When do network effects harm consumers? Network-based platforms and antitrust concerns.
Many of today’s most dominant tech companies benefit from network effects. As more people use Amazon, the company gets more data into user behavior that informs more powerful recommendation algorithms and gives insight into competitors for Amazon’s own products. Farronato’s article’s discussion about the benefit that companies like Amazon get from network effects adds nuance to our class’s discussion about network effects, which has mostly focused on consumer-facing network effects. Analyzing the network effects of Amazon with the model presented in class would focus on how more buyers on Amazon translates to more potential customers for sellers; or how more sellers on the platform gives buyers a larger selection. This article provides a holistic understanding of network effects and their effects on all stake holders. Through my recounting of the article, I will discuss how network effects are complex and might even lead to negative outcomes for markets and consumers.
The benefits Amazon gets from network effects come at a price to markets—and potentially consumers. As a company like Amazon gets more data from their increasing network, their platform improves to the point where it becomes harder for competitors to enter the market. It raises a question that challenges our understanding of network effects: is there a point past which network effects begin to harm consumers?
These challenges to markets have been the subject of antitrust conversations across the world. As the article explains, it is hard for antitrust laws to measure the harm done to consumers because these network-based platforms center around data. Whereas it is easy to see the harm done to consumers in a market like retail, where a monopolistic company can charge an exorbitantly high price, it is difficult to measure the consumer harm of tech companies collecting more data. The opacity of companies’ data practices, along with antitrust officials’ tendency toward a laissez-faire approach, mean that companies like Amazon that show monopolistic qualities have been able to continue their operations for a long time, without intervention. To begin to address network platforms’ antitrust concerns, we need to better understand the data they collect.
While the answer to correctly making antitrust policies lies in being able to better understand tech companies’ data collection practices, it is a fantasy to expect companies to willingly disclose these practices. Therefore, legislation is needed. We are already seeing regions like Europe take strides in holding tech companies accountable for anti-competition practices. However, if we are to change the status quo in the U.S., given all the lobbying power these large tech companies wield, change will need to be grassroots.
We are already seeing a grassroots push for more people-friendly, transparent data practices. For example, California’s Consumer Privacy Act of 2018 began as a ballot measure. People all over the world need to continue this momentum and demand more from their legislators if we are to address the anti-competition behaviors of large tech companies.
This article gives us another lens through which we can understand the effects of network effects and their implications. This article introduces us to the anti-competition effects that network effects can have. Equipped with this awareness, as consumers, we need to challenge how we understand network based companies and make our voices heard to legislators.
Article:
https://hbr.org/2021/10/network-based-platforms-must-be-regulated-but-how