In this second instalment of ‘the antitrust books you should’ve read in 2022’, we shift our attention from antitrust’s hottest market—gaming—to two books that are more directly related to the practice of antitrust: Direct by Kathryn Judge and The New Goliaths by James Bessen. (If you haven’t read the first set of book reviews, you can do so here.)
One book that is not reviewed here but cannot go unmentioned is How Big-Tech Barons Smash Innovation—and How to Strike Back by Ariel Ezrachi and Maurice Stucke. Ever since Virtual Competition, the writers’ duo is on every antitrust lawyer’s radar, and I reviewed their book Competition Overdose as part of ‘the antitrust books you should’ve read in 2020’. In the interest of ‘contestability’ (increasingly a concern in competition policy—and one that is shared by the authors), I’m putting the spotlight on other books this year.
‘Direct: The Rise of the Middleman Economy and the Power of Going to the Source’ by Kathryn Judge
In short: In Direct, Kathryn Judge takes a deep look at the rise of powerful middlemen in every sector of the economy, from real estate to banking to retail (and even the rise of middlemen behind those middlemen). The phenomenon is not limited to digital relations, which are increasingly intermediated by platforms; in fact, Judge spends more time discussing Walmart than Amazon. These middlemen are often drivers of efficiency. Judge notes, for example, how the rise of Walmart ‘has resulted in meaningfully lower prices for consumers’ (p. 52). But she also argues that there is a flip side to the benefits brought by middlemen.
The harms from (over)reliance on middlemen are varied, including higher prices (e.g., in real estate), consumer deception, the preservation of inequality, and even obesity (thanks to Walmart). Increasing intermediation also comes with ever more complex supply chains, which lack accountability. To combat these ills, Judge offers solutions, the most obvious one being ‘direct exchange’ (chapter 9) or ‘going to the source’ (chapter 2). The benefits of doing so exceed the purely economic (relating, e.g., to health, environment, and community), although she is also careful to point out limitations too (depending on the market, cutting out the middlemen can come with higher prices).
Favourite chapter: Antitrust surfaces throughout the book but really comes to the fore in chapter 7, which zooms in on the strategies middlemen use to perpetuate the need for middlemen (i.e., prevent disintermediation). To provide consumer-friendly benefits, successful middlemen build critical infrastructure. That infrastructure can become a real moat, though, and middlemen can use it to further ‘entrench arrangements that allow them to earn overly high fees at the expense of end users.’ (p. 139) The antitrust laws can help, but ‘failed to fulfil their purpose in recent decades.’ (p. 132)
Quotable: ‘[M]any platforms are more middlemen-lite than full middlemen. … In theory, a well-designed platform can marry benefits of the middlemen economy … with benefits of direct exchange[.] Just how many of those benefits are realized depends on a platform’s design and how much control it is willing to cede.’ (p. 199)
Further reading: The idea that platforms need not be the problem but—when well-designed—can be the solution, ties in well with the unbundling solution that James Bessen puts forward in The New Goliaths.
‘The New Goliaths: How Corporations Use Software to Dominate Industries, Kill Innovation, and Undermine Regulation’ by James Bessen
In short: Upon superficial reading, it’s easy to misunderstand the point James Bessen makes in The New Goliaths, namely that investment in proprietary software has led to the persistent dominance of large firms. Is his point that R&D spending is bad? No, the argument is more complex. Bessen starts by describing how the rate of disruption has declined because large-scale investments in proprietary software have changed the nature of competition. Firms compete on complexity, which means that ‘eventually the leading products become highly complex, involving large numbers of features that require large initial fixed costs that rivals cannot profitably duplicate’ (p. 25). The superstar firms developing these products continue to increase their lead over rivals, while those rivals become decreasingly likely to leapfrog the incumbent.
A contributing factor to this trend toward dominance is the rate of technology diffusion, which has slowed. When GM invented automatic transmission, rivals were using it within years, either because they independently invented it or because they licensed the technology. Today, ever-greater complexity makes independent creation difficult, while dominant firms have little incentive to license their technology to rivals. In Bessen’s words, we’ve moved ‘from open to closed capitalism’. Closed capitalism is a problem because it slows productivity growth, especially at the startup level, where product (rather than process and incremental) innovation tends to happen. Regulation can help, but comes with its own challenges, given that complexity has increased the information asymmetry between firms and regulators.
Favourite chapter(s): From the start, Bessen states clearly that the dynamic he describes applies to all sectors, from retail to car manufacturing, and not just tech. In chapter 9, however, he zooms in on ‘Platforms and Antitrust’. He stresses, once more, that the point is not that ‘big is bad’, but rather that ‘closed is bad’. Accordingly, the solution ‘is not to break up platform businesses or turn them into public utilities but to encourage or compel more firms with proprietary technology to become open platform businesses’ (pp. 145–46). Bessen’s more specific solution, put forward in chapter 10, is unbundling. Unbundling measures range from undoing ties (e.g., IBM back in the day, or Google Android more recently) to mandating data portability/interoperability (e.g., Open Banking).
Quotable: Today the likelihood that a top firm in any industry will be displaced by a rival is less than half of what it was in the late 1990s.’ (p. 20) Chapter 2, on ‘Disruption Lost’, lays the groundwork for everything that follows. Bessen dares make bold statements but duly corroborates them.
Further reading: The last few years have seen the publication of a series of books on the state of competition and its broader implications for the economy. Noteworthy contributions include The Great Reversal by Thomas Philippon (recommended in 2020) and The Profit Paradox by Jan Eeckhout (recommended in 2022).
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