July 15, 2022 | News

This article by expert Dr. Daniel Spulber from Northwestern University considers U.S. and EU antitrust policies regarding intermediaries with digital platforms. The article examines antitrust concerns about "Big Tech." The discussion emphasizes the need to apply advances in the Economics of Markets and Platforms in developing these antitrust policies.

Introduction:

The United States and the European Union are developing major antitrust policies targeting digital platforms with a focus on “Big Tech.” The U.S. Congress is considering the American Innovation and Choice Online Act (“AICO”) (S.2992) and the Open App Markets Act (S.2710). The EU approved a provisional version of the Digital Markets Act (“DMA”). These antitrust policies are likely to have significant effects on competition and innovation in digital platforms. These antitrust policies also could have far-reaching consequences for economic growth and development.

Antitrust policies should not be aimed at companies simply because they are both “Big” and “Tech.” Antitrust enforcement in the U.S. has long emphasized anticompetitive conduct rather than market power or market share. Antitrust enforcement in the EU involves greater scrutiny of large firms but their conduct must exhibit “abuse of a dominant position.” Targeting companies based on their size and technology risks mischaracterizing both competitive strategies and anticompetitive conduct. Such antitrust policies could penalize innovation competition and yet miss monopolization and exclusionary activities. 

Antitrust policies toward “Big Tech” should apply economic analysis to address innovation and competition. In this article, I argue that antitrust policy toward digital platforms and “Big Tech” can benefit from advances in the Economics of Markets and Platforms.

Antitrust policy faces two main challenges. First, “Big Tech” firms are economic intermediaries that own and manage digital platforms. Economic intermediaries are central to the economy because they create and operate markets. The Economics of Markets and Platforms can help policy makers distinguish competitive strategies from anticompetitive conduct.

Second, “Big Tech” firms engage in innovative competition by introducing transaction innovations. Transaction innovations improve the efficiency of economic transactions and foster new types of markets. To address innovation competition, I observe that antitrust policy should consider advances in the Economics of Technology & Innovation.

I began to study the economics of intermediaries in the early 1990s. My motivation was to better understand how markets worked. I noted that the textbook frameworks of perfect competition and imperfect competition did not offer satisfactory explanations for how markets form or how markets operate. 

The perfect competition framework does not specify how an economy achieves market-clearing prices and outputs. This framework assumes that buyers and sellers take prices as given whether in a single market (partial equilibrium) or across multiple markets (general equilibrium). But, if buyers and sellers are price takers, how do markets attain an equilibrium? Market clearing then would require a force outside the market such as a hypothetical auctioneer.

The imperfect competition framework addresses price adjustment but does not offer a comprehensive description of how markets form. In the imperfect competition framework, firms with market power choose prices, with buyers continuing to take prices as given. This framework emphasized pricing decisions of producers without examining transaction costs or market formation.

In considering these issues, I observed that intermediary firms solve these problems in most markets. I found that intermediary firms contribute between a quarter to a third of the total value generated by the U.S. economy. Intermediary firms create markets by bringing buyers and sellers together. Intermediary firms act as market makers and match makers. Intermediary firms communicate with buyers and sellers, handle the details of transactions, and help adjust market prices. The activities of intermediary firms help explain how markets are formed and how markets operate.

Intermediary firms also drive technological change in market transactions. Intermediary firms create transaction innovations that improve the efficiency of markets. Intermediaries introduce new types of transaction methods and improve the efficiency of transactions. Entrepreneurs embody innovations in startups and new firms. What I have termed the “Business Revolution” involves innovations in transaction methods, e-commerce, and digital platforms.

Firms that create and operate digital platforms, including “Big Tech,” generally are intermediaries. This suggests that antitrust policy toward “Big Tech” should preserve the benefits provided by intermediaries, while also addressing problems caused by anticompetitive conduct. Antitrust policy toward intermediaries should be designed to protect innovation competition, while deterring conduct that impedes innovation. 

In this article, I consider some aspects of the Economics of Markets and Platforms that shed some light on these significant policy developments. I offer an economic definition of intermediaries and discuss some of the economic literature. I offer some observations about identifying competitive and anticompetitive conduct in the digital economy.
 

The views expressed in this article are solely those of the authors, who are responsible for the content, and do not necessarily represent the views of Vega Economics. For more information about Prof. Spulber, please email experts@vegaeconomics.com.

Antitrust Policy Toward Intermediaries: Digital Platforms and "Big Tech"

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