Mobile payments, antitrust and socio-economic development

Digital Markets, Mobile Payments Systems, and Development – Competition Policy Implications in Developing Countries in Light of the EU Experience

Abstract

The digitization of economic activity has important socio-economic development implications and at the same time creates challenges for antitrust analysis. These implications and challenges have been met differently in jurisdictions around the world. In this paper we analyze the different experiences in the EU and developing countries, focusing on mobile payments. We find that this market exhibits special characteristics that need to be taken into account in the analysis of competition conditions. First, it is enabled by mobile telecommunications infrastructure and is offered by network operators, which causes competition in both markets to be closely linked. Second, there are factors, such as the lack of interoperability and geographical reach, that make network effects in this industry different from those present in other platforms. Third, since mobile payments in developing countries serve a niche—the population underserved by mainstream banking—the definition of the relevant market is not straightforward. We propose the criteria to be applied when making such a definition. Finally, since mobile payments have associated financial services, there is an interaction between competition and financial stability that needs to be considered.”

You can download the paper here

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A contribution to the empirics of algorithmic pricing

An Empirical Analysis of Algorithmic Pricing on Amazon Marketplace

Abstract

The rise of e-commerce has unlocked practical applications for algorithmic pricing (also called dynamic pricing algorithms), where sellers set prices using computer algorithms. Travel websites and large, well known e-retailers have already adopted algorithmic pricing strategies, but the tools and techniques are now available to small-scale sellers as well. While algorithmic pricing can make merchants more competitive, it also creates new challenges. Examples have emerged of cases where competing pieces of algorithmic pricing software interacted in unexpected ways and produced unpredictable prices, as well as cases where algorithms were intentionally designed to implement price fixing. Unfortunately, the public currently lack comprehensive knowledge about the prevalence and behavior of algorithmic pricing algorithms in-the-wild. In this study, we develop a methodology for detecting algorithmic pricing, and use it empirically to analyze their prevalence and behavior on Amazon Marketplace. We gather four months of data covering all merchants selling any of 1,641 best-seller products. Using this dataset, we are able to uncover the algorithmic pricing strategies adopted by over 500 sellers. We explore the characteristics of these sellers and characterize the impact of these strategies on the dynamics of the marketplace.”

You can download the paper here

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What do computer scientists have to say about algorithmic collusion?

The importance of talking to computer scientists before making assumptions about what pricing algorithms can do:

Algorithms, Machine Learning, and Collusion

“Abstract

This paper discusses the question whether self-learning price-setting algorithms are able to coordinate their pricing behaviour to achieve a collusive outcome that maximizes the joint profits of the firms using these algorithms. While the legal literature generally as- sumes that algorithmic collusion is indeed possible and in fact very easy, the computer science literature on cooperation between algorithms as well as the economics literature on collusion in experimental oligopolies indicate that a coordinated and in particular tac- itly collusive behaviour is in general rather difficult to achieve. Many studies have shown that some form of communication is of vital importance for collusion if there are more than two firms in a market. Communication between algorithms is also a topic in ar- tificial intelligence research and some recent contributions indicate that algorithms may learn to communicate, albeit in a rather limited way. This leads to the conclusion that algorithmic collusion is currently much more difficult to achieve than often assumed in the legal literature and is therefore currently not a particularly important competitive concern. In addition, there are also several legal problems associated with algorithmic collusion, for example questions of liability, of auditing and monitoring algorithms as well as enforcement. The limited resources of competition authorities should rather be de- voted to more pressing problems as, for example, the abuse of dominant positions by large online-platforms.”

Download the paper at https://mikro.uni-hohenheim.de/please-change-url-alias-757369458/publikation/algorithmus-machine-learning-and-collusion

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Smarter solutions than breaking up Facebook

It’s time for Identity Portability

By Digitopoly

“You want people to be able to communicate across networks.

. . .

The solution . . . is to allow individuals to port their identity to other networks, With that identity comes a set of permissions associated with that identity and it is that which creates value here. A competitor to Facebook — call it, for the sake of argument, NoRussiaBook — could come in, offer a different ad policy and you could move there. Your friends and connections need not know the difference although I would not recommend that be hidden — just that defaults be set for ubiquity which can then be seen and adjusted at the discretion of individual users. To be sure, privacy is complicated here but that is because privacy is complicated, not because there is anything really special or risky about this proposal.

