BOX 7.1 Digital Platforms Are Prone to Market Concentration and Dominance Three key features of the digital economy create a tendency for market concentration. The first is returns to scale, driven largely by technologies that have led to a rapid and steep decline in the costs of data storage, computation, and transmission. The second feature is network externalities, which arise from the fact that the convenience (value) of using a product or service increases with the number of users that adopt it. The third feature is the intensive use and accumulation of personal data. Digital technologies allow companies to collect, store, and use large amounts of data that in turn lead to continuous improvements in business intelligence and more profitability. These features erect barriers to entry and make certain digital markets, such as digital platform markets, prone to market tipping: that is, once a firm gains an initial advantage, it keeps building on that advantage at the expense of its competitors. This in turn creates conditions for a winner-take-most economy, leading to concentration of market power and wealth in a small number of global “big tech” firms and individuals. Although these features are not unique to the digital sectors, they tend to be much more relevant than in most traditional activities. There is also evidence that firms based in high-income countries have been using anti- competitive practices in overseas markets to gain market dominance. An analysis of publicly available information on 103 finalized antitrust cases around the world, as of January 2020, reveals that most cases concerning abuse of dominance and anticompetitive agreements have been filed in developing countries against firms headquartered abroad. This pattern calls for international cooperation to prevent such abuse, such as a coordinated effort on digital taxes, data interoperability policies, and adoption of standards to allow data flows across firms, industries, and borders so firms in developing countries also have a fair chance to scale. Source: Zhu et al., forthcoming.
3. Ensure an Open Trade Regime that Supports Access to External Knowledge and Technology As shown in the previous chapter, participation in international markets and global value chains facilitates the adoption of technologies. While trade and investment policies appear to be beyond the realm of technology policies, they are in fact intertwined. For example, high import tariffs or nontariff barriers on equipment, restrictions on hiring foreign engineers and managers, or restrictions on investors and technology licensing can be critical barriers to technology adoption. Maloney (2002) shows how in addition to lack of investments in knowledge institutions, inward policies focusing on import substitution played a key role in impeding economic growth in Latin American countries. Ensuring access to external knowledge and the diffusion of technologies is key, especially for most developing countries that adopt existing technologies.
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Bridging the Technological Divide
