Working paper by Sotirios Georgousis, Bowman Heiden, Nicolas Petit, 2023
Abstract
Whether digital firms earn monopoly profits has been a subject of significant debate within economic literature. This paper seeks to contribute to this discussion by adopting an empirical approach to examine the determinants of profits in digital firms. Economically, profits can be attributed to monopoly, Ricardian, or Schumpeterian rents. To shed light on which types of rents, or combinations thereof, determine profits in digital firms, we develop and empirically test a set of hypotheses. In our empirical analysis, we focus on five major players in the digital industry: Google, Apple, Meta, Amazon, and Microsoft. Our findings challenge the traditional monopoly model as an accurate descriptor of the rents extracted by these tech giants. The study reveals substantial variations in the rent profiles of these companies, emphasizing the importance of considering firm-specific factors. The results of this research underscore the need for further research into the nature of rents in the digital sector. Additionally, the findings call for a cautious approach in antitrust law and regulatory policymaking, as the characteristics of digital firms invite a nuanced understanding of their value creation and value capture mechanisms.