Lower-quality products with less privacy

Companies, antitrust authorities increasingly recognize, can compete on privacy and protecting data. But without competition, data-opolies face less pressure. They can depress privacy protection below competitive levels and collect personal data above competitive levels. The collection of too much personal data can be the equivalent of charging an excessive price.

Data-opolies can also fail to disclose what data they collect and how they will use the data. They face little competitive pressure to change their opaque privacy policies. Even if a data-opoly improves its privacy statement, so what? The current notice-and-consent regime is meaningless when there are no viable competitive alternatives and the bargaining power is so unequal.

Surveillance and security risks

In a monopolized market, personal data is concentrated in a few firms. Consumers have limited outside options that offer better privacy protection. This raises additional risks, including:

• Government capture.  The fewer the firms controlling the personal data, the greater the potential risk that a government will capture the firm. Companies need things from government; governments often want access to data. When there are only a few firms, this can increase the likelihood of companies secretly cooperating with the government to provide access to data. China, for example, relies on its data-opolies to better monitor its population.
• Covert surveillance.  Even if the government cannot capture a data-opoly, its rich data trove increases a government’s incentive to circumvent the data-opoly’s privacy protections to tap into the personal data. Even if the government can’t strike a deal to access the data directly, it may be able to do so covertly.
• Implications of a data policy violation or security breach.  Data-opolies have greater incentives to prevent a breach than do typical firms. But with more personal data concentrated in fewer companies, hackers, marketers, and political consultants, among others, have even greater incentives to find ways to circumvent or breach the dominant firm’s security measures. The concentration of data means that if one of them is breached, the harm done could be orders of magnitude greater than with a normal company. While consumers may be outraged, a dominant firm has less reason to worry about consumers’ switching to rivals.

Wealth transfer to data-opolies

Even when their products and services are ostensibly “free,” data-opolies can extract significant wealth in several ways that they otherwise couldn’t in a competitive market.

First, data-opolies can extract wealth by getting personal data without having to pay the data’s fair market value. The personal data collected may be worth far more than the cost of providing the free service. The fact that the service is free does not mean we are fairly compensated for our data. Thus, data-opolies have a strong economic incentive to maintain the status quo, in which users, as MIT Technology Review put it, “have little idea how much personal data they have provided, how it is used, and what it is worth.” If the public knew, and if they had viable alternatives, they might hold out for compensation.

Second, something similar can happen with the content users create. Data-opolies can extract wealth by getting creative content from users for free. In a competitive market, users could conceivably demand compensation not only for their data but also their contributions to YouTube and Facebook. With no viable alternatives, they cannot.

Third, data-opolies can extract wealth from sellers upstream. One example is when data-opolies scrape valuable content from photographers, authors, musicians, and others’ websites and post it on their own platform. In this case, the wealth of the data-opolies comes at the expense of other businesses in their value chain.

Fourth, data-opolies can extract our wealth indirectly, when their higher advertising fees are passed along in the prices for the advertised goods and services. If the data-opolies had more competitors for their advertising services, ads could cost even less—and therefore so might the products being advertised.

Finally, data-opolies can extract wealth from both sellers upstream and consumers downstream by facilitating or engaging in behavioral discrimination, a form of price discrimination based on past behavior—such as internet browsing history. Data-opolies can use the personal data to get people to buy things they did not necessarily want at the highest price they are willing to pay.

As data-opolies expand their platforms to digital personal assistants, the Internet of Things, and smart technologies, the concern is that their data advantage will increase their competitive advantage and market power. As a result, the data-opolies’ monopoly profits will likely increase, at our expense.

Loss of trust

Market economies rely on trust. For online markets to deliver their benefits, people must trust firms and their use of personal data. But as technology evolves and more personal data is collected, we are increasingly aware that a few powerful firms are using our personal information for their benefit, not ours. When data-opolies degrade privacy protections below competitive levels, some consumers will choose “to [not] share their data, to limit their data sharing with companies, or even to lie when providing information,” as the U. K. Competition and Markets Authority put it. Consumers may forgo the data-opolies’ services, which they otherwise would have used if privacy competition were robust. This loss would represent what economists call a deadweight welfare loss. In other words, as distrust increases, society overall becomes worse off.

Significant costs on third parties

Additionally, data-opolies that control a key platform, like a mobile phone operating system, can cheaply exclude rivals by:

• steering users and advertisers to their own products and services to the detriment of rival sellers on the platform (and contrary to consumers’ wishes)
• degrading an independent app’s functionality
• reducing traffic to an independent app by making it harder to find via its search engine or in its app store

Data-opolies can also impose costs on companies seeking to protect our privacy interests. My book with Ariel Ezrachi, Virtual Competition, discusses, for example, Google’s kicking the privacy app Disconnect out of its Android app store.

Less innovation in markets dominated by data-opolies

Data-opolies can chill innovation with a weapon that earlier monopolies lacked. Allen Grunes and I call it the “now-casting radar.” Our book Big Data and Competition Policy explores how some platforms have a relative advantage in accessing and analyzing data to discern consumer trends well before others. Data-opolies can use their relative advantage to see what products or services are becoming more popular. With their now-casting radar, data-opolies can acquire or squelch these nascent competitive threats.

Social and moral concerns

Historically, antitrust has also been concerned with how monopolies can hinder individual autonomy. Data-opolies can also hurt individual autonomy. To start with, they can direct (and limit) opportunities for startups that subsist on their super platform. This includes third-party sellers that rely on Amazon’s platform to reach consumers, newspapers and journalists who depend on Facebook and Google to reach younger readers, and as the European Commission’s Google Shopping Case explores, companies that depend on traffic from Google’s search engine.

But the autonomy concerns go beyond the constellation of app developers, sellers, journalists, musicians, writers, photographers, and artists dependent on the data-opoly to reach users. Every individual’s autonomy is at stake. In January, the hedge fund Jana Partners joined the California State Teachers’ Retirement System pension fund to demand that Apple do more to address the effects of its devices on children. As the Economist noted, “You know you are in trouble if a Wall Street firm is lecturing you about morality.” The concern is that the data-opolies’ products are purposefully addictive and thereby eroding individuals’ ability to make free choices.

There is an interesting counterargument that’s worth noting, based on the interplay between monopoly power and competition. On the one hand, in monopolized markets, consumers have fewer competitive options, and arguably, there is less need to addict them. On the other hand, data-opolies like Facebook and Google, even without significant rivals, can increase profits by increasing our engagement with their products. Data-opolies can have an incentive to exploit behavioral biases and imperfect willpower to addict users—whether watching YouTube videos or posting on Instagram.

Political concerns

Economic power often translates into political power. Unlike earlier monopolies, data-opolies, given how they interact with individuals, possess a more powerful tool: the ability to affect the public debate and our perception of right and wrong.

Many people now receive their news from social media platforms. But the news isn’t just passively transmitted. Data-opolies can influence how we feel and think. Facebook, for example, in an “emotional contagion” study, manipulated 689,003 users’ emotions by altering their news feed. Other risks of this sort include:

• Bias.  In filtering the information we receive based on our preferences, data-opolies can reduce the viewpoints we receive, thereby leading to echo chambers and filter bubbles.
• Censorship.  Data-opolies, through their platform, can control or block content that users receive and enforce governmental censorship of political or religious information.
• Manipulation.  Data-opolies can promote stories that further their particular business or political interests instead of their relevance or quality.