Editor’s note: Joe Kennedy is Senior Fellow at the Information Technology and Innovation Foundation. Facebook’s Mark Zuckerberg, Amazon’s Jeff Bezos, Sundar Pichai of Google and Tim Cook of Apple are set to answer for their companies’ practices before Congress as a House panel caps its yearlong investigation of market dominance in the industry. But are they as big a threat to business as critics say?
WASHINGTON, D.C. – Internet platforms are online businesses that facilitate commercial agreements between two or more sides of the same market—often buyers and sellers of a particular good or service.
Although many platforms run marketplaces that match buyers and sellers (Amazon and Etsy), other platforms try to connect people interested in dating (Zoosk), renters with owners (Airbnb), advertisers with viewers of content (YouTube and Facebook), and app developers with phone users (Apple and Google).
Different platforms have different business models, and interact with different parties in different ways. Some sell products (Amazon and eBay) or services (Task Rabbit and VRBO). Others primarily allow users to communicate with each other (Facebook and TikTok) Thus, each platform has created its own rules for optimizing these interactions. Some important distinctions are the degree to which a platform relies on advertising revenue versus fees, its rules for managing suppliers and content, and its relationship with consumers.
Platforms themselves are not new. For example, shopping malls, job placement services, credit card companies, and newspaper classified ads are all two-sided markets. There is a well-established literature on the nature and role of these platforms, with the consensus being they offer users tremendous benefits, largely by reducing the transaction costs of finding other parties to interact with.
The rapid growth of large platforms has caused some activists, scholars, and political officials to worry about their impact on competition. Concern seems to be aimed at two issues. First, certain companies, such as Amazon, sell directly to customers but also run a platform that connects third-party suppliers to customers. Some people are concerned that platforms could compete unfairly by using data about sales by third-party sellers to decide whether to develop and sell competing products.
Second, because of network effects, many platform markets have one or two dominant players. Some advocates claim this harms consumer welfare and innovation. On top of that, some worry this position becomes self-sustaining because the data the platforms collect gives the companies an advantage their rivals cannot overcome.
This report shows that these concerns are largely misplaced. Platforms create significant economic value. Far from being lazy monopolists that try to increase profits by artificially reducing supply, these companies seek to grow rapidly. They are constantly innovating to attract new users and retain the ones they have. To do this, they invest enormous amounts of money in research and development (R&D).
While the potential benefits of the platform business model are great, the dangers are overdone. These platforms face continued competition in many of the markets they participate in. Their industries are continually evolving. Although some compete with other companies on their platforms, the incentive to attract more third-party suppliers usually outweighs their interest in displacing any one supplier. And although data can be a valuable resource, its value depends on how it is used. Data alone can seldom protect an incumbent against a rival with a better product.
Takeaways from report
- Online platforms are much like other two-sided market platforms, such as shopping malls, job placement services, and newspaper classifieds: They provide tremendous benefits by reducing transaction costs as they bring together buyers and sellers.
- Critics worry online platform markets often have one or two dominant players, and they could compete unfairly when they sell directly to consumers alongside third parties. But they underappreciate network effects and overstate the dangers.
- Platforms face intense competition on many fronts—advertising, for example—and they have more incentive to attract third-party sellers than displace them.
- Far from being lazy monopolists that try to increase profits by artificially reducing supply, online platforms are constantly innovating to attract and retain users. To do this and create new markets, they invest enormous sums in R&D.
- Existing policy is adequate to deal with legitimate antitrust problems involving online platforms. The statutes readily encompass non-price issues such as threats to innovation or fair dealing.
- Antitrust policy should continue to focus on maximizing overall economic welfare, not on protecting companies from legitimate competition. Other issues, such as privacy, data security, and political power, demand their own policies.
Just as the rise of the industrial corporation in the early 20th century laid the groundwork for 75 years of unprecedented prosperity, it is possible the rise and spread of the platform business model over the next two decades could be equally transformative.
This is a critical issue in antitrust thinking and doctrine because it is about more than a few large Internet-based companies today. Because of the growing importance of information technology, the frequent combination of high fixed costs, economies of scale and network effects, and global markets, the platform business model may very well represent the wave of the future. Many sectors, such as financial services, professional services, health care, and education, could potentially be transformed and disrupted by Internet-based platform business models, the way Lyft and Uber disrupted the taxicab industry, and Netflix and Hulu disrupted the movie business.
Just as the rise of the industrial corporation in the early 20th century laid the groundwork for 75 years of unprecedented prosperity, it is possible the rise and spread of the platform business model over the next two decades could be equally transformative. But the first revolution happened because policy makers did not give in to the Ida Tarbells of the day and break up large industrial corporations. While policymakers rightly went after trusts, neither the Sherman Act nor the Clayton Act prohibited large industrial concerns, even ones with significant market share. Rather, the antitrust regime that was put in place was largely focused on limiting abuses, not size.2 The risk is that today’s Ida Tarbells will succeed in limiting the entire business model of Internet-based platforms, and in so doing hold back the needed evolution of the U.S. economy, to the detriment of economic growth.
Finally, existing competition policy is adequate to deal with legitimate antitrust problems. The statutes readily encompass non-price issues such as threats to both innovation and fair dealing. The main imperative is antitrust should continue to focus on maximizing consumer and social welfare, not on protecting companies from legitimate competition. Other issues, such as privacy, data security, and political power, demand their own policies.