Capitalism and Society

Volume 15, Issue 1 2021 Article 2

Markets and Regulation in the Age of Big

Tech

Kaushik Basu, Aviv Caspi, and Robert Hockett

Cornell University, Cornell University, and Cornell University

Electronic copy available at: https://ssrn.com/abstract=3985585

Markets and Regulation in the Age of Big
Tech
Kaushik Basu, Aviv Caspi, and Robert Hockett

Abstract

The digital revolution, along with the growth of the companies known collectively as Big Tech,
is transforming the global economy and giving rise to novel policy challenges. This paper
analyzes the microeconomic foundations of this change, particularly how the natures of
competition and oligopolistic equilibria are changing as a result of the large returns to scale
and the global connectivity made possible by these new technologies. We then discuss how
these changes fit into the existing regulatory landscape and argue that, for certain kinds of
large digital-platform firms, existing antitrust laws may not be adequate. We conclude by
considering more radical reform, such as requiring certain platform firms to be organized as
nonprofits or public utilities.

Keywords: digital revolution, Big Tech, vertically serrated industries, maroon theorem, profit
sharing.

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 Capitalism and Society, volume 15 (2021), issue 1, article 2

Introduction
For some ideologues, the solutions to economic woes are easy. Either free markets work or
they don’t: so you leave it all to the market or put it all under the charge of the state.
Fortunately, such extreme positions are, largely, relics of the past. Nowadays, most economists
take a more nuanced stance on policy, one that depends on the issue at hand. It is recognized
that there are domains where our response needs to be different. When trying to solve the
problem of the village commons or global climate change, we need government and even
intergovernmental action. When dealing with the market for regular goods and services, be it
for onions or haircuts, most economists would argue that it is best to leave it to the free hand
of the market.
What is, however, not readily recognized even today is that, thanks to the march of
technology and gradual changes in the environment, the ground beneath the economy—and
beneath specific markets—keeps shifting and that at times, a critical point is reached when an
existing regulatory structure may no longer work. We may need state intervention where earlier
there was no need for this; conversely we may free some product from the charge of the
government to natural market forces because the nature of the market has changed. If we do
not recognize these shifts and adjust our laws and regulations for running the economy
accordingly, we may run the dinosaur risk: doing grave damage to our economy and even to
our survival.
We have seen major technological changes in the past when humanity has faced an
existential challenge. The Industrial Revolution, which began in the middle of the eighteenth
century and lasted for about a hundred years, was one such time. While rapid advances in
technology, such as new steam engines, machines for producing garments, and novel chemical
methods, created big opportunities for humanity, the world also wilted under the strain of the
changing landscape of production and work. The skies were smoky with soot and industrial
pollution. Children toiled as laborers, damaging their health and destroying their human
capital. And wealth at first skewed to the tops of national distributions, fomenting social
unrest.
It may not be altogether surprising that the Industrial Revolution coincided with some
of the biggest breakthroughs in economics, from Adam Smith’s classic The Wealth of Nations
in 1776, through John Stuart Mill’s Principles of Political Economy in 1848, to Léon Walras’s
Eléments d’économie politique pure in 1874. In addition, after a period of initial chaos, the Industrial
Revolution prompted some of the most radical new economic policies ever seen, beginning
with Robert Peel’s Factories Act in 1802 and including various laws, which were treated by
many at that time as an assault on the invisible hand of the free market, such as restricting
child labor, setting limits to daily work hours, and the imposition of the outrageous idea of
taxing people’s incomes, in Britain in 1842. Thanks to these novel interventions made on the
precipice of chaos, the Industrial Revolution was converted into an opportunity for
humankind and served as a trigger for progress and well-being.
Today we live in uncannily similar times. The digital revolution that began a little over
half a century ago and continues to pick up pace is changing the landscape of the world’s
society, economics, and politics. Over the last year, thanks to the COVID-19 pandemic, there
has been an accelerated learning curve in the use of digital technology and distanced work.
This is bound to act as a fillip to the pace of technological advance in the years ahead.