. . .

All of the other solutions — namely, breaking up Facebook — do nothing to resolve the underlying issue — network effects become barriers to entry. We need to start taking that seriously if we want to do something here.”

More at Digitopoly

Alternatives to market concentration as a measure of competition

Measuring Competition

By Chris Dillow

“[C]ompetition economists have known for some time – that you cannot necessarily measure competition by the number of firms in an industry: the Herfindahl index, for example, can be a bad measure.

. . .

But if you cannot measure competition by the number of firms, how can you?

One alternative, proposed (pdf) by Jan Boone, is profits elasticity. The idea here is that if profits fall sharply in response to a rise in marginal costs then the industry is competitive but if they don’t then it isn’t. A competitive market is one which punishes inefficiency.”

More at Stumbling and Mumbling

More on market concentration and wage levels

From the NBER:

“Stagnant wages and a declining share of labor income in GDP in recent decades have spawned a number of explanations. These include outsourcing, foreign competition, automation, and the decline of unions.

Two new studies focus on another factor that may have affected the relative bargaining position of workers and firms: employer domination of local job markets. One shows that wage growth slowed as industrial consolidation increased over the past 40 years; the other shows that in many job markets across the country there is little competition for workers in specific job categories.”

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The bigger picture and meaningful policy goals

Income per capita varies wildly across countries. Adjusted for purchasing power, the average resident in Luxemburg has an annual gross income of over USD 100 thousand while the average Bangladeshi makes do with USD 3.5 thousand. Let that sink in for a second. Where you were born determines, to a great extent, your experience on this planet.

This phenomenon has captured a great deal of attention from economists for close to a century. From what we have been able to observe since the Industrial Revolution, there are times at which some poor countries have been able to grow fast for a long period of time and catch up with the income levels of the developed world. Many economists have tried to identify what was Japan’s, South Corea’s or Singapore’s secret. Parallels have been drawn to how the US or Western Europe experienced growth at an earlier stage. One point of focus has been the policies that were responsible for the successes observed. Investments in education have been a common pattern as well as a well-articulated industrial policy. Countries like the US, and later Japan and South Corea, changed their competitive advantage. They protected their industries at first so that they could develop and reach the technological progress of their international rivals.

The same path was tried around the world with a mixed bag of results. The import substitution industrialization model (in other words, favoring domestic production over foreign imports) failed tremendously in Latin America. Many poor countries were never able to leave behind meager investment rates to create the wealth and mimic the knowledge of the production means of other countries.

Efforts to identify the determinants of this situation have been numerous. There are many empirical studies that attempt to identify the main causes of growth. The results surprise very few people. A mix of political and macroeconomic stability, strong institutions, higher levels of education, and so on have been identified to have a strong causal link with higher per capita incomes. In principle, then, we do know why some countries are poor and some are rich. Those that wisely prioritize the use of public funds to take care of their uneducated and vulnerable citizens and create stable and sustainable forms of government can escape the trap.

The Economist, however, has recently claimed that “[e]conomists understand little about the causes of growth”. The assertion is to a great extent on point. Even if economists know that differences in growth and prosperity are due to differences in technological progress and the factors that determine this (such as low levels of education and higher country risk), they have not come up with a satisfactory answer regarding as to why certain developing countries have been able to overcome these problems and others have not.

Economists are frequently criticized for how they approach these questions. The classic accusation is that they over-rely on mathematical and statistical tools. On the other hand, at a general level, abstractions do allow observers to obtain a manageable framework to analyze a set of facts. Indeed, some degree of abstraction is not only helpful but imposed by the complexity of the phenomena studied by economics. However, equations and mathematical theorems, as helpful as they are, should be complemented with other economic approaches such as historical studies.

I mentioned Bangladesh at the beginning of the post because it is a perfect example of the shortcomings of our current understanding of economic growth. As pointed out by many experts, Bangladesh appears to be solving its problems and is poised to surpass Pakistan in terms of GDP per capita very soon, but no one could have predicted that before the country entered into this path. In other words, any economist’s prediction on which will be the next poor country to start growing fast and in a sustainable manner can be regarded as an educated guess, at best.

