more.

Tim Worstall is a Senior Fellow at the Adam Smith Institute in London