When NYU economist Thomas Philippon moved to the United States from France in the 1990s, he noticed everything from laptops to internet access was cheaper in America. But over time, as the access industry consolidated, prices slowly rose and now Americans pay more for data than almost every other country worldwide.
In his new book, The Great Reversal: How America Gave Up on Free Markets, Philippon sets out to examine why that happened, and why there’s so little competition in American markets. I don’t often directly recommend books on the show or the site, but I think everyone in tech or interested in tech ought to read this book — it provides a rigorous, but easy-to-grasp look at the economics of consolidation and what it does to markets, prices, and products.
There are two things that really jumped out to me during this conversation: first, that concentration can actually be good and create value for the consumer, because healthy competition weeds out poor performers and rewards the winners, but concentration due to lobbying and political influence has the opposite effect.
The second is something I’d never really thought about, but makes perfect sense: Philippon pointed out that companies going bankrupt is actually a sign of an efficient, competitive market, because it means companies have to price their products and services very low in order to compete, instead of extracting as much profit as possible. Those low margins are treacherous, and it means that some companies simply won’t survive — but having enough companies to create that pricing pressure and actually go bankrupt is a sign there’s competition in the first place.
That idea really changed how I think about so many tech businesses that give things away for cheap or free. Take streaming services, where Disney, Apple, and Amazon are all now selling very expensive programming for very cheap. Here’s how longtime streaming execs Matthew Ball and Alex Kruglov described the economics of streaming in a piece for Vox yesterday:
If you actually want to make money, subscription streaming shouldn’t even be your real business. Instead, give it away as a free or low-cost perk that’s part of a much higher-margin and less-competitive business, such as wireless service, smartphones, e-commerce subscriptions, or theme park passes. Better still, use your service to make money by selling other people’s unprofitable video services.
It looks like there’s competition in streaming, but it’s all subsidized by monopolies in other businesses, and pure streaming companies might get priced out of the market because huge competitors like Disney and Apple are actually willing to lose money on streaming to maintain their huge profits elsewhere.
If you have been listening to The Vergecast and been paying attention to our larger conversations about whether we should be breaking up big tech companies, whether we should regulate them, or whether tech companies with network effects like Google and Facebook are different than companies like AT&T and GE, this episode is for you. Below is a lightly edited excerpt of the conversation.
Nilay Patel: I read the first page of your book and thought, “Oh, he wrote a book for me” because you start by wondering why cellphone plans in the United States are so expensive, and the answer is because our markets are bad, which Vergecast listeners know is something we are constantly talking about.
Thomas Philippon: I was pretty much clueless about these questions until I started researching them by myself, even though I should have noticed. Because if you go back and forth between the US and, say, Europe or even most of Asia actually, you should notice that things that used to be much cheaper in the US are now much more expensive in the US and somehow you didn’t notice the difference because the changes were very, very slow.
It’s the old story of, if you cook a frog very slowly then the frog is going to die.
That’s exactly what happened with many of these markets in the US. When I came here in 1999 as a student, I was much more price-conscious than I am now. I noticed that plane tickets, access to the internet, cellphone plans, of course laptops, all of that was a lot cheaper. And we’re not talking about 5 percent — it was like 30 percent, 40 percent cheaper in the US. Today, it’s reversed.
You brought up air travel, you brought up internet access, laptops — you wouldn’t think that the root of those price differences are all the same cause. But you’re saying it is.
To a large extent, yes. And what’s interesting is also that the dynamics are started to be very different on both sides of the Atlantic.
Essentially, what happened is when Europe finally woke up to the fact that the US’s approach to free market regulations ... in the 1990s ... was a good idea, it started implementing that at home, leading to lower prices [while] the US was forgetting its own history, leading to higher prices. And so Europe started from a starting point of a pretty not-competitive market, but got better over time. The US was the opposite. It was a pretty competitive market, good wealth at the time, and the changes cumulated over 20 years until today where many of these markets, the situation is reversed.
So you’re saying the United States has poorly competitive markets, and Europe has competitive markets.
Yeah, in many of them. It’s not true of every single industry — in retail it’s actually not true. Just to give you an example, if you buy internet broadband access, on average, in the US, the monthly price of broadband is $68 per month. The average price in France is $31. So we’re not talking about, ‘It’s 10 percent cheaper.’ It’s less than half. In Germany, 35; Japan, 35; Korea is 33; you name it. They’re all in the same ballpark, around 30, 35 dollars. The UK as well. And the US is at 68. If you look at cellphone plans, it’s the same thing. It’s a ratio of 1:2, you pay literally twice here for the same monthly cellphone plan that you would pay in Europe or Korea or Asia.
How did that happen?
What happened is that in the US, they essentially stopped enforcing pro-competition policies. And we tend to think of antitrust mergers because of course that’s like the tip of the iceberg, the very visible outcomes, and that’s true, that’s part of the story. But it’s much more widespread than that, it’s a host of regulations that prevent entry of new firms.
And in Europe, essentially we did exactly the opposite. My favorite example is the cellphones because we had, in France, three legacy carriers, and they all charged the same price. And it’d be like today, if you’re in New York and you have the choice between two plans and one is $79.99 and the other one is $79.99. So you’re very happy to have a choice. So it was the same kind of choice in France. You had three operators and you had the choice between €45 in one and €44 in the other, and it was very expensive.
For a long time, a new entrant named Free Mobile asked for a license to compete in that market. And of course, the incumbents lobbied extremely hard to prevent the regulators from giving the license to them. And finally, they lost in 2011, Free got its license, entered the market and for the same contract that used to cost €45, they priced at €20. Within six months, the incumbents had to match the price. So they went down to €20-25, which means even if you’re not a tech-savvy consumer and just kept the same exact plan, did nothing and just sat on the couch, just six months later, you are paying half. So that’s competition.
In that case, it’s a regulatory decision. It’s not really antitrust, it’s not a merger. So that’s part of the equation. And in the US, you went into reverse by allowing too many mergers.