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Information services: competition and externalities

Periodic Reporting for period 3 - ISECO (Information services: competition and externalities)

Reporting period: 2018-11-01 to 2020-04-30

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 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.
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: The research has focused on the role of consumers’ information in two-sided markets, where each side must anticipate other sides' behavior, 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.
• Virtual layer, recommendation systems, privacy, transaction costs: A first part of the project has concerned recommendation systems and online feedback systems. A second part has focused on the economics of privacy.
• Physical layer, pricing, investment: One analysis studies vertical relationship with price-discrimination at the retail level. Another analysis focuses on the effect of mergers on adoption of new technologies, investment and innovation.
• Competition policy for two-sided markets: The research addressed several competition issues in the context of two-sided markets such as tying, collusion or mergers.
The project made significant progress and is expecting as much progress in the second period. New models have been developed to address the issues described above, in particular related to dynamic competition, consumer privacy in the new economy and competition policy in platform markets. These models and their implications will be further investigated in the second part of the project. Several publications have been achieved and many promising articles are in preparation.