Periodic Reporting for period 2 - CoDiM (Competition in Digital Markets)
Reporting period: 2023-02-01 to 2024-07-31
This ERC project comprises three groups of sub-projects addressing different but related questions about competition in digital markets. Projects in the first group analyze how the competitive forces in the market, coupled with technological innovation, are transforming the competitive landscape of digital advertising. Advertising in the internet era is mostly about capturing the attention of consumers browsing the web. This requires both detailed data to tailor the ad to the right consumers and fast algorithms to bid on the online auction platforms where ad space is sold. These needs have given rise to a major shift from advertisers' individual bidding to delegated bidding by highly specialized intermediaries. In turn, by concentrating demand of many advertisers within a few large intermediaries, this evolution has triggered the emergence of buyer power as a countervailing force to the highly concentrated supply of online ad. Thus, while supply is still mostly in the hands of a single firm, Google, its market power has been at least in part curtailed by intermediaries. But are advertisers benefiting from this evolution or is concentration among intermediaries creating a double marginalization problem? This crucially hinges on the functioning of the intermediary market and, specifically, on the contracting between advertisers and intermediaries. The first group of projects explores these problems by using new data and contributing to understanding whether in one of the most highly concentrated and economically relevant digital platforms the market is fixing itself.
Public interventions, in the form of ex ante regulation or ex post antitrust sanctions, represent a different and hotly debated response to the concerns on competition in digital markets. But what would be the proper way for public regulators to foster competition in digital platforms? Is what we know about regulating natural monopolies that sell to rational consumers (Viscusi, Harrington and Sappington, 2018) adequate for digital platforms? Or should we consider these as environments that are apt for competition – not being natural monopolies – but also characterized by users that do not conform with the homo economicus model? These are the types of questions explored in the second group of projects. A key feature is the attention to combine how users’ biases - such as a default effect (Thaler and Sunstein, 2008) for the search engine used – interact with the market structure and, hence, with how an effective public intervention should be organized.
Finally, a third set of questions addressed by the third group of projects concerns the interplay of competition and privacy. In several digital platforms – most notably in those selling products like apps, movies or music – sellers’ revenues often come from three sources: charging a price to consumers, exposing them to advertisements (and, hence, earning from the sale of ad space) or acquiring their data. In the latter case, the revenues are typically produced by the subsequent resale of the data to advertisers and other specialized intermediaries. If until recently consumers seemed relatively unconcerned about the value of their personal data, there is mounting evidence of a growing price that consumers are willing to pay to preserve their privacy. However, not all platforms give consumers the right to their data (for instance, opting out of personalized ads is not an option on Facebook) and there are many open questions regarding what is the best market design for “attention oligopolies” (Prat and Valletti, 2019) and digital platforms more broadly.
Public interventions, in the form of ex ante regulation or ex post antitrust sanctions, represent a different and hotly debated response to the concerns on competition in digital markets. But what would be the proper way for public regulators to foster competition in digital platforms? Is what we know about regulating natural monopolies that sell to rational consumers (Viscusi, Harrington and Sappington, 2018) adequate for digital platforms? Or should we consider these as environments that are apt for competition – not being natural monopolies – but also characterized by users that do not conform with the homo economicus model? These are the types of questions explored in the second group of projects. A key feature is the attention to combine how users’ biases - such as a default effect (Thaler and Sunstein, 2008) for the search engine used – interact with the market structure and, hence, with how an effective public intervention should be organized.
Finally, a third set of questions addressed by the third group of projects concerns the interplay of competition and privacy. In several digital platforms – most notably in those selling products like apps, movies or music – sellers’ revenues often come from three sources: charging a price to consumers, exposing them to advertisements (and, hence, earning from the sale of ad space) or acquiring their data. In the latter case, the revenues are typically produced by the subsequent resale of the data to advertisers and other specialized intermediaries. If until recently consumers seemed relatively unconcerned about the value of their personal data, there is mounting evidence of a growing price that consumers are willing to pay to preserve their privacy. However, not all platforms give consumers the right to their data (for instance, opting out of personalized ads is not an option on Facebook) and there are many open questions regarding what is the best market design for “attention oligopolies” (Prat and Valletti, 2019) and digital platforms more broadly.
Significant progress has been achieved in the initial phases of the project, particularly in the development and dissemination of scholarly work. To date, the project has yielded three significant papers. The first, titled "Regulating online search in the EU: From the android case to the digital markets act and digital services act," co-authored with Muxin Li, has been published in the "International Journal of Industrial Organization." The other two manuscripts, exploring the intersections of artificial intelligence, data obfuscation, and online search competition, are currently in the working paper stage and have been submitted for publication, with one in the revision stage for the "American Economic Journal: Microeconomics."
