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Potential competition impacts of Big Tech entry in retail financial services — a consultation response

One of the nice features of the UK’s political landscape is the openness of regulatory and competition authorities to academic input. Recently, the Financial Conduct Authority (FCA) published a discussion paper titled: “The potential competition impacts of Big Tech entry and expansion in retail financial services“. In parallel, they organized a Webinar introducing the topic as well as several roundtables, where interested parties (big tech, start-ups, academics, consultants, other policy makers) could raise their voices. They also opened a consultation and asked for written comments.

This consultation is academically interesting because (i) retail finance, covering markets for deposits, payments, insurance, and consumer lending, is economically relevant for many banks, financial intermediaries, and very many consumers. (ii) Big tech firms have started to venture into this highly regulated sector, e.g. by offering Apple Pay and Google Pay, but might plan a more massive market entry. Whoever understands the theory of connected markets may know, why. Hence, getting the pros and cons of such potential market entries right is important for respective regulators, in this case the FCA.

Together with my CCP and UEA School of Economics-colleague Andrea Calef, who knows much more about finance than I do, we tried to contribute our perspective in a response submitted to the FCA. In a nutshell, we identify as the key question for the FCA, whether each of the markets is “data driven”, or not. Being “data driven” implies that a market is subject to data-driven indirect network effects and, hence, very likely to tip in the future. If so, this would negatively impact the innovation incentives of both dominant and smaller firms (and potential entrants) and consequently be very bad for consumers.

In the past, we developed a test for data-drivenness of a market (some details here and here), which would also serve the FCA well to answer this crucial question. It suggests that, if a market is found to be data driven, the regulator should intervene. If it is not data driven, let unhampered competition have its way!

Institutional Economics at the EU Commission

The EU Commission’s Directorate-General for Economic and Financial Affairs (DG ECFIN) is responsible for the implementation of several investment programs of the EU. Among them is the legendary Recovery and Resilience Facility (RRF), a program set up to fight the consequences of the Coronacrisis across the EU (endowed with > EUR 650 billion!) and to foster the bloc’s major economic policy goals.

To complement existing expertise, DG ECFIN is now collaborating with several Institutional Economists, whose task it is to bring in new approaches, insights, and ideas about institutional design and economic governance, to help in the implementation of these programs.

I have the privilege of being on board of this team and putting some existing initiatives, such as LearnIOE (see also here) in touch with policy makers and in areas where knowledge about institutions can prove to be very valuable.

Relatedly, the Annual Research Conference 2023 of the EU Commission will be dedicated to “European Integration, Institutions, and Development.” I am very impressed by these developments and hope the EU can also take a globally leading role beyond the regulation of the digital world, namely in institutional design.

New working paper: “How important are user-generated data for search engine quality? Experimental results”

Online search engines are a key “platform market” and are used by billions of users every day. They offer the basic infrastructure for many other industries and are, therefore, of very high economic, political, and social importance. Over the past few years, an intense policy debate has formed around the question: do some search engines produce better search results because their algorithm is better, or because they have access to more data from past searches? In the former case, it may be best to refrain from interventions in the market in order not to stifle the innovation incentives of successful entrepreneurs (and their potential contestants). In the latter case, mandatory data sharing of user-generated data, a policy that is currently discussed and already contained in the EU’s Digital Markets Act, could trigger innovation and would benefit all users of search engines.

Together with Tobias Klein, Madina Kurmangaliyeva, and Patricia Prufer, I have had the opportunity to study this question empirically (theory is here). In 2020, we conducted an experiment with a small search engine, Cliqz, on behalf of the German Finance Ministry, who wanted to know when a market is “data driven” (results are here).

Now, the core academic paper is available, which reports background, methodology, and results in detail. The results show that the mandatory sharing of user data — a provision in the EU’s Digital Markets Act that is planned to be enforced in 2023 — may be an appropriate remedy on the search engine market: it would likely allow entrants, such as Cliqz, to successfully compete with the incumbent (Google) by enabling Cliqz to provide search results that are also of high quality for rare queries.

Unlike in other contexts, this remedy does not directly harm the incumbent, as it makes use of the non-rivalry of information: the incumbent will still be able to use the same data. Only the exclusivity of data access would be reduced. Consequently, users would benefit. 

A CCP Policy Brief, explaining the study in a nutshell, is here.

If you are interested In how to implement mandatory data sharing on data-driven markets in an economically efficient way that is in line with European competition law, consumer protection law, IP law, and privacy law, read the article linked here.

Go West

I am happy to announce that, as of September 2022, I will move to the University of East Anglia’s School of Economics as Professor in Economics and join the Centre for Competition Policy. I am very much looking forward to the new environment and to contributing to interdisciplinary, policy-relevant research in economics, law, and political science.

CfP: Workshop on Economic Governance and Legitimacy

TILEC, the Tilburg Law and Economics Center, will be organizing a workshop on “Economic Governance and Legitimacy” at Tilburg University, the Netherlands, on May 19-20, 2022.

A foundational question for any economic governance system concerns the legitimacy of its rules, where legitimacy is defined as the degree to which individual citizens believe they have a moral obligation to obey the ruler (Bisin, Rubin, Seror, and Verdier, 2021). Obviously, if (most) people believe the ruler (president, queen, chieftain, dictator, association director, influencer, etc.) has the right to rule, ruling becomes cheaper, quicker, and more efficient. But what are the origins of legitimacy in political, legal, and social systems across the world? Why do some players have a lot of influence and are listened to by many followers, whereas others do not (even if their arguments or proposals may be better)?

