The Threat of Big Tech

| Stephen Steiner | February 26, 2018 |

At the recent World Economic Forum annual meeting in Davos, Switzerland, regulation of the technology industry took the fore; world leaders and leaders of other industries warned of the dangers they pose not only to the integrity of the global economy, but also to global security over concerns regarding access to data. German Chancellor Angela Merkel cautioned, “The question, who owns those data will decide in the end whether democracy, participation, digital sovereignty and economic success can go hand-in-hand,” while Martin Sorell of WPP LLC claimed that tech industry leaders could draw “parallels to Standard Oil.” It remains to be seen whether or not these concerns are overblown.

Facebook, Apple, Amazon, Microsoft, and Google have collectively been involved in a total of 519 acquisitions in the past decade. According to the Wall Street Journal, these companies “are the five most valuable in the U.S. by market capitalization, the first time a single industry has occupied that position in several decades, according to S&P Capital Inc.” Perhaps most alarming, these companies have access to enormous swathes of data on individual consumers and their buying habits, allowing them to engage in what is called first degree price discrimination. In economic theory, this concept refers to the ability of a company to modify the price of a good based on the willingness of a consumer to pay for that good. Essentially, by using the data available to a company like Amazon, they can charge two consumers different prices for the same product.

This theory has taken on a life of its own, making its way out of the classroom and into online market places. Online retailers now can sell products to consumers based on their search history and even go so far as to set the price of products differently based on a consumer’s location and consumption habits. Perhaps one of the best examples of this is a recent study cited in an article in The Atlantic:

“Four researchers in Catalonia tried to answer the question with dummy computers that mimicked the web-browsing patterns of either “affluent” or “budget conscious” customers for a week. When the personae went “shopping,” they weren’t shown different prices for the same goods. They were shown different goods. The average price of the headphones suggested for the affluent personae was four times the price of those suggested for the budget-conscious personae.

I brought this up to a friend the other day while I was doing background research for this article and he didn’t seem concerned; in fact, he said he had “resigned to the fact that he’s always being watched.” I acknowledge that I had resigned myself to an extent as well, but I have found looking at methods of data collection to be particularly alarming in the context of the economy and competition. These vast tracts of data can serve as a barrier to entry for new companies. Online retailers will often use this data to undercut the prices of goods sold by competitors, operating at price levels at which new entrants are unable to compete.

The growth of companies in this industry has not gone unnoticed. The University of Chicago, the champion of laissez-faire through the last quarter of the 20th century, has taken a very notable turn away from this ideology by embracing an idea of greater competition that is less favorable toward established firms. The main concern of the university, admittedly, has not been solely aimed at tech firms; they are concerned with the integrity of the economy and have noticed declining competitors in such industries as health care and airlines, among others, but the clout of the technology industry is undeniable.

The University of Chicago had originally argued in favor of large firms because they believed regulators to be too heavy-handed, leaving the economy in the doldrums during the seventies as a result. Before long, they argued their case so effectively that the Department of Justice and Federal Trade Commission accepted the university’s views as the general approach to regulating the size of big firms. But clearly these firms have grown very large as a result of these policies, leaving a growing number of economists at the University of Chicago concerned with their size. An article in The Economist takes note of this:

“What has changed? The facts. The pendulum has swung heavily in favour of incumbent businesses. Their profits are abnormally high relative to GDP. Those that make a high return on capital can sustain their returns for longer, suggesting that less creative destruction is taking place. The number of new, tiny firms being born is at its lowest level since the 1970s.

Creative destruction describes the process by which firms use resources to innovate and make new, more efficient means of accomplishing tasks. This effectively ‘destroys’ the old manner of business in the process. Many have argued this to be an advantage of large firms; with more resources and profits, they are able to bolster efficiency and therefore function as a means of progressing technology. This quote from The Economist is claiming that firms have little incentive to innovate because they can make a lot of money over a longer period of time than they would be able to if there were more firms to compete with; the limited degree of competition is reducing established firms’ incentive to innovate and to further technology. Simply put: if it ain’t broke, don’t fix it.

This concern will not go away and it will likely get worse. Competition is under threat and the economy has become overshadowed by large firms. I argue that the leaders who expressed concern at the World Economic Forum were justified in doing so. In fact, I argue that they’re behind the curve. Using the University of Chicago’s growing concerns about market power and competition as justification, the Federal Trade Commission and Justice Department need to conduct a full investigation of not only the tech industry but of the integrity of the entire economy. We no longer have the luxury of being uninformed consumers. We are consumers of the digital age, and it’s time we stop letting Amazon charge us more for a product than our neighbor.