Tuesday, February 20, 2018

Pollutant Taxes on Energy: Why So Focused on Roads?

Most countries of the world tax oil products, especially the gasoline used in the road sector, but impose only very low taxes on other fossil fuels.  The OECD compiles a Taxing Energy Use Database that includes energy use and energy taxes for 42 countries that make up 80% of global energy use, and not coincidentally, 80% of global carbon emissions. For the latest iteration of this database, the OECD has also published Taxing Energy Use 2018: Companion to the Taxing Energy Use Database (February 2018), which pulls together some of the overall patterns. Here are a couple of the figures that caught my eye.

This figures shows energy taxes on a country-by-country basis. The energy taxes are measured in terms of euros per ton of carbon dioxide emitted. The little horizontal notches show the total tax on carbon emissions from energy use. Switzerland, Luxembourg, Germany, and Norway have the highest taxes, while the US and China are down at the low end,along with Brazil, Indonesia, and Russia. The variation across countries is considerable.

The dark blue balls show the tax on oil products, including gasoline. As is quickly apparent, the effective tax rate on carbon emissions from oil is higher than the tax rate on carbon emissions from other sources of energy. In particular, coal goes essentially untaxed in most countries. As a result, the OECD finds that 81% of carbon emissions are not taxed at all.


Here's a similar story, but told in terms of sectors of the economy. The first section of the table on the left shows taxing of energy in the road sector, and the blue lines show carbon taxes on diesel and gasoline. But the next sections show energy taxes in industrial uses, in residential/commercial, and in electricity generation. From a global perspective, energy pollution arising from these other sources is largely untaxed.


If burning fossil fuels is enough of an environment problem that it justifies taxes on oil products in the road sector, then it seems quite peculiar to have burning of fossil fuel from other sectors going essentially untaxed. Indeed, there is a literature on the "co-benefits" of reducing air pollution, which points out that there are immediate short-term health gains to doing so, as well as a longer-term reduction  in the risks posed by carbon emissions.

Monday, February 19, 2018

Some Patterns for Same-Sex Households

A couple of decades back, it was  hard to find systematic and reliable information on the economic and family characteristics of same-sex couples. However, the US Census has been collecting baseline data for some year now, and just released collects baseline data, and just released an annual report, Characteristics of Same-Sex Couple Households: 2005 to Present. The report is just a few statistical tables. I've taken one of the tables, cut some of the rows, left out the columns showing statistical significance, and cut the footnotes. But there's enough left to note some patterns.

  • For the US as a whole, The Census folks counted 56.4 million married opposite-sex couples, 6.8 millions unmarried opposite sect couples, and almost 900,000 single-sex couples, more or less evenly split between male-male and female-female couples. 
  • By average age, the same-sex couples are much closer to the opposite-sex couples than to the unmarried opposite-sec couples. 
  • Same-sex couples are much more likely to be interracial than married opposite-sex couples, especially male-male couples. 
  • Same-sex couples tend to have higher education levels than opposite-sex couples, who in turn have  higher education levels than unmarried opposite-sex couples.. 
  • In terms of employment, unmarried opposite-sex couples rank highest, followed by the same-sex couples, while married single-sex couples are lowest. 
  • Married and unmarried opposite-sex couples are about equally likely to have children in the household, while same-sex couples--especially male-male couples--are much less likely to have children in the household. 
  • In terms of median household income, the rank from highest to lowest is: male-male couples, married opposite-sex couples, female-female couples, and unmarried opposite-sex couples. 


A table like this one is useful for showing some factual patterns, but it would be extremely unwise to draw any conclusions about causality from it. For example, it is certainly not true that if the unmarried couples were to marry, they would immediately become older, better educated, and with higher paychecks.

