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Shoppers with Internet access and a bargain-hunting impulse can find a universe of products at their fingertips. In this thought-provoking exposé, Ariel Ezrachi and Maurice Stucke invite us to take a harder look at today’s app-assisted paradise of digital shopping. While consumers reap many benefits from online purchasing, the sophisticated algorithms and data-crunching that make browsing so convenient are also changing the nature of market competition, and not always for the better. Computers colluding is one danger. Although long-standing laws prevent companies from fixing prices, data-driven algorithms can now quickly monitor competitors’ prices and adjust their own prices accordingly. So what is seemingly beneficial—increased price transparency—ironically can end up harming consumers. A second danger is behavioral discrimination. Here, companies track and profile consumers to get them to buy goods at the highest price they are willing to pay. The rise of super-platforms and their “frenemy” relationship with independent app developers raises a third danger. By controlling key platforms (such as the operating system of smartphones), data-driven monopolies dictate the flow of personal data and determine who gets to exploit potential buyers. Virtual Competition raises timely questions. To what extent does the “invisible hand” still hold sway? In markets continually manipulated by bots and algorithms, is competitive pricing an illusion? Can our current laws protect consumers? The changing market reality is already shifting power into the hands of the few. Ezrachi and Stucke explore the resulting risks to competition, our democratic ideals, and our economic and overall well-being.
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Virtual Competition Virtual Competition T H E P RO M I S E A N D P E R I L S O F T H E A LG O R I T H M - D R I V E N ECO N O M Y Ariel Ezrachi • Maurice E. Stucke Cambridge, Massachusetts London, England 2016 Copyright © 2016 by the President and Fellows of Harvard College All rights reserved Printed in the United States of America First printing Library of Congress Cataloging-in-Publication Data Names: Ezrachi, Ariel, 1971– author. | Stucke, Maurice E., author. Title: Virtual competition : the promise and perils of the algorithm-driven economy / Ariel Ezrachi, Maurice E. Stucke. Description: Cambridge, Massachusetts : Harvard University Press, 2016. | Includes bibliographical references and index. Identifiers: LCCN 2016018188 | ISBN 9780674545472 (cloth) Subjects: LCSH: Electronic commerce. | Pricing—Technological innovations. Classification: LCC HF5548.32 .E996 2016 | DDC 381/.142—dc23 LC record available at https://lccn.loc.gov/2016018188 Contents Preface vii PART I Setting the Scene 1 The Promise of a Better Competitive Environment 1 3 2 New Economic Reality: The Rise of Big Data and Big Analytics 11 3 Light Touch Antitrust 22 4 Looking beyond the Façade of Competition 27 PART II The Collusion Scenarios 35 5 The Messenger Scenario 39 6 Hub and Spoke 46 7 Tacit Collusion on Steroids: The Predictable Agent 56 8 Artificial Intelligence, God View, and the Digital Eye 71 PART III Behavioral Discrimination 83 9 Price Discrimination (Briefly) Explained 85 10 The Age of Perfect Price Discrimination? 89 11 The Rise of “Almost Perfect” Behavioral Discrimination 101 12 Behavioral Discrimination: Economic and Social Perspectives 117 13 The Comparison Intermediaries 131 vi Contents PART IV Frenemies 145 14 The Dynamic Interplay among Frenemies