Beyond these completed works, two additional papers are in the final stages of preparation. These papers delve into the regulation of digital advertising and the analysis of complementarities in vertical markets within the digital advertising industry. This expanding body of work demonstrates a broadening of the project's scope, extending beyond the initial analysis proposed in the project's inception. The research now encompasses a deeper examination of the dynamics between advertisers and digital platforms, shedding light on competitive practices and regulatory implications.
The relevance and impact of this research are further underscored by its presentation at various prestigious academic and policy-focused platforms. These include conferences organized by the National Bureau of Economic Research (NBER) and the TSE-Yale Digital Economy, as well as seminars and discussions at top-tier universities and institutions. Such engagements have not only facilitated the dissemination of the findings but also highlighted the policy implications of the research, particularly in relation to EU competition law and digital market regulations.
In summary, the project has made significant strides in exploring and understanding the complex dynamics of digital markets and advertising, contributing valuable insights to both academic discourse and policy deliberations. This work has not only expanded the scope of the original research agenda but also positioned the project at the forefront of discussions on the regulation and competition of digital platforms.
Beyond these completed works, two additional papers are in the final stages of preparation. These papers delve into the regulation of digital advertising and the analysis of complementarities in vertical markets within the digital advertising industry. This expanding body of work demonstrates a broadening of the project's scope, extending beyond the initial analysis proposed in the project's inception. The research now encompasses a deeper examination of the dynamics between advertisers and digital platforms, shedding light on competitive practices and regulatory implications.
The relevance and impact of this research are further underscored by its presentation at various prestigious academic and policy-focused platforms. These include conferences organized by the National Bureau of Economic Research (NBER) and the TSE-Yale Digital Economy, as well as seminars and discussions at top-tier universities and institutions. Such engagements have not only facilitated the dissemination of the findings but also highlighted the policy implications of the research, particularly in relation to EU competition law and digital market regulations.
In summary, the project has made significant strides in exploring and understanding the complex dynamics of digital markets and advertising, contributing valuable insights to both academic discourse and policy deliberations. This work has not only expanded the scope of the original research agenda but also positioned the project at the forefront of discussions on the regulation and competition of digital platforms.
Two papers from this project stand out for their contributions to advancing current knowledge. "Competition and Defaults in Online Search" leverages recent antitrust actions to explore optimal regulatory strategies for digital platforms. Meanwhile, "Artificial Intelligence & Data Obfuscation: Algorithmic Competition in Digital Ad Auctions" pioneers the examination of AI in search ad auctions and represents one of the earliest investigations into AI's economic behaviors.
While claiming a breakthrough in research is challenging, these papers offer significant progress. "Competition and Defaults in Online Search" not only uses antitrust interventions to inform digital market regulation but also advocates for an evidence-based regulatory approach. Similarly, "Artificial Intelligence & Data Obfuscation" introduces an innovative perspective by linking platform data policies with the use of AI by businesses. This insight is particularly groundbreaking as it reveals how platforms' data management can influence the effectiveness and adoption of AI tools in digital markets, a dynamic not yet addressed in current legislative frameworks like the Digital Markets Act or the Artificial Intelligence Act.
By highlighting the connection between platform data policies and AI tool performance, this paper advances our understanding of digital market competition and the emerging trend of platforms providing AI tools directly. This contributes to a deeper understanding of the potential distortions in market competition, emphasizing the importance of fair competition in the digital economy.
While claiming a breakthrough in research is challenging, these papers offer significant progress. "Competition and Defaults in Online Search" not only uses antitrust interventions to inform digital market regulation but also advocates for an evidence-based regulatory approach. Similarly, "Artificial Intelligence & Data Obfuscation" introduces an innovative perspective by linking platform data policies with the use of AI by businesses. This insight is particularly groundbreaking as it reveals how platforms' data management can influence the effectiveness and adoption of AI tools in digital markets, a dynamic not yet addressed in current legislative frameworks like the Digital Markets Act or the Artificial Intelligence Act.
By highlighting the connection between platform data policies and AI tool performance, this paper advances our understanding of digital market competition and the emerging trend of platforms providing AI tools directly. This contributes to a deeper understanding of the potential distortions in market competition, emphasizing the importance of fair competition in the digital economy.