In a new book, Professor Ariel Ezrachi looks at how online commerce is challenging classical notions of competitive markets
Within the span of a decade the internet has expanded marketplaces, enabling business and consumers to enter into new and apparently beneficial relationships. But in a new book, Virtual Competition: The Promise and Perils of the Algorithm-Driven Economy, Ariel Ezrachi and Maurice E. Stucke, warn that this new environment maybe changing the nature of competition. Mr. Ezrachi, who is a professor of competition law at the University of Oxford, launched the book during a meeting of the Intergovernmental Group of Experts on Competition Law and Policy, organized by UNCTAD, in Geneva on 19 October.
Q: Tell me about your book.
A: The thesis that we put forward is that when you look carefully at the online world, competition as we know it has changed. This is not a change in the behaviour of one or two companies, but actually a transformation of the process of competition. We are accustomed to markets where the "invisible hand" is operating, an organic force that is supposed to assist us and safeguard our welfare. And yet when you move online, this invisible hand is being pushed away by the "digital hand", because the environment you see is being controlled by companies.
Q: You compare online commerce to the science-fiction film "The Truman Show" about a man who thinks he's living a normal life but in reality lives inside an artificial reality controlled from outside – why?
A: In that film, Truman lives an ecosystem in which he was perfectly happy, but it was all a façade. And in the online environment we are not very far from that… We cannot uncritically assume that the internet exerts a magical power where customers will always be the winners.
Q: What is "dynamic pricing"? What effect can it have?
A: Dynamic pricing is what you and I see when we go online. Prices are determined every second. No longer do we have the shop owner who every morning perhaps adjusts the price of milk or bread a little bit up or down. Now we have an environment in which algorithms determine the price of goods taking into account the price of other goods. Many sellers online do not have the capacity to engage in dynamic pricing, so they outsource it to a company like Boomerang, which actually tells you on their website: "We will make sure you make money". Sellers say "Please manage the pricing for me so I can extract more value from the market."
Q: What about price discrimination?
A: We are talking about a shift from "third-degree" price discrimination, which we are all familiar with – if you have a student card when you take a train you pay less, if you take a train during peak hours you pay more – to "first degree" price discrimination, when people are grouped in very detailed sub-groups. This almost approaches "perfect" price discrimination. The benefit of this is my ability to second-guess your reservation price. Today, when you go to a shop, nobody knows who you are: the price you see is the price on the product. In the online environment, you are known to your sellers, because of data extraction and analysis. Big Data and Big Analytics can power the machine of behavioural discrimination. We can identify and try to approximate what your likely reservation price is.
This is not science fiction. This is already happening. There are companies that will charge you more if you are using a MacBook Air to buy your product than if you are using a PC. Some companies will charge you more if you are using a mobile platform. Others take in account your post code. Let's say you search for a hotel and you indicate that you have no flexibility. The algorithm understands that you have fewer outside options – in other words, your reservation price is higher. It can target you and offer a more expensive price.
Q: Why do you say that virtual competition is "the end of competition as we know it"?
A: It's not the end of competition, just the end of competition as we know it… Of course, some online markets are extremely competitive but we have to understand there are new dynamics and new contractual arrangements that are being put in place to undermine the helpful dynamics. We are all better off than we were ten years ago but following this wave of innovation are powerful undercurrents that are maybe shifting us a little bit backwards in terms of our welfare.
