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There are no economic reasons to regulate the US tech giants

The likes of Google, Facebook, Apple, Amazon and Microsoft may dominate their markets, but the economic argument to regulate them is weak

There is an increasingly loud argument being made that the tech giants must be dealt with – whether this means broken up, regulated, having their power reduced or something else. The two important questions to ask in response to this are why and how?

That Google, Apple, Microsoft, Facebook and Amazon have economic power might seem obvious. They’re all very large companies, and they influence, if not dominate, their respective markets.

For many critics, that’s enough – concentrations of economic power must be broken up or controlled and that’s all there is to it. To the economist, it has to be said that it gets more complicated than this.

A first stab at the economists’ view might come from Mancur Olsen, who said society is a selection of special interest groups fighting over the spoils. The emergence of a new sector will cause conflict over who should control it.

A corollary to this would be the observation that we really cannot say that no politician ever has sought some inconsequential cause that can be exploited to gain power or votes.

Thus the argument in favour of controlling the tech giants is simply that the people who would do the controlling get something to do. A more cynical explanation is that the lobbyists who would get paid to make the arguments either way are suggesting the control idea as a manner of boosting business.

Market dominance

If we decide to leave such realism aside then we should look at the more conventional ideas around monopoly, market power and anti-trust actions.

The most important point here is that size doesn’t matter. There is something of a split in attitudes here, with Europeans believing that dominance of a market is what matters, while a more American (perhaps British, the UK is more like the US here) emphasis is on the effects on the consumer.

These aren’t as different as we might think – you can only affect the consumer if you have dominance, after all. 

The ability to exercise market power only becomes dangerous when someone does try to exercise it
Tim Worstall, Adam Smith Institute

The first question to look at concerning whether anything needs to be done is to ask if these companies have dominance. The answer is perhaps not as much as many think. It’s entirely true that Google has around 80% of the search business, but so what? That doesn’t mean dominance of the sort that confers economic power.

Take that classic accusation – that people will dump products to bankrupt everyone else then raise prices to cash in. What search price can Google raise? Even a charge of 0.001 pence per search conducted would lead to their business evaporating.

Or we might look at what makes Google money, its advertising business. Certainly, Google is large, possibly dominant, here. But then it faces competition from others – except Apple, in this case.

Facebook has a sizeable part of the ad business, on mobile at least, while Amazon is sharpening up its act and Microsoft keeps trying and failing. If Google tried to deploy its potential economic power, it would again swiftly lose business.

Dangerous economic power

To economists, this becomes the definition of potentially dangerous economic power – not size, not even dominance, but the ability to exercise market power, and it only becomes dangerous when someone does try to exercise it.

This is a good example that concerns some of the same firms previously mentioned, where they colluded to insist they would not poach engineers from each other, forming a near monopsony – a single buyer.

That was definitely the exercise of market power, and definitely detrimental to the wages of engineers who couldn’t job hop. It was also found, punished and they were fined for it. They weren’t fined enough for it, but it does all match up with what economists think is a bad thing to be happening, and the right thing was done.  

The exercise of market power to the disadvantage of consumers or suppliers is something we must guard against – and this is where the tech giants have been hit before.

But this leads us back to “Why?” again. What is it any of these companies are doing that merits regulation or breaking them up? The mere possibility of it isn’t enough, they must actually be doing it – and that’s where the justification fails.

Then there’s the question of what should we do? To argue “something must be done” is all very well, but what? Facebook, for example, gains from network effects. The more people who already using Facebook, the more people who will join because everyone’s there.

So, let’s say we decide to break Facebook up. Great, we’ve got two or more social networks and all social networks still gain from network effects. We’ll end up, soon enough, with one of the mini-Facebooks getting all the traffic again.

Reasons to regulate

How would we break up or even curb Apple? It’s a big company with monster profits, but it’s making phones, and there’s no lack of market competition there. Apple is just good at making phones, that’s all.

Break up Google? But that search dominance cannot be exploited with prices or anything else. The ad business faces well-funded opposition, even if Google is currently dominant.

Amazon isn’t anywhere close to dominance in any business sector other than e-books, and Apple was fined for market manipulation there.

Microsoft’s operating system dominance has been broken this past decade, with Windows at number three in the market, behind iOS and Android.

All of which leaves us only with the demand that they must be regulated – to show that they are being regulated. This then brings us back to Olsen: No reason to regulate them, no idea of what we’re going to do, but lots of lovely jobs for the regulators.

It’s possible there might be a better way to manage an economy, such as, perhaps, do nothing until something must be done and we have a reasonable, if not a clear, idea of what we’re going to do.

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