Sunday, 23 April 2017

People Who Live In Glass Houses Shouldn't Accuse Google Of Being A Monopoly

Just about every paper today is reporting on the story of how Google is apparently a monopoly that may need to be regulated and broken up to allow further competition. This is a big mistake by the European commission, and sadly rather typical of institutions that don't understand monopolies and how widespread value is created through economic power laws (the three newspaper articles I read today don't do much better).

First things first. How can you tell when there is a natural monopoly? That's a serious question - before you complain about monopoly power, you first have to establish that there is a monopoly, then if there is, explain why there is one. Because even if there is one, you'll find there are often many good reasons for monopolies or for dominating firms in particular industries.

One of the main areas of enquiry when there appears to be a monopoly is to ask whether there are good alternatives for consumers, and if so why aren't they being consumed, and if not, why not? And by 'monopoly' we could just mean having the lion's share of the market. For example, suppose Domino's has the lion's share of the pizza market. If consumers think Pizza Hut, Papa John's and other pizza places are a good substitute for Domino's then there is healthy competition. If they don't, despite competing firms, then Domino's are probably providing the kind of pizza (or the kind of price) that a significantly large number of people like.

Now the only way to determine whether competitors are a close alternative is to examine the elasticity of demand. If there is elasticity of demand then if Domino's raises its prices then a lot of pizza eaters will switch to Pizza Hut or Papa John's. If, however, the elasticity is negligible then more pizza eaters will stick with Domino's.

The thing we hate about monopolies is that they are predominant forces that stifle competition - which is bad because it is competition that brings the most significant progress for people in society. If you have a monopoly on a good or service there is no selection pressure to improve and innovate, as consumers have nowhere else to go as an alternative. But with competition, providers are continually looking to improve products, innovate to offer something new, and retain competitive prices too.

Incidentally, I can't help but point out the irony here because the people that most qualify as being monopolistic forces that stifle competition and progress are governments that choose to put industries into public ownership. They are the most unassailable monopolies of all.  

What Google has, just like Facebook and Amazon, is not an unassailable monopoly - it is the possession of the lion's share of innovation and value-creation in its particular sphere of market value. Digital powerhouses, similar to supermarket, electricity, water and railway providers, have the lion's share of industry control not through unfair monopoly power or competition-starving cartels, but because it takes a high level of start-up costs, investment and infrastructure to provide large-scale, high quality services at that level.

Not only do companies like Google, Facebook and Amazon control the lion's share of their particular niche industry, the demand for their services has grown so large precisely because they've created or helped create the market for these services people value, and lest we forget, at a cost lower than their competitors.

There is nothing stopping competing firms coming in to challenge - but if they cannot challenge Google in terms of its efficiency of output then there's no reason why anyone should be concerned about their market size. Obviously if any firm became so enlarged that they used their dominance for ignoble means then of course we should be concerned and look to intervene. But if there's no sign of that happening - and Google, Facebook and Amazon are simply doing what they do really well, and providing mass value in doing so - who is anybody to complain about that?

Moreover, because Google, Facebook and Amazon don't have an unassailable monopoly in terms of shutting out competition, it is therefore highly unlikely that they would do anything that would be to the detriment of consumers. How ironic, then, that an actual monopoly force like the European commission wants to break them up in an attempt to make the industry more efficient, when one of the main reasons those industries like Google, Facebook and Amazon are so far ahead of their competitors is because they have dominated the sectors through predominant efficiency.