Tim Lee

Against Platform Monopolies: Conclusion

To wrap this series up, let me recap the reasons that platform monopolies are a bad idea:

  • Advocates of platform monopoly rights argue that such rights increase the profitability of new platform creation, thereby encouraging more R&D spending and innovation.
  • Technological systems are subject to “gains to interoperability,” analogous to the gains from trade.
  • Firms have an incentive to engage in “platform protectionism,” which reduces the surplus created by network effects but can increase the share of that surplus captured by the firm.
  • Often, very little of the value of a platform can be explained by the design decisions of the firm that created it.
  • A platform owner will tend to under-license its platform due to the inability of intermediaries to capture the full value created by the platform. This problem gets worse as the number of intermediaries increases, inefficiently “flattening” the development structure.

  • Excessive platform profits can induce wasteful competition in which companies expend resources to capture a larger share of the above-market returns in ways that don’t expand the size of the pie.
  • Platform rights aren’t a good choice for encouraging innovation because they tend to produce profits that are much larger than necessary and because they become valuable only long after the initial product has become a hit. Moreover, even in the absence of platform rights, pioneering firms enjoy plenty of advantages over challengers.
  • Many innovative products consist of a thin layer of of proprietary code atop a large stack of open, commodity technologies. Such products don’t cost very much to build, and if they, too, are opened up, they can often form the foundation for subsequent generations of technology.

    I think that these considerations, taken together, constitute a pretty strong economic case against giving companies monopoly platform rights. I should mention explicitly that I don’t think they add up to an economic case for mandated interoperability a la France, because explicit government regulations opens up the possibility for rent seeking and regulatory capture, problems which strike me as even more worrisome than platform monopolies. But simply declining to create platform monopolies, or repealing laws that do so, create no such public choice concerns.

    To get back to the issue that started this discussion, the DMCA’s side effect of monopolizing digital media technologies is not a point in its favor. There is little reason to think that platform monopolies create wealth, and considerable reason to think they destroy it. The ability to tie different products together is clearly good for the companies that make the products, but generally speaking, it’s not good for consumers or the economy as a whole.

    July 27, 2006 | Comments |

    5 comments posted

    1. Posted by: PLN - 07/27/2006

      You’ve done a truly wonderful job putting together this argument… I’ve gotten so tired of neo-Schumpeterians claiming that because companies *like* monopoly profits, and often hope to have them temporarily, we must therefore move heaven and earth to guarantee them.

    2. Posted by: Tim - 07/27/2006

      Thanks Peter! I’m glad someone was interested to read it all the way through. :-)

    3. Posted by: Doug Lay - 07/28/2006

      To those of us who drank the Internet Kool-Aid long ago, the superiority of open standards is so self-evident that lengthy justifications don’t seem necessary. Obviuously, however, not everyone sees things this way (University of Chicago law-and-economics types seem to have special difficulty “getting it”), so work like this is very important. Thanks, Mr. Lee!

    4. Posted by: Noel - 08/07/2006

      Tim, I’ve looked through your posts on “monopoly platforms” and while interesting, I’m curious what exactly do you mean by “monopoly.” Do you mean protected by IP, with semi or fully closed protocols, centralized control by a vertically integrated platform creator? Can you give some examples…

      Also, some good related article:
      http://papers.ssrn.com/sol3/papers.cfm?abstract_id=216533
      http://papers.ssrn.com/sol3/papers.cfm?abstract_id=913402

    5. Posted by: short url - 12/20/2006

      5514222223d8 Great work short url short url

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