Should We Establish A Digital Authority?

This post is by Jeff Carter from Points and Figures

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Spent much of the last two days at the Stigler CenterProfessor Luigi Gonzales organized a pretty powerful conference.  It was a lot to take in, and in the University of Chicago tradition, it wasn’t just one opinion being spouted.  People had to defend their ideas, and there was consistent debate.  As a passive audience member, some of my assumptions were challenged.  It was a lot to take in and frankly, I am still taking a lot of it in.

One of the ideas that came out of the conference was that some sort of digital authority should be established to police digital companies.

I don’t think I agree with this conclusion, but I certainly understand where it comes from.  Digital companies can do a lot to put chokepoints in distribution.  Once they attain market power, they are hard to dislodge.  The side is this.  Yes, Amazon is a huge company and dominates digital commerce, but it accounts for less than 7% of all purchases in the United States.  Google only makes money on 6% of the clicks it serves up for search.  Combine that with existing competition or potential competition and it really depends on how you frame and draw the lines.

For example, in the futures industry, it is pretty clear that CME has a practical monopoly on contracts it trades. But does it?  It dominates Eurodollar trading but that is only for regulated futures.  If we examine the entire market for Eurodollars CME has a small slice of a gigantic market.  There is a regulator, CFTC, and the condition still persists. It’s not clear a regulator stops one company from dominating.

So, this is not so easy.

Yale economics Professor Fiona Scott Morton outlined her ideas on what the problems in digital are, and how she would solve them.  After her presentation, there was rebuttal and then the debate got heated.  Professor Morton asserted that existing antitrust law is not powerful enough to reign in monopolistic competition in the digital space.

She outlined digital platforms and digital space.  Here are some bullet points:

  • There are economies of scale and/or scope
  • Increasing returns to data
  • Often two-sided market places with network effects
  • Prone to “tipping”, meaning network externalities create winner take all competitions

Digital platforms have big impact.  There are issues with:

  • Privacy
  • Data
  • Politics
  • Policy
  • News

Of course, we have seen this in our news cycles and the way the political debate has taken place since digital platforms emerged in the latter part of the first decade of this century.

Additionally, commerce is affected.  For example, digital platforms often use framing, behavioral economic nudges, and defaults that can direct a consumer to make a choice that is most profitable for the platform, but a lower optimum choice for a consumer.  Ex-ante studies on consumer behavior show support for that.  In many cases, digital platforms can charge the price of “free” or even a negative price.  The platform will do this because the data is so valuable.

The other harm is innovation.  When a big dominant competitor is present, the pace of innovation is slower.  Investors have little incentive to invest. Entrepreneurs build compliment products instead of direct competitors that get sold to incumbents.

Professor Morton asserts that:

  • Self-correction is unlikely
  • Risk to waiting
  • Public policy should not rely on market forces
  • Antitrust or regulation is the way to solve the problem
  • There is currently no US regulator equipped to tackle the issue

US Tech platforms can be really hard to regulate and the lines of competition are really blurry.  Take Google.  They have search.  But, they have maps.  They have a work station suite of spreadsheet, document and presentation that competes with Microsoft and Apple.  They have video with YouTube.  They have driverless cars.  They have a mobile phone platform with Android.  They have a browser.  They are selling computers and tablets.

Where do you start to regulate a company like Google with a digital regulator?

Professor Morton outlines some ideas and I don’t disagree with her in many cases.  She states, “A regulator could enforce conditions that enhance competition such as data portability (should consumers ever obtain a right to control their own data, for example) or the creation of open standards, such as for the Internet of Things or micropayments. A regulator could also carry out any remedy chosen by the antitrust authority to restore lost competition after a determination of an antitrust violation. Such remedies might include sharing data (e.g., a detailed map of Wi-Fi hotspots and commercial locations), interoperability, or firewalls between platforms and their content.”

Here is her speech on her ideas. It runs to 34:15 and is about 15 minutes long. There is more after her talk and you will get a flavor of some of the back and forth. The entire video is very long.

I guess the thing I struggle with is that a lot of the business practices of digital companies have been with us forever. Is the behavioral nudging that they engage in any different than what grocery stores do when they organize their shelf space?

I am not persuaded by the fact that the newspaper industry has been decimated by digital platforms. To me, that’s business evolution. Traveling minstrels were put out of business by Gutenberg. Floor traders were put out of business by electronic traders. How do we know that there aren’t enough local bloggers and local websites which report what is going on locally a lot better than the old local newspapers did?

One trend does seem certain to me and it is uncomfortable. When innovation happens, the concentration of dominant players seems to get tighter. Yes, there are a lot of resellers enabled by Amazon, but Amazon is the dominant player. In finance, there used to be a lot of market makers in Treasury futures, and now there are just a few.
It’s not that this is “good” or “bad”. But, what are the real effects to society and to free markets? If there is a positive economic effect that we can determine, what should we do about it? Is society willing to make the cost/opportunity cost trade? We might give up some efficiency so that an industry is less concentrated. That means we might pay higher prices.

It is also hard to model the effects of regulation before you regulate. Suppose we conclude that Google has to divest Doubleclick. What is the long term effect of that even if we think it has a good short term effect? It would be a good idea to try and measure and quantify everything. For people on both sides of the debate, it’s very important to clearly outline the assumptions you are making and how you went about drawing those assumptions.

It’s also pretty clear to me that no matter what we do, even if we do nothing, we will make mistakes. In today’s political climate, mistakes are not tolerated. That also raises the stakes.  Will digital innovations like cryptocurrency change the face of competition?

I am glad that I feel uncomfortable about it. When you are wrestling with ideas, it is good to feel that way.