Electronic copy available at: https://ssrn.com/abstract=3985585

 Basu, Caspi, and Hockett: Markets and Regulation in the Age of Big Tech

This is arguably as important a change as the Industrial Revolution. The digital

revolution has been a source of both hope and alarm, as captured by popular expressions like
the sharing economy and disruptive innovation. It is now being recognized that the innovations of
the digital revolution can speed up growth and dramatically lift living standards of vast
numbers of human beings. But it can also be a source of social and political polarization and
conflict. Whatever happens, it is evident that the digital revolution is going to engulf our lives.
There is a growing literature evaluating and commenting on the implications of this
digital revolution on society and politics (Sundararajan 2016; World Bank 2016; Zuboff 2019).
The rise of digital platforms for buying and selling regular goods and services, which received
a big boost because of the COVID-19 pandemic, is changing the nature of retail markets. A
recent McKinsey (2018) report, “Winning in Digital Ecosystems,” estimates that by the year
2025, over 30% of all global economic activity—a value of over $60 trillion—is likely to be
mediated by digital platforms. The rise of artificial intelligence and robotics is causing the
demand for certain kinds of conventional labor to collapse, creating political polarization and
social unrest. The increasing specialization of worldwide supply chains, in which different
nations produce not just different goods but also different components of the same product,
is creating large economies of scale but also the risk of disruption and novel forms of the
holdup problem—forms rooted as much in revived geopolitics as in familiar geoeconomics.
The rise of new technology has left our regulatory framework in tatters. There has
recently been a renewed interest among US federal agencies in regulating Big Tech, but without
a clear vision of how to do so. As recently as June 3, 2019, federal agencies announced that
they would investigate the “dominance of tech companies, [leading] to the first overhaul of
antitrust rules in decades” (Kang, Streitfeld, and Karni 2019). However, there is no agreement
—among neither lawmakers nor law and economics professionals—on the best strategy to
regulate these new markets with their staggering economies of scale. There has been a
profusion of writing on this subject as economists, legal scholars, and even some information
technology professionals have tried to wrap their heads around this new phenomenon. The
urgency of the problem is emphasized by the sweeping reforms being proposed in a bill in the
United States Senate, proposed by Amy Klobuchar on behalf of Richard Blumenthal, Cory
Booker, Ed Markey, and Brian Schatz, titled the Competition and Antitrust Law Enforcement
Reform Act of 2021 (S. 225, 117th Cong. [2021–22]).
The aim of this paper is to describe the key structural changes occurring in the world’s
economy as a result of new technology and then to discuss possible policy interventions. Much
has been written on this subject. What distinguishes this paper is that it gets into the weeds by
spelling out some of the industrial organization theory that is implicated by the new
technology. We argue that we have to go beyond broad generalizations to some of the
microeconomics of the problem, using adaptations of ideas that go back to Augustin
Cournot’s work on oligopoly. We refrain from algebra and try to explain some formal ideas in
words. This can give rise to some important insights into regulation, law, and policy making.
We argue that the new policy thinking has to be out of the box (including that of
Edgeworth), in the true sense of this much-abused expression. This is a moment akin to the
Industrial Revolution and requires novel modes of legal and regulatory interventions. The
policy discussion is inevitably tentative, as the situation on the ground is still evolving. But we
do not want to shy away from radical policy ideas, despite the awareness that some of these
policy suggestions will be rejected. The hope is that some variants of these broad ideas will

Electronic copy available at: https://ssrn.com/abstract=3985585

 Capitalism and Society, volume 15 (2021), issue 1, article 2

make their way to implementation and, once adopted, will not look as radical as they may
appear now. The main policy analysis occurs in the last section. The next two sections are
devoted to the economic theory of the new digital world.

Globalization, Supply Chains, and Serrated Industries

Globalization is a process that has occurred over millennia: Homo sapiens learned to roam the
lands, initially hunting and foraging, gradually learning to settle down and grow food and make
other basic goods, and then carrying these goods to other terrains and other tribes to trade
and barter. As technology kept advancing, the nature of linkages with distant lands took novel
forms. By the end of the fifteenth century, we mastered long-distance travel by sea, facilitating
trade, movement of people, and eventually, colonial control over faraway lands.
Colonialism transformed the nature of the global economy. The Industrial Revolution
that began in the eighteenth century changed our economy dramatically, resulting in a sharp
rise in economic growth rates around the world. From the end of World War II, the pace of
globalization picked up. Over the last few decades the internet started transforming the very
basis of work and connectivity.
One outcome of this long history of globalization is that, in producing any slightly
complicated product today, be it a computer, a phone, a refrigerator, or a vaccine, we can have
components of the final product be made in distant places from each other. In the production
of a car, for instance, we can have the chassis produced in one country, the steering wheels in
another country, and gears in yet another. With this level of specialization, there can be massive
increasing returns to scale and big gains in productivity, making cars much cheaper to produce
than would be the case if the full production of a car were done in one factory, inside one
shed. There is no surprise that, once we have the engineering technology for specialization
and the digital technology for linking different places in the world, such megaspecializations
will happen. In the language of Coase (1937), contracting costs diminish and firms are
accordingly able to disaggregate where production is concerned while, paradoxically, further
concentrating where market power is concerned.
What is not often realized is that this is changing the very nature of markets, thereby
rendering many of the familiar theoretical tools of economists unhelpful. The standard tool
for analyzing a market with several producers goes back to 1838 and the classic work of
Cournot ([1838] 1897), with later extensions by Bertrand (1883). In the Cournot model we
have 𝑛𝑛 firms involved in producing one product. Let us think of cars. If 𝑛𝑛 = 1, we have a
monopoly, only one firm producing cars. If 𝑛𝑛 = 2, it is a duopoly; there are two firms
producing cars. As 𝑛𝑛 becomes large, we head toward a competitive market. In technical
language, as 𝑛𝑛 goes to infinity, we have perfect competition in the limit. Usually, it is the case
that as 𝑛𝑛 becomes larger—that is, there are more firms producing cars and competing to sell
to consumers—the consumers get a better deal, mainly in the form of lower prices. This is the
justification behind the world’s antitrust laws, going back to the Sherman Antitrust Act of
1890. The idea is to discourage monopoly and promote greater competition among firms
producing the same product.
It is clear that, in our globalized world, we may have 𝑛𝑛 firms involved in the production
of cars but in a very different way. What we have is some firms that produce car wheels, some
that produce chassis, and some that assemble the various components into cars. There may

