How the tech industry cures and exacerbates market failures

For over 300 years, the West revered experimental sciences for its ability to unravel the secrets of nature and the universe. This hunger for science was, and still is, driven heavily by societal needs. With the help of engineers, science was converted into technologies. Technologies which, like a mechanical genie, professed to fulfil the wishes of society. But how does technology exacerbate or cure the results of the market in society?

For over 300 years, the West revered experimental sciences for its ability to unravel secrets of nature and the universe. This hunger for science was, and still is, driven heavily by societal needs. With the help of engineers, science was converted into technologies. Technologies which, like a mechanical genie, professed to fulfil the wishes of society. And those wishes are no stranger to business enterprise. From Richard du Boff’s telegraph machine that expedited transactions during the nineteenth century, and in so, helping to industrialize the US (Uselding 1980); all the way up to Big Tech dominating the market we know today. Technological change is constant. No era has lacked for it (Miller 2001, 385). However, pace has hastened in the last 50 years, with dramatic impacts on society and business at large. In this paper, I demonstrate how the tech industry exacerbates and cures some of the most prominent market failures we accept today. I will reflect descriptively and normatively on the prominent aspects of technology in the market.

Descriptively, some literature celebrates that market failures have technological fixes (Huesemann 2001, 271). For example, externalities, like pollution, are hailed as solvable by well-resourced technological R&D (Yunus et al. 2012); or the Internet, is revered as an omniscient combat against information asymmetry (Kulkarni 2000). However, both of these externalities can also be exacerbated by technologies. Environmental externalities, like emissions, can result from technological progress (Eren 2002, 1); and the Internet, can also be a source of misleading information (Kulkarni 2000).

From this descriptive analysis, I follow with a brief normative suggestion, that, because technology is so intertwined in the market, both positively and negatively, it therefore ought to be more involved in responding to those very market failures, in collaboration with the government. This is proposed in a three-part approach via a) technology markets ; b) government; and, c) their collaboration. With this, I demonstrate the pervasive nature of technology in the market, in order to highlight the need for its deepened ethical consideration.

1. What are market failures and the market failure approach?

To begin, a market failure exists where goods and services are inefficiently allocated in the marketplace. The individual incentives for rational behaviour do not culminate in rational outcomes for the collective (Phang 2013). This results in costs or benefits that do not show up in the pricing system.

A general example of a market failure in technology is the private sector’s lack of investment in energy innovation (Nemet and Kammen 2006, 746). This occurs when one company invests their resources to generate knowledge that improves society in general, and other parties can use that knowledge, whereby the original company cannot purport the full value of their investment (Nemet and Kammen 2006, 747). This stunts innovation, resulting in a market failure: an incomplete market. And from market failures, the ‘market failure approach’ to business ethics was developed, predominantly by Joseph Heath and Wayne Norman (Landes and Néron, 2018, 564). The key premise of the market failure approach as illustrated by Heath, is that most market norms are akin to good sportsmanship. Competitors should follow good regulations, should not lie and cheat, should not exploit market failures, and should not try to ‘game’ the rules (Brennan 2015).

Having established a brief sketch of market failures and its approach, we can diagnose an extensive list of what those failures are. However, for the sake of space, we will spotlight four of the most common cited market failures. These include information asymmetry, incomplete markets, positive and negative externalities, and monopoly power (Mazzucato 2015, 121; Chappelow 2019; Landes 2018).

2. Information asymmetry and the tech industry

As Joseph Stiglitz argued, some of the most important advancements in economics concern information (Landes and Néron 2018). Information asymmetry illustrates scenarios in which buyers and sellers are not properly informed about products or services (Landes and Néron 2018, 565). Alongside this, often sellers are much better informed than buyers, meaning sellers could take advantage of buyers. This causes a market failure whereby the law of supply and demand is compromised, and some buyers pay too much for goods and services. This can be exemplified by the Internet, a technology that can both cure information asymmetry, by either providing a smorgasbord of information; or exacerbate it by the means of incorrect, or misinformation.

