However, as argued earlier, the stock market may reward an incumbent monopolist with the high share price and fund-raising capacity that allows him to threaten anyone who enters with a bruising fight, and to buy out any innovator. Perhaps, then, the presence of other incumbents who have similar resources may prevent the stock market from anointing any one incumbent, and may prove better for competition, both on current prices and on innovation. Put differently, while the prospect of maintaining a monopoly is a spur to innovation, being forced to start the race for that prize at the same starting line, rather than many paces in front, is an additional spur. Schumpeter’s theory about the irrelevance of current industry structure is not fully persuasive—competition today may be necessary for competition tomorrow.
THE CASE AGAINST GIGANTISM
Is there anything else that can guide us? Are there any other dangers to industry dominance by a few large firms? Our discussion throughout this book suggests that the larger and fewer the firms in an economy, the easier it is for them to do deals with the state to protect their position.4 Conversely, a state that seeks to concentrate power in its hands needs to persuade only these few large players with carrots or sticks. Perhaps the most successful examples of outside interventions to create liberal democracies were the postwar transformations of defeated fascist Germany and Japan. A key step there was the insistence by the American-occupying authority that big business cartels and combines be broken up. Indeed, the Celler-Kefauver Act passed by the United States Congress in 1950 attempted to reduce the dominance of any industry by a few firms within the United States, in part because “centralizing of corporate control also threatened to destroy a democratic system requiring decentralized private as well as political power.”5
Society cannot afford to be complacent. Democracy requires constant vigil, and the need for corporate independence from the state suggests a mild bias against corporate gigantism, especially if it does not come at the expense of corporate efficiency. In this vein, the owners of small and medium enterprises or well-to-do professionals are the modern equivalent of the seventeenth-century British gentry. They are not large enough to do individual deals with the state or to monopolize their industries. They are rich enough, though, to not depend on government support, and indeed can fund movements pushing their favorite causes. This independent small-holder group needs open access and a level playing field. It constitutes the vanguard of any movement for broader economic and political opportunity. Therefore, any economic system has to also be judged by whether it preserves room for new entrants and fast-growing small and medium firms. As we have noted, the pace of new business creation is falling in the United States, as are the number of start-ups that stay independent.
A final, and separate, rationale for encouraging new entrants and fostering dynamism is that small and medium enterprises also tend to be contained within specific communities and can do more for those communities.6 In work that I have done with coauthors, we find that large banks are more able to lend to large firms that have good accounting records, while small banks are much more able to lend to small nearby firms that operate more informally.7 Intuitively, decisions by small banks can be made by the owner or manager assessing the trustworthiness of the potential borrower through direct meetings, and substantiated with information from the local grape-vine—while decisions by loan officers of large banks have to be sufficiently supported with hard records so that they pass muster with headquarters, or can be checked by inspection teams.8 Small banks are therefore better at local, informal, lending. Indeed, such studies validate the Pilsen community’s strong desire to rescue its local community bank (discussed in the Preface).
So what does all this mean for antitrust policy? Antitrust authorities should examine mergers for the possibility of industry dominance, not just from the perspective of whether the customer is better served today, but also whether competition will be irretrievably altered. For instance, acquisitions that have the primary objective of closing an innovative competitor, or absorbing a rival who might prove a competitive threat, should be prohibited. Preserving competition today may also be essential so that the stock market does not give a dominant incumbent the resources with which to shut out competition tomorrow. The pragmatic solution is to adopt once again the clear and defensible rules of thumb of the past, whereby antitrust authorities opposed corporate actions that increased a single corporation’s dominance of any market beyond a preset specified point, no matter what the claims about greater efficiency and consumer welfare were. Antitrust authorities must be broad-minded about what constitutes the relevant market and competition, recognizing that technology can bring product and geographic markets together that were separated in the past. However, arguments that innovation or entry by rivals will make the market more competitive in the future should be met with some skepticism—today’s dominance can allow the incumbent to alter conditions so as to make it much harder for rivals to get their foot in the door in the future.
The economic costs of rule-of-thumb antitrust enforcement may not be large as information technology improves, and as contracting and monitoring costs fall. Instead of a company owning the entire supply chain, we could get a more nimble, competitive supply chain consisting of many corporations contracting with one another. Instead of a company merging with all competitors who produce a product, ostensibly to obtain economies of scale, we could instead retain many competitors who cooperate on specific projects through alliances whenever the economies of scale of doing so are really significant. Put differently, corporations will adapt to effective antitrust enforcement, and given the improvements in contracting and communications, we will likely get both competition and productive efficiency at the same time.