A decade ago, Dan A. Black, Seth G. Sanders, and Lowell J. Taylor. wrote about "The Economics of Lesbian and Gay Families." in the Spring 20017 issue of the Journal of Economic Perspectives (21:2,  53-70). They noted that many of the observed patterns of same-sex couples are consistent with economic reasoning. For example, if a smaller share of same-sex couples are likely to have children, this will influence patterns of work, willingness to live in urban areas, and other factors. They wrote:
"The economic approach to thinking about families—with its focus on deliberative choices made by people with reasonably stable preferences—stresses the importance of constraints. That is, when economists seeks to understand systematic differences in the behavior of gays, lesbians, and heterosexuals, we do not start with a hypothesis of innate differences in preferences, but instead seek to understand how differences in constraints systematically alter incentives faced by gay, lesbian, and heterosexual people. This paper uses the economic approach to organize our thinking about gay and lesbian families, and thus implicitly assumes that, aside from sexual preference, other preferences do not systematically differ by sexual orientation. Based on that approach we provide evidence pertaining to some initial questions. 
"For example, do differing biological constraints faced by gay, lesbian, and heterosexual couples affect choices over children? Clearly they do; there are far fewer children in lesbian and gay families than heterosexual-partnered families. Gays and lesbians also face higher costs for adoption, which further reduces opportunities to raise children. 
"Do differences in fertility (or anticipated fertility), again owing to differences in constraints, influence where people live? We argue that because gay couples face a relatively high price for children, they will consume more non-child goods, and this increased consumption often takes the form of locating in expensive highamenity locations like San Francisco or New York. 
"Do same-sex couples have patterns of household specialization that differ in predictable fashion from heterosexual couples? Available evidence indicates that lesbian women have higher wages and greater labor force attachment than heterosexual women, while the opposite situation pertains for gay men relative to heterosexual men. A variant of Becker’s (1991) model of household specialization would predict this pattern. 
"Of course, many other interesting and fundamental questions await analysis, from economics and other social science disciplines, as better data sources become available."

"The Great Advantage of the Americans Consists in Their Being Able to Commit Faults Which They may Afterward Repair"

Why is it that the United States (or democracies in general) can in many cases pass foolish bad laws or make a  misguided selection of leaders--but nonetheless continue over time to flourish over a sustained time? Alexis de Tocqueville tackles that question in this passage from his 1840 work Democracy in America (Chapter XIV: Advantages American Society Derive From Democracy – Part I, available various places on the web like here and here).  It's food for thought for today's President's Day holiday.

