Digital economics in one paragraph

Search costs are lower in digital environments, enlarging the potential scope and quality of search. Digital goods can be replicated at zero cost, meaning they are often non-rival. The role of geographic distance changes as the cost of transportation for digital goods and information is approximately zero. Digital technologies make it easy to track any one individual’s behavior. Last, digital verification can make it easier to verify the reputation and trustworthiness of any one individual, firm, or organization in the digital economy. Each of these cost changes draws on a different set of well-established economic models: Primarily search models, non-rival goods models, transportation cost models, price discrimination models, and reputation models.

From a review paper by Avi Goldfarb and Catherine Tucker, which discusses the empirical findings for each of the points above.

3 very different views of economic models

The first is a famous one, from Milton Friedman, via Justin Fox’s The Myth of the Rational Market:

[T]he relevant question to ask about the “assumptions of a theory is not whether they are descriptively “realistic,” for they never are, but whether they are sufficiently good approximations for the purpose at hand. And this question can be answered only be seeing whether the theory works, which means whether it yields sufficiently accurate predictions.

As Fox writes:

To head off the obvious objection that it was ridiculous to think regular folks reason according to complex statistical rules, Friedman and Savage argued that billiards players couldn’t write down the physics formulas that underlay their shot selections but nonetheless acted as if they did.

Here’s quite a different take that I just came up on recently, from J.W. Mason of the Roosevelt Institute:

It seems to me that Deirdre McCloskey was right: Economics is not the study of the economy. Economics is just what economists do. Economic theory is essentially a closed formal system; it’s a historical accident that there is some overlap between its technical vocabulary and the language used to describe concrete economic phenomena. Economics the discipline is to the economy, the sphere of social reality, as chess theory is to medieval history: The statement, say, that “queens are most effective when supported by strong bishops” might be reasonable in both domains, but studying its application in the one case will not help at all in applying it in in the other.

Finally, a third view, from Dani Rodrik’s excellent book Economics Rules:

I wrote this book to try to explain why economics sometimes gets it right and sometimes doesn’t. “Models” — the abstract, typically mathematical frameworks that economists use to make sense of the world — form the heart of the book. Models are both economics’ strength and its Achilles’ heel; they are also what makes economics a science — not a science like quantum physics or molecular biology, but a science nonetheless.

Rather than a single, specific model, economics encompasses a collection of models. The discipline advances by expanding its library of models and by improving the mapping between these models and the real world. The diversity of models in economics is the necessary counterpart to the flexibility of the social world. Different social settings require different models. Economists are unlikely ever to uncover universal, general-purpose models.

But, in part because economists take the natural sciences as their example, they have a tendency to misuse their models. They are prone to mistake a model for the model, relevant and applicable under all conditions. Economists must overcome this temptation. They have to select their models carefully as circumstances change, or as they turn their gaze from one setting to another. They need to learn how to shift among different models more fluidly.

Would better antitrust rein in the 1%?

The American economy has grown more concentrated in recent years — in most industries, the top few firms account for more revenue than they did 10 or 15 years ago. This phenomenon appears linked to the decline in the share of national income going to labor, as opposed to capital.

Would better antitrust help reverse that trend, resulting in higher wages and less inequality? That seems plausible, and my inclination is toward stronger antitrust. But the answer may depend on the sort of inequality we’re talking about.

It’s helpful, I think, to consider two types of inequality: the gap between the 1% and the rest, and the gap between educated professionals/the top 20% and the rest. Both gaps have grown, albeit for different reasons. The terrific rise of the 1% is largely an American phenomenon, whereas the other is more global.

Generally speaking, the international nature of the latter inequality has led economists to look beyond policy for explanations, to things like technology or globalization. The localized nature of the 1% inequality has led to an emphasis on U.S. policy decisions.

But the theme of a small number of top firms pulling away from the rest in terms of productivity and wages — not exactly the same as industry concentration necessarily, but related — appears to be international.

That suggests to me that the sort of inequality that would be addressed by tackling industry concentration is the widespread gap between educated professionals and the average worker, not the gap between the 1% and the rest.

This is all speculative, of course. It could be that concentration is a necessary but not a sufficient condition for the rise of the 1%, such that we don’t observe the same inequality around the world but that antitrust would address it. But it’s worth remembering what Alvaredo, Atkinson, Piketty and Saez concluded in their paper on the 1%:

The most obvious policy difference—between countries and over time—regards taxation.

