Hal Varian (Google Chief Economist) – The Impact of the Tech Antitrust Bills on Consumers (May 2022)

Chapters

Abstract

The Digital Economy: A Critical Analysis of the House Antitrust Report Integrating Supplemental Information

Unraveling the Myths of Market Dynamics, Innovation, and Consumer Welfare

The House Antitrust Report, a pivotal document scrutinizing the digital economy, has sparked intense debate over market dynamics, innovation, consumer welfare, and antitrust concerns. However, a closer examination reveals several contradictions in the report’s assertions. Empirical evidence suggests that, contrary to the report’s claims, the digital economy is marked by decreasing prices, enhanced product quality, thriving innovation and entrepreneurship, and vibrant competition. This article delves into the report’s key allegations and juxtaposes them with real-world data and trends to offer a comprehensive, neutral analysis of the current digital landscape, incorporating insights from the recent report by the House Committee on the Judiciary’s Subcommittee on Antitrust and expert perspectives like Hal Varian.

Non-Discrimination Requirements: A Double-Edged Sword:

The report calls for non-discrimination requirements to prevent platforms from favoring their own services. While aiming to level the playing field, this approach inadvertently creates barriers to integrated user experiences, potentially hampering efficiency and innovation. As the American Choice and Innovation Online Act proposes, prohibiting covered platforms from showing preference for their own services or products would hinder the integration of user experiences and require users to make additional clicks to select alternative services. Such a move would limit market entry opportunities and potentially diminish competition, contradicting the report’s objective.

Structural Separations: A Misguided Solution?

The advocacy for structural separations and business restrictions, as suggested in the report and inspired by the Ending Platform Monopolies Act, could lead to the fragmentation of services. This not only degrades the user experience but also limits market entry opportunities, possibly diminishing competition rather than enhancing it. Structural separation would degrade user experience and reduce competition by preventing platforms from competing with incumbent firms outside their core markets.

Mergers and Acquisitions: The Unseen Benefits:

Contrary to the report’s stance on prohibiting mergers and acquisitions, such activities often provide vital exit strategies for startup founders and venture capitalists. This aspect of the digital economy plays a crucial role in encouraging startup formation and fostering an environment of innovation. The Platform Competition and Opportunity Act recommends provisions that would restrict mergers and acquisitions by covered platforms, limiting exit opportunities for startup founders and venture capital investors and discouraging startup formation. Most successful startups rely on acquisitions by larger firms as their exit strategy. Hundreds of venture capital-backed startups in machine learning and artificial intelligence would be affected by these restrictions. Neither founders nor venture capitalists expect numerous independent firms to lead the mature market, and many hope to develop technologies that can be acquired by established companies.

Price Dynamics: Debunking the Myth of Rising Costs:

The report’s claim of increased digital product prices is contested by numerous studies and indices like the Adobe Digital Price Index, which show a consistent decline in online prices. Furthermore, the prevalence of free digital services further undermines the assertion of rising costs. Empirical evidence and academic literature align with this perspective, indicating that prices for digital products are decreasing, not increasing. Many digital services are free for consumers, eliminating price concerns. Online prices have been declining over time, as shown by the Adobe digital price index.

Quality and Integration: Consumer Preferences Lead the Way:

Research indicates that consumers favor the convenience and integration offered by digital firms. These companies continually innovate to improve ease of use and navigation, challenging the report’s claim of declining product quality in the digital field. Consumers prefer the convenience of integrated experiences, which digital firms are constantly innovating to enhance. Quality improvements are evident in both ease of use and navigation.

Innovation and Entrepreneurship: Flourishing in the Digital Age:

The assertion of diminished innovation and entrepreneurship is contradicted by the record-breaking startup funding in 2021. The vibrant market for acquisitions is a testament to a dynamic ecosystem that incentivizes entrepreneurial ventures. 2021 was a record year for startup funding, twice as high as the previous year and 10 times higher than a decade ago. Most startups expect to be acquired, providing an incentive for entrepreneurship. Restricting acquisitions can discourage startup creation. Big tech firms typically acquire small, young companies to access their innovative ideas and products.

