QUESTION: To start, can you explain why critics in government, academia, and the media are calling for the breakup of Big Tech companies such as Google, Facebook, Apple, and Amazon?
ANDREW CHING: The size of these companies is a direct consequence of “network effects.” In general, as more people connect with these platforms, their value to the participants increases (e.g., regular people like us connected in Facebook, retailers and buyers connected through Amazon, users and app publishers connected through the Apple app store, and so on). When they become bigger and bigger, they have disproportionate advantages over their rivals, and they can become indispensable for most of us.
On the one hand, they provide us with a lot of convenience. On the other hand, their AI algorithms in a recommendation system play a crucial role in what we will see on the platform. A slight twist of the algorithm can give some participants a huge advantage in connecting with others. This is particularly true of Facebook, Amazon, and Google. And because these big companies set the rules for their platforms, they also have the power to determine what kind of participant behavior is allowed on their networks.
In addition, these Big Tech companies have enormous resources. With deep pockets of cash, these companies can simply acquire their start-up rivals. Whenever they see start-up tech companies with network effects gaining traction, they just buy them. For instance, Facebook bought Instagram and WhatsApp, which cater to very different segments of customers. The price that they offered to buy these companies may seem insanely high. But Facebook recognizes how the network effect can play out; they were afraid that these platforms could become the next Facebook in a couple of years, and they did not want to take that chance.
Conversely, what might be the argument for not breaking up the companies?
Let’s say we break up Facebook so that Instagram and WhatsApp can operate completely independently. The nature of market competition in network industries will just inevitably lead to another dominant player (or a very few dominant players).
The key problem is our outdated regulations and antitrust laws as applied to tech companies that leverage the internet. As we keep improving the internet’s speed and infrastructure, that only increases the network effects that I described earlier.
Some might argue that there advantages for consumers when companies such as these become so large and powerful – for example, the immense volume of products available via Amazon and the speed of delivery via Prime. But, in terms of the public welfare, is it possible to strike a balance between the convenience of Amazon and the market dominance of Amazon?
Interestingly, participants in selling platforms like Amazon also generate positive externality to other participants. For instance, as more buyers visit Amazon, retailers will find it very attractive to set up a virtual store within Amazon to reach those buyers. But individual buyers do not care about this extra positive effect. Amazon, as the owner of the platform, has a big-picture objective to maximize its value to all users. Hence, the Prime membership benefits they offer is a way to “internalize” this externality.
The problem is that although we all enjoy the incredible benefits of Prime membership for now, the more Amazon secures its dominant position in the retail industry its network can become so indispensable that the company no longer needs to subsidize buyers. Meanwhile, we still have to go to Amazon to check things out.
Introducing competition is one of the key ways to ensure that tech giants like Amazon will always need to pay attention to threats and not be able to act like a true monopoly. Updating our antitrust regulations for internet companies is crucial. Regulators need to have a deep understanding of network effects and recent AI development to set much better criteria in determining whether a merger or acquisition should be approved, and what kinds of pricing and marketing tactics should be regulated in tech industries.