Andrew Leigh

Digital Competition And Economic Dynamism
Monash University Business School, Melbourne
Friday, 17 March 2023

Introduction

I acknowledge the people of the Kulin Nations, the Traditional Custodians of the land on which we gather today.

I pay my respects to their Elders, extend that respect to other First Nations people present today, and commit myself, as a part of the Albanese Government, to the implementation in full of the Uluru Statement from the Heart.

I would also like to acknowledge Monash University and thank the Business School for putting together such a great event. I’m especially chuffed that you’ve invited Joshua Gans to join us. Joshua is one of Australia’s great competition thinkers, but now works out of the University of Toronto. He and I have co-authored nine journal articles and a book, but we’ve never before spoken at the same conference. So thanks to the organisers for allowing Joshua and me to tick that one off our academic bucket lists. 

I also recognise the work of Australian Competition and Consumer Commission Chair Gina Cass-Gottlieb and Productivity Commission Chair Michael Brennan.

Both made an appearance at this event earlier today, and both are leading their respective agencies at a time of great digital change.

The Treasurer, the Assistant Treasurer and I are considering recommendations made by the Australian Competition and Consumer Commission in the latest digital platform services interim report (ACCC 2022). 

Today, the Productivity Commission releases its 5-year Productivity Inquiry final report, which shows Australia has a well-functioning system of competition regulation, but needs to evolve with the changing business landscape. This is a very significant piece of Australian policy research.  It’s almost 1000 pages long. It's nine volumes and makes more than 70 recommendations across all tiers of government.

In other work, the Australian Government has recently conducted a consultation to examine if online booking platforms are restricting tourism and accommodation providers from setting their own prices.

Treasury has also completed a review of the News Media and Digital Platforms Bargaining Code and the Government is considering the review’s findings and recommendations.

Meanwhile, the House Economics Committee, ably chaired by Monash-economist-turned-parliamentarian Daniel Mulino, has just embarked on an inquiry into ‘promoting economic dynamism, competition and business formation’. I expect this to be an important and wide-ranging study of the decline in dynamism, which will doubtless consider how competition law should respond to the digital revolution.

So there is a substantial body of work being done to help us better understand digital challenges and make the most of the opportunities. 

We’re not the only government going down that path. 

The continued growth of digital platforms has raised questions around the world about whether consumer and competition settings are adequate.

First, governments are asking how do we ensure the gains from innovation are bigger and broader? 

And second, for this to occur, how do we put in place the right regulatory safeguards? 

Today, I want to explore some of those issues.

Citizens of the digital revolution

Technological advancement has driven change throughout human history – but the scale of the digital revolution has produced unprecedented change at unprecedented speed. It’s in our schools, workplaces and homes.

Indeed the technology that enables it is almost always with us – sometimes in our pockets, more often in our hands. 

As digital citizens a typical morning might see us roll out of bed and immediately unplug our iPhones from the charger. 

With bleary eyes and bed hair – looking nothing like our profile photos – we might scan Facebook or Instagram for social and mainstream news.

Next, we might search or ask Google for a weather report before deciding if we should pack an umbrella. 

Here in Melbourne, the answer is always yes.^[1]

Monash-Dean-turned-Productivity-Commissioner Stephen King puts it well when he says ‘none of this was possible thirty years ago’ (King 2022). 

There’s no doubt that digital technology has made our lives easier in ways that would have been hard for previous generations to imagine.

But there’s a catch – or perhaps more appropriately a glitch.

The digital interactions I mentioned earlier all involve using platforms with more than half the share of the market.

In 2022, about 60 per cent of mobile phones used in Australia were on the Apple’s iOS or operating system (Statcounter 2023). So the Apple App Store accounted for around 60 per cent of app downloads (ACCC 2022 p38).

Google has consistently provided between 93 to 95 per cent of search services in the past 10 years (ACCC 2022 p38).

Measured by time spent, from June 2018 to May 2022, Meta’s Facebook and Instagram combined supplied 79 per cent of social media services in Australia (ACCC 2022 p38).

So just think about that again. When you’re using Apple phones, Google search, and Meta social media, you’re using platforms with more than half the market. These firms wield considerable power over consumers and competitors. 

Powerful companies are not a new thing, nor are companies that dominate particular sectors of the economy. 

But the degree, scope, and scale of market concentration means some digital companies enjoy an unprecedented lack of competition.   

That’s the challenge.

More competition, please

Over the past year, I’ve delivered five major speeches on economic dynamism and competition.

