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Larry Summers on the rise of monopoly power

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Here's Larry Summers in the Financial Times:

Consumers also appear more likely now to have to purchase from monopolies rather than from companies engaged in fierce price competition meaning that pay checks do not go as far.
I decided to follow the link, expecting an academic study showing the rise of monopoly power. Instead I found another FT article, which began as follows:
Have we reached a market top in technology stocks and, in particular, those of the Fangs: Facebook, Amazon, Netflix and Google? That is the question many investors are asking, not only because their valuations seem so high but also because it seems Big Tech has become the new Wall Street and the prime target for a populist backlash in a world increasingly bifurcated, economically and socially.
It's interesting that Summers chose those examples of monopolies reducing the purchasing power of consumers. Let's take them one at a time:

1. Facebook: Totally free social networking.

2. Amazon: Known for slashing prices by introducing more competition into industries such as book retailers. Just purchased Whole Foods, and is now slashing the prices of groceries.

3. Netflix: A new product that did not previously exist; hence it cannot possibly explain declining consumer purchasing power. If compared to movie theaters, it's cheaper.

4. Google: Totally free search engine.

Even if Facebook, Netflix and Google were very expensive, instead of dirt cheap, I don't see how they would reduce purchasing power. Back in 1990 the cost of these services was infinite---they didn't exist.

There may be some problems associated with these companies---perhaps they lead to more inequality at the very top of the income distribution. But I don't see how they can be accused of ripping off consumers with monopoly prices. Am I missing Summers' point?

Perhaps it was the editors at the FT who added the link, not Summers.

COMMENTS (14 to date)
dlr writes:

A more favorable reading is at least possible. If Facebook and Google had a monopoly on advertising it might show up as an increase in the price of reducing search frictions born by sellers and passed through as higher prices on traditional products more than offsetting reduced newspaper subscription costs and the value of social networking and search services. I don't believe this is how it has worked at all but it's a colorable argument at least.

To the extent that Netflix or Amazon is in the group, the monopolies are surely entirely on the come and so a terrible argument about existing markups. Except perhaps for AWS but A. that's not what anyone means and B. the profits are only a few years old much what they are offering is newish anyway.

Rajat writes:

I think people always have to fret about something. Summers has observed low productivity growth and others have complained about rising inequality and slow wages growth. And the rise of the FAANG stocks has accompanied all of this.

I think the fear is that while these firms offer free or cheap stuff now, they will use their growing power to exclude (or buy up) rivals and one day raise prices for their existing services or leverage their power in other industries. Investors are clearly pricing in some expectation of these firms making hay one day. But I think that real predatory pricing is far less common than people - including economists - fear, because driving out competitors is not a once-and-for-all exercise, but an activity than requires constant 'investment' in foregone profits.

Don Boudreaux writes:

For the past 80 or so years, the great majority of economists other than Chicagoans, UCLAers, and the Austrians have been no more sophisticated in understanding competition and market structure than has the typical man-in-the-street. (And early on even some Chicagoans weren't very thoughtful on this issue - e.g., Henry Simons and the early George Stigler.) For most economists, bigness=monopoly power. Indeed, the typical economist is often worse than the man-in-the-street, the latter of whom isn't misled by rote belief in the theory of "perfect competition" into supposing that activities that in reality are widely and correctly understood to be instances of competition - activities such as price cutting, advertising, and new-product development - are "anticompetitive."

Fazal Majid writes:

Economists pay too much attention to profits and not to other motivators of corporate behavior. Paranoia is very common in the tech industry because it is very aware of how quickly technological change can render once seemingly unassailable positions irrelevant, e.g Microsoft.That's what drives seemingly irrational defensive behavior that is not profit-maximizing, e.g. Microsoft vs. Netscape, or their quixotic waste of resources on Bing and Windows Phone, or Google's failed efforts to promote Google Plus.

As for Larry Summers, the man has been a catastrophic failure at the various institutions that had the misfortune of employing him, from the US government to Harvard. Why does anyone pay attention to him, apart from his undeniable social capital?

Stephen Gradijan writes:

Anyone who thinks Google is a monopoly should check out Bing. If Summers and others are afraid that Google will one day be a monopoly, then they should consider using Bing instead of Google.

Personally I hate Bing and enjoy using Google, not to mention that I am *not* worried about Google, so I will continue to use Google.

Mark writes:

Don Boudreaux:

"For most economists, bigness=monopoly power."

I think you pinpoint here the central misconception on monopolies that unfortunately seems to dominate the discussion.