Tocqueville argues that aristocracies "are infinitely more expert in the science of legislation" than democracy and also that those " who are entrusted with the direction of public affairs in the United States are frequently inferior, both in point of capacity and of morality, to those whom aristocratic institutions would raise to power." But in Tocqueville's view, these problems are more than counterbalanced by the fact that democracy over time is responsive to "the well-being of the greatest possible number," and that a democracy has checks and balances. From this perspective, Tocqueville offers one of his famous lines: "[T]he great advantage of the Americans consists in their being able to commit faults which they may afterward repair." Here's the full passage:
"Democratic laws generally tend to promote the welfare of the greatest possible number; for they emanate from the majority of the citizens, who are subject to error, but who cannot have an interest opposed to their own advantage. The laws of an aristocracy tend, on the contrary, to concentrate wealth and power in the hands of the minority, because an aristocracy, by its very nature, constitutes a minority. It may therefore be asserted, as a general proposition, that the purpose of a democracy in the conduct of its legislation is useful to a greater number of citizens than that of an aristocracy. This is, however, the sum total of its advantages.
"Aristocracies are infinitely more expert in the science of legislation than democracies ever can be. They are possessed of a self-control which protects them from the errors of temporary excitement, and they form lasting designs which they mature with the assistance of favorable opportunities. Aristocratic government proceeds with the dexterity of art; it understands how to make the collective force of all its laws converge at the same time to a given point. Such is not the case with democracies, whose laws are almost always ineffective or inopportune. The means of democracy are therefore more imperfect than those of aristocracy, and the measures which it unwittingly adopts are frequently opposed to its own cause; but the object it has in view is more useful.
"Let us now imagine a community so organized by nature, or by its constitution, that it can support the transitory action of bad laws, and that it can await, without destruction, the general tendency of the legislation: we shall then be able to conceive that a democratic government, notwithstanding its defects, will be most fitted to conduce to the prosperity of this community. This is precisely what has occurred in the United States; and I repeat, what I have before remarked, that the great advantage of the Americans consists in their being able to commit faults which they may afterward repair.
"An analogous observation may be made respecting public officers. It is easy to perceive that the American democracy frequently errs in the choice of the individuals to whom it entrusts the power of the administration; but it is more difficult to say why the State prospers under their rule. In the first place it is to be remarked, that if in a democratic State the governors have less honesty and less capacity than elsewhere, the governed, on the other hand, are more enlightened and more attentive to their interests. As the people in democracies is more incessantly vigilant in its affairs and more jealous of its rights, it prevents its representatives from abandoning that general line of conduct which its own interest prescribes. In the second place, it must be remembered that if the democratic magistrate is more apt to misuse his power, he possesses it for a shorter period of time. But there is yet another reason which is still more general and conclusive. It is no doubt of importance to the welfare of nations that they should be governed by men of talents and virtue; but it is perhaps still more important that the interests of those men should not differ from the interests of the community at large; for, if such were the case, virtues of a high order might become useless, and talents might be turned to a bad account. ... The advantage of democracy does not consist, therefore, as has sometimes been asserted, in favoring the prosperity of all, but simply in contributing to the well-being of the greatest possible number.
"The men who are entrusted with the direction of public affairs in the United States are frequently inferior, both in point of capacity and of morality, to those whom aristocratic institutions would raise to power. But their interest is identified and confounded with that of the majority of their fellow-citizens. They may frequently be faithless and frequently mistaken, but they will never systematically adopt a line of conduct opposed to the will of the majority; and it is impossible that they should give a dangerous or an exclusive tendency to the government.
"The mal-administration of a democratic magistrate is a mere isolated fact, which only occurs during the short period for which he is elected. Corruption and incapacity do not act as common interests, which may connect men permanently with one another. A corrupt or an incapable magistrate will not concert his measures with another magistrate, simply because that individual is as corrupt and as incapable as himself; and these two men will never unite their endeavors to promote the corruption and inaptitude of their remote posterity. The ambition and the manoeuvres of the one will serve, on the contrary, to unmask the other. The vices of a magistrate, in democratic states, are usually peculiar to his own person."

Friday, February 16, 2018

Homeownership Rates: Some International Comparisons

High-income countries vary considerably in the share of households that own their own homes, The US rate of homeownership was about average by international standards 20-25 years ago, but now is below the average. Here are some facts from Laurie S. Goodman and Christopher Mayer, "Homeownership and the American Dream" in the Winter 2018 issue of Journal of Economic Perspectives (32:1, pp. 31-58).
"The United States does not rank particularly high among other high-income countries when it comes to homeownership. Table 1 compares the homeownership rate from 1990 to 2015 across 18 countries where we have been able to obtain somewhat comparable data over the entire time period. The United States was ranked tenth in 1990, at the middle of the pack and close to the mean rate. By 2015, the United States was the fifth-lowest, its homeownership rate of 63.7 percent falling well below the 18-country average of 69.6 percent. Over the 1990–2015 period,  13 of the 18 countries increased their homeownership rates. The five countries with declines in homeownership were Bulgaria, Ireland, Mexico, the United Kingdom—and the United States.
"In a broader sample of countries, many of which have missing data for some of the years in question, the United States homeownership rate in 1990 was slightly below the median and mean of the 26 countries reporting data. By 2015, the US ranked 35 of 44 countries with reliable data, and was almost 10 percentage points below the mean homeownership rate of 73.9 percent."


