The Vergecast - How America gave up on free markets with Thomas Philippon

Episode Date: November 12, 2019

On this week’s Vergecast interview, Verge editor-in-chief Nilay Patel talks to finance professor and an economist at the NYU stern school of business Thomas Philippon. Thomas just wrote a book called The Great Reversal: How America Gave Up on Free Markets all about competition and consolidation in different markets. When Thomas moved to the United States from France in the 90s, he noticed everything from laptops to internet access was cheaper in America, but over time has gotten more and more expensive. In the interview Nilay and Thomas discuss why that is — unsurprisingly the answer is consolidation in a lot of our markets. Thomas makes a point that in some places, concentrations are actually good and creates value for the consumers, but in some markets like healthcare, technology, and airtravel, that consolidation has resulted in way higher prices for Americans. Since the prices go up slowly, we don’t actually notice. If you have been listening to The Vergecast and been paying attention to our big conversations about whether or not 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 conversation is up your alley. Below is lightly edited except of the conversation. Learn more about your ad choices. Visit podcastchoices.com/adchoices

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covering the biggest names and stories in sports and mom. And this is Am Mom, a community for athletes, game changers, and moms of all kinds. dropping May 14th. Tap in with us. Hey everybody, it's now from the Vergecast. On this week's interview episode,

I have Thomas Philippon. He's a finance professor and an economist at the NYU Stern School of Business. He's just written a book called The Great Reversal How America Gave up on free markets. If you've been listening to Vergecast,

this book was written for us. He starts with the question of why cell phone plans are more expensive in the United States than Europe and Asia. So we talked about that for a long time. Thomas moved here from France in the 90s.

He noticed everything from laptops to internet access, was cheaper in America, but over time it's gotten way more expensive. And so we talked about why that is. The answer, unsurprisingly, is consolidation in a lot of our markets. The average internet customer in France has five choices of providers. In America, it's one and a half, which means most people just have one, and some people have two. That's a big deal, and you can apply that theory of consolidation and prices and whether or not concentration is good or bad to a lot of industries. Thomas makes a point that in some places, concentration is actually good for consumers,

it creates value. But in many places, healthcare, technology, air travel, that consolidation has actually resulted in way higher prices for us. And because the prices go up slowly, we don't actually notice. I loved this conversation. I'm excited for you to listen to it. I think a lot of people should read this book. If you've been listening to the Vergecast and even paying attention to our big conversations about whether or not we should break up these companies, whether we should regulate them, whether tech companies with network effects like Google and Facebook are different than companies like 18T and GE. This conversation is going to be up your alley. And I really really think people should read this book. Check it out. This is Thomas Filippon on the Vergecast.

Thomas Philopon, you are a professor of finance at NYU Stern School of Business. Thanks for being on the Vergecast. Thank you for having me. So you've written a book. We've never met before, but I literally read the first page of your book, The Great Reversal, how America gave up in markets, and thought, oh, he wrote a book for me. Because you started this book by wondering why cell fund plans the United States were so expensive. And then the answer is because our markets are bad, which is Vergecast listeners know, something we are constantly talking about. But give me sort of your background and how you came to this specific question. Well, I can read very indirectly.

To be honest, just like everybody else, 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 U.S. and, say, Europe or even most of Asia, actually, you should notice that things that used to be much cheaper in the U.S. are now much more expensive in the U.S. And somehow you didn't notice the difference because the change is very, very slow. It's the old story of if you cook a frog very slowly,

then the frog is going to die. So I think that's exactly what happened with many of these markets in the US. When I came here in 1999, as a student, so I was much more price conscious that I'm now, I noticed that, you know, plane tickets, access to internet, cell phone plans, of course, laptops, computers as well.

All of that was a lot cheaper. And we're not talking about 5%, like 30, 40% cheaper in the US. Today is reversed. So big picture, you brought up air travel, you brought up internet access, laptops. You wouldn't think that that is all, the root of that price difference is 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 at the time where Europe finally woke up to the fact that the U.S. approach to free market regulations, which was very much what the U.S. was doing in the 1990s, when Europe started to wake up to the fact that this was a good idea and started implementing that at home, therefore leading to lower prices, the U.S. was forgetting its own history leading to higher prices. And so Europe started from a starting point of pretty, you know, not very competitive markets, but got better over time. The U.S. started the opposite with pretty competitive market, got worse over time. And the changes accumulated over 20 years until today where many of these markets, the situation is reversed compared to 20 years ago. 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. Retail actually is not true. but retail trade, wholesale trade is less true. But 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 French is 31.

So we're not talking about, you know, it's 10% cheaper, it's less than half. In Germany is 35, Japan is 35, Korea is 33, you name it. They are all in the same ballpark around $30, $30, $35. The UK as well. And the US is at 68.

If you look at cell phone plans, it's the same thing. It's a ratio of one to two. You pay literally twice here for the same monthly cell phone plan that you would pay in Europe or in Korea or Asia. How did that happen? So 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, you know, prevent entry of new firms. And in Europe, essentially, we did exactly the opposite. So my favorite example is the cell phones, because we had in France three legacy carriers. Okay, it was a classic oligopolyistic market. And they all charge the same price. A bit like today, you know, if you're in New York and you have the choice between two plants and the one is 79, 99, 99.

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 euros in one and 44 euros in the other. And it was very expensive. Okay. And for a long time, a new entrant aptly named Free Mobile, wanted to enter that market, was asking for a forced license to compete in that market. And of course, the incumbent lobbied extremely hard to prevent the regulators from giving the license to the new entrance.

And finally, they lost in 2011 and three got its license, entered the market. And for the same contract that used to cost 45 euros, they entered at 20 euros. Within six months, the incumbents had to match the price. So they all went down to 2025 euros, which means essentially even if you were not like a tech savvy consumer, just kept the same exact plan, did nothing, just sat on your coach. Six months later, you were paying half. That's competition. In that case, you see, it's not really anti-truth. I mean, it's a regulatory decision.

It's not antitrust, it's not a merger. So that's part of the equation. And in the U.S., you went into reverse by allowing too many mergers. And this is something we talk about outside, this massive consolidation wave that has swept basically every industry. Right now in the United States, there are four carriers, and Sprint and T-Mobile are on track to combine to form a third. Just based on that story alone, you would say, oh, this is going to lead to a bad outcome.

Oh, there is no doubt. I mean, I think we're reaching the pinnacle of insanity here, because you, you, you, you have probably the most expensive internet access for the country that pretty much invented the internet. And, you know, again, 20 years ago, it was the opposite. So 20 years ago, the US was a place where access to internet was very cheap and very democratic. So now you have about the worst prices for access to internet. You also have the worst prices for cell phones. And at the very same time where these facts are obvious, you're considering repealing net neutrality on the one hand.

No, sorry going. allowing a four to three murders among their cell phone providers, which is crazy, essentially. One of the conclusions in your book, I think you said it was a surprising conclusion, is that competition in free markets are actually quite fragile. They're very difficult to protect. Why do you think that this reversal has happened? Is it just we took our eye off the ball in the United States, and we didn't realize the competition was helping consumers?

Is it we got lazy? Is it the lobbyists did what they did very well? What drove this sense that everything should get consolidated? And that at the same time, the people who most loudly proclaim the benefits of markets are going to end up proclaiming the consolidation is the way to go. And it's a mix of, honestly, if you're looking at it, I think it's a mix of ideology, corruption. I mean, we say lobbying to be polite, but, you know, it's basically corruption. Yeah, the Timo executive's all stayed in Trump's hotel during the merger process.

