Consumer Benefits Afforded By Economies Of Scale
As we saw a couple weeks ago, “big is bad” is thrown around too often and without full understanding of the nuance. However, the large scale of a company allows it to offer immense benefits to consumers. A recent Twitter thread from FTC Commissioner Christine Wilson explains how firms’ economies of scale translate to affordable goods for consumers—and the tech industry is no exception.
Outlined below are highlights from her thread, plus their application to the digital marketplace.
— Product differentiation is a hallmark of our market economy, resulting in a variety of choices for consumers at a variety of price points.
— Efficiencies of scale allow large companies to keep prices low, providing affordable options for consumers and putting upward pressure on standards of living.
Product differentiation is a hallmark of our market economy, resulting in a variety of choices for consumers at a variety of price points.
In addition to low prices and high quality, product variety is a core element of the consumer welfare standard, via Information Technology & Innovation Foundation (ITIF)’s Joe Kennedy. “These experts argue that the consumer welfare standard, properly defined, protects all counterparties from an excess of market power. It incorporates nonprice harms to consumers, such as lower quality, reduced variety, or slower innovation. It gives regulators the power to look at the effect of monopsony power on other sellers, including on workers, and allows antitrust agencies to consider the effect of an action on innovation. They also argue that antitrust policy should remain focused on market activity and be backed by a clear economic analysis of likely effects.”
DoubeClick Founder Kevin O’Connor reminds us that the robust competition in the tech sector means that other product options are “only a click away.” “What is Big Tech’s offense? Size. Politicians and pundits seem to assume that big is bad. Though many of their products are provided free of charge, tech titans now face political attack for their success. Yet if you don’t like their products, the competition is only a click away. There’s no reason internet companies can’t be out-competed in the marketplace (remember Alta Vista, MySpace and Pets.com?). Critics say Google and Facebook’s dominance of digital advertising is evidence of illegal market manipulation. A simpler explanation is that their products work very well.”
Efficiencies of scale allow large companies to keep prices low, providing affordable options for consumers and putting upward pressure on standards of living.
It’s not the size of a company that matters, but rather its innovation and high-quality products for consumers, explain economist Richard Sousa and antitrust expert Nicolas Petit. “The FAANG monopsonist naysayers have not brought proof that smaller tech firms would improve competitiveness in labor markets. What matters is the consumer welfare generated by firms, regardless of their size. If large tech companies make our lives better by putting people to work at good wages and by innovating and creating higher quality products, they should be acknowledged for their role in the economic recovery and their contributions to society’s well-being. They should not be vilified by unsupported claims that the grass could be greener.”
According to Robert Willing, Professor of Economics at Princeton University, an increase in economies of scale indicates increased innovation and productivity in the tech sector. “A major part of the changes in the economy, from my point of view, have been the increasing prevalence of economies of scale, also economies of scope. And I would like to point out this is not a bad thing in itself, because increase in scale economies is really a concomitant of the fantastic innovations that we’ve seen, the increases in productivity, the technological progress, the effusion of technology into a wide variety of sectors.”
Robert Atkinson, founder of ITIF, says larger companies provide lower prices, along with higher wages and other positives. “Bigger companies provide higher-wage jobs, better workplace benefits, lower prices, stronger environmental protection, and greater workplace diversity, safety, and stability, while engaging in less tax evasion. Regardless, neo-Brandeisians want to go back to an economy in which most Americans are employed in small, locally owned firms or worker co-ops, and they want to use aggressive antitrust enforcement to get there.”