There are a lot of possible reasons for this variation, including "culture, demographics, policies, housing finance systems, and, in some cases, a past history of political instability that favors homeownership." They offer an interesting comparison of how homeownership rates in the UK and Germany evolved after World War II (citations and footnotes omitted):
"For example, consider the evolution of homeownership in (the former) West Germany and the United Kingdom. Both countries pursued a similar policy of subsidizing postwar rental construction to rebuild their countries. However, in intervening years, German policies allowed landlords to raise rents to some extent and thus finance property maintenance while also providing “protections” for renters. In the United Kingdom, regulation strongly discouraged private rentals, whereas the quality of public (rental) housing declined with undermaintenance and obtained a negative stigma. As well, German banks remained quite conservative in mortgage lending. The result was that between 1950 and 1990, West German homeownership rates barely increased from 39 to 42 percent, whereas United Kingdom homeownership rates rose from 30 to 66 percent. Interestingly, anecdotes suggest that many German households rent their primary residence, but purchase a nearby home to rent for income (which requires a large down payment but receives generous depreciation benefits). This allows residents to hedge themselves against the potential of rent increases in a system that provides few tax subsidies to owning a home."
By international standards, the US has had fairly generous mortgage interest deductions. Moreover, Goodman and Mayer walk though the question of whether owning a home in the US typically makes financial sense. Of course, buying a home at the peak of hosing prices circa 2006 and then trying to sell that home in 2008 is a losing proposition. But they argue that if Americans are buying a home at a typical price and willing and able to hold on to the home for a sustained time--say, buying in 2002 and holding on through 2015 or later--then housing pays off pretty well in comparison to alternative investments. They write:
"Our results suggest that there remain very compelling reasons for most American households to aspire to become homeowners. Financially, the returns to purchasing a home in a “normal” market are strong, typically outperforming the stock market and an index of publicly traded apartment companies on an after-tax basis. Of course, many caveats are associated with this analysis, including variability in the timing and location of the home purchase, and other risks and tradeoffs associated with homeownership. There is little evidence of an alternative savings vehicle (other than a government-mandated program like Social Security) that would successfully encourage low-to-moderate income households to obtain substantial savings outside of owning a home. The fact that homeownership is prevalent in almost all countries, not just in the United States, and especially prevalent for people near retirement age, suggests that most households still view homeownership as a critical part of a life-cycle plan for savings and retirement."
Thus, owning a house is a kind of self-discipline that encourages saving. Also, buying a house in which to live is an investment that offers two kinds of returns: both the financial return when you sell, but also the fact that you can live inside your owner-occupied house, but not inside a stock portfolio.

Thursday, February 15, 2018

Rising Interest Rates, but Easier Financial Conditions

The Federal Reserve has been gradually raising its target interest rate (the "federal funds interest rate) for about two years, since early 2016. This increase has been accompanied by a controversy that I think of as a battle of metaphors. By raising interest rates, is the Fed stepping on the brakes of the economy? Or is it just easing off on the accelerator pedal?

To shed light on this controversy, it would be useful to to have a measure of financial conditions in the US economy that doesn't involve one specific interest rate, but instead looks at actual factors like whether credit is relatively available or not, whether leverage is high or low, and whether those who provide loans are able to raise money with relatively low risk. Fortunately, the Federal Reserve Bank of Chicago has been putting together a National Financial Conditions Index based on exactly these components. Here's a figure of the data going back to the 1970s.



This figure needs a little interpreting. Zero is when financial conditions are average. Positive numbers reflect when financial conditions are tight or difficult. For example, you can see that in the middle of the Great Recession, there is an upward spike showing that financial conditions were a mess and it was hard to raise capital or get a loan at that time. Several previous recessions show a similar spike. On the other side, negative numbers mean that financial conditions are fairly easy by historical standards to finance and receive loans. 

