How to Protect Competition and Consumers in Digital Markets

While some markets may self-correct, rapid self-correction in markets dominated by large digital platforms is unlikely. The economy and market structure subcommittee of the Stigler Center’s Digital Platforms Project proposes ways to reform antitrust law and regulation in order to adequately deliver competition to consumers. 

 

 


On May 15-16, the Stigler Center will host its third annual antitrust and competition conference. Titled “Digital Platforms, Markets and Democracy: A Path Forward,” the conference will bring together dozens of top scholars, policymakers, journalists, and entrepreneurs.

 

During the 2018 conference, a consensus emerged that the political and economic issues raised by the market power of tech platforms must be addressed. To provide independent expertise on the appropriate policy responses, the Stigler Center formed the Committee for the Study of Digital Platforms. The committee is composed of four specialized subcommittees: the economy and market structure; privacy and data protection; the media; and the political system. Each subcommittee is comprised of a chair and specialists in different fields (economics, law, data sciences, media, public policy, political science, venture capitalists, etc.). Its ultimate goal is to produce independent white papers that will inform decision and policymaking.

 

During the conference, the four subcommittees will discuss their initial conclusions. In preparation, we will publish the executive summary of each preliminary report. Find them all here


 

Attributes

 

The market structure and antitrust report begins by discussing the characteristics of digital markets. These markets often have extremely strong economies of scale and scope due to low marginal costs and the returns to data. Moreover, they often are two-sided, have strong network externalities, and are therefore prone to tipping. If so, the competitive process shifts from competition in the market to competition for the market. This combination of features means many digital markets feature large barriers to entry. The winner in these settings often has a large cost advantage from its scale of operations and a large benefit advantage from the scale of its data. An entrant cannot generally overcome these without either a similar installed base (network effects) or a similar scale (scale economies), both of which are difficult to obtain quickly and cost-effectively.

 

Additional barriers to entry are, ironically, generated by the very consumers who are harmed by them. Consumers do not scroll down to see more search results, they agree to settings chosen by the service, they single-home on one platform, and generally take actions that favor the status quo and make it difficult for an entrant to attract consumers. In general, the findings from the behavioral economics literature demonstrate an under-recognized market power held by incumbent digital platforms.

 

The theme that runs throughout the report is the difficulty of entry into digital platform businesses once an incumbent is established. Whether the entrant is vertical or horizontal, has succeeded to some degree, is nascent, is a potential entrant, or is a large platform in an adjacent space, its existence improves consumer welfare. Either the entrant provides more choice, different features, and a chance of higher quality, or the threat of those outcomes spurs the incumbent to provide lower prices, higher quality, and innovation, and to do so more quickly.

 

The role of data in digital sectors is critical. Personal data of all types allows for targeted advertising to consumers, a common revenue model for platforms. The report shows that the returns to more dimensions and types of data may be increasing, which again advantages incumbents. Consumer data in the United States is not regulated in any way that gives useful control or privacy to consumers; and additionally, most consumers have little idea what is being collected about them and re-sold. One way in which digital platforms often exploit their market power—and increase their profits—is by requiring consumers to agree to terms and conditions that are unclear, difficult to understand, and constantly changing, but which give the platform freedom to monetize consumers’ personal data.

 

Digital platforms are characterized by free services. “Free” is not a special zone where economics or antitrust do not apply. Rather, a free good is one where the seller has chosen to set a monetary price of zero and may set other, non-monetary, conditions or duties. It is possible that a digital market has an equilibrium price that is negative; in other words, because of the value of target advertising, the consumer’s data is so valuable that the platform would pay for it. But the difficulty of making micropayments might lead a platform to mark up this negative competitive price to zero. As a result, barter is a common way in which consumers pay for digital services. They barter their privacy and information about what restaurants they would like to eat in and what goods they would like to buy in exchange for digital services. However, in principle, that information has a market price that can be analyzed.