So I think it's a mixture of ideology, corruption, and sometimes just more like incompetent. Like, many people end up being the useful idiots of somebody else. And it's not really that they're dishonest. They're just don't understand someone they're talking about and they end up making argument that are serving somebody else. So I think it's a mixture of all of that. But what I find very striking is that, and that's why maybe like a third of the book or a quarter of the book

looks at Europe as a comparison to the U.S. Because what's really interesting in Europe is that we didn't have any new ideas. You see, the way we set it up in Europe is we created this single market. for goods and services. Because we did that, we wanted to have EU-level, European-level regulations. And when we did that, we looked around, so, okay, how are we going to design these regulations at the EU level? And of course, at that time, so that's like mid-1990s.

Obviously, the benchmark was the US. So essentially what we took is we took the playbook from the US. We imported it in Europe. We didn't change it that much. So it's not like we had any brilliant new idea. We just essentially applied it. We did one thing very smart and a complete forward fumble in football. It was by chance.

We made the regulators very independent, much more so than in the US. And that's very surprising first because you're like, why would you do that? In Europe, we don't have the tradition of independent regulators. Like politicians in Europe, they like to play dominoes with industries, like the French especially. And so why did it at the EU level, they didn't do that? Well, we didn't because we didn't trust each other. So the French and the German didn't trust each other. and the Italians and the Spaniards.

And so therefore, in a world where you don't trust each other, and yet you want to have a single market, then you're going to say, well, fine, I'm going to make the regulator very independent, which means I won't get to influence the regulator, which I don't like, but I'm confident that nobody else will. And so because of this kind of strange outcome,

we ended up with very independent regulators. And then that gives you a very nice natural experiment, because we have a set of countries that are neither better nor worse than the US, using roughly the same technologies, consumers with the same tastes, the same playbook, so no new idea,

but one big difference, much more independent regulators. And you play the movie for 20 years, and essentially they resist lobbying and bad ideas much more than in the US. So we don't have the same issue as, say, revolving door issues for the FCC. I mean, that's really outrageous.

That's a level of, that's really corruption. We don't really have that issue at the Digi Comp in Europe. The DOJ and, and the FTC always worried that if they do something that's going to displease a big firm, then they're going to get beaten up by the senators or the congressmen. Again, we don't really have that issue in Europe because the regulators are relatively independent. And so I think over time, these independents make them just apply the playbook much more consistently than in the U.S.

And that played out in many. Then we can talk specifically about airlines or telecom. But this is what happened. That's what's the common factor between all of these industries. So what's really interesting is that the European application of the United States playoff, book, actually now has resulted in a different kind of policymaking, right? The European Union is very interested in preserving competition. The United States measures all competition in prices, and prices in some cases have gone down.

But you're pointing at prices have actually gone up. Oh, yeah. Surprisingly gone up. Why is it that where the United States regulators are blind to these obvious price increases? Or this obvious price discrepancy between U.S. and Europe and Asia. Absolutely. So the thing is, again, this price. So first of all, regulators rarely, I mean, if you build an antitrust case in the US,

you're just not going to use data from outside the US. That doesn't happen, essentially. So it's not surprising they are not even aware of it. I think most people who don't travel outside are not even aware that they are getting ripped off on their telecom, on their cell phone bills or their ISP bills. It's only you need to have some experience outside the US to realize that prices are much lower in some other regions. So that's one factor.

And then in some of these market, the price increase happened. very slowly over time. So, just, I think it's important to have in mind like the benchmark number. So if you look at the past, say, since 2000, so roughly 20 years of data, roughly speaking, wages for the median worker went up by about 50, 55%. Okay. That's the nominal increase in wages. Then prices for the typical baskets of good went up by about 46%.

So the real wage, the wage in addition to the inflation in prices, went up by about a third of a person per year. So that's a very tiny increase. So when you have these discrepancies, my estimate is that the prices that people pay in the US for the typical basket of goods and services that they buy is about 7% too high today, 7% or 8% too high compared to why it should be

if competition had remained at its level of 2000. So that's a cumulative price increase of 7% to 8% for a very diffuse basket of goods over 20 years. So you see year to year, you would barely notice the difference. But of course, when you accumulate, that means that your median household in the US today pays about $300 per month too much. Now, for the median household, that's a lot of money. Like most people cannot, most household cannot cope with a 500 unexpected expense. So they're paying extra 300 per month.

So every household in the US should get at the end of the month with $300 free in their pocket if the regulators have done their job properly. So when you frame it that way, people start to understand what it means. So I think that's the issue. So what's interesting here is that I make this sort of argument a lot. Your book has far more data and is far more rigorous than me just yelling. So thank you. Now I can point to the book.

And the answer I always get is twofold. One, let's take airlines, for example. Airline travel got cheaper. We deregulated the airlines and now Spirit Airlines exists. And it's a horrible experience, but it's really cheap. And if you want a better experience, you can switch to do that. Delta and then pay for Delta Comfort Plus and then pay for first class and actually the first class cabin, they're getting more and more opulent because people want to pay for it. So this pricing differential actually worked out.

If you just want to go from A to B, you can buy very cheap. If you want the good experience, you can pay a lot more money. The second one I always get is, well, look over there. Like all the best internet companies are in America. Google and Facebook and Apple and Microsoft are great companies. We should just leave them alone because they make obviously better products. and they're going to respond to their customers because, well, they say they are.

How do you respond to those two critiques of there's actually plenty of competition because there's all these choices you have? Now, these are absolutely critical. But they are very separate. So let's talk about the airlines first. So first of all, airline prices are much... Airlines make a lot more money per passenger money today

than they did 20 years ago. And the main reason is because you went from 8 to 4. You used to have eight major or significant airlines in the US when I came in 20 years ago. And today you have four left. Okay, the top four control 85% of the market. And that's another perfect example. And it's very ironic because Southwest essentially invented the successful model of low-cost airline. And today, of course, Southwest is not a low-cost airline.

It's just a regular airline. And in Europe, we do have low-cost airlines. And they are much more successful and aggressive than here. So we have EasyJet and Ryanair. And these are the guys going, you know, pushing the prices down in Europe, which is why the legacy carriers have had to create their own brands of low cost, which is why the profit they are making is much lower and people pay much less for plane tickets in Europe today than in the US.

So I think that's kind of the perfect example. So many of these markets don't actually have much competition. And again, like, so airlines, it's four major airlines for the U.S. But of course, many people live in cities where there is one, maybe two if they are lucky. So many people don't even have, you know, really a real choice. So I think that's the big issue. Same thing with ISPs, by the way. So on average in the U.S., the average household has one and a half ISPs to choose from.

That means half of the population has one and the other one has two. Okay, so if you live in New York, you have like Time Warner and then Verizon, and that's it. And by the way, since it's the same price anyway, it doesn't really matter. The median household in France has five ISPs to choose from. So that's a lot more choices, a lot more competition. I don't think it's that surprising than prices are higher here. The real question is, why is it that you let it happen? I think that's because of lobbying, mostly, and bad regulation.

And then what to do then we can discuss later. Now, the Internet firms, that's a very different story. I think there you need to – first of all, it's oftentimes people mix up everything and say, oh, you know, like Europe, the reason Europe doesn't have, that's a story that most of the Europeans use. They said the reason we don't have our own Google or Facebook is because our anti-trust policy is too strict, which is, of course, the most bogus claim in the history of claims.

What's that? Because there's absolutely never any antitrust action in the history of Europe that was targeting anything that could have become Google or Facebook. Yeah. So they didn't stop any Google on Facebook to be created from being created. The reason we don't have Google and Facebook and Europe is because our universities are way behind the U.S. So we don't have the same ecosystem that created Google, Apple, Facebook, which is literally this nexus between venture capital and universities. So that we don't have.

That's clearly something the U.S. has that nobody else has at the same level. And the second thing, we don't have, we don't have a single market where these companies could grow immediately EU-wide. See, we have 18 languages and 18 stupid regulations. So if you are in a B2C business, the C part of the equation, the consumer regulation to sell your product, are going to be all different across the EU. So if you're small firms, it's very costly. And so they tend to remain national. And if they remain national, they remain too small. So that's changing, by the way.

