No country for old regulations: Protecting dynamic competition for digital agricultural markets

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Two young farmers are seen browsing the internet on their smartphone. Photo: Abugrafie/Shutterstock
Photo: Abugrafie/Shutterstock

Two hundred years ago, Adam Smith introduced the idea that free market competition is the bedrock of economic well-being. According to Smith, governments have responsibilities to protect the “system of natural liberty” against the “wretched spirit of monopoly.” Since then policy-makers have followed Smith’s advice and used market regulations, competition policies, and antitrust laws to prevent concentrations of market power and preserve competition within the market. Fast forward to today and a lot has changed in our world: top hats and corsets fell out of fashion, space exploration is a reality, and digital platforms — including agricultural ones—are taking over traditional brick and mortar markets for virtually every consumer product or service (Figure 1). Are these digital platforms a boon for competition, expanding the marketplace to more sellers and buyers? For example, just the other day I purchased a small solar pump for my farm directly from a vendor in China. Or are they like hitman Anton Chigurh from the movie ‘No Country for Old Men’, ruthlessly hunting down and dispatching less efficient competitors in the search for cash while skillfully avoiding law enforcement and regulatory control?

Rise of the Platforms: digital platform firms dominate their offline competitors in 2018.  Source: World Development Report 2019.
Rise of the Platforms: digital platform firms dominate their offline competitors in 2018. Source: World Development Report 2019

Digital platforms like Amazon and Alibaba are very effective in establishing efficient marketplaces with robust competition among sellers. Nonetheless, few firms are competing against Amazon and Alibaba to offer such marketplaces. Why?

With strong network effect, high fixed costs, and low marginal costs, digital platforms have created a market structure that is prone to tipping and concentrations of market power. Instead of competing within the market for a larger share of consumers, digital platforms compete for the entire market. The winner-takes-all race is on to be the landlord of the digital neighborhood that generates agglomeration benefits such as thicker yet less congested markets where more buyers and sellers can meet and match-up efficiently. Companies that successfully develop the “next big” product, service, or feature disrupt the existing market by exacting new rents from both consumers and producers, assuming market leadership, and diminishing or eliminating actual or potential rivals.

Our food system is built on a complex system of upstream, midstream, and downstream markets where agricultural input providers, food producers, processors, sellers, and consumers interact. These markets are increasingly becoming the target of disruption by digital platforms. With the rise of precision agriculture, the agricultural input industry is transitioning from selling physical inputs such as fertilizers and machinery to providing digital platforms that encompass a whole suite of agricultural services to help farmers become more productive and profitable. Both traditionally powerful players and ambitious newcomers are drawn to race for the ultimate platform. John Deere’s digital platform connects their equipment with input suppliers, agriculture retailers, local agronomists, and software companies to improve the efficiency of information flow. With the platform Climate FieldView, Bayer is on its way to building the “Amazon of farmers”, offering a one-stop shop for field data storage, management, and analytics aimed at improving productivity. Even the tech giant IBM decided to join the race, partnering with Yara to develop a global digital farming platform with weather forecasts and personalized recommendations to minimize risks and losses. On the consumer side, as more people opt for the convenience of ordering groceries online that are delivered straight to their door, digital platform firms begin to dominate fresh food e-commerce markets. In China, the top 5 companies accounted for 63.1% of the fresh food e-commerce market. In the U.S., Amazon’s acquisition of Whole Foods further increased its control over the e-grocery market.

What does this mean for regulation? Are our existing competition policies and anti-trust regulations enough for an increasingly digitized marketplace, or are they like Anton Chigurh’s nemesis Sheriff Bell who is always one step behind? Instead of fixing the attention on competition in agricultural markets, has the time come for regulators to take a forward-looking perspective and craft policies that protect the vigor of dynamic competition for agricultural markets? How should the public sector redefine what constitutes anticompetitive behavior? What should the new antitrust policies look like? How can regulations encourage innovation and competition in food systems’ markets that are dominated by single players? Some of the initial suggestions include greater enforcement of privacy controls and data use protocols as well as interoperability standards. Join the discussion on the role of the public sector in this new era here.

 

We hope to crowd-in some of the world’s best minds to participate in a global conversation on food and technology through the “What’s cooking? Rethinking farm and food policy in the digital age” blog series. We invite people with diverse backgrounds and perspectives to join us and share their comments.

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Authors

Jenny Zhang

School of Foreign Service, Georgetown University

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