Should We Get Rid of Data Monopolies?

dataminingWriting for HBR, Kira Radinsky (@KiraRadinsky) asks a very interesting question:

Should data that only one company owns, to the extent that it prevents others from entering the market, be considered a form of monopoly? (“Data Monopolists Like Google Are Threatening the Economy”)

She reasons that as an ever-increasing amounts of data are collected by businesses, new opportunities arise to build new markets and products based on this data. However, as a result of the established player’s control of proprietary data, data itself becomes the barrier-to-entry to the market preventing new competitors from entering. Kira says that he search market is a perfect example of data as an unfair barrier-to-entry.

Kira’s is the argument behind the ‘essential facilities doctrine’, which requires a monopolist or a dominant firm to provide access at a “reasonable” price to an essential or bottleneck facility that the monopolist controls and that is deemed necessary for effective competition and consumer welfare.

The essential facilities doctrine was first applied about a century ago to assets that have natural monopoly characteristics or strong network effects, and where access is supposed to create or facilitate competition. For example, it may specify when a rail-road must be made available on “reasonable” terms to a rival rail company, an electricity transmission grid to a rival electricity generator, or a communication network to a rival communications provider.

Courts in the US, EU and other countries have extended the doctrine to different properties including intellectual property rights. Its application has often been surrounded by controversy, because it might result in unfortunate consequences, which neither enhance consumer welfare nor result in any improvement in the degree of competition in the concerned market.

A facility should only be considered essential in situations where the facility is absolutely indispensable. In this paper(1), Ali A. Massadeh proposes the following six questions as a test for the application of the essential facility doctrine:

  1. The facility should be considered as an essential facility only in situations where it is described as fundamental to the public, where there are a large number of people seeking a vital product, where producing this commodity depends on the facility, and where denial in giving access to the facility will affect a great number of people. If these restrictions are fulfilled then the facility can be deemed essential.
  2. The emergence of a new product; this means that the proposed product is substantially different than the incumbent’s (the owner of the facility) product, and constitutes a separate market. This leads on to the idea that the existence of two markets should be present in any given case, to be considered as an essential facility case.
  3. The facility owner is engaged in anticompetitive conduct designed to extend market power into another market, and/or are engaged in anticompetitive behaviour in a way that preserves market power in the facility market.
  4. The feasibility of the facility in question (i.e. can the facility in question serve competitors as well as the facility owner?).
  5. Is it reasonable to duplicate the facility or is there any substitute to the facility (i.e. are there any legal, technical, or even economic constraints that make it difficult or impossible to duplicate the facility?).
  6. Is there any objective justification for the denial of using the facility?

Following the questionnaire, here is my take on whether massive amount of proprietary data qualifies as an essential facility:

  1. Yes, search has become a vital product, and it critically depends on accumulated data about the internet structure, queries, and personal data.
  2. Not clear what the NEW product is. A lot of ideas, but we are still in discovery mode. Not even Google has been able yet to “monetize” beyond its main search-advertising model.
  3. Yes, absolutely. Data incumbents are trying to extend their market power into everything.
  4. Sure. (notwithstanding bullet point 2, and notwithstanding that the technology sophistication required to use big data is beyond most organizations today.)
  5. I would say: no without a little help from protectionism, like the one the Chinese government is granting to Chinese’s internet me-too’s)
  6. No.

Sure, this debate is worth much more than a short post, therefore I would like to hear edgy ideas. How would you fill the test out?

____________________

(1) Massadeh, Ali A. 2011. The Essential Facilities Doctrine Under Scrutiny: EU and US Perspective. SSRN Scholarly Paper ID 1738326. Rochester, NY: Social Science Research Network. http://papers.ssrn.com/abstract=1738326.

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