Just How Competitive Is the Tech Sector?

The tech startup sector is full of new ventures jostling for funding, and only a handful of them become successful. But at the more mature end of the tech sector, a few giant companies control the vast majority of online advertising. Google and Facebook have tremendous power to limit competition while they benefit from user data harvested from “free” use of their services, argues Chicago Booth’s Luigi Zingales, director of Booth’s Stigler Center for the Study of the Economy and the State. Zingales and Chicago Booth’s Raghuram G. Rajan, find that big tech firms stifle innovation when they buy up promising startups.

The Stigler Center’s Committee on Digital Platforms has studied the degree of market power digital platforms enjoy and the way this market power harms consumers. The tech giants have less incentive to innovate, maintain the quality of their services, or refrain from even more aggressive data-collection practices if their users don’t have alternative services to turn to. Limited competition in the market for online advertising could also drive up costs for advertisers, which could in turn result in higher prices for those companies’ customers. And as Zingales has argued, tech firms’ dominant position threatens to distort not only markets but the political system as well.

What can we do about it? One important step we could take, Zingales says, is to draw upon the regulatory playbook from the dawn of the telephone industry, in which networks were made to work together to allow their users to call each other. Such forced interoperability between digital platforms could help restore competition online.