In the Gruen Lecture at the Australian National University, I presented new evidence on the decline in market dynamism.

Over recent decades, the new business start-up rate has declined. Market concentration has risen. The biggest companies on the Australian share market have barely changed in a generation.

In the Warren Hogan Lecture at the University of Sydney, I delved into three moments in history where countries had experienced major boosts in economic productivity as a result of competition reform.

These were the US Sherman Act and Teddy Roosevelt’s vigorous enforcement of competition laws, Germany and the post-war breakup of industrial giant IG Farben, and Canada’s 1985 competition reforms.

At a Sydney Ideas talk marking the 30th anniversary of the Hilmer reforms, I discussed the competition reforms spearheaded by Fred Hilmer and Paul Keating, which led to the removal of anti-competitive regulations, the creation of a national electricity market and the prioritisation of competition across governments.

The changes contributed to the 1990s surge in productivity. On one estimate, the typical Australian household is $5,000 a year better off as a result.

At the Sydney Institute, I explored the issue of price markups – noting that the gap between firms’ cost of production and the price they charge has been steadily rising.

It’s a finding that is quite consistent with the growth in market concentration, and highly relevant at a time when inflation is surging around the world.

And at a Per Capita talk in Melbourne, I outlined the evidence on monopsony power, which suggests that greater employer power is one of the factors dampening wage growth. Just as monopoly power hurts consumers, monopsony power hurts workers.

The bottom line is we need more competition.

Not just in the digital space but across the board.

Competition has the potential to boost dynamism and put Australia on a faster growth trajectory in decades to come. 

It drives businesses to innovate.

It provides an incentive to take up new technologies.

It creates an economy where new businesses can start up and where workers can switch jobs. 

Running to MAMAA

In theory, navigating to a new website or installing a new app should be quick. You might think that in the digital space, competition was ever-present, and monopolies were like sandcastles.

Yet as we’ve seen, a number of features of these markets encourage lock-in. People have begun to refer to ‘MAMAA’ – Meta, Apple, Microsoft, Alphabet and Amazon – the five firms that dominate social media, smartphones, software, search and online shopping. 

And just to show that this winner-take-all dynamic is a feature of the technological platforms, the same is true in China. There, four players known as ‘BATX’ – Baidu, Alibaba, Tencent, and Xiaomi – dominate search, e-commerce, social media and smartphones.

As the Australian Competition and Consumer Commission report observes, ‘the market positions and power of these platforms appear unlikely to be challenged, at least in the foreseeable future’ (ACCC 2022 p36).

The Australian Competition and Consumer Commission has observed ‘Digital platform markets have a tendency to tip leaving one or two firms dominating a market’ (ACCC 2022). It is worth unpacking some of the reasons that are distinct to digital platforms. One is network effects – where users are drawn to the platform with the largest number of users – means market concentration is to a degree inevitable. 

For a recent example of network effect, consider those people who responded to recent changes at Twitter by moving to the platform Mastodon – only to find it was rather lonely there, and return to Twitter.

Market concentration leaves us with less choice. 

If you’ve ever rolled your eyes at a software agreement, but clicked ‘accept’ anyway, you’ll know what I mean.

Another concern, which I’ve already mentioned, is innovation taking a back seat. 

For small businesses using platforms to connect with customers that might mean lower quality services.

There is also a chance that prices will be higher. 

Charging app developers inflated commission rates is an example of that.

For many in-app purchases, Apple takes a 30 percent cut. Most app developers can’t avoid that cost, but some of the big ones have chosen to opt out. If you’ve ever wondered why you can’t go onto your iPhone to buy a Kindle book, pay for a Netflix subscription or sign up for Spotify, it’s because those firms have become large enough to work around Apple’s 30 percent fee. But for other developers, it’s just a (very large) cost of doing business. 

The US House Judiciary Committee, chaired by Jerry Nadler, and its Antitrust Sub-Committee, chaired by David Cicilline, undertook a 16-month investigation into competition in digital markets starting in June 2019 (Cicilline 2022). 

They hauled the big tech company CEOs before the committee for questioning and formally published a report in 2022 which concluded:

‘Whether through self-preferencing, predatory pricing, or exclusionary conduct, the dominant platforms have exploited their power in order to become even more dominant’ (Nadler and Cicilline 2022).

I recently did an in-conversation event at the Australian National University with the authors of Choke Point Capitalism, Rebecca Giblin and Cory Doctorow. 

