Coronavirus Economy: Monopolies and the concentration of market power

The Corona pandemic is causing an acceleration in the digitalization of the economy and society. This affects online commerce in particular. As a result, there may be far-reaching consequences for market power concentration and even monopolization tendencies.

How the Corona pandemic is accelerating digitalization

The Corona pandemic is accelerating the use of digital technologies in business through various channels:

• In manufacturing, the use of machines and digital technologies pays off because it saves on labor. This makes it easier to implement social distancing in production facilities. The automatization was already in full swing before the Corona pandemic because digital technologies lead to significant productivity gains. The argument of using these technologies to increase crisis resilience acts as an additional motivation.
• In the organization of production processes, working in a home office has been used intensively during the Corona pandemic outbreak. This form of employment reduces the risk of infection and prevents a work absence due to fear of contagion in the company. Online meetings and video conferencing replace business trips that are not possible during a lockdown. These forms of work save time and money and should continue in many companies even after the end of the Corona pandemic.
• In consumption, the epidemic-related decline in demand was less than expected because of the switch to online retailing. Online purchases are replacing purchases from brick and mortar retailers. The same applies to delivery services, which replace restaurant visits, and streaming services, which replace movie theaters. People who had good experiences with these forms of consumption during the corona crisis will continue to use them after the pandemic ends.

Corona pandemic and concentration of market power

The Corona pandemic also poses a double threat of increasing market concentration.

First, many companies will not survive the loss of sales during the Corona pandemic economically and will go bankrupt. However, a company’s and liquidation does not mean that its physical production capacity (buildings, machinery, stored inputs, and raw materials) will also be lost.

These capacities can be acquired and used by other companies. It can be assumed that only those companies that come through the Corona pandemic relatively well will have the financial resources to do so. This threatens to lead to an increasing concentration of market power.

Second, as digitalization accelerates due to the Corona pandemic, there is a growing risk that more digital monopolies will emerge. There are two main reasons for this.

• High initial or fixed costs characterize many digital goods and the networks associated with them. However, the reproduction and delivery of a computer program, a CD, or a piece of music often takes place via a download and is therefore associated with very low incremental costs. As a result, the company that offers the largest quantity has the lowest unit costs and can charge the lowest price. In the long term, therefore, only one can survive on the market. Economists call this case a natural monopoly.    
• Digital platforms often have network effects. The benefit for consumers depends on the size of the network. For example, the more participants there are in a social online network, the more attractive it is for people to join the correspondingly large network. In the end, the company that has the most participants prevails. So once again, only one provider on the market in the long term. This phenomenon is called a winner-take-all market.

Online commerce versus stationary retail

The danger of an increasing concentration of market power exists above all in the area of online commerce. Here, the Corona pandemic can lead to a downward spiral from the perspective of brick and mortar stores:

• Corona-induced lockdowns are shifting demand for consumer products from brick and mortar retail to online commerce. This leads to some individual store closures in the city centers.
• If fewer people come to the city centers; as a result, the sales of the remaining stores decline, as do those of restaurants, cafés, cinemas, etc., leading to further store closures. This trend is accelerated when many employees work from home and do not come to the city centers anymore.
• The attractiveness of the city centers declines. This can lead to a desolation of the inner cities. Switching to online retailers thus becomes more and more attractive and strengthens the power of online retail.

Outlook

The risk of increasing concentration of market power presents competition policy with the challenge of preventing the exploitation of this market power. This is particularly true in the area of online commerce, which is likely to emerge from the crisis stronger than brick and mortar retail. Here, it is essential to prevent the exploitation of market power.

If this does not succeed, numerous negative consequences are to be feared.