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Please expand on one of our weekly topics in an essay (1000-1500 words). Use the book as your main source to explain your chosen topic. You may use additional sources.  List of available topics for students

* Collusion scenarios online: Fair for Whom?

* Differentiating price and behavioral discrimination

* Algorithmic pricing: fairness and liability

* Platform price comparisons, “suggestions” for purchase and pricing

* Online adverts – regulatory efforts in labour markets (or in the credit or housing market)

* Web tracking, cookies, and consumer group profiling

* Geo-location and online discrimination: A discussion of targeting algorithms

* Auctioning ad placements and algorithmic bias

* Capture in online value extraction

The book reading is attached below and the name of the book is Virtual Competition: The Promise and Perils of the Algorithm-Driven Economy (2016) by

Ariel Ezrachi

,

Maurice E. Stucke

Virtual Competition
Author(s)
Ezrachi, Ariel
Imprint
Harvard University Press, 2017
ISBN
9780674973336
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PART I
Setting the Scene
M
UCH HAS BEEN WRITTEN about the transformative effects that recent
technological changes have had on our society and well-being. These
technological developments in e-commerce, computers, Big Data, and
pricing algorithms, have no doubt changed the way we shop and communicate. The dynamics of online commerce have freed customers from reliance on local offerings. Gone are the days when many of our choices were
restricted to a few local retailers who controlled which products were placed
on the shelves, the deals we struck, and largely the information on which
we based our decisions. Advances in technology and changes in communications, transportation, and commerce are expected to further change
our environment and promise to increase competition and well-being.
Our discussion in this part presents two contradictory themes. We begin with the commonly accepted promise of the algorithm-driven economy; 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 efficiency, competition, and ultimately our
prosperity. The new economic reality promises to be bright.
Chapter 2 looks at key technological developments—the rise of selflearning algorithms and Big Data that are fueling these dynamic innovations—
every thing 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-and-mortar behemoths like
Walmart.
In Chapter 3 we summarize the enforcers’ typical approach to digital
markets. We note how, given the significant potential benefits of innovation
1
2
Setting the Scene
and technology, the rallying cries within the tech industry, and increasingly
the antitrust circles, are that only a light regulatory hand, if any, is needed.
Having explored the “promise” of a data-driven economy, we turn in
Chapter 4 to introduce its darker sides. Venturing behind the façade of
virtual competition, we question the conventional wisdom that the competitive problems of the analog world—collusion, monopoly, and price
discrimination—are less likely to reappear in the digital world, where rivals
are simply a click away. As the remaining parts of this book explore, variants of these traditional anticompetitive scenarios may develop—with a
vengeance.
1
The Promise of a Better
Competitive Environment
T
ODAY, with a few taps on our smartphone, tablet, or computer, we can
discover an array of products, reviews, and prices. The Internet has
made our world smaller. After watching an entire season of Downton Abbey
on Amazon Prime, you could, without leaving your home—whether in
Oxford, Mississippi, or Oxford, U.K.—aspire to the British aristocracy,
buying your Barbour hunting jacket and Hunter boots from a U.K. merchant, your Range Rover from a dealership several hundred miles away,
your Rhodesian Ridgeback from a California kennel, your summer rental
in the Lake District from a family through Airbnb, and Wordsworth’s
poems and a sketchpad from Amazon.com. You could find eager sellers on
eBay, Fiverr.com, or one of the many tradesmen’s advice websites, and join
a host of communities, chat rooms, and information websites. Indeed,
you could even find your future spouse online to accompany you to your
English manor, where you could post photos on Facebook to celebrate your
elevated social status. Freed from the restrictions and the tyranny of the
former gatekeepers—whether the local media, brick-and-mortar retailers,
or tastemakers—we must be better off.
The competitive future appears so bright because the online data-driven
competition has many appealing economic features. You want to travel
next week to Las Vegas? Previously you would have gone to a travel agent
or searched the travel advertisements in the local newspaper. Today you
would likely turn to search engines and price comparison websites (PCWs).
The Internet has a constellation of platforms to reduce the time and expense of searching the World Wide Web for what we want. Consumers are
increasingly relying on these platforms for purchasing decisions.1 Indeed,
many platforms have established themselves as significant players in the
3
4
Setting the Scene
distribution chain.2 Among the promises of online commerce are greater
market transparency, efficiency, and ease of use. All of these, as we’ll see,
should increase competition in ways that promote our well-being.
Increasing Market Transparency and Flow of Information