As the Chicago Fed explains: "The National Financial Conditions Index (NFCI) and adjusted NFCI (ANFCI) are each constructed to have an average value of zero and a standard deviation of one over a sample period extending back to 1971. Positive values of the NFCI have been historically associated with tighter-than-average financial conditions, while negative values have been historically associated with looser-than-average financial conditions."

The interesting thing about our present time is that although the Fed has been raising its target interest rate since early 2016, financial conditions haven't gotten tighter. Instead the National Financial Conditions Index is lower now than it was back in early 2016; indeed, this measure is at its lowest level in about 25 years. At least for the last two years, any concerns that a higher federal funds interest rate would choke off finance and lending have been misplaced. Instead, having the Fed move the federal funds rate back close to its historically typical levels seems to have helped in convincing financial  markets that the crisis was past and normality was returning, so it was a good time to provide finance or to borrow.

The National Financial Conditions Index can also be broken down into three parts: leverage, risk, and credit. The Chicago Fed explains: "The three subindexes of the NFCI (risk, credit and leverage) allow for a more detailed examination of the movements in the NFCI. Like the NFCI, each is constructed to have an average value of zero and a standard deviation of one over a sample period extending back to 1973. The risk subindex captures volatility and funding risk in the financial sector; the credit subindex is composed of measures of credit conditions; and the leverage subindex consists of debt and equity measures. Increasing risk, tighter credit conditions and declining leverage are consistent with increases in the NFCI. Therefore, positives values for each subindex have been historically associated with a tighter–than–average corresponding aspect of financial conditions, while negative values indicate the opposite."

Here's a figure showing the breakdown of the three components. Although the three lines do tend to rise and fall together, it seems clear that the blue line--showing the extent of leverage or borrowing--plays an especially large role in the fluctuations over the last 25 years. But right now, all three parts of the index are comfortably down in the negative numbers.



Patterns can turn, of course. Perhaps if the Federal Reserve increases the federal funds rate at its next scheduled meeting (March 20-21), financial conditions will worsen in some substantial way. But at least for now, the Federal Reserve raising interest rates back from the near-zero rates that had prevailed for seven years is having the (somewhat paradoxical) effect of being accompanied by  looser financial conditions. And concerns over raising those rates at least a little further seem overblown.

Wednesday, February 14, 2018

Nudge Policies

A considerable body of evidence suggests that people's decisions are affected by how a choice is presented, or what the default option looks like. There's a reason that grocery stores put some products at eye-level and some near the floor, or why the staples like milk and eggs are often far from the door (so you have to walk through the store to grab them), or why the checkout counters have nearby racks of candy. There's a reason that gas stations sometimes advertise that gas is 5 cents a gallon less if you pay cash, but never advertise that gas is 5 cents more per gallon if you don't pay cash. There's a reason that many people have their employer automatically deduct money from paychecks for their retirement accounts, rather than trying to make their own monthly or annual payments to that same account.

Once you have admitted that people's decisions are affected by these kinds of factors, an obvious question is whether public policy might make use of how decisions are presented to influence behavior. A decade ago in 2007, Richard H. Thaler and Cass R. Sunstein brought this possibility to public attention in their book Nudge: Improving Decisions About Health, Wealth, and Happiness.  For a sense of what has happened since then, Bob Holmes offers an overview in "Nudging grows up (and now has a government job)," which is subtitled, "Ten years after an influential book proposed ways to work with — not against — the irrationalities of human decision-making, practitioners have refined and broadened this gentle tool of persuasion" (Knowable Magazine, February 1, 2018).

(A side note here: Knowable Magazine  is a publication of the good folks who publish the Annual Review volumes familiar to academics. There are now about 50 of these volumes across a wide array of topics, from economics to entomology and from analytical chemistry to vision science. Like the title says, there is one volume per year on each subject, with each volume containing an array of papers written by prominent experts in the field describing what is happening in their area of research. The articles in the magazine take the Annual Review papers in the last few years as a starting point, and then publish an essay that draws out common themes--with references to the underlying papers for those who want the gritty details. In short, the magazine is a good place to get up to speed on a very wide range of topics across the sciences and social sciences in a hurry.)

