‘Big Tech’ is not bad, says new IEA paper

Big Tech’ is not bad, says new IEA paper

Regulators have become too fearful of ‘Big Tech,’ according to a new Hobart Paper published by the free market think tank the Institute of Economic Affairs

A competitive market may only have a few large companies if they efficiently provide high-quality products and innovate.

Competition ensures that successful companies are constantly challenged by new entrants and products in the market.

Adopting a ‘precautionary principle’ in response to digital mergers risks harming consumers and reducing investment and innovation.

Policymakers should focus on removing state-imposed barriers to competition, like excessive patent protection, regulation and taxes – rather than trying to ‘break up’ Big Tech or block acquisitions.

The Competition and Markets Authority’s (CMA) blocking of the Microsoft/Activision Blizzard and Meta/Giphy acquisitions has raised concerns about tech investment in the UK. Now, a landmark new Hobart Paper from the Institute of Economic Affairs hits back at the ‘big means bad’ mantra dominating debate about ‘Big Tech.’

Paper author Dr Cento Veljanovski, an economist and legal scholar, highlights that even the largest established digital firms “are constantly innovating, offering consumers new and better services typically to stay ahead of the game and the wall of potential competitors.”

Hayek on Competition: A liberal antitrust for a digital age? harnesses Nobel Prize-winning economist and IEA author F.A. Hayek for the modern age. Hayek explicitly rejected the “popular prejudice against bigness” and contended that a small number of firms in a sector may be beneficial if they can produce products more cheaply and continue innovating.

Google, Microsoft, Amazon and Meta collectively invested over US$71 billion in 2017 in R&D, second only to the pharmaceutical sector, and are consistently ranked as the most innovative firms globally. “Big tech may look like a monopoly, but it does not behave as a classic monopoly that restricts output and overcharges its customers,” writes Veljanovski.

Hayek highlighted the dynamic view of competition, in which open markets are constantly evolving and adapting in unpredictable ways. Building on these ideas, Veljanovski suggests that uncertainty about the future means that bureaucrats are unlikely to improve outcomes and should be reluctant to intervene in dynamic industries.

“The increased adoption of a precautionary principle in dealing with digital mergers risks reducing the competitive dynamics in the digital sector with long-term harm to consumers and reduced innovation,” writes Veljanovski. A Hayekian pro-competition policy should focus on removing barriers to effective competition – including intellectual property laws, taxes and regulations which raise barriers to entry.

Veljanovski also shows that Hayek saw a positive role for the state to set the rules of the game, within the constraints of the rule of law and liberty, but a limited role for prescriptive competition regulation. Hayek accepted the need for laws against certain predatory practices by firms designed to protect themselves from competitors – like contracts restricting trade and predatory pricing – but argued these should be enforced by allowing impacted individuals to sue instead of bureaucratic regulators.

IEA Law and Economics Fellow and paper author Dr Cento Veljanovski said:

“Digital services have delivered immense benefits to humanity through innovative products, often at zero direct cost to consumers. Rather than fearing their bigness and pursuing potentially dangerous interventions, policymakers should seek to embrace the immense power of dynamic competition.

“This is just one of the key insights that can be ascertained from F. A. Hayek, the preeminent classical liberal economist and philosopher. This Hobart Paper shows how Hayek’s views on markets, competition and the law are highly relevant to the digital age. It’s a nuanced and complex picture, which will surprise policymakers and even liberals and free market thinkers.”