Tag Archives: competition

Standards

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Colleen Dunlavy’s Small, Medium, Large is an interesting and thought provoking read – and relevant to today’s debate on industrial policy. It’s a relatively short book, a history of the emergence of standards in US goods in the 1910s and 1920s. For example, in 1918-21 there were 78 different mattress sizes on the market and in 1922 the industry agreed to bring this down to 4 standard sizes, the ones we still use in the US and UK (apart from Ikea’s!). I write ’emergence’ but the book tells the fascinating history of the way industry agreements were brokered by the US government. During the years of US participation on World War 1 this was for reasons of prioritising production capacity and materials for the war effort. In the 1920s and beyond it continued at the behest of Herbert Hoover as Commerce Secretary in a drive to improve the productivity of US manufacturing. This took places under the auspices of a division ofhte Department with the wonderful name of Division of Simplified Practice (‘Simplified Practice’ sounded less socialist than ‘standardisation’.) Making multiple models in short production runs meant US firms could not capture economies of scale. Meanwhile in the UK and Germany separate standardisation drives were under way.

Of course, this meant not giving customers what they had wanted in terms of variety and choice – it was the Henry Ford approach of any colour you like as long as it’s black. A Ford executive is quoted as saying, “We standardized the customers.”  Officials railed against the “excessive mulitiplicity of styles” as wasteful.  The customers got mass production and lower prices in return, but they were kept out of the government-organisaed co-ordination between producers. Of course, another word for this might be ‘collusion’ and the book notes the obvious tension with anti-trust policy. By definition, if competition occurs over price rather than variety or attributes, this kills small producers.

Anyway, the history was new to me, and the book set me thinking about the role of standards. There has been a proliferation of variety and personalisation of goods because the technological possibilities have made this cheap enough to do without losing the benefits of flexible and rapid manufacturing. Yet as the well-known Marc Levinson book The Box pointed out, some standards have transformative productivity effects – the GSM mobile phone standard would be another example. This seems a highly relevant question now as we continue the ‘war on carbon’ – when is avoiding waste a good rationale for enforced co-operation over technical standards? At what level of the production or technology stack should governments want standardisation – requiring collaboration – so as to enable competition and variety at higher levels – for example in generative AI now? The dimensions along which firms compete are to some extent a social choice variable.

 

The public option

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I’m on my way to a workshop at The New Institute in Hamburg, where I will talk about the scope for a public option in (especially) digital markets. As preparation, I’ve read a recent short (and moderately technical) book surveying the literature on ‘mixed oligopoly’ by Joanna Potoygo-Theotoky; these are oligopolistic markets with a mixture of private and public provision, where the public competitor has a broader objective function than profit maximisation – such as social welfare broadly, or ESG motivations, or universal service obligations. The basic idea is that by having a different objective function, the presence of the public provider acts as a regulatory function; private firms will choose a lower price/higher quantity or will select to compete on a different level of quality.

I’m most interested in the latter area, where the formal results can go both ways. Public firms can either decide to offer a ‘basic’ package to deliver universal service or can offer a higher quality package than the private sector. Think of public schools vs private schools providing great sports fields and additional subjects in the former case, or public broadcasters ensuring provision of children’s programmes or religious programmes in the latter case. Given the concentration in digital markets and the limited tools governments other than the US and China have to affect the behaviour of Big Tech, provision of a public option in some domains is worth thinking about.

The book, Mixed Oligopoly and Public Enterprises, is a very nice survey and introduction to the mixed oligopoly literature, much of it focused on the price and quantity decisions and the optimal mixture of private and public, but covering some more recent literature on issues like R&D, quality and ESG standards. It also ends outlining a fascinating research agenda – introducing issues of motivation of employees, and even wider objectives such as creating jobs and reducing inequality.

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De-gilding the age

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I’ve been reading Mordecai Kurz’s The Market Power of Technology: Understanding the Second Gilded Age, in between more summer-holiday type books (half way through Paul Murray’s excellent The Bee Sting now). Kurz’s underlying argument is one I find plausible: Technical innovation by corporations (on a platform of publicly-funded basic scientific research) drivers growth, but corporations translate innovation into monopoly power and rents. Policy alternates between lax and tough competition enforcement, the latter limiting the period of monopoly power. In between, there have been gilded ages.

The book distinguishes the return to capital productively employed from wealth, the accumulation of those rents. It argues that “all intangible assets are just different forms of monopoly wealth” – clearest for IP assets that explicitly guarantee firms’ monoplies. The book argues for prevention of tech mergers, break-up of vertically integrated parts of big corporations, and limitations on the granting of patents and copyright. Tech-based market power cannot be avoided but it should be contained.

The book combines economic and business history with an extended formal model of Kurz’s approach (and this means it is probably not a book for the general reader). The formal modelling is actually the part I found least compelling – particularly in Chapter 5, which for example assumes the monopoly producer has a constant returns to scale production function. This chapter estimates that monopoly power led to delays of 12-15 years in the diffusion of electricity in the US, but – unless I missed a key step –  the calculation seems not to take account of the impact of scale effects, which would shorten those estimates.

