Virtual Competition: The Promise and Perils of the Algorithm-Driven Economy

365 Pages·2016·10.05 MB·English

by  Ariel Ezrachi

Virtual
Competition

Virtual
Competition
THE PR OMISE AND PERILS OF THE
ALGORITHM- DRIVEN E CONOMY
Ariel Ezrachi • Maurice E. Stucke
Cambridge, Mas sa chu setts
London, Eng land
2016
Copyright © 2016 by the President and Fellows of Harvard College
All rights reserved
Printed in the United States of Amer i ca
First printing
Library of Congress Cataloging- in- Publication Data
Names: Ezrachi, Ariel, 1971– author. | Stucke, Maurice E., author.
Title: Virtual competition : the promise and perils of the
algorithm- driven economy / Ariel Ezrachi, Maurice E. Stucke.
Description: Cambridge, Mas sa chu setts : Harvard University Press, 2016. |
Includes bibliographical references and index.
Identifi ers: LCCN 2016018188 | ISBN 9780674545472 (cloth)
Subjects: LCSH: Electronic commerce. | Pricing— Technological innovations.
Classifi cation: LCC HF5548.32 .E996 2016 | DDC 381/.142— dc23
LC reco rd available at https://l ccn. l oc. g ov/ 2 016018188
Contents
Preface vii
PART I Setting the Scene 1
1 Th e Promise of a Better Competitive Environment 3
2 New Economic Real ity: Th e Rise of Big Data and Big Analytics 11
3 Light Touch Antitrust 22
4 Looking beyond the Façade of Competition 27
PART II The Collusion Scenarios 35
5 Th e Messenger Scenario 39
6 Hub and Spoke 46
7 Tacit Collusion on Ster oids: Th e Predictable Agent 56
8 Artifi cial Intelligence, God View, and the Digital Eye 71
PART III Behavioral Discrimination 83
9 Price Discrimination (Briefl y) Explained 85
10 Th e Age of Perfect Price Discrimination? 89
11 Th e Rise of “Almost Perfect” Behavioral Discrimination 101
12 Behavioral Discrimination: Economic and Social Perspectives 117
13 Th e Comparison Intermediaries 131
vi Contents
PART IV Frenemies 145
14 Th e Dynamic Interplay among Frenemies 147
15 Extraction and Capture 159
16 “Why Invite an Arsonist to Your Home?” Understanding
the Frenemy Mentality 178
17 Th e F uture of Frenemy: Th e Rise of Personal Assistants 191
PART V Intervention 203
18 To Regulate or Not to Regulate 205
19 Th e Enforcement Toolbox 218
Final Refl ections 233
Notes 251
Acknowl edgments 345
Index 347
Preface
Could digital commerce and new technologies actually harm us? T oday,
the rise of the Internet, Big Data, computer algorithms, artifi cial intelli-
gence, and machine learning all promise to benefi t our lives. On its surface,
the online world—w ith the growth of price comparison websites, dynamic
pricing, web promotions, and smartphone apps—s eems to deliver in terms
of lowering prices, improving quality, widening the sel ection of goods and
ser vices, and hastening innovation.
And yet, could it be that, aft er the initial procompetitive promise, these
technologies lead to higher prices, poorer quality, fewer options presented
to us, and less innovation in t hings we care about, such as our privacy?
Our suggestions may sound heretical and counterintuitive. A ft er all, in
many markets, data and technology have visibly stimulated entry, expan-
sion, and competition. We do not dispute t hese benefi ts. Technology and
Big Data can be benefi cial, no doubt. However, once one ventures beyond
the façade of competition, a more complex real ity emerges.
Th e dynamics of artifi cial intelligence, price algorithms, online trade, and
competition lead us to uncharted ground—to a landscape that ostensibly
has the familiar competitive attributes to which we are accustomed, and
yet delivers far less than what we would expect.
Th e new market dynamic, new technologies, and start- ups have capti-
vated our attention and created a welfare mirage—t he fantasy of intensifi ed
competition. Yet, b ehind the mirage, t here operates an increasingly well-
oiled machine that can defy the f ree competitive forces we rely on.
Our thesis concerns the implications of the rise of a new— algorithm-
driven—p ower, which changes several structural and behavioral pillars that
underpin traditional markets.