Electronic copy available at: https://ssrn.com/abstract=3985585

 Basu, Caspi, and Hockett: Markets and Regulation in the Age of Big Tech

still be 𝑛𝑛 firms engaged in car production but they do not relate to one another in the same
way as in a Cournot or Bertrand oligopoly. Just as Cournot and Bertrand considered a polar
case for ease of exposition, let us here consider the other polar case, which the world is veering
toward.
Suppose there are 𝑛𝑛 firms or corporations engaged in producing cars. Consider the
case where one of those 𝑛𝑛 car producers makes all the wheels, another all the gears, yet another
the seat covers, and so on. This is a very different form of oligopoly, if we can call it that at
all, from the one we have in our textbooks. This may be referred to as a “vertically serrated
industry” or simply a “serrated industry” (Basu 2018). If we model a serrated industry, we get
results that are very different from a standard Cournot oligopoly analysis. Suppose in a serrated
industry, each firm sets the price of the product. A vector of 𝑛𝑛 prices is an equilibrium, if it is
a Nash equilibrium of the game. The ultimate price of a car is the aggregation of the prices of
all the components.
In the standard Cournot oligopoly model, the equilibrium price that consumers pay
goes down as the number of firms, 𝑛𝑛, increases. 1 But if this is a serrated oligopoly, as 𝑛𝑛
increases, the opposite happens: It can be proved that the price of a car rises (Basu 2021). As
more producers come into play, far from benefitting consumers, we leave consumers worse
off, with megaprofits going into the coffers of the corporations.
In case the firm that finally assembles and supplies the product is able to price
discriminate across consumers, it is true that not all consumers will be paying a higher price as
𝑛𝑛 increases. Each buyer will pay the maximum they are willing to pay. So the end result is the
same: consumers will be worse off as the march of technology allows us to specialize more
and more in producing different components.
Clearly, standard policy does not work in this kind of a world. Though the world
described in the model is a polar case, this is where we are now headed with the rise of digital
technology. Having more firms involved in producing cars does not help consumers. If we
use our antitrust law to say that, for each component, we must have many producers, it is true
that we will have greater competition. But we shall lose out on much of the advantages of scale
that make the production of goods cheaper—a recurrence of the “antitrust paradox” at each
stratum of the serrated market (Bork 1978). The equivalent of this in an earlier age would be
to say that everyone must produce their own food to deter exploitation by large farms. This
would lead to equity, true, but that would be the equity of shared misery.
The vertical serration of industries and the resultant long supply chains spanning the
world give rise to another potential problem, which has received much less attention than it
deserves: the fragility of entire industries to shocks anywhere in the world. The current
COVID-19 pandemic has given us a foretaste of this potential challenge. Consider the
automobile industry once again. In the old world, if one firm among the 𝑛𝑛 firms shuts down—
maybe because there is a natural calamity or political trouble in the region where the firm is
located—this would mean, typically, (1/𝑛𝑛)th of the car production would be disrupted. But
in a vertically serrated industry, if one firm stops production, the entire automobile industry

1 If this were a Bertrand competition, the price of the car would remain unchanged. In either case, an increase
in n does not cause the price to rise.

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 Capitalism and Society, volume 15 (2021), issue 1, article 2

might shut down, because you cannot have cars without wheels. (We see something like this
at present in industries dependent upon the microchip and rare earth industries.)
In short, specialized supply chains create efficiencies, but they can also create new
vulnerabilities, causing shocks to be magnified and thus massive disruptions. During the
COVID-19 pandemic and the consequent lockdowns, we saw some of these cascading effects
where one or two segments of the supply chain broke down and spread disruption all across
complementary sectors.
In addition to natural disasters, like pandemics and earthquakes, and even spontaneous
political disruptions, the long supply chains of complementary goods can be threatened
deliberately by countries that control key production processes shutting them down, thereby
bringing global production to a halt, in order to derive political mileage. A manner of OPEC-
on-steroids problem can confront multiple markets with massive exogenous shocks stemming
from motives that are as much political as economic.
Of course, actions like this will materially harm the very countries that take them. But
in times of conflict or periods in which noneconomic values are salient, those sacrifices may
be deemed worthwhile. Because we do not have evidence of these deliberate shutdowns until
they occur, this is largely the kind of danger that lies in the domain of economic theory. We
have to use our reason and the logic of choice under risk or uncertainty to visualize it and then
prepare different kinds of insurance policies. Countries may need to have backup production
plans ready to be activated in case of a breakdown in supply chains, as many already do for
military production. Indeed one way of thinking of present developments might be as
extending the domain of national security beyond more traditional military considerations.
Accordingly, we may also need to have global treaties and conventions, similar to those
pertaining to war, nuclear arms, and climate change, that force nations to give guarantees that
they will not use this kind of holdup strategy.

Digital Platforms, Big Tech, and the Trials of Antitrust Law

Apart from the change in the nature of market competition discussed in the previous section,
there is also a major specific development that is changing the welfare properties of market
equilibria. We refer to the arrival of digital platforms for buying and selling goods. To
understand how the digital platform is changing our markets not just by increasing efficiency
but also in more fundamental ways, consider the central paradigm of neoclassical economics:
the Walrasian general equilibrium system. How do buyers and sellers find one another? Walras
(1874) conceptualized this by positing an imaginary auctioneer, who announces prices on the
basis of which buyers and sellers place orders. If the aggregate demand and aggregate supply
for a commodity do not match, the auctioneer simply changes the price, raising it if there is
excess demand and lowering it if there is excess supply. This goes on until supply and demand
match for all commodities, and we have a general equilibrium.
Think now of modern digital platforms: Amazon, Uber, Lyft, Airbnb, Alibaba,
TaskRabbit, Tencent, and Amazon Mechanical Turk—the list goes on. What they do is similar
to what the Walrasian auctioneer does. But there are two important differences: unlike the
auctioneer, they actually exist, and further, they are themselves profit-maximizing agents, like
those who use, not merely own, the platform to buy and sell goods and services.
This is a dramatic development, and not surprisingly, it is transforming our economic
world beyond recognition, creating vast opportunities and wealth alongside novel hazards and