The previous chapter has an intriguing chart (4.9): the 50s-late 70s are reported as a period of high monopoly profits – like the 20s and the 2000s on – yet were obviously a period of strong productivity growth and rising living standards. Kurz explains these decades as not being designated a gilded age because policy ensured rising real wages and high employment. But actually if monopoly wealth brings about rapid growth through self-reinforcing technological innovation, it would be nice to have more of that. The policy lesson seems to be more about redistribution and labour market policies than about competition enforcement to limit the monopoly rents. The periods of low welath and low market power in this historical chart were periods of weak growth or worse.

I’d also like to have had more about countries other than the US, and indeed some other examples – is Walmart a tech monopoly? Or Nike? Few other countries span as much of the technology frontier as the US, so diffusion becomes the more important issue, and market power protected by IP and other tactics can be deployed anywhere. But wealth inequality is high in many countries – are all characterised by companies garnering monopoly rents and if so how?

Still, the book does set in a coherent theoretical framework the many recent books that have addressed the issue of market concentration and particularly big tech. It’s an interesting framing of current growth challenges, and one I broadly agree with. And Kurz’s call for tougher competition policy echoes many others. We will see whether it will translate into tougher enforcement and an ened to this second gilded age.

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Spreading the thriving

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Jan Eeckhout’s The Profit Paradox: how thriving firms threaten the future of work is a very good read. It’s a game of two halves (yes, someone in my household is permanently watching the football at the moment).

The first half (in fact parts 1 and 2) is a nice synopsis of the reasons the economy (mainly the US but others are covered) tend towards a) concentration across many markets and hence b) diverging fortunes of companies and their employees, and the places where people live. This covers the features of digital technology, superstar phenomena, agglomeration economies – these are familiar to anyone who has been keeping up with the literature, but I applaud how well the book is written. Hooray for an economist who can write so engagingly. This section documents the evidence on concentration and mark-ups, the growing divergence between companies in terms of productivity and profits, and the corresponding decline in the labour share as outsourcing of routine occupations (call centres, cleaners, admin) has progressed. Eeckhout argues that there is assortative matching such that pay and conditions are polarising between people with high value jobs in frontier firms and people with low value added jobs in their contractors.

The book’s focus is on the implications of market power for people as workers, rather than as consumers – although it also notes the excess pricing power too. In sum, it reduces wages, both directly through monopsony power in individual labour markets and also because of the the macroeconomic consequences: with so many people in contingent work with low pay, aggregate demand is inadequate. (Some) firms are doing well but the economy isn’t. And this is the heart of Eeckhout’s argument: “The effect of the tide of market power is lowering wages across the economy.” I find this link persuasive. While there are many economists looking at the elements of this story, the way they are combined here is enlightening.

The second half turns to the much harder question of what to do, starting with an affirmation that for all the disruption the new technologies are a good thing (this chunk reminded me a bit of my own Paradoxes of Prosperity, which first came out in September 2001 and not surprisingly was hardly noticed).

The recommendations boil down to: enforce labour standards; mandate more data openness; and beef up anti-trust policies. In particular (under the last heading) stop big tech making more acquisitions, regulate them rather than break them up (so as not to lose beneficial network economies), and assess market impacts in the round rather than firm by firm. (Tricky to implement but I do remember that in my days on the Competition Commission, as it then was, we often had to include a section of the report on ‘Features of the market’ – problems in concentrated markets do often spread beyond an individual transaction).

I’d agree with all these suggestions in the book but they add up to a meta-suggestion: find the political will to change the institutional architecture so that it delivers fairer outcomes. The technological tides won’t retreat but the effects depend on what institutions confront them. Is Lina Khan’s appointment in the US a sign of lasting change?

 

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Banks versus business

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The latest in my catch-up reading has been British Business Banking: The Failure of Finance Provision for SMEs by Michael Lloyd. This is obviously a bit niche but of great interest as the vacuum in finance for growing businesses has often been identified as one of the reasons for the UK’s weakness in translating an excellent research base into lasting commercial success and eventually productivity gains. The stock of bank lending to SMEs in the UK was £166bn at the end of 2018, according to an OECD survey. (It will perforce have increased signigicantly in 2020.) If this sounds a lot, it was only about one tenth the stock of their residential mortgages. The UK banking sector just doesn’t do much business lending.

I’ve long thought lack of competition is a key part of the story. The commercial banking sector has consolidated steadily over the decades – I’m old enough to remember some of those swallowed up, like Williams and Glyns and National Provincial. In this book Michael Lloyd argues that while the development of an oligopoly might have been part of the cause of the SME finance gap, introducing more competition won’t be part of the cure now. There has been some new entry such as Santander, but the newcomers are not interested in the SME sector either.

He anyway sees the gap as a quasi-cultural one, linked to the “free market” philosophy embraced more eagerly in the UK even than in the US, and in the centralisation of banking decisions. He advocates a restoration of relationship banking spearheaded by a state Investment Bank. What we are getting instead is a National Infrastructure Bank – needed, but unlikely to do a lot for SMEs around the country. However, I find the relationship argument persuasive: I’d see it in terms of a vast loss of information that has come about through bank mergers and centralisation. Automated decisions are based on too little information, whereas old-fashioned bankers in boots would have a wealth of information about local SMEs.

It’s a hard problem to solve even with a government willing to have a go. Still, this is an interesting book for those worrying at the issue, well worth a read.

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