Antitrust vs. Network Effects
Antitrust laws aim to prevent monopolies that could harm consumers, usually by forcing consumers to pay higher prices due to a lack of competition. They can help keep the economy fair, but they often disrupt popularity trends that can be helpful to suppliers or consumers. One current antitrust suit is attempting to block the merger of two large American book publishers: Simon & Schuster and Penguin Random House. The U.S. Department of Justice is trying to block the merger because it believes that it will hurt authors, but Bloomberg Opinion columnist and book author Allison Schrager disagrees with this opinion. She believes that the consolidation of publishers can be helpful due to network effects in the market.
Some goods become more desirable when there is higher usage of the product, making the number of buyers a function of both the customers’ individual willingness to pay, as well as the benefit the customers get from the fraction of the population that is using the product. Schrager believes that large book publishers benefit greatly from network effects, so the merger will be beneficial in creating a larger firm with even more customers and authors under its umbrella. The author argues that the publishers need to merge to compete with the size of Amazon, another company that benefits from network effects and has been accused of “monopoly power” by the antitrust panel of the House Judiciary Committee.
Part of Amazon’s massive success has also been aided by the network effect. The network effect is generated by a positive externality, which is when an individual benefits from the actions of another individual who is not being compensated for generating the externality. Amazon benefits from the network effects of both new buyers and new sellers joining the platform. Andrew Ching, an economist from the Johns Hopkins Carey Business School, explains that “Interestingly, participants in selling platforms like Amazon also generate positive externality to other participants. For instance, as more buyers visit Amazon, retailers will find it very attractive to set up a virtual store within Amazon to reach those buyers.” This is an example of the “rich get richer” effect; both buyers and sellers have followed the information cascade and started using Amazon, giving the platform an overwhelming array of products. Using antitrust to break up Amazon would lower these positive externalities that result from Amazon’s large user base. Antitrust laws can help protect employees and consumers from being exploited due to a lack of competition, but it also must be recognized that powerful companies are often formed by network instincts that maximize the payoff of users.
Bloomberg, Allison Schrager |. “Analysis | the Labor Market Doesn’t Need Antitrust Protection.” The Washington Post, WP Company, 15 Nov. 2021, https://www.washingtonpost.com/business/the-labor-market-doesnt-need-antitrust-protection/2021/11/15/0f0e7f52-4614-11ec-beca-3cc7103bd814_story.html.
Johns Hopkins University Carey Business School. “Academic Research Should Help Guide Antitrust Policies on Big Tech.” Newswise, Newswise, 28 Oct. 2021, https://www.newswise.com/articles/academic-research-should-help-guide-antitrust-policies-on-big-tech.