INTELLECTUAL PROPERTY AS A SOURCE OF MARKET POWER
In the new economy being created by the ICT revolution, information, knowledge, creative works, and ideas—broadly termed intellectual property—are the key assets. Such intangible assets are nonrival—if I sing or listen to a song, it does not preclude you from singing or listening to that same song. If a song could be sung by anybody, the songwriter could never benefit monetarily from her creativity; without legal protection, intellectual property, especially property that needs to be used publicly, would have no value.
In addition to being nonrival, though, intellectual property is often essential and unique. These two characteristics make protected intellectual property a very great source of monopoly power, far greater than that obtained from physical property, for which there typically are substitutes. Moreover, because intellectual property gets its value from past innovation and government protection rather than necessarily the owner’s continued innovativeness or efficiency, it tends to make the private sector more dependent on the government for protection than would be the case with physical property; it draws behemoth and leviathan closer.
One example of such protection is patents, which aim to encourage innovation. It is unclear that the patent awardee has a strong incentive to innovate further after acquiring the patent. Economists Michele Boldrin and David Levine, strong critics of the patenting system, argue that bursts of innovation start out in competitive industries.9 Patents are typically filed after a substantial amount of time has passed. The filings tend to obscure key steps so as to keep competitors from stealing a march, even though this defeats the purpose of patenting—which is to reveal the underlying secrets for all to build on in exchange for a period of government-protected monopoly. By the time patents are approved, the flurry of innovation that moved the industry to new heights has abated. As a result, they argue, patents typically serve to protect the positions of incumbents against entrants and rivals, rather than spur additional innovation.
The patenting process has to manage the tension between two fundamental aspects of the free enterprise system—the need to protect property rights as a reward for past effort and the need to preserve competition as a spur to current initiative. Too much patent
protection, and we chill competition. Too little, and we may deter effort. It is unclear whether patent protection achieves the right tradeoff in the United States today, but clearly small innovators are disfavored in a number of ways. Even if they are awarded a patent, single patents are easy for large firms to navigate around or to challenge. Few good lawyers are willing to work to defend a single patent on a contingency fee basis (where the lawyer gets paid only when the plaintiff wins), and most small entrepreneurs cannot afford to pay legal fees otherwise.
A more effective strategy is to develop a cluster of patents that will trip up a violator no matter how they contort themselves to explain their strategy, but such extensive patenting is something that typically only large firms can afford. Indeed, large firms often seem to use their patents not so much to protect their innovations but as a possible counterthreat against rivals who sue for patent infringement. Given the thicket of patents that have been awarded in recent years, corporations have invariably violated one another’s patents. In such cases, patents, like nuclear weapons, are valuable primarily because they can be used to threaten mutually assured legal destruction. If so, would all sides except lawyers not be better off with no patents? In sum, in an environment where corporate dominance of industry and rising concentration of income are important sources of concern, it is probably wise to reduce the contribution of patents to market power, even while monitoring closely the effect of these changes on innovation.
The reforms that should be considered include being more careful about what can be patented—Apple received a patent for the shape of the iPad, while drug companies received patents for genes.10 The first trivializes patenting, while the second gives drug companies too much power for something that already exists in nature—which is why such patents were eventually denied by the Supreme Court.11 In general, patent offices should adhere to their mandate of granting patents for nonobvious bigger ideas rather than allow every minor extension of existing ideas to be patented. Furthermore, patents should not be for longer than necessary to give the inventor a reasonable profit. Today, all patents last for twenty years, driven in part by drug companies, which take a long while to test their drugs and get approval before they go to market. An alternative could be to allow a patent to expire twenty years after filing or (say) eight years after a product using the patent is sold in the market, whichever occurs first. This will limit the extraordinary profits that accrue to software producers, who need little time to reach the market and enjoy nearly twenty years of protected sales.
Finally, given the criticality of the patenting process to innovation, it is important that more well-trained talented people should be hired into government patent offices. It may be relevant to note that one of the examiners in the patent office in Bern, Switzerland, between 1902 and 1909 was a certain Albert Einstein.12
DATA AS MARKET POWER
Information is power today. When an e-commerce platform like Amazon or Alibaba collects data on the sales and receipts of a merchant selling on their platform (and perhaps buying on it), they have a good sense of the merchant’s cash flows, and thus his creditworthiness. This allows them to lend to the merchant. Over time, when the platform sees the merchant service loans regularly, it can entrust him with larger loans, thus allowing him to grow his business. Given its privileged access to the information, the platform can charge a hefty interest on the loans. In other words, if the platform owns the merchant’s data, it can refuse to share it with others (and his own records may neither be well maintained nor credible). It has a lock on him. The data are both essential and unique, which gives the platform tremendous economic power.
