Competition

The need for innovation and start-up cultures is a given in the tech world: tech companies that don’t innovate don’t last very long. Outside this environment many companies and governments prefer to paint themselves as victims of the intense changes wrought by Internet and high technology. These parallel cultures mean most companies, and especially governments, find it hard to disrupt themselves (examples like gov.uk are relatively few). Where many governments fight innovations, Estonia decided to embrace them.

In this small Northern European state, the government is fostering a start-up culture and marrying it with radical administrative disruption. The President is a geek and the job of the few bureaucrats that exist is to exploit the dynamic forces of private competition. Here digital technology breeds opportunity and jobs instead of chafing against red tape.

You’ve undoubtedly heard about Skype; perhaps Estonia’s 13 year old eID system is a flicker in your memory. But are there shared ingredients? Can it be copied?

The first ingredient is hard to copy. Estonia has a population of 1.3 million – a close-knit community half the size of Brooklyn, which is easier to shape than a decentralized Germany or a mammoth United States.

The second is a historical legacy of both tech and direct action. The Soviet Union’s Institute of Cybernetics (still running today) was founded in the Estonian capital Tallinn in 1960. It’s no coincidence that the parents of some of Skype’s founders worked there or that its headquarters is next door. Meanwhile citizens each year participate in “Let’s Do It” day – banding together to fix things in their community with their own hands.

That’s related to the third ingredient, the #EstonianMafia start-up scene – where names like Toggl and GrabCad are racing to be the next TransferWise.

But it’s the fourth ingredient that matters most: partnerships for achieving scale.

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Last Wednesday, the White House released a report on “Big Data and Differential Pricing.”  The reason you have probably not heard much about it is that it was about as exciting as an Economics 201 lecture.  If you have heard about it (and you are not tenured faculty in an economics department), you may have meandered across an article such as this one, whose headline seems to imply that there is a problem that regulators need to solve.

However, if you take time to read the report, the conclusions (to the extent there are conclusions) are far more balanced and restrained.  In fact, the report notes that price differentiation is not widespread, usually beneficial, and certainly not unique to the online world.  Where differentiation is potentially problematic (not necessarily for economic reasons, but for matters of “fairness”) is in risk-based pricing markets (such as insurance, employment or credit-issuance).  But in risk-based markets, the takeaways are not unidirectional either.  In these scenarios, differential pricing is often a good thing, as it can discourage risky behavior upfront (and guard against adverse selection).  Indeed, the report recognized these types of benefits.  For example, if health insurance companies offer lower rates to non-smokers or generally healthy individuals who eat-well or exercise regularly, this can encourage healthy behavior upfront.  The report recognizes other benefits as well, such as expanding output.  To again use the health insurance market as an example, if health insurers couldn’t differentiate pricing and had to offer uniform prices, those who engage in risky behavior (e.g. smoking) would be forced to subsidize those who engage in non-risky behavior, causing fewer low-risk individuals to purchase health care plans.  Even in non-risked-based markets, differential pricing often leads to more efficient outcomes (particularly in high-fixed cost markets).

Real problems can arise when factors outside one’s control (genetic predispositions) or protected classes (race, sex, age, sexual orientation, etc.) are used to directly disadvantage consumers.  However, these problems are not unique to the online/big data world, and — as the report points out — antidiscrimination provisions of existing laws (such as the Fair Credit Reporting Act and the Civil Rights Act) already apply in these situations.

Nevertheless, some voice Orwellian fears that Internet-enabled big data might allow sellers to more precisely gauge individuals’ willingness to pay, thus transferring wealth (i.e. “surpluses” in economic terms) to producers.  This is “first degree” or “perfect” price discrimination in economic textbooks, which is hardly elaborated upon outside of theoretical models because it is virtually impossible in the real world, and — despite overblown concerns — still nearly impossible in the online world as well.

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A Neutral Economy?

by James Waterworth on February 12, 2015

It isn’t always necessary for catchy phrases to have a clear meaning, after all poetry as an art form depends on beauty and a certain mystery. Mario Cuomo famously quipped that in politics ‘You campaign in poetry; you govern in prose’. While there is much merit in this claim, the poetry must lead you in the right direction otherwise the outcomes will not be what has been claimed.

This is the case with the current European debate about “platform neutrality”: a seductive phrase, but with a true meaning few have considered.