During a multidisciplinary and discussion-intensive two-day on-site workshop, we aim to learn from theoretical, empirical, experimental, and conceptual papers addressing the topic from various angles.

Keynote addresses will cross disciplinary boundaries between economics and law (Gillian Hadfield, Toronto), sociology (Sonja Opper, Bocconi), political science (Gérard Roland, Berkeley), and religion studies (Jared Rubin, Chapman).

The deadline for paper submissions is January 16, 2022. Papers should be submitted in PDF format to TILECgovernance@tilburguniversity.edu. More details are in the call for papers and at the Workshop website.

“Consumers’ Privacy Choices in the Era of Big Data” forthcoming in Games and Economic Behavior

In 2013, Edward Snowden shocked the world by revealing large surveillance programs of US intelligence services. In 2012, Sebastian Dengler and I had started to think about privacy from an economic perspective. Of course, we were not the only ones, as this interim review article shows. It turned out to be a hard task to trade off the costs and benefits of privacy against other goods. Therefore, we are very happy that this work has now borne fruit.

Our paper, “Consumers’ Privacy Choices in the Era of Big Data” (working paper version), has just been accepted for publication in Games and Economic Behavior. There, combining Industrial Organization, Behavioral Economics, and insights about digital markets, we start from the observation that recent progress in information technologies provides sellers with detailed knowledge about consumers’ preferences, approaching perfect price discrimination in the limit. We construct a model where consumers with less strategic sophistication than the seller’s pricing algorithm face a trade-off when buying. They choose between a direct, transaction cost-free sales channel and a privacy-protecting, but costly, anonymous channel. We show that the anonymous channel is used even in the absence of an explicit taste for privacy if consumers are not too strategically sophisticated. This provides a micro-foundation for consumers’ privacy choices. Some consumers benefit but others suffer from their anonymization.

Video “Mandatory Data Sharing on Data-driven Markets: Why, When, and How?”

The University of Passau (Germany) dedicated a series of talks to the platform economy this summer. A diverse set of scholars had the opportunity (and time) to browse through various research projects and to point out connections and uncharted territories. In my contribution, now on video, I could tell the full story of the idea to implement mandatory sharing of user-generated data on data-driven markets: from economic theory via the development of a “test for data-drivenness,” its exemplification (by experimental testing with a search engine and in a representative consumer panel) up to the current draft of the Digital Markets Act and our proposal how to implement mandatory data sharing in practice.

The Nonprofit’s Dilemma

Nonprofit firms producing services that are of broad public concern — mission-driven organizations — are a key part of the economy in many countries, especially in “care” sectors (healthcare, childcare, care for the elderly…). They mostly pay lower wages than for-profit firms and often use low-powered incentive schemes, which has been explained by binding financial constraints and the threat to attract wrong worker types if wages are increased. Yet, they face higher labor turnover than for-profit firms, which is very costly.

Together with Yilong Xu, in a new, short discussion paper, I construct a simple model that reproduces these stylized facts, explains the high labor turnover of mission-driven organizations, and suggests a way out of this nonprofit’s dilemma, based on insights from the economic psychology literature. We construct testable empirical hypotheses and offer managerial and policy implications.

Post-Academic Training on Competition Law & Digital Regulation

The Tilburg Institute for Law, Technology, and Society (TILT) & the Tilburg Law and Economics Center (TILEC) jointly offer a post-academic training on Competition Law & Digital Regulation in January 2022. The program provides practitioners at law firms, in-house legal counsels, policy officials, or officials at regulatory authorities and sectoral bodies with a comprehensive overview of the legal issues relating to the application of competition law in the digital sector and the ongoing policy as well as legislative initiatives regarding the regulation of platforms and data.

The program is taught by a mix of distinguished practitioners who have direct experience of the rules and by an academic team whose members participate actively in the policy debates.

More information and registration is available here

“Governance of Data Sharing” forthcoming in Research Policy

The latest paper of our long-term project studying the economics of data-driven markets is concerned with implementing the policy solution that was developed by previous work: “Governance of Data Sharing: a Law & Economics Proposal” (co-authored with Inge Graef) has had quick uptake and will be published in a special issue on the “Governance of AI” at Research Policy.

To the best of our knowledge, this is the first actual design proposal how and with which governance structure (i.e. which allocation of rights and duties) mandatory data sharing can best be implemented. It is currently considered by EU authorities revising the proposal of the Digital Markets Act, a key piece of EU-legislation aiming to regulate online platforms.

More details (working paper version): To prevent market tipping, which inhibits innovation, there is an urgent need to mandate sharing of user information in data-driven markets. Existing legal mechanisms to impose data sharing under EU competition law and data portability under the GDPR are not sufficient to tackle this problem. Mandated data sharing requires the design of a governance structure that combines elements of economically efficient centralization with legally necessary decentralization. We identify three feasible options. One is to centralize investigations and enforcement in a European Data Sharing Agency (EDSA), while decision-making power lies with National Competition Authorities in a Board of Supervisors. The second option is to set up a Data Sharing Cooperation Network coordinated through a European Data Sharing Board, with the National Competition Authority best placed to run the investigation adjudicating and enforcing the mandatory data-sharing decision across the EU. A third option is to mix both governance structures and to task national authorities to investigate and adjudicate and the EU-level EDSA with enforcement of data sharing.