Since this blog is focused on antitrust law, I am obliged to explain why this paragraph is the first place where I mention the term. It is a way of making an important point. Competition policy does not exist in a vacuum. What we make of it should be dictated by a meaningful context. We have to understand the big picture before we can decide what to do with antitrust law enforcement. Competition law is sometimes said to be the economic constitution of a country or economic region. However, since most competition laws are applied with a specific purpose—improving consumer welfare—such an assertion is completely off the mark. My point is that, although we increasingly understand more about how the economy works, there is still a big shadow over many (economic, social, political, psychological) relationships that we have yet to discover. The role of competition policy within different socio-economic contexts does not escape this reality.

To wrap it up, as we improve our measures of competition policy performance, we will be more able to test their effects on economic performance. There will also be natural experiments that will help us to estimate how deviations from the consumer welfare criterion affect law enforcement and other economic policy objectives. However, none of this will be meaningful until we gain more knowledge on what moves the poorer parts of the world to a path of sustained economic growth. Little by little, we will understand the role competition policy has to play in a wider economic context. Some of the questions that I hope we will be able to answer are the following: if economic growth is about getting the political economy right, is there a relationship between the latter and antitrust law? Can we develop manageable legal standards to create a consistent case law if we depart from consumer welfare considerations? If development into an innovation-oriented economy requires at a first stage protectionist policies, what room does that leave for competition policy? What role does market concentration play in income inequality?

These are challenging topics. However, to paraphrase what  Christopher Edley, Jr. said at my LLM graduation (or what I think I understood): although we need to have the confidence to know that we can tackle any complex task that is before us, we need to be humble enough to recognize that to reach the answer we always need to go deeper.

The effects of market power over wages

More and more companies have monopoly power over workers’ wages. That’s killing the economy.

By Suresh Naidu, Eric Posner, and Glen Weyl

 Vox

“For a time, economists believed that labor markets were . . . competitive. But that conventional wisdom was vaporized by a series of empirical studies that suggest that labor market power is real and significant. A number of studies, summarized here, have found, for example, that when wages fall by 1 percent, only about 2 to 3 percent of workers leave, at most.

If labor markets were really competitive, we might expect the figure to be closer to 9 or 10 percent. Other studies have found that employer concentration has been increasing over time and that this concentration is associated with lower wages across labor markets.

. . . .

[G]rowing labor market power may well be a significant explanation of the host of maladies that have beset wealthy countries, notably the United States, in the past few decades: declining growth rates, falling labor share of corporate earnings, rising inequality, falling employment of prime-age men, and persistent and growing government fiscal deficits. It’s remarkable how well labor market power alone can simultaneously explain all these trends.

Many conservative economists blame high taxes for these problems. But inordinately high taxes cannot explain these trends, because tax rates have been cut several times during this period. Nor can globalization and automation. Globalization and automation can help explain why inequality has increased but not why economic growth rates have stagnated: On the contrary, globalization and automation should have increased economic growth (by expanding markets and by reducing the cost of production), not reduced it.”

Read the whole article at Vox

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Democracy and prosperity: What can antitrust do to maintain or create an open economy?

“Why Nations Fail: The Origins of Power, Prosperity and Poverty” is quite an ambitious book. The authors, Daron Acemoglu and James A. Robinson, attempt to put forth a global theory that explains the cause of the differences in prosperity across countries. Granted, there is already substantial work on how many factors, such as low levels of education and corruption, affect income per capita levels and growth rates. The book in question goes, however, to a more fundamental level. Why have some nations been able to overcome these problems and others not? That is the trillion dollar question.

The differences that we see today in income levels across the globe were historically unprecedented before the industrial revolution started in Great Britain. Before that, the whole world was roughly equally poor. After this fateful development, some countries became substantially wealthier than others by adopting the latest production technologies and becoming themselves fertile ground for later frontier innovations. According to the book, at that time, the industrial revolution could only have happened in a country like Great Britain. Why? Because it had generated a virtuous circle of inclusive political and economic institutions. Here, inclusiveness means a regime that allows and encourages the participation of a broad cross-section of society as opposed to a small powerful elite (both in economic and political terms). The more inclusive the participation in political life became, the more inclusive the economic rules of the game, which in turn empowered more people who acquired a saying in what the government did. In the authors’ words, Great Britain broke the mold. Before then, the historical rule had been that of extractive regimes or relatively short-lived, imperfect attempts at inclusiveness (such as the Roman Republic and Venice between the 11th and 13th century). Was the benevolence of British rulers the cause of such a drastic departure from history? According to the book, no.

