(Photo: iStock)
(Photo: iStock)

Opinion | The competition law and data advantage conundrum

Network effects generate benefits but at the cost of choice, which is seen as vital for a good market

Competition law is struggling to come to grips with the internet. Web platforms have an incentive to pursue growth over profits. They operate on the basis that long-term customer lock-in is far more strategically important than the short-term benefits of quarterly profits. This often leads them to pare prices to the bone so as to maximize customer growth—behaviour that would ordinarily have attracted the attention of the competition regulator.

However, the question of whether the price at which a given product or service is being sold is “predatory" or not depends on whether it is being sold below cost. Since internet businesses, by design, offer unprecedented economies of scale and savings on overheads, it is difficult to establish whether their price is, in fact, predatory—especially since the traditional businesses they are benchmarked against cannot match the scale and efficiency of an online business.

Some internet platforms have grown to the point where they are fast becoming (if they are not already) part of the critical infrastructure of the internet. In some cases, given their dominance as the most effective platform for the delivery of services, even competitors have no choice but to use them. As a result, platform businesses have access to unprecedented volumes of data—far in excess of what their competitors will ever possess—and can understand, better than anyone has so far been able to, what users like, how they behave, and what they need. This has given them the ability to tailor their services more accurately than before, offering a quality of user experience that is truly unprecedented.

E-commerce platforms understand what sells and can take advantage of the feedback loops baked into rankings, user reviews and shopping carts. On social media, where the currency is user preferences, the rich and granular insights that these platforms have on their millions of subscribers give them an insurmountable advantage over traditional advertisers as to who they should aim their advertisements at. On-demand app services that provide accommodation and transport in new and disruptive ways understand travel patterns and demand curves so well that they can provision the supply of services in ways that the competition simply cannot hope to match. It is this data advantage that internet platforms use to establish clear blue water between themselves and their competition, so much so that in today’s world, any business that is unable to properly leverage data will find it impossible to keep up.

If the purpose of competition regulation is to ensure diversity of market access and prevent the concentration of market power in the hands of a few, regulators should do something to address the distortion that internet platforms bring. There is no doubt that data gives those who know how to harness it a significant advantage. However, restricting the manner in which digital platforms function, or worse, breaking them up to reduce concentration of market power, will end up denying consumers the very advantages that these businesses are so uniquely capable of generating.

At the heart of this conundrum is the peculiar nature of network effects, a feature of digital markets that ensures that the more users the business has, the better is the quality of the customer experience that it can offer. As data platforms acquire more and more customers, their understanding of user behaviour improves exponentially, making it possible for them to deliver services more directly relevant to the needs of their individual customers. As word spreads of the increasing number of benefits that are now available to users of a dominant platform, more and more customers from other platforms will gravitate towards it, eventually giving rise to a winner-takes-all dynamic that inevitably results in platform consolidation.

The history of the modern internet is replete with examples of this dynamic. Over the years, many smaller, complementary businesses have rolled themselves up into larger platforms in order to leverage the scale and data advantage of the combined business. But as much as all this consolidation results in a better user experience, it also progressively robs customers of choice, the natural and inevitable consequence of which is that users will eventually have no option but to use one single dominant platform for all their needs.

Herein lies the crux of the problem. While on the one hand, network effects generate tremendous benefits to consumers, it does so at the cost of the choice that we all have come to believe is essential for a well performing market.

But should choice be an end in itself? Can there be situations in which having multiple platforms to choose from is neither ideal nor even desirable? If you think about social media, the reason why we gravitate towards a single platform is that all our friends and family are on it. By signing up ourselves, we are looking for an opportunity to be able interact with all of them in one single place. It makes no sense whatsoever to split up this sort of a platform in the name of customer choice when consolidation of our social circle is the reason why we went there in the first place.

If we want to regulate competition on the internet, we will need to come up with something new. The remedies that have served us so well for all these years are just not useful in the same way when it comes to internet platforms.

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