The most recent winner of the Nobel Prize for Economics, Jean Tirole, has written extensively about ‘platforms’ or two-sided markets. Such markets include newspapers, shopping centres, estate agencies, video games, credit cards, TV networks and many more.  A market is two-sided when it brings together two-distinct groups, through a platform or intermediary, that benefit from each others’ existence.  Ebay buyers benefit from having more sellers (and sellers benefit from more buyers), stores in shopping malls benefit from more shoppers and shoppers benefit from more stores, and Xbox video game developers benefit from more Xbox owners (and vice versa).  The company the creates the platform (whether it is a online website, the seller of a video game platform, or the owner of a shopping mall) makes money by creating value for the other parties in the system.

The platform company often creates (or facilitates) a market. What is notable is that the “platform neutrality” discussion doesn’t recognize, as Tirole does, that these situations occur throughout the entire economy. As Tirole notes, “[m]any if not most markets with network externalities are two-sided.”  Instead, the “platform neutrality” debate only focuses on famous online platforms such as Apple, Allegro, Amazon, eBay, Facebook, Google, etc, and fails to recognize that these platforms are not unique to the online world.

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Airbnb has turned homes into hotels. Hosts deliver an experience – full of local knowledge, free WiFi, and stocked kitchens – not merely a place to sleep. It’s a similar story with European-based competitors Wimdu, HouseTrip and Waytostay; and niche operators from the upmarket onefinestay to gay-friendly Misterbnb.

The revolutionary power of these platforms comes from the fact that it is about sharing and trusting, in a world where those sentiments can be sadly lacking. It is simply nice to stay in someone’s carefully tended home. Nicer than passing time in a soulless chain hotel, sleeping in the accommodation equivalent of a Filet-O-Fish burger.

The digital revolution has shifted people’s perceptions of ownership. People own less and experience more, and want to do different things with what they own. These tides meet in the Airbnb experience, and this alignment with Millennials is what will doom hotels that don’t flow with the tide.

So it’s a pity that hotel owners are fighting back by leaning on regulators instead of innovating. While they fight for the right to keep charging us $30 a day for WiFi, Airbnb innovates with nifty features likes Airbnb Neighborhoods and Local Lounges. Smarter hotels are learning from Airbnb but perhaps the rest have been numbed by the speed of Airbnb’s scale: four years to reach 600,000 beds compared to 93 years for Hilton.

Most amazing is the willingness of governments to crack down on innovations like Airbnb without first gathering evidence of consumer or social harm. The New York Attorney General demanded massive data sets and Amsterdam hired 22 inspectors to crackdown on what exactly? Even non-users are benefiting from lower hotel prices. These cities would be better off following the British example, of confirming in law that it’s OK for individuals to let rooms out on a short-term basis.

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Silent rage is the best way to describe my experience at London’s Gatwick Airport in December 2014, as I battled with the airport money-changers to get a dollar for every pound I handed over.

Needing US dollars to pay for a visa upon arrival in Vietnam, Moneycorp – the monopoly currency exchanger at the airport – had a license to legally pick-pocket me. With no pound sterling in my wallet, and no alternative provider or machine, Moneycorp could demand a 4 pound fee to withdraw 40 pounds from my credit card, a handling fee (because it was a small transaction) and leave me with a poor exchange rate. As I handed over the cash it felt like Groundhog Day: just the latest episode in a decade-long struggle through the endless fees and rules of banks and other parties to pay off credit cards in my native Australia, and access cash from ATMs in the world’s largest cities.

There are two ways to look at my Gatwick experience: 1) Thank heavens Moneycorp was there to save me in my hour of need or 2) Why was I paying roughly 20% commission for a service an ATM could have provided me for under 5%. Of course, it would be even better value if an airport vendor had been allowed to link up with an online currency service, letting me pick up my cash the same way I might collect a parcel.

A further question is: when does frustration cross into exploitation? And what are the roles innovators and policy-makers could play?

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The debate of the last couple of years about corporation tax in Europe resembles a popular ‘whodunnit’: point at an obvious suspect before realising that things are not as they seem. The storyline is still being written, but it risks taking a shortcut by identifying some politically convenient suspects, without uncovering whether any wrongdoing has occurred. This would certainly not please the fictional Belgian detective Mr Hercule Poirot who was insistent that “It is the brain, the little gray cells on which one must rely. One must seek the truth within–not without.”

It is to that standard the European Commission’s competition enforcement teams must live up as they investigate claims that state aid has been granted by certain countries to certain companies.