The explanation is of course somewhat complicated. It all starts with the Black Death, goes through the instauration of the Transatlantic trade, and ends up with the Glorious Revolution. I want to keep it short and also do not want to spoil more of the book so I will not go into much detail on this. The principle behind it all is that these shocks (or critical junctures, as the book calls them) provided an opportunity for some parts of the population who were historically neglected (peasants and merchants) to demand greater rights and representation from the crown. In all of these developments, there is one important element that the authors do not neglect: chance. Great Britain had some luck in coming out of these shocks as a more inclusive society than before.

I think this is enough explanation of the book to set the mood. The point that is worth highlighting in this blog is the part of the book that talks about antitrust. According to the authors, the US antitrust laws played an important role in the time of Standard Oil and the Robber Barons. The prosecution of anticompetitive behavior and monopolization of markets was key in maintaining the US economy open to the entrepreneurial efforts of a broader cross section of society. The book also talks about competition policy matters when it analyzes how the abolition of monopolies in many markets and trade routes in Great Britain in the years leading up to and after the Glorious Revolution allowed it to keep developing a more inclusive and prosperous society.

The point has important implications for what we consider competition law’s role in a society to be. The US antitrust laws were conceived as a tool to halt the rising tide of concentration in the American economy because such a trend was incompatible with democratic values. Later on, these views largely disappeared from antitrust scholarship and case law, though not from other fields of the economics profession. The predominant view now is that consumer welfare (or sometimes overall efficiency), both from a static and dynamic point of view, should guide enforcement activities.

Under the current paradigm, market concentration can be tolerable to the extent that it incentivizes creative destruction, or in other words, innovation efforts to become the next monopoly. To be sure, such a consideration does not always trump static concerns in many important cases. However, and here is where the theory developed in the book comes into play, the incentive of other firms to innovate in order to achieve a dominant position is not the only dynamic effect of market concentration. In addition, monopolies and oligopolies have an incentive to stop or delay innovation through their political influence. In other words, the dynamic effects of monopolies (at least the largest ones) are theoretically ambiguous. On one side we have eager firms who will spend considerable resources to innovate in order to achieve the same profitability of current dominant firms (or current dominant firms trying to maintain their lead); on the other, we have the obstacles that incumbent players could erect thanks to their political power.

The book is full of examples of how regimes in extractive societies explicitly opposed innovation and the adoption of the latest technologies based on the fear of social unrest and, therefore, their hold on power. Russian and Austrian monarchies were reluctant to allow the construction of railroads and the adoption of manufacturing technologies because these led to urban development, and cities made it easier for the people to organize and take action against social injustices.

In most countries with a competition law, it is hard to imagine that politicians can oppose innovation explicitly based on such considerations. The arguments have changed. However, organized interest groups are still able to exert their political influence to shield themselves from competitive pressures.  There is vast theoretical and empirical work that explores how policy is thus shaped.

The role of antitrust in developing countries could then be to support the development of inclusive social and economic institutions. In developed countries, antitrust can be a powerful tool to keep the economy open. How can antitrust authorities achieve this? Certainly not alone but they can do their part. Inclusive political and economic institutions depend on other important areas such as tax policy, social investments (e.g. education, public health, transport, and communications infrastructure), and IP rights.

Some highly complex questions that must be answered based on this are whether it should be anticompetitive that firms lobby to close markets and how much market concentration should be tolerated to keep dynamic incentives to innovate. The answer to neither of them has been uniform across jurisdictions.