Spotify being one example. But there are many others today that are growing in Europe. So I think it's going to change. But clearly, that's the reason we don't have Google. That has nothing to do with antitrust enforcement. And in the U.S., of course, that's the thing that's fantastic is that you have this. companies, but they were all created 10 or 15 years ago. Since then, nothing has happened. So that's the issue. So in your book, you talk about, you know, what to do of Facebook,

what to do with Google. You call them the Gaffams, Google, Apple, Facebook games on Microsoft. It's funny. The acronyms, here you have the fangs because you put Netflix. I think they picked that because it sounds cool. Yeah, for sure. No, because at some point it was, I think also because when they came with this idea, like Microsoft was a bit like, you know, not so starting you on, which is crazy. It's an amazing company, and they are more successful now than many of the other ones. So I think the aim of Microsoft clearly belongs there. So Gaffam is what you call them. And you have this point, which is we think of them as giants, historical giants. And you're saying actually, in the context of history, they're quite small.

Yeah. So that's the part of being an economist or an academic, which is always the easiest one, which is you can be sure of one thing, people always overestimate. how much new is going on today compared to what was happening in the past. That's a human bias that's been true forever. So you can pretty sure that every time somebody claims something is new or unprecedented, there's a 95% chance. That's not true.

So it's not 100%. I mean, you can't be fully sure, but it's a pretty good bet. And in that because, of course, I said, oh, you know what, maybe I should check whether that's true or not, that these firms are really much larger and unprecedented by their size and scope and value. And low and bio, I found that was essentially BS. So both in terms of profit margins, in terms of sales and revenues, market value of equity,

productivity, productivity growth in all of these metrics, they are very similar to the stars of the past. The mistake people make is there are always been amazing firms. And the top five firms are self-selected to be the best of a generation. So if you look at the book, I just do it decade by decade. I give you the breakdown of the top, the star firms of each decade since 1950. And of course, every one of these is amazing. And at some point, the names change. So General Motors was there on Leon and of course, GE and IBM and AT&T. And as you move forward, the names change.

Interestingly, the only one that remains in the top 10 throughout the century is ExxonMobil. Of course. I'll tell you something about what's really constant. But otherwise, like, the profit margin of Google today is the same as the profit margin of IBM in the 70s and AT&T in the 60s. in terms of their ratio of stock market valuation, which is not our metric people. Oh, you know, Apple is a trillion-dollar company amazing. Well, actually it's not.

When Apple was a trillion-dollar company, it was 2.5% of the stock market, which is actually less than what AT&T at its peak was 4.5% of the stock market. So if you just scale by the right number, which is how much of the total value it is, then it's not that different. And it's even strikingly constant.

So the top five firms ranked by market value, they've been 10% of the total value of the market. They've been 10% since 1980. So in 1980, the top five firms was 10% of the market. 1990 is the same, 2000, and today the top five firms, which happened to be the Gaffams, are exactly 10% of the market. So in that sense, they are not new. And what's important here to understand is it has two implications, that is in my mind.

One is you shouldn't think of them as being exceptional in the sense that, oh, if we break them up, it's the end of the world. That's not true. They are just great firms, but there were so many great firms in the past, and you still treat them as normal companies. That's point one. And point two, if you dig a bit deeper, I think they are actually their impact on the economy smaller than their grandparents. And the reason is because many of them are much less integrated in the ecosystem. So think about, I think maybe like GM would be a big industrial company.

Imagine GM, GE. imagine that this firm, when he was at its prime, do the thought experiment. Imagine that they become overnight twice more productive. The thing of what he would do to the economy. I think it's pretty obvious that if you imagine GM doubling its productivity overnight in 1950, you would see it in the GDP number, like right away. Why?

Because, of course, there we'd become more productive, but the entire supply chain would become more productive by the same account. They would just multiplicatively move everybody up. So GM, you're saying, in 1950, if they ship twice as many cars, they've got to order twice as many seats, they've got to build twice as many engines, they've got to have twice as many marketing people and dealerships and what have you. And you would see the ripple effect of their output everywhere. And we have a way of measuring that, which is you can look at the, a simple metric is how much do they buy from other producers? And that's something we have, we have data on that. You can see how much actual economic services.

good and services do their source from all their product in the economy. And that's a metric of their impact on the economy. And by that metric, the only one today which is comparable to the giants of the past is Amazon. And I think it fits the narrative. I mean, if you imagine today you wake up and Amazon is twice as productive as it used to be, I think you would see the GDP number going up. I have no doubt about that. But if you imagine tomorrow that you wake up and Facebook is twice as productive, I think GDP does move. It's like a terrifying idea. Yeah, maybe. But I can I'll tell you one thing, the GDP wouldn't move. Right.

Because the best case, you would have more targeted ads, but nobody's going to get more productive because of that. So in that sense, I don't think they are even as good as the giants of the past. So isn't this intrinsic to particularly Google and Facebook being software companies? Right. I think in the book you refer to them as reclusive, right? They, the defining feature of the new start is a quote from a book. The defining feature of the new stars is how few people they employ and how little they buy

from other firms. So isn't that just the nature of a software business of this scale? Right? The marginal cost of every ad Google serves is zero. The marginal cost of every Instagram post for Facebook is zero. And they can hire more coders to make that more efficient, make the ads more expensive, what have you. But their sort of unit cost is always fixed at zero. Yeah, but I think the keyword is the one you just mentioned, which is the ad.

I don't think it's specific to software. I think it's specific to the ad market, which is these guys are just giant ad businesses. They are the madmen of today. That's what they are. So if you improve the efficiency of the advertisement industry, you're just not going to move the needle very much. See, I wouldn't say the same thing about the cloud, for instance. And so cloud, of course, there's some hardware,

but there's a lot of software. And I think this has a massive impact on productivity. Like the fact that, you know, now if you start a business, you don't essentially need to buy anything. You certainly don't need to buy your own server. You can put everything in the cloud. That's a big improvement in productivity for everybody else. So I think that the reason this first,

firms have a lower impact on productivity is not so much that they are in the software business. I think it's because they are in the advertisement business. That's the issue. So you're saying if Amazon made AWS twice as efficient, you would see a GDP number. Well, it would make the cost of running a new business for everybody else, much cheaper as a start. And then, no, I think it would have an impact. Or imagine Google. Imagine that Google stopped getting its revenues from. Imagine Google was very serious about having efficient driverless cars. And it worked.

Unfortunately, I don't think. It's a big question. I don't think it's going to happen, but let's do that thought experiment. Well, you don't think it's going to happen. I'm just curious. I think they are much further back from having real serious stuff. I have a lot of self-driving car CEOs on the show, and I say, is it going to happen? They say yes.

And I say, when? Yeah, exactly. I have the same experience. I think it's going to happen for bus lines, but for real cars, I think I'm still waiting. But anyway, but we can still run the thought experiment. Imagine Google really had a very efficient way of having safe driving cars. I imagine that business became a lot more productive. I think that would have a really big impact on the economy.

But that's still a hardware business. No, but most of the driverless car is how you treat the information. So I think the value is mostly the software, like how you process the information. I think the camera is a cheap part of it, is how you process the information, which is tricky, how you replicate the human brain. And if they could do that, I think that would have a big impact. So again, but that would be the reason it would have a big impact because that's not advertising. That's real.

So a company like Apple, which obviously has... has a huge supply chain, it's mostly in China, but it's globalized. If they somehow were able to ship even more iPhones at a cheaper price, that would have some impact than GM. Oh, it would, of course. The only thing is because it's Apple, both of some of the productivity gains would show outside the US. But in the global sense, it would, yes.

