ICYMI: MIT Antitrust Expert Catherine Tucker – Network Effects Are No Guarantor Of Market Dominance For Digital Platforms
Tech critics have repeatedly pointed to “network effects” as one reason to rethink antitrust enforcement. However, in her latest for the American Bar Association’s quarterly journal Antitrust, Massachusetts Institute of Technology professor and antitrust expert Catherine Tucker explains that network effects “are not the guarantor of market dominance that antitrust analysts had initially feared” — instead, she finds that the market can still be competitive even when larger firms have stronger network effects.
Recent history shows network effects for digital platforms may create rapid instability, not market entrenchment, especially with consumers regularly using multiple digital platforms. “Shifts in the nature of technology away from hardware towards purely digital platforms reduce the likelihood of a positive feedback loop that can reinforce incumbency. Network effects no longer imply entrenchment but instead can lead to instability.”
In a world where user attention is pulled in many different directions, platforms are responding to users’ demands for personalized connections by creating opportunities for localized networks for users and advertisers. “The shift to personalization and individualization in the provision of digital technologies means that network effects are often very localized and unlikely to be simply a function of the number of users or firm size.”
— Impact on digital advertising: “The effects of personalization can also be seen in digital advertising markets. An advertiser may be unconcerned about the total number of users on a particular platform, but instead very interested in the presence of a few (otherwise hard to target) individuals. The entire value of digital advertising, indeed, rests on the premise that it can be used to target specific individuals, rather than the same ad appearing to all users of a platform.”
Congestion, desire for privacy, and social/cultural reasons can lead to users choosing platforms that exhibit lower levels of usage or weaker network effects. “Network effects may not always be positive. In some cases, having a large network may even act as a detriment, enabling differentiated competition from entrants.This directly contradicts the earlier wisdom that a larger platform size is always competitively desirable and bestows sustainable market power.”
The conclusion: “In general, platform markets may still be competitive even if larger firms in these industries exhibit both sizable user bases and competitive dynamics, which are driven by network effects. This implies a tempering of antitrust enforcement actions surrounding market dominance of digital platforms predicated simply on their relative size of user base. It also implies some (but not all) alleviation of concerns that antitrust authorities may have surrounding stances towards mergers that involve the combination of digital platforms.”