Episode 35 – How Google, Facebook and Uber challenge the game? New business models bring new economic and legal questions

In the second part of the interview with Prof. Dr. Toker Doganoglu, Dean of the faculty of economic at the University of Wuerzburg and holder of the chair for Industrial Economics, we discussed economical and legal questions, that have been arising in the context of platform economies.

DIGITAL TRANSFORMATION – DATA AND NEW TECHNOLOGIES BRING NEW QUESTIONS

The enormous rise of (big) data and new technologies affect almost every part of social and working life and has implications on all markets – along with that, new questions related to the field of industrial economics have been arising. A current topic can be seen in the digitalization and automation and the implementation of suitable competition laws, data-security and privacy regulations.

The economic implications of the market power of superstar firms like Google, Amazon, Facebook and other platform economies like Uber or Airbnb are hot topics for industrial economists and lawyers. How has the market power evolved and is it still possible for other companies to compete with the big players and quasi monopolists? Here, we have to differentiate between the process that brought them their market power and the current state. Google’s business model for example is based on a large amount of data that is collected during every use of the search engine. Google works with algorithms that learn from every single transaction (search – result – action) on the one side and compares the individual actions with reference group transactions on the other side. Therefore, Google can deliver high-quality and exact answers with a high hit rate. Consumers benefit from a high-quality service on the one side, but on the other side there are high market barriers for potential competitors and a quasi-monopolistic market structure emerges. Obviously, there is no easy and one-dimensional answer how to deal with such a market situation – how can we induce a competitive market structure in such situations? How can we induce incentives for firms to compete with Google and other dominant platform economies at a playfield that is dominated by a business model led by exclusive data. There are current debates in this context. Besides known data privacy debates, there are discussions on approaches of making collected data portable so that other providers can use it as well. A similar proposal has come up for introducing and stimulating interconnectivity in social networks by Prof. Joshua Gans from the University of Toronto. If almost everyone is on Facebook, how will it be able for individuals that join a smaller social network, to communicate with their contacts on Facebook. The proposal is similar to the regulation of the telecommunication market. Here it is possible to call someone, who has a contract with a different service provider, meaning that the communication networks are interconnected. Therefore, the proposal claims, that any future social network should provide a connected communication channel, so that consumers can communicate across platforms. Along with those kinds of proposals, again, a lot of complex questions emerge – with legal and economic focus.

Market power leads to inefficient resource allocation and suboptimal welfare. That’s what students learn in an introduction class. So, we just have to break up the monopolist and that’s it – or not? Well, just breaking up these firms is probably not the right option, as this will lead to a situation, where one of the broken pieces can quickly become the new monopolist. If it is the goal to change the monopolistic market structure, one has to think about a sensible regulatory framework and corresponding competition laws.

This is also true, when we focus on the business models of platform economies like uber and Airbnb – in these particular cases, there are differences in the regulatory framework that favor the platforms to the disadvantage of traditional market competitors. In contrast to the taxi industry, uber – in particular uber drivers – underlies different market regulations. In Germany, taxi drivers must have a taxi license, that costs money and is connected to an official examination. Uber drivers are not subject to this regulatory framework. Therefore, uber is banned in large parts of Germany and other countries. But is banning in this case the right instrument? There are examples that show, that there are other options. In Turkey for example, given a local regulatory framework, uber turned out to be more expansive than the traditional taxis – but still people chose the service due to a higher quality and service level.

As technological progress and digitization will proceed, new platforms will emerge that challenge the current regulatory framework. State authorities have to analyze these situations carefully and harmonize current regulation frameworks to set fair conditions for equal competition. In contrast to earlier decades, we now have huge amounts of data that can be used to run empirical economic analysis and use the results to develop sensible proposals that fit the current and future environment.

From an economical and legal view, there are lots of complex questions to be asked – in most cases, the answers are also multi-dimensional. As economists like to say, „it depends“.

EDUCATION IN INDUSTRIAL ECONOMICS

At the end of the Podcast-Session, we talked about Prof. Doganoglu’s goal in the education of his students. Here is a short summary, of what Prof. Doganoglu wants his students to learn:

  • Thoroughly studying (market) situations: Critical thinking on issues and navigating to pin point potential problems.
  • Learning to USE the tools: students need to know and use the analytical toolsets so that they derive answers for different questions and situations by themselves.
  • Learning how to derive answers instead of learning the answers given in a prescribed manner.

Students from the Industrial Economics program find a broad range of fields, where they could work later on and bring in their profound strategic expertise:

  • government agencies (e.g. competition, regulation, law etc.)
  • strategy division (e.g. in consulting companies and organizations – use toolset to solve concrete problems)
  • marketing departments (here: understanding consumer behavior and derive strategies)

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