Is Competition Dying in the Modern Capitalist Setup?

Binit Agrawal


With oligopolies controlling most of the sectors of the economy, competition has been undermined, a change in the regulatory system is due


In this post I am going to argue that modern capitalism has undermined competition, using the tech sector as an illustration, and go on to suggest how competition in modern capitalism can be improved.

Introduction

Until only a few years back, technology was seen as an open space. A space of opportunities and competition, which allowed 20-year-olds to bring down billion dollar empires, with a promise that there are many other nerds plotting the downfall of these very firms in their fabled garages. This narrative is in decline. These tech firms are now seen as dangers to democracy, abusers of freedom and rent seekers of the highest order.

Facebook has evidently helped manipulate elections and breach privacy. Apple and Google have both used their platforms to prioritize their own software while making life costlier for other developers. Amazon has become the big brother of retail and has used its huge cash-pile to invest frantically in every sector it can. Very few know of Amazon’s dominance in the business of storage servers (Netflix is actually hosted by Amazon). Softbank and Alibaba, too, are emerging as major dominators. In most of Asia, Softbank is the de facto controller of ride-sharing business and Alibaba of the e-wallet business.

While such oligopolies have always existed, there is something different happening this time. These firms have not only maintained their domination in their sectors but are well poised to extend them to multiple other fields. Whether it be the vehicle, entertainment, manufacturing (through their AI subsidiaries), finance, healthcare, outer space or news media, these oligopolies are investing heavily to have a pie. They have fuelled this increasing dominance by acquiring even remotely formidable startups. They make startling offers and upon non-acquiescence, frantically copy the startups. All this is happening at a time when inequality is at its zenith, automation is all set to destroy millions of jobs, human rights are heading downwards and irrationality seems to be ubiquitous. With their strategy of efficient and cheap, these firms are concentrating income in their hands and are set to extenuate the economic crisis the world is facing. Given the fact that bigger corporations have the benefit of scale, efficiency and effectiveness, why do we need competition?

Importance of Competition

Going back to economic textbooks one might believe competition is about price competition, the one who sells cheap is the winner. But a Schumpeterian approach would suggest it is not that kind of competition which actually matters but one of innovation. It is the new product, organisation or process which sounds the death knell for the incumbent. The new product is not necessarily cheaper but adds some value earlier inexistent. Today, we need a social media which innovates to create not only better services but also better privacy and truthfulness; a retailer which aims not just to provide the cheapest, but also protects its retailers and creates jobs in the economy; a device maker, which facilitates screen de-addiction, doesn’t stash all its cash offshore and supports developers; a search engine which doesn’t manipulate results; a cab service which doesn’t abuse its drivers and so on. It is this sort of innovative competition that today’s capitalists fear and are destroying. Once used by Microsoft, the strategy of “embrace, extend and extinguish” is now widely used by major tech firms.

One might argue that these oligopolies continue to be innovative and set new benchmarks regularly. But these innovations come at a cost. Many of these innovations are actually works of acquired startups or are copied from others. We all know where WhatsApp’s status and call feature or Instagram’s filters came from (meanwhile, Snapchat’s stocks are bleeding and Viber is archaic). These all add up to create an opportunity cost for users to leave the dominant platform and prevents them from using others. Other platforms, potentially having many other better ideas, better privacy or better economic model, die out in the process and do not grow up to create an alternative.

Further, this has also made startups unattractive to investors, lest the start-up’s innovations be copied by a giant, in the process, killing it. The ultimate result is fewer startups and even fewer who will grow up to become responsible corporations.

Moreover, lesser number of firms around means lesser diversity of offerings and increased reliance on a few firms. Today, most of the production houses shy away from producing commercially risky projects, owing to the increasing dominance of Netflix. Similarly, arm-twisted by Amazon to cut costs and its control over the increasingly expanding eBook and audiobook market, publishing houses are less inclined to publish books which may not become bestsellers. Additionally, a process to keep people addicted to their offerings as against real innovation has begun. Facebook, instead of improving security and privacy, tries to add addictive features. Just like most fast food and soft drink companies have never really invested in healthy alternatives but only on making themselves omnipresent and cheap. These giants are already approaching the stage where they will become too big to fail. This begs the question, how do we reign on these monopolistic tendencies and re-ignite the spirit of competition in the world market?

How to improve competition?

It ultimately falls on the state to undertake this task and cannot be left either to the corporations or the forces of the market. Roosevelt’s antitrust regime contained railroads, big oil and continued to serve well until the 80s, when they were weakened by advocates of Reaganomics. Recreation of a practical antitrust regime can be key to a fair and competitive market. The definitions of market and dominance must be altered. While Amazon is disrupting and destroying most of the retail world and is approaching close to dominance share in e-retail (it is close to 44% now), it has a mere 5.6% share in overall US retail. That characterizes Amazon as a non-dominant player and lets all its shark strategies off the antitrust hook. Similarly, while no app can thrive without its presence in either Apple or Google’s app stores, none of them can be said to be dominant due to less than 50% market share.

For long our antitrust regimes have been structured around the idea that monopolies are bad and oligopolies are fine. But we know oligopolies have not worked. Although, cost of living and prices have stabilized in the western world, wages and job growth have flattened. As against this, stocks, dividends, executive pay and corporate profits are soaring. A possible resolve can be to take measures to modify the process of determination of dominance. Such measures may include, first, using the rate of increase in the market share as a metric as against relying only on the present market share. Amazon posts a market share growth rate of around 5% for e-retail and 2% for the overall retail market. Thus, even though it controls a mere 5.6% share of the retail market, the share is rising at an exponential speed. This signals its monopoly power. Secondly, dominance in a given part of an industry should be enough to bring the firm’s presence in other parts of the industry under scanner. The reason being, once a given part of an industry is consolidated other parts feel the need to consolidate. For example, Google’s dominance in search engine and operating systems has helped it consolidate maps and app development business. Lastly, attempts to establish an international antitrust regime must be undertaken. Today’s firms are not limited to any one country and use their incomes in one country to fund loss-making expansions and acquisitions elsewhere. As such anti-trust activities in one nation have consequences elsewhere. For instance, while Grab and Uber might have merged in Singapore, there will be consequences across South East Asia.

Further, changes to the Intellectual Property Regime too can spur innovation and competition. It is a fact that with time the speed with which new technologies go extinct keeps on increasing. As such, the time for which patents are granted must be reviewed and altered to suit the present times. This, while allowing the developer to reap optimum benefits, will also allow better access for other innovators. This, by reducing the impact of technological barrier, will help them become competent.

Lastly, heavy investment in education can lead to more ideas, innovation and able entrepreneurs. It is a fact that higher education across the world is beyond the reach of most. Of those getting one, student loans ensure graduates are forced to take up jobs instead of starting on a risky entrepreneurial path. Lack of entrepreneurs, in turn, leads to a decreased probability of creation of businesses which can challenge the incumbents. This also supports the vicious circle of static income and inequality. Investment in education, higher especially, can be the solution to many woes the western world and world at large is suffering.

Conclusion

There is no doubt that oligopolies have not worked for the economy and have undermined competition. A remodelling of our antitrust regimes, patent laws and heavy investment in higher education can bring about the desired change. These, supported by governments open to new people, new ideas and diversity, will lead the world to new riches.


Image Source: Macrobusiness.com.au

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