Breaking Up Big Tech: An Evaluation of Sen. Warren’s Proposal
On March 8, Senator Elizabeth Warren published a post on Medium titled “Here’s how we can break up Big Tech”. First I will provide some additional evidence to examine the overarching theme that market concentration has squashed innovation, next I will dive into the specific anti-competitive strategies she names and I will conclude with the possible welfare implications of her proposal.
Overview of Market Concentration and Shifts in Innovation
The post claims early on that “weak antitrust enforcement” has led to a dramatic reduction in competition and “stifled innovation” in the tech sector. While there has been fewer startups and financing rounds for tech startups has been in decline as noted in the post, this may not be a result of increasing market concentration. Robert Atkinson, president of a public-policy think tank that promotes policies based on innovation economics, argued citing the Census Bureau’s Economic Census that about 40 percent of industries concentration has not been increasing while most of the remaining 60 percent have remained unconcentrated. Instead he cites stiff international competition and the Great Recession as key drivers of the decline in startups.
While startups may be in decline, it also could be that the share of innovation has shifted towards larger, more established corporations. These larger corporations have a key advantage over start-ups in that they are able to take on the large fixed costs necessary for innovations including logistics systems that have allowed Amazon to offer 2-hour delivery for household items and groceries with Amazon Prime Now. Larger firms now make up an out-sized portion of total innovation, measured by patent grants. Astonishingly, the top 10 US patent assignees were granted 26,437 patents in 2018, which adds up to 8.6% of the 308,853 total grants. To get a scale of the size of these ten corporations, their annual revenue sums to only 3.6% of US GDP as of the end of 2018, suggesting that these corporations take on an out-sized proportion of all innovation. US Patent grants have also been grown over threefold (in the same time period where startups have declined) from 89,823 in 2005 to 308,853 US Patent Grants in 2018.
Anti-Competitive Strategies:
The first anti-competitive strategy discussed is “Using Mergers to Limit Competition”. Specifically cited is Facebook’s purchase of Instagram and WhatsApp, Google’s purchase of Waze and DoubleClick, and Amazon’s purchase of Whole Foods and Zappos. However acquisition provides the necessary incentive for many investors to fund start-ups in the first place. Angel Investors and Venture Capital often require exit strategies for startups so they can get a return, and acquisition is one of two main exit strategies (alongside an Initial Public Offering or IPO). With the possibility of acquisition reduced for competitors, the availability of funding for these startups will also be diminished.
On top of reduced availability of startup funding, there is added danger that reversals of “anti-competitive” mergers could create economic uncertainty for many businesses and investors. Furthermore, her analysis ignores the welfare benefits of these mergers. Amazon’s purchase of Whole Foods benefited both business and consumers. Amazon can now take advantage of the advanced logistic systems for the “last mile” that Whole Foods already had in place, and customers can now use Whole Foods outlets to pick up their packages sooner than possible before the acquisition. Customers also have an increased ability to get “ultra-fast delivery” of fresh produce, meat, seafood and other groceries in as little as one hour. Facebook’s purchase of Instagram for $1 Billion back in 2012 benefited consumers in a different way, it scaled the photo-sharing app much more quickly than it could have by itself. At SXSW 2019, Instagram founder Kevin Systrom commented that access to Facebook’s immense resources allowed it to grow to the size it has. Systrom also revealed that Instagram’s Stories feature enjoyed by more than 500 million users daily was a directive from Mark Zuckerberg and may not have existed without the merger.
The second anti-competitive strategy discussed is “Using Proprietary Marketplaces to Limit Competition”. Many tech companies own a marketplace while also participating on the marketplace, creating conflicts of interest that undermine competition. Warren suggestion of passing legislation that designates large tech platforms as “Platform Utilities” and breaks apart from platform participants has merit in increasing competition on these platforms that would benefit consumers. Platforms mentioned include Amazon Marketplace, Google’s ad exchange, Google Search and Apple’s App Store. Tech firms owning both product and platform allows for unfair business practices including white-labeling products on Amazon, Google favoring its own restaurant ratings over Yelp’s and Apple affecting search results in its App Store. Breaking products from platforms that they are sold increases competition and forces products to compete on their own merit.
Welfare Implications:
Breaking up so-called anti-competitive mergers could have unpleasant effects on reducing incentives for start-up funding, increased economic uncertainty, and reduced product offerings for consumers such as Prime Now and Instagram Stories. On the other hand, there may be room to increase competitiveness through reducing conflicts of interest between marketplaces and their participants. Parts of Warren’s prescription have the opportunity to promote healthy competition and benefit consumers but it is not so dire as “protecting the future of the internet”.
SOURCES:
Elizabeth Warren – Here’s how we can break up Big Tech
The Number of New Startupus is Down — and That’s OK