"Time to break up Amazon. Monopolies are wrong!"
That’s Elon Musk, the eccentric founder of SpaceX and Tesla going against Jeff Bezos, after an author complained on social media about being unable to self-publish a book via the world's largest online retailer.
In today’s article, we will try to understand what modern monopolies look like and their effects on our society.
Clearing up the basics
Ideally, a monopoly is an enterprise that is the only seller of a good or service in a market. However, this has been interpreted by courts in the recent past as companies having significant and durable market power. In the absence of government intervention, a monopoly is free to set any price it chooses and will usually set the price that yields the largest possible profit. While monopolies are thought to rest on government policies as evident in utilities providing water, sewer services, electricity, and energy, monopolies may also emerge in driven by superior efficiencies.
Monopolies may benefit from economies of scale and greater innovation driven by supernormal profits invested into R&D (think patents). However, the reason why monopolies are so unpopular is that they leave society worse off by charging higher prices, reducing consumer surplus, creeping inefficiencies, and leveraging political clout to affect society in undemocratic and unaccountable ways.
And governments have been proactive in restricting such unfettered power to a single corporation through Antitrust Laws. Antitrust laws can be traced back to 1890, when the Sherman Law was implemented in the USA to restrain the government's impulse to grant exclusive privileges (think the British East India Company). However, all this changed by Robert Borke, a former Solicitor General of the United States, who identified economic efficiency, disguised as consumer welfare, as the sole objective of U.S. antitrust law in his book “The Antitrust Paradox” and is currently accepted as the framework to analyze any anti-trust action.
So, what does a modern monopoly look like?
Modern monopolies are the bastions of technology companies in the form of aggregators which, enabled by zero marginal costs and user preference fueled network effects, drive suppliers onto their platforms and end up creating a virtuous cycle as encapsulated in the popular “Amazon Flywheel”. While technological markets may often start in an ultra-competitive state, but quickly devolve into monopolies or duopolies as network effects and economies of scale take over. We have seen similar progressions in operating systems, in search, in social networks, in digital advertising, and in e-commerce. Think Microsoft, Google, Facebook, Amazon, and all of them have been subjected to anti-trust petitions by organizations and governments around the world.
Wait, the services provided by these companies are really awesome. So what’s going on?
● Microsoft had a monopoly on operating systems for personal computers, created by the network effects between developers using the closed Windows API and users leading to an ecosystem where others players could not compete. Microsoft was found guilty of illegally bundling Internet Explorer with Windows and unfairly restricting OEMs from shipping computers with alternative browsers through competition-constraining contracts.
● Google has a 92% market share in Search. Android has a 72.5% Mobile Operating System market share while Google Play has a 75.7% share in app downloads. Network effects create high entry barriers - the more consumers use a search engine, the more attractive it becomes to advertisers. Similarly, the data a search engine gathers about consumers can in turn be used to improve results. Google has consistently favoured its own properties in search results - Youtube over other video segments, local results from Google Maps above Yelp, TripAdvisor etc, hotel and flight listings above Booking, Expedia, etc and listing Google AMP-enabled websites above others. Google leveraged the Play Store to force Android OEMs to feature Search and Chrome, and forbade OEMs from shipping any phones with open-source Android alternatives.
● The arguments on Facebook are more nuanced. While Facebook has 36.6% share in social networking sites, the combination of Facebook, Instagram and WhatsApp has a user base large enough to dominate digital advertising. Facebook has been accused of using its outside profits in the digital ad market to buy the winner in another - Instagram in social media. Consumer internet companies have suffered massively due to the dominance of Google and Facebook.
● Amazon has a 39.7% market share in the US e-commerce market. It is supposed to have a 35% market share in India. Amazon has grown as an online gatekeeper - more than 50% of people looking to buy something online start on Amazon with a majority of American households relying on Prime for ordering. Despite its effect on competition, Amazon has drawn little scrutiny from antitrust enforcers, because it offers low prices. Thus, sellers are facing a Faustian bargain - relying on a competitor who allegedly steals sales data of third party sellers to access the market. And just read about Diaper.com to understand Amazon’s propensity to underprice competitors out of the market.
Is there a remedy around?
Elizabeth Warren, the US senator who ran as a Democratic hopeful for the 2020 Presidential campaign, presented a wide-reaching proposal that specifically targeted reigning in BigTech. We may use some of her strategies to create broader remedies to encourage alternatives:
● Limiting mergers to limit competition or reversing illegal and anti-competitive tech mergers: Breaking apart Facebook, Instagram, and WhatsApp will definitely be beneficial for competition. It would make other companies like Snapchat and TikTok more competitive by virtue of forcing advertisers to diversify. Amazon has made anti-competitive acquisitions like Zappos, Diapers.com, and Whole Foods. Regulators should look at the acquisition of other potential platforms with extreme skepticism.
● Restricting companies owning a marketplace from participating in the marketplace - Google might be forbidden from offering its own results for things like local search, or be forced to feature results from competitors according to an algorithm. India is already implementing these rules for e-commerce platforms especially Amazon and Flipkart. Restricting these platforms from accessing data of third party sellers can be a step in the right direction.
● Stricter application of antitrust laws: FTC’s investigation on Microsoft requiring interoperability and opening up APIs presented users with choice in terms of both browsers and media players who won in the long run (Firefox and Chrome, and iTunes). Keeping a close eye on rent-seeking, bundling, and providing an advantage to own products may help in taking proactive action on platforms. Regulators should pay attention to market restrictions that are enforced by contracts that limit competition.
There are concerns about Spotify becoming a monopoly by replicating Google and Facebook’s gatekeeping strategies. Its acquisition of Gimlet, Anchor, The Ringer, and the recent $100 million deal with Joe Rogan may spell the end for independent podcasting by attempting to roll up power over digital audio markets.
Walking the tightrope between innovation and regulatory straitjacket
However, we have to understand that each of the mentioned companies created new markets by leveraging technology to solve unique user needs, acquired users, then leveraged those users to attract suppliers onto their platforms by choice. We have to make sure that innovation gets its deserved reward while ensuring significant consumer benefits.
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About the Author: The post is written by our EZPP Partner Abhirup Roy with relevant edits from our editorial team. Abhirup is a graduate from IIM Ahmedabad and works with Zolo Stays.