As one example of a "nudge" policy. consider organ donation. In opinion polls, people overwhelmingly support being an organ donor. But in practice, fewer than half of adults are actually signed up. A nudge policy might suggest that all driver be automatically enrolled as organ donors--with a choice to opt out if they wish to do so. In other words, instead of framing the choice as "do you want to sign up to be an organ donor?", the choice would become "do you want to opt out of being an organ donor?" As long as the choice is presented clearly, it's hard to argue that anyone's personal autonomy is being violated by the alternative phrasing of the question. But the alternative phrasing would lead to more organ donors--and the United States alone currently has about 100,000 people on waiting lists for organ transplants.

Perhaps the best-known example is that employers can either offer workers the option to enroll in a retirement savings plan, or they can automatically enroll workers in a retirement savings plans, with a choice to opt out. Phrasing the choice differently has a big effect on behavior. And a lot of people who never quite got around to signing up for the retirement plan end up regretting that choice when it's too late in life to do much about it. 

A graph shows that automatic enrollment leads to almost 100% of users contributing to their retirement savings, while “opt in” plans are much less successful.


Once you start thinking about nudging, possibilities blossom. Along with applications to organ donation and saving, Holmes discusses nudges related to home energy use, willingness to use generic drugs, choice of when to start receiving Social Security, requiring a common and simpler format for information about mortgages or phone contracts to make them easier to comprehend and compare,


Holmes reports: "At last count, more than 60 government departments and international agencies have established “nudge units” tasked with finding and pulling the right behavioral levers to accomplish everything from increasing retirement savings to boosting diversity in military recruits to encouraging people to get vaccinated against flu. The United Kingdom's Behavioural Insights Team, one of the first and largest such units, has expanded from a handful of people in 2010 to about 100 today, with global reach. Clearly, nudging has moved into the mainstream."

Three broad concerns discussed by Holmes seem worth noting. First, nudges can often be very specific to context and detail. For example, when people in the UK got a letter saying that most people pay their taxes on time, the number of tax delinquents fell sharply, but the same nudge in Ireland had no effect. Sometimes small details of a government notification--like whether the letter includes a smiley face or not--seem to have a substantial effect. 

Second, the total effect of nudge policies may be only moderate. But saying that a policy won't totally solve, say, poverty or obesity hardly seems like a reason to rule out the policy. 

Finally, there is a legitimate concern over the line between "nudge" policies and government paternalism. The notion that government is purposely acting in subtle ways to shift our choices is mildly disturbing. What if you just sort of forget to opt out of being an organ donor--but you actually have genuine personal objections to doing so? What if you just sort of forget to opt out of the retirement savings account, but you know that you have a health condition that is extremely likely to give you a shortened life expectancy? A nudge policy can be beneficial on average, but still lead to less desirable choices in specific cases. 

Moreover, what if the goals of a nudge policy start to reach beyond goals like adequate retirement saving or use of generic drugs, and start edging into more controversial settings? One can imagine nudge policies to affect choices about abortion, or gun ownership, or joining the military, or enrolling your child in a charter school. No matter which direction these nudges are pushing, they would  certainly be controversial. 

In the Annual Review of Psychology for 2016, Cass Sunstein contributed an essay titled, "The Council of Psychological Advisers." It begins: "Many nations have some kind of council of economic advisers. Should they also have a council of psychological advisers? Perhaps some already do." For many people, the idea of a government council of psychological advisers seeking to set up your choices in such a way as to influence the outcome, in ways you don't even know are happening, will sound fairly creepy.