They discuss the way that the much vaunted ‘flywheel’ effect can have an anti-competitive effect entrenching market dominance by locking in suppliers and producers. Like a physical flywheel, the economic flywheel builds momentum, making it difficult to stop.

Giblin and Doctorow write:

Amazon didn’t turn an annual profit until ten years after it started up… Spotify has lost money every year… But their stock prices have rocketed all the same because investors see how cleverly they’re capturing their markets (Giblin and Doctorow 2022).

Giblin and Doctorow point out that digital monopolies have come to dominate markets in unexpected ways. Because copyright permissions are so difficult to secure, hip-hop artists that want to produce songs that sample other songs need to sign with a major label. Spotify’s business model has come to serve record labels well, but at the cost of artists, who now earn around one third of a cent per stream.

Through its use of digital rights management, Amazon has come to control over half of the e-book market. 

Perhaps the most obvious form of flywheel effect in the digital space are the advantages that accrue to big tech firms from the data they’ve gathered about customers and suppliers. 

For example, Amazon’s digital marketplace provides vast amounts of information about popular products. This means that Amazon is perfectly positioned to copy popular products, use its data advantage to optimise their marketing, and encourage consumers to buy Amazon products. 

Apple’s app store is another example. App developers are required to sign agreements that allows Apple to develop similar products that compete with their apps. But conversely, Apple scoldingly tells app developers not to be ‘copycats’, and to ‘come up with your own ideas’ (ACCC 2021). 

Some dominant players aren’t even subtle about it. Billionaire tech entrepreneur and venture capitalist Peter Thiel argues that ‘competition is for losers’. If you want to build a lasting company, Thiel advises, look to build a monopoly.

What’s good for investors may not be good for consumers and suppliers. It ultimately falls to governments to respond.

There is also a risk that large firms can squeeze both consumers and suppliers. Take an iPhone user. They’re likely pay more for the latest and greatest iPhone because of Apple’s market dominance. Meanwhile, app developers are likely to get paid less for their product because Apple has the monopsony on which apps run on its systems.

Acquisitions matter too. Between January 2016 and December 2020, Google, Meta, Apple, Microsoft, and Amazon collectively acquired 296 other companies. (ACCC 2022). 

A generation ago, the ‘Chicago School’ approach advocated a more light-touch approach to competition regulation. Yet the Stigler Center at Chicago University has recently argued that in many digital platform markets, we generally see competition ‘for the market’ rather than competition ‘in the market’. In such markets, the incentives for a large digital platform to remove the threat of competitors by acquiring them can be overwhelming (Stigler Center 2019).

The right safeguards

The Australian Competition and Consumer Commission's digital platform services interim report, released in November, focused on the need for regulatory reform to better manage digital platforms.

It listed scams, harmful apps, fake reviews and inadequate dispute resolution as consumer harms.

It also identified increased market concentration and anti-competitive conduct as competition concerns. 

Like other jurisdictions, the Commission said Australia’s current competition and consumer laws are not well suited to addressing these emerging issues (ACCC 2022).

It recommended:

• Economy-wide consumer measures, including a prohibition against unfair trading practices and unfair contract terms.
• Consumer measures specific to digital platforms, including mandating dispute resolution processes and obligations to prevent and remove scams, harmful apps and fake reviews.
• A new competition framework that would subject ‘designated’ digital platforms to mandatory codes applying to the services they provide. 
• Targeted competition obligations for designated digital platforms to be in the framework and codes.

It’s a significant set of recommendations and we asked Treasury to seek industry views over the summer.

In particular, we were keen to hear wider views on the likely effectiveness and efficiency of the recommendations.

For example, do they target the source of the problem?

Can they be enforced? 

What would be the cost to industry?

And how would they affect the incentive for innovation? 

Already, our government is progressing a number of changes in areas where the competition watchdog has identified consumer harms.

We’ve committed to establishing a National Anti-Scam Centre.

We’ve also passed legislation through the Parliament to strengthen and extend the coverage of unfair contract terms protections to a larger number of small businesses.

And we’ve already legislated increased penalties for breaches of the competition and consumer law.

Fines should not be so modest that companies can treat them as a mere cost of doing business.

The Australian Government believes regulation has an important role to play in the digital economy.

We’re not alone.

Several jurisdictions have found their economy-wide competition and consumer protection regimes have fallen short in effectively dealing with digital platforms.

The regimes found inadequate typically rely on ex post enforcement – that is addressing conduct on a case-by-case basis after it has occurred.

