Platform Economy & Digital Monopolies

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What are “digital monopolies”, what are the risks for users and why do small internet players help us in this situation?

“The United States has GAFA (Google, Apple, Facebook, Amazon), China has BATX (Baidu, Alibaba, Tencent, Xiaomi). And Europe? We have the GDPR (General Data Protection Regulation)."[1]

This quote is from the current French President, Emmanuel Macron, from an interview in December 2020, in which he points out the ambivalence between European dependence on international technology corporations and the importance of functioning data protection rules.

Having already addressed the issue of data and information security in detail on our blog, this time we will focus on the first part of the quote: Digital monopolies of multinational corporations.

What is a Monopoly?

A monopoly is a market structure in which market power exists on the supply side because there is only one supplier or producer. This is possible in particular in the form of state monopolies, such as in national defense or, until a few years ago in Germany, in postal services and telecommunications, or through the existence of a so-called natural monopoly. In the economic sense, a natural monopoly often arises when high fixed costs and particularly low marginal costs lead to increasing returns to scale. Fixed costs are costs that generally do not change over a longer period of time and are therefore not directly dependent (in the short term) on the quantity produced. These include, for example, rental costs. In contrast, marginal costs are the costs incurred by producing one additional unit of the good produced. In turn, increasing returns to scale means that, as a consequence, the output produced increases faster than the input used to produce it.

If these factors occur, a company can offer a demanded good more cheaply than possible competitors, which in turn forces these competitors out of the market. A natural monopoly is created.

In practice, pure monopolies are very rare. In a quasi-monopoly, there is not only one supplier or producer, but several, with one producer enjoying a strong dominant position due to a competitive advantage.

What does Platform Economy mean?

In a narrower sense, the term platform economy refers to a digital business model in which producers and consumers meet online at a marketplace. The best-known examples are probably the Amazon and Alibaba platforms. These companies traditionally offer “only” the platforms on which the actual market participants are active via online trade. Although not as obvious, the other GAFA or BATX groups can also be described as platform economies. In this context, the search engines Google and Baidu and the social networks Facebook and Tencent are companies “that trade in the attention of their users and thus bring advertisers and advertised parties together."[2] The only exceptions to this are Apple and Xerox. The only exceptions are Apple and Xiaomi, which traditionally also produce their own hardware and end devices, such as smartphones, laptops and tablets.

The answer to this question can also be introduced with an appropriate quote from the German contemporary philosopher, Richard David Precht:

“Platform capitalism revolutionized the liberal economy and changed its rules of the game to such an extent that today, in many cases, there is no longer any question of liberal economics and free markets. Not only do very few forms dominate very large parts of the most significant market, as is generally known, but these firms are now the market themselves."[3]

But what is the reason for the observed monopoly formation in those industries? As it is often the case, there are a variety of causes that can be cited in this regard. Previously, we have already outlined the theoretical facts of monopolies, in short: increasing returns to scale. So let’s assume that the expensive digital infrastructure that corporations in the platform economies have to build is the fixed costs. These include, for example, the large server facilities, rental or office costs. The marginal costs are therefore decreasing, since there is no need for an own (additional) infrastructure for each additional trader on the platform. Thus, for each additional user of the platform, the costs for the company providing this platform decrease in return. This results in increasing economies of scale.

This is reinforced by the fact that the location of the corresponding infrastructure is not directly relevant for the business model. This means that potential (future) competitors can simply be bought up and integrated into the company’s own platform in order to protect its own dominant position. The purchase of Instagram and WhatsApp by Facebook can be cited as a well-known example.

In addition, this can not only expand the (quasi-)monopoly position in one’s own sector, but also expand one’s own business activities into areas of other platform economies, which leads to the formation of huge, multinational, digital corporations that have market power not only in one sector, but in several. For example, Google has long since ceased to be just a search engine; among other things, the corporation bought YouTube, the best-known video portal, back in 2006.

In addition, there have been increasing tendencies towards so-called “vertical integration” in recent years. Vertical integration is the technical term used when companies attempt to enter further business areas by buying up or merging with other companies in their own supply chain or processing stage. To illustrate this, let’s once again turn our attention to Amazon. Amazon no longer simply offers the trading platform, but is producing more and more products offered on the digital marketplace itself.

What is the impact of this situation on the Users?

If we go back to economic theory, we talk about a so-called welfare loss. Economic welfare consists of the sum of the producer surplus and the consumer surplus. While the producer surplus reflects the difference between the equilibrium market price and the minimum price to remain profitable, the consumer surplus is the price consumers are willing to pay and also the equilibrium market price they actually have to pay. Monopolies, however, can set the real price above this equilibrium price in order to increase their producer surplus, i.e. the producer gains part of the consumer surplus for himself and the consumer loses. However, a portion is lost to both the producer and the consumer in this process, the welfare loss.

