MARKET ECONOMY IN DANGER?
Networking, big data and artificial intelligence are among the drivers of the digital revolution. They justify the concept of the digital economy. But what effects do these components have on the economic order of the future? System-inherent mechanisms promote the emergence of monopolies and thus contradict the competitive principle of the market economy.
“The winner takes it all” markets Digitization is progressing at a rapid pace. This is mainly because the provision of the products of platform-oriented companies (Google, Facebook, Amazon, Uber) causes virtually no marginal costs. Once the platform is developed and ready for the market, it can be made available globally and indefinitely. So there are high fixed costs for the development of the platforms, but only low marginal costs in lauf¬den operation. According to the economics textbook such a cost constellation leads to so-called natural monopolies. The phenomenon was already known before the advent of the digital economy. However, if in the past it was more of an exception for very specific industries, there is a tenet in the digital economy that natural monopolies become the norm.
Businesses that occupy a market first may have promising opportunities in the digital economy for an even world-wide dominant position (“The winner takes it all”). This outlook leads to intense competition and to a kind of innovation and investment race. The digitization of all areas of life is driven forward rapidly, because speed is rewarded. The result of intense competition for market leadership is then often a market with monopolistic structures.
This is fundamentally a case for competition policy, because monopolies traditionally associate higher prices, lower supply of goods and a lack of innovation. There are also distribution problems if the added value is not shared among several companies in a sector, but is essentially only generated by a large company. Competition policy faces a particular challenge because the markets of the digital economy are often global, whereas the competition authorities are mostly national or regional.
Now, the question arises whether the above-mentioned disadvantages typically associated with monopolies (higher prices, lower supply of goods, lack of innovation) are transferable to the markets of the digital economy at all. At least, consumers are not directly affected by higher prices. Frequently, platform-based services are free for consumers or traded goods are cheaper than those sold in the traditional economy. However, consumers often pay indirectly through the data lanes they leave with
the platform companies and use them commercially. In addition, the market for advertising must be included in the overall analysis. Platform companies may demand higher prices from advertisers if they
have a monopoly position in their segment. The advertisers – and ultimately their customers – thereby subsidize the often free platform offers.
A shortage of supply is not recognizable by the rise of the digital economy. On the contrary, there are always new offers, and digitalisation tends to lead to overflow because of lower marginal costs, rather than to shortage. And finally, there is no trace of innovation in the digital economy, far and wide. The prospect of monopoly leads to intense innovation competition. Google, Facebook or Amazon are not exactly known as innovation barriers.
In particular, the power of the big Internet companies in the advertising market, the power of disposal over the customer data as well as the effects on the income distribution that a “winner takes it all” economy brings with it are to be seen critically. Distribution issues could become the biggest economic challenge in the future.
Networking and Share-Economy
The digital economy may also change people’s attitude to private property. The so-called share economy arose from the realization that many consumer goods are consumed by consumers only for a short time,
but most of the time they are not used. This gave rise to the idea that the use of such goods and access to them at any time is more important than their possession. Sharing the goods then promises a well- being gain for those involved. Companies that feel obligated to this idea offer the appropriate platforms for this purpose. These are, for example, car sharing services (DriveNow), temporary real estate providers (Airbnb) or lending networks for numerous consumer goods (Fairleih.net). The practically free
digital networking then in turn allows a frictionless and timely mediation between providers and consumers of the object to be divided and thus represents the basic requirement for the establishment of such concepts. Even if the ownership of many platforms of this kind are well defined and for If the transfer of goods is generally required to be remunerated, the consumer is increasingly becoming accustomed to no longer having to own or to want to own certain things himself. Gradually, a mentality may develop in which community property or community use is considered more important than classical private property. This is not a problem as long as groups of individuals voluntarily join together to form owners and consumers. But it will be problematic if such a free or community culture leads to the fact that the importance of private property for the functioning of the market economy is no longer understood or – in extreme cases – even expropriation as a means of politics become acceptable.
The digital transformation of the economy undoubtedly brings additional growth and prosperity. With the help of digitization, pressing problems of humanity can be solved. At the same time, however, the digital transformation also brings with it a series of new challenges. Currently we are experiencing political reflexes that are difficult to reconcile with the hitherto prevailing market economy principles (industrial policy, unconditional basic income). Some observers expect the reincarnation of the planned economy in a new digital guise because of the new technological possibilities. Whatever leads the way, we will analyze in further contributions of the series “market economy in danger”.