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Copyright © 2018 The Brattle Group, Inc.
Regulation of digital and intangible assets HOW DIGITAL PLATFORMS DISRUPT MARKETS
PRESENTED TO ACCC & AER Regulatory Conference PRESENTED BY Eliana Garcés 26-27 July 2018
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Agenda
What is a digital platform? – Definition – Economic characteristics – Data
Markets on digital platforms – Efficiencies and barriers to entry – Platform intermediation – Data disruption
Take away points
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What is a digital platform?
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What is a digital platform? Definition
There is no definition of ‘digital platform’
One proposal “A system of technology and connectivity standards that allows a variety of users to interact on a digital support in a variety of ways such as communicating, sharing content and information, or perform commercial transactions”
Regulators often narrow the scope of interest o Internet based o Commercial o B2C intermediary (latest EC regulation)
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What is a digital platform? Economic Characteristics
Platform exhibit very large reductions in transaction costs
Low search costs
Cheaply interconnects a very large amount of people (hundreds of millions)
Information costs Information on parties, products, price comparisons, localized searches
Communication costs Easy to use interfaces
Processing costs Payment, delivery, posting, sharing, publishing
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What is a digital platform? Economic Characteristics
Network effects Each user’s valuation of the service increases with the total number of users (of same or different type)
Increasing returns to scale The service becomes better and more efficient as the size of the platform increases
Economies of scope Offering a service becomes cheaper or better if some services are already offered
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What is a digital platform? Economic Characteristics
Economic characteristics work to amplify success ‘Know how’ and ability to realize efficiencies plays an important
role in platform success
Successful platforms can grow fast and can ‘conquer’ a market
Successful platforms can often enter new activities efficiently
Users may experience economies of scope when using services on the same platform
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What is a digital platform? Data
Platforms can easily collect data Tracking on own sites Provided by user (logged environments, user generated content) Collected by tracking on third parties sites Acquired from data sellers
Platforms can monetize data Targeted advertising Targeted content, targeted offers Price discrimination Forecasting, planning, market intelligence Resale of data Innovation input (AI)
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What is a digital platform? Data
Data has an increasing impact in platform performance Data can exhibit increasing returns to scale Data is a source of economies of scope Not all data is equal (Veracity, velocity, volume, value) Data analytics capabilities matter
Platforms vary in their reliance on data for monetization Business models will be impacted by the importance of data in profit generation (Apple iOS vs Android)
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Markets on digital platforms
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Markets on digital platforms Efficiencies and barriers to entry
Platform service (Search, publishing,
shopping)
Data collection
Service Improvement
Platforms can generate a virtuous loop that may be difficult to exactly replicate
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Markets on digital platforms Efficiencies and barriers to entry
Regulators considering ‘entry points’ to address unfettered expansion Data access and control – Example: more user control
Assessment of data intensive mergers
Possible anticompetitive effects of tying of services
Can also argue dynamic competition is working well
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Markets on digital platforms Platform intermediation
Platforms may become powerful intermediaries and may also compete with business users
Platform (Search, publishing, shopping)
Own service
Rival service Customers
Data & operation services
?
data
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Markets on digital platforms Platform intermediation
Regulators looking at possible abuse of gatekeeping role Fair terms in B2B relations
Pricing restrictions, contractual terms, access to efficiencies, placement
Fairness in user relations, social considerations
Algorithmic ranking and decision making on what gets promoted Search results , retail offers, news content
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Markets on digital platforms Data disruption
Data monetization disrupts business models
‘Atypical’ commercial practices to incentivize engagement Low and zero prices for services with high price elasticity of ‘engagement’ Favoring of content with high click-through rate
Online advertising puts all content in competition on platforms
Value is being increasingly appropriated by those who can capture the power of data analytics
Value chain control lies in data and user interface
More traditional businesses struggle to compete Business reorganizations and acquisitions
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Markets on digital platforms Data disruption
Data monetization disrupts privacy
Social trade-off: Data efficiencies rely on data collection Optimal point of control for privacy is unclear
Regulators: What benchmark to use? Users: Inconsistent behavior (privacy paradox) Firms: Problem with incentives
Tension between competition and privacy No overwhelming evidence of privacy as a dimension of competition Restrictions to data usage impact small firms more (ex GDPR)
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Assessment of platform conduct
Understanding platform business model is important for assessment of conduct
How does a platform make money? What are its incentives? How does it coordinate different users? Account for multisided-ness, interdependencies, externalities
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Take Away Points
Platforms succeed by generating transaction efficiencies Economic characteristics of platforms can result in the most successful ones ‘taking over’ a market Data and its usage may reinforce this effect but is mostly a disruptive force Must develop better analytical tools to discern efficient business model decisions from illegal conduct
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Thank you!
brattle.com | 20 Privileged and Confidential Prepared at the Request of Counsel
PRESENTED BY
Eliana Garcés Principal, Washington D.C. +1.202.419.3358 Eliana.garces@brattle.com
Dr. Eliana Garcés is a Principal at The Brattle Group with broad experience in antitrust enforcement and regulatory design. Dr. Garcés has held positions in both government and the private sector, including previous economic consulting experience in the United States. She was in the cabinet of Vice President Joaquín Almunia, the European Commissioner responsible for competition policy in 2010-2014. In that position she supervised antitrust and merger investigations in information technology, telecommunications, financial services, and energy market. She holds a Ph.D. in economics from University of California and a Licenciaura in Economics from Universidad Autónoma (Madrid).
The views expressed in this presentation are strictly those of the presenter(s) and do not necessarily state or reflect the views of The Brattle Group, Inc. or its clients.
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