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US tech giants and monopoly power

In recent years, US tech companies have faced increased scrutiny in Washington over their size and power. Despite the big tech firms in America being economically robust, seemingly more so than any other sector, they are also more politically vulnerable. This potential vulnerability is present regardless of the recent election result.

Both the Democrat and Republican parties are thinking critically about monopoly power and antitrust issues, where ‘antitrust’ refers to the outlawing or control of oligopolistic collusion. Despite the varied reasons across different parts of the political spectrum, the increased scrutiny over big tech companies is bipartisan.

Rising monopoly power

Monopoly power occurs when a firm has a dominant position in the market. A pure monopoly is when one firm has a 100% share of the market. A firm might be considered to have monopoly power with more than a 25% market share.

If there is a rise in market concentration, it tends to hurt blue-collar workers, such as those employed in factories, more than everyone else. Research, from the University of Chicago, studied what happens to particular classes of workers when companies increasingly dominate a market and have more power to raise prices. The study found that those workers that make things tend to be left worse off, while the workers who sell, market or design things gain. When companies have more pricing power, they make fewer products and sell each one for a higher profit margin. In that case, it’s far more valuable to a company to be an employee working in so-called expansionary positions, such as marketing, than in production jobs, such as working on a factory line — because there’s less production to be done and more salesmanship.

Monopoly power under Trump Vs Biden

In February, President Trump and his economic team saw no need to rewrite the federal government’s antitrust rules, drawing a battle line with the Democrats on an issue that has increasingly drawn the attention of economists, legal scholars and other academics. In their annual Economic Report of the President, Mr. Trump and his advisers effectively dismissed research that found large American companies increasingly dominate industries like telecommunications and tech, stifling competition and hurting consumers. At the time the Trump administration contended that studies demonstrating a rise in market concentration were flawed and that the rise of large companies may not be a bad thing for consumers.

On page 201, the report reads:

Concentration may be driven by economies of scale and scope that can lower costs for consumers. Also, successful firms tend to grow, and it is important that antitrust enforcement and competition policy not be used to punish firms for their competitive success.

The Trump administration approved some high-profile corporate mergers, such as the merger of Sprint and T-Mobile, while also trying to block others, such as AT&T’s purchase of Time Warner. Mr. Trump’s advisers stated that agencies already had the tools they needed to evaluate mergers and antitrust cases. It lamented that some Americans have come to hold the mistaken, simplistic view that ‘Big Is Bad.’

However, it is likely that such big firms, including the tech giants, would take a hit under the new presidency. President-Elect Joe Biden has pledged to undo the tax cuts introduced by Trump and has vowed to increase corporation tax from 21% to 28%. As part of these tax changes, he has suggested the introduction of a minimum 15% tax for all companies with a revenue of over $100 million. This has now been given the nickname of the ‘Amazon Tax’ and it is clear how it would impact on the big the firms such as Amazon.

This is the opposite of what was probable if Trump were to have been re-elected. It was expected that the US would continue along the path of deregulation and lower taxes for corporates and high-income households, which would have been welcomed by the stock market. However, analysts suggest that the tax changes under Biden would negatively affect the US tech sector, with some analysts maintaining that the banking sector would also be hit.

Antitrust enforcement is often associated with the political left, but the current situation is not so clear-cut. In the past, Silicon Valley has largely avoided any clashes with Washington, even when European regulators have levied fines against the tech giants. European regulators have fined Google a total of $9bn for anticompetitive practices. In 2018 Donald Trump attacked the EU decisions. “I told you so! The European Union just slapped a Five Billion Dollar fine on one of our great companies, Google,” Trump tweeted. “They truly have taken advantage of the US, but not for long!”

However, since then the mood has changed, with Trump and other conservatives joining liberals, including senators Elizabeth Warren and Bernie Sanders, in attacking the dominance of tech firms, including Amazon, Google, Facebook and others. While Democrats have largely stuck to criticising the scale of big tech’s dominance, Republicans, including Trump, have accused the major tech companies of censoring conservative speech.

An antitrust subcommittee of the Democrat-controlled House Judiciary Committee released a 449-page report excoriating the Big Four tech companies, Amazon, Facebook, Apple and Google-owner, Alphabet, for what it calls systematic and continuing abuses of their monopoly power. Recommendations from the report include ways to limit their power, force them out of certain areas of business and even a break-up of some of them.

Democratic lawmakers working on the probe claim that these firms have too much power, and that power must be reined in. But not all Republicans involved agreed with the recommendations. One Republican congressman, Jim Jordan, dismissed the report as “partisan” and said it advanced “radical proposals that would refashion antitrust law in the vision of the far left.” However, others have said they support many of the report’s conclusions about the firms’ anti-competitive tactics, but that remedies proposed by Democrats go too far.

