Firm in the clouds: Supplier market power and technology adoption in the cloud computing industry

Abstract

I study the effects of technology adoption on firm productivity in the French cloud computing services market, a setting with falling adoption costs yet a high concentration of suppliers. I study how IT-using firms make technology bundling choices when faced with these adoption frictions, and analyze the effects of competition policies on downstream adoption and welfare. I find that adopting cloud computing increases firm productivity from 0.2% to 1.6%, with heterogeneous effects across sectors and a larger impact for firms that purchase services from multiple cloud providers. To estimate the effects of competition policies to increase supplier switching, I estimate a model of industry dynamics, in which downstream firms produce output and make computing input bundle choices and suppliers compete to set prices. I find substantial entry and switching costs, of which egress fees are at most 8%. There is substantial complementarity between Microsoft products. A simulated merger between Microsoft’s and Google’s cloud platforms lowers average annual welfare by 0.28%, driven by an average price increase of 26%. By comparison, simulating the effects of a ban on data egress fees from the EU Data Act and an increase in software interoperability, I find these policies produce annual welfare gains of 0.06% and 0.16% (€183-491 million), respectively.