hroughout 2021, China’s regulators adopted a hardened anti-monopoly stance against the internet sector, meting out 87 fines and punishments for monopoly-related violations. Under this tightened regulatory approach, the market value of Chinese internet companies contracted considerably in the past year. By the end of 2021, among the world’s largest 30 internet companies, only three are from the Chinese mainland, and just one, Tencent, is in the top- 10.
While some of China’s anti-monopoly measures are long due, the authorities need to adopt a more refined and targeted approach in 2022. First, we need to consider that the emergence of internet companies was a force that challenged long-existing monopolies in many traditional industries previously dominated by Stateowned enterprises (SOEs). China’s anti-monopoly measures should not just target the internet sector, but should also tackle the monopoly problems in sectors that are still largely controlled by SOEs.
Second, the authorities need to make a distinction between monopoly and monopolistic competition. In a monopoly, there is only one seller with many buyers and the seller commands absolute powers. Under monopolistic competition, there are several sellers offering differentiated products. With such a market structure, a firm may enjoy a certain level of monopoly, and does not necessarily exclude competition.
Many economists believe that permanent and long-term monopoly can only stem from administrative and regulatory advantages. By comparison, a monopoly obtained through technological innovation is transient, and it can collapse if competitors obtain new technologies. In this scenario, the excessive profits of a monopolistic firm should be considered a reward for its technological innovation.
In the past couple of decades, the world has experienced rapid technological advances which have seen seismic changes in many industries. A firm with a technological breakthrough can become an industry leader in a very short time. In most industries, monopoly has been replaced by monopolistic competition.
If the authorities treat monopoly and monopolistic competition in the same way, it may discourage the much-desired innovation. In carrying out its antimonopoly policies, regulators need to focus on monopolistic behavior, rather than target companies with the largest market share.
We must acknowledge that the rise of internet companies in China has made a great contribution to China’s economy by increasing the efficiency of logistics, lowering transaction costs, boosting demand and challenging the monopolistic status of traditional firms. In the financial sector, where internet companies have come under increasing scrutiny, they have played an important role in providing small and micro businesses with access to financial support.
The advantages internet companies possess in the sector lie in their technological innovations. Through collecting big data and employing algorithms, internet companies help financial institutions to reduce the risks of bad loans and better connect borrowers and lenders, which could lead to a win-win situation for stakeholders, including businesses, banks and internet companies themselves.
While the authorities need to continue to watch out for abusive monopolistic behavior, it should not discourage technological innovation in the internet sector. Despite the decades of development, the internet sector remains a new industry that keeps evolving. The authorities need to keep an open mind and closely monitor developments in relevant fields to establish an effective and efficient regulatory framework that will promote, rather than undermine, the healthy development of the internet sector.