That’s not the only cause they highlight. But the spectacular rise of the 1% is a mostly American phenomenon and so likely the result of something specifically American. The rise of incredibly powerful, productive superstar firms doesn’t fit the bill.

A reading list on market power, superstar firms, and inequality

My best attempt at an overview of the corporate concentration issue, from an HBR piece in July 2017:

The basic facts are these: Most industries in the U.S. have grown more concentrated, meaning the largest firms account for a larger share of revenue. At the same time, corporate profits have reached all-time highs, despite lackluster rates of business investment. And the number of new businesses being founded has declined; the number of new growth startups being founded has risen, yet these firms struggle to scale. The cause of these trends is not clear. Theories include the rise of IT and the network effects it creates, less-rigorous antitrust enforcement, and lobbying and excess regulation.

And a reading list (I’ll try and update it, and let me know what I’ve missed):

The Pro Market blog at the Stigler Center has been excellent on this. Here are a few examples:

Economists: “Totality of Evidence” Underscores Concentration Problem in the U.S.

The Rise of Market Power and the Decline of Labor’s Share

Is the Digital Economy Much Less Competitive Than We Think It Is?

So has the Washington Center for Equitable Growth. 

Market power in the U.S. economy today

Is declining competition causing slow U.S. business investment growth?

U.S. antitrust and competition policy amid the new merger wave

A communications oligopoly on steroids: Why antitrust enforcement and regulatory oversight in digital communications matter

New federal antitrust legislation recognizes U.S. workers are not only consumers

Unlocking the promise of antitrust enforcement (conference recap, with videos)

The New America Foundation’s Open Markets program is focused on this:

(update: New America and the Open Markets program have parted ways)

Amazon’s Antitrust Paradox

The Economist has done several great pieces:

The problem with profits

Too much of a good thing

A giant problem

The rise of the superstars

So has The Atlantic:

America’s Monopoly Problem

America’s Monopolies Are Holding Back the Economy

So has ProPublica:

The American Way

These Professors Make More Than a Thousand Bucks an Hour Peddling Mega-Mergers

This is a great piece from Fivethirtyeight on the state of startups:

The Next Amazon (Or Apple, Or GE) Is Probably Failing Right Now

Neil Irwin on winner-take-all at The Upshot:

The Amazon-Walmart Showdown That Explains the Modern Economy

Noah Smith at Bloomberg and on his blog:

Monopolies Are Worse Than We Thought

The Market Power Story

America’s Superstar Companies Are a Drag on Growth

Big Companies Are Getting a Chokehold on the Economy

Tyler Cowen on rising markups: “the whole story just doesn’t add up”:

The Rise of Market Power

Productivity and market power in general equilibrium

Intangible investment and monopoly profits

And on what tech companies are good at; and I comment

More on the rising markups paper (linked below):

Karl Smith

Robin Hanson

Arnold Kling

Larry Summers comments:

“I’m not certain”

Joe Stiglitz has a big piece in The Nation:

America Has a Monopoly Problem

Litan and Hathaway on decline of new business formation:

Declining Business Dynamism in the United States: A Look at States and Metros

Jason Furman was involved in two papers on this topic:

A Firm-Level Perspective on the Role of Rents in the Rise in Inequality

BENEFITS OF COMPETITION AND INDICATORS OF MARKET POWER

Vox’s Matt Yglesias and Ezra Klein did a podcast on this:

The Weeds

Justin Fox on winner-take-all industries and firm lifespans:

America’s Most Winner-Take-All Industry, Visualized

The Fall, Rise and Fall of Creative Destruction

Greg Ip at WSJ:

A Provocative Look at the Harm From Corporate Heft

McKinsey on winner-take-all dynamics in manufacturing:

Making it in America

Washington Monthly

The Democrats Confront Monopoly

Academic papers:

Are U.S. Industries Becoming More Concentrated?

The Fall of the Labor Share and the Rise of Superstar Firms

Declining Competition and Investment in the U.S.

The Rise of Market Power and the Macroeconomic Implications

(have not read yet, but…) Oligopolies, Prices, and Quantities

(have not yet watched) Rise of Monopoly Power in the U.S.

