From UPSC perspective, the following things are important :
Prelims level : Positive Externality
Mains level : Paper 3- Challenge of Big Tech
The article deals with the issue of checking the misuse of monopoly power by the Big Tech while encouraging their positive externalities.
Worldwide Investigations against Big Tech
- Big Tech firms, especially Facebook and Google have been investigated worldwide, including in the European Union and the United States, on the abuse of monopolistic power.
- Comparisons are drawn with investigations in the U.S. on the telecom industry and the break-up of the AT&T.
- However, there are important differences this time around.
- First, the information good that is being provided by the Internet firms of today, is largely non-rival.
- Second, Internet firms operate globally, therefore, it is often difficult to lay down international rules of obligation and fulfilment.
- Third, while it is debatable whether the goods and services provided by the Internet firms are excludable.
- It is this factor that was leveraged by the Internet firms to provide search, navigation, and social connectivity with no charge to the consumers, and, consequently, making these services non-excludable.
Monetisation model of Big Techs and isseus with it
- Public goods should be provided by governments, but the information goods as described above are being provided by private firms.
- This arrangement poses several problems.
- First, private firms need to have monetisation models to cover the costs of providing their services.
- So, the Internet firms have resorted to personalised advertisements and third-party sharing of the personal data of their users for monetisation purposes.
- Second, the strong network effects present in these Internet platforms warrant increasing the subscriber base and garnering as much market share as possible.
- This results in near-monopoly of some firms in their defined markets.
- These firms may resort to anti-competitive behaviour including acquiring rivals to vertically integrate; erecting entry barriers by refusing to interconnect and inter-operate with competing firms, and leveraging their capital base, thereby engaging in predatory pricing, and driving out competitors.
Positive externalities and consumer surplus
- Network effects create a huge consumer surplus.
- Even without our knowledge, these Internet firms have now become an indispensable part of our lives.
- There are positive externalities as well, for example, Google Maps Application Program Interface (APIs) is being used by almost all logistic transand port companies.
- Facebook APIs are used for advertisement by almost all firms across the industry.
- Google, recently announced that its Search is being expanded to provide accurate and timely information on vaccine distribution to enable quick recovery from the COVID-19 pandemic.
Challenge of regulation
- The question before policymakers is how to regulate these Internet firms from abusing their monopoly power while encouraging the positive externalities and consumer surplus they create.
- It is often very difficult to prove that the firms engage in the abuse of their monopoly power.
- Due to strong network effects, it is not possible to ban or curtail these services.
- A traditional view is to subsidise the good that creates positive externalities.
- Governments can provide tax subsidy to these Internet firms in return for their orderly behaviour in the marketplace.
- Governments could explore mandating sharing of Non-Personal Data (NPD) owned by these firms for societal and economic well-being as pointed out in the expert committee on NPD.
- The other way to control any abusive behaviour of the Internet firms is to use the power of public voice.
Consider the question “Services provided by the Internet firms have become indispensable part of our life, this leads to the problem of checking their monopoly power while encouraging their positive externalities and consumer surplus. In light of this, discuss the challenges posed by the Big Techs and suggest the ways to deal with them.”
While governments and regulators deal with these dilemmas the Internet firms should adhere to core ethical principles in conducting their businesses as firms that aim at super monopoly profits and are greedy to become powerhouses of the world, often end up in the ditch.
Back2Basics:What is positive externality
- A positive externality exists if the production and consumption of a good or service benefits a third party not directly involved in the market transaction.
- For example, education directly benefits the individual and also provides benefits to society as a whole through the provision of more informed and productive citizens.
What is Network Effect
- The network effect is a phenomenon whereby increased numbers of people or participants improve the value of a good or service.
- The Internet is an example of the network effect. Initially, there were few users on the Internet since it was of little value to anyone outside of the military and some research scientists.
- However, as more users gained access to the Internet, they produced more content, information, and services.
- The development and improvement of websites attracted more users to connect and do business with each other.
- As the Internet experienced increases in traffic, it offered more value, leading to a network effect.