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Information services: competition and externalities

Periodic Reporting for period 4 - ISECO (Information services: competition and externalities)

Reporting period: 2020-05-01 to 2021-04-30

This project aims at fostering our theoretical and empirical knowledge of the economics of information services, such as Internet services, digital communications, certification or broadcasting.
The digitalization of communication services and the Internet have triggered a massive increase in communications and changes in the organization of trade. This had drastic consequences at multiple levels: societal, political, cultural and naturally economic. The research concerns the production and exchange of information from an industrial organization perspective.
The recent development of information technologies has resulted in a global increase in the level of externalities between economic agents, as information spreads over all layers of the digital economy. While the phenomenon is global, its effects are often seen at the micro level, where most innovations take place. It is thus useful to think of the concept of externalities as a unifying theme for the issues that are developed by this research. The prevalence of externalities in information services can be traced to several features of information services. For one thing, many information services include communication or matching activities, which typically implies the existence of network externalities. These externalities may be one-sided as for digital communications services such as Skype or two-sided as for e-commerce platforms or search engines. Moreover, information has the nature of a public good. Thus, the production and exchange of information between two parties may affect other parties. In the case of information good, the externality may be positive, for instance when a consumer put a recommendation online, or negative, for instance when a website fails to protect the data of its users. These externalities are difficult to correct in the context of information goods as property rights on information are imperfect and contractual possibilities are limited. Finally, information services and infrastructures are complements.
The research focuses mainly on the analysis of strategic interactions between various agents involved in the production and exchange of information services, based on rigorous analytical framework and empirical validation, in the tradition of industrial organization, as represented by Jean Tirole’s textbook (‘The Theory of Industrial Organization’, 1988, MIT Press).
Externalities arise in at least two distinct layers of the information society. The first layer can be referred to as the content level and includes all activities of production and exchange of information. The second layer consists of all the physical activities that support the virtual sphere. These two layers are intrinsically related, and the project aims at developing research on both layers.
Output
The project has provided new knowledge on four themes, one methodological, two related to the virtual and the physical layers of Internet and one on policy.
• Background theory, two-sided markets, network dynamics, contractual externalities: This part develop new theory and models to study issues of externalities between participants to the digital economy. The research has focused on the role of consumers’ information in two-sided markets, where each side must anticipate other sides' behaviour, as well as on the incentives for a multi-product firm to move from a one-sided platform structure to a multi-sided platform structure. The role of consumers' beliefs in shaping competition between platforms is also explored. The most recent developments focus on the dynamics of competition with network externalities. One paper develops a new theory explaining when and why a firm may decide to develop as a two-sided platform by hosting rival products.
• Virtual layer, recommendation systems, privacy, transaction costs: This part is concerned with the behaviour of firms and consumers online, in the production, exchange and treatment of information. A first part of the project was concerned with recommendation systems and online feedback systems. A second part has focused on the economics of privacy, with several contributions analysing firm’s incentives to protect personal data and the impact of privacy regulation. Another line of research has been concerned with the implications of search friction in online markets.
• Physical layer, pricing, investment: This part is mostly concerned with the telecom infrastructure and link between virtual and brick-and-mortar activities. After an inquiry on the issue of net-neutrality, the research has evolved toward the analysis of the effect of mergers on adoption of new technologies, investment and innovation in infrastructure. Another work reconsiders vertical relationships and optimal distribution modes when fine information allows price-personalization at the retail level.
• Competition policy for two-sided markets: The research addressed several competition issues in the context of platforms and two-sided markets. This includes for instance work on collusion between platforms and work on anti-competitive tying by two-sided platforms. Special attention has been devoted to mergers which include contributions on mergers in two-sided markets, mergers in innovative sectors and mergers between multi-product firms.
Recently the team has been interested by the impact of artificial intelligence on firms’ behaviour and competition (personalization, targeted advertising, algorithmic pricing...). In particular it started to investigate empirically and theoretically the issue of tacit collusion by autonomous pricing algorithms
Dissemination
Many publications have been achieved in top economic journals. The work has been presented in many conferences, with participation of researchers but also of policy makers and stakeholders.
The expertise developed has induced members of the team to contribute to the public debate through many roundtables and several reports. This includes 3 reports to the European Commission (with participation of J. Crémer, D.S. Jeon, Y. Lefouili and L. Madio) and a report for the Stigler Center of Chicago Booth (participation of B. Jullien).
A large part of the research output is synthetized in the forthcoming chapter of volume 4 of the Handbook of Industrial Organization (“Two-Sided Markets, Pricing and Network Externalities”). The team has also contributed to several policy papers (on merger and innovation, competition policy for two-sided market, platform liability, algorithmic pricing)
The ERC has also contributed to finance two regular conferences. The Digital Economic Conference is an annual conference gathering scholars, business actors and policy makers. The ERC grant was also used to launch a more specialized annual workshop on The Economics of Platforms, that now continues alternative funding
The project made significant progress in our understanding of the digital economy. In particular it provided many new insights on the role of platforms, the economic issues they raise and policy responses. New models have been developed to address the issues described above, related to two-sided markets, dynamic competition, consumer privacy in the new economy and competition policy in platform markets. The large number of publications shows the impact of the research in the academic community. There are still many promising articles in progress. An important effort has been made to diffuse the results of the research among policy makers
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