The US tech giants


Amazon is a leading example of the economic strength held by the tech giants. Amazon has produced 12-month revenues of $321bn to October 2020, which in an increase from 2019 and 2018 revenues of $280bn and $233bn respectively. However, Amazon, along with the other big players Apple, Facebook, Google parent Alphabet, and Microsoft, are facing increased government scrutiny.

The US Department of Justice has filed a lawsuit against Google for entrenching itself as the dominant search engine through anti-competitive practices. Google’s complex algorithms, software, and custom-built servers helped make it into one of the world’s richest and most-powerful corporations. It currently dominates the online search market in the USA, accounting for around 80% of search queries. The lawsuit accuses the tech company of abusing its position to maintain an illegal monopoly over search and search advertising. Facebook also faces an antitrust lawsuit from the Federal Trade Commission. It is arguable that the US tech giants are so powerful that they may accomplish the seemingly impossible and unite the two parties, at least on one policy – breaking them up.

If it is correct that the tech giants’ behaviour ultimately damages innovation and exacerbates inequality, it is arguable that such problems have only grown worse with the coronavirus pandemic. Many smaller businesses have succumbed to the economic damage: many have been closed during lockdowns or suffered a decline in sales; many have gone out of business.

The changing patterns in teleworking and retail have accelerated in ways that have made Americans more reliant on technologies produced by a few firms. Shares in the Big Four, along with Microsoft, Netflix, and Tesla, added $291 billion in market value in just one day last week. It could therefore be claimed that the dangers of Big Tech domination are more profound now than they were even a few months ago.

Google’s lawsuit

On 20 October, the Department of Justice — along with eleven state Attorneys General — filed a civil antitrust lawsuit in the U.S. District Court for the District of Columbia to stop Google from unlawfully maintaining monopolies through anticompetitive and exclusionary practices in the search and search advertising markets and to remedy the competitive harms.

This is the most significant legal challenge to a major tech company in decades and comes as US authorities are increasingly critical of the business practices of the major tech companies. The suit alleges that Google is no longer a start-up company with an innovative way to search the emerging internet. Instead Google is being described as a “monopoly gatekeeper for the internet” that has used “pernicious” anticompetitive tactics to maintain and extend its monopolies.

The allegation that Google is unfairly acting as a gatekeeper to the internet is based on the argument that through a series of business agreements, Google has effectively locked out any competition. One of the specific arrangements being challenged is the issue of Google being preloaded on mobile devices. On mobile phones running its Android operating system, Google is preinstalled and cannot be deleted. The company pays billions each year to “secure default status for its general search engine and, in many cases, to specifically prohibit Google’s counterparties from dealing with Google’s competitors,” the suit states. It is argued that this alone forecloses competition for internet search as it denies its rivals to compete effectively and prevent potential innovation.

However, Google has defended its position, calling the lawsuit “deeply flawed”. It has argued that consumers themselves choose to use Google; they do not use it because they are forced to or because they can’t find an alternative search platform. Google also argues that this lawsuit will not be beneficial for consumers. It claims that this will artificially prop up lower-quality search alternatives, increase phone prices, and make it harder for people to get the search services they want to use.

Conclusion

Despite wanting to stop Google from “unlawfully maintaining monopolies in the markets for” search services, advertising, and general search text, the lack of consensus and divergence among the Democrats and Republicans on the antitrust issues remains a major issue to move things forward.

The Democrats want to see the power held by these companies reined in, while the Republicans would rather see targeted antitrust enforcement over onerous and burdensome regulation that kills industry innovation. It is clear that the US government will have to balance its reforms and ideas while making sure not to put the largest companies in the USA at a competitive disadvantage versus their competitors globally.

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Questions

  1. With the aid of a diagram, explain how pricing decisions are made in a monopoly.
  2. What factors influence the degree of monopoly power a company has within an industry?
  3. What are the advantages of a monopoly?
  4. Why would a government want to prevent a monopoly? Discuss the policies a government could implement to do this.
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A moral hazard in cancelling student debt?

With university fees for home students in England of £9250 per year and with many students receiving maintenance loans of around £9000 per year, many students are graduating with debts in excess of £50 000. Loans are repaid at a marginal rate of 9% on incomes over £25 716.