In practical terms, the producers have market power and the users, i.e. all of us who use the aforementioned platforms, suffer obvious, or in most cases less obvious, disadvantages, such as overpriced products or economic and social dependencies, which might lead to our privacy and personal rights being undermined.

To illustrate that this is not a hypothetical issue, it is useful to point out here that, especially in 2020, antitrust authorities responsible for free competition violations around the world are increasingly taking legal and political action against such market power and its exploitation to the detriment of users. The U.S. has recently initiated lawsuits against both Facebook and Google, as has the German Federal Cartel Office. Australia and the United Kingdom also have their own proceedings against Facebook and Google.[4] The EU Commission is currently seeking similar proceedings against Amazon.[5] The General Data Protection Regulation, which has been in force since 2018, can also be understood as an expression of the containment of the abuse of market power, even if the focus is explicitly on data protection in general.

What is ViOffice’s stance on this?

Unlike the companies mentioned, ViOffice is a small, young start-up. However, we are a digital business enterprise ourselves, so we cannot act as an independent authority in this discussion. It is therefore in no way our intention to denounce these corporations or to make a final assessment on individual cases. We only want to inform about the topic on the basis of the best-known examples and point out existing problems in this context.

In addition, we would like to take the opportunity to place the topic in general, independent of individual examples, in our own corporate philosophy. The obvious disadvantages that arise for society from the monopolization of platform economies are one of the reasons why we are clearly in favor of the widespread use of Free Software. Free Software is transparent and can be used by everyone without restriction. Besides many other advantages for the users, Free Software avoids a lock-in effect, which makes it difficult to switch to other software or other providers at a later time. Thus, it does not create a long-term dependency on its own services, which contradicts a monopoly.

Unlike the companies mentioned, ViOffice is a small, young start-up. However, we are a digital business enterprise ourselves, so we cannot act as an independent authority in this discussion. It is therefore in no way our intention to denounce these corporations or to make a final assessment on individual cases. We only want to inform about the topic on the basis of the best-known examples and point out existing problems in this context.

In addition, we would like to take the opportunity to place the topic in general, independent of individual examples, in our own corporate philosophy. The obvious disadvantages that arise for society from the monopolization of platform economies are one of the reasons why we are clearly in favor of the widespread use of Free Software. Free Software is transparent and can be used by everyone without restriction. Besides many other advantages for the users, Free Software avoids a lock-in effect, which makes it difficult to switch to other software or other providers at a later time. Thus, it does not create a long-term dependency on its own services, which contradicts a monopoly.

Ultimately, we offer simple and useful tools at reasonable prices, which are primarily based on our costs and realistic, sustainable future orientation. Our pricing model is not aimed at dominating entire market segments, nor at strict profit optimization. We strive for social balance and participation through solidarity pricing, without compromising on functionality. We go into more detail about our corporate values in the blog entry on Corporate Social Responsibility.

Sources

[1] Emmanuel Macron in an Interview with Niklas Zennström at the Atomico State of European Tech Report 2020. Online: https://www.elysee.fr/emmanuel-macron/2020/12/09/il-est-temps-pour-leurope-davoir-sa-propre-souverainete-technologique [09.12.2020].

[2] Bundesministerium für Arbeit und Soziales (2017): Plattformökonomie und Crowdworking. Eine Analyse der Strategien und Positionen zentraler Akteure [German]. In: Forschungsbericht 500. Online: http://www.bmas.de/SharedDocs/Downloads/DE/PDF-Publikationen/Forschungsberichte/fb500-plattformoekonomie-und-crowdworking.pdf [November 2017].

[3] Richard David Precht (2020): Künstliche Intelligenz und der Sinn des Lebens [German], Goldmann Verlag. The quote is based on an analysis of Philipp Staab (2019): Digitaler Kapitalismus. Markt und Herrschaft in der Ökonomie der Unknappheit [German], Suhrkamp Verlag.

[4] Simon Hurtz (2020): Der wilde Plattformkapitalismus geht zu Ende [German]. In: Süddeutsche Zeitung. Online unter https://www.sueddeutsche.de/digital/google-facebook-klagen-regulierung-1.5152755 [19.12.2020].

[5] Alexander Göbel (2020): EU wirft Amazon Kartellverstöße vor [German]. In: tagesschau.de. Online unter https://www.tagesschau.de/wirtschaft/eu-kartellklage-gegen-amazon-101.html [10.11.2020].