Scaling Up In The 21st Century
Scale economies in the technology space enable consumers and small businesses to ride the momentum of digital transformation, unlocking efficiency benefits and spurring innovation races in a broader market. While many criticize the size of the technology sector based on the shallow analogies between the prevalence of digital platforms and the industrial monopolies from over a century ago, they fail to recognize the unpredictable margin of competition by both established and new players to achieve scale.
As waves of new providers and users continue to be integrated in high-quality digital assembly lines, it is important to understand what’s unique about scaling up in the 21st-century technology sector:
— Scaling up can be easy in the digital economy, but sustaining the scale in a hypercompetitive and regulated market is much harder.
— Scale economies for tech are different from traditional sectors.
— Economies of scale allow technology firms to grow efficiently and provide affordable options for consumers.
Scaling up can be easy in the digital economy, but sustaining the scale in a hypercompetitive and regulated market is much harder.
Given the low marginal cost of adding users, digital platforms can achieve scale more easily; however, openness of the tech ecosystem makes it hard to sustain scale. Feng Zhu & Marco Iansiti, professors at Harvard Business School: “The factors affecting the growth and sustainability of platform firms (and digital operating models generally) differ from those of traditional firms. Let’s start with the fact that on many digital networks the cost of serving an additional user is negligible, which makes a business inherently easier to scale up… And as Didi is learning, it’s often easier for a digital platform to achieve scale than to sustain it. After all, the advantages that allow the platform to expand quickly work for its competitors and anyone else who wants to get into the market.”
The technology sector is not a zero-sum game—consumer needs often change the competitive dynamics that lead to broader competition. Ben Bajarin, Principal at Creative Strategies: “This is not a zero-sum game where for someone else to succeed someone else has to fail. This fact is a core trait of a mature industry. This industry is large enough to sustain a number of healthy growing companies all thriving for decades to come… [W]hen an industry matures the consumer of the products of those industries understand more about what they want from the product or service and start searching out things that serve their unique needs, wants, or desires. This is what opens the door for broader competition and segmentation, and it is when this happens that the competitive dynamics within a market often change.”
The current antitrust regime can be calibrated to address different competitive dynamics influenced by economies of scale. Thom Lambert, Wall Chair in Corporate Law and Governance and Professor of Law at the University of Missouri: “[T]o the extent economies of scale and network effects influence competitive dynamics by rendering certain conduct anti- or procompetitive, the current antitrust regime can account for that. Economists understand quite a bit about economies of scale, network effects, and two-sided markets. Under the prevailing antitrust regime, their views are sure to influence both the application and continued calibration of legal standards, and when economic understanding grows or circumstances change, courts may reach different conclusions.”
Scale economies for tech are different from traditional sectors.
Scale economies are different between manufacturing and networking industries, as the latter brings more consumer benefits from its large operations. George L. Priest, Edward J. Phelps Professor of Law and Economics at Yale Law School: “Scale, as described by the Justice Department and as used in the context of network industry, is a lot different. It does not mean raising over cost; in fact, Google pays out prices and gains revenue from advertising, but there is no cost for consumers using Google. So the large market share is not quite the same as it is in other antitrust contexts… Scale in the manufacturing industry may mean the same with market share, but scale in the network industry means this is a large network and more network benefits from its operations.”
Scale economies do not secure a technology firm’s long-term dominant market position. Ryan Bourne, R. Evan Scharf Chair for the Public Understanding of Economics at Cato Institute: “[T]he predictions of unassailable market dominance that we hear in relation to today’s tech giants, often explained by appeals to economic phenomena such as network effects, economies of scale, tying of products, or other cost barriers to entry, have been heard many times before in similar industries. The forecasts have proven ill‐founded. The predictions of sustained dominance by Amazon, Google, Facebook, Apple, and others should therefore be taken with extreme skepticism. Yes, the nature of technologies and markets can result in one firm enjoying large market share, sometimes persistently. But this does not mean that the firm’s dominant position will endure, nor that the firm’s dominance is bad for consumers—either now or in the future.”
Unlike traditional sectors, scale economies in the technology sector require continuous investments in actionable innovation and user acquisition in an ever-changing competitive landscape. Joe Kennedy, Senior Fellow, Information Technology and Innovation Foundation: “Although economies of scale and network effects may advantage a particular provider, these forces are not absolute. Platforms can experience congestion and offsetting network costs. Switching costs have also fallen. In addition, there is an active competition to become the dominant platform. The result is even companies that have a dominant position in their specific market must invest large amounts of research into continually improving their products in response to constantly changing technology. Unlike traditional monopolists, platforms have no incentive to reduce the number of their users in order to raise prices. Instead, network effects demand they continually try to attract new users.”
Economies of scale allow technology firms to grow efficiently and provide affordable options for consumers.
The force of market-based competition underlying the technology sector encourages obtaining efficiencies through economies of scale. Carl Shapiro, former DOJ antitrust attorney: “The bigger question is what do we make of the increases in concentration that we observe. There are two very different interpretations. One interpretation is that when a market gets more concentrated, that means it’s less competitive, so we have a problem. That is not a new view; it was a fairly popular view in the ’50s and ’60s. And many people seem to be taking that view without even realizing that there is a perfectly coherent alternative view. The alternative view attributes increases in concentration to growing economies of scale, which means that the larger companies tend to be more efficient than the smaller ones.”
An increase in economies of scale indicates increased innovation and productivity in the tech sector. Robert D. Willing, Professor of Economics at Princeton University: “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.”
Larger companies provide lower prices, along with higher wages and other positives. Robert D. Atkinson, President of Information Technology and Innovation Foundation: “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.”