As we have written previously here on DisCo, there has been much debate about corporation tax in Europe recently. The debate has sometimes assumed that Internet companies pay less corporation tax than other firms while the opposite is true according to the European Commission’s expert group: they pay many times the average effective rate of European firms. In this political climate Europe’s competition enforcers, DG Competition, have opened state aid investigations into some European countries’ tax rulings to see if the arrangements provide firms with an unfair advantage.

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As Jon noted on Friday, the Supreme Court invited the views of the U.S. Solicitor General on whether to hear the Oracle v. Google case.  This suggests the Court is far likelier to review the Federal Circuit’s decision regarding copyright, interoperability, and the Java APIs (previously discussed here).

The Solicitor General (SG) coordinates the U.S. Government’s litigation before the Supreme Court, and the Court from time to time will invite the SG’s views on whether to take a case.  Roughly a dozen times a year, the SG is asked to file such briefs, in an order referred to by Supreme Court wonks as a “CVSG order” (which calls for the views of the Solicitor General).

Empirical evidence suggests that (a) this bodes well for the petition, and (b) that the substantive views of the SG can be influential.

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01/12/15 Update: The Court issued an invitation calling for the views of the U.S. Solicitor General, an act that shows interest in the case.  It suggests the Court is more likely to grant the petition, although it is now very unlikely to be heard this Term.


 

Today the Supreme Court conferences over whether to review the Federal Circuit’s decision in Google v. Oracle America. This is a welcome development because it provides the Supreme Court with the opportunity to overturn the Federal Circuit’s flawed decision relating to the protectability of the Java Application Program Interfaces (APIs) under copyright.

We previously discussed the Federal Circuit’s May 2014 decision here, here, here, and here. Google incorporated elements of the Java API in the Android API. Oracle acquired the rights in Java when it purchased Sun Microsystems, the company that developed Java. After the acquisition, Oracle sued Google for patent and copyright infringement. The district court dismissed the patent claims, and the case presently centers on the copyright claims. MORE »

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Buying airfare online is a complicated and frequently fraught experience.  You can buy your ticket directly from the airline of your choice, from online travel booking sites, or even via travel metasearch engines—and your purchase price might be different depending on the time of day or day of the week you choose to shop.  All of that is to say that airline pricing structures are very complex, and a cottage industry has grown out of consumers’ demonstrated demand for better tools to navigate air travel booking.

At first glance, Skiplagged would seem to be just that—another tool for consumers to parse the secretive pricing strategies of airlines.  The website takes advantage of an obscure quirk of airline pricing: trips that include a stopover in a high-demand destination prior to a final leg to a less-frequented one are regularly cheaper than direct flights to the same high-demand destination.  So a prospective traveler (without checked baggage) looking to fly to San Francisco from DC might book a trip to Lake Tahoe with a stopover in SFO and then skip the final leg of the trip to take advantage of the lower total fare for the Tahoe itinerary.  Skiplagged shows consumers these “hidden city” deals and directs them to the travel booking sites from which they can be purchased. MORE »

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2014

New Year’s is always a time for remembrance and nostalgia, with lots of “top” lists. This is another, focused on the most important, entertaining and reverberating technology law cases of 2014.

1.  Apple’s iPod Class Action Win.  Near the end of the year, a decade-old antitrust class action against Apple Inc. finally went to trial in early December. The gist of the claim was that by reconfiguring its DRM system for the then new (now iconic) iPod MP3 players in a way that broke compatibility with RealNetworks’ protocol back in 2006, Apple monopolized the market for digital music. Although the Sherman Act theory was questionable, at best, the presiding federal judge refused to dismiss the complaint or enter summary judgment for either side. After just three hours of deliberations, the jury returned a unanimous verdict for Apple, finding that the new software was a meaningful product improvement over previous versions. (This was also the case where the late Steve Jobs testified, by way of videotaped deposition, from the grave.) Lesson: even monopolists get the blues.

2.  Software & Business Methods Patents Narrowed.  In one of several precedent-setting Supreme Court cases involving intellectual property, the Court ruled in Alice Corp. v. CLS Bank that vague or generic patents, which do little more than operate mathematical algorithms on a general purpose computer, are not “patentable subject matter.” CLS Bank has already had a profound effect on the Court of Appeals for the Federal Circuit, which for nearly the first time invalidated some business method patents on patentablity grounds in its wake, and the the U.S. Patent & Trademark Office, which was far more aggressive in rejecting patent applications during the second half of the year. The longer term consequences in the ongoing debate over patent trolls and patent reform legislation remain to be seen. Lesson: the era of easy patents may be ending. MORE »

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