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Perfect Failure in Pursuit of Perfect Competition

Legislators in the European Union, who have long been losing the game of innovation to the USA and China, claim to have found the culprit for the continent’s failure: American Big Tech. They allege Big Tech companies create an unfair competitive environment in Europe, preventing small innovators from breaking into the market. To restore the “level playing field,” the EU signed the Digital Market Act (DMA), which, starting on May 2, 2023, will heavily regulate ten American (and one European) technological giants.

Since only one European company (Siemens) ranks on the list of the Top 20 most innovative firms in the world, Europe must pull itself together. But an outright attack on the most innovative companies is a rather peculiar way to promote innovation.

Drafters of the DMA justify their plan based on the “gatekeeper” concept. Looking at the digital market, they see a vast field of benefits such as networking effects, search engines, operating systems, and software application stores. From their point of view, digital platforms “emerged” as a toll-collecting troll, holding the key to the gates separating the users from the digital economy’s features. Policymakers assume that serving as an “important gateway” leads to unfair behavior, lack of “contestability,” higher prices, lower quality, and less innovation. Curtailing “gatekeepers,” they conclude, allows consumers and business users to “reap the full benefits of the platform economy.”

Policymakers plan to curb gatekeepers through a variety of targeted rules and regulations. Apple, for instance, will have to give third-party app developers access to its operating system and hardware (e.g., Apple Pay microchip) without security or quality clearance. The law will prohibit Amazon from privileging businesses that deliver their products with “Fulfillment by Amazon,” thus expanding opportunities for sellers to use other delivery services. Google will have to share its search data with other search engines.

In other words, platforms will have to give up many business decisions or even whole business models, under the threat of restrictions and massive penalties reaching up to 10 percent of annual revenue. At the same time, smaller competitors will receive advantages on a regulatory silver platter.

Creating more opportunities for small businesses, thus enhancing competition in the market, may sound benign. But the DMA exhibits a massive misconception of competition and innovation processes that will lead to opposite results in practice than those presented in theory.

Competition is not an end in itself. There is no goal as to compete more. Any business aims to outdo competitors by innovating and attracting more customers with superior products, services, and solutions, especially in such a fast-moving sector as digital technology. The winners secure a “durable position” where they can reap rewards for their efforts and ingenuity, while consumers enjoy the best-possible service. How did Apple, Amazon, or Google become so large and impactful? By creating the technological gates through which millions of consumers and businesses, otherwise scattered and separated, can now reach and interact with each other. These companies have become “gatekeepers” because they have attracted a considerable market share by creating phenomenal value: the digital economy itself, which legislators in the EU assume to exist “out there,” without those companies.

The DMA ignores that without the efforts and ingenuity of Big Tech, there were no “gates” to keep. The digital platform economy has become and continues to be the driver of innovation in the 21st century because Big Tech created the means to connect the world.

Limited choice and overcharging? Google gives away most of its products for free. Its whole business model is to create unique products and give them away, thus attracting billions of people, to earn ad revenue.

Lower quality and less innovation? People can’t wait to get their hands on the newest model of an iPhone, iPad, Macbook, Apple Watch, or AirPods because they are fantastic, ever-improving products.

Regarding contestability, the DMA assumes that large companies do not face pressure to improve their services and offer the best possible product without the threat of multiple competitors keeping them at bay. In reality, however, potential competition is as relevant a concern as existing one. Nobody, for instance, could have predicted that Thomas Edison would put John D. Rockefeller’s domination of the home lighting market to an end with his lightbulb. Similarly, Nokia, which controlled almost fifty percent of the mobile phone market, was suddenly outwitted by Apple and Samsung. Facebook’s “lock” on social media did not prevent TikTok from becoming a dominant platform among young people.

Even the most prominent and seemingly immovable industry giants must always look out for existing and potential competitors that can dethrone them. Companies like Apple, Alphabet, Amazon, and Microsoft understand it, so they continue to be the most innovative enterprises in the world (first through fourth positions, respectively) rather than stagnating monopolies. That few giants currently dominate the digital industry does not prove, as EU legislators assume, that companies hold positions unfairly.

Legislators systematically avoid providing evidence that Big Tech hinders the innovative capabilities of creators in Europe. Instead, they free-ride on the negative attitude towards big companies to promote a political agenda disguised as liberating Europe’s innovative potential. But by taking the competitive advantage from successful companies and giving it to wannabes, the DMA will remove the incentive to innovate from both. Today’s giants will stop because their innovations will be taken from them anyway, while smaller players will expect to legally free-ride on those who continue developing.

Unfortunately, there is nothing new under the European sun. Matt Ridley argues that Europe has already suffocated creators in fields such as medical devices and gene-editing technologies through its massive, protectionist regulatory apparatus. The DMA is but another of Europe’s self-inflicted regulatory wounds. Sadly, it will also affect the ability of giants of Silicon Valley to continue delivering progress in the US and across the globe.

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