05 December 2017

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

Ariel Ezrachi and Maurice Strucke
2016, Harvard University Press, 368 pages,
ISBN 9780674545472

Reviewer: Leath Al Obaidi

In 2014 Peter Thiel, PayPal co-founder and early Facebook investor, wrote an essay for the Wall Street Journal titled ‘Competition is for losers’. He argued that start-ups need to focus on products with which no one can compete. At the time of writing he could not anticipate that two competition lawyers, Ariel Ezrachi and Maurice Strucke, would be prompted by his work to author a provocative book on the competition among these e-commerce platforms, such as Google, Amazon and Uber.

The future of e-commerce promises us, the consumers, a world where the data-driven and dynamic marketplace offers us the best possible price and best possible rate. Constraints of geography and deficiencies of information do not apply in the digital world of trade, a paradise for the free market. However, Ezrachi and Strucke envisage three possible scenarios in which this promise of the competitive e-commerce environment could become less competitive than one would expect. They describe how the invisible hand could be replaced by a ‘digitalised hand’, where corporations manipulate the interface of what the users are allowed to see to what price and so create a selective approach of competitiveness of what might seem a scarce good to us.

This hypothesis shines a light on the current, antiquated antitrust laws and competition policy, which fail to take into account how pricing algorithms will increasingly dominate how prices themselves interact with consumers. Yet Ezrachi and Strucke go further, asking whether algorithms, without the intention or knowledge of their makers, might interact to collude in price fixing. The authors suggest three principal ways in which this virtual competition could cause a real headache for regulators, policy makers, competition lawyers and economists alike. The book is, accordingly, divided into three parts.

The first part sets out the collusion scenario. Here, the authors describe how collusion (an implicit or explicit agreement between competitors) could evolve in the digital eco-system, so that algorithms collude without the operator’s knowledge or intent. In this scenario, certain operators use a smart algorithm that monitors the market and strategically fosters an increase in price by punishing deviation from the upper price equilibrium. The suppliers would thereby create a collusive market, even if they never intended do so. Another illustration of this is the hub and spoke where one platform, for example Uber, uses one price algorithm to determine the price for driver and customers alike.

In the second part of the book, Ezrachi and Strucke shift to behavioural discrimination. Here companies go above and beyond in their collection of information on consumers in order to create a bespoke list of goods consumers would have never thought they needed but, when prompted, are tempted to buy. The authors explain how e-commerce marketplaces shift from third-degree, imperfect price discrimination to ‘near perfect’ price discrimination. For example, an e-commerce operation could differentiate its pricing for a particular product by salary or need without manifestation of scarcity. Here an economist would say the demand curve shifts to the right and the consumer surplus is marginalised.

In the third and final section of the book, the authors describe how the first two scenarios converge to create a new ecosystem, which they call ‘frenemies’.  Here, apps can only survive if their incentives are aligned with those of the super-platforms – such as Apple, Amazon, Google, and Facebook – rather than being geared towards the benefit of their users. Thus, while these super-platforms attract a mass of programmers, app designers, investors and marketers, they can behave as gatekeepers (imagine if a mapping app was created independently that rivalled Google Maps, and was therefore quashed at birth). The super-platform would thus be hindering those it sought to attract from entering its eco-system and flourishing therein.

This book invites the reader to think beyond what they believe could happen in the world of virtual competition. It adds to the suspicion about market concentration within many industries, the rise of the gig economy and inequality, topped with the spread of user’s information bubbles. The interface with which the user will be confronted will be founded upon an eco-system that benefits platforms alone. In particular competition authorities might not be fully aware of the effects, and will therefore have an incomplete picture of the market realities. It seems Adam Smith’s invisible hand is being twisted round his back by the rise of algorithm-driven economy.