CCP Annual Conference 2015 Live Blogging Session 4: Trust in Digital Markets
June 19, 2015 Leave a comment
Alex Chisholm (Competition and Markets Authority @CMAgovUK) opens up Session 4 with his presentation on “Data and Trust Concerns in Digital Markets: What are the Concerns for Competition and for Consumers?”. A transcript of his speech will be available to download from the CMA website later today.
Jonathan Porter’s (Ofcom @Ofcom) presentation mainly covers the economics of personal data and data privacy, the practical issues with informed consent in an on-line word and the potential implications for Ofcom’s work on the ‘Internet of things.’ He discusses the application of both the standard economic framework and behavioural biases to the analysis of data privacy concerns. He talked about the impact of technology on privacy and the economics of privacy to consumers and firms. The key features are (i) the market for personal data (ii) the market for privacy can be thought of as two sides of the same coin leading to different trade-offs between costs and benefits and (iii) the positive/negative externalities from data transmission.
Greg Taylor @EconTaylor (Oxford Internet Institute) rounds off Session 4 by considering how the existence of contracts between firms and intermediaries affect, on the one hand, the quality of advice received by consumers and, on the other hand, firms’ incentives to invest in improving the quality of their products. It is important to consider these dynamics as, in many industries, consumers rely on advice and recommendations from an intermediary when choosing between competing products. Moreover, competition concerns lie in the fact that intermediaries in many industries are not independent of the market. Indeed, an intermediary may be owned by a firm in the market, thus raising concerns regarding its objectivity.
Greg takes us through the paper which he has co-written with his colleague Alexandre de Cornière. They use a ‘quality competition model’ that involves one intermediary and two firms who choose how much to invest. Greg explained the contrasting behaviours of an informed and uninformed consumer when selecting an intermediary firm. In Nash Equilibrium, profits are zero. He then considered the situation in the context of vertical integration. The non-integrated firm (without intermediaries) experiences a greater incentive to invest in low quality products than products of high quality. However, the integrated firm will have a greater incentive to invest in order to benefit from economies of scale. Greg cites the Google case as an example of this application.
In terms of price comparison, under vertically integrated situation, in equilibrium, (i) all prices increase, (ii) consumer welfare ambiguously falls, and (iii) the endorsed firm is always the ‘worst one’. Where quality is the main dimension of competition, the integrated firm has a high incentive to invest, whereas the non-integrated form will have a low incentive. In this instance, no consumers can benefit from becoming informed when the intermediary’s profit is maximised.