When we think about innovation, competition, and consumer protection we need to understand that there is no perfect solution. There might be situations where innovation is best achieved by a few large entities. Alternatively a large number of smaller competitors may provide options to consumers.
In the past, deciding on this was not as difficult because pricing was done differently. The main concerns that regulators have about monopolies is the potential abuse of these companies that could have been manifested in either high prices or poor quality. The problem that we face today is that dominant companies such as Google provide services for free, which eliminates the concern that it could take advantage of a monopoly position to harm consumers by raising prices.
The innovation aspect of monopolies is more complex. First, it is unclear what could lead to greater innovation. In principle the more firms there are the more likely that a revolutionizing idea could emerge. However this assumes that companies are similarly endowed or at least have comparable opportunities to gain access to the resources they need to develop and bring their ideas to market. This is increasingly difficult because innovations are complex, requiring greater resources and expertise.
Innovation in a digital economy can require an army of skilled workers in many areas such as design, programming, psychology (to learn about what customers want and their behavior), economics (to understand the economic factors that people consider when making decisions), marketing – which now includes social media – project management, and fundraising abilities to obtain the capital necessary to move an idea forward.
Given the greater needs, it is easier for a large corporation like Google to have the resources and expertise to bring about more successful and rapid Innovations. At times it feels that we have entered a golden age of innovation in a digital economy. Google has demonstrated that it can continue to bring to market products and services that people value. It is, however, unclear whether these companies will continue to be benevolent market players and not harm other parts of the economy.
In the short-term we could argue that we have benefited from Google’s many free products such as search engines, maps, translation, video content, market analytics, and digitization of books. However, we also need to think about the long-term, beyond the immediate desires of consumers. We need to be concerned about the power of a dominant company in its interactions with competitors and collaborators and the effect that it may have on the labor market. We need to consider the extent to which we should rely on a very small number of companies for the bulk of innovation that may not quickly diffuse to others.
The European Union recently announced the imposition of a large fine on Google. While markets should most frequently be left alone, it is necessary to monitor some industries, signaling to the players that the government will intervene when there is evidence of abuse. In this case, it is clear that the European Union has been monitoring Google for years. There is evidence of anti-competitive behavior in the previous EU case against Google over its dominance in search engine listings, and in the US the company colluded with other big technology companies to prevent employee poaching. We need to consider the counterfactual of fostering a market with many firms as opposed to a few dominant ones.
Given that Europe and the United States have taken different stances with respect to powerful companies, we may have an opportunity to see the impact of the two approaches. If the Europeans succeed in curtailing Google’s power we might be able to see the impact on innovation in a model with many competitors while in the United States the Federal Trade Commission has been less restrictive on the company, which may offer different outcomes in terms of innovation. One thing we know better now than before is that the tech industry faces more policy and regulatory issues than was commonly assumed in the early years of social media and the Internet.