Chillin'Competition

Introduction

When Nicolas Petit invited me to contribute to the symposium with scholarly commentary on his book, brevity was his sole instruction. I agreed without reservation as I remembered an earlier discussion with Nicolas in 2015 at the University of Lund when his views were still preliminary.

Now several years later, Nicolas has produced what he calls a ‘new theory of dynamic competition under uncertainty’. A commentary on a ‘new theory’ involves a substantial amount of reading and thinking, so I should have known better: brevity and scholarly commentary seem like an oxymoron.

Before providing a critical view on Nicolas’ work, I will try to give a concise account of what I understand his theory to be. Summarizing 200 pages in 400 words is quite a formidable and essentially doomed endeavor, but it is one which is required. 

Petit’s cat

The book presents a ‘new theory of dynamic competition under uncertainty’. The theory addresses competition between the six U.S. big tech firms, that is Google, Apple, Facebook, Amazon, Netflix, and Microsoft. The motivation for the theory is the mainstream account of the big tech firms as “monopolies”. Petit suggests that big tech raises a Schrödinger’s cat issue, or in other words, a situation in which two contradictory states of the world exist at the same time.

Big tech firms appear on the one hand, to be monopolists and on the other hand, to be in competition. Yet, there is an exception to a typical Schrödinger’s cat setting. The monopoly and competition states do not exist in the same space at the same time. Instead, monopoly and competition occur at the same time but in different spaces. In antitrust terminology, they arise in different ‘markets’. To be clear, Petit notes that each big tech firm enjoys a native ‘monopoly’ market where direct entry is unlikely as the market has tipped. Meanwhile, competition (often by other big tech firms) by indirect entry fuels a process ‘that reconfigures and creates new channels of competition’ (p165). This in turn leads to uncertainty. The pressure created by uncertainty is multidimensional. There is uncertainty about if, where, and how the competition will develop in indirect entry markets (and other future undiscovered markets). There is also uncertainty about whether the native market will continue to deliver monopoly rents. 

To ground his theory empirically, Nicolas documents systematic deviations between the behavior of big tech firms’ and the ‘textbook monopoly’ model. Observed firm-level data (extracted from 10K filings with the SEC) illustrates that big tech companies are concerned about short-term output expansion; growth; and implicitly about long-term rather than short-term profit (growth over profit). These empirical regularities find a better theoretical home in the 1970s to 1990s economics literature on network effect markets. A large degree of uncertainty exists below the “tipping point” for a number of reasons including willingness to pay; the cliff effects of market changes leading to boom/bust scenarios; and uncertainty as to where the actual tipping point is. Firms therefore do not, and cannot, behave like textbook monopolists. Instead, and to simplify, uncertainty below the tipping point leads to very strong competition for the (new) market(s). Nicolas’ book suggests that this uncertainty should be better accounted for in economic models.

Indirect entry

A key observation in the book is that the tech companies expand in areas where it is possible to leverage their ‘computation and digital information’ assets (p118). Yet, the direction and trajectory of big tech firms’ expansion is not random. Big tech firms tend to favor competition by indirect entry against other big tech firms. They compete mostly by direct entry against other non-tech companies or start-ups.  Moreover, the book reminds us that a form of Schumpeterian competition for the market is often at play in these cases. Overall, the takeaway is that the dominant strategy of big tech firms is indirect entry with imperfect substitutes in the untipped market. In turn, this should lead us to treat them as oligopolists competing for the market, as opposed to their predominant characterization as (only) monopolists.

The market, the firm, and the conglomerate 

The book asks us antitrusters to overcome a perceived ‘inability to consider competition across markets holistically’. The hard question comes at p166: ‘how does the market competition in cloud remove monopoly power in online commerce?’  

A deeper reading of the book suggests that this is not so much the argument, and that it is addressing a different question. The book’s main argument concerns ‘new markets’, that is markets before tipping or markets that have not yet tipped. In my opinion, the central ‘conundrum’ with the argument is related to the subject of the book vs the focus of ‘traditional’ competition analysis. The book’s focus is different to traditional antitrust analysis.  It mainly concerns firms that are active in different markets and therefore contrasts with antitrust’s traditional focus on specific markets. Consider the following example. Conglomerate firm S controls investments, companies, and different brands across different areas of the economy. The classic antitrust analysis would not ask whether Conglomerate S is a competitive organization or a monopoly. It would explore whether Conglomerate S is in competition or a monopolist in individual areas of the economy, traditionally called markets.  Additionally, it might (depending on the jurisdiction) apply specific legal rules or standards to the company as a conglomerate.

The book’s focus on the firm rather than the market is also evident from its reliance on 10Ks. Filings to the financial authorities provide great insight into firms’ views of their competitive environment. However, they tell us less about markets and their specificities.

This distinction between the firm and the (relevant) market is readily acknowledged by the book: ‘Many works— including this one— discuss if, how, and when firms or products tip, when they should instead talk about markets. To put things differently, it is neither a firm that reaches critical mass nor its product that tips. It is the market.’ (p86)

While there is a lot to take away from Nicolas’ book, I would highlight two things that go beyond big tech. First, the book is an invitation to be more mindful and precise when discussing competition law and policy issues, as is the case with the key distinction between ‘the firm’ and ‘the market’.  Neither exist in a vacuum, but they interact. Second, the book’s discussion of big tech companies and interactions between firms and markets invites us to revisit how competition law treats conglomerates. In this sense, the lessons drawn from this book on big tech may well apply beyond this context.  

In writing this short note, I focused on Chapter IV of the book. Chapter IV is where the ‘new theory of dynamic competition under uncertainty’ is laid down. The analysis left me eager to read about the suggested policy implications, that is Chapter V. While I do not want to take away from other brilliant commentators, here is a (for some maybe even unexpected) teaser: ‘The point is to limit monopoly rents in tipped markets, and steer big tech firms toward competition in untipped markets.’(p255)