Bigger Can Be Better, When Governments Step Out of The Way!

There’s a growing appetite across industrialized nations to crack down on large firms. In the United States, there are bipartisan efforts to flex the federal government’s anti-monopoly powers against big tech firms. In France, big tech firms were seen as exploitative and a GAFA (Google, Amazon, Facebook and Apple) tax was adopted in 2019 to deal with “injustices.” In Canada, attempts at consolidation and mergers between telecoms companies and airlines have been met with claims of rising market power and monopolies. The common denominator is that “big firms” are exploitative monopolies. 

However, and there is no way around it, bigger is better. That is if you are familiar with the work of economist Harold Demsetz. In the 1970s, Demsetz published an influential article in the Journal of Law and Economics that pushed back against the view that higher concentration facilitated collusion and the exercise of market power by large firms (thereby generating monopoly profits). He argued that people had been getting things backwards: larger firms arise because they are more efficient than their competitors. Thus, according to Demsetz, it is entirely possible to observe competition-like outcomes on a market even if a single firm has 100% of market shares. 

When Demsetz is correct, there are important benefits for workers and consumers. Large firms, when they are more efficient, are able to offer higher wages to attract workers. Consumers can also benefit from lower prices when an inefficient producer is bought out. 

Unfortunately, there is a condition that matters. If we want to say that bigger is better, there must remain the threat of competition. There need not be any competition, merely the possibility of new firms to challenge incumbents. Most importantly, those challenges do not need to come in the form of direct competition. They can come in the form of substitute products. If such challenges are possible, incumbents must remain vigilant to discourage entry. 

In other words, bigger is better if challenges are possible. The problem is that governments place multiple barriers in the way of potential challengers. Consider the case of Canada’s telecoms industry, which has been featured heavily in the news recently as Rogers (the big player on the market) announced it wanted to buy Shaw (the second largest firm). 

If Rogers is buying Shaw, we can safely assume that it believes that it can use the workforce, infrastructure, and equipment to generate greater value than the latter. However, those concerned with consumer welfare point out that Canada already has high prices for telecoms services and that the deal would make things worse. It isn’t strictly true that Canada has high prices, but the deal could indeed make things worse if the purchase makes it harder for new firms to challenge Rogers. 

The problem is that Canada’s government makes challenges incredibly harder to mount because of federal legislation. According to federal legislation, all firms with more than a 10 percent market share cannot have more than 20 percent of the voting shares owned by non-Canadians. This essentially limits the ability of firms from the United States, which tend to be able to offer much lower prices than Canadian firms, from entering the Canadian market. In other words, legislation and not market structure make challenges harder. 

In fact, if you take a hard glance at instances of big firms being accused of acting like monopolies, you will often find something similar to the Canadian telecoms case. This has an important implication for those who propose remedies to deal with “big firms” (which they take to mean monopoly). Indeed, rather than placing the onus on governments to intervene to regulate these big firms, one is forced to assign blame to governments for protecting some big firms from the threat of competition. 

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