Digital platforms force a rethink in competition theory
Economists need to provide regulators with tools to deal with market concentration
by: Diane Coyle, FT.com
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.
How will investment in physical networks or content get funded if an incumbent using the network and content captures all the profit downstream?
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.
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