Monopoly: Big Tech

This week we're covering monopolies, which have been in the news quite a lot recently!  For example, the Department of Justice just sued Apple for monopolizing smart phone markets. Similarly, the FTC recently sued Amazon for abusing monopoly power. Do economists think that these suits are fair? Are big tech companies actually monopolies?

A recent working paper investigated this.  They found that of all the big tech companies, the only one that showed signs of monopoly profits was Apple. The other firms' profits were better explained by being more efficient than their competitors* (Ricardian rents in the table below) or by being ahead of the curve (Schumpeterian rents in the table below). Notably, they find Amazon is not a monopoly, nor is it particularly efficient, nor is it ahead of the curve anymore.

How is this possible? Well, Amazon sells physical things and so faces lots of competition from physical stores. In addition, companies like Walmart and Target have entered the online shopping game. 

What about Google? Google is so dominant in the internet search industry that we use the verb "google" to mean "to look something up online."  Why can't they make money from this? Let's say that Google decided to start charging $5 a month to anyone who used their search engine. We'd all switch to Yahoo or Bing overnight. Even though almost everybody uses Google, they can't act like a monopoly because the threat of competition, even if not many people use Yahoo or Bing today. Note that while Google may not charge consumers much for its services, it makes a lot of money on advertising. 

A caveat that applies to all the papers I present here, and especially this one: not all economists agree that this paper is right! There are very smart and thoughtful economists who disagree with this paper, and their work is worth reading as well. One of the fun parts of being an economist is that you get to have thoughtful and data driven arguments in good faith with people who disagree with you!

* When a firm makes money by being more efficient than its competition, we say that they earn Ricardian rents. For example, the Iowan farmers in question 8 of chapter 13 who make more money than other firms because their soil is very fertile and productive earn Ricardian rents. Google and Microsoft have very efficient corporate cultures. Employees there are more productive than similar employees at other firms.