Regulating Digitalization – What can Economics Contribute?

Around 20 years ago, internet usage and digital data collection grew exponentially. While the exploitation of the information within this data has contributed to remarkable social progress in some areas, it has also led to a number of problems requiring our attention. How can economists contribute to addressing these problems and managing the digital revolution?

Interviews with Armin Schmutzler, Gregory Crawford and Marek Pycia

Mr. Schmutzler, are analogue and digital markets subject to the same regulation in the area of competition?
ARMIN SCHMUTZLER: Certain markets in which the dominance of individual companies is hard to avoid, e.g. the postal service, railways or electrical utilities markets, were subject in the course of the decades to very strict state market regulation. In digital markets, the legal framing conditions allow for more competition. There seems, however, to be a tendency for this competition to destroy itself: The big firms become so dominant in competition that after a certain point it is difficult to challenge them and it becomes ever more difficult for new companies to penetrate this market.

Are we in Switzerland well prepared to tackle these new challenges?
In Switzerland, anti-trust law for the digital field functions using the instruments available today relatively well. Admittedly, the area of acquisitions is too little regulated in the opinion of many. There are hardly legal bases for preventing very large firms from gradually taking over all of their potential competitors. There is a great need for action in the merger policy in our country, even compared with the European Union, in which the threshold for intervention is lower.

Do economists to a certain degree contribute to researching the consequences of digitalisation for society? If yes, to what extent?
Economists who understand how platform markets function have a lot to contribute. The research delves into a lot of case-specific topics. It’s heavy on detail. One example of this is hotel booking platforms. Here in Switzerland, we had a case in the Commission on Competition a couple of years ago. In the future, the practices of these platforms will be directly regulated by the Law Against Unfair Competition (UWG). A large number of academic articles have been written on this topic alone, and their results went in different directions. Some works constituted positive effect for consumers and competition, others negative. Ultimately the question is from which perspective one looks at these matters. From the view of consumers? Businesses? 

You talk about perspectives. Not everything is black or white. Does a discussion of values have a place in economic research, in your opinion? 
Yes, I am of the opinion that a discussion of values in general is very important. This discussion of values is not given enough weight in many topics in economics. It should not be left to itself, but should be conducted with care. One also has to talk about annoying minor details, such as the details about how markets function.  

From your point of view, are economists prepared for such a discussion by their training?
Many elements in our training are already very broad. Our students attend, for example, lectures in mathematics, computer science, law and business management. It would certainly be good, though, if  economists also got philosophical training.

Mr. Crawford, nine of the ten most valuable companies by capitalization in the world today are digital platforms. Is this a worrying situation?
GREGORY CRAWFORD: Yes. These companies make good products in markets whose economic characteristics often favor “winner-take-all” outcomes, but public policy has not done enough to prevent some of them from becoming dominant (especially Google and Facebook). Two examples are underenforcement in merger control and failing to prevent dominance in one market from spilling over into another. In addition, not enough attention has been paid to how important data is to competition in the digital space. Lack of competition is a privacy problem because dominant companies don’t have to worry about competing on privacy. But lack of privacy is also a competition problem, as companies are able to collect ever more data and leverage that data into other markets.

Tech giant Google recently acquired Fitbit, a health-focused company. What is particularly problematic about this purchase?
Fitbit has health and fitness data that Google will now be able to exploit. The problem with this is that Google can combine this data with its own unrivaled demographic, location, and interest data. The ability of a firm dominant in one source of data to combine it with new data will enable the exploitation of consumers, as there are no restrictions yet on how the data can be used and there will be no competition to discipline Google’s plans. I foresee exploitation of consumers in insurance markets, in “health tech” markets, maybe even in employment markets. It would not have been easy under existing law, but the European Commission should have learned from the numerous international reports on this topic, including its own, and tried to block this merger.

What needs to be done to better protect consumers?
A good start would be enforcing existing data protection regulations by privacy regulators. But competition authorities also must do their part. The way consumer data is used is problematic. Services that appear to be free are not: there is the old saying that “if you’re not paying for the product, then you are the product!” Lack of privacy (via data collection) is a price and should be treated as such by policymakers. More generally, there should be special rules and obligations for dominant digital platforms to prevent further consumer exploitation and loss of competition.

Some countries have acted more than others addressing the competition harms from digital dominant platforms. What do you think would be the best way to address this?
The European Commission and the UK have been pushing the agenda in Europe with the introduction of “gatekeeper” regulations. The UK is also changing its merger review policies for dominant digital platforms. The U.S. also seems to be more proactive, with new legislation being proposed not only for digital platforms but for the economy as a whole. This is all a good opportunity to see what works.

Do you think we will be able to create a better regulated digital market in the future?
My hope is that we will get some proper regulation as long as those governments are in power that are willing to limit the power of the dominant digital platforms. In the EU, the Digital Services Act and the Digital Markets Act are steps in the right direction, but the devil is in the details. They need to be implemented in a good way. Given their recent track record, I am concerned, but hopeful.

Mr. Pycia, what is the relation between technological innovation and market design?
MAREK PYCIA: There is a feedback loop between technological innovation and market design, as well as legal environments and ethical standards. I have seen this interaction most closely in the context of kidney exchange. Technological innovation made kidney transplants possible, raising the question of how to organize the allocation of deceased donors’ kidneys and the exchange of donors’ kidneys between patients so as to ensure the kidneys are compatible with the patients’ immune systems. The development of the exchange necessitated changes in legal and ethical standards. Many countries chose to make kidney exchange legal. Initially the exchange systems required a patient’s and his or her donor’s operations to be carried out simultaneously. This requirement was relaxed thanks to altruistic donations and to the occasional advantages of shipping kidneys; the latter made possible by further technological innovation. The asynchronicity enabled contracting on priority for future kidney exchanges, through what my former colleagues at UCLA and I called kidney vouchers. The vouchers were initially considered controversial but, by now, they facilitate hundreds of kidney transplants per year.

What are pressing societal challenges where market design could help find solutions?
A frequent example in the press is how markets help us balance the costs of climate change and the costs of limiting pollution. A less-known example is the threat of an overload of the electricity grid. The demand for electricity is increasing because of the development of hybrid and electric cars. At the same time, the generation of energy from wind and solar sources is more volatile than the generation from oil, gas, coal, or water. Many parts of the global grid may need costly upgrades in order to be able to withstand the increased demand and volatility. We can alleviate the need for upgrades by new market designs such as, for instance, allowing hybrid and electric cars to both buy and sell electricity to the grid. Of course, sometimes new market designs become part of the problem: e.g. the maintenance of some cryptocurrencies, through so-called mining, consumes substantial amounts of electricity. The market design community works on less energy-consuming cryptocurrency designs.

To what extent does the increasing availability of data affect research in market design?
The new data enable more precise designs. The collection of the data is also a challenge to privacy. Both issues pose new questions for market design. 

Do you see a paradigm shift in market design that is driven by Artificial Intelligence (AI)?
The development of AI goes hand in hand with the increasing availability of data. Data play a major role in training AI and, in turn, AI allows us to process the data. In specific designs, AI also facilitates the decisions for market participants and the communication between the participants and the market. AI is already changing our society and economy, and its continued development poses a major long-term challenge for economists and policy makers: a need to guide AI’s evolution that goes beyond specific markets.