Like many people, I like to think of myself as someone who considers options and makes choices. But the reality of nudge policies calls this perception into doubt. For many real-world life choices, a truly neutral presentation of the options does not exist. There will always be a choice about the order in which options are presented, how the options are phrased, what background information is presented, what choice serves as the default option. Even when no official nudge policy exists, and all of these choices have been made for other reasons, the setting of the choice will often influence the choice that is made. It will influence me, and it will influence you, too. Thus, there isn't any escape from nudge policies. There is only a choice as to what kinds of nudges will happen--and a need for all of us to be aware of how we are being nudged and when we want to shove back by making other choices.

Tuesday, February 13, 2018

Network Effects, Big Data, and Antitrust Issues For Big Tech

You don't need to be a weatherman to see that the antitrust winds are blowing toward the big tech companies like Amazon, Facebook, Google, Apple, and others. But an immediate problem arises. At least under modern US law, being a monopoly (or a near-monopoly) is not illegal. Nor is making high profits illegal, especially when it is accomplished by providing services that are free to consumers and making money through advertising. Antitrust kicks in when anticompetitive behavior is involved: that is, a situation in which a firm takes actions which have the effect of blocking actual or potential competitors./

For example, the antitrust case against Microsoft that was settled back in 2001 wasn't that the firm was big or successful, bur rather that the firm was engaged in an anticompetitive practice of "tying" together separate products, and in this way trying to use its near-monopoly position in the operating systems that run personal computers to gain a similar monopoly position for its internet browser--and in this way to drive off potential competitors. .

In the case of big tech companies, a common theory is that they hold a monopoly position because of what economists call "network effects." The economic theory of network effects started with the observation that certain products are only valuable if other people also own the same product--think of a telephone or fax machine. Moreover, the product becomes more valuable as the network gets bigger. When "platform" companies like Amazon or Facebook came along, network effects got a new twist. The idea became that if a website managed to gain a leadership position in attracting buyers and sellers (like Amazon, OpenTable, or Uber), or users and providers of content (like Facebook, YouTube, or Twitter), then others would be attracted to the website as well. Any potentially competing website might have a hard time building up its own critical mass of users, in which case network effects are acting as an anticompetitive barrier. 

Of course, the idea that an already-popular meeting place has an advantage isn't limited to the virtual world: many shopping malls and downtown areas rely on a version of network effects, too, as to stock markets, flea markets, and bazaars.

But while it's easy to sketch in the air an argument about network effects,  the question of how network effects work in reality isn't a simple one.  David S. Evans and Richard Schmalensee offer a short essay on "Debunking the `Network Effects' Bogeyman: Policymakers need to march to the evidence, not to slogans," in Regulation magazine Winter 2017-18, pp. 36-39).


As they point out, lots of companies that might at the time seemed to have an advantage of "network effects"  have faltered: for example, eBay looked like the network Goliath back in 2001, but it was soon overtaken by Amazon. They write:
"The flaw in that reasoning is that people can use multiple online communications platforms, what economists call `multihoming.'   A few people in a social network try a new platform. If enough do so and like it, then eventually all network members could use it and even drop their initial platform. This process has happened repeatedly. AOL, MSN Messenger, Friendster, MySpace, and Orkut all rose to great heights and then rapidly declined, while Facebook, Snap, WhatsApp, Line, and others quickly rose. ...
"Systematic research on online platforms by several authors, including one of us, shows considerable churn in leadership for online platforms over periods shorter than a decade. Then there is the collection of dead or withered platforms that dot this sector, including Blackberry and Windows in smartphone operating systems, AOL in messaging, Orkut in social networking, and Yahoo in mass online media ... 
"The winner-take-all slogan also ignores the fact that many online platforms make their money from advertising. As many of the firms that died in the dot-com crash learned, winning the opportunity to provide services for free doesn’t pay the bills. When it comes to micro-blogging, Twitter has apparently won it all. But it is still losing money because it hasn’t been very successful at attracting advertisers, which are its main source of income. Ignoring the advertising side of these platforms is a mistake. Google is still the leading platform for conducting searches for free, but when it comes to product searches—which is where Google makes all its money—it faces serious competition from Amazon. Consumers are roughly as likely to start product searches on Amazon.com, the leading e-commerce firm, as on Google, the leading search-engine firm."
It should also be noted that if network effects are large and block new competition, they pose a problem for antitrust enforcement, too. Imagine that Amazon or Facebook was required by law to split into multiple pieces, with the idea that the pieces would compete with each other. But if network effects really are large, then one or another of the pieces will grow to critical mass and crowd out the others--until the status quo re-emerges.