The book’s theory is indeed compelling. It will go through a very important test in the medium to long term, namely, through the developments in China. Currently, this nation has been taking steps toward a more central and authoritarian rule. It is possible again for a president to hold power for his entire life. According to the Economist, Xi Jinping is the most powerful ruler since Mao Zedong. If the political situation does not change and China is still able to achieve the levels of prosperity in per capita terms as those experienced in Western Europe and the US, then the book’s hypothesis will suffer a fatal blow. If not, China might still be able to contest the technological supremacy of other nations in some fields (as it also happened in the times of the Soviet Union) but a wealthy society depends on a broader reach of innovative efforts.

I personally think it is highly unlikely that China will achieve, let alone sustain, a high level of prosperity under a ruler that faces little constraints. Even if we assume that Xi Jinping is an enlightened and benevolent statesman, the situation will still be fragile for three reasons (the first two taken from the book): first, there will be strong incentives to overthrow him since getting your hands on such a powerful economy will be incredibly attractive to his detractors, who may not show the same hypothetical restraint; second, even if the first does not happen, there is a high likelihood that an appointed successor, who will be subject to ever fewer restrictions regarding the exercise of power, will start to steer the economy to the benefit of its supporters, which normally has destructive consequences to economic welfare; and third, open dissent and public debate, which are necessary conditions of effective policy making, are utterly incompatible with authoritarian rule. On another level, I think it is still tricky to argue that it is good to live in a prosper society even if most civil liberties are abolished. Though I do not think it will come to that.

The purpose of this discussion is to open a fundamental debate regarding the role of antitrust. Should we go back to basics? i.e. should we apply the antitrust laws so that the functioning of the economy is not incompatible with democratic values (taking into account the positive feedback loop that may exist between both)? or should we leave it to other areas of public policy to guard the gates?

The way the two questions are formulated above implies that there should be some, at least academic, consensus on the need for limiting corporate influence on economic policy. If we assume this, then the question is which is the right policy approach to achieve this result. The book seems to lean toward interventions that aim at market structure. However, a legitimate question is whether other policy options could serve this purpose better. Direct regulation of campaign donations and lobbying activities are a choice. Whether these and structural measures should be substitutes or complements should also be explored. These could be some starting points. The matter is rather complex for one blog post but I leave you with the promise of future analysis.

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Standard economic thinking does not capture consumer behavior quite well

The understanding of complex social problems requires interdisciplinary approaches. In a Project Syndicate article, Ricardo Hausmann describes recent research on how moral psychology can improve current economic models of consumer behavior. This branch of psychology can give better insights on how to predict our economic choices, since we carry out transactions not only with the aim of maximizing our utility but also driven by social norms that are specific to the groups to which we belong or want to belong.[1]

For example, our aspirations and those of our peers may cause our demand to be significantly inelastic to price, which has an important implication for antitrust analysis. Different groups that share common values may constitute different relevant markets. If authorities are able to identify such groups, the information would be useful to know where to look for different price elasticities. This could expand current criteria used to segment relevat markets. Relevant market segmentation is of course a common concept, but the innovative insight would be to look for social norms that determine purchasing behavior across different customer groups.

This line of thinking might also lead us to better understand the potential of a new entrant that offers a product with great social identity appeal (e.g., electric cars). A good reason to buy a Tesla instead of a diesel engine luxury car may not only be our genuine concern for the environment but also our desire to be seen as progressive. In the same way, small shops may be able to survive the onslaught of giants and their economies of scale because a significant group of people may not want to be seen in a Walmart but rather at a local farmers market. Some people may use Uber not only because it is cheaper and convenient but also because they want to be seen as supporters of innovation and technological progress.

In addition, other consumer behavior theories can help us understand advertising within antitrust cases in a different way. If, contrary to standard economic theory, we do not assume stable preferences, advertising can also be regarded as a powerful force that can sway consumer spending (a Don Draper-approved statement) toward a given firm’s output. The effect would not only be due to awareness of a product and its characteristics but because the advertising campaign may be successful in making consumers perceive a brand as compatible with the group that they want to be a part of.

In sum, consumers make decisions not only based on relative prices and qualities but also on who they are and who they want or not want to be. If we want to assess market conditions within antitrust cases more accurately, we should start taking all of this into consideration.

[1] Hausmann describes this as a quiet revolution, but such theories of consumer behavior have been around for a long time. For a brief review, see Swan, Peter (2009). The Economics of Innovation (pp. 187–197). United Kingdom: Edward Elgar Publishing.

 

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