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 Basu, Caspi, and Hockett: Markets and Regulation in the Age of Big Tech

pitfalls. Once again, to use the analogy of a Cournot oligopoly, what this new technological
development has done is to alter the game that firms actually play.
The standard Cournot model posits an aggregate-demand curve constructed out of
the demand for a certain product by many consumers, each of whom is too small to be able
to affect the price. So the consumers are price-taking agents. Cournot took the firms to be
larger than consumers and generally aware of the fact that each one selling more will tend to
lower the price, however negligibly, and each one cutting back on sales will tend to raise the
price. If there are 𝑛𝑛 firms producing and supplying the product, then this is an 𝑛𝑛-player game.
Cournot defined an equilibrium of this game as one where each producer decides how much
to sell. A vector of 𝑛𝑛 such decisions is an equilibrium when each producer feels that, given
other producers’ sales decisions, they have no reason to alter their decision.
This was a work of breathtaking originality in which Cournot anticipated some of the
work of John Nash that would occur more than a hundred years later. Cournot was sufficiently
avant-garde that people took little notice of his work in his lifetime. But it subsequently did
become the pillar of mainstream research on market equilibrium and also provided the
foundations for much of our thinking on antitrust laws.
Yet the arrival of the corporation has rendered these standard models largely
inapplicable, since we now also have to account for a profit-maximizing platform in the game.
The game is now an (𝑛𝑛 + 1)-player game, consisting of the 𝑛𝑛 producers plus one platform
firm. In our recent research (Basu and Caspi 2021), we have modeled these markets as (𝑛𝑛 +
1)-player games and studied the nature of Nash equilibria. This has led us to some interesting
findings, which can provide a useful foundation for the literature on regulation and legal
reform related to the challenge faced by antitrust legislation in the context of Big Tech and
the rise of digital platforms.
The new market structure has meant that our regulatory framework is under a lot of
strain, and there is now ample writing on the need to do more (e.g., Evans 2003; Khan 2017;
Sunstein 2018; Wu 2018). There is also a new interest among federal agencies about how these
megafirms could be regulated, though few actual solutions have been proposed. On June 3,
2019, federal agencies expressed interest in investigating the dominance of tech companies,
leading to the first attempt to overhaul antitrust rules in decades (Kang, Streitfeld, and Karni
2019). However, there is little consensus on how to do this.
In the next section we shall deliberate on policy, but let us first explain one theoretical
finding in Basu and Caspi (2021) that could be used to inform the policy debate: the “maroon
theorem.” To understand this, consider some market that is beginning to run through a digital
platform. Car rides via Uber would be a good case in point. Finding your ride via this platform
can save a lot of time and effort on the part of the customer and the driver. We no longer
have to wait on the curbside with flailing arms and taxis do not have to cruise the streets trying
to guess where there may be customers looking for a ride. The platform can offer to cut down
the search cost and extract a price from the buyers and the sellers. 2
The maroon theorem shows that as the platform becomes larger, the cost of trying to
do business outside the platform gets higher. The few who are “marooned” outside the
platform will then be willing to pay a very high price to get on to the platform. This implies

2Even if the charge for using the platform is placed on one side of the market, say the sellers, both sides will
share the burden, depending on the elasticities of demand and supply, as in standard matters of sales tax.

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 Capitalism and Society, volume 15 (2021), issue 1, article 2

that even if these platforms do not make a large profit or in fact make losses to start with, they
will more than make up for this when the platform becomes the gateway to survival for small
producers. In effect, there is a rent opportunity brought by a network effect, the prospect of
which can render it rational for the platform firm to invest through front-end loss acceptance.
(The strategy is not unlike “dumping” in product markets as a means of expanding later-
exploitable market share.)
The maroon theorem captures and formalizes the inchoate worries and concerns that
have been expressed by scientists, scholars, and even popular media (e.g., an Economist [2019]
cover story) about the rise of artificial intelligence and the gig economy. This theoretical result
shows formally how new technology, while expanding the production possibility frontier of
the world and making all of us potentially better off, can leave significant sections of the
population marooned, without bargaining power, and with a worse quality of life in the end—
all depending on platform firms’ legal capacity to exploit dominant positions.
This squares well with some of the evidence that has been highlighted in the law and
economics literature. Researchers have pointed to how large digital-platform firms have been
prepared to take large losses in the hope of capturing a large market share in the long run.
Amazon made big losses during the first seven years of its existence and notched up a debt of
around $2 billion (CNN Money 2002). Uber has reported running up a loss of $1 billion in
China and is accumulating a large debt trying to wrest some of the market out of the hands of
DiDi. The singular aim of platform firms seems to be to capture market share by developing
a large dependent customer base. The maroon theorem shows how this makes sense. Once
the market share is very large, the reservation earnings of all retailers and consumers will go
down and the platform can then make up for past losses by making large profits. The
willingness to sacrifice near-term profits in order to get a larger market share in the longer
term has led legal scholars to ask if these firms are after profit or something else (Khan 2017).
We argue that they have an enlightened view of their own self-interest. They want to make a
lot of profit in the long run and are willing to take losses in the short. For platform firms,
market capture is the first step to profit maximization. Their market strategy replicates one
interpretation of China’s global trade strategy—a sort of “firm-level mercantilism.”
There is a philosophical argument here that is worth a moment’s digression. The
principle of free contract argues that if two or more individual adults voluntarily agree to a
trade, exchange, or contract that has no negative fallout for uninvolved outsiders, then the
state must not stop such a trade, exchange, or contract. This is the heart of liberal philosophy
and underlies many seminal works in moral philosophy and welfare economics, such as
Amartya Sen’s (1971) paper on the liberal paradox. If we accept the principle of free contract
as a normative axiom, it seems that the state should not get in the way of the platform firm,
the producers, and the consumers operating on the platform. As long as no coercion is used,
the market should be left to function freely with no government intervention.
Interestingly, a controversial problem arises in this free market argument if we accept
a proposition associated with the philosopher Derek Parfit (1984). Parfit argued that there are
situations in life where we can think of 𝑛𝑛 steps, where 𝑛𝑛 ≥ 2, such that each step is a Pareto
improvement (some people are better off and nobody is worse off), but when comparing