A related argument is that big tech firms have access to Big Data from many players in a given market, which gives them an advantage. Evans and Schmalensee are skeptical of this point, too. They write:
"Like the simple theory of network effects, the “big data is bad” theory, which is often asserted in competition policy circles as well as the media, is falsified by not one, but many counterexamples. AOL, Friendster, MySpace, Orkut, Yahoo, and many other attention platforms had data on their many users. So did Blackberry and Microsoft in mobile. As did numerous search engines, including AltaVista, Infoseek, and Lycos. Microsoft did in browsers. Yet in these and other categories, data didn’t give the incumbents the power to prevent competition. Nor is there any evidence that their data increased the network effects for these firms in any way that gave them a substantial advantage over challengers.
"In fact, firms that at their inception had no data whatsoever sometimes displaced the leaders. When Facebook launched its social network in India in 2006 in competition with Orkut, it had no data on Indian users since it didn’t have any Indian users. That same year Orkut was the most popular social network in India, with millions of users and detailed data on them. Four years later, Facebook was the leading social network in India. Spotify provides a similar counterexample. When Spotify entered the United States in 2011, Apple had more than 50 million iTunes users and was selling downloaded music at a rate of one billion songs every four months. It had data on all those people and what they downloaded. Spotify had no users and no data when it started. Yet it has been able to grow to become the leading source of digital music in the world. In all these and many other cases the entrants provided a compelling product, got users, obtained data on those users, and grew.
"The point isn’t that big data couldn’t provide a barrier to entry or even grease network effects. As far as we know, there is no way to rule that out entirely. But at this point there is no empirical support that this is anything more than a possibility, which one might explore in particular cases."
Evans and Schmalensee are careful to note that they are not suggesting that online platform companies should be exempt from antitrust scrutiny, and perhaps in some cases the network and data arguments might carry weight. As they write:
"Nothing we’ve said here is intended to endorse a “go-easy” policy toward online platforms when it comes to antitrust enforcement. ... There’s no particular reason to believe these firms are going to behave like angels. Whether they benefit from network effects or not, competition authorities ought to scrutinize dominant firms when it looks like they are breaking the rules and harming consumers. As always, the authorities should use evidence-based analysis grounded in sound economics. The new economics of multisided platforms provides insights into strategies these firms may engage in as well as cautioning against the rote application of antitrust analysis designed for single-sided firms to multisided ones.

"It is time to retire the simple network effects theory—which is older than the fax machine—in place of deeper theories, with empirical support, of platform competition. And it is not too soon to ask for supporting evidence before accepting any version of the “big data is bad” theory. Competition policy should march to the evidence, not to the slogans."
For an introduction to the economics of multi-sided "platform" markets, a useful starting point is Marc Rysman's "The Economics of Two-Sided Markets" in the Summer 2009 issue of the Journal of Economic Perspectives (23:3, 125-43). 

For an economic analysis of policy, the underlying reasons matter a lot, because they set a precedent that will affect future actions by regulators and firms. Thus, it's not enough to rave against the size of Big Tech. It's necessary to get specific: for example, about how public policy should view network effects or online buyer-and-seller platforms, and about the collection, use, sharing, and privacy protections for data. We certainly don't want the current big tech companies to stifle new competition or abuse consumers. But in pushing back against the existing firms, we don't want regulators to set rules that could close off new competitors, either.