Do you think Apple is as reclusive as these other firms that you're describing? No. I mean, there is clearly an engineering tradition at Apple, which is very similar to other engineering firms. So it's kind of halfway, I would say. Well, the reason I ask is when I think of competition in the phone market, I often think of switching costs between the platforms. So it's very difficult to switch from Apple to Samsung for the reason alone that you lose your messaging service. You lose I message along the way.

And people literally do not want green bubbles. They want to be blue bubbles. Is that the sort of place where an EU regulator using sort of old US playbook looks and says, hey, that's actually a huge anti-competitive issue? Or is that the place where, I don't know, a newly revived United States regulator would come and say, hey, this actually needs to be interoperable because we want to lower these switching costs? Or is that fair play to Apple? Well, I think conceptually, I don't see why that's very, very different from in the old days when you had the beginning of the telephone industry and the initial companies running telephone services

didn't really want their phones to interpret. They didn't really, they wanted you, if you're on my network, you can call people in my network, you cannot call people in the other network. I think that was their natural tendency. We had to force them to have one network where if you have a phone at home, you can call anybody else in the country. That was not the market outcome.

That was forced by regulation. I think the text messaging, to some extent, looks very similar to me. It's just that maybe it's less important so people have been paying less attention to it, but I don't say that, I think it's at some point we're going to require that, you know, there should be some interoperability of these systems.

But there is, it's a first standard text messages, there is. There is, yeah. But very few people are using that now. Well, because they have high message. I mean, I think this gets to... Or WhatsApp, no, everybody could be using WhatsApp. I think if WhatsApp was independent from Facebook, that would be another thing. They would definitely then push that much more. Yeah. Well, I mean, it just, to me, it gets to this very difficult problem of, okay, we know Facebook bought WhatsApp and Instagram. It was probably a mistake to allow that to happen. Maybe we'll unwind it now. But you look at a company like Slack and their competitor is actually Microsoft, which is going to build teams

and give it away for free. How do you say that's anti-competitive behavior? Because at some point you can't tell Microsoft to stop doing things. At some point you can't say that's predatory pricing. They're just charging you, they're giving you more for the same amount of money. That seems like a very difficult line to say this is actually anti-competitive to Slack. I agree. But the fact that it's very difficult is not new.

If you look at every single case of big antitrust case in the US or the US. abroad. It's never easy. Like the idea that somehow the old cases were obvious. Well, they are only obvious in retrospect. If you read what people were saying in real time, they always thought, oh, but it's not obvious. Is that really untacted? And it can't be if it was obviously, it wouldn't happen. So, you know, what's the difference between Microsoft today giving it away this machine you were saying about? What's the difference with Microsoft doing it for free today compared to, you know, the lawsuit they had in the late 90s because they forced people to do the Intent Explorer by tying it to their operating software.

I mean, is that different? They were giving Explorer for free to beat up next step. So, like, what's the line? Which I think it's not obvious. It's never going to be obvious. But then I think that's a very important point, though, which I talk about at the end in the book. And the WhatsApp case is a good case.

It's never obvious in real time. But then the question you need to ask yourself is, one, what's the cost of what we call in statistics, type 1 versus type 2 errors. And two, you need to allow the government to make mistakes. I think these are two core principles. So the first one is type 1, type 2 error.

Type 1 error is like you put the wrong person in jail. Type 2 error is you let somebody who is guilty walk for free. So in the case of a merger, you could say, you could make the mistake by allowing a merger, but really you should have blocked it. Or you block a merger, but you really should have allowed it. And one of the mistake that came out from, that's a long history, if we go on.

I mean, it's part of the Chicago school issue in antitrust. They started to treat this type 1, type 2, or symmetrically. And in the case of mergers, it makes no sense. I mean, if you block a merger, which you should have allowed, they can come back two years later and ask for it again. What's the big deal? You lost two years.

You know, it's not like, that's not the end of the work. If you allow a merger that should not have happened, then it's extremely hard to reverse. I mean, even in your best case scenario, suppose we elect somebody, both president and Congress, who really wants to do something about the Facebook WhatsApp merger. How long, in your best case scenario, How long does it take?

Ten years. Yeah, agree. So you see, that's completely asymmetric. So in your world where the cost of the mistake is completely asymmetric, you should have some principle where the burden of the proof should be higher on one side. So if you don't know, you should be able to say, well, no, not now or you wait or whatever. The problem is that this assumes that people are going to be willing to, you know, let the government try something, and sometime it's going to be a mistake.

And yes, government official can make mistake, and that's okay. And the point of the issue in the U.S. is you've moved into a world in which somehow, how any government mistake, the guy is going to be pilloried. And that's not a good outcome because then they don't enforce anything. Or you can't believe in a situation where the only cases that are going to be tried is the one where the DOJ or the FTC is sure to win because that surely is too little. I mean, I think we just saw this with the big Facebook fine. Yeah.

Where the FTC, the biggest fine in their history doesn't seem big enough, right, $5 billion. But the reason they didn't go and actually try to win in court was they were unsure that they can actually defeat Facebook for a very clear record of wrongdoing. And that seems to be tracked exactly with what you're saying, is that our regulators are basically too afraid to try because if they get it wrong, they're done. Yeah, but I think that's a bad outcome. And maybe they need to explain better what they do. I'm not saying that they are blameless, but they need to be able to try.

And they need to be encouraged to try. And so that's why you need politicians to tell them to try. And instead, what you have over the past 20 years is politicians who get campaign donations from big firms. who therefore are convinced that they should tell the regulator to try less, not to try more. But that's a, I want to come back to the core idea of your book, which is that we've, in America, we have walked away from markets. We didn't even know what's happened. We're the frog that was boiled.

Now the free market is effectively neutered. Our level of competition is very low, and that's bad for consumers. Yeah. First of all, I mean, you've written a book to convince people of that. You've convinced me. We're on the show trying to convince people of that, potentially. But how do you convince the broader public that, hey, our, sort of industrial and economic policy

is actually anti-free market. We've actually let this thing that we cherish and hold up as American value. We've let it go. How do you even make that case more broadly to people that think that that's what America stands for? And then how do you fix it? Oh, so I have this very naive view of...

I think I'm part of the dying breed of people who still believe in bipartisan and objective analysis. So the book... It's amazing. Every time I write... We should take a photo of Thomas so that you can preserve...

I'm like a dinosaur. I'm going to disappear soon. No, so the book gives you, every time I say something, have you both sides of the argument, I say, you know, people disagree because they argue X. I think it's Y, and this is the data. And based on the data, I conclude that it's more Y than X. And many of these cases are not obvious.

So, in fact, I start the book by examples where our concentration is a good sign. And there are plenty of examples of that. Like, we have plenty of amazing analysis by economic historians or by people in what we call industrial organizations. who study this market, of cases where more competition leads to more concentration. And if you think about it's pretty obvious, if you have a very highly competitive market,

then if you're not very good, you can't survive. Well, mechanically, that means that if you take a market, you make it more competitive, you're going to weed out the weaker firms. Therefore, the level of concentration is going to be mechanically higher. So there is a very clear case that in many cases, more competition leads to more concentration. And so when you see more concentration, you should not think, it should not jump to the conclusion, it's bad. Okay.

You need, if you want to argue that it's bad, like I do in the book, you need to be very clear about exactly why the control is happening. And so that's why you need a lot of work to convince people. And the other thing you need to do is recognize that it's not true everywhere. They are industries today that are very competitive. And like the wholesale industry, wholesale trade, even retail trade, to be honest, I think it's still very competitive.

I mean, big firms are going out of business in retail every day. So that this is a competitive landscape. Wait, I read this part in the book, and I actually really wanted to explain it. So you're saying retail is very competitive. Obviously, Walmart and Amazon exist. We know they're very competitive. But you're saying Sears going out of business is a sign of competition. I think most people would say that's actually quite bad.