 

Harms

 

Market power, consumer biases and an ad-supported platform model can generate significant consumer harms. First, market power in advertising markets will result in markups paid by advertisers. Secondly, while behavioral economists have studied consumer biases and firm responses in offline markets, these are swamped by what digital businesses can learn by using high-dimensional, large datasets to explore every nook and cranny of consumers’ many behavioral shortcomings and biases in real time. Framing, nudges, and defaults can direct a consumer to the choice that is most profitable for the platform. A platform can analyze a user’s data in real time to determine when she is in an emotional “hot state” and offer targeted sales. These tactics reduce the quality of the zero-price content the user experiences on the platform.

 

Today’s platforms understand that in some settings they can obtain higher margins if they make all of the necessary complements themselves or, position themselves as a mandatory bottleneck between partners and customers. In particular, today’s digital platforms are often very careful to maintain complete control over the user relationship so that they do not face any threat of disintermediation from a complement. These technological and policy choices can be used to reduce the possibility of successful entry by direct competitor. Other strategies such as exclusive contracts, bundling, or technical incompatibilities can also be used by platforms to restrict entry of competitors. Some of these strategies could be violations of existing antitrust law, as discussed below.

 

In addition to de novo entry, platforms fear disintermediation by a partner or complement. If a platform’s partner is able to directly access and serve the platform’s customers, it might take them off the platform entirely, reducing the platform’s profit. A platform that has total control of demand due to control over framing of consumer choices, policies for complements, and technical standards can steer customers to content and complements of most benefit to it. The most privately beneficial content might be owned by the platform itself rather than provided by independent firms that could extract rent or even challenge the platform’s market power in the future. To the extent that consumers single-home, they may not be aware of such steering, or may not have competitive alternatives to which they can turn if they are aware.

 

Insufficient competition and entry result in harms to investment and innovation. There is significant theoretical and empirical research that concludes that anticompetitive creation or maintenance of market power will cause a reduction in the pace of innovation. The lessening or blocking of innovative entry is of particular concern given its value to consumers. A VC will usually be wary of outright investing in an innovative startup that will implicitly or explicitly compete head-on with a tech giant. In that case, the entrepreneur can only hope to be the preferred innovator of a complement and sell its business to the platform at an early stage. However, if entry barriers were reduced, the entrepreneur would not have to settle for a small fraction of the platform’s profits, but could compete for all of them and try to replace the platform. This possibility generates a much larger incentive to innovate.

 

“Antitrust law and its application by the courts over the past several decades have reflected the now outdated learning of an earlier era of economic thought, and they appear in some respects inhospitable to new learning.”

 

Solutions

 

While some markets may self-correct, the findings of this report suggest that rapid self-correction in markets dominated by large digital platforms is unlikely.

 

While US antitrust law has long been flexible in combatting anticompetitive conduct, there is increasing concern that it has been under-enforced in recent years. Antitrust law and its application by the courts over the past several decades have reflected the now outdated learning of an earlier era of economic thought, and they appear in some respects inhospitable to new learning. Antitrust enforcement better suited to the challenges of the Digital Age may therefore require new legislation.

 

Technology platforms present particular challenges for antitrust enforcement. Markets tip, and resulting market power is durable, so even effective antitrust enforcement is unlikely to generate fragmented markets. Nonetheless, enforcement that protects competition on the merits in the first stage and prevents exclusionary conduct in the second stage will help ensure that market participants make unfettered choices among competing platforms and that entry and innovation are not inhibited by private rent-seeking.

 

Economists and lawyers will have to develop tools to explain to courts the role of behavioral biases in the creation of market power and their effect on the quality of content. The existence of zero money prices means that measurement of quality will be critical. Likewise, the impact of potential competitors and nascent competition must be taken into account. Market definition will vary according to what consumers are substituting between, whether there is competition on the platform between complements or competition between platforms. The need to identify the specific anticompetitive exclusionary conduct and analyze it may raise enforcement costs, given all the possible variants of exclusionary conduct possible in digital markets.