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 Basu, Caspi, and Hockett: Markets and Regulation in the Age of Big Tech

where we were at the start with where we end up, we may find that we do not have a Pareto
improvement. Some people are actually worse off. 3
There are many real situations in life where this paradox arises (see Basu 2010). Every
time a laborer voluntarily agrees to give up some basic rights in order to work in an export-
processing zone, it is arguable that both the employer and the worker are better off. But it can
also be argued that allowing contracts that draw in workers by inducing them (voluntarily) give
up certain basic rights—such as the right to collective bargaining—ends up making workers
as a whole worse off. In short, the situation is characterized by a collective action problem that
can be exploited by divide-and-conquer strategies undertaken by opportunistic players
(Hockett 2015). It could therefore be right that organizations such as the International Labour
Organization and trade union activists work to stop these kinds of contracts.
Similarly, turning to the subject of child labor, it is possible to argue that each child
who (along with parental consent) agrees to do labor is better off by virtue of working. But
when all children are allowed to work and many end up working, they are collectively worse
off, and arguably, all workers are worse off. Here, too, the situation is characterized by a
collective action problem that opportunistic players can exploit with divide-and-conquer
strategies. And so child labor laws can be salutary not only for reasons of justice but on
grounds of efficiency.
What the maroon theorem, alongside the findings of contemporary legal scholars,
suggests is that something similar is at work in the area of Big Tech and large platform firms.
Each producer or retailer joining the platform may bring a Pareto improvement, but a large
number of such steps, which leaves those outside the platform with few choices, may not
ultimately be welfare enhancing. Workers, producers, and retailers may be actually vastly worse
off in the end.
In these kinds of situations, clearly some policy interventions are needed. These can
be conceived as exercises of collective agency aimed at diffusing collective action problems
(Hockett 2015). Policy makers have a more familiar term for such exercises of collective
agency: they call them regulations.
It was, accordingly, as justifiable on efficiency grounds as on grounds of justice when
Britain enacted laws in the wake of the Industrial Revolution, such as the Cotton Mills and
Factories Act of 1819. This was one of the first acts stopping child labor. This radical law,
which was attacked at that time as an assault on the free market, ruled that no person below
the age of 9 was allowed to do paid labor and those above this age could work no more than
12 hours a day. There was concern expressed at that time that the working classes would
become lazy as a result of such revolutionary laws, stopping 10-year-olds from working more
than 12 hours a day (Tuttle 1999). There was also concern expressed about why, if both sides
to a deal want to do it, the state should intervene. While we do not want to dismiss these
objections out of hand, because it is also easy to err by allowing for wanton state intervention,

3 See also Voorneveld (2010); Rachmilevitch (2020). This kind of paradox has a long history of related
paradoxes, going back to the ancient Greeks and, in particular, to the sorites paradox, the discovery of which is
generally attributed to Eubulides of Miletus. The sorites or heap paradox observes that if grains of sand do
not make a heap, then + 1 grains of sand would (surely) not be a heap. However, while 1 grain of sand is not
a heap, surely there exists an such that a pile of grains of sand is a heap.

10

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 Capitalism and Society, volume 15 (2021), issue 1, article 2

the maroon theorem tells us there may be need for nuanced intervention in today’s digital
revolution of the kind that was required in the Industrial Revolution.

The Policy Options: Constitutions, Profit Sharing, and State Ownership

As it was during the Industrial Revolution, the world today is at a juncture where novel policy
interventions need to be considered. Reasonable regulations, such as child labor laws and laws
that prevent employers making their workers labor more than 10 hours a day, sparked fear
and uncertainty when they were first introduced; we must therefore be willing to consider
ideas that may appear strange to avoid the risks this new economy poses. Done correctly, we
can convert these technologies into an opportunity for greater and more equitably shared
growth. 4 Moreover, even though some of these policies sound radical and unconventional
today, they will likely appear inevitable and normal, even banal, in the long run.
In this section, we discuss a few of the policy avenues that should be part of the
conversation. We have raised a range of problems, from antitrust concerns in platform-based
markets to the international vulnerabilities and market power of vertically serrated industries.
So it is fair to expect that the policy options considered will be similarly varied. We stress that
our goal is to raise some broad and potentially uncomfortable solutions that will need to be
tailored to meet the needs of the moment. We begin by considering the role of global
conventions and treaties in the context of vertical serration. Next we discuss policy options to
address the antitrust challenges with which governments struggle. Finally we rethink the
relationships between platform firms and society.
It is not hard to see why, given the increase in globalization, we need some minimal
global rules of behavior. The reasonable-sounding normative rule that most liberals abide by—
let us call it the liberal axiom—is that when it comes to our norms, cultures, and beliefs, we
must respect differences and allow societies and groups to practice what is their historical
normal and what they wish. This principle is, in its aspiration, a good one. But we have to
recognize that, in a globalized world, attempts to implement this may give rise to chaos and
conflict.
Here is an example. Suppose, to start with, people live on different islands. They are
modern and have roads, cars, and trucks. But the world overall is unconnected. Each society
lives on its own island, with minimal cross-island interaction. People rarely go to other islands.
With cars and roads in existence and travel on each island, you would expect these societies
to develop some laws or norms—basically focal points to coordinate expectations—about
which side of the road to drive on; this would avoid the disastrous third Nash equilibrium,
where people use the mixed strategy of tossing a coin to decide which side they will drive on

4 Though outside the scope of this paper, it is worth noting that it is not our aim to maximize growth as viewed
popularly, consisting of more cars, more homes, and more yachts. In reality, there is economic growth if the
total value of what we consume increases. We can have growth that consists of consuming better health and
greater longevity rather than more cars and more homes. This will in turn mean that our production need not
slow down but shift to more sustainable activities, such as more research on health, vaccines, and medicine and
a greater generation of ideas, literature, and poetry. This suggests that innovation and creativity, which had for
long been the mainspring of growth, need not stop. Large numbers of people can have a sense of agency which
is the mainspring of well-being (Phelps 2018). In short, we can have GDP grow and grow even more rapidly
than it is doing now, and we can enjoy all the excitement that growth and innovation gives; but the content of
that growth will be different from what has been the case thus far.

