The European Union (EU) is planning to rein in big technology companies with new laws. European Competition Commissioner Margrethe Vestager will be announcing two sets of draft rules for the digital sector on 2 December. These will ask for greater accountability from the tech giants as well as level the playing field for smaller players.
Market concentration has been increasing in Europe in the last decade. This means that the total market share is held by a smaller number of firms. The image of a few giants unfairly keeping the smaller entrants out comes to mind. But is this necessarily bad? It all depends. There are two sides to the debate of the economic consequences of high and rising market concentration.
On one hand, we hear that the rise in concentration is a result of “superstar firms”. The playing field is level, but because these “superstar firms” are so good at what they are doing, the customers flock to them. Much of the profits go to them.
On the other hand, it could be that because a few firms control the market share, the playing field is tilted in their favour. There is not much that other firms can do when the masses patronise only the top few firms. These top firms continue to win the customers, not because they use more efficient technology or strategies, but because customers tend to go with the tried and tested. Imagine you want to buy a vacuum cleaner. If many of your friends and family are using Brand X, you may hesitate to go with a lesser known Brand Y.
In a recent study, my co-authors and I aim at two objectives: First, assessing quantitatively the extent of market concentration in Europe, a situation which faced a lack of data previously; and second, we attempt a first analysis on what the likely impact of such concentration is.
On the first, we document – using a novel firm level dataset we have contributed to create for 19 European countries from 2000 to 2017 – that market concentration in the EU has increased after 2008.
That is not such a bad thing, because our statistical analysis found that such concentration is positively associated with sector-level productivity. There has been a better allocation of resources.
In turn, revenue has moved from the less productive to more productive firms. This implies a good mark for the anti-monopoly regulation policies adopted in the EU. Higher market concentration – possibly in line with technological progress and scale economies – has taken place, but without creating monopoly power of large firms, which would have hampered market forces and ultimately constraining aggregate productivity.
How will the new proposed laws, if given the go-ahead, tilt the playing field in the technology sector? Time will tell. But it will be good to look at the issue from both sides of the coin. Big is not necessarily bad.