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Children of Gaia and Ouranos, the six titans dominated the world before Cronos was dethroned by Zeus, his own son. After the victory of the gods, all the titans were relegated to Tartarus. François Lévêque brilliantly portrays the emergence and consolidation of the economic power of very large firms, which, like the titans of Greco-Roman mythology, may seem immortal, but which may come up against the clash of states and the telluric forces of geopolitics rather than the gods. The United States, China and the European Union are not only markets but political actors for whom the end of history has not yet come.
This review aims to highlight some of the facets of the fascinating essay by François Lévêque, professor of legal economics at the Ecole des Mines, one of France’s leading specialists in industrial economics and competition economics.
First, François Lévêque highlights the factors that lead to increasing market concentration and the establishment of situations of ultra-dominance on digital markets. The decisive issue is not the efficiency of the large platform companies but the contestability of their market positions. Their position of strength is undoubtedly the result of this efficiency, but can their dominance always be challenged by market forces alone? Have these players not acquired market power that enables them to block competition on the merits?
Secondly, François Lévêque places these very large companies in a territorial framework and invites us to link their future competitive dynamics to inter-state frictions. He outlines the prospects for change in the light of two phenomena that could create a perfect storm for these titans. On the one hand, there is the possibility of a return to state control, due to their systemic nature. This return can be achieved through specific regulation and a more resolute application of competition rules. On the other hand, it is the return of history. Even in the digital field, economic activities are characterised by institutional and geopolitical embedding. The two home states of these giants, the United States and the People’s Republic of China, but also the European Union, could potentially take on the role that the gods of Olympus once played vis-à-vis the titans.
Following the plan adopted by the author, we consider successively the factors that led to the appearance of the titans and the restoring forces that are exercised by the States in the framework of the reaffirmation of their sovereignty and by the geopolitical tensions.
The factory of the titans
François Lévêque presents, with clarity and a certain pedagogical talent, the main economic parameters that have led to a spectacular increase in market concentration and the emergence of very large firms, particularly in the digital field, the titans, in which we find mainly the American GAFAMs and the Chinese BATX. The characteristics of the titans are distinct from those of the giants of the traditional economy.
Drawing in particular on the work of Thomas Philippon (2020), François Lévêque highlights some of the main factors explaining this growth. One of the most important points to consider is the link to the globalization of markets and the existence of increasing returns in certain activities. The larger the size of markets for industries with high fixed costs and low marginal costs, the larger the firms that will prevail in the competitive game.
As François Lévêque has shown, the globalisation of markets is a powerful factor of concentration: it increases the scale of production and strengthens competition. The winner takes all phenomenon is all the stronger when activities are intensive in research and development. In this respect, growth in firm size and high concentration are not bad in themselves. Contrary to what a structuralist or neo-Brandeisian logic might lead one to conclude, this concentration is not a problem requiring a response from public authorities. It is the result of superior efficiency and benefits consumers. Not all dominant positions are ill-gotten and concentration does not in itself distort competition.
However, several dimensions must be taken into consideration, both in terms of competitive dynamics and inequalities. In terms of dynamics, the question is the contestability of these positions: are they sustainable? Can they be challenged by market forces, with a more efficient firm supplanting the dominant firm of the day? In terms of inequality, what are the consequences of the Matthew effect (Merton, 1968), whereby wealth begets wealth and small initial differences lead to significant differences between firms, and of the Pavarotti effect (Rosen, 1981), whereby income becomes increasingly concentrated on a small number of market players? The large platforms were undoubtedly the best initially, but they could remain dominant whatever their future merits by polarizing the bulk of resources. This phenomenon of self-reinforcing dominance is not unique to digital, but is exacerbated by its structural specificities.
Margin rates (mark-ups as defined by Lerner) are increasing globally in our economy (De Loecker et al., 2020). However, they do not necessarily reflect an exercise of market power (i.e. an extraction of all or part of the consumer surplus). They are also the consequence of a transformation in the composition of production: the share of fixed costs is increasingly high. The rise in mark-ups nonetheless reflects a position of strength for companies. Moreover, this increase is concentrated on certain companies... inexorably the largest. The rise in margins should also be seen in the context of the concentration of productivity gains, which particularly concerns the largest firms.
This is not in itself a bad thing: the degree of concentration in a market is not a good indicator of the level of competition in that market. A duopoly may be characterized by strong competition, and a monopoly situation may, far from guaranteeing a peaceful life, result in sleepless nights, if the threat of disruption persists. The question of the contestability of acquired positions is decisive. It is not the concentration of markets that is damaging, but the fact that the positions acquired can no longer be challenged. The dominant firm then has little incentive to pass on its productivity gains to consumers, has little incentive to innovate and can safely abuse its market power.
The question of sustainability is therefore decisive. It was raised in the 1970s in the United States in the debates on no-fault monopolization (McKinney, 1980). It was also raised in the preliminary impact study presented by the European Commission in June 2020. The "new competition instrument" was aimed at such situations, characterized by competitive risks linked to market structures [1].
