By Dr. Bowman Heiden, Ph.D., Executive Director, Tusher Strategic Initiative, Haas School of Business, U.C. Berkeley and Dr. Nicolas Petit, Ph.D., Professor of Competition Law at the Department of Law of the European University Institute (EUI)
The extreme profits achieved by digital economy giants like Google, Apple, Meta, Amazon, Microsoft, and Netflix present a unique intellectual challenge: what is the nature of the tech giants’ profits, and what are the implications for society? This topic is not just relevant for economists but also vital for industry leaders and policymakers.
The Big Question: Are Digital Firms Earning Monopoly Profits?
The debate is intense. On one hand, there's evidence suggesting these firms earn substantial profits, indicative of monopoly-like dominance. On the other hand, the nature of these profits is complex. Some argue these profits result from a market tipping point where customer demand becomes insensitive to price changes. Others suggest these profits stem from anti-competitive practices stifling innovation. A third perspective highlights the rise of 'superstar' firms - entities excelling in quality, cost efficiency, or innovation, thus garnering exceptional rewards.
Why Does This Matter?
The nature of the tech giants’ profits is crucial. If they are indeed monopoly profits, society loses out due to reduced consumer welfare. However, if these returns are due to efficiency or innovation, the implications are less straightforward. Recognizing the type of profits is essential for the development of appropriate policies and regulations.
An Empirical Dive into Digital Firms’ Profits
Our research focuses on big tech firms like Google, Apple, Amazon, Meta, and Microsoft, aiming to understand the source of their profits. We explore whether these are monopoly profits, Ricardian profits (linked to efficiency), or Schumpeterian profits (related to innovation). Our findings show significant differences at the firm level, challenging the notion of a one-size-fits-all approach in economic analysis and policy formulation.
The Dynamic Nature of Digital Economy Profits
Digital firms might not fit a static profit profile. The type of profit can evolve - innovative breakthroughs leading to Schumpeterian profits might transform into Ricardian profits through economies of scale, and potentially into monopoly profits. This evolution is also a key aspect for economic policy analysis.
Rethinking Economic Modeling in the Digital Age
The current economic framework does not separate the different types of profits. This approach, while traditional, oversimplifies the dynamics of the digital economy. It's important to recognize that each profit type has distinct welfare effects. Monopoly profits limit output and cause deadweight loss, Ricardian profits correspond with output expansion and allocative efficiency, and Schumpeterian profits are tied to innovation and long-term growth. If all digital economy profits are described as monopoly ones, predictable policy error is inevitable.
Conclusion: A Call for Nuanced Understanding
Our research underscores the need for a nuanced understanding of profits in the digital economy. Policymakers and industry leaders must recognize the diverse nature of profits and their varying implications. This understanding is crucial for developing policies that foster innovation and growth while safeguarding consumer welfare and market competition.
This brief aims to provide clarity in the complex world of digital economy profits, offering insights that are crucial for both policymakers and industry leaders in navigating this dynamic and influential sector.
The full working paper, Gatekeepers, Landlords, or Superstars? An Empirical Study of Rents in the Digital Economy, authored by Sotirios Georgousis, Bowman Heiden, Nicolas Petit, is available at https://www.dynamiccompetition.com/publications/.
About the Authors
Dr. Bowman Heiden is currently the Executive Director of the Tusher Strategic Initiative for Technology Leadership. He is also the Director of the Center for Intellectual Property (CIP) at the University of Gothenburg, and co-chair of the Technology, Innovation, and Intellectual Property program at the Classical Liberal Institute at the NYU School of Law. Dr. Heiden was recently a member of the European Commission High-Level Expert Group on Standard Essential Patents. Dr. Heiden holds degrees in engineering, technology management, and economics, and his research is at the interdisciplinary interface of economics, law, and innovation, in particular, intellectual property and open innovation in knowledge-intensive sectors. Before turning his focus to the field of knowledge-based business, Dr. Heiden played professional basketball in a number of European countries. https://www.linkedin.com/in/bowman-heiden-060746/
Dr. Nicolas Petit is Professor of Competition Law at the Department of Law of the European University Institute (EUI). His research in recent years has focused on EU and US competition law, competition and innovation, law and economics, and law in a context of technological change. Nicolas Petit uses mixed approaches including law and economics, doctrinal and empirical legal methods. He has previously worked as an assessor with the Belgian competition authority and in private practice for a prominent US law firm based in Brussels. He was also a Visiting Researcher at Harvard Law School in 2005, and served on the European Commission High Level Expert Group on Artificial Intelligence from 2017 to 2020. In 2022, he co-founded the Dynamic Competition Initiative (“DCI”), with UC Berkeley and VU Amsterdam. https://www.eui.eu/people?id=nicolas-petit