Market Structure: The Reality of Competition:

The digital economy is characterized not by winner-take-all dynamics but by constant competition and innovation. The report’s view of market concentration and gatekeeper power is challenged by the dynamic nature of the industry and the numerous examples of market failures among prominent firms. Varian disagrees with the House Antitrust Report’s claim that the digital economy is less competitive than before. The digital industry is highly dynamic, with constant competition and failures highlighting its competitive nature. Aggressive competition from innovative new consumers funded by venture capitalists and foreign governments challenges leading firms. Gatekeeping efforts by leading firms invite disruption, as consumers demand the highest quality services at the lowest possible price. Firms in the digital economy must keep consumer welfare at the forefront to remain competitive.

Antitrust Concerns: A Misdirected Focus?

The report seems to prioritize the protection of less efficient firms over consumer welfare. However, for digital firms to remain competitive, consumer welfare must be at the forefront of their operations. The report appears to prioritize the protection of inefficient incumbents over consumers, a perspective challenged by Hal Varian. Varian emphasizes that firms in the digital economy must keep consumer welfare at the forefront to remain competitive.

Global Competition: Beyond Domestic Borders:

The competition in the digital economy extends beyond domestic firms. Foreign companies like Toyota and TikTok, adopting the Silicon Valley model, are intensifying competition against counterparts like Ford and YouTube. Examples of foreign competition, such as Toyota’s competition with Ford and TikTok’s competition with YouTube, demonstrate the impact of foreign firms as competitors. Foreign firms are increasingly adopting the Silicon Valley model, leading to increased competition for domestic companies in various sectors.

Technology Adoption and Market Dominance:

Historical examples like Ford and Edison show that early adopters of new technologies can achieve significant growth. However, technology transfer allows other firms to enter the market, promoting competition, as evidenced by new entrants like Niva. Google’s success is attributed to billions of dollars invested in improving search over 20 years. The company’s consistent investment in research and development ensures its products constantly improve, with 16% of revenue dedicated to this effort.

Addressing Digital Barriers to Entry:

The report’s claims about barriers to entry in the digital economy due to economies of scale, scope, and data usage are challenged by the ongoing competition and innovation, as well as the entry of new firms leveraging data for market insights. The ongoing competition and innovation, as well as the entry of new firms leveraging data for market insights, challenge the report’s claims about barriers to entry in the digital economy due to economies of scale, scope, and data usage.

Information Goods and Market Dynamics:

The nature of information goods, with high production but low reproduction costs, is addressed through licensing and subscription models. This sector has become an integral part of the economy, adapting to economies of scale and scope. The nature of information goods, with high production but low reproduction costs, is addressed through licensing and subscription models. This sector has become an integral part of the economy, adapting to economies of scale and scope.

The Role of Data in Search Engines:

Recent user data is crucial for search queries, with reminder ads often based on merchant data rather than search engine data. This practice is used by online retailers to engage potential customers, showcasing the nuanced use of data in the digital economy. Recent user data is crucial for search queries, with reminder ads often based on merchant data rather than search engine data. This practice is used by online retailers to engage potential customers, showcasing the nuanced use of data in the digital economy.

A Questionable Basis for Antitrust Policies:

The House Antitrust Report’s conclusions and the bills it inspired appear to protect inefficient incumbents over consumers. The lack of empirical support for its claims suggests that the policies based on these assertions may lead to suboptimal outcomes, highlighting the need for a more nuanced understanding of the digital economy. The House Antitrust Report’s conclusions and the bills it inspired appear to protect inefficient incumbents over consumers. The lack of empirical support for its claims suggests that the policies based on these assertions may lead to suboptimal outcomes, highlighting the need for a more nuanced understanding of the digital economy.

Notes by: Ain