There are fewer firms competing now. Why is a company going in a business a sign of competition? Because the reason they went out of business is because prices were low and they couldn't compete. See, if the prices had been high, they would have. have just made money and they could have stayed in business. So usually when we see firms exiting, or take the airlines in Europe. Like in France today, we have too many airlines, just two went bust recently. Because we reached upon where there was so much competition, prices are so low, marginals, so

tight that they just can't continue and they go bust. But that's not a bad sign. It means the market is working efficiently. I mean, like the margin, in any efficient competitive economy, the marginal firm should be on the verge of bankruptcy. That's almost a definition of efficiency. because if it's too comfortable, that means the prices are too high. It's as simple as that.

So I think concentration is not always a bad thing, and I give examples where a construction is good. It's just that on balance over the past 20 years, I think the best way is to have a dichotomy. There's good concentration and bad concentration. And good concentration is the one that comes together with productivity growth, investment, and innovation. And we've seen plenty of that.

And the bad concentration is the one that comes with heavy, being regulations to prevent entry and then anti-competitive behavior by the dominant firms. And both of them have always existed throughout history. And the question is only at any point in time, do we see more of the type 1, the good type, or the type 2, the bad type? What I'm showing in the book is that throughout the 80s and 90s, we saw mostly type 1, the good type of concentration. And since 2000, we've seen more of the bad type, to the point that today, more than

than half of the construction is happening, if you want, is of the bad type. I think that's my claim. I'm not claiming that it's bad everywhere. Support for the show comes from Framer. Framer is an enterprise-grade, no-code website builder, used by teams at companies like Perplexity and Muro to move faster. With real-time collaboration and a robust CMS, with everything you need for great SEO, not to mention advanced analytics that include integrated A-B testing, your designers and

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Terms and conditions apply. So one thing I want to talk about with software companies in particular, and you get into it in the book, is that it is very easy to enter the market to compete with Facebook. But it is very hard to actually compete with Facebook because of the network effect, right? Everybody's using Facebook, getting them all to switch and use my less privacy invasive Facebook is very difficult, right? The cost of every new user is actually really, really high at the beginning. We're actually seeing this with TikTok right now. TikTok, the user acquisition funnel is buying ads on Facebook, which is absurd. Does that make this different in kind that because Facebook has this massive entrenched network of users,

and it's very hard to spin up a competitor because you don't have their asset, and rightfully so, it's their user base. But you can't peel off an entire user base and offer them a superior product. Does that make this argument different? It makes it different quantitatively, but I don't think it's not a difference of kind, because network effects, you know, they are just one particular form of what we could increasing returns which is the bigger you get the more efficient you get that is something that is prevalent in many

industries. Most industries where R&D is a big part of your cost you're going to have these effects so in the telecom business you already had this network effect that existed for a long time and we've dealt with them like when AT&T was the dominant and the Bell system that was one giant network

and nobody could enter so it's not as if I think these are not new and we don't necessarily, that's why I disagree with some of the more extreme proposition in the US. I don't think we need radically new tools to do it. I think we have mostly the tools. We just need to apply them a bit more aggressively and creatively. So that's why I would put the distance.

In other words, suppose that the regulator had really looked twice at the Instagram or WhatsApp acquisition by Facebook. Maybe that would have been enough to create competition in that market. We'll never know, but maybe that would be enough. So I would try to run that experiment first, which is let, you know, make sure they can't buy too many competitors or nascent competitors. Is that enough to break the network effect?

Because there are plenty of ecosystems that, like Google and Apple, actually, in terms of two ecosystems that are not really compatible or not very well compatible, they still coexist. And both have network effects. It's just that you have differentiation against, according to different dimensions. You could imagine a Facebook competitor, which would be better on privacy, you know,

and that would coexist. They would have, the network effect would not kill that. But they need to have a chance to exist. That's the thing. Because in the book, you bring up the idea that we should have data portability

in some interoperability standards. Oh, yeah. Which seemed like how you would directly tackle a regulation that dismantle some of the moat that the network effect. Completely. But these are old ideas.

These are not new ideas. They've been applied to the telecom industry for a long time, this idea of interoperability and portability of, I mean, that came with the file that you can portability of your phone number when you switch.

I mean, that's something the industry fought against. So this idea is not new. And I think if you apply it to... So the bottom raise, I think it's a matter of trying and being a bit creative and aggressive and pushy. So we need regulators and politicians who are willing to push for that. I don't think we need to reinvent the wheel. How do you begin?

I mean, that seems like the hard problem here. I think we are always at the verge screaming about net neutrality and ISP prices. it doesn't seem to translate that much into action. We're going to keep screaming, I assure you. But how do you begin to say our competition policy needs X, Y, Z changes? What are the first steps? Well, my first step would be, and that may be about self-serving, but my first step would be to make sure people are aware that they pay too much.

Like, they just don't know. And so I think that's kind of put the number on the table, explain that this is not small potatoes, you're paying too much. If you say that people listen, that's my experience. at least. And by that, I don't mean just like, you know, fancy New Yorkers. I mean, everywhere. Tell them you're paying too much, people listen. So that's what's step number one. Step number two, try, I mean, you need to be a bit opportunistic. So I think that if there is agreement to do something about some particular firm, then go for it, which in this case is going

to be the big tech. Yeah. I mean, it's Facebook. What I'm getting at, I think, is, is this the moment where you say, we're going to break up Facebook? Well, I don't know if you're going to manage to break. I even know for sure that's the right solution, but you should try. I mean, I can't do anything. Yeah. I can just say that we should. But I mean, but is this the moment where the United States should actually take that up? Oh, yeah, for sure.

There is no question that you should try to do that as a country because it might not be the right solution. It might not work, but it's definitely worth trying because it's going to at least, you know, set the stage for a real debate and real action. And also, to be honest, the reason that we are doing a fair Facebook today is because that's the only thing the right and the left can agree on. It's not because Facebook is the one that's really taking the most money out of people's pocket. That's just not true.

I mean, they are, but it's not that much. And they are the privacy issue, of course. That's another one. But it's a target of opportunity. If you look at these 50 AGs who signed, who just are on board, the reason they go after Facebook and Google is not because of Facebook and Google, it's because that's the only thing you can agree on. They wouldn't agree on anything else.

Yeah. And so, but fine, so be it. So that's the way to start. But if you go that way and you need to be honest about it, even if you break up Facebook, you're not going to bring back, you're not going to put real money, real disposable income in people's pocket.

Because you have to go through the chain. So what's the best case scenario? You do something against the, again, privacy is different. Just talking about economics here. So you make the market for online advertising more competitive. So Google and Facebook have real competition, maybe you bring some new guys, you force them to share their data, you do XYZ.

You make this market more competitive. So there's more competition in online advertising. So the price of online advertising falls. Who benefits? Well, it's not directly the consumer, certainly, is the firms who are advertising. So then their profit margin goes up. And then you have to hope that somehow they're going to pass it on as lower prices. That's a very indirect chain.

And if these guys themselves are not in a very competitive industry, they will not pass on the savings. So all you would have done is you would have taken some margin from Facebook and you would have transfer them to people who advertise online. Okay, that's not directly going to help the consumer. So I think it's a good starting point. And also politically it's very important because sometimes Facebook is used as an excuse by other businesses who want to protect their own monopoly rents. You know, they say, oh, you can't do that to us because local Facebook and we are so dominant and we need to compete with them. So don't do anything to us. So if you do something to Facebook, you take that argument.

of the table and it's good for everyone. But you shouldn't stop there. If you just stop there, then you would have done essentially very little. If you're serious about antitrust, you need to talk about transportation, you need to talk about telecoms, and you need to talk about healthcare. Because that's where the big margins are. And that's where the thing that really hurt people in terms of their disposable income, that's where the money is.

