Digital markets have a lot of interesting characteristics arising from things such as network effects and data as a new kind of input. In most of my videos I talk about how this affects firms and business strategy. But today, we want to switch perspectives and think about the role of the government and discuss some of the key issues for regulation in digital markets.
We will talk about regulation of telecommunication markets, platforms, competition policy in digital markets and finally, regulation about privacy and data protection. Let’s start with some interesting aspects of telecom regulation. In many countries, communication infrastructure, starting with letter and parcel delivery, and later telephone networks were operated and maintained by the state.
In the 1990s, these services were privatized. The idea was that for-profit firms, especially when there is enough competition, would have greater incentives to continue to invest in network infrastructure and keep up with the fast pace of technological developments. Privatization also meant that governments set rules for how private companies can interact with network infrastructure that was previously state-owned.
There are a number of rules that can make the life easier for consumers. For example, in many countries you can keep your phone number when you switch network operators. The core issues in telecom regulation, however, include price regulation.
For example setting maximum fees that network operator A can charge network operator B for letting B’s customers use A’s network, for example when traveling abroad. An important aspect of price regulation is net neutrality. Let’s take a closer look.
The way you access the internet is through Internet service providers – or short ISPs. These can be mobile network operators, or operators that connect you to the internet via a cable in your home. You can think of ISPs connecting consumers and content providers, such as YouTube.
In most countries, the pricing policy of ISPs is regulated. They can only charge a price to one side of the market: to consumers. On the other side of the market, the price cannot be different from zero for all content providers.
This pricing regulation is called net neutrality. No content provider can pay the ISP to get their content faster to consumers. There has been a big debate whether net neutrality is good or bad.
Different theoretical models predict different welfare effects if we would repeal net neutrality. Without net neutrality, we could end up in a situation where some content providers are forced out of the market. Or we could end up in a situation where ISPs have additional profits that they can invest in network quality.
There are good arguments on both sides and there is a lot of money on the table. As a few countries have recently started to abolish net neutrality, we might soon have empirical evidence that other countries can learn from. Content providers, or platforms are also subject to rules and regulations in digital markets.
Some content platforms are closed in the sense that the group of complementors is fixed and decided by the platform. Think of a news website, for example. They employ journalists to research and write news articles.
In contrast, other content platforms are open. Think of YouTube. Anyone can create a channel and upload videos.
Now, what if YouTube was legally liable for all the millions of videos that they make available? YouTube would most likely not exist in its current form. So there must be some regulation.
Early on, governments introduced so called safe harbor provisions that exempt internet platforms from certain types of liabilities, for example when it comes to criminal content, hate speech or infringement of intellectual property. The concrete measures vary across different laws and countries, but generally platforms are required to take down or block access to such content after they have become aware of it. In this context, we have had heated debates about the trade-offs between freedom of expression and the enforcement of copyright.
When we talk about platform regulation, we can also think about examples of consumer protection in digital markets. For example, the European Union has introduced a so-called right to be forgotten. Consumers can complete a form and request removal of personal information from a search engine.
Now that you have a brief idea of what telecom and platform regulation can entail, let’s move on to competition policy issues. Generally speaking, governments who do competition policy intend to make markets more competitive, to incentivize innovation, and keep prices low. All of which are great for society as a whole.
The tool box of competition policy include ex-ante merger control, but also ex-post investigations. The consequences for violating competition policy and anti-trust rules can be quite fierce. Governments can issue large fines, impose behavioral restrictions, break up firms, and so on.
In digital markets, we have seen a number of prominent anti-trust cases against large tech companies, often on grounds of abuse of dominance in order to gain a competitive advantage in another market. For instance, Microsoft being dominant in the operating system market was accused of abusing that dominance to get a head start in the market for web browsers. In the context of e-commerce, Google was caught showing their own offerings more prominently than those of competitors.
And Facebook has been accused to use abuse their dominance as a social media platform to collect data that gives them an unfair advantage in the advertising market. The case against Facebook is interesting because it has elements of competition policy, the abuse of dominance part, but also aspects of consumer protection. Specifically, privacy and protection of personal data.
Before we get there, let’s first think about why we should care about privacy. Beyond our usual perspective of economics and strategy, privacy is an important aspect of dignity, autonomy, and ultimately human freedom in serving to protect someone’s personal space and their right to be left alone. Privacy is often also described as the control over and safeguarding of personal information.
This is where privacy becomes an economic problem. Privacy is important because access to personal information can shift economic power. Think of it on both sides.
If a firm knows that you have a high valuation for their product, they can charge you a higher price to extract more of your consumer surplus. But if you have better information about the market, prices and qualities of competitors, this put you in a better situation with less frictions, reduced search cost and better match to your personal taste. An important aspect is that the sharing of personal information can have externalities.
Positive and negative ones. For example, your medical records can help to generate valuable insights for society as a whole. On the other hand, if enough people that share similar characteristics as you leave digital traces, your preferences can be statistically inferred even if you didn’t disclose your own personal data.
In digital markets, there is often a trade-off between money and privacy. Often, when you use the internet, much content is free. But you leave data that can be valuable.
Think about how incredibly useful Google’s search engine is,. but you have never paid for it. But by using it, Google knows a lot about what you are interested in.
A way to think about how much you value your privacy is to think about your willingness to pay to not share your personal data. How much would you be willing to pay for a Google search that didn’t record your data? Now what’s really interesting is that your answer doesn’t matter, because often in digital markets you do not get the option to pay.
It’s either free and you have to click that you agree with a long and boring legal document, or you cannot use the service at all. Let’s look at an example. Some time ago, Google changed one sentence of their privacy policy.
What was previously written as: “We will not combine cookie information with personally identifiable information unless we have your opt in consent. ” Was changed it to: “Depending on your account settings, your activity on other sites and apps may be associated with your personal information in order to improve Google’s services and the ads delivered by Google. ” If you had actually read the new privacy policy and compared it to its earlier version, you would have realized that this is quite a big change, a change that has the potential to shift economic power.
But of course you didn’t. I did neither. Examples like that fuel the idea that consumers, and their personal data, need to be better protected in digital markets.
Governments around the globe are now introducing regulations that aim to do that. One of the earliest and far-fetching approaches was taken by the European Union with their general data protection regulation or GDPR. The GDPR is putting heavy sanctions on breaches of data protection and strengthens the rights of consumers.
As with all governmental interventions, also the GDPR sparked a big debate of whether it reached its goals, and about its unintended consequences. To sum up, in this video I introduced some of the most important pillars of regulation in digital markets. Spanning from telecom and platform regulation to competition policy and data protection.
There are two important take-aways. First, it is clear that the four regulatory fields are not at all distinct and there is a lot of overlap and interactions. And second, because digital markets often do not have the traditional geographic boundaries, and data flows are international, it is becoming increasingly difficult for governments to design rules and regulations that do not have spillover effects outside of their own legal territory.
