Andrew Ching
research
November 1, 2021

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Academic Research Should Help Guide Antitrust Policies on Big Tech, Says Carey’s Ching

Why it matters:

Carey Business School Professor Andrew Ching, an expert in digital business, offers his insights into a possible breakup of “Big Tech.”

Article Highlights

  • Big Tech has deep pockets, for acquiring start-up rivals and for fighting government antitrust actions.
  • Antitrust laws have not kept pace with the rapid development of the internet.
  • Tech companies should provide the data, and government should provide the funding, for academic studies that would bring greater understanding of Big Tech’s business models.

Individually, they’re among the world’s best-known and most profitable companies, offering services and products used by billions of people every day – Amazon, Apple, Facebook, Google, and Microsoft.

Collectively, they’re known as “Big Tech,” a label suggesting a level of market dominance that critics regard as a threat to the greater public good.

In the case of Facebook, the concerns go beyond mere dollars. Critics also have focused on the platform’s use as a megaphone for authoritarian voices around the world, and have alleged that the company’s leadership has not done enough to moderate such activity.

Some of the most forceful critics of Big Tech occupy seats in the United States Congress. In early October, a 450-page report by the antitrust panel of the House Judiciary Committee scathingly condemned the “monopoly power” of Amazon, Apple, Google, and Facebook. The report might result in antitrust legislation as well as Justice Department and Federal Trade Commission litigation against the companies.

In the following Q&A, Johns Hopkins Carey Business School Professor Andrew Ching, an economist with expertise in digital business, addresses some of the topics related to a potential breakup of Big Tech – including how the companies built their influence over their customers, whether monopolies provide any advantages to consumers, and whether antitrust action might serve as a disincentive to start-up tech companies aiming to emulate the innovations of the Big Tech giants.

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.  

“Facebook bought Instagram and WhatsApp. … 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.” – Professor Andrew Ching
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Some people who oppose attempts to rein-in big tech say a breakup would rob those companies of the rewards gained from their innovations, and could serve as a disincentive to others hoping to imitate their success. What’s your view of this argument?

It depends on what kind of argument the government uses to break up a company. If it is interpreted as a rule that any company that reaches a certain size is deemed to be too big and must be broken up, it may have a negative effect. But let’s face it: Any company that can reach 10 percent of the size of Google, Amazon, Facebook, or Apple would be a huge success. If start-up companies feel that 10 percent of the size of these tech giants would hardly receive scrutiny from the government, then my view is that it will not affect the environment for new start-up innovation.

In Congress, Democrats have tended to favor breaking up and restructuring the companies, while Republicans have been more in favor of increasing funding for the antitrust enforcement agencies – i.e., putting more teeth in enforcement. How do you rate these two approaches?

Breaking up a tech giant is not something the government can totally control. A court may not side with the government even if it wants to. Both sides will likely be spending hundreds of million dollars in any court battle, and we do not know what the outcome would be. On the other hand, simply injecting more funding into antitrust enforcement agencies is not enough. This is not just an enforcement issue.  Our regulations and rules are outdated. 

How can we make informed decisions about how to reform antitrust laws? This will require us to have a better understanding of the impact of different internal policies within a company. I believe the tech companies would also like to do good for the society. The first important step is to use their data to conduct more academic research and make it publicly available to improve our understanding of their business models. I would encourage the tech companies to make their data available to academic researchers, and the government to provide research funding to encourage the academic community to conduct more research. Use unbiased academic research to guide policy.

Another thing worth paying attention to is the Chinese market. The Chinese government is in the midst of reining-in their tech giants such as Alibaba, Didi, and Tencent.  Closely watching how these companies perform and how the Chinese tech industry evolves will provide valuable lessons for the U.S. government.

We have a window of opportunity to dramatically update our antitrust laws. The public wants it. But we have to do it very carefully, as we do not want unintended consequences that make things worse. That’s why I believe it is urgent for Big Tech and the government to work with the academic community to generate more unbiased research and use it to guide us through a significant update of our antitrust laws.

Andrew Ching’s research focuses on developing new empirical structural models and estimation methods to understand the forward-looking, strategic, learning, and bounded rational behavior of consumers and firms. He has applied these techniques to study the demand for prescription drugs, nursing homes, new technology adoption decisions, choice of payment methods, information spillover, late-mover advantages, video games demand, stockpiling, online support groups, and integrated marketing communication.

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