A legitimate competitive fear may therefore be that the position of the digital titans is less contestable than that of the large traditional firms. The business models of the various firms that make up the GAFAMs are very different. Microsoft, Apple and Amazon must be distinguished from Google and Facebook. The latter operate mainly in the attention markets. However, despite these specificities, the digital titans are distinguished from other large firms by their scale effects, network externalities and especially by their ability to collect, process and use data in real time. This capacity allows them to reduce the risk of being supplanted by a competitor "flying under the radar", by a technological breakthrough or by an unanticipated change in consumer needs, as has been the case for dominant firms in the past (including in the digital domain).
The rise of the titans in our globalized economies has other effects, notably on inequality. First, wage inequality is increasing significantly between firms. The most powerful firms on the market achieve strong productivity gains, pay high salaries, attract the best profiles... and have a workforce structure in which the most qualified categories are over-represented. The Matthieu effect comes into play. Second, this effect on inequality is exacerbated by incentive mechanisms based on the distribution of free or preferential shares.
In addition to these inter-firm and inter-employee inequalities, there are extremely privileged situations for some very senior executives and particularly for the founders of companies, notably through shares with privileged voting rights. Increasingly, control is no longer challenged by the dilution of the founders in the capital of companies. This is an additional guarantee against short-term strategies (which is further reinforced by the patience of investors). However, it is a factor of weakness in the long run, if the initial managers lose their business acumen (i.e. the entrepreneur’s intuition) or give in to hubris.
This personalization is also a source of vulnerability because of the increasing exposure of these leaders. Personification moves the titans away from the post-war model of the firm in which control and ownership were separate. It exposes firms, through their leaders, to politicalbacklash. The image of the robber barons of the late 19th and early 20th centuries is very easy to revive. In addition to these populist risks, the public authorities themselves may have some reason to react to the influence of firms whose power can rival that of the States.
Indeed, economic power cannot, as François Lévêque shows, be considered as without influence in political terms, if only by their influence on the formation of public opinion. The algorithms of the dominant companies on the attention markets through personalization enclose users in filter bubbles, thus fragmenting the information to which their users have access(the news of our world appears to us as the news of the world). This effect is reinforced by the play of echo chambers. We are less and less exposed to contradictory information. This phenomenon makes us all the more vulnerable to misleading news and is likely to bias our view of the world.
In addition to the influence of firms on the market of ideas, they have the capacity to influence the political choices of States, and particularly regulation. The capture of regulation can take different forms, often informational. Dominant firms have every interest in investing in the market of ideas and in lobbying activities. François Lévêque shows that dominant firms overinvest in lobbying compared to their competitors. This investment is not reprehensible in itself. To a certain extent, it helps to clarify the choices of public decision-makers. However, it can contribute to biasing them and freezing acquired positions (Cowgill et al., 2021). The literature in the field of political economy shows that the capture of political power is the best protection against the risk of challenging economic power (Zingales, 2017). As Stigler pointed out over fifty years ago, the strongest barriers to entry are regulatory barriers.
Although lobbying investments represent only symbolic amounts compared to advertising investments, they make it possible to influence the market of ideas and still have an influence on the zeitgeist, in this case the positions shared by the various stakeholders on the situation of the markets... This influence is particularly important in terms of competition. While the texts are virtually unchanging, their implementation priorities are evolving and their application involves a real margin of interpretation.
The application of competition law is inseparable from a conventional dimension in the sense of Robert Salais (2015): it is based on periods of "consensus" in which qualifications and standards are taken for granted. In this respect, the years 2020-2021 represent a period of extreme fragility of a consensus (or at least of a dominant opinion) that is almost half a century old, leading to dominance being considered as the result of efficiency and not as an obstacle to the competition process. The implementation of the competition rules would have favoured a tendency towards concentration by excessively raising the standard of proof to be met by the complainant in proceedings relating to unilateral practices and leaving too much room for the claim of efficiencies in the control of mergers and acquisitions. To forego efficiencies in the interest of preserving a more dispersed competitive structure was seen as a capture of competition law, protecting competitors at the expense of consumers. As François Lévêque rightly shows, Standard Oil dismantled in 1911 would never have been dismantled in 2011.
State-proofing titans, globalization and deglobalization
However, if the growth of the titans has been the result of the convergence between the increasing returns of the digital economy and globalisation, it risks being called into question by a double phenomenon of government takeover and the fracturing of international trade. As François Lévêque shows, certain titans have pursued strategies that could clash with the States themselves. Dominant companies are not without reaction to public decisions that may affect their interests. As noted above, they can exercise a power of influence. They can also pursue autonomous strategies vis-à-vis the states themselves and implement a realpolitik aimed at reconciling their development on international markets with this or that local constraint. In these frictions between digital titans and state authorities, François Lévêque cites the case of Facebook in its project, announced more than two years ago, to develop a cryptocurrency, Libra; we could also mention the case of its "supreme court". Platforms that are increasingly important, for better or for worse, in the constitution of public opinion can implement private regulation. Yet, as the US Supreme Court Justice recently stated in a concurring opinion in a ruling on the suspension of former President Trump’s account by Twitter, platforms are emerging as essential vehicles of public debate and should therefore be subject to public oversight [2].