2.1 Technology as a cure for information asymmetry

Starting with technology’s curing role in information asymmetry, mobile phones and the Internet can play a significant role in spreading knowledge. For example, mobile phones can connect African farmers to the market, resolving information between farmers and markets (Aker et al. 2010, 207). Such basic technology might seem insignificant in wealthy countries, but in many parts of sub-saharan Africa, they can be substantive in bettering farmers’ earnings as well as reducing costs for buyers (Ibid). Furthermore, a study in Kenya found that farmers who were sent basic reminders with “remember to weed this week” increased their yields of sugar cane by 11% (Casaburi et al. 2019, 7).

Alongside this, in more established markets, allocative and productive inefficiencies can result from information failures, including price signals not being precisely conveyed; and, human error in deciphering those price signals can also occur (Coval and Shumway 2005, 1). However, technology, like Big Data and IoT, can resolve these issues with sophisticated information synthesis tools (Ibid).

2.2 Technology as an exacerbation of information asymmetry

This section describes how technology can make the information asymmetry problem worse. As technology is subject to human intentions, the consequences of its use, can depend on who is in control. Technology can be used to benefit those in control, and mean negative results for related stakeholders (Xiao et al. 1998, 80). This is amplified by the fact that information under existing technological conditions, is available at near zero marginal costs (Miller 2001; Elsner 2003, 523). Therefore, there are common tendencies in the markets to create information at “suboptimal levels and of complete lock-ins of information […]under conditions of individualistic decision-making (Elsner 2003, 524).

More generally, the comprehensive amount of information online can make it arduous for consumers to recognise what is most applicable to them (Peters et al. 2007). Technology can help to overcome these problems, however, information asymmetry can still exist between services and consumers, whereby services provide information that may not be fully transparent or correct. In these cases, consumers may not always be equipped to determine the best choice for them, again, exacerbating the market failure problem of information asymmetry (Porras 2016, 88).

3. Monopoly power and tech industries

Monopoly power is unanimous with the tech industry. Tech firms like Amazon, Google, Facebook, Apple, and Microsoft are regularly referred to as “Big Tech”, or “FAMGA”. In other words, they are considered “monopolies” . Monopoly power is a market failure, and is a consequence of power being controlled by too few. Some solutions recommend government intervention, breaking up the monopolies, or regulating them with capped profits and tight regulation, as with water or power utilities (Efstathiou 2019). However, since technology markets can influence market power through its effect on the number of competitors, this can indeed worsen, but also interrupt the monopolistic nature of the market. Yet, historical case studies of Myspace, Nokia, Kodak and many more, illustrate that monopoly can also not secure continued power (Bourne 2019). As theorized by prominent economist Joseph Schumpeter, all these companies saw their market shares collapse in the wake of new insurgent companies born by market competition. In light of this, the following section will explore how the technological actors can either increase, or decrease monopoly power.

3. 1 Technology as a cure to monopoly power

This first view on technology — as a cure to monopoly power market failures — suggests two perspectives. Firstly, that technology markets can interrupt monopoly power; and secondly that, the rate of technological progress will be greater where markets are dominated by few large firms. In regards to the first perspective, the technology market can interrupt monopoly power through disruptive innovation. Disruptive innovation is a type of insurgent technology that creates new market value to eventually interfere with established market-leaders (Christensen and Bower 1995). Given that a quarter century ago Facebook or Amazon did not exist, it follows that they were once mutineers, and the next generation of mutineers can come again. As Schumpeter described, it’s hard to anticipate future progress of corporations and technologies, whereby it could occur that “firms innovate to capture consumers, in turn achieving market share, only to be eventually usurped themselves” (Bourne 2019).