An interesting anonymous contribution, via Tyler Cowen

Large U.S. firms have always commanded monopolistic rents–think Dupont, Bethlehem Steel, IBM, GM/Ford/Chrysler in their respective heydays. However, several developments have worked to dramatically change how those rents are shared. Before the 1980s shareholder revolution, monopolistic rents of dominant firms were more broadly shared–not just with rank and file employees but with the local community. (link)

We’ve done tons at HBR on this…

…are firms failing faster?

The Biology of Corporate Survival

The Scary Truth About Corporate Survival

(not HBR but see also the last quote)

…on startups being started but not scaling:

The U.S. Startup Economy Is in Both Better and Worse Shape than We Thought

…on superstar firms, and the pay inequality that comes with them:

Productivity Is Soaring at Top Firms and Sluggish Everywhere Else

A Study of 16 Countries Shows That the Most Productive Firms (and Their Employees) Are Pulling Away from Everyone Else

Research: The Rise of Superstar Firms Has Been Better for Investors than for Employees

Corporate Inequality is the Defining Fact of Business Today

Corporations in the Age of Inequality

Investing in the IT That Makes a Competitive Difference

…on digital firms pulling ahead:

The Real Reason Superstar Firms Are Pulling Ahead

The Most Digital Companies Are Leaving All the Rest Behind

What the Companies on the Right Side of the Digital Business Divide Have in Common

Managing Our Hub Economy

(see also several of the items in the superstar section above)

…an interview with Jason Furman:

Competition Is on the Decline, and That’s Fueling Inequality

…on mergers:

Mergers May Be Profitable, but Are They Good for the Economy?

…on antitrust:

As More People Worry About Monopolies, an Economist Explains What Antitrust Can and Can’t Do

The Rise, Fall, and Rebirth of the U.S. Antitrust Movement

…on antitrust, data, and AI:

How Pricing Bots Could Form Cartels and Make Things More Expensive

Should Antitrust Regulators Stop Companies from Collecting So Much Data?

…on lobbying and rent-seeking:

Lobbyists Are Behind the Rise in Corporate Profits

…on common ownership:

One Big Reason There’s So Little Competition Among U.S. Banks

Warren Buffett Is Betting the Airline Oligopoly Is Here to Stay

…on big companies paying more than small ones, but less so than they used to:

Big Companies Don’t Pay As Well As They Used To

…and trying to sum it all up:

Making Sense of Our Very Competitive, Super Monopolistic Economy

***

More stuff I haven’t had time to organize

Cloud computing and young firm survival

Productivity and IT in Italy

NBER on innovation and inequality: here, here.

AI and productivity, here and here. And robots.

A new paper on the decline of entrepreneurship.

Good overview on antitrust and how competition relates to innovation.

A paper on competition in broadband.

Innosight report on firm survival and turnover

On fast growing firms that fail to find a second act

Why is Google Maps so far ahead of the competition?

New paper on lack of investment, and competition

Noah Smith on monopolies and wages

A paper on labor markets and concentration

Healthcare and antitrust

Brookings on the “monopoly moment”

Wired on antitrust

Artificial intelligence, incentives to innovate, and competition policy

Tyler Cowen on lobbying not paying off for firms, and the paper he cites

Declining labor share and innovation

More industry concentration, more advertising

Tyler Cowen’s IO syllabus (and updated)

Timothy Tayler on network effects, with many good links.

2011 HBR article begins with data on increased volatility in business.

McKinsey Global Institute

FT on big tech and market failures, and also here

And the FT covers a Goldman report on concentration

Maybe markups aren’t rising as much as we think

David Wessel in HBR on declining competition in the U.S. economy

Sunk costs and market structure

Are incumbents doing the innovating? (related)

Wages and monopsony power (New York Times)

A special issue of The Nation devoted to this topic.

Marshall Steinbaum on monopsony.

Intangible investment and competition. Related: this book.

The Obama White House on big data and differential pricing.

Labor market concentration by commuter zone.

Fortune 500 tech acquisitions.

Consumer product purchasing concentration.

Jim Pethokoukis at AEI on McKinsey’s study.

Is big business really that bad? Atkinson & Lind in The Atlantic, with historical data on concentration.

Should we be concerned about the rise of data-opolies?