As François Lévêque shows, the points of friction between titans and States also concern the tax dimension. Avoidance strategies pose a double challenge. The first is the distortion of competition between firms. If a lower tax contribution allows the most powerful firms to free up more financial capacity for their investments than their competitors can, competition on the merits is compromised. Moreover, tax strategies can, especially if they are based on tax rescripts, aggravate the risks of tax competition between States. The latter lead to real risks for the viability of regional economic areas... from which large firms, including the digital titans, have benefited greatly. However, globalisation is increasingly challenged by the development of increasingly conflicting trade policies based on dumping arguments or risks in terms of sovereignty.
These developments lead François Lévêque to question the tensions that may prevail between globalization, democracy and sovereignty. Drawing on Rodrik (2000), he provides an explanation for the return of states. The latter is increasingly challenging the dynamics of globalization. Although digital firms are less exposed to the risk of fragmentation of economic space than traditional firms, they are no less vulnerable. Even beyond the risks of balkanization of the Internet, the impact of Sino-American tensions in the mobile ecosystems sector has demonstrated the risks involved. The closure of national markets, the extraterritorial application of law on the one hand, and the control of firms’ strategies by the State on the other, can lead to a major break in the development dynamics of the titans.
Operating in a smaller market is particularly detrimental to these firms: access to data and economies of scale can no longer be the same. The absence of "European" titans is, as François Lévêque has shown, partly linked to the fragmentation of our internal market, particularly due to the cultural and linguistic diversity of the Member States. However, these factors are not the only ones to be taken into consideration to explain why the EU has fallen further behind the United States in the rankings of very large companies vis-à-vis China. A stronger presence in traditional sectors compared to digital is a first factor. A second factor is related to less investment in research and development. A third factor is the difficulty of accessing finance. This is a major obstacle to the development of innovative companies. The absence of European titans is all the more detrimental as the economic spin-offs of a company in its country of origin are greater than those enjoyed by its various host countries.
This European weakness is all the more unwelcome given that other American states are increasingly involved in controlling the strategies of their national groups. Questions of sovereignty, linked in particular to the control of key technologies and essential economic infrastructures, are becoming increasingly acute. The stakes are no longer simply competitive but geostrategic.
The return of inter-state frictions, in a context that is no longer that of the beginning of the century, and the tendency for markets to fragment are not the only risks weighing on the titans. As François Lévêque notes, the role of economic regulation has been significantly reinforced. This return is all the more essential as the contestability of acquired positions was increasingly questioned. If, as we have seen above, the size of firms or their market shares are not in themselves competitive problems, lasting dominant positions whose contestability would be illusory would result in a blockage of the competition process. Free and undistorted competition cannot prevail if a firm can impede its competitors’ access to the market and privately regulate its relevant market.
In the European Union, the proactive enforcement of anti-competitive practices law and the proposed Digital Markets Act of December 2020. In the United States, a large number of antitrust cases were initiated in the fall of 2020 and a political shift, announced by the bipartisan House of Representatives report in October 2020, was enshrined in the appointments made by the Biden Administration in the first half of 2021. However, several issues remain unresolved. The first issue is the treatment of concentrations. How can we balance the need to prevent consolidating acquisitions with the need to take into account potential efficiencies when the acquisitions in question appear to be at best vertical, if not conglomerate? The second question concerns the need, in the American case, to see such changes reinforced by reversals in case law... Whether it is a question of competition or geostrategic issues, the titans are exposed to the return of the States. As François Lévêque concludes, the European Union must have a clear strategy in this new context which is no longer characterised by soft trade but by the return of power games both in the economic sphere and in the sphere of inter-state relations.
References
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De Loecker J., Eeckhout J. and Unger G., (2020), "The Rise of Market Power and the Macroeconomic Implications", The Quarterly Journal of Economics, 135(2), pp. 561-644
European Commission, (2020), Inception Impact Assessment - New Competition Tool, Ares(2020)2877634, June.
McKinney L.C., (1980), "The Case Against No-Conduct Monopolization", Washington and Lee University Law Review, 37(1), pp.73-82
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Philippon T., (2020), The Great Reversal: How America Gave Up on Free Markets, Belknap Press.
Rodrik D., (2000), "How Far will International Economic Integration Go?", Journal of Economic Perspectives, 14(1), pp.177-186
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Salais R., (2015), "Revisiting the question of the state in the light of Europe’s crisis: external, situated or absent state", Revue Française de Socio-Économie, 2, pp. 245-262.
Zingales L., (2017), "Towards a Political Theory of the Firm", Journal of Economic Perspectives, 31(3), pp.113-130.