With regards to the second point, large tech firms can act as a cure because they are better equipped to resource funding in technological innovation, since they work on large, diversified scales. This makes them more likely to find commercially viable solutions for new technological developments. Alongside this, risk — as a key part of R&D, and going to market — is somewhat dissolved by market power (Martin and Scott 1998, 438). And, because tech firms fear insurgent companies and technologies, they are continually diversifying into new product markets. They compete with one another in serving low ends of markets not yet captured. Examples of such innovation (created outside of an institutional framework) include Amazon’s contribution to cloud services, Google’s Maps, and Netflix’s streaming services. These were all introduced without any definitive commercialization strategy. And when products fail, exiting the market is prompt, like, for example, the smartwatch Microsoft Band (Petit 2018, 83).

3.2 Technology as an exacerbation of monopoly power

In almost every country, regulators describe US tech giants as monopolists (Petit 2018, 82). “FAMGA” could be considered the poster-children of market failure as monopoly power. Tech giants can create unfair competition, and entry barriers for new actors (Bourne 2019).

As a monopoly power, there are three key abuses of that power: price control, innovation stagnation and rent-seeking (Ibid). Firstly, a monopoly can increase price above marginal cost by artificially constraining supply. In other words, a firm that concentrates most profit can use that same power to set prices at high levels, and without the stimulation of competition, markets suffer, and consumers end up paying more. Secondly, in contrast to the previous section, some economists suggest that a monopolist has less incentive to innovate than a competitive firm because there is no competitive threat. And, innovation suffers because market barriers, created by monopolies, are just too high to break in. Thirdly, rent-seeking could be an issue. Rent-seeking means a company tries to increase its share of existing wealth, but without creating new wealth. Usually, this involves government-funded social services and can be compared to corruption (Lambsdorff ‎2002, 97). All in all, tech industries can play a large inflammatory role in the exacerbation of the monopoly market failure, and can be “a drag” on economies locally, and internationally (Fleishman 2019).

4. Externalities and the technology industry

Moving onto the third market failure, externalities can exist in both positive and negative formulations. In general, an externality is an economic concept that recognises the cost or benefit by, or received by, a third party without their control (Kenton 2019). This phenomena is generally defined in the literature as the gap between an activity’s social consequence and its private one (Pigou 1932). Positive externalities are the positive effect an activity imposes on a third party, where research and development is a standard example of a positive externality. Negative externalities are costs imposed by an economic activity that create a negative effect on the third party, this can include air pollution from production of goods and services. As economist David Friedman illustrates on the problem of externalities, it “is not that one person pays for what someone else gets, but that nobody pays and nobody gets, even though the good is worth more than it would cost to produce.” In the following section we will explore the types of positive and negative externalities born from technology.

4.2 Positive externalities created by technologies

Positive externalities are defined in most literature as the social and private beneficial spillovers to third parties. One well known positive externality would be the scale of knowledge diffusion enabled by the Internet, allowing for scores of better educated people who can, in turn, contribute to the global economic network. In addition to this, because of its social and economic attributes and its global reach, the Internet itself is even being pledged as a global public good (GPG), that “require government intervention and multilateral cooperation to develop efficiently and uniformly worldwide” (Canazza 2016, 2).

4.3 Negative externalities exacerbated by technology

In contrast to positive externalities, technology causes some negative externalities. The growth of online retailers causes brick and mortar shops to become redundant; fast new industry causes social and occupational dislocation; there’s threats to privacy; and ecological damage, whether it be air, water or soil (Huesmann 2000, 271; McDermott 1997, 90).

Even with government intervention, can we eliminate technology’s negative externalities, and even further, with technology itself? Though some literature suggests possible solutions via government intervention — like taxation, government regulation, and property rights — this may not be enough, especially in regards to conservation. This is for two key reasons. Firstly, both the “conservation of mass principle and the second law of thermodynamics decide that most technologies — while successful in solving specific pollution problems — cause unavoidable negative environmental impacts elsewhere or in the future” (Huesemann 2000). And, secondly, it is by nature unachievable to design industrial techniques that have zero negative environmental impacts (Ibid). Therefore, although technology has a key role in finding solutions to environmental problems, by itself it cannot fix anything. Therefore, it is important to acknowledge the deeper source of ecological issues, particularly, the dominant materialistic drive sustaining overconsumption.

