Regulation Of Big Tech
- Oliver Hughes
- Sep 4, 2024
- 4 min read
The idea of regulating big tech is prominent in an age where digitalisation has never been more integrated, and the dominance of Tech Giants has caused a rise in concern about monopoly power and data privacy. The goal of regulation is to increase the scrutiny on Big Tech to address these concerns, ensuring market stability, however this task is multifaceted. We can use economic analysis, to provide a valuable insight on potential policy changes made by regulatory bodies such as the Financial Conduct Authority (FCA) or the European Union’s (EU) recent Digital Markets Act (DMA).
Network Effects:
A large portion of Big Tech’s value are from Network Effects. Network effects are an externality where the value of a product changes with a change in the number of users. Metcalfe’s Law states that this change is exponential. With the scale of users in Big Tech firms this exponential increase is a key defensibility and creates an extremely high barrier to entry for potential competitors. This reduces competition and innovation which is important for a healthy economy. It is notoriously difficult to regulate network effects however, since the value is embedded in the product. The barrier of entry could be lowered by new competitors merging or being acquired by larger Big Tech firms, but this leveraging will lead to a greater market power; also reducing competition.
Market Power:
The five Big Tech firms represent roughly 25 percent of the US S&P 500, and by market capitalisation are some of the largest corporations in the world. With such a large market share there are concerns of supressing competition, causing a lack of efficiency and innovation in the economy. To combat this market power Open Banking and Open finance has been implemented, which allows regulated financial firms to access customer payment accounts with their explicit consent, typically using APIs, to extract data and/or initiate payments. Furthermore, the regulation of acquisitions that increase this disparity in the market by the Certified Management Accountant (CMA) helps to reduce the market share of Big Tech firms.
Data Privacy and Consumer Protection:
Big Tech firms are data driven, and data privacy is one of the largest issues that Big Tech faces. Many consumers are losing trust due to the failure of keeping sensitive data private. One way in which this can be regulated is through transparent data sharing such as existing FCA policy of Data sharing and data access in the credit information market. This includes a mandatory reporting requirement for regulated data contributors to share credit information with designated Credit Reference Agencies (CRAs) and to have a common data format when credit information is reported. This is economically important since it addresses quality issues in the market, re-establishing trust in the digital ecosystem for consumers. Furthermore, to increase consumer protection, active policies such as the FCA: Sludge, dark patterns and gamification investigates consumer journeys to ensure they are taking decisions in their best interests. There are investigations into Big Tech creating in depth personal profiles concerning their uses to experiment with behavioural biases. This is economically substantial as it allows consumers to act rationally and not be manipulated by the large sets of data that many Big Tech firms have, to cause manipulation or behavioural biases. This maximises consumer utility.
Global Perspective:
As global companies, Big Tech firms have access to multiple markets across multiple jurisdictions. And future regulation should incorporate the consequences of not just the UK but the Global economy. Regulation needs to be compatible and harmonizing across the regulatory bodies for a cooperative global framework.
Market Dynamism:
It is important that a market encourages innovation, and there are questions on the issues of overregulating Big Tech. An increase in regulatory policies will lead to a decrease in employment growth and business investment: causing lower economic growth, and some could argue that an increase in these policies stifles the entrepreneurship of these firms and is not allowing the Free Market to act naturally, which can be argued to be the most efficient allocation of resources. Finding a balance to promote competition while encouraging new ideas in the market is important and should be considered when addressing regulation.
Conclusion:
Regulation should focus on the issues of Market power and monopoly abuse, reducing overly high barriers to entry, safeguarding consumer privacy and protection and global cooperation. Policies should be cautious and aware that Big Tech firms do not all operate under the same environment and the varying dynamics of a digital economy. Regulation should continue to invite growth in the market through entrepreneurship and innovation.
1: Available at: Big Tech Needs To Be Regulated. Here's How. | Time
4: Available at: How Do Big Tech Giants Make Their Billions? (visualcapitalist.com)
6: Available at: Full article: Big Tech (tandfonline.com)
7: Available at: Recommendations for the next phase of open banking in the UK (publishing.service.gov.uk)
What an insightful article, it really grinds my gears when big tech exploit us proletarians for monetary gain! Well said young oliver!