Big is not bad
Counting the number of firms is wrong way to ensure competition
Spare a thought for the consumers. As Britain this week discussed a future trade deal with the US, all anyone wanted to talk about was the effects of importing chicken and beef on British farmers. Never mind that lowering tariffs and adjusting regulations would mean more choice and lower prices in the shops (chicken in the US is often more than 20pc cheaper). The prospect of a US-UK free trade agreement was presented by those unreconciled to Brexit as an unalloyed threat to our industries.
Yet on both sides of the Atlantic, there have lately been noises on what, on the face of it, might sound a more promising pro-consumer agenda. US Democrats this week promised a beefed up antitrust approach to competition policy – an explicit aim for reducing corporate concentration in certain sectors.
Here, the aftermath of the general election is leading to senior Conservatives thinking on similar lines. In a long essay for the new website Unherd, Ruth Davidson, the Scottish Conservatives’ leader, spoke of “breaking up monopolies”, whilst a host of other thinkers and politicians have in recent years pointed to the need to tame the tech giants, break up the banks and even reduce the power of supermarkets.
Often this analysis stems from a caricatured view of what competition means, with big business synonymous with monopoly power and a large number of small firms equated with robust competition. But this is misguided. What actually matters for consumer welfare (what we should ultimately care about) is the contestability of a market, and its openness to new modes of production and innovation, not the number of firms.
There is far less evidence that companies can enjoy entrenched monopoly positions across long periods than politicians believe. Big is not often bad and increased industry concentration is usually not to the detriment of consumers. To portray small businesses as the heroic competitors and big business the crony capitalist is likewise a crude misrepresentation.
Amazon has a huge market share in online retail of certain products, for example, but has revolutionised the market for consumers, lowering prices dramatically under the constraint of individual and specialised competition for particular services.
A small number of supermarkets likewise dominate UK food sales, but these clearly provide more choice and lower relative prices than the local monopoly baker or butcher did in the immediate post-war period. Often mergers and high concentration can mean economies of scale, delivering lower prices and improvements in the quality of products. In fact, it’s often local stores that seek to create barriers to entry by seeking to block new supermarkets through mechanisms such as the planning system.
That’s not to say, of course, that there are no areas of economic life where barriers to entry are high, incumbent firms seek to block or suppress competition and consumer experience is poor. But often this anti-consumer activity arises due to high levels of existing state regulation (see banking) or favouritism, including patent or copyright law, where changes could be made directly. Arguably an economy-wide focus on the need for opening up markets would start with the BBC’S privileged position in the broadcast news media and the NHS’S virtual monopoly on healthcare too.
A crude approach to competition policy based on firm counting then could be very bad for consumers. As it is, competition policy often deals with markets on a static basis, meaning it constantly fights yesterday’s battles.
The US antitrust authorities spent ages in a suit against Microsoft after it broadened its market power into browsers through Internet Explorer, bundling it in with its operating system. After years of litigating, Google’s Chrome and Firefox arguably developed much better software anyway and smartphones replaced much PC use. Before that, IBM endured more than a decade of antitrust cases. Competition policy often fails to keep up with technological developments.
Similarly, the EU fined Google recently for the purportedly anticompetitive practice of using its search engine to give greater prominence to certain results.
Yet it has presented no evidence that this has been harmful to consumers, and seems to miss that in individual markets, such as searching for flights, Google faces a raft of competition just one click away should it develop a bad reputation (both for search engines and alternative flight price checking websites).
It should not surprise us then that companies pushing for action against Google in the past and present are often its competitors.
Indeed, in 2010 in the US, Microsoft argued action needed to be taken against Google largely based on the “what goes around, comes around” principle. Far from being monopolistic, across a host of areas platforms such as Amazon, Google and Facebook are competing fiercely against each other.
Maybe because the consumer welfare case against many “big” companies is so weak, commentators instead talk either highly speculatively about their potential in future to raise prices or else highlight their likely political power or ability to pay low wages to workers. Yet the first is highly speculative and can be dealt with when evidence arises, and using competition policy to address the latter issues seems an incredibly crude tool.
If Davidson and others want to improve outcomes for consumers, they should not start from the point of committing to “break up monopolies” but instead put their other goal of “removing barriers to entry” at the centre of a pro-consumer agenda. Yes, many markets are dominated by big companies. But this can be because they provide services consumers value at scale. The existence of a robust competition policy can act as an effective deterrent to uncompetitive behaviour, but a crude desire to break up big companies could crush beneficial innovation and raise prices.
Ryan Bourne holds the R Evan Scharf Chair for the Public Understanding of Economics at the Cato Institute
‘To portray small businesses as heroic and big business the crony capitalist is a crude misrepresentation’