So what do you make of the AT&T-T-T-T-Whorter merger? This is consolidation a different kind. Obviously, the Justice Department tried to stop it. I think the Trump administration hilariously was not able to make the net neutrality argument that seems very obvious because they opposed net neutrality but yet they tried to stop it.

That doesn't seem like the kind of consolidation you're describing but it still seems in the end we're all going to end up paying more for AT&T so it can subsidize HBO or what have you. Yeah, so that one is one of these cases where I think it's not totally obvious what the right answer was.

It's not I think the like the 4-2-3 merger in the mobile phone business, that's a no-brainer. The 80-30-time-water, I don't know if it's a good idea by the idea, but what I know for sure is the way it was handled is a disaster. Really? Yeah, because the one thing you don't want in antitrust is politics. I mean, it has to be rule of law, rules of the game,

and you have independent regulator apply the rules. And they go and they apply the rules based on the criteria, which is you do whatever is based for the consumers in the long run. And here you had exactly this bizarre situation where it looks like the White House wanted to kill the deal because they didn't like one of the participants. And at the other hand, the obvious reasoning for killing a deal would have been to appeal to net a charity. But since they also against that, they couldn't say anything. But that's exactly the point.

You see, that's why if you bring short-term political considerations in the regulation of antitrust or the economy in general, they are going to have a disaster. So it's not, it's a bad process. To me, this one was a clear example of a bad process. And that's surprisingly, that's what we do well in Europe now, which is everything. It's not as if Vestager at the DGCOM makes no mistake. She makes mistakes. She's amazing, but she's a human being.

She makes mistake. But it's a rule of law. There are rules and we apply the rules. And that's just a big relief because you don't have to think, okay, did she do that because of political pressure? No, she applied the rules. And that's, you know, that makes the debate a lot more rational. It's just better.

So one of the big questions here is whether we have the right rules. So we had Lena Kahn on the Vortcast earlier this year. She's in your book. Of course. I think she's at the FTC now. But she wrote a very influential paper called Amazon's Antitrust Paradox. She wrote a couple of influential papers, yes. She's also amazing.

But, you know, her argument is we, and you mentioned the Chicago school earlier, and I feel very guilty because I went to the University of Chicago. So I helped it in some way. But we broke it. We broke America along the way. But the Chicago School is the consumer welfare standard, which is what Lena wrote about. It basically doesn't apply to Amazon. So right now in the United States, we say if prices will go up, we should block this merger.

And actually the AT&T Time Warner argument was pages and pages of technical reasoning about why cable TV rates would go up 50 cents or something. It was unreadable. It was hundreds of pages along. Unreadable. And the judge said, I don't believe you. And there's no way to argue that point. There's a lot of action around, hey, we should change. change the consumer welfare standard. We should find a new standard that actually measures competition

directly so that a company like Google, which gives all its products away for free, just doesn't escape all scrutiny. Do you think we should change that standard? So first of all, I think it's a debate that's absolutely central, and we should all be very grateful to Lin Akan for bringing it up because it's a debate that needs to happen. On that specific issue, I have some disagreement with that. I don't actually think we need to change the consumer welfare standard. for a couple of reasons. Or at least, we have to be precise what we mean.

I think there are two issues. You have politics and economics. What I agree with what Lena Kahn writes is when she writes about power. And she says that if you look at the history of antitrust, then part of the deep root, like the DNA of this movement, was mistrust of concentrated corporate power.

But mostly for political reasons. So if that's the argument, I agree. But that's not specifically. about antitrust. An argument for saying we should avoid massive concentration because it comes to go out with too much political power, then I agree with that. But I don't think that's very much connected

to the debate about the consumer welfare standard. That's a much broader theme, and on that one, I agree, we need to be watchful of concentrated political power in any hand, and whether it's corporate or just rich people, I think that's an issue. But if you literally just look at the way we should apply the consumer welfare or the anti-trust,

I think consumer welfare is the right thing. So I agree with the Chicago School. there. That's the right target. What I disagree is that I don't think they were honest about the way to get there, which is consumer welfare depends on prices and choices, and not today, but today and for many days to come. So the right, I mean, conceptually, the consumer welfare says you want to make sure that consumers' welfare goes up over the long run. So therefore, short-term price changes is just one input, but it's not necessarily the most important. And that standard is perfectly consistent with saying that choice is important, innovation is important.

And if you can show that too much market power today, even though it might not show up as high prices, is going to lead to fewer choices and less than you can apply the consumer reference now to go after this guy. So I don't think that's an issue. And to go back to the Chicago School, because I think that's also a super interesting debate. So it's a bit geeky, but basically...

That's what we're here for. Yeah. Go for it. So, like, the one... I'm going to try to summarize it so it's easy to understand. The basic argument of the Chicago School in the 50s, 60s, and then more, later on, more important in the 70s, was, look, you don't need to worry about monopoly power.

And the reason is because if there is excessive profits, it's going to attract new entrants. And these entrants are going to come in the market and compete away the excessive profits. So therefore, the Chicago will say, look, you need to enforce very strict rules about, you know, cartels price fixing, for sure. That you should be very tough about that.

But you don't need to worry about one firm dominating a market excessively, because if they make too much money, they're going to attract entrants. So that was the main argument. And the big issue was that argument, if you look at the data, so you have the data in the book, that argument was roughly right when they made it. So in the 70s and the 80s, it was true that if you look at the whole landscape of corporations in the U.S., in places where profits were very high,

you could predict much higher entry rates over the following years, and these entrants would compute away the profits. It did happen. It worked like that. So it was true. The problem is today, if you do the same exact calculation, that rebalancing mechanism has disappeared. The correlation between entry and excess profit has become zero.

So in that world, where entry is not there anymore to rebalance excess profits, then the Chicago school argument that you don't need to worry about market power falls apart. Why isn't there entry anymore? Well, I think because what we see today is the reason, it's very much linked to this good construction, bad concern, sorry, If you believe it's good concentration, then entry should rebalance the economy. If you believe that it's the bad concentration story, which is the reason you see concentration is not that the top dogs have become so efficient that they take away some market shares.

If you believe that the country instead is driven by the top dogs managed to put barriers around its market, then you don't expect entry to rebalance anything. Because in fact, the reason they are making money is not that they've become more efficient, is they've become more insulated from the rest. So that, I think, is a tell-tale sign that the buyer to entry is driving the stuff. So there are a couple of companies I want to make sure we talk about in these last few minutes.

One is Amazon, and you reach some surprising conclusions about Amazon in the book, which is that they are a different kind than the Google and Facebook and Apple of the world, and that they are far more integrated into the economy, they're spending money, they are in a much more competitive environment. That is surprising.

I think when people think about giant power American monopolies right now. Amazon sits at the top of the list. What did your data show you that suggests it's actually different? So if you look at, well, there are many dimensions in which Amazon is very different from the other companies. First of all, like the medium wage at Facebook is $230,000, the median wage, right, per year. So the median employee at Facebook earns 230 or maybe 240, something like that per year. The median employee at Amazon earns 46, okay, so to start with. Because they have warehouse workers. Right, because they have a whole cross-section of people, like the employees of Amazon have much more representative of the entire U.S. population than the employee of some of these other firms.

So that's one difference. But more importantly, if you look at just what they do, they just do a lot of capital expenditure, a lot of investment, and a lot of productivity growth, which at the end of the day is what you want. Now, yeah, they do have monopoly power in some markets, but overall, they are still operating in a fairly competitive system. system, I think. I don't think Walmart is that far behind. If you just look at the retail, the thing that's Amazon, so because of that, I think they are just, you might say they have too much. I do believe they do have market

power. I would like to have some action against their ability to do copycat and to use their data. I think that we should investigate, absolutely. This is where they see what products are selling while on Amazon. They copy it and they put it at the top there on this thing. That's an issue. To be honest, CVS and all the retail

guys have been doing that forever, obviously. But Amazon can do it at scale. And so There is a case there to tell them what, you know, to just slap them a bit on that. I'm fine with that. But the big picture is they do contribute to growth. I mean, they hire people, they invest and they push the economy forward. So at the very least, they are doing that right. So I think they should get credit for that in my book.