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 Basu, Caspi, and Hockett: Markets and Regulation in the Age of Big Tech

(Basu 2018). Let us think of these rules as coming to be viewed as religious customs. If you
are a practitioner of religion X on one island, you drive on the left, and if you are one adhering
to religion Y on another, you drive on the right. Taking the view that each religion must be
respected is fine in this world.
Now suppose there is rapid globalization and people begin to travel all over and settle
on different islands. The liberal axiom—let people adhere to their own religious practices and
norms—is no longer feasible no matter how attractive it may sound, at least not without a
huge human cost of accidents and chaos. The religious norms that may have been innocuous
earlier are no longer so. There will literally be head-on conflict between those following the
norms of religion X and the ones following the norms of Y. We cannot have some people
driving on the left and some on the right in this globalized world. We have no choice but to
make compromises and trade in some of our norms. In short, globalization, especially today’s
form of hyperconnected globalization, forces us to think of these unpalatable questions. We
thus need global conventions, or even a type of minimal global constitution.
We do not know if this is solvable. It is folly simply to assume that we will be able to
resolve all these kinds of challenges and survive. We may not. But clearly we have to try. The
first task for that is to look our biggest challenges in the eye and follow a moral compass that
respects all human beings. In the kind of example discussed above, we clearly need
compromise. Someone has to give up their custom or practice or some merger or trade-off
must be developed.
The above kind of social and political matter is important for the world but less central
to the concerns of this paper, which are focused on our economic challenge arising from the
digital revolution. Hence, let us move away from the discussion of global constitutions and
the management of political and social conflict and turn directly to the economy.
It is gradually dawning on observers that new digital technology, which is creating a
hyperconnected world, has given rise to a regulatory challenge that we are ill-equipped to
handle. The European Union Competition Commission and its commissioner, Margrethe
Vestager, have been aggressive in dealing with the challenge. In the US, the Justice Department
is preparing to probe Google for antitrust violations and the Federal Trade Commission is
starting a probe of Facebook and Amazon. The profusion of commentary on the law and
economics of regulating platform-based markets is a good indicator of the size of this
challenge (Hovenkamp 2009; Auer and Petit 2015; Streel and Larouche 2015; Stucke and
Ezrachi 2016). However, the writings also show that a deeper understanding of the economics
of the digital economy and platform-based markets would be of value. The theoretical
arguments presented in the paper are an attempt to fill and make amends for this lacuna.
A lot of writing emphasizes how Big Tech and large digital platforms are virtual
monopolies and thus what we need is a greater effort to apply our antimonopoly laws more
aggressively. Some of this applies to the pharmaceutical industry as well. We, however, take a
different line, since the standard concepts and categories used in existing industrial laws—
from the Sherman Antitrust Act of 1890 in the United States, through the Antimonopoly Law
of 1947 in Japan, to the Competition Act of 2002 in India—often do not apply to these new
market structures; even when they do, they are inadequate in dealing with the novel features
of the challenge.
It was a part of America’s antitrust foundation—written into the Sherman Antitrust
Act—that, when a monopoly arises naturally because of increasing returns and not by using

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 Capitalism and Society, volume 15 (2021), issue 1, article 2

strategies to block new entrants or by colluding, then such a monopoly has the right to exist.
As was recognized at the 2018 Jackson Hole meeting of central bankers, advances in
technology and increasing returns to scale are changing the nature of competition and creating
more natural monopolies. A report on the Jackson Hole meeting in the Economist (2018) points
out that “platforms such as Google, Uber and Airbnb match buyers and sellers, and thus make
outsize gains as they grow. In such winner-takes-most competition, a slight advantage can tip
the entire market in a company’s favour.”
What should be the role of antitrust laws in such a situation? And if antitrust action is
not adequate, what other policy options do we have? We want to address that here.
Through the ages, laws done right have played a major a role in triggering or enabling
creativity, entrepreneurship, and growth and in making a difference between survival and
decimation (Cooter and Schäfer 2012; Hadfield 2016). Financial products, assets, and wealth,
which may appear natural to us, are often the result of complex legal codes (Pistor 2019).
Done right they can create value; done wrong they can be instruments of exploitation and
conflict.
The emerging new world of artificial intelligence, digital technology, and platform-
based trading has given rise to increasing market concentration. 5 Grullon, Larkin, and
Michaely (2019), in their comprehensive analysis of industrial data in the United States over
the last 40 years, finds strong evidence of sharply rising market concentration. They record
that the Herfindahl-Hirschman index of market concentration has risen in over 75% of
American industries. Further, the four largest firms in most industries have seen sharp
increases in their market shares. Several economists, most notably Joseph Stiglitz (see Stiglitz
2018), have been vocal about how little the authorities are doing to curb this rising industrial
inequity.
Our hesitation with the more vigorous use of antitrust law to combat this problem is
that, in this new digital world, the size is the strength. It is the size of these megaplatforms that
enables us to get large productivity increases. We should use antitrust laws to the extent that
we can, 6 but that may be rather limited because when we have sufficient increasing returns to
scale, there will be a natural tendency to market concentration. The one firm can be so
productive by virtue of there being one firm that this may be a case of a natural monopoly.
Antitrust laws have long recognized that natural monopolies are not ones that we should
forcefully break up into many. Yet such firms unquestionably accumulate market power that
can be opportunistically exploited. So what can and should we do?
First, note that the enormous profits of these firms are a problem and give rise to
intolerable inequality because, currently, large parts of these corporations are owned by a few