If you shop in a store where the products are not clearly priced, the process
can be frustrating. Transparency enables us to readily compare products’
price and quality and to choose the product that matches our price/quality
requirements. Economists have long recognized that information is a key
component in promoting a competitive market, which in turn promotes
consumer welfare.3 Indeed, the undistorted flow of information is one of
the conditions of the theoretical economic model of “perfect competition,”
under which consumers benefit from lower prices, wider choice, and better
quality.4 Market transparency, the OECD noted, “increases efficiency by reducing customers’ search costs and allowing suppliers to benchmark their
performance with that of their competitors.”5 Market transparency, besides
helping buyers, helps sellers “to save costs by reducing their inventories,
enabling quicker delivery of perishable products to consumers, or dealing
with unstable demand etc.”6
In general, increased transparency ameliorates the problems of “information asymmetries.”7 This is when one party knows more key information than the other party (such as the seller of a used car who knows more
about the car’s problems than the buyer).8 As the flow of information increases and becomes more balanced, sellers and buyers are more likely to
make educated decisions, and markets become more efficient.9
We often see the benefits of increased transparency when we shop online.
Rather than trudge to different retail stores, we can quickly search for and
identify the particular product we want, compare prices among the major
online and brick-and-mortar retailers, and have the item shipped to our
home or available for pickup at a nearby outlet. There are now even companies, such as Doddle in the U.K., that have set up delivery points for a range
of online retailers, such as Amazon and ASOS, allowing customers to pick
up all of their online shopping in one place. Many online platforms and retailers provide user reviews and other information that consumers consider
important to their purchasing decisions.10 Sellers can easily inform customers of new products or ser vices, their characteristics, and the price.
Customers, aware of the range of options available in the marketplace, can
intelligently choose the option that matches their preexisting preferences.
The Promise of a Better Competitive Environment
5
Lower Search Costs
Having more information and greater market transparency is not especially helpful if it takes too much time and effort for consumers to review
the information. New York City has over 5,000 grocery stores.11 Grocery
stores are often transparent in their prices. But consumers don’t have the
time to travel around town to compare prices for each grocery item. Thus
another procompetitive feature of online markets is their ability to reduce
users’ search costs.
The economic literature has long illustrated that increases in search costs
will likely lead to increases in the seller’s power and prices.12 Ill-informed
customers are more likely to be subjected to higher, even monopolistic,
pricing. When the seller’s market power is based on the presence of high
search costs related to quality or price, reducing those costs should, in
theory, decrease the seller’s market power and prices.13
Online platforms can help reduce search costs for both sellers and buyers
by facilitating information flow and enabling users to quickly compare a
range of products and relevant prices.14 The promise of online platforms,
including PCWs, in promoting competition lies not only in their provision
of price information, but in several other features that support customers’
decision making and reduce their search costs. For example, online shopping platforms provide users with interactive tools to identify the products
or ser vices that match their preferences. The combination of user-defined
parameters, such as maximum price and average user rating, with a platform’s own algorithms, such as matching accessories for the item that the
consumer is considering, mean the online platform can distill for consumers a far greater volume of relevant information than they other wise
would have, enabling better purchasing decisions made more efficiently.15
By reducing our search costs, these platforms enable us to undertake
multiple searches on multiple platforms, further enhancing the competitive pressure on sellers—again, to our benefit.
Illustrative is the launch of a price comparison website in the U.K.
dedicated to extended warranties. This information website was created
following an investigation by the U.K. Competition Commission that
identified a deficiency in the availability of relevant information, which
undermined the competitive process.16
Another example is air travel. Suppose you want to fly next Friday from
London to Las Vegas. You can search each airline’s website for fares; but to
lower your search costs, you can use Orbitz or another web-aggregator.
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Setting the Scene
Indeed, some sites, such as SkyScanner, search multiple web-aggregators,
which in turn search the web for airfares to Las Vegas next Friday. You can
quickly determine the best flight, based on price or non-price factors (such
as length of flight, number of transfers, and quality of airline ser vice). You
can also run the same search on multiple platforms (e.g., Orbitz and Kayak)
