by Mark MacCarthy

The benefits of bigness: consumers can gain from large tech firms and market leaders

Feb 20, 2018

A common misconception is that big businesses are bad businesses. In the case of tech firms, this is not always true, and there are many benefits to consumers that come from big firms.

big data merger and acquisition big business smb
Credit: Thinkstock

Some antitrust advocates seem to think that business size is a sign of wrongdoing, or a source of it. Franklin Foer, for example, wants to return to Louis Brandeis’s view that bigness is a “curse” and to take steps to avoid corporate “gigantism.”  He rejects the framework of consumer welfare developed by Franklin Roosevelt’s antitrust chief Thurman Arnold, who thought the debate over business size “is like arguing whether tall buildings are better than low ones.”

The reality is that small firms are not necessarily good and big firms are not necessarily bad. Acting Federal Trade Commission Chair Maureen Ohlhausen said it best at the recent International Consumer Electronics Show: “You can’t say big is bad, and small is good across the board. You have to look at why is it big? Is it innovating? Is it providing products that consumers want at a good price point?”

In his Senate confirmation  hearing, the Administration’s nominee to be the new Chair of the FTC, Joseph Simons, echoed these sentiments, “Big is not necessarily bad…Oftentimes companies get big because they are successful with the consumer. They offer good service at low price and that’s a good thing and we don’t want to interfere with that.”

The irrelevance of size used to be an antitrust commonplace.  It is heartening that this perspective is still in place among our current antitrust regulators.

In addition, large companies often have advantages over small companies.  As Ohlhausen pointed out, “…sometimes companies are big because there are big economies of scale, economies of scope, there’s a lot of efficiencies in a big company.” Sometimes companies can produce products more efficiently when operating at scale.  Moreover, their size sometimes enables them to design higher quality products and to improve them faster and more efficiently.  In these cases, products and services get better and cheaper when provided by large companies, to the benefit of their consumers.

In today’s integrated global economy, moreover, these benefits of bigness cannot be ignored. U.S. companies compete against large companies from around the world.  To be effective, they need the scale to manage geographically dispersed supply chains, to integrate networks of customers and suppliers and to customize products and services for local markets.

Big firms have advantages for labor as well.  In studies going back a generation and spanning several continents, economists have documented that larger firms pay their workers higher wages, driven in part by the higher productivity and stability of the workforce in larger firms.

Firm size is often confused with market concentration, as if large firms must necessarily be market leaders.  But size and concentration are very different.   As antitrust scholar Herbert Hovenkamp points out, in a local market where only two firms supply a product such as pre-mixed cement, there would be high market concentration even though each firm has only several employees and few assets. In contrast, a huge firm such as Kroger with almost 3,000 stores has only 10% of the national retail marketplace, which has a large number of independent, fiercely competitive firms.

Several studies including one by Harvard economist David Autor have found that market concentration is increasing in the economy as a whole. From 1982 to 2012 the share of shipments made by the top four firms grew 4.5% in manufacturing, 4.4% in service industries, 15.0% in retail industries, and 2.1% in the wholesale sector.

Is this increase in market concentration a good or bad thing? The 2016 Democratic Party Platform appears to assume it is bad, adopting a policy “to take steps to stop corporate concentration in any industry where it is unfairly limiting competition.”

But sometimes market concentration results from vigorous competition. As economist Carl Shapiro says, an increase in concentration could reflect “the forces of competition at work, with the firms providing better value to customers gaining market share.”  David Autor’s study suggests that the more concentrated a manufacturing industry is the greater its increase in productivity.  Law professor James Bessen’s study demonstrates that increased use of proprietary information technology allows more productive firms to capture greater market share.

When more productive firms price their products and services at a lower cost and thereby gain market share, this should be considered a sign of the success of competition, rather than its failure.  In a similar way, when companies use information and advanced algorithms to provide the best software products and services and thereby become market leaders, this is a triumph for marketplace capitalism, not a sign of its demise.  

It is possible that market leadership, like firm growth, can result from or be maintained by anticompetitive actions, and this is a legitimate area for antitrust inquiry.  But the fact that a firm is large or that it is a market leader is not evidence of wrong doing.  Absent some evidence of actual anticompetitive conduct, size or market leadership suggest that the competitive process has worked to select the lowest cost or the most innovative firm.