Issue 60

Privacy and industry concentration

Economist Timothy Taylor wrote a blog post last week, commenting that:

“Concentration  isn’t a good barometer of the extent of competition in the market,”  says Chicago Booth’s Chad Syverson. “It’s not just a noisy barometer; we  don’t even know what direction the needle is pointing. There are cases  where, clearly, things happen in a market to make it more competitive,  and concentration goes up.”

As an example, imagine rules that  made made your personal data more portable. A step like this would  probably encourage more competition in certain industries, because if  your data moved with you, it would be easier to switch between phone  companies, or banks, or health insurance providers. However, if it is  easier to switch and competition goes up, a possible result is that the  already-big providers grow even bigger, and concentration rises as well.

I've written about rising industry concentration before.  It's not obvious it's a bad thing given how it has come about. Here it  is visualised (the data are out of date but it's the best I've got):

The  rise in industry concentration appears to be happening because the most  productive firms are becoming "superstars" by offering consumers lower  prices (or no price), eliminating their less productive rivals. It  should come as no surprise that the top five S&P 500 companies today  are Apple, Microsoft, Google, Amazon and Facebook. But the way they  became so big was by benefiting consumers, the polar opposite of  industry concentration resulting from monopolistic behaviour, which is  what antitrust was developed to combat (at least in theory). Tim concludes:

In short, when thinking about the  extent of competition in a market, and how certain antitrust or  regulatory policies might affect competition, it's reasonable to look at  measures of industry concentration and how such measures might shift.  But before one has a knee-jerk negative reaction to measures of higher  industry concentration, one needs to be quite specific about how  concentration is being measured: how a specific industry is defined, and  whether the focus is local, regional, or national. One also needs to be  aware that higher competition can lead to higher concentration for an  extended period of time.

There's no doubt that, for  example, the social media industry is heavily concentrated. But it's not  clear that there's a lack of competition or monopolistic behaviour on  behalf of the Facebook, nor is it clear that the social media industry should be defined as Facebook's version of social media (ever heard of Fortnite?).

There  is, however, a risk that misdiagnosing the problem may lead to  regulations that further entrench the incumbents over start-ups. Privacy  regulations such as the one Tim mentioned above catch up, along with  some ill-advised antitrust action as proposed by the likes of Warren,  Sanders and the Chinese,  are two such examples. If concentration has risen as a result of  increased competition then those actions may, perversely, solidify that  concentration while muting competitive forces.

Note that Facebook's share price hit a record high last week and in his annual note, Mark Zuckerberg again called for his firm to be more heavily regulated. He's no fool.

Enjoy the rest of this week's issue. Cheers,

— Justin


Other bits of interest

Blockchain and sporting contracts

Salary  caps for sporting leagues are generally set on a single year basis, but  teams often sign players on multi-year deals. That tends to result in  some contracting shenanigans, with clubs front or back-loading contracts  to create "windows" in which they can challenge for a title by  essentially having a more talented squad than they would otherwise be  able to afford. Enter blockchain:

After nearly three  months of delays, including a threat from the NBA to ban him from the  league during negotiations, Brooklyn Nets point guard Spencer Dinwiddie  plans to launch his token-based investment vehicle on Monday in  conjunction with a bid to get selected to his first career All-Star  Game.

Dinwiddie is going to sell his securities-backed SD8  tokens, which can’t be traded for a year, for $150,000 apiece to  verified accredited investors under SEC Regulation D, Rule 506 (c). What  he created, he said, allows players to structure and issue debt  instruments in digital token form to invest their money how they’d like.  It would function as a decentralization of the personal loan to  athletes through bonds they create with their guaranteed contracts as  collateral.

The SD8 coin will be a three-year bond expected to  pay out 4.95% base interest on a monthly basis—much better than you’d be  able to get at a bank—with the full principal paid out at the end of  the period upon maturity in a bullet payment. The investment period will  begin on Monday and end on February 10, with the bond notes maturing  and paying out in full on February 10, 2023. According to a chart  provided by Dinwiddie’s representatives, if all 90 coins were purchased,  it would net investors just over $2 million over the course of the  three years.

By  tokenising their contracts, professional athletes might be able to  'smooth' out these front or back-ended deals, equalising their pay  across the duration of their contract in return for an annual interest  payment.

Learn more:

The Reserve Bank of Australia dismisses Libra

Imagine  if the Reserve Bank of Australia (RBA) was the regulatory body in  charge of the internet? It would no doubt have concluded, as Paul  Krugman did, that:

By 2005, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's.

Like  Krugman it would have been horribly, horribly wrong. The difference is  that the RBA has the power to regulate Libra out of existence (at least  in Australia); thankfully Krugman did not have that power over the  internet. Here's the RBA:

The G7 has cautioned that  private sector global stablecoin initiatives should not be permitted to  launch until all risks and regulatory requirements have been addressed.  The [RBA] is supportive of this view.

In Australia, it is unclear  that there will be strong demand for global stablecoins even if they do  meet all regulatory requirements, particularly for domestic payments.

Who cares if there's demand. Let Facebook try. If there's no demand, it will fail. Problem solved.

Learn more:

That's all for now. If you enjoyed this issue, feel free to share it via email


Issue 60: Privacy and industry concentration was compiled by Justin Pyvis and delivered on 14 January 2020. Join the conversation on the fediverse at Detrended.net.