 

The report details the particular areas where antitrust law will need reform in order to adequately deliver competition to consumers. The report also suggests the establishment of a specialist competition court to hear all private and public antitrust cases which would allow judges to develop some expertise. The committee believes that vigorously enforcing the antitrust laws under these conditions would be likely to increase entry in digital platform industries, competition, and consumer welfare. Moreover, such enforcement would likely result in remedies to restore competition that has already been lost, as well as serve as a deterrent to future anticompetitive conduct.

 

However, because technology platforms present the enforcement challenges detailed above, even effective enforcement may not be enough to generate competitive digital markets in a timely fashion. Therefore, the report suggests that Congress create a specialist regulator, the Digital Authority. The regulator would be tasked with creating general conditions conducive to competition. The committee also suggests separating out some types of regulation that will apply to virtually all market participants while others are only appropriate tools to apply to companies with bottleneck power. “Bottleneck power” describes a situation where consumers primarily single-home and rely upon a single service provider, which makes obtaining access to those consumers for the relevant activity by other service providers prohibitively costly.

 

The Digital Authority should routinely collect data on digital transactions and interactions, with an emphasis on data from businesses with bottleneck power. These data—made public to the extent possible—would allow policy makers and researchers to assess the performance of the sector. The DA should have a mandate to create “light touch” behavioral nudges when these will make markets more competitive. An example of a regulation that would enhance competition is data portability. The DA could set up rules that allow users to easily port their data from one service provider to another and monitor compliance. The DA may also promote open standards in such areas as micro-payments and digital identities. Should Congress request it, the DA could oversee a mandate for interoperability in any market where market power has become entrenched and threatens long term harm to competition. The report also suggests that the DA carry out a parallel merger review that would be set up to incorporate necessary antitrust reforms and modern standards.

 

Some regulations should apply only to firms that meet the DA’s definition for bottleneck power. Because the cost of false negatives is high and there is uncertainty, the public interest requires the DA to take a more interventionist approach in these settings. The DA would have merger review authority over even the smallest transactions involving digital businesses with bottleneck power because nascent competition against these entities is very valuable for consumers. Non-discrimination rules would protect against a complement that is a potential competitor of the platform itself, or one that operates only on the platform as a rival provider of content.

 

When a company has been found liable for violating the antitrust laws, part of the current process is that antitrust authority devises a remedy to restore the lost competition. Data sharing, full protocol interoperability, non-discrimination requirements, and the unbundling of content from a platform are all tools that the regulator, in conjunction with the antitrust authority, could apply and monitor over time in order to restore competitive markets.

 

 

Subcommittee on Economy and Market Structure:

 

  • Chair: Fiona Scott Morton, Theodore Nierenberg Professor of Economics, Yale University School of Management
  • Pascal Bouvier, Managing Partner and co-founder, MiddleGame Ventures
  • Ariel Ezrachi, Slaughter and May Professor of Competition Law and Fellow of Pembroke College, University of Oxford
  • Bruno Jullien, Research Faculty, Toulouse School of Economics
  • Roberta Katz, Senior Research Scholar, Stanford University
  • Gene Kimmelman, President and CEO, Public Knowledge
  • Douglas Melamed, Professor of the Practice of Law, Stanford Law School
  • Jamie Morgenstern, Assistant Professor, School of Computer Science, Georgia Tech

 

DISCLAIMER: The purpose of these preliminary reports is to identify what are the new challenges digital platforms pose to the economic and political structure of our countries.These reports also try to identify the set of possible tools that might address these challenges.Yet, there is potential disagreement among the members of the committees on which of these problems is most troubling, which tools might work best, whether some tools will work at all or even whether the damage they might produce is larger than the problem they are trying to fix. Not all committee members agree with all the findings or proposals contained in this report. The purpose of these preliminary reports, thus, is not to unanimously provide a perfect list of policy fixes but to identify conceptual problems and solutions and start an academic discussion from which robust policy recommendations can eventually be drafted.  

 

For more on this, check out the following episode of the Capitalisn’t podcast:

 

 

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