5 We are not even going in to the political fallout and damage to democracy that this kind of inequality does
(Stiglitz 2019).
6 It has, for instance, been argued that in the US (and, as a result, in much of the world) antitrust laws have

been concerned almost exclusively with protecting consumer rights and consumer welfare. But if monopoly or
oligopoly can be exploitative, so can monopsony or oligopsony. This means that hundreds of thousands of
workers competing for work in a few corporations may face the problem of excessively low wages, the same
way that consumers may have to pay excessively high prices when they compete to buy from a few big firms.
Likewise, the large number of retailers trying to find a foothold on the one or two digital platforms essential for
their survival face a similar problem. Some recent writings draw attention to these neglected dimensions of
antitrust (Sunstein 2018; Naidu, Posner, and Weyl 2018; Naidu and Posner 2021). Indeed, these are aspects of
antitrust that must be strengthened.

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 Basu, Caspi, and Hockett: Markets and Regulation in the Age of Big Tech

big shareholders. So the profits go disproportionately into the pockets of a few individuals,
thereby exacerbating inequality. We would not be so distressed by the monopoly or duopoly
created by this new technology if the shares of these digital-platform firms were more widely
distributed—perhas over entire populations of the jurisdictions in which they operate. The
greater profit would not be a worry because it would ultimately flow into the pockets of a large
number of consumers, workers, and even the owners of small retail firms, via their
shareholding (Basu 2018). By this argument, the right way to respond to the rise of platform
firms might be to use antitrust laws to the extent that we can (Khan 2017; Stiglitz 2018) but
also to enact laws that require a wider dispersal of shareholding (Hockett 2007, 2022; Moene
and Ray 2016).
There are many complications that can arise from this. It has been noted in the
literature that with dispersed shareholding there is a risk of free riding, whereby no owner
takes adequate interest in the way the corporation is managed (Shleifer and Vishny 1986).
Unlike promoters who have a long-term interest, shareholders may push for higher return on
equity than assets (Nakabayashi 2019). A big player in today’s financial markets happens to be
the institutional investor, one prominent example of which is the pension fund. We may need
to have special provisions and exception clauses for them.
A more dispersed shareholding by law may have to be coupled with new rules about
ownership and the right to take decisions on behalf of the firm. We may also have to create
rules about promoters and founders having the right to own a disproportionate share of the
corporation for a certain number of years, somewhat in the spirit of patents, so as to not
dampen the incentive to start up new firms and be creative as entrepreneurs. It is arguable that
unless a few shareholders make large enough profits, they may not be willing to take some of
the risky decisions that lead to innovation and breakthroughs. Giving special promoter rights,
at least for the start-up years, can help mitigate some of this. So can more public investment
(Hockett 2021).
Finally, we may also have to reconcile ourselves to the fact that, with legally enforced
dispersed shareholding, innovation and growth may slow down. This seems like a reasonable
trade-off. After all, in today’s world most people would agree that even though the absence of
bondage and slavery may slow down growth, we should be prepared to live with the slower
growth. Moreover, again, robust public investment strategies can substitute for private
investment lost through the limiting of monopoly rents (Hockett 2021).
For a few really large platform firms, we may need to think of an even more radical
kind of reform, including the reorganization of their relationship with society. A natural
direction is to consider platform firms that rely on mass scale and provide key services to the
modern economy as public utilities. A growing number of papers offer this as an appropriate
framework (e.g., Rahman 2018; Bagnoli 2020) and the appeal is intuitive: profits to encourage
innovation and heightened regulations to protect public welfare. Some platform firms may
preempt being regulated in this way by proactively incorporating as B Corporations or
nonprofits where appropriate. In other cases, some countries may consider nationalizing
platforms.
This needs explanation. State ownership should be used rarely because it comes with
its own costs. So it is worth pausing to understand at an abstract level some underlying factors.
Observe that economic transactions can be of different kinds. The typical transaction with
which the bulk of mainstream analysis is concerned is that of directly buying goods and

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 Capitalism and Society, volume 15 (2021), issue 1, article 2

services: apples, oranges, haircuts. Let us call these unitary transactions. But there are other
practices, which entail first having to pay a charge to acquire the right to access a certain market
of goods and services and then getting to buy all those goods and services at a lower price. We
shall refer to these as gated transactions, where we need to get past a barrier before we are able
to access the market. There are some gated transactions that give access to small bundles of
goods. This is true, for instance, of Disneyland, where you pay an initial entry price to access
numerous sights and amusement park rides. But gated transactions can take more radical
forms.
The most striking example is the arrival of money in a barter economy. This created a
new world of gated transactions. If you did not have access to money, you could not access a
large part of the market. You would have to rely on barter. Not surprisingly, those who could
create a credible money could make huge profits. So much so that by the seventeenth century,
it become evident that the creation of money may be one activity that needed to be regulated
or even socialized by government; thus central banks were created. 7 Thus the Bank of
Amsterdam, the Swedish Riksbank, and the Bank of England were established in the
seventeenth century (Hockett 2019). The Bank of England was regulated and expected to
finance sovereign operations but nevertheless was a profit-making entity. It was founded with
more than 1,200 people purchasing shares, on which they earned dividends.
Likewise, India’s money-creating authority, the Reserve Bank of India, which was
established in 1935 following the Reserve Bank of India Act of 1934, was privately owned. A
widely dispersed shareholding was planned with the demarcation of the country into five
regions and the shareholding dispersed across all. As with the Bank of England, there were
rules and regulations to guide behavior, but nevertheless it was privately held and the owners
earned profit from the central bank.
In the US, by contrast, the Federal Reserve System established in 1913 was an explicitly
public sector institution, patterned in part after similar German public sector prototypes. This
was because privately ordered clearinghouse arrangements among private sector banks, which
had functioned as proto–central banks, had shown themselves incapable of adequately
providing the public good that is essential as commercial infrastructure in any exchange
economy: a spatially and temporally uniform currency (Hockett 2019).
By the 1920s, in India and elsewhere, accordingly, a lot of soul searching had
commenced about the wisdom of private ownership and the right to maximize profits being
vested with central banks. It was clear that for anyone to survive in the modern world, it was
essential to have access to payment media. Though once upon a time barter was common, in
the modern world it was infeasible. To be left outside the money economy would amount to
being marooned, akin to what would happen to those who try to operate outside the digital
platforms once these become really large.
It was soon evident that this gave powers to private individuals that would allow them
to extort at a pace that was not politically viable. The Reserve Bank of India was accordingly
nationalized in 1949, with a monopoly on creating currency notes, just like virtually all central
banks in today’s world.

