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Wednesday 20 Sep 2017 | 10:23 | SYDNEY
Wednesday 20 Sep 2017 | 10:23 | SYDNEY

Safeguarding competition in a cyber economy

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12 July 2017 08:26

The European Commission in Brussels has fined Google €2.4 billion for using its dominant position in search to advantage the Google price-comparison service. The internet giant has yet to give a substantive response, but this case illustrates the challenges that new technology poses for competitive markets everywhere.

Adam Smith recognised the tendencies towards monopoly 250 years ago. But the nature of monopoly has changed greatly. In many ways technology has made competition stronger, reducing barriers of distance and improving information. At the same time technology has produced more examples of natural monopoly.

The traditional example of natural monopoly is the provision of water and electricity. It doesn’t make sense for electricity cables and water pipes to be duplicated in the street, so it is inevitable these services will have strong monopoly elements. The same inevitability applies to many technology services. The normal operation of the market will tend to produce a single dominant operator, such as Facebook, Airbnb and Uber. Facebook is hard to displace because all your friends are using it. This kind of monopoly gets stronger as more people use it, which makes it hard for a competitor to break into the market.

Google’s dominance in search is more complex than the traditional view of natural monopoly based on water and electricity. To start with, it invented a hugely useful product and should be rewarded for that. No government regulation stops rivals from attempting to take over Google’s dominant position (90% of European searches), and if Google exploits its dominant position too blatantly, rivals could get a foot in the market as disgruntled searchers move to other search engines: the market is to some degree ‘contestable’. To complicate things further, Google's service to customers is free. Who can complain about a provider, even a monopoly provider, who gives away the product for free?

But of course Google does charge for the product – it charges advertisers who value its ability to target potential customers. And consumers using Google also pay, in two ways. First, they may be paying more than they should for their purchases because they are offered a restricted choice. Second, they are parting with something which, when collated, is valuable: the data on their preferences and behaviour.

Even when giving away free access to their services, these market-dominant positions are very valuable. This might be judged by the size of the fine imposed on Google, which was scaled to represent the excess profit which Google had made from its biased shopping guidance. Or firms might be judged by the astronomical value that equity markets place on companies like Google, Facebook or Uber, whose main assets are not physical capital, but rather their market dominance.

What might be done? The traditional answer to natural monopoly was government ownership or close regulation. But government enterprises often lack the dynamism of private ownership and regulation can be clumsy and costly. Thus there will be heated debate on whether the solution is worse than the problem. When the American authorities examined Google’s dominant position in 2013, they agreed there was a problem but decided not to do anything.

Monopolies have an advantaged position not based on superior ability, but because of market structure. Why not change the market structure? Just as the portability of phone numbers greatly increased competition among telecommunications suppliers, Google might offer its service in a more neutral way. This would, of course, undermine its value to advertisers, but competition would be enhanced and consumers might get a better deal. Perhaps this is the European Commission’s aim. Its earlier prosecution of Microsoft forced that company to give greater access to its platform. Opening these technology platforms to competition might be analogous to earlier market-structure experiments that opened rail lines and telecommunication cables to competing users.

The issues go beyond monopoly. Who should have property rights to the data which Google and other technology companies collect? Who should have the right to use or on-sell it? What constraints should be put on its use? Somewhere in all those unread pages of conditions most of us agree to with a quick click of the mouse, there are answers to these questions, and the answers favour Google. Perhaps these kinds of data should be seen as a public good, like the data collected by government statistical bureaux, available to everyone.

There are also a host of security issues.  With our greater dependence on the services provided by the technology companies, should governments have more say in how reliable they are, and how hack-resistant? Should these services be safeguarded as closely as the payments system, because failure would be critical, perhaps catastrophic? Should Apple have the right to protect encrypted messages, even if they threaten the nation’s wellbeing? Should Facebook be the gatekeeper on what for many is their only news source?

The European authorities are setting the pace in this unexplored territory, tentatively developing a framework for markets where the tech giants operate. What they have done so far is just a beginning: they have two other cases pending against Google and a wider agenda under development. Of course there are concerns about too much interference. After all, while Brussels has abandoned its attempt to regulate the shape of cucumbers, it still has a well-deserved reputation for activist rule-making. On the other hand, should this be left to the United States, with its dominant free-market ethos, driven by the power of vested interests that have self-serving reasons for minimising regulation?

Australia has the same interest as Europe in ensuring markets have the appropriate degree of regulatory infrastructure, ensuring that firms don’t abuse their market power, while encouraging them to innovate and fostering appropriate scale. Of course we have our own competition authority and other market-regulating authorities as well. There may be room for different rules in different countries but, for a medium-size country like Australia, the room for setting our own rules is limited. In a world where global rules are scarce and under pressure, Brussels’s tentative rule-making in these new areas of market power should be applauded as an attempt to provide some de facto global rules for the technology giants.

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