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Why Economics Must Go Digital

Mainstream economics has largely failed to keep up with the rapid pace of digital transformation, and it is struggling to find practical ways to address the growing power of dominant tech companies. If economists want to remain relevant, they must rethink some of their discipline's basic assumptions.

CAMBRIDGE – One of the biggest concerns about today’s tech giants is their market power. At least outside China, Google, Facebook, and Amazon dominate online search, social media, and online retail, respectively. And yet economists have largely failed to address these concerns in a coherent way. To help governments and regulators as they struggle to address this market concentration, we must make economics itself more relevant to the digital age.

Digital markets often become highly concentrated, with one dominant firm, because larger players enjoy significant returns to scale. For example, digital platforms incur large upfront development costs, but benefit from low marginal costs once the software is written. They gain from network effects, whereby the more users a platform has, the more all users benefit. And data generation plays a self-reinforcing role: more data improves the service, which brings in more users, which generates more data. To put it bluntly, a digital platform is either large or dead.

As several recent reports (including one to which I contributed) have pointed out, the digital economy poses a problem for competition policy. Competition is vital for boosting productivity and long-term growth, because it drives out inefficient producers and stimulates innovation. Yet how can this happen when there are such dominant players?

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