How to Make the Digital Economy More Competitive

1. How to Make the Digital Economy More Competitive Jason Furman Harvard Kennedy School Regulatory Policy Program New Directions in Regulation Seminar Cambridge, MA October 3, 2019

2. Outline Increased Concentration Introduction to to the Expert Panel Four Questions Ex Ante (Regulatory) Proposals Ex Post (Merger/Antitrust) Enforcement Proposals Next Steps

3. Outline Increased Concentration Introduction to to the Expert Panel Four Questions Ex Ante (Regulatory) Proposals Ex Post (Merger/Antitrust) Enforcement Proposals Next Steps

4. 1. Increased Concentration Concentration

5. 1. Increased Concentration Concentration has increased in most sectors—the original CEA list Note: * indicates that the percentage point change is calculated using only taxable firms in that industry, as its 1997 revenue share data are only available for the 50 largest taxable firms and the 50 largest tax-exempt firms as separate categories, rather than for all firms combined. Performing this same calculation using data for only tax-exempt firms results in two additional industries showing a decline in concentration (Arts, Entertainment and Recreation, and Educational Services) , while one shows a slight uptick (Other Services). Source: Council of Economic Advisers (2016).

6. 1. Increased Concentration Numerous academic papers have documented increase in concentration in industry data • “In the last two decades, over 75% of U.S. industries have experienced an increase in concentration levels” based on NAICS 3-digit industry (Grullon, Larkin and Michaely 2018) • Increase in CR4, CR20 and HHI for sales and employment has trended up, especially for sales, based on 676 industries of which 388 are in manufacturing (Autor et al. 2017) • Weighted average CR8 has increased both in manufacturing and non-manufacturing as has the HHI for Compustat firms (Gutiérrez and Philippon 2018) • Increase in mean and median CR4, CR8, CR20, and CR50 across 750 industries in Census data (Barkai 2017)

7. 1. Increased Concentration Consistent with findings from numerous IO studies of more well defined markets • Agriculture: Share of revenues held by the top four firms increased between 1972 and 2002 in eight of nine dairy processing and manufacturing industries (Shields 2010) • Appliances: Following Whirlpool-Maytag merger, Herfindahl-Hirschman index (HHI) increased by 800-1,600 for refrigerators, dishwashers, clothes dryers, and clothes washers (Ashenfelter, Hosken, and Weinberg 2013) • Beer: Substantially increased concentration in the beer industry with the HHI increasing from about 1,000 in the mid 1970s to over 4,000 by 2009 (Gokhale and Tremblay 2012) • Fertilizer: Increased Lerner indices of oligopolistic firms from late 1990s/early 2000s to early 2010s (Taylor and Moss 2013) • Financial Services: Loan market share of the top ten commercial banks increased from about 20 percent in 1976 to about 50 percent in 2010 (Corbae and D’Erasmo 2013) • Hospitals: Between the late 1980s and 2006, average HHI across hospital markets increased by about 40 percent to about 3,200, level associated with just three equal-sized competitors in a market (Gaynor, Ho, and Town 2015) • Railroads: Increased market concentration in at least two-thirds of crop reporting districts for four different agricultural commodities between 1985 and 2007 (Prater et al. 2012) • Wireless: Average HHI for wireless providers in a market increased from under 2,500 in 2004 to over 3,100 in 2014 (FCC 2015)

8. 1. Increased Concentration Interpreting greater concentration • Increasing concentration could mean:

9. 1. Increased Concentration Interpreting greater concentration • Increasing concentration could mean: • More competition

10. 1. Increased Concentration Interpreting greater concentration • Increasing concentration could mean: • More competition • OR • Less competition

11. 1. Increased Concentration Potential sources of increased concentration Good/Natural Causes: More competition • Superstar firms • Globalization • Increasing returns to scale and network externalities

12. 1. Increased Concentration Potential sources of increased concentration Good/Natural Causes: More competition • Superstar firms • Globalization • Increasing returns to scale and network externalities • Bad/Unnatural Causes: Less competition • Reductions in merger and antitrust enforcement • Increased regulatory barriers to entry • Increased common ownership??

13. 1. Increased Concentration The retail sector looks a lot like the superstar hypothesis In retail, concentration has increased along with efficiency but markups are unchanged: Source: Crouzet and Eberly (2018)..

14. 1. Increased Concentration The health sector looks much less like the superstar hypothesis Sources: Gaynor (2017) and Fulton (2017).

15. 1. Increased Concentration Macro evidence that on balance the less competition story predominates • At a macro level, the rise of concentration helps explain the decline of the labor share (Barkai 2016) • The evolution of several stylized macro facts like a larger premium on capital can be explained by a calibrated model with a declining neutral rate of interest and reduced competition (Eggertsson et al 2018) • The reduced competition hypothesis survives, albeit in somewhat smaller form, after taking into account the growth of intangibles (Farhi and Guourio 2018) • “Firms in industries with the largest increases in product market concentration have enjoyed higher profit margins, positive abnormal stock returns, and more profitable M&A deals.” (Grullon et al 2016)

16. 1. Increased Concentration Different perspectives on competition policy (Neo)-Brandesians

17. 1. Increased Concentration Different perspectives on competition policy (Neo)-Brandesians Chicago School

18. 1. Increased Concentration Different perspectives on competition policy A Yet-to-be-named School (Neo)-Brandesians Chicago School

19. Outline Increased Concentration Introduction to to the Expert Panel Four Questions Ex Ante (Regulatory) Proposals Ex Post (Merger/Antitrust) Enforcement Proposals Next Steps

20. 2. Introduction to the Expert Panel Our Terms of Reference (excerpt) • “Consider the potential opportunities and challenges the emerging digital economy may pose for competition and pro-competition policy, and to make recommendations on any changes that may be needed… • the impacts of the emergence of a small number of big players in digital markets such as social media, e-commerce, search, and online advertising • appropriate approaches to mergers, takeovers and anticompetitive practices in digital markets • opportunities to enhance competition, to increase business innovation and expand consumer choice • how best to assess consumer impacts in ad-funded products and services that are “free” to consumers.”