And then the other part of Amazon is the, if you break down the profits between the retail part and the cloud AWS, a lot of the profits coming from AWS. And I don't think you can, at least I haven't heard people saying that the, the, cloud landscape is not very competitive. I think that, at least until now, Microsoft, Google, Amazon, they are competing fairly aggressively in that space. So I think both in the retail in the cloud, I see a system where, you know, there's some competition.

I think Baidu is on that list, too, if you look outside. Yes, absolutely, yeah. A fourth big competitor that someone pointed out to me is actually nipping on all of them. I want to ask about Disney, which just seems to be sucking in all the oxygen. We're recording on a week. Martin Scorsese literally wrote an essay in The Times about how Marvel movies are bad, which seemed to me to be an essay literally about Disney's market power as opposed to anything else, because this is what Disney wants to make.

Do you think that is a company that has achieved dangerous scale? Yeah, but the arts and I think it's very hard to analyze. I don't have any specific insight on that one. On movies, though, I'm a movie geek, and I tend to agree with Scorsese, but on purely artistic ground. You're also French. Yeah, I think Superio movies are kind of dumb, yeah. I mean, whatever. I'm sorry.

Most of them, I mean, somehow, like, Black Panther was great, but it's like one in a very, very long list of movies that I find freedom. So on that one, I agree with course. It's not economics. Well, I mean, it's just interesting to me that we are in this moment where there's a massive competition in, like, streaming television. Yeah. And that is all run by giants who are willing to burn money

to get to a place where it seems like they will be the last one standing. Correct. Do you think that is, like, is that a lot of, a good outcome? I don't think it's a bad outcome necessarily. I think that's one of these cases of good concentration. They are all pretty good company. They are well-run. They are, I mean, they are successful at what they do. They do product people enjoy. And they are competing hard to try to get market share. So to me, it looks like a case where we could have some, on the face of it, I don't think that's a big issue in my mind. You have a story in the book about getting a taxi

in France when you were young and how it was very hard and you were effectively priced on the market because taxis were expensive and they were hard to acquire. And then it turns out people actually just like having a bottle of water and an iPhone charger in their cab. And like some minor competition actually dramatically improves customer experience. I agree with this story. I do think it is an iPhone charger in the car. But I want to ask specifically about Uber and then I want to ask what we work. Because to me, both of them seemed extraordinarily willing to just burn money and price out their competitors in order to gain a monopoly and then flip the switch and make monopoly profits.

Do you think that strategy is effective? I think with Uber we've seen, we had Mike Isaac on the show. He just wrote his book about Uber. That strategy flamed out. They have a new CEO. He's refocusing the business. It obviously led to an outcome. With WeWork, that strategy seems to have destroyed $40-some billion in value over time.

Do you think there's ever a world in which it's fine to burn money on your way to a monopoly and then try to walk it back and charge? Does that work? Is that an interesting competitive? Well, you know, but I'm an economy. So I think of it more from the pursuit of the consumers. Would I want to live in the world where these guys try this? Yeah, I think I would.

I mean, it's their problem if they burn money or they're investors for them. So, you know, as a consumer or as a consumer advocate, I should say. I feel like I'm like a consumer advocate, really. I want firms to try that, and I want them to burn money trying to do it. And if the idea they're going to get – and it is fine to have some monopoly rents if you burn money to get there. I think there's no problem with that. We just don't want these ranks to be forever.

Like, there's no economy in the world that works. without monopoly rents. Every single successful company has monopoly rents. So that's not the issue. The issue is the persistence. The issue is you don't want these rents to be there forever. And in the case of, well, honestly, I think Uber and WeWork are kind of different.

I mean, we work, I just never understood. No, but it's like, do you have the ultimate long-term, the maturity mismatches? Yeah. I mean, remember, I also teach finance. I'm like, I see the balance. I'm like, you're going to find this gigantic long-term lease with like short-term paper.

I've seen that playbook in 2008. It doesn't end well. So that's separate. Uber, it was a great idea. It's fantastic. But the truth is there are plenty of competitors now. I mean, in Europe, if you go to France, you don't, like, you don't need toously use Uber. They all have their apps.

They work just as well. They have the same prices. And so I think Uber created a great product. I don't think they're going to enjoy their monopoly runs for very long. But Uber is kind of the classic example of the network effect applied to a very large hardware problem. That's true. If all the drivers are on Uber, then all the rider. are going to be in Uber, and how are you ever going to peel a driver off to go with another app?

And that seems to be... But lift has some drivers, and if you travel around Europe today, you've got to find many local apps that people use, essentially building on the same technology. Because the thing is building the app is not that complicated anymore. So I have an app where you track a vehicle and then you track a consumer, and then they can see each other on the app and then match. It's just, that becomes like bread and butter. Yeah.

So all the taxi companies in Europe have it now. And so they can effectively compete on that way. So at the end of the day, if you think about the big picture, what's the end outcome is Uber created this really great idea of having an app to register and to find your taxi driver. The taxi driver being not necessarily somebody who does it full-time, these ideas are great and they have to stay. It's obvious to me that in 50 years,

people will still have this model where we have a great app to match drivers and consumers, and that the drivers are not full-time drivers. They do it because it's convenient because they are students because they want a second job. This is great for everybody. So I think that's going to stay. Whether or not Uber is still there,

or whether they run out of cash in the meantime, to be honest, as a consumer advocate, I don't really care. Yeah, I'm happy to have some venture capitalists subsidize my rights for me. That's effectively what's happening. That's capitalism. But why aren't there more competitors in New York City? You and I both live in New York. There's Uber and Lyft.

There was Juno. They really tried to make Juno happen. It never happened. Why are there more competitors in France and not in New York City? Well, that's a specifically sure about big cities, which is, I think the value added of this in big cities is kind of low. I mean, like the future of transportation in big cities is not individual cars in my mind. I mean, I came to your deal with my bicycle because it's twice faster. You know, the great thing with the GPS is now you can track the cars and we can compute the average speed.

The average speed of an Uber driver or any car with a GPS below 24th Street in New York City is like less than walking. Yeah. So I think that's part of the issue. But I mean, that to me is one of these questions of, is that good concentration or bad concentration, that Uber and Lyft have become a duopoly and they're the big national providers. Maybe in some places, I think in Austin two years ago there were some regional providers. But then they let Uber in and that company kind of failed out. How do you say this market needs to be competitive when it wants to tend towards duopoly in that way? But I don't think, I don't think Duo is going to be a market.

is going to be monopolized at the end. The yellow cabs are still there. They could get better apps, actually, to be honest, these people. What I don't understand is if you look at many of the markets in Europe, the existing taxis, which was typically these guys were monopolies often by cities, and they got crashed initially by Uber and Lyft. But they didn't disappear. They reacted by putting water bottles and USB charger in their taxis.

That was great. And then by creating their own apps, which essentially works just as well. sometime even better than the Uber or Lyft app. And so today, they are competing back. And I think the market just have stabilized totally. So I don't think I don't see why that would not happen in the US. Yeah. Last question.

