Rent-Seeking and Public Choice in Digital Markets

Abstract

The branch of economics known as “public choice” uses the tools of economics to analyze political behavior. Rejecting idealized versions of government intervention, it assumes that individuals participating in the political system are rational self-interest maximizers (homo economicus). A key insight of public choice is that private firms will endeavor to boost their profits above competitive levels by co-opting government’s unique right to coerce. Such “rent-seeking” behavior typically involves exploiting the self-interest of government officials and is often successful even though it tends to reduce social welfare by softening competition, diverting productive resources to non-productive activities, and destroying the value of competing firms’ productive investments. This article documents instances of rent-seeking and other adverse public choice concerns in digital markets. It considers two broad categories of rent-seeking behavior: efforts to procure an effective subsidy and attempts to raise rivals’ costs. Examples within the former category are (1) news publishers’ attempts to force digital platforms to purchase news snippets and (2) efforts by producers of digital content to free-ride off the investments of operating systems developers. Examples of rent-seeking by raising rivals’ costs include (1) dominant digital platforms’ lobbying for rules with which their rivals will have difficulty complying; (2) efforts by firms competing with platforms that host user-generated content to weaken the protections of Section 230 of the Communications Decency Act; and (3) the creation and financing of “astroturf” (fake grass-roots) groups that instigate legal action against group members’ competitors. As they craft policies to address purported market failures in digital markets, policy makers should account for potential government failure in the form of enhanced rent-seeking and other public choice concerns.

Keywords: digital markets, rent-seeking, rent seeking, public choice, Section 230, free-ride, public choice, self-interest, platforms

JEL Classification: K21, L11, L12