One would have thought that technological developments will bring producers and consumers closer obviating the need for intermediaries taking a cut in between. Indeed, traditional middlemen have been disintermediated, only to allow a much larger and more dominant middleman to emerge – an Amazon or Flipkart displacing traditional distributors, wholesalers and retailers of consumer goods or a Google and Facebook displacing traditional media channels. This blog by Matt Stoller talks about how the world has allowed monopolies of middlemen to emerge and capture a large share of the economic rents in the value chain.
“One central problem in our commerce is the outsized role of middlemen. Amazon, Walmart, Vizient, CVS, Google – these are monopolists, yes, but their specific mechanism for exerting monopoly power isn’t controlling production of some item, but in putting themselves in the middle of transactions and taxing one or both sides.”
Stoller starts with the example of Google’s dominance of ad spends thanks to its near monopoly in search and cites the problem with that:
“Now, one might say that search advertising is only one channel, and surely there are other ways to get customers. And there’s some truth to that, but not as much as one might assume. A few years ago, Amazon did an experiment in Mexico, seeking to see what would happen if it stopped advertising on Google search. Amazon bought paid media on every other available channel from billboards to TV, but its traffic suffered. Google is a monopoly so powerful that it can extract from Amazon, which has perhaps the strongest retail brand name in the world. And that means Google can set the price for firms that need to engage in marketing, which is to say, every firm.
Google uses a host of tactics to exclude others from dislodging or competing with its search engine. Some of these tactics are good, such as creating and maintaining a high quality search engine. But others are predatory, like ensuring that only Google can crawl the web, or forcing the pre-installation of its own apps on user phones to the exclusion of others via contract and payment. Then Google effectively sells access to its users through targeted and search advertising.”
He goes onto give another example of a middleman monopoly in the US hospital supplies business and likens such businesses to Standard Oil:
Here’s the granddaddy of monopoly power, Standard Oil, which monopolized refining and controlled railroads and pipelines in order to impose a tax on oil producers and kerosene users.
In this case, oil producers were very much in the position of medical suppliers selling to hospitals through GPOs, or content producers trying to get to users through Google. A bevy of laws, like the Sherman Act, the Clayton Act, and the Robinson-Patman Act, were passed to block the exploitation of dominant middlemen. And such law should be usable today against firms like Google, since Google, while technologically different than Standard Oil, is fundamentally using similar tactics. But antitrust laws have gone largely unenforced for four decades.”
He reckons change is underway:
“Increasingly, policymakers and scholars are recognizing this middleman problem. The FTC has started to revive the Robinson-Patman Act, a law that prohibits the use of rebates by middlemen to control markets. And in her new book Direct, anti-monopoly scholar Kate Judge describes how a monopolized middleman economic order works, and what it is doing to our democracy. It’s not that middlemen are per se bad, the role of matching suppliers and buyers is useful. The problem is when middlemen turn into monopolies. Consolidated middlemen keep a swollen amount of the transaction amounts they mediate. And by manipulating pricing, middlemen can break markets and turn investment towards unproductive uses.
One core problem we have with our economy is that our business people are focused on controlling what others produce, instead of producing themselves. If we simply got rid of the legal arrangements fostering this business model, then we would have a very different set of commercial arrangements.”
Closer home, the Indian policy makers have been indeed building Digital Public Goods such as Aadhaar, UPI, DBT and most recently the Open Network for Digital Commerce, to democratise the benefits of technology than create middlemen monopolies.
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