Brief Analysis of the High Tech Sector Fiona Scott Morton Yale School of Management February 2016

IT Revolution Changes: MCfalls Qualityrises Concentrationrises Endogenous sunk costs become more important Results – Market expands – Monopoly (at any moment in time) – High margins => Large profits for successful firm

Examples Local bookstores => Amazon Local socializing => Facebook Taxis => Uber Reference books => Google search Often the consumer value for the Internet service is much higher than for the old method of obtaining the service Economies of scale come from: Direct network effects (friends) Indirect network effects (search algorithm) Economies of scale (warehouses)

Interpretation Unprecedented change in market structure – Any historical parallel? What is.....the change?..a competition enforcer against? Big? High margins? Consumer surplusX

Policy implications If higher consumer surplus, indicates benefit from innovation despite market structure. Market power obtained on the merits How to maintain competition? Entry is a good focus for competition authority – Consumer continues to benefit from disruptive entry – Want entrants to be protected from exercise of market power that is not competition on the merits