Markups in retail (NBER)

Declining quality of manufacturing entrepreneurship

Chart: the distribution of economic profits across firms.

McKinsey on the digital transition, winner-take-all, and more.

Two papers on industry shakeout during innovation. (one, two)

Digital innovation with high costs of entry – HBS paper

David Leonhardt on oligopoly

R&D spending by tech giants

McDonald’s and monopsony.

Today’s economic puzzles: a tale of weakening competition.

Hal Varian on tech and industry structure.

Alex Tabarrok in Washington Monthly

Who Thinks About the Competition?

Stigler Center conference.

Me: The Conundrum of Corporate Power

BU conference

Joshua Gans on antitrust

Entry to avoid competition

Big data and big finance

Markups in the digital era (OECD)

“Their analysis shows that the introduction of a range of new technologies is responsible for 17 percent of the increase of the difference in earnings between college- and high school-educated workers from 1960 and 2000.” (paper and summary)

The real villain behind our gilded age (Posner/Weyl, NYT)

NBER digest on two monopsony papers

Vox big idea on monopsony

A framework for thinking about market power (me)

ProMarket interviews Glen Weyl

It’s not just monopoly and monopsony (EPI)

Catherine Tucker on why network effects don’t always imply market power

On dispersion of markups

Monopsony in online labor markets (plus the paper, plus an interview plus my tweeting)

Two new retrospectives on the Microsoft antitrust case: one, two.

Buying power and supplier wages

Yale Law symposium on antitrust

How fast do retail brands scale?

Brookings / Hamilton project panel on this

Furman and Orszag with a new paper on productivity, inequality, and concentration

More businesspeople are running for office.

Concentration in arcade game apps

On wages in finance

Conference on corporate political engagement

Who profits from patents?

Raising your digital quotient – McKinsey

Hamilton Project report on concentration and dynamism (and here)

James Bessen overview/synthesis on concentration, IT, and AI

Startup employment across countries

Anticompetitive mergers

AI policy one, two

Trade and innovation lit review

Network effects are less important than they once were

FTC hearings on competition

Conference on productivity dynamics

Quartz interviews Tirole

Andy Haldane BOE 2018 speech on productivity in UK and Chris Giles of the FT comments on Twitter

The Richmond Fed reviews the evidence on industry concentration

Brookings on digital competition

Lionizing CEOs

IMF:

Our paper finds that, starting from low levels, higher markups are initially associated with increasing investment and innovation, but this relationship becomes negative when market power becomes too strong. Further, the link between markups and investment and innovation is more strongly negative in industries featuring higher degrees of market concentration.

Monopsony power in the U.S. labor market

More from the OECD:

Aggregate productivity gains are now led by highly-technological, innovative firms that enjoy increasingly large market shares due to their competitive advantage. Even though these dominant positions tend to be temporary, as firms at the technological frontier are continually being challenged by new and better innovators, this process drives down the labour share – the share of national income going to labour. Frontier companies invest massively in capital-intensive technologies and thus tend to have lower labour shares, while reallocation of market shares towards these “superstar” firms further contributes to a lower part of value added that goes to workers (Chapter 2).

Longer version is here (Ch2). Press coverage is here.

How monopsonies work, with numbers.

Facebook-commissioned analysis pushing back on the idea of “kill zones” where startups can’t grow lest the giants eat them up. The fact that Facebook feels the need to pay for this analysis is perhaps more interesting than the analysis itself. (and more)

New thinking on vertical mergers (Econofact)

Dynamism declining perhaps because of IT (evidence from Belgium)

Digital innovation and the distribution of income (and more)

Equitable growth: there’s a lot to fix in antitrust enforcement.

Market power, and mismeasurement.

Felix Salmon argues Amazon doesn’t have as much market power as markets seem to think. (I think?)

Chris Mims in WSJ.

On antitrust’s consumer welfare principle.

Overview from Equitable Growth.

Competition and IT.

Why is competition important?

Yglesias explains new antitrust ideas.

Matt Phillips on Apple and the rise of “megacompanies.”

Google’s Hal Varian on the EU’s case against Android

The FT on corporate giants

Van Reenen review paper for Jackson Hole, written up here and here

Krueger on monopsony

Intangible capital. and paper.

More Noah Smith, with many links.

Is concentration actually down at the local level?

IGM survey on market share and market power