5. Missing markets and technology

Turning to missing markets, we can refer to the concept of Pareto Optimality. When an economy is in a Pareto Optimal state, it is a situation when no further allocations of resources in the economy can make one person better off, without at the same time making another worse off. However, a market failure occurs when, sometimes, markets don’t exist where Pareto-optimality might suggest it should (Werner 1990, 205). Technology can be an actor in resolving missing markets, but also exacerbate it, as we will see in the following section.

5.1 Missing markets cured by technology

Societal challenges, like climate change, unemployment and ageing, have triggered new approaches for innovation policy that asks decisionmakers to ‘think big’ about what kind of technologies and policies can solve these issues (Mazzucato 2015, 1). Although solving these issues is not necessarily a technological fix, the arrival of technologies like the Internet or biotechnology (Foray et al., 2012), have something to say for socially beneficial markets. Alongside this, the Internet is described by many scholars as a global public good, indicating tech’s role in ‘filling in’ the gaps.

Not only can technologies lead to the creation of new markets, it can also allow incomplete markets to become complete over time. This can occur on four key accounts: cost, controlling free riders, solving information failures, and faster processing. Firstly, new technology can diminish production expenditure, as well as pass on these cost savings to consumers. For example, platforms like Airbnb have untrapped economic surplus for middle-class homeowners, transforming a large group of people into buyers and sellers. Secondly, new technology can respond to the free-riders problem, for example, with car-plate tracking that tackles payment evasion. Thirdly, information failure is resolved fairly cost effectively through data. And fourthly, technology can streamline payment methods, which can make public goods more accessible.

Alongside these four points, within the ecological space, there is also interest from investors and policy-makers in environmental ventures where “it has been argued that the prevalence of market failure provides a basis for viewing high carbon sectors as fertile with opportunities for entrepreneurs” (Ibid).

5.2 Missing markets exacerbated by technology

It is the job of the markets to efficiently allocate resources by activating individual self-interest towards allocation via pricing. And, even though a number of incentives can stimulate market creation and increase profit earned by inventors — like intellectual property rights — sometimes there are deficiencies in the market that allow for missing markets, that the technology sector itself contributes to. This is for two reasons that most industries participate in. Firstly, the technology sector doesn’t generally fulfill broader societal goods and services, like public goods, because there are little gains to be made. And secondly, besides goods and services, the short-termism approach to markets, and especially the ‘go fast, break things’ mantra of tech, leave certain groups of people that markets do not reach, generating missing markets.

In regards to the first point, there is a limit to the formation and completion of markets, and the technology industry operates on a similar plane. This is not unsurprising as most industries contribute to this market failure, therefore we will not investigate this further, only to mention that the technology industry progresses much faster, causing potentially more strain on government intervention efforts.

Secondly, future generations are also a missing market. Because short-term market behaviour dictates that future generations are unable to engage in our markets today, their demand is not addressed. If future generations were covered in a markets analysis, we would see that our current system is not functioning at Pareto Optimality, because they are made worse off. Allocating more resources to future generations and less to our own would likely be much more efficient in the long-run (Bishop 1993, 69), because the long term benefits generate better returns. This is because the future generation concern is closely linked to the exhausability of ecological resources (Meadows et al. 1972) , where short-term over-extraction leaves future generations with a wrongly composed wealth portfolio with too few natural resources relative to man-made capital, causing inefficiency (Sinn 2007, 13).

6. Technology, government and their union over market failures

From the above descriptive analysis, I hope to have demonstrated the key ways in which technology is deeply woven in the market. I will now argue that, because technology markets are so intertwined in the market, both positively and negatively, they ought to be a tool to respond to those very market failures. This is intended in collaboration with the government. The following section acts merely as a normative ‘thought-starter’ for broader ethical consideration.

The competitive market indeed has power, and the technology market even more so due to its size and speed (Kinsey 2000), and there therefore should be a more aggressive review of how government and the technology market can work together to minimise the negative effects of market failures. To achieve this, I suggest a three-pronged approach designed to stimulate responsibility via three perspectives: a) the responsibilities by a company to address market failures; b) the responsibilities by government to address market failures; and c) responsibilities of why both government and technology markets should cooperate.

