• Using Economics in Policymaking for Digital Platforms: A Q&A with Jeffrey T. Prince

    In September 2020, Analysis Group affiliate Jeff Prince completed his year serving as Chief Economist for the Federal Communications Commission (FCC), where he advised the Commission on economic policy, auction design, data analytics, and antitrust matters. Managing Principal Chris Borek and Vice President John Browning spoke with Professor Prince upon his return to academic research at Indiana University’s Kelley School of Business, where he is a professor and chair of business economics and public policy, the Harold A. Poling Chair in Strategic Management, and co-director of the Institute for Business Analytics. Professor Prince also has provided expert testimony and reports in antitrust and intellectual property (IP) litigation in the technology industry, most notably in Qualcomm v. Apple.

    Dr. Borek and Mr. Browning talked with Professor Prince about his ongoing research into technology and telecommunications markets.

    It certainly is an interesting time to be studying the telecommunications and technology sector. The GAFA companies in particular – Google, Apple, Facebook, and Amazon – are facing intense scrutiny by regulators around the world, including here in the US. In fact, in the first week of October, the antitrust subcommittee of the US House of Representatives’ Judiciary Committee released a detailed report with findings and recommendations from their investigation into competition in digital markets.  

    Jeffrey T. Prince - Headshot

    Jeffrey T. Prince: Harold A. Poling Chair in Strategic Management, Professor and Chairperson of Business Economics and Public Policy, Kelley School of Business, Indiana University

    Yes, my year at the FCC has provided me with an additional perspective on the workings and goals of our policymakers, which is useful when considering these kinds of government reports. Coincidentally, my colleague Michael Baye and I have also just finished a paper evaluating policy assertions made about the new challenges that two-sided platforms have created for antitrust. We look into the economics of digital platforms and two-sided markets, and particularly applications to internet search, online advertising, media, data, and privacy.

    In that paper, we examine the economic assumptions that policymakers use to justify different policies, such as increasing regulation, breaking up large companies, subsidizing entry for new competitors, or requiring tech companies to share the data they collect. For that matter, these assumptions also underlie arguments that digital markets are working just the way they should. From what I understand about the House report, our paper discusses many of the same issues the subcommittee members attempted to address.

    From an economics perspective, how can we best sort through the very complex questions being raised in the current public debate over competition and regulation in the digital ecosystem?

    The first step is to recognize that rigorous quantitative analysis of empirical evidence has an important role in assessing the welfare-enhancing impacts of a particular proposal or intervention. Economic theory is a starting point, but it can be used to rationalize almost any policy decision. Instead, we maintain that sound public policy benefits from science-based empirical analyses. This means looking at what is actually happening in the marketplace, not just what could happen.

    Our view is that it would be a mistake to simply cherry-pick the factors or outcomes that support a predetermined approach. When you analyze the empirical evidence, you are likely to find that some factors (for example, cost complementarities and economies of scope) may support a more hands-off approach, while others (for example, obvious abuses of market power) may support intervention. 

    A prominent example is the argument that a business’s size alone is justification for intervention. However, whether “bigness” or concentration harms consumers or competition is an empirical question, not a theoretical one. 

    T. Christopher Borek - Headshot

    T. Christopher Borek: Managing Principal, Analysis Group

    What makes digital platforms different from more traditional firms in terms of competitive analysis?

    Social welfare exists on all sides of a multi-sided platform, not just one side. Platforms typically serve two or more sides, which are all codependent and realize benefits that are in part determined by what happens on another side of the platform. So platform companies make business decisions that are based on and impact the preferences and incentives of all sides of the platform. As a result, a platform’s business decisions can have quite different effects on the welfare of participants on different sides of the platform, even if welfare in the relevant markets overall increases.

    For instance, quantifying the impact of, say, alleged anticompetitive behavior on one side of a two-sided platform may, at first blush, suggest a remedy such as divestiture or price regulation. But that remedy will also impact participants on the other side of the platform, or perhaps even impact unrelated sets of customers who are also served by the platform. To avoid unintended harm and the potential for decreased overall consumer welfare, impacts must be considered for participants on all sides of the platform and included in the competitive calculus.

    How do you approach some of the unique challenges that digital platforms can pose for competitive analysis?

    What is most important is to apply a sound and defensible methodology to quantify as best as possible the many qualitative factors that drive digital markets. The difficulty in doing so lies in all of the interrelations that may exist among different customers’ demands for the many different products and services provided by large platforms. Then there are additional complexities related to multiproduct costs and network effects.

    The complexity is compounded by the free services provided by digital platforms to consumers. While, all else equal, low prices are good for consumers, the presence of free services does not necessarily mean that the platform won’t be subject to antitrust scrutiny.  

    For that reason, the economic value of certain features of services provided to consumers for free is relevant and can be evaluated using those features’ shadow price (as distinct from a pecuniary, or cash, price). The shadow price is used to indicate consumers’ willingness to pay for a marginal improvement in a particular attribute, such as search quality, as captured by, say,  speed or privacy. Similar to a pecuniary price, the shadow price can be used to assess relevant performance metrics, such as consumer welfare.

    John M. Browning - Headshot

    John M. Browning: Vice President, Analysis Group

    What are some important considerations for policymakers when applying a scientifically valid empirical approach to two-sided markets?

    Policymakers should keep in mind that regulatory decisions may result in policies that benefit some market participants at the expense of other market participants. Public policies may have disparate effects in two-sided markets. For instance, allowing certain practices on a payment platform may benefit merchants but harm consumers, while disallowing them may have the opposite effects. The same may be true of the participants in online advertising markets.

    We also should remember that the competitive landscape in big tech can turn on a dime, as illustrated by the change in the identities of the dominant players over the past twenty years. Think of BlackBerry or AOL, for example. Technological advances will continue to be made over the next twenty years, and business models will continue to evolve in step with them.  There is every likelihood that, over time, we will see new and better options for consumers, and potentially new competitors as well.

    You have a broad range of interests in technology and telecom markets. Does that work help inform your thinking on two-sided markets?

    It does, indeed. For example, while at the FCC, I helped spearhead public comments by the Commission on the Vertical Merger Guidelines that the Federal Trade Commission recently released. These guidelines are highly relevant to technology markets, as many of these firms are vertically integrated in some way. 

    I also recently distributed a research paper that values online privacy for a range of data types, across several platforms and countries. Data privacy has become a primary issue for technology and telecom markets, and finding ways to value such privacy is important for firms and regulators alike. ■