While monopolies exercise power over customers, monopsonies undermine competition further upstream. To date, they’ve largely been given a pass.
by Thales S. Teixeira.
More than a century ago, when President Theodore Roosevelt began scrutinizing corporate anti-competitive behavior with his characteristic zeal, federal regulators focused their ire on monopoly power. After achieving market concentration, so-called robber barons such as John D. Rockefeller and Andrew Carnegie had driven up consumer prices for oil and steel. Washington sought to restore a level playing field and protect consumer welfare.
Today, by contrast, fast-growing markets face an entirely different threat. Amazon, Apple, Google, and Facebook aren’t monopolies in the classic sense. For one, they’re not as large. At the turn of the 20th century, Standard Oil controlled 88 percent of America’s oil production. By contrast, Amazon controls 49 percent of online retail (5 percent if you consider all US retail), and Google-parent Alphabet claims only 42 percent of digital advertising (22 percent of all US advertising). Further, Big Tech’s presence serves to push consumer prices down, not up.
Politicians are now starting to look at Google and Facebook in regards to data privacy, misinformation and its impact on competition. But while these and other new firms may not pose a monopolistic threat in the classic sense, Big Tech has been undermining competition in another aspect. As the dominant buyers of specialized know-how, services, and supplies — by becoming what economists term “monopsonies” — they have wielded a power to set the prices paid to their employees, suppliers, and partners. While distinct from monopolies, these new behemoths similarly serve to undermine fair market competition.
If Standard Oil and U.S. Steel were 900-pound gorillas, Amazon and Alphabet are more like octopuses, spreading their tentacles into vastly different sectors of the economy. Amazon, for example, isn’t just an online retailer — it owns twenty-six subsidiaries in the U.S. alone, operating in vastly different sectors such as entertainment, enterprise software, video games, pharmaceuticals and consumer electronics. Alphabet owns thirteen subsidiaries and more than ninety investments in far-removed fields ranging across video streaming, autonomous vehicles, biotech, and consumer electronics.
As a result, businesses and professionals who might once have had multiple options to sell goods or labor across a range of markets often discover they can’t avoid working for one of these Big Tech behemoths. In turn, engineers and programmers notwithstanding, all others accept compensation well below competitive market rates.
Consider the labor market. Amazon has more than 600,000 employees and has displaced McKinsey and Goldman Sachs as the largest recruiter of MBA graduates in top universities across the United States. Instead of letting each subsidiary hire its own, it concentrates hiring under one roof. That gives the company enormous leverage over potential recruits. As one of my students graduating from Harvard this year told me upon receiving an offer from Amazon, the company “does not entertain any salary negotiation. It’s take it or leave it.”
Business-to-business dealings are also subject to abuse. Alphabet today requires companies working with any of its subsidiaries to grant “Google, its affiliates, distributors, and end users a perpetual, irrevocable, non-exclusive, worldwide, fully paid-up, royalty-free license.” In effect, this means that suppliers who sell knowledge-based services to YouTube in California end up giving it to Google India essentially for free.
By the same token, Amazon requires anyone selling through its marketplace to accept a participation agreement that gives it “sole discretion” to withhold payments for up to 90 days. In a market with multiple buyers, suppliers might well refuse to make such concessions, but under current circumstances, many now have no choice. In text-book monopsonist fashion, ever-present tech companies have claimed the power to set prices below what they would have to pay in a competitive market.
Because Big Tech’s upstream influence on suppliers is largely hidden from public view, regulators in Washington have yet to develop the regulatory tools required to counter this threat. A look outside the U.S. shows that monopsony power should not be allowed to roam free. Across the world, corporate octopuses have long entangled and squeezed other nation’s economies.
In the Philippines, for example, a single family-owned firm, Ayala, controls businesses in the retail, banking, telecom, water, and energy sectors. South Korea’s Samsung accounts for 20 percent of the country’s exports, and India’s Mahindra, with sixteen different businesses ranging from aerospace to hotels, boasts similarly vast and pervasive holdings. While these behemoths are occasionally lauded for being generous corporate citizens, they use predatory pricing and financial resources shared across business units to squeeze their competitors out of specific markets. Here in the U.S., that’s exactly what’s beginning to happen. Amazon’s predatory pricing strategy? Below cost. Google’s? Free products.
Regulators need to address this new problem with a new approach. Rather than treating consumer welfare as the primary indicator of anticompetitive behavior, Washington should scrutinize conglomerates’ abilities to enter and control markets. If, for example, a company acquiring a firm in an unrelated industry intends to absorb it, the Federal Trade Commission and Department of Justice should not only consider the downstream effects for consumers, but also the upstream impact on suppliers and workers.
Second, regulators should insist on arms-length separation between unrelated divisions. Crucial business operations — human resources, accounting, procurement — should be independent from one subsidiary to the next. This will mitigate the conglomerate’s urge to consolidate and enforce bargaining power via monopsony behavior in labor, financial markets, and supplier relations. Each subsidiary should also have its own branding: Google Docs, Google Play, and Google Drive should appear to the public as separate entities.
Most important, the federal government should end what might be termed “inbred favoritism.” When Google began offering reviews of local businesses and services to book online travel, its search engine favored its own offerings at the expense of then-industry leaders Yelp and TripAdvisor. Similarly, Amazon’s online marketplace gives special terms to products manufactured by its production arm, Amazon Basics. This detrimental behavior has been addressed by European regulators, but Washington has so far overlooked it. Preferential treatment hurts competitiveness and gives companies an unfair advantage. Instead of competing and winning on the basis of better products or services, they do so by brute force, transferring their dominance in one business to another. It’s wrong and should not be allowed.
Washington has a long history of protecting free market competition against the threat of “bigness.” But because monopsonies undermine competition further upstream, they’ve largely been given a pass. That must change. Regulators should start to scrutinize the growing tech octopuses poised to strangle multiple sectors of the economy with a reach far and wide. New tentacles should be nipped.