21. 2. Introduction to the Expert Panel The Panel (note, the excellent Secretariat is invisible—as always)

22. 2. Introduction to the Expert Panel The Process • 11 evidence gathering round-tables in London. • More than 60 written pieces of evidence submitted • Numerous other experts consulted • Global engagement including competition authorities in the United States, France and Australia, the OECD and the G7.

23. 2. Introduction to the Expert Panel The UK Government and Regulators

24. 2. Introduction to the Expert Panel The report

25. Outline Increased Concentration Introduction to to the Expert Panel Four Questions Ex Ante (Regulatory) Proposals Ex Post (Merger/Antitrust) Enforcement Proposals Next Steps

26. 3. Four Questions Four questions Is competition in the digital sector beneficial? Is competition in the digital sector absent? Is the lack of competition costly? Can there be competition in the digital sector?

27. 3. Four Questions It depends what you think of consumer preferences OR

28. 3. Four Questions Competition policy is a hammer, but not everything is a nail

29. 3. Four Questions Four questions Is competition in the digital sector beneficial? Is competition in the digital sector absent? Is the lack of competition costly? Can there be competition in the digital sector?

30. 3. Four Questions Share of time spent on social media Sources: Digital Competition Expert Panel (2019).

31. 3. Four Questions High or rising market shares Sources: Digital Competition Expert Panel (2019).

32. 3. Four Questions The online advertising duopoly Sources: Digital Competition Expert Panel (2019).

33. 3. Four Questions Forms of competition Competition in the marketCompetition for the market Source: Stockstoinvestin blog (2014) and Online Gravity (2017).

34. 3. Four Questions Forms of competition Competition in the marketCompetition for the market No Source: Stockstoinvestin blog (2014) and Online Gravity (2017).

35. 3. Four Questions Forms of competition Competition in the marketCompetition for the market No Probably Not Source: Stockstoinvestin blog (2014) and Online Gravity (2017).

36. 3. Four Questions Four questions Is competition in the digital sector beneficial? Is competition in the digital sector absent? Is the lack of competition costly? Can there be competition in the digital sector?

37. 3. Four Questions Why is “free” costly? • Zero is just another number—equilibrium price might be negative • Pay more in cash due to advertising markups • Pay in data, privacy • Lost quality, variety • Lost innovation

38. 3. Four Questions Four questions Is competition in the digital sector beneficial? Is competition in the digital sector absent? Is the lack of competition costly? Can there be competition in the digital sector?

39. 3. Four Questions Obstacles to competition • Natural • Economies of scale/scope • Efficiency • Brands, access to finance, etc.

40. 3. Four Questions Obstacles to competition • Natural • Economies of scale/scope • Efficiency • Brands, access to finance, etc. • Unnatural • Killer acquisitions • Predatory behavior • Standards and data

41. 3. Four Questions Summary of the questions Is competition beneficial? Yes No Non-economic regulation Is competition absent and is this costly? No Yes No policy change Is competition policy effective? No Yes Utility regulation Pro-competition policy

42. Outline Increased Concentration Introduction to to the Expert Panel Four Questions Ex Ante (Regulatory) Proposals Ex Post (Merger/Antitrust) Enforcement Proposals Next Steps

43. 4. Ex Ante (Regulatory) Proposals Digital markets unit Sources: Digital Competition Expert Panel (2019).

44. 4. Ex Ante (Regulatory) Proposals The Code of Conduct is similar to existing antitrust rules • Principles for businesses with “strategic market status”: • Access to designated platforms on a fair, consistent and transparent basis • Prominence, rankings and reviews on designated platforms on a fair, consistent, and transparent basis • Not unfairly restricted from, or penalized for, utilizing alternative platforms or routes to market

45. 4. Ex Ante (Regulatory) Proposals Digital markets unit Sources: Digital Competition Expert Panel (2019).

46. 4. Ex Ante (Regulatory) Proposals Digital markets unit Sources: Digital Competition Expert Panel (2019).

47. 4. Ex Ante (Regulatory) Proposals Digital markets unit Sources: Digital Competition Expert Panel (2019).

48. 4. Ex Ante (Regulatory) Proposals The UK is establishing a Digital Markets Unit “I am pleased that Professor Furman has today agreed that he will advise on the next phase of work on how we can implement his recommendation to create a new Digital Markets Unit.” --Prime Minister Teresa May on June 10, 2019

49. Outline Increased Concentration Introduction to to the Expert Panel Four Questions Ex Ante (Regulatory) Proposals Ex Post (Merger/Antitrust) Enforcement Proposals Next Steps

50. 5. Ex Post (Merger/Antitrust) Proposals Merger recommendations To may false negatives, should be willing to have more false positives. To that end: Prioritize digital mergers