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Five ways disruptive tech is challenging the Federal Trade Commission’s practices

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Kudos to the Federal Trade Commission (FTC) for holding “Hearings on Competition and Consumer Protection in the 21st Century.” The questions the FTC is asking largely relate to how tech is disrupting established practices in antitrust and consumer protection. This comes at an important time.

via REUTERS.

The FTC’s last major rethink of competition and consumer protection occurred in 1995. Much has changed since then. In 1995, Yahoo! led search. Myspace led social media. And America Online was viewed as an internet industry leader. Things have changed because technologies and their economics have changed, which means regulations should change.

Here are five things that I believe the FTC should begin doing. More complete explanations are contained in the comments that I filed.

1. The FTC should drop its emphasis on market-by-market analysis.

Today’s market power analyses often begin with the defining of markets. This is done by examining historical data on supply and demand to determine whether customers believe there are good substitutes for the product that is the subject of the FTC investigation. But what if customers and companies are changing so fast that historical data say little about the future? If regulators rely on an increasingly irrelevant history to make decisions about the future, they could deny customers efficiencies and innovations that businesses are trying to create.

How else can a regulator identify market power if it doesn’t define “market”? That is my second point.

2. Antitrust regulators should emphasize factors that lead to monopoly instead of trying to find evidence of market power.

Regulators should focus on endowed or illicit factors that cause monopoly across generations of products. Why focus on multiple product generations? The life of a single product is too brief to warrant regulatory action. Regulatory responses should be limited to factors either endowed or illicit because they are either unearned or destructive. Any other factor must be built or acquired by a firm, and such innovations should be encouraged.

Why not look for evidence of market power? Data decay is one reason. Another reason is that many regulators, pundits, and analysts have trouble distinguishing between a company with market power and one that has made a lot of customers happy. Market power is something that harms customers when it exists. That isn’t what is happening in tech. As I explain in a 2017 blog:

Successful tech companies become large because customers choose them. Facebook does not compel anyone to sign up, Google does not divert searches from Bing or DuckDuckGo to www.google.com, nor does Amazon block people from driving to Books-A-Million. In fact, at least two of these companies became successful by surpassing other companies that pundits once described as controlling their markets — namely Myspace and Yahoo!. And the National Retail Federation ranks Amazon as only seventh in the US in retail sales for 2017. (hyperlinks omitted)

3. In analyzing rivalry, recognize that products that are not substitutes nonetheless compete with one another for consumer time and attention.

Companies compete aggressively for consumer time and attention. They do so to gain information, knowledge, and understanding. Companies accumulate and leverage these resources to sell products and advertising, and to launch what happens next. The companies that accumulate the most such resources have an earned advantage over rivals. Earned advantages benefit customers because the prospect of gaining the advantages gives companies a strong incentive to compete for the future.

4. Firm boundaries are changing.

Economists have long understood that the boundaries of firms — i.e., where a supplier ends and the customer begins — depend on the nature of transaction costs, i.e., the costs incurred to employ or contract for resources. Sometimes it is less costly to hire people to perform a task, but other times it is more economical to outsource it.

What’s changing? Blockchain promises to lower costs of tracking, validating and securing data, and of making data available for analysis. This is happening within firms, between firms, and between suppliers and customers, which changes transaction costs. So look for firms in some industries to shrink and firms in other industries to grow.

The other technology changing industry boundaries is artificial intelligence (AI). AI changes businesses by changing the economics of decision making, which changes transaction costs and the loci of decision making. Decisions that were once firm-centric can now be shared, which alters supplier-customer relationships and relationships between rivals.

5. Privacy should be viewed in the framework of the supply of and demand for information.

I wasn’t able to address this in my comments, but I would have if not for time constraints. Many policy debates about privacy seem to focus on “rights” that are actually obligations coercively imposed on others.

For example, Europe’s “right to be forgotten” is actually an opportunity to force search engines to incur the costs of purging their indexes or catalogues of web pages. The EU’s General Data Protection Regulation is actually an opportunity to force data firms to incur costs of removing data from their archives or be sued.

A better framework would be to consider the supply and demand for information. The demand side is well known: Companies from all sectors want data to run their AI algorithms. The supply side is more complex, but includes you and me going about our daily lives. In some instances we have to incur costs or change our behavior to keep others from collecting data on us, if that is something we want to inhibit. In some of those situations, as in healthcare, consumers’ desire for privacy is so common across the population that it makes sense to pass laws restricting access rather than have you and me incur costs case by case. But sometimes our desires and interests vary greatly across individuals, making it more efficient to have individuals incur the costs of their desire to keep information about themselves from others than to pass general laws. Viewed this way, the instances of laws protecting “privacy” should be few and far between.

Again, kudos to the FTC for seeking to update its approaches to antitrust and consumer protection. Hopefully this results in greater market freedom for customers and companies.

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