Wednesday, May 24, 2017

Business concentration, superstar effect, and hegemony

I like Tim Harford and enjoyed reading his several books. But I cannot help getting the impression that he has lost the plot here. And it is a teachable moment in the cognitive blindspot of the liberal establishment and how it causes alienation that leads to the likes of Brexit and Trump. The article has several blindpsot based arguments. Sample this,
Why hasn’t competition chipped away at the market position of the leading companies? The simplest explanation: they are very good at what they do. Competition isn’t a threat to them. It’s an opportunity. What Professor Autor and his colleagues call “superstar firms” tend to be more efficient. They sell more at a lower cost, so they enjoy a larger profit margin. Google is the purest example: its search algorithm won market share on merit. Alternatives are easily available, but most people do not use them. But the pattern holds more broadly: superstar firms have grown not by avoiding competitors but by defeating them... The policy response required is subtle: after all, the growth of innovative, productive companies is welcome. It’s the unintended consequences of that growth that pose problems.
The last is a deep and unqualified statement. Let us unpack it. This essentially means that superstars firms like Google competed on a level-playing field with competitors and won the race on merits. How can we be so sure? In fact, there are strong arguments to dispute this narrative.

I see several alternate narratives. What if there were entry barriers (beyond a network size) that stifled competition and that Google was, by happenstance, the first to cross this? What if these barriers gave Google the time and network density to gather more data to refine its search algorithm, which in turn entrenched its position even further? What if there is some stickiness to search engine users that confers definitive first mover advantage (beyond a certain network size)? What if Google manipulated its search algorithms to steer traffic towards itself and away from competitors?

What if Google manipulated the market with unfair business practices that took advantage of its initially emerging leadership share? Or what if Google used its rising market power to lobby and put in place rules of the game that erected subtle entry barriers - after all Eric Schmidt was the Technology Czar in the first Obama administration and there is some argument that the frequent visits by Google executives to White House helped swing the anti-trust investigations by Federal Trade Commission their way? For more on a theory of such narratives, whether you believe them or not, read Matt Ridley here.

I am not suggesting in favour of any of these narratives. In fact, most reasonable people would agree with me that all these narratives, including the one unquestioningly embraced by Mr Harford, are possibly equally likely (even people like David Autor included). Maybe all of them played some part or other in elevating Google. It is true that they may arrive at different choices when they apply their judgement call on the various alternatives. I am inclined to believe that we may never be able to decipher the true dynamic that has catapulted Google to where it is today. 

But I am disturbed by the nonchalant, almost reflexive, manner in which Mr Harford overlooks all these alternatives to embrace his narrative to rationalize away the trend of business concentration as the meritorious evolution of superstar firms. By calling it an "unintended consequence of growth", Harford is dramatically altering the frame of reference in conversations surrounding business concentration. It attenuates the sting of the economic efficiency and moral repugnancy arguments against business concentration. It is inconceivable that an intelligent and shrewd commentator like Mr Harford is unaware of these. It is more likely that he considers them less likely or unimportant.

This is hegemony. Such depth of mental capture is disturbing. And it is true of many important public concerns among even the most influential liberal thinkers and opinion makers.

1 comment:

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