Many students also study for a masters degree. The average fee for a taught, classroom-based masters (MA) is £7392 and for a laboratory-based masters (MSc) is £8167 but can be considerably higher at some prestigious universities where demand is high. Government loans of up to £10 906 are available to contribute towards fees and maintenance. These are paid back at a marginal rate of 6% for people earning over £21 000, giving a combined marginal rate of 15% for first and masters degrees.

For high earners on the 40% income tax rate, the combined marginal rate of payment out of income is 40% tax, plus 2% national insurance, plus 15% for those with undergraduate and masters loans. This gives a combined marginal rate of 57%.

Average student debt in England is higher even than in the USA, where the average is $37 000. US university courses are more expensive than in the UK, costing an average of $34 000 per year in tuition alone. But undergraduates can borrow less. They can borrow between $5500 and $12 500 per year in federal loans towards both fees and maintenance, and some private loans are also available. Most students do some paid work during their studies to make up the difference or rely on parents contributing. Parental contributions mean that students from poor families end up owing more. According to a Guardian article:

Race is a huge factor. Black students owe an average of $7400 more than white students when they graduate, the Brookings Institution found. After graduation, the debt gap continues to widen. Four years after graduation, black graduates owe an average of nearly $53 000 – nearly double that of white graduates.

Student debt looks to become one of the key issues in the 2020 US presidential election.

Pressure to cancel student fees and debt in the USA

Most of the Democratic candidates are promising to address student fees and debt. Student debt, they claim, places an unfair burden on the younger generation and makes it hard for people to buy a house, or car or other major consumer durables. This also has a dampening effect on aggregate demand.

The most radical proposal comes from Bernie Sanders. He has vowed, if elected, to abolish student fees and to cancel all undergraduate and graduate debt of all Americans. Other candidates are promising to cut fees and/or debt.

Although most politicians and commentators agree that the USA has a serious problem of student debt, there is little agreement on what, if anything, to do about it. There are already a number of ways in which student debt can be written off or reduced. For example, if you work in the public sector for more than 10 years, remaining debt will be cancelled. However, none of the existing schemes is as radical as that being proposed by many Democrats.

Criticisms of the Democrats’ plans are mainly of two types.

The first is the sheer cost. Overall debt is around $1.6tn. What is more, making student tuition free would place a huge ongoing burden on government finances. Bernie Sanders proposes introducing a financial transactions tax on stock trading. This would be similar to a Tobin tax (sometimes dubbed a ‘Robin Hood tax’) and would include a 0.5% tax on stock transactions, a 0.1% tax on bond trades and a 0.005% tax on transactions in derivatives. He argues that the public bailed out the financial sector in 2008 and that it is now the turn of the financial sector to come to the aid of students and graduates.

The other type of criticism concerns the incentive effects of the proposal. The core of the criticism is that loan forgiveness involves moral hazard.

The moral hazard of loan forgiveness

The argument is that cancelling debt, or the promise to do so, encourages people to take on more debt. Generally, moral hazard occurs when people are protected from the consequences of their actions and are thus encouraged to make riskier decisions. For example, if you are ensured against theft, you may be less careful with your belongings. As the Orange County Register article linked below states:

If the taxpayers pay the debts of everyone with outstanding student loans, how will that affect the decisions made by current students thinking about their choices for financing higher education? What’s the message? Borrow as much as you can and wait for the debt to be canceled during the next presidential primary campaign?

Not only would more students be encouraged to go to college, but they would be encouraged to apply for more costly courses if they were free.

Universities would be encouraged to exaggerate their costs to warrant higher fees charged to the government. The government (federal, state or local) would have to be very careful in auditing courses to ensure costs were genuine. Universities could end up being squeezed for finance as government may try to cut payments by claiming that courses were overpriced.

Even if fees were not abolished, cancelling debts would encourage students to take on larger debt, if that was to be cleared at some point in the future. What is more, students (or their parents) who could afford to pay, would choose to borrow the money instead.

But many countries do have free or highly subsidised higher education. Universities are given grants which are designed to reflect fair costs.

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Questions

  1. Assess the arguments for abolishing or substantially reducing student fees.
  2. Assess the arguments against abolishing or substantially reducing student fees.
  3. Assess the arguments for writing off or substantially reducing student debt.
  4. Assess the arguments against writing off or substantially reducing student debt.
  5. If it were decided to cancel student debt, would it be fair to pay students back for any debt they had already paid off?
  6. Does tackling the problem of student debt necessarily lead to a redistribution of wealth/income?
  7. Give some other examples of moral hazard.
  8. If student fees were abolished, would there be any problem of adverse selection? If so, how could this be overcome?
  9. Find out what the main UK parties are advocating about student fees and debt in the nations of the UK for home and non-home students. Provide a critique of each of their policies.