to quickly assess airfares to Las Vegas next Friday. The web-aggregators
also offer fare calendars that tell you the average prices for traveling to Las
Vegas on other days that month.
More Entry and Expansion
A third attractive feature of online markets is seemingly lower entry barriers. Customers generally benefit when potential sellers can rapidly enter
and exit the market without incurring significant costs that they cannot
recover elsewhere. The belief is that companies cannot exercise market
power for long when entry into markets would be timely (generally under
two years), likely (profitable for the entrants), and sufficient (the entrants
would attain sufficient business to prevent the exercise of market power by
the incumbent firms).17 If a firm raises prices above, or degrades quality
below, competitive levels, entrants and incumbents would seize the opportunity to profit and competition would be fully restored. Whether this is
empirically true is another matter.18 But there is little dispute that market
power can be sustained in markets with significant barriers to entry and
expansion, and that “entry analysis constitutes an important element of the
overall competitive assessment.”19 Thus, as entry barriers significantly decrease, so too should concerns about likely anticompetitive effects.
In the online world, one doesn’t need brick-and-mortar retail outlets to
compete. One can easily design and create a website, offer ser vices online,
and reach customers with the help of online advertising and unbiased
search engines. For example, you could compete against hotels and hostels
through the accommodations app Airbnb or Booking.com. These online
platforms facilitate entering the accommodation market in hosting guests
at our own residences. In the same vein, it is a lot easier for drivers to enter
the taxi market through a ride-sharing app, such as Uber, Lyft, or Didi
Chuxing, than to acquire a taxi medallion or a cab.
Online platforms can facilitate a competitive market by mitigating the
seller’s actual (or perceived) risk and costs of entering. The risks of renting
my place to a stranger may appear daunting. So platforms like Airbnb pro-
The Promise of a Better Competitive Environment
7
vide information and ratings of potential guests and a “Host Guarantee”
that reimburses eligible hosts for damages up to $1,000,000.20 In a similar
vein, Uber provides its drivers with a passenger rating, which is an average
rating of those provided by all of a passenger’s previous drivers, which is
not immediately available to the passenger. So for intoxicated passengers
who vomit in the car, their chances of getting picked up are slim; they may
not even be able to use the app.21 In providing advice, reviews, and guarantees, online platforms can attract individuals who would other wise be
apprehensive about transacting with unfamiliar parties.
Online platforms can also foster entry by reducing advertising expenses.
Suppliers who wish to advertise directly on search engines will bid for
search words, as on Google AdWords, and pay for any click on the advertisement. That is an improvement over the old media model, where you
would pay to advertise, often not knowing how many people saw, listened
to, or read your ad. Price comparison websites (PCW), which benefit from
economies of scale and high conversion rates, can further lower these advertising costs and facilitate access to markets.22 Indeed, it has been reported that consumers indicated that “they would only know to contact a
few companies for any given product or ser vice, but on [PCWs] they get a
wider range of options to choose from.”23
More Dynamic Disruption and Efficiencies
Reducing search costs, lowering entry barriers, and increasing information
flows can increase the competitive pressure to innovate.24 Thus the fourth
promise of online markets is to promote distinct dynamic and allocative
efficiencies. The disruptive technology—by increasing transparency and
reducing search costs—can more efficiently match buyers and sellers,
thereby promoting allocative efficiency. With these online tools, users can
quickly identify the provider or product that better matches their needs.25
As the U.K. Office of Fair Trading (OFT) noted,26 “[t]he Internet allows for
a much swifter search and comparison across a wide variety of choice
factors including price, dates, quality and location.”27
The rise of Big Data and Big Analytics may yield other distinct economic
efficiencies. For instance, they can reduce costs by optimizing inventory
levels; “to have the right amount of stock in the right place at the right
time.”28 Manufacturers, distributors, and retailers can rely on sensors
to track products and components throughout the supply chain from
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Setting the Scene
production to point-of-sale. Moreover, online platforms can unleash economic value on several levels. The sharing economy, for example, promises
to increase efficiency through greater transparency and disintermediation.
People can immediately profit from assets currently being underutilized—our
cars, houses, power tools, or spare time. As more people rely on ride-sharing
apps, fewer people will need to buy cars. Fewer cars, or individual car trips,
mean less space devoted to garages and parking lots; space in high-rent
urban centers like San Francisco now can be used for housing and other
