Conservatives generally subscribe to the idea that we should promote aspiration. In the US, while on the campaign trail in 2012, then presidential candidate Mitt Romney said that, contrary to conventional wisdom, it was actually the Democrat party that was the party of the already rich, and the Republicans the party of those who wanted to be rich. Aspiration is based on allowing people to succeed or fail based on their merits and hard work, and not on who they know or government privileges (which leads to the cronyism which has infected so many societies).
Both of the candidates for Tory leadership have talked about this on the campaign trail and one thing they do agree on is that competition should be the organising principle of the economy.
The real test comes when you probe deeper into what is meant by the word ‘competition’ Does it mean ‘big is bad’, and large firms should be broken up – as was the case in competition enforcement in the US in the 1950s or the EU now? Or does it mean maximising voluntary exchange without distortion? This is often paraphrased as the difference between using competition policy to protect competitors. or to promote the ordinary process of competition which are two very different things.
So what does ‘competition’ actually mean? The goldilocks answer is that economies function best when competition is optimised – you can have too much competition which becomes cannibalistic and ignores the sunk costs some firms have to spend in order to develop certain products. Or you can have too little, which leads to oligopoly or monopoly. So what is the benchmark for competition to be optimised (if not maximised)?
There has been a long debate on this in the US, the country with the longest history of competition enforcement.
Back in 1968, economist Harold Demsetz exploded the myth that fragmented markets should be an objective of antitrust enforcement (i.e. breaking up big firms to create smaller ones). He noted that we have no theory that suggests fragmented markets are a good in and of themselves. In the 1950s and 60s the US enforcement system very much prioritised smaller firms, in one case even preventing a merger on competition grounds when the combined firm would have had only 7.5% market share.
That attitude changed after Demsetz’ groundbreaking work and led to an antitrust retrenchment. Policymakers and regulators came to understand that the real danger was firms abusing market power. In order to do that, you had to have market power in the first place. It then became relevant to think about the durability of that market power – after all, what was true in old line industries such as steel might not hold for the new tech firms emerging in the 1980s and 1990s, where low barriers to entry meant that one error could lead to a new firm entering the market.
Through litigating these ideas in the 1970s and 1980s economists and lawyers came round to the idea that ‘competition’ was really shorthand for maximising consumer welfare in the economic sense. This meant maximising productive and allocative efficiency – which allowed the dynamic gains of competition to be counted. Many enforcement actions actually lower productive efficiency, as firms can no longer invest in the sunk costs required to develop infrastructure or conduct research and development.
The rise of platform-to-platform competition meant that in some cases regulators became more tolerant of a smaller number of players on each platform in order to facilitate that wider platform-to-platform competition, because in order to optimise competition between platforms it was necessary to allow individual platforms to fully take advantage of the fruits of these sunk costs. This became apparent with the rise of the new media economy where, for example, you take in your news as a consumer in a variety of ways that historically had not competed (social media vs. newspapers vs television for example). Economists have certainly argued that the spectacular success of telecoms and IT in the US was partly a result of this shift in competition thinking.
It is against this backdrop that the UK’s Competition and Markets Authority (CMA) ruled that Meta (formerly Facebook) must divest itself of Giphy, the GIF marketplace it acquired in 2020, and the US FTC has signalled it will litigate to prevent another Meta acquisition of another Metaverse-related company.
The UK case is on appeal. But these cases illustrate a wider point at play in global competition circles that could have a profound effect on where the successful development of key new technologies such as AI and quantum will take place. A too heavy-handed approach from the CMA could lead to significant chilling of the investment needed to develop these new platforms and weaken the necessary competition between each other. The CMA’s decision is borne out of the notion, popularised by the EU regulator, that big is indeed bad and that reaching a certain level of market share is effectively a scarlet letter, after which your behaviour will be regulated much more restrictively than your less successful competitors. Herbert Hovencamp, a knowledgeable US antitrust judge and author, has talked about the need not to curtail the top end returns because if you do, the whole structure of innovation starts to fall apart.
Outside the EU, Britain has to decide whether it follows the EU into a world which US economists and lawyers discredited long ago – one in which regulators try to break up big tech companies simply because competitors complain – or whether it ploughs a more economically rational furrow.
The stakes are very high. If China is able to deploy quantum computing at scale, it could prevent others from succeeding in their efforts to deploy it, and Beijing clearly will not break up its large companies – indeed it will do the opposite by distorting its market for trade and commercial advantage. This decision of the UK is even more important as the Biden administration, and its Federal Trade Commission Chair, Lina Khan, has signalled a much more aggressive and interventionist antitrust stance, not unlike the EU’s ‘big is bad’ approach. The battle of ideas that many thought had been won in the 1980s and 1990s about the purposes of competition policy has not in fact been won, and the arguments need to be redeployed.
These are not mere academic or esoteric points for practitioners. How they are resolved could determine the global competition in the high-tech space for decades to come. The UK, as with many aspects of regulation can argue that the meaning of competition is to maximise consumer welfare. And if it does, and succeeds in persuading its allies and partners to do so too, starting with the US, then wealth can be created, critical new technologies developed and the poor lifted out of poverty.
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