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The Role of 'Big Data' in Online Platform Competition

63 Pages Posted: 27 Aug 2014 Last revised: 19 Sep 2014

Andres V. Lerner

Compass Lexecon

Date Written: August 26, 2014

Abstract

The collection of user data by providers of online services recently has become a popular topic in debates about the application of competition policy to online markets. At issue is whether the collection of large amounts of data — sometimes referred to as “big data” — in particular data collected from users, leads to markets “tipping” to dominant online platforms and, as a result, whether online markets merit earlier and more aggressive antitrust intervention. Concerns regarding the collection of user data are based on the assumption that there is a strong “feedback loop” — that online providers need a large base of users from whom to collect data, and large amounts of user data in order to compete effectively for users and advertisers. In this article, I offer an analysis of the assumptions behind arguments that the collection of user data by large online platforms creates insurmountable scale advantages and thus leads to “tipping” to dominant platforms. The overall conclusion is that calls for greater antitrust scrutiny of the data collection efforts of large online platforms are based on unsupported assumptions rather than fact-based inquiry.

User data is a valuable input into the provision of online services. The collection of user data is conducted by firms of all sizes, by firms offering a wide array of services to users, by both new entrants and established players, and by online as well as traditional offline (“brick-and-mortar”) firms. Online providers collect user data in order to improve the services offered to users and to monetize those services effectively through targeted advertising, which leads to valuable services being offered to users at subsidized prices, often for free. As a result, the collection of user data by online providers is an important part of the competitive process and generates sizable consumer benefits.

However, the conclusion that the benefits of user data lead to significant returns to scale and to the entrenchment of dominant online platforms is based on assumptions unsupported by real-world evidence. While, in theory, control of an “essential” input can lead to the exclusion of rivals, a careful analysis of the evidence indicates that such concerns are unwarranted for many online businesses that have been the focus of the “big data” debate. As an initial matter, no single online provider controls all, most, or even a significant amount of user data. And, in contrast to economic theories about foreclosure of rivals through the control of an essential input, incumbent online providers do not have explicit or de facto exclusivity over user data. Moreover, competitive success is not dictated by control over vast troves of user data. The quality of services offered to users, as well as the ability to monetize effectively by attracting advertisers, is driven by many other inputs including, perhaps most importantly, engineering resources and technological investments and innovation. While there are economies of scale in the provision of many online services, as in most businesses, these economies are subject to rapidly diminishing returns. Consistent with these economic characteristics of online markets, there is no evidence that the vast majority of online markets have “tipped” to dominant platforms.

Keywords: big data, network effects, exclusion, tipping, monopoly power, online markets, online search, online platforms, platform competition, lock-in

JEL Classification: K21, L12, L40, L41, L42, L51

Suggested Citation

Lerner, Andres V., The Role of 'Big Data' in Online Platform Competition (August 26, 2014). Available at SSRN: https://ssrn.com/abstract=2482780 or http://dx.doi.org/10.2139/ssrn.2482780

Andres Lerner (Contact Author)

Compass Lexecon ( email )

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