And I think this is related to the earlier thing we were talking about, which was Google and Facebook particularly feel like targets. Let's say we break up Google and Facebook. We split off YouTube from Google, search. We split off Instagram and WhatsApp from Facebook. It seems natural to the next thing that Facebook would do, after Instagram is cleaved off of it, is build an Instagram clone. It seems natural the first thing that the Google search company you do after YouTube has moved away is build a YouTube computer and the first thing

that YouTube would do is build a search engine. Is that the sort of right outcome to rebalance or do you still want new entrance? Because that's the thing I've heard most is here's what will happen. You'll split up Google from YouTube, YouTube will build a search engine, Google will build a video player, they'll fight, everyone will be happier, and they'll try any things. It seems to me that, sure, that seems great, but what I really want is new ideas to enter, and that is still too hard.

So how do you solve that problem? Well, then do you have to take a sound on why you think the new ideas are not coming in? I think the competition would have two main virtues. One is, I don't think it's by chance that if you look at the privacy policy of Facebook, it started to really go down the drain precisely at the time where Facebook stopped fearing competition until the point where as long as they felt there was some real attention. to Facebook, they actually more or less applied the rules that they said

they would apply by not tracking their consumers or tight Facebook. And they only started to really violate the privacy principles when they felt that they were pretty sure there was no alternative. And in fact, they were right, because every time there was a scandal about things that was clear outrageous, the way they shared

the data or not protect the privacy of their customers, well, nobody switched because there was nowhere to go. So I think one of the virtue of competition is that, and that's why I disagree a lot when I hear the people from Facebook arguing that they need to be big to be able to, you know, either moderate content. No, that's wrong. The most important is not the money, is the incentives. If you're dominant, you don't have an incentive. It's like the taxi driver in Paris.

It's not rocket science to put a bottle of water in your car. And it doesn't cost any money. See, the reason they didn't do it is because they didn't have any incentives to do it. I think incentives trump profits all the time. Incentives are way more important than profits. If you have the right incentive, you will find the money. That has spoken like a true economist. Yeah, I'm a true free market, guys. I can't believe it. That's true.

I do believe it. So I think that's the first virtue of competition is we would actually have better privacy because they would have an incentive because they know that if they don't respect it, that I will switch. So I think that's the first one. And the second one is, why is it that we don't have new ideas? Yeah, why is it that for the past 10 years, essentially we haven't seen much really exciting in that field? Well, that's because many of the firms that could have gone public decided to stay private.

longer. Part of it for good reason, because the private market has become more efficient, so they can sustain themselves and grow while remaining private for longer. So that's one good reason. But the other bad reason is because instead of going for IPOs, now they go for acquisitions. But the reason they go for acquisitions is because they don't think they could survive independently. So they rather sell themselves out to the existing big companies rather than trying to make it on their own with an IPO. I think that's the issue. And presumably, if you made the landscape more competitive, you would have more IPOs. Well, so you would have more acquirers.

And then you'd have to, A, create more companies, and then B, do as you said earlier, which is raise the standard for an acquisition. So it was easier and more efficient to IPO than to be acquired by Amazon, say. Exactly. And so then that's the way you could bring some of new ideas into the market. How do you – I mean, we talk to so many companies at sort of the midpoint of their life cycle. I think the one I always think of is ERO, which was a Wi-Fi router manufacturer.

And we loved ERO and we talked to their CEO all the time. And they just basically burned through money until they had no choice but to sell to Amazon. And that is in some ways a good outcome, right? The people who bought that product could continue to use their service. They're going to make more Eros. Those employees all have jobs. Whereas otherwise, they might have cratered out. A thing that happened to them along the way that really damaged their business was Google saw that their product was successful, put out a competing Google Wi-Fi product,

price of $50 less because they could care less about the profit margin. put it at the top of Google search. Is that the sort of behavior that, like, a regulator should look at? Yes, exactly. So the issue is exactly the second half of what you said, which is the fact that Google had the power to do that. And in that case, a conflict of interest between the search engine and the product design. But isn't that totally fair?

Google owns the search engine. Yeah, but that's the main argument for splitting these guys apart. And in that case, that's a good example. That's the same argument you can make for Amazon sometimes. for why you would want to put limits on what they can produce by themselves. Or the famous case of the diapers.com issue that Amazon. These are all these fall into this range where if the firm has too much power, it can effectively kill competition either to then kill it or replace it

and raise prices later. So this is something that the regattor should be looking at, absolutely. But the thing with the IPO, the thing that's tricky and it's important to keep in mind is you are really deeply in the world of the law of small numbers. which is even in the best case scenario, there are very, very few IPOs. Even in a fully competitive economy, most of the firms that are both of the startups are either going to fail or be acquired. The IPO is always a tiny, like the sliver.

It's like a very small number. The problem is that it's also very sensitive to competitive conditions. So if that small number goes from being small to being zero, 15 years later, you are in trouble. And that's exactly what we've seen. Having a few IPOs from time to time is very different. having essentially no significant IPO in that field for 10 years. And that's what we had de facto, and that's the big problem. How should people think about this problem?

I mean, they can go buy your book, presumably from Amazon, which is great. So let's help that monopoly out. For Bount and Nobles. That's good. Yeah. Go to the competitor. Or your local store. I mean, what I love it, one of the thing that is really great when you write a book

is you get pictures from people who find your book in a bookstore and send you a picture from local bookstore. It's just like a warm feeling. Okay. So support your local bookstores for buying your book. What's the next thing people should think about? Well, there are plenty of ideas people have proposed to, so specifically the case of mergers.

There are plenty of proposals to review the way we do, we enforce or even we analyze murders. The typical case in the past was if the firm is big enough, the target and the acquirer are big enough, then you're going to investigate. But if the target is too small, then you're not going to investigate. But then ask yourself, okay, why do we buy small? Well, of course, in the old days, by small women,

whether you don't have many employees or your revenues are not very high or your profits are not very high. And you are big if you had large revenues or large profits. And somehow that was a fine definition. But of course, that definition fails completely if the target is a firm that is growing extremely fast and yet has essentially zero revenues today because they are pricing anything for free to build their market share. So then we need to define a new metric and you could look at or you could lower the revenue threshold. But we've tried that in Germany. It doesn't work very well because then you end up bothering

mom and pop shops for their acquisition, which makes no sense. So that's not a good solution. At the end of that, the two things that seem to be making sense is one is you should pay attention to the price of the transaction. In other words,

even if the target doesn't seem to be making any money, if somebody is willing to pay $10 billion for it, you should look at it. So part of the information that the regulator should be looking at is the value of the transaction. That would be, one, change compared to what we used to do.

And the second one is we probably need to have a different policy with respect to reviewing the case later. You can say, well, you can merge, but I will have the right to revisit the case in one year or two. And that's also that would be a change in the way we enforce antitrust. It's not ideal because you would like to be able to say yes and no for sure. But in a world where you, I think it's better to admit that there is uncertainty, and therefore we have rules that allow us to reverse rather than pretending we know and make the wrong decisions. Yeah. Well, Thomas, thank you so much for coming on. I really appreciate. Thank you.

I couldn't stop talking. I could talk to you about this all day and all night. But the book is out now. It's called The Great Reversal, How America Gave Up on free markets in your local mom and pop bookstore. Yes. Which would be free to make any acquisition at once from what I got from the last answer. Can they tweet at you? Can I email you? What's the best of your head of you? I can find me on Twitter. It's Tomafi, too, I think. Very good. Well, thank you so much. We'll talk to you soon. Thank you.

All right. My thanks to Thomas Philpon for joining us. His book is The Great Reversal, How America Gave Up in Free Market. It's out now. You can go get it. We'll back later this week with a chat show. And then the week before Thanksgiving, we're turning the Vergecast upside down. We're doing a series of vignettes about pirate radio. Those will come out Tuesday, Thursday, and Tuesday. I'm really excited about these.

Our team is working hard on them. Andrew our producer has been cranking way in them. I think you're really going to like them. Look for that starting the 19th. You can also tweet at me. I'm at Reckless. I love hearing from you. I love hearing your thoughts on the show and what we talk about.

Send me that feedback. We'll see you soon.