Digital platforms force a rethink in competition theory

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Anxiety about the health of competition in the US economy — and elsewhere — is growing. The concern may be well founded but taking forceful action will require economists to provide some practical ways of proving and measuring the harm caused by increasing market power in the digital economy.

The forces driving concentration do not affect the US alone. In all digital markets, the cost structure of high upfront costs and low additional or marginal costs means there are large economies of scale. The broad impact of digital technology has been to increase the scope of the markets many businesses can hope to reach. In pre-digital days, the question an economist would ask is whether the efficiencies gained by big or merging companies would be passed on to consumers in the form of lower prices. Another key question was whether it would still be possible for new entrants to break into the market. Digital platforms make these questions harder to answer.

  • One much-needed tool is how to assess consumer benefits.
  • A second issue is how to take into account the interactions between markets, given that most platforms and tech companies steadily expand into other activities and markets.
  • A third issue, perhaps the most important, is the effect increasing concentration has on incentives to innovate and invest.

[Diane Coyle is professor of economics at the University of Manchester]

Digital platforms force a rethink in competition theory