7The power that comes with control over currency carries over to the larger domain of international politics
and global coercion. Not surprisingly, this is an area where we all recognize the need for collectively created
rules and global conventions (Kirshner 1995).

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 Basu, Caspi, and Hockett: Markets and Regulation in the Age of Big Tech

One can see the power of being the money-creating authority by doing a hypothetical
exercise. Consider a barter economy, where someone comes up with the idea of money. Once
you acquire this thing called money, you can use it to buy and sell with others who have entered
this gated community. Initially, people would have a genuine choice. Should I incur the cost
of entering this money economy, where, after entry, the transaction costs of buying and selling
goods are much lower than in the barter economy I currently inhabit? As more and more
people enter the gated community of money users and the barter economy gets smaller and
sparser, the transaction cost of buying and selling in the latter—going with your oranges and
trying to find someone prepared to sell you apples—will grow more prohibitive. If those who
control the gates of the money economy happen to be private profit-maximizing agents, their
profits will soon become astronomical, since life outside the gates in the barter sector will be
miserable, and they will be able to raise the entry fee to new highs. Those not persuaded by
this should try going with a bag of oranges to Wegmans or Trader Joe’s and trading them for
apples.
This is what the maroon theorem refers to. In some spheres, platform firms can
become so all-encompassing that they approach central bank powers. If economic survival
depends on access to the platform, we may have to think about this platform the way we
thought about money-issuing authorities. The modern economy was made possible by taking
away the right to manage money creation from private firms and giving this power to a
nonprofit organization with well-specified autonomies, namely, the central bank.
It is easy now to understand the implications of what is beginning to attract a lot of
attention, that is, the phenomenon of platform firms bringing more and more activities within
the gates. Amazon may have begun by bringing book buyers and book sellers together, but
now it sells much more and, by initially cutting special deals with transport companies (and,
mor recently, directly absorbing those functions), it effectively provides delivery services as
well. As more and more goods and services become available behind the gates of some
platform, the reservation utility, namely, that which a person earns who stays outside, keeps
dropping.
Some of this happens in a fairly direct way. As Amazon persuades delivery companies
to give Amazon’s customers discounts—by some estimates this can be as high as 70% (Khan
2017)—the delivery companies make up for this by raising prices on others. This “waterbed
effect” has received a lot of recent attention (e.g., Inderst and Valletti 2011; Genakos and
Valletti 2011). This in turn allows the platform to keep raising charges for joining the platform,
since being outside of the platform becomes increasingly costly. The gated activities become
even larger and those left outside of the platform are made further worse off.
This is why we need to consider a range of policy options in the world of platform
markets. As consumers, we have mostly benefitted from the lower prices the scale of these
firms has enabled, but we are slowly becoming aware of the growing challenges created by the
dissappearence of the producers they are replacing. We also cannot be sure that the gates
keeping small producers off these platforms might not one day be placed on the consumer
side as well. Proactive regulation is necessary, whether that happens in keeping with the public
utility model, through nationalization, or in some other manner.
If the route of nationalization is considered, the incentive dynamics must be taken
seriously. There may have to be a sufficiently long grace period when the firm is allowed to
remain private to keep the profit incentive alive. Then we may need ancillary regulation to

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 Capitalism and Society, volume 15 (2021), issue 1, article 2

make sure that these firms are not drained by their owners before the state takes over. Or,
again, we might mandate that the state take a more active role in research, development, and
investment in innovation; Alexander Hamilton envisaged such in the US and others, notably
Friedrich List in Germany and MITI in Japan, showed how successful this could be in
subsequent centuries. Indeed, while self-styled conservatives often decry the Obama
administration’s investment in failed Solyndra, they aren’t so loud about another fledgling firm
financed through the same federal program—Tesla, now one of the world’s largest companies
by market cap (Hockett 2021).
It must also be recognized that the government’s power to control these
megaplatforms will also need to be curbed, since the platforms can otherwise become
instruments of political manipulation. It is not for no reason that virtually all central banks are
given some kind of autonomy from government control. If the platform ultimately becomes
a nonprofit entity, the minutiae of its control and autonomy will need careful design. Further,
this is a prescription meant only for megaplatforms that end up serving as a conduit to
economic survival for individual buyers and small retail firms.
Direct public investment and, especially, nationalization are often controversial among
economists because these can lead to gross inefficiencies. It is not our goal to ignore the costs
that aggressive nationalization has historically caused, but to draw on the example of central
banks and other successful state interventions to raise the option for consideration in this
novel market structure. We imagine intermediate options would be attempted first, but the
goal of all these options should be clear: ensuring that the profit motive that can lead to
dangerous gatekeeping is moderated by the need to share surplus equitably with the broader
society.

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