productive endeavors.
Online retailers are already employing complex pricing algorithms “that
take into account factors like an item’s popularity and what competitors
are charging for it” and “data about you—such as where you live, when
you shop, how often you’ve visited the site, and what you’ve bought in the
past.”29 These increasingly automated, digitized transactions could create
a more transparent marketplace in which resources are allocated more efficiently and in which the best product or ser vice, at the lowest price, triumphs. The new market environment provides retailers with the capacity
to better identify their customers’ needs and react to market changes with
ever-increasing speed.
Reduction in Seller Power
Finally, old world antitrust problems seem less likely. If online markets increase information flow, market transparency, and dynamic innovation,
and reduce entry barriers, then sellers should have less market power, and
monopolies should be even rarer. Importantly, the popularity of search engines, PCWs, and shopping platforms like Amazon and eBay should make
it harder for suppliers to take advantage of ill-informed customers who are
subjected to high information costs.30 As Amazon notes, “The presence of
many competing sellers on the same e-commerce site strengthens competition to provide the best offers and prices. It also enables customers to
easily compare competing offers by brand, quality, price, speed of delivery
or other attributes and select the offers that best meet their needs.”31
Suppose you are interested in buying a particular brand of coffee maker.
A web-aggregator can tell you the price of that coffee maker at different
online and brick-and-mortar retailers (intrabrand competition), but also
other manufacturers’ coffee makers, their specifications, features, warranty, and customer reviews (interbrand competition). The increase in
The Promise of a Better Competitive Environment
9
both intra- and interbrand competition can further pressure manufacturers and retailers to reduce prices, increase quality, and enhance services, such as free repairs. Hotels, travel agents, insurance brokers, and
other upstream providers compete on transparent platforms in which
price, ser vice, and other variables are visible to all.
The rise of web-aggregators in some markets has in fact led to lower
prices and consequently lower profit margins for upstream sellers.32 For example, one empirical economic study found that the rise of Internet comparison shopping sites for life insurance reduced term life prices in the
1990s by 8 to 15 percent and increased consumer surplus by at least $115–
$215 million per year.33
Furthermore, with the rise of pricing algorithms, we arguably no longer
need to worry about collusion, where competitors agree in smoke-filled
hotel rooms to fix price, allocate markets, or reduce output. When each firm
relies on its own pricing algorithm, cartels may become less stable. Indeed,
the advance of pricing algorithms might suggest the end of cartels. Computers do not exhibit trust, which is important for many cartels’ success.34
Nor is there any collusion among the computers. “Collusion is more likely,”
the U.S. Department of Justice noted, “if the competitors know each other
well through social connections, trade associations, legitimate business contacts, or shifting employment from one company to another.”35 Pricing algorithms will not “congregate in the same building or town,” thereby having
“an easy opportunity for last-minute communications.”36 Instead, it is often
assumed that algorithms, in engaging in cold, profit-maximizing calculations, won’t agree with, or trust, other computers; even if they did, they would
find ways to cheat on any agreements.
Price discrimination should also be less likely. The collation of information makes it easier for consumers to compare the prices of advertised
goods—thus making it harder for sellers to selectively increase the prices
or degrade the quality of goods.37 Armed with more information, consumers become aware of the full range of substitutes, which they can take
into account when making purchasing decisions.38
On the Path to Better Competition
With the growth of online platforms—from search engines to price comparison websites—we are seemingly on the road to optimizing competition. Prices should steadily decline toward marginal cost. Fully informed
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Setting the Scene
sellers and buyers easily enter and exit the market; such as Uber drivers
who are enticed by surge pricing to hop in their cars and meet the surge in
demand.
So the rise of the digital economy can be a good thing. Few hunger for
1970s fashions. Why then pine for the old competitive framework, with its
cartels, including the government-supported uranium cartels, and monopolies like Kodak and IBM? If online markets accelerate market forces, we’re
heading toward healthier competition, where entry and exit are easier, buyers
and sellers are numerous and better informed, prices are approaching marginal cost, and firms are innovating to remain relevant. Antitrust becomes
less relevant, as monopolies and cartels are less durable. In short, the promise
of online markets could free us from the monopolies and gatekeepers of old
and unleash tremendous value as resources are used more efficiently.

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