Virtual Competition

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E-commerce has brought us all closer to the promised land of competition – where ample choice, better quality and lower prices reside. Our online environment is seemingly delivering constant waves of innovation and competitive pressure. It has led to reduced barriers to entry, increased market access, increased market transparency and lower search costs. 

Alongside these positive developments - somewhat behind the scenes - a range of strategies have emerged, which may undermine these developments – limiting transparency, price competition, choice and access to markets. Indeed, following the wave of innovation and competitiveness introduced by e-commerce, increasingly powerful anti-competitive undercurrents have come into play.

At times, anti-competitive strategies may be unilateral, and include behavioral discrimination or exclusionary practices. At other times, novel contractual frameworks may limit competition, such as online marketplace bans and wide parity clauses. Also noteworthy are instances in which advanced algorithms may be used to facilitate coordinated action and establish algorithm-driven collusion.

These developments raise challenging policy and enforcement questions. Should they call for antitrust intervention or should we put our trust in the market’s ability to correct itself? To what extent can exiting competition and disruptive innovation safeguard consumer welfare from new algorithm-driven business strategies? 

Consider, for example, the challenges presented by the shift to dynamic pricing. As industries are shifting to automated dynamic, differential pricing where sophisticated computer algorithms rapidly calculate and update prices, an interdependence may emerge. The algorithm’s ability to detect and quickly react to price changes in a highly transparent market, may (somewhat counterintuitively) chill competition and result in price increases. This phenomenon which may emerge under certain market conditions is known as tacit collusion. In itself it is not illegal. But, should it be condemned when companies use algorithms to change the market dynamics and artificially create parallelism? 

Another interesting strategy which raises enforcement challenges is that of price discrimination. Increasingly, online operators are harvesting our personal data and can adjust pricing accordingly. Online platforms are able to create a mirage of competition – a seemingly competitive environment – which in fact has been altered to maximize profitability, by identifying the user’s willingness to pay and charge at that level. The user’s postcode, computer brand, search history and other data points, all play a role in personalizing the shopping environment, and the price displayed.  As a result, the seller is able to engage in discriminatory practices and charge higher prices, while retaining the façade of competition. The customer, being unaware of the information gathered and the method used to calculate the price, is often unaware of it being targeted by these strategies.

These strategies, and others, form an increasing part of our modern online environment. Stealth, and asymmetry of information, are two striking characteristics of our online dystopia. Also noteworthy is the increased concentration online - as the key information and search junctions are captured by a select number of players who benefit from network effects. The majority of us trust a few search interfaces and service providers.  As we increasingly depend on these providers to shape our online interface their gatekeeper’s power increases. Worryingly, we may lack the ability to detect whether the marketplace has been distorted and through which means.

While many are concerned about the shift in power from consumers to the platforms, key questions remain: Is the shift in power transient or here to stay? Is competition law the adequate tool to address our concerns? And if it is, how effective might it be in addressing these strategies.

These questions are at the top of the agenda of most competition agencies. Enforcers in the EU and elsewhere grapple with the various theories of harm and the role competition law should play in these evolving markets. Possible remedies may include ex-ante and ex-post measures and may go beyond the narrow scope of competition law. They could, for example, focus on consumer empowerment, privacy and data mobility. The risk of over intervention is clear – it may chill innovation and investment. At the same time, the risk of under enforcement is also notable and significant, and may result in clear consumer harm.

We should all hope, that our enforcers and elected representatives will rise to the challenge and develop an inclusive data-driven economy which safeguards both innovation and consumer welfare and which benefits society as a whole. 

Read more about these themes:

A Ezrachi & M Stucke Virtual Competition–The Promise and Perils of the Algorithm Driven Economy (Harvard University Press)

A Ezrachi & M Stucke ‘Two Artificial Neural Networks Meet in an Online Hub and Change the Future (Of Competition, Market Dynamics and Society)’ University of Oxford Legal Studies Research Paper Series, available on SSRN.

Ariel Ezrachi is the Slaughter and May Professor of Competition Law at the University of Oxford and the Founder and Director of the University of Oxford Centre for Competition Law and Policy. He routinely advises competition authorities, law firms, and multi-national firms on competition issues, and develops training and capacity building programmes in competition law and policy for the private and public sectors. He is the co-editor-in-chief of the Journal of Antitrust Enforcement (OUP) and the author, co-author and editor of numerous books, including Virtual Competition – The Promise and Perils of the Algorithm-Driven Economy (2016, Harvard) and EU Competition Law, An Analytical Guide to the Leading Cases (5th ed, 2016, Hart).

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