Author Name : Adhiraj Mahajan
There was a time when an encyclopedia was the source of all information, communication meant
writing letters, and shopping meant a visit to the local market. But technology has changed that
completely. We use Google to search for information, Amazon to shop, mobile phones to
communicate, and Microsoft products for school and work. These companies succeed by making
valuable services and products accessible to people in smaller towns.
However, as these companies expand and grow into giant business houses, small businesses find
it difficult to compete with them. This raises an important question: why do digital companies
become so powerful?
One important reason is the network effect. This means that a product becomes more useful
when more people use it. For example, on Amazon, an increase in the number of sellers
increases the number of buyers. And more buyers attract more sellers. This creates a cycle where
the company keeps growing.
Another reason digital companies become powerful is economies of scale. Initially, they need to
invest a lot in research, software, cybersecurity and artificial intelligence. Nonetheless, once a
system is set up, adding users to it doesn’t cost much. A company like Google can serve millions
of additional users without its costs increasing at the same rate.
The scale also gives large companies another advantage. It is easier for them to spread their cost
over millions of users, enhancing their websites and improving their products. The smaller
competitors, on the other hand, may not afford to spend so much.
Another important factor is data. Every click creates data for companies, which is used to
analyse the user and improve and improvise their services. For example, YouTube uses viewing
history to recommend videos, while Amazon suggests products based on previous purchases.
The more data a company collects, the better its services become.
Another major challenge faced by small companies is that the larger companies become both a
marketplace and a competitor, providing a marketplace for their sellers and also selling their own
products. For example, Apple controls the App Store while also providing its own apps. Google
controls search while also offering services such as Maps and Shopping. This can lead to
self-preferencing, which happens when a company gives its products or services better treatment
than competing products. When this happens, smaller businesses find it much harder to compete
fairly.
Digital companies also create ecosystems by connecting many different products and services.
Apple is a good example. The iPhone works together with the App Store, iCloud, Apple Watch
and AirPods. Google connects products such as Android, Gmail, YouTube, Chrome and Google
Maps. Microsoft connects Windows, Office, Teams and Azure.
Ecosystems are convenient because they connect different products. However, they can create
switching costs, making it harder for people to switch to competitors. If someone uses many
Apple devices, switching to Android may mean buying new products and learning a new system.
Sometimes, a giant company buys smaller businesses, benefiting the small company as it gets
both money and a larger audience. However, there is a growing concern that they are bought to
curb them from becoming serious competitors. The debate surrounding Meta’s purchases of
Instagram and WhatsApp is an example of this issue.
Nevertheless, this can prove advantageous for the consumers. People can get easy access to
information on Google, small businesses can expand their customer base, and cloud services
allow new companies to access powerful computing without building their own data centres.
Therefore, the core issue is not the size of a company but whether other companies receive fair
opportunities to compete. Competition may be weakened when customers cannot easily switch
platforms, or businesses rely heavily on a single company, or powerful companies use their
market power to suppress other competitors.
Governments therefore aim to control unfair competition without slowing innovation. The EU’s
Digital Markets Act regulates large “gatekeeper’ companies on data portability, interoperability
and fair treatment of business users.
India is also strengthening its rules regarding digital competition. The Competition Commission
of India has acted against Google over Android and Play Store practices, while new rules for
very large companies are under consideration.
In conclusion, digital giants gain power through network effects, economies of scale, data and
digital ecosystems. Being large is not automatically a problem if they continue to provide useful
and affordable services. The problem arises if they use their position to prevent others from
competing.
A healthy digital economy should support successful companies to grow while also ensuring fair
opportunities for new businesses. Competition is important because it encourages companies to
keep improving their products, prices and services. Therefore, the aim should not be to stop
digital giants from succeeding, but to make sure that even the biggest companies cannot
completely close the door to future competitors.
Sources:-
- OECD. (2019). An Introduction to Online Platforms and Their Role in the Digital
Transformation. - Rochet, J.-C. & Tirole, J. (2003). Platform Competition in Two-Sided Markets.
- European Commission. Digital Markets Act.
- Competition Commission of India. Google Android and Play Store Competition Cases.
- U.S. Department of Justice. Google and Apple Antitrust Cases.
- Federal Trade Commission. Amazon and Meta Antitrust Cases
