Vinod Jain is an expert in global and digital business, former business professor, consultant, speaker and author of Global Meets Digital.
On July 29, 2020, the CEOs of four of America’s (and the world’s) largest tech companies, Amazon, Apple, Facebook and Google, testified before the Congress on issues such as market power, monopolistic practices and data privacy, among others. Not only have these companies been summoned before Congress to explain their anticompetitive practices, but these and many other tech companies have also faced billions of dollars in fines for antitrust violations in the United States and the European Union.
Moreover, countries like China and India have started taking similar actions. The EU has been the most aggressive among all countries going after Big Tech companies. For instance, the European Commission, the EU’s antitrust enforcer, has fined Google a total of 8.25 billion euros ($8.6 billion) in three separate cases over the last decade—for using its dominant position in online advertising to undercut its rivals and for other anticompetitive practices.
What’s happening here? Aren’t companies in market economies like the U.S. and EU free to compete and dominate their markets through innovation, better products and services, and efficient operations? Well, not quite. As I explore in this article, companies can indeed aim for market dominance, but only within the bounds of laws and regulations designed to ensure fair competition and consumer protection. The business practices of the tech companies cited above raised questions of fair competition and consumer protection, which led to their CEOs having to testify before Congress. (While this article is focused on businesses in technology industries, I have found that the principles explored here apply to most industries.)
Competition In The Digital Age
Competition in information technology industries typically differs markedly from that in non-digital or traditional industries. Companies selling digital goods and services generally have high fixed costs and low variable cost and exhibit network effects. (A product has network effects when its value to its users increases as more users join the network.) The stronger the network effects in a market, the greater the degree of market concentration and market power. As a result, digital markets can be highly concentrated, especially due to network effects, scale economies and the need for large amounts of data to make them work. A large, installed base of users can also act as an entry barrier for prospective new entrants, even if a new entrant offers a better product.
Companies in digital markets can also charge different prices to different customers. They can employ personalized pricing strategies based on a customer’s willingness to pay, sometimes even offering services for free (as seen with search engines) or at prices below their marginal cost. (Marginal cost is the cost of producing an additional unit of the product. For digital products, marginal cost is effectively zero.) As I discussed in a previous article, “Many of the fastest-growing companies (such as Apple, Amazon and Google) are ecosystems where they themselves act as a hub for networks of customers, suppliers and providers of complementary goods and services.” They derive competitive advantage not just from their scale, scope and network effects, but also from their ability to connect different businesses and aggregate data flows between them through data analytics.
Antitrust In The Digital Age
Traditional antitrust considerations revolved around dominant firms’ ability to hike prices, harm consumers and engage in various anticompetitive practices. In the digital age, tech companies leverage the power of technology to reconfigure traditional business models in markets where platforms shape competition, network effects drive market dynamics and data is supreme.
But as with any advancement, companies have to be cautious about abusing their market power. In one of the earlier antitrust cases in the U.S., Microsoft was accused in 1998 by the U.S. Department of Justice for monopolistic practices for bundling the Internet Explorer browser with its Windows operating system, thereby harming the interests of other browser makers. The case was settled in 2001 when Microsoft agreed to make its products compatible with third-party software and to not punish partners for using competing products. Along the same lines, the European Commission imposed a fine of $613 million on Microsoft in 2004.
Antitrust in the digital age is a multifaceted challenge, touching on technology, economics, law, data security and even politics. While the digital age offers many opportunities for innovation, growth and an improved quality of life, its inherent characteristics can also facilitate market dominance, potentially harming consumers and competition. I believe Big Tech must be part of the solution—collaborating proactively with peers, policymakers and customers for solutions that benefit all stakeholders.
How Tech Leaders Can Be Part Of The Solution
Avoiding regulators’ scrutiny is not only a legal necessity in most countries, but it’s also about fostering fair competition and building customer trust in the market. Here are some suggestions for Big Tech companies to keep from being cited for anticompetitive practices.
• Avoiding Exclusive Agreements And Product Bundling: Avoid entering into exclusive agreements and product bundling to block out potential competitors from the market. As noted above, Microsoft paid a heavy fine for bundling the Internet Explorer browser with its Windows operating system.
• Preserve Competition: In mergers and acquisitions, make sure that the acquisition does not lead to reduced competition. In the U.S., the Federal Trade Commission and the Department of Justice review all proposed M&A transactions beyond a certain size and can block a deal if they find that it will reduce competition substantially.
• Open Pricing: Have an open, transparent pricing structure for goods and services, and avoid predatory pricing designed to drive out competition.
• Fair Algorithms: If your business operates a platform of its own, make sure that your algorithms are not designed to favor your own products over competitors’ products.
• Transferable Data: With Big Tech firms holding vast amounts of data, allow users the ability to take their data from one provider to another. A lack of data portability can stifle competition.
Conclusion
Mergers and acquisitions continue to be an important concern of antitrust authorities, though applicable mostly to large companies where an acquisition may substantially lessen competition or create a monopoly. By following the above steps, you can avoid antitrust scrutiny and raise trust in your organization from consumers and fellow companies alike.
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