While approaches around the world will vary, the European Union and United Kingdom are implementing competition and consumer protection frameworks that will impose specific ex-ante obligations on certain digital platforms.

Like some of the Australian Competition and Consumer Commission’s proposals, ex ante means rules that are imposed up-front or ahead of time. 

For example in the European Union, designated gatekeepers will no longer be able to self-preference, or list more highly and favourably their products over another business (European Commission 2022).  

While we’re yet to land on any decisions our belief is that regulation should be practical. 

It should be targeted. 

And it should be capable of evolving alongside the technologies themselves.

That’s where we see the opportunity.

I’ll make a final point about platform-specific obligations.

They’re already a feature of our laws.

Existing regimes use designation and codes to remedy potential competition issues.

Closing remarks

Last month, it was revealed that hundreds of words have been changed or removed in new editions of Roald Dahl books, in an attempt to make them more inclusive. Children are no longer described as ‘fat’. Some references to ‘mothers’ and ‘fathers’ have become ‘parents’ and ‘family’. 

Salman Rushdie and the Queen Consort were among many who criticised the edits. But few noticed why it had occurred. Copyright in Roald Dahl’s books is now wholly owned by Netflix. As one commentator noted, Netflix appeared to be making the decisions over the artistic content in its possession much as a snack food company might choose to change the name of a brand (Walther 2023). 

The Roald Dahl affair says as much about the power of platforms in the digital age as it does about the words we use to describe plus-sized children.

Digital platforms are fundamental to the modern economy.

So, we need to ensure the right safeguards are in place within the marketplaces that digital platforms have created.

Every day we enjoy the benefits of technology.

When we video chat with family and friends.

When we make a telehealth appointment.

When we shop online during a politician’s speech at the end of a two-day conference.

Competition is a way to keep the innovation happening.

In some ways, the consumer and competition challenges are as large as the digital platforms themselves.

We’re examining the challenges through various lenses.

Home Affairs Minister Clare O’Neil is leading vital work for the Australian Government on cyber security. Attorney General Mark Dreyfus is leading the government’s work on online privacy.

In the competition space, we look forward to responding to the Australian Competition and Consumer Commission’s report and methodically working through the recommendations of the Productivity Commission’s five-year report.

As Rebecca Giblin and Cory Doctorow put it, many critiques of big tech seem to worry about its ‘techness’, rather than its ‘bigness’. They argue that’s the wrong approach, and I agree. 

The Australian Government welcomes the productivity-boosting potential of technological advances. Our concern is to ensure that this innovation doesn’t dampen dynamism, and that we continue to foster a competitive and innovative economy which serves workers, consumers and entrepreneurs alike.

* My thanks to officials in the Australian Treasury's Structural Analysis Branch for invaluable assistance in preparing these remarks.

References

ACCC (Australian Competition & Consumer Commission) (2021) Digital Platform Services Inquiry Interim Report No.2 – App marketplaces Australian Government, accessed February 2023.

ACCC (Australian Competition & Consumer Commission) (2022) Digital Platform Services Inquiry Interim Report No. 5 – Regulatory reform Australian Government, accessed February 2023.

Cicilline D (2022) Judiciary Committee Publishes Final Report on Competition in the Digital Marketplace (media release 19 July 2022).

European Commission (2022) Digital Markets Act: rules for digital gatekeepers to ensure open markets enter into force (media release 31 October 2022), Brussels.

Giblin R & Doctorow C (2022) Choke Point Capitalism, Beacon Press.

King S (2022) Australia's data and digital dividend Productivity Commission, Australian Government, accessed February 2023.

Nadler J and Cicilline D (2022) Investigation of competition in digital markets, Sub-committee on Antitrust, Commercial, and Administrative Law of the Committee on the Judiciary of the House Of Representatives, US Government.

PC (Productivity Commission) (2022) Interim Report 2, 5-year Productivity Inquiry: Australia’s data and digital dividend Australian Government, accessed February 2023.

Statcounter (2023) Mobile Operating System Market Share in Australia - January 2023 accessed February 2023.

Stigler Center (2019) Committee for the Study of Digital Platforms Market Structure and Antitrust Subcommittee Report, Stigler Center, Chicago Booth School of Business, Chicago, IL.

Walther, M (2023) ‘The Truth About the ‘Censorship’ of Roald Dahl’, New York Times, 5 March, p.SR8.

[1] OK, I’m exaggerating. But I can’t resist pointing out that the probability of rain on any given day is 41 percent in Melbourne, compared with 29 percent in Canberra.