A short video went viral a few days ago. It showed the value of the 15 top global brands from the year 2000 (though the source of the data is unclear). Four companies remained at the top of the league table in the first decade of this century—Coca-Cola, Microsoft, IBM and GE. Google displaced GE in 2011. Then Apple made it to the top four. Amazon followed in no time. Facebook has also muscled into the list. Only Microsoft in the dominant quartet of 2000 has held its ground. GE found itself at the bottom of the pile in 2018. The other big story was the rapid eclipse of Nokia after 2009.

Meanwhile, Simon Mundy reported in the Financial Times this month about how the Anil Ambani conglomerate is at risk of unravelling. The four listed entities in the group have collectively lost 97% of their market value since 2008, as the cost of servicing debt overwhelms cash flows. There is a similar story in several overleveraged business groups.

I recently took a look at the 30 companies that were part of the benchmark Sensex in December 2008. There were two Anil Ambani firms featured—Reliance Communications and Reliance Infrastructure. Both have dropped out of the popular index. So have companies such as Jaiprakash Associates and DLF. One can go back further in time to see how power shifts at the top. The Sensex in December 1988, for example, included companies such as Premier Automobiles, Hindustan Motors and Futura Polyesters.

These two examples are interesting given the heated debates right now about monopolies. Regulators world over are concerned about the power of digital economy giants such as Facebook. Economists have revived the old question about whether market structure deepens inequality. These are valid concerns. The policy question is whether market power should be seen in a static or dynamic sense. Is a monopoly temporary or permanent? Neither Nokia nor Premier Automobiles could sustain their market power in the face of innovation and structural change.

A new paper by German Gutierrez and Thomas Philippon of the Stern School of Business at New York University takes a look at superstar firms in the US economy over the past six decades. Their careful empirical work ends with a counter-intuitive conclusion. Superstar firms have not become larger, have not become more productive and their contribution to productivity growth has fallen by more than a third. They speculate that one possible reason why superstar firms are contributing less to productivity growth is that rising barriers to entry have allowed incumbents to reduce spending on investment and innovation.

The key then is not just the size of the firm but also barriers to the entry of new firms. Take a look at the digital economy, where network externalities create natural monopolies: I am on Facebook because my friends are on Facebook. Jean Tirole knows more about economics of digital platforms such as Facebook. He spoke in a recent interview about the need to distinguish between transient and permanent monopolies: “Large economies of scale as well as substantial network externalities imply that we often have monopolies or tight oligopolies in the new economy. The key issue is that of ‘contestability’. Monopolies are not ideal, but they deliver value to consumers as long as potential competition keeps them on their toes…. But for such competition to operate, two conditions are necessary: efficient rivals must, first, be able to enter and, second, enter when able to."

This is easier said than done, first, because data monopolies reduce the contestability in a market, and second, because the end game for many new competitors is to not take on the incumbents but sell out to them. Regulating the giants of the platform economy is a tricky issue because neither price nor market share are useful guides to regulatory action. But the basic idea by Tirole that regulators should focus on dynamics rather than statics, and the ease of entry for competitors, are important guideposts for the future.

It is always useful to go back to one of the classic works by the original prophet of innovation, Joseph Schumpeter. “In capitalist reality as distinguished from its textbook picture, it is not (traditional) competition that counts but competition from the new commodity, the new technology, the new source of supply, the new type of organisation," he wrote in Capitalism, Socialism And Democracy. Schumpeter said that this type of competition “strikes not at the margins of profits and the outputs of existing firms but at their very foundation and their very lives".

The problem of monopoly power is not to be sniffed at, especially when it comes to the digital economy. However, it would be useful to remember that corporate mortality is far higher than is usually assumed. Most of us would still be using Nokia phones—if that were not the case, Futura Polyester would still be in the Sensex.

There are two interlocked regulatory questions at play. First, does a firm have monopoly power at this point of time? Second, is a firm likely to remain a monopoly because it has blocked the entry of potential competitors? There is a static question. There is a dynamic question. Separating the two will be a useful first step as the new contours of regulation are being drawn.

Niranjan Rajadhyaksha is research director and senior fellow at IDFC Institute. Read Niranjan’s previous 'Mint' columns at www.livemint.com/cafeeconomics

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