Even if a company has 90% of the market, if the companies controlling the other 10% (or potential companies that don't exist yet) could swoop in and readily intrude on the aforementioned company's share should it raise prices or reduce quality, that company doesn't really enjoy a monopoly. Such is the case for all the companies Summers mentioned; it would mean little inconvenience for customers to ditch any one of them for an alternative if it gave them a reason to, and alternatives abound. Just remember how fast myspace collapsed and facebook took over; or eBay vs. Amazon.

What matters is the competitiveness of a market, not the number of companies or the distribution of market share, and the latter two don't necessarily serve as proxies for the former. Ironically, if (to use a popular example) we were to cap the market share for banks at, say, 10%, this wouldn't solve the 'monopoly' problem, but exacerbate it: rather than having 4 or 5 big banks in an oligopoly, you'd just end up with 10 little monopolies, each of which would be prevented from competing with the others by the market share cap.

Scott Sumner writes:

dlr, How did they increase the price of reducing search frictions?

Rajat, I hope that not many economists believe "predatory pricing" is a problem, because it isn't.

Don, Sad!

Rajat writes:

Maybe traditional predation (supplying below marginal cost) is not the key concern around FAANG. But I'm sure many economists are concerned that FAANG will raise prices one day, when it is too late or too hard for competitors to challenge them due to their incumbency/network benefits. I personally don't think it would take much by way of higher prices to encourage a lot of people to switch out of using FAANGs, but then I haven't invested huge amounts of time putting my life's minutiae on facebook.

wantoknow writes:

In my opinion, no matter whether the big tech companies are monopolists or not, they have absorbed our consumer power in a way.

I believe, consumer power is not only in money term but also include the cost of time, freedoms of choices and the willingness to produce more. For my point of view, Facebook, Google, and all other tech companies who provide their services at a significant low price in money term actually has capitalised some of our purchasing power by transferring them to their use.

In this sense, we trade some of our purchasing power in returns of free services at present. No saying that they will charge us high premium on uses of their services in future, but will reduce our willingness to produce more. This is a side effect, we haven’t encountered before.

dlr writes:

dlr, How did they increase the price of reducing search frictions?

the idea would be they showed up and offered a product consumers marginally preferred given price zero vs the product and price they previously used. but their market power allowed them to charge higher prices to advertisers per unit of customer attention than the displaced publishers. if this higher price exceeds the added consumer utility from these new attention services there might be a net increase in markup that shows up as higher toothpaste prices (which are also monopoly profits at FB/GOOG) that are only partially offset by the consumer surplus of attending to free Facebook instead of free talk radio or not-free time magazine. i don't think this is how it has worked but it could be.

Larry writes:

For these companies (ex- Netflix) the consumer is the product, not the customer. Advertisers and publishers are the customer. Antitrust is coming. See to understand.

Scott Sumner writes:

Rajat, Of course in that case Summers is wrong.

dlr, So the advertisers pay more, and pass the cost on to consumers? I suppose that's possible. Of course it's also possible that they make markets more efficient. (Especially Google)

Larry, I'm not a customer of Amazon?

ChrisA writes:

I think there is confusion between a moat and a monopoly in much of this discussion. Moats are when firms, like Facebook and Coke, can earn premiums because people trust them and thus don't want to default to some other potential alternative. I am definitely in this position with Apple phones, they get to charge me higher prices because I am reluctant to learn a new operating system and figure out how to make a new computer ecosystem all talk to each other. But unlike in a monopoly situation if Apple starts to seriously fall behind, or imposes onerous policies, I can take the step to change, and they know this and will accordingly be careful and will watch that, even at the margin, people are not leaving them or not even joining their "club". So we don't need regulation on moats. Of course there are lots of people who would love to get their hands on the rent that moats create, which is why there are articles like Summers appearing.

Charlie writes:

I won't defend Summers (I can't even click through), but this paper has been making the rounds a bit, would be interested in your thoughts.

The Rise of Market Power and the Macroeconomic Implications

We document the evolution of markups based on firm-level data for the US economy since 1950. Initially, markups are stable, even slightly decreasing. In 1980, average markups start to rise from 18% above marginal cost to 67% now. There is no strong pattern across industries, though markups tend to be higher, across all sectors of the economy, in smaller firms and most of the increase is due to an increase within industry. We do see a notable change in the distribution of markups with the increase exclusively due to a sharp increase in high markup firms.

We then evaluate the macroeconomic implications of an increase in average market power, which can account for a number of secular trends in the last 3 decades: 1. decrease in labor share, 2. increase in capital share, 3. decrease in low skill wages, 4. decrease in labor force participation, 5. decrease in labor flows, 6. decrease in migration rates, 7. slowdown in aggregate output.


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