Breaking up big tech

What do economists think about antitrust in the digital economy

In October, the US Department of Justice launched a federal antitrust lawsuit against Google, accusing the technology giant of abusing its dominance in the market for internet search. Chicago Booth surveyed both European and American economists.

Question A: Google’s dominance of the market for internet search arose mainly from a combination of economies of scale and a quality algorithm.
Europe:

US:

Question B: In light of Google’s dominance, its current operating practices could have a substantial negative effect on social welfare in the long run.
Europe:

US:

Question C: The nature of the market dominance of technology giants in the digital economy warrants either the imposition of some kind of regulation or a fundamental change in antitrust policy.
Europe:

US:

Antitrust in the Digital Economy – US
Antitrust in the Digital Economy – Europe

The harm to innovation

Last week the U.S. government filed another antitrust suit, this time against Facebook, seeking to break up the corporation for monopolistic practices.
In this paper Kamepalli et al. analyze why acquisitions by Facebook and Google in the startup space discourage new entry. They construct a simple model that rationalizes this counter-intuitive effect: a crucial role in the success of an innovation is played by early adopters amongst customers who offer a signal about the fundamental quality improvement brought about by the new platform. When this new platform is acquired, the early adopters incur high switching costs, as a result the prospect of a merger will dissuade many early adopters from trying the new technology, reducing prospective payoffs to new entrants.

They test this prediction using data on investment in startups. They show that venture capitalists significantly reduce the number of deals and the amount of money they invest in markets where Facebook and Google have made a large acquisition, after the two giant digital platforms have made those acquisitions.
Kill Zone
Authors: Sai Krishna Kamepalli, Raghuram G. Rajan, Luigi Zingales
From: University of Chicago

The social harm

Stanford’s Cyber Policy Center just published a study co-authored, among others, by Francis Fukuyama on the scale, scope, and power exhibited by the digital platforms. Below are some highlights from the study:

Pressuring the platforms to curate political content in the manner of a media company is not a long-term solution to the problem they pose for democracy.

We do not believe the antitrust laws in their current form provide adequate remedies for non-economic harms.

A combination of regulation and new technology might enable new forms of competition to emerge on top of the existing platforms, an approach we call a ‘middleware’ solution.

Report of the Working Group on Platform Scale
Authors: Francis Fukuyama, Barak Richman, Ashish Goel, Marietje Schaake, Roberta R. Katz, Douglas Melamed
From: Stanford University