Firstly, on the responsibilities to be taken into account by the technology firm, I borrow from Joseph Heath’s market failures approach to business ethics in which he argues that, in pursuing profits, firms have a responsibility not to exploit market failures, as listed in this very paper, which, in doing so, serves both ethics and efficiency (2014). Heath recognizes, as earlier described, markets should engage in good sportsmanship. He acknowledges there is space for competition in the market, as do I, however, it should be a healthy competition serving a healthy growth without exploitative measures.

Secondly, regarding government responsibility, the state should adopt the most flexible, incentive-oriented regulation policy approaches to alleviate market failures, because they are more likely to encourage low-cost compliance than prescriptive regulatory approaches (Jaffe et al. 2005). Economic growth and progress has considerably elevated the demand for resources. This has increased pressure on many natural resources, raising questions of sustainability and availability, and increased prices for some resources (Rademaekers et al. 2011, 7). These issues can be addressed by encouraging technology firms through innovation stimulating tools like market-based policy instruments (MBIs). MBIs are subsidies and support for resolving issues, and help in determining resource efficiency (Rademaekers et al. 2011). Although MBIs are not a ‘silver bullet’, they could be a part of a broader policy package in order to stimulate the right response to market failures.

And thirdly, regarding collaboration between government and technology firms, government and markets can cooperate to maximise social benefit and market efficiency, as expressed by the ‘benefits of cooperation account’ by Heath. I will not go into this deeply, but briefly, Heath argues that there are five mechanisms by which collaborating generates efficiency benefits. These are: economies of scale, gains from trade, risk pooling, self-binding, and information transmission (Heath 2006).

I will shortly go through each mechanism to demonstrate the value in technology markets and governments collaborating to alleviate market failures. Although these mechanisms are generally intended for individuals, they have clout for applying to major entities.

Firstly, economies of scale states that not all jobs can be done by one person, and so, involving other parties generates benefits. This could be said for cooperation between more than one entity, in which state and tech tackle large societal ‘jobs’.

Secondly, gains from trade says that because people have different needs and abilities, benefits can be achieved by rearranging tasks according to those needs and abilities. There is a similar arrangement between government and markets, whereby governments ‘fill-in’ where markets fail. However this could be explored further, as per the Justice Failure approach by Abraham Singer (2018), which suggests markets should ‘fill in’ where governments cannot.

Thirdly, risk pooling suggests that benefits come not from the fact that “risks are transferred, but from a reduction in the variance achieved through the “law of large numbers” effect, and the “utility gain this provides to risk-averse individuals” (Heath 2014). Effectively, if governments and markets cooperate, they can reduce risks associated with responding to market failures.

Fourthly, self-binding suggests that one of the great advantages “we achieve from social interaction […] is the ability to enlist others in our aid” (Ibid). If government and technology markets can hold each other accountable for achieving certain resolutions of market failures, there is more to be gained than the converse.

Fifthly, information transmission dictates that we can transmit information to one another more effectively in cooperation. This means that, when government and technology markets collaborate there will be huge efficiency gains in knowledge exchange between each other they may not have otherwise had.

In sum, the benefits of cooperation via entities can be demonstrated by the many benefits as illustrated above, and therefore ought to be encouraged in pursuit of resolving market failures by two of the strongest entities around, government and tech.

7. Conclusion

In conclusion, I have demonstrated that technology is deeply intertwined with the market, as well as in the exacerbation and the curing of market failures. I have then shown that, because of the deep involvement of technology markets, both positively and negatively, technology ought to be a prime partner with government in responding to market failures. This manifested in three parts as a responsibility yielded by each: firstly, from the perspective of the firm and how they could act by not exploiting market failures; from the perspective of government and how they could act by stimulating incentives; and finally from the combination of both government and technology markets and how they could benefit, by cooperating.

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