Data-Driven Market Power: An Overview of Economic Benefits and Competitive Advantages from Big Data Use
Posted: 29 Jul 2019 Last revised: 23 Feb 2021
Date Written: July 26, 2019
Recent high-profile merger and antitrust cases as well as policy debates worldwide have centered around the relationship between the access to (big) data and the market power of firms in digital markets. In particular, the economic success and the increasing societal importance of online platforms, whose business model is based on the collection, analysis, usage and monetization of personal data, have prompted a discussion on factors that facilitate the establishment of market power in the data economy and whether new competition rules are necessary with regard to data-driven businesses.
These discussions have brought forward numerous conceptual arguments for and against the conjecture that market power may be derived from a firm’s access to big data. However, those arguments often do not consider findings by the empirical academic literature that has studied firms’ economic benefits from big data use. Moreover, it is often unclear whether the exploitation of big data in a specific case will lead to short-term economic benefits (which increase a firm’s performance, but do not alter market structure in the long run) or to inimitable, long-term competitive advantages (which protect a firm from competition and lead to market power). Yet, in order to effectively protect consumers through competition policy and to avoid costly intervention errors, it is important to characterize the factors and conditions that delineate those two different economic outcomes.
This study attempts to shed light on the aforementioned issues and makes the following contributions: First, we survey the economic, information systems and marketing literature and provide an overview of the empirical evidence on the economic benefits that firms can derive from big data in the internet economy. Specifically, we focus on data-driven personalization and targeting of online platforms and derive nuanced insights on how big data can be beneficial to firms, while also highlighting moderating factors that significantly influence economic outcomes.
Second, we identify six facilitating factors that enable a firm to gain a long-term competitive advantage based on the economic benefits achieved from big data. These factors include structural market characteristics as well as business strategies that firms may pursue to strengthen their competitiveness. More specifically, we highlight that (i) exclusive access to data, (ii) exploitative access to data (iii) economies of scale in data analytics, (iv) platform business models and network effects, (v) data-induced switching costs, and (vi) economies of scope and ecosystem expansion foster a firm’s ability to establish data-driven market power and raise entry barriers.
Third, we contribute to the current policy debate on market concentration and on how to deal with dominant data-driven firms. Based on the identified facilitating factors, we propose a set of escalating policy measures to address competitive concerns and anti-competitive conduct in the data economy. Specifically, we suggest that transparency rules, a right to data portability, and mandated open access to input data constitute a set of ex-ante and ex-post instruments that can be applied in a proportionate manner.
Keywords: big data, data-driven business models, market power, competition policy, regulation, competition in digital markets, online platforms, internet economy
JEL Classification: L10, L40, L51, L86
Suggested Citation: Suggested Citation