What if the merchant owned the data he generated? What if the platform were forced to send data (in standardized digital form) on the merchant’s sales and receipts as well as his loans and repayments, to any entity the merchant directed it to share with? The platform would lose its information monopoly. It would still collect the information, hoping the merchant would borrow from it, but it would have to compete with other possible financiers on service or ability to analyze the data, rather than get a step up based on its privileged information. The change in property rights, from the data being implicitly owned by the platform to it being explicitly owned by the merchant, changes the allocation of power and profits from the platform to the merchant. Indeed, the European Payment Services Directive that came into force in January 2018 requires banks to share their depositors’ current account transactions data with any third party specified by the depositor, thus freeing customers from the hold of their bank.
In this Information Age, therefore, the individual or small business needs to own their own data if they are to be free economically.13 The one exception could be when firms invest substantial amounts in gathering and processing data into usable form, when some kind of profit-sharing arrangement from the use of the data ought to be worked out.
Customer ownership of their own data is not an impossible ideal, especially given the advances in data processing. If the interface between the customer and the application, the application itself, and the customer data it uses are all separate, any data collected on a customer could be maintained in standardized but decentralized fashion. Any designated recipient could recreate structures like the web of social relationships the individual has, and their likes and dislikes.14 Most of us would not be able to manage our data, but if there is a need, the market will respond. It is easy to visualize the emergence of trusted information utilities, with no ties to firms that use the data. The individual could authorize the utility to map out where the individual’s data lie, what is used and how. The utility could partition data into various buckets depending on their usefulness for different purposes, enabling the individual to grant or withdraw usage permission (a potential financier does not need to know her dating preferences, even if they could be marginally useful in the decision to approve her loan application).
Once the individual controls her data, she will have the option to sell portions of it to firms, or enter into longer-term arrangements where firms would provide her services in return for the use of her data. Some of what is implicit today would become explicit, the difference is it would be controlled by the user. Indeed, new technologies like blockchains will help decentralize this process, and bargaining bots can help routinize data acquisition for a fee when corporations need vast amounts of data to train their artificial-intelligence applications.15
Another important source of power that e-platforms or social media have is their ownership of the network. If an individual leaves a network, her access to it, and to the many relationships she has built on it, are cut off. This causes many to stay on even if they dislike the network and its services. In other words, as the size of the network grows, the degree to which people are attached also grows (since more of their relationships are on it), and the more value is extracted by the network.
Some countries deal with this problem by placing the ownership of the network in the public domain. For instance, in India, electronic retail payments are made over a bridge called the Unified Payments Interface (UPI), which has been developed by a corporation owned by all the banks. An individual with an account in a bank or platform like Google, WhatsApp, or Alipay, can make payments over the bridge to anyone who has an account in any other bank or company. No entity owns the network, but all benefit from it.
Public ownership of the network is not necessary so long as a country mandates interoperability between networks. If an individual wants to leave social network A and go to social network B, she should still have access to all her relationships in network A, and they should have access to her in network B. The networks may not have exactly the same functions and features, but much as calls are connected between networks run by different mobile companies, social networks should also be interconnected. Of course, the networks will negotiate some interchange fee based on the net requests for connections.
The objective in all this
is not to eliminate the profitability of innovation, but to reduce the economic power corporations and platforms acquire through intellectual property, data, and network externalities that tie users in. By redefining ownership of intellectual property and the data, and shifting more of the latter into the hand of the users who create it, as well as by requiring networks be interoperable, power will be rebalanced. As the temptation to acquire monopolies is reduced, corporations and platforms will have to compete harder on the products and services they provide. This is as it should be.
REDUCING REGULATIONS THAT LIMIT COMPETITION
Regulations are not necessarily bad. For example, the presence of the Food and Drug Administration and the knowledge that it has vetted a new food producer allows consumers to have more confidence in the safety of the food produced, and thus facilitates entry by new food producers. Large incumbent firms have more of an ability to deal with regulations, though, and regulatory bureaucracies have an incentive to churn out more regulations to justify their existence. The New York Times estimated a total of about five thousand restrictions and rules that applied just to an apple orchard, including a large number on how precisely a ladder should be placed.16 Lighter, more meaningful regulation that does not overly burden small and medium enterprises and chill entry has to be a reform priority.
Non-compete clauses, which prevent individuals from moving to rival firms that value them more, are a restraint on individual choice, and may prevent the diffusion of knowledge that helps elevate productivity in entire industries and keep them competitive. California, one of the most innovative states, does not have them. Why should others?
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