vii
viii Preface
Competition, as we knew it—t he invisible hand that distributes the necessi-
ties of life—is being displaced in many industries with a digitalized hand. Th e
latter, rather than being a natu ral force, is man- made, and as such is subject to
manipulation. Th e digitized hand gives rise to newly poss ib le anticompetitive
be hav iors, for which the competition authorities are ill- equipped.
Of course, we agree that the rise of Internet commerce through sophisti-
cated computer algorithms can intensify competition in ways that increase
our welfare. But, importantly, this is not assured. Our book explores how
the paradigm shift can leave some of us better off , while leaving many in
society worse off . Moreover, competition authorities may need to reassess
and reinterpret the l egal tools at their disposal to prevent and punish t hese
unusual new forms of anticompetitive restraints. Even basic questions, such
as “Can computers collude?” or “How much choice does the online environ-
ment off er?” may be challenging. At times, it may be diffi cult to see beyond
the façade of competition to the toll that the new paradigm has on us, our
welfare, and our demo cratic ideals.
In what follows we explore t hese dynamics. We consider the pos sib le use
of sophisticated price algorithms and artifi cial intelligence to facilitate col-
lusion or conscious parallelism. We refl ect on the expansion of behavioral
advertising and the poss ib le use of advanced technology and tracking to
engage in “almost perfect” behavioral discrimination. Th e discussion also
explores information harvesting and analy sis, the eff ects of intermediation
and price comparison websites, the rise of super- platforms, and their
“Frenemy” relationship with in de pen dent application developers.
Our exploration of t hese themes raises challenging questions as to the
true competitiveness of prese nt and future online markets. We consider the
limits of competition, consumer protection, and privacy law in an advanced
algorithm-d riven environment, and refl ect on the enforcement gaps and
policy implications.
Th is book was born of a question that challenged our minds during a
stroll along the River Th ames: “What if computers could collude?” To para-
phrase T. S. Eliot, that led us on our journey:
Oh, do not ask, “What is it?”
Let us go and make our visit.
And so we did. Our research prompted additional questions and stimulating
discussions with competition offi cials, lawyers, economists, computer scien-
tists, phi los o phers, and engineers. We welcome you to the debate.
PART I
Setting the Scene
M
UCH HAS BEEN WRITTEN about the transformative eff ects that recent
technological changes have had on our society and well- being. Th ese
technological developments in e-c ommerce, computers, Big Data, and
pricing algorithms, have no doubt changed the way we shop and commu-
nicate. Th e dynamics of online commerce have freed customers from reli-
ance on local off erings. Gone are the days when many of our choices w ere
restricted to a few local retailers who controlled which products w ere placed
on the shelves, the deals we struck, and largely the information on which
we based our decisions. Advances in technology and changes in commu-
nications, transportation, and commerce are expected to further change
our environment and promise to increase competition and well-b eing.
Our discussion in this part pres ents two contradictory themes. We be-
gin with the commonly accepted promise of the algorithm-d riven econ-
omy; then we switch gear and outline its perils— its darker and less charted
sides.
Chapter 1 explores the many alluring features of online markets and the
promise they carry—to increase effi ciency, competition, and ultimately our
prosperity. Th e new economic real ity promises to be bright.
Chapter 2 looks at key technological developments— the rise of self-
learning algorithms and Big Data that are fueling t hese dynamic innovations—
everyt hing from books sold on Amazon to airplane tickets on Orbitz. We
illustrate how Big Data and Big Analytics are providing online retailers like
Amazon a competitive advantage over brick-a nd-m ortar behemoths like
Walmart.
In Chapter 3 we summarize the enforcers’ typical approach to digital
markets. We note how, given the signifi cant potential benefi ts of innovation

1