Tag Archives: incentives

Consolidation is the result of economies of scale – essentially horizontal integration, vertical integration, and resource sharing. These methods create competitive advantages in powerful ways that make it difficult for smaller players to compete in the same markets. There is nothing necessarily wrong with this trend, but it creates large barriers to entry and often leads to larger profit margins than would be otherwise possible.

In the information age – yes, now – this effect is greatly increased, and the limitations of transportation and capacity have been eliminated. The ability to integrate and share resources is much easier, and new extra-strength synergies are created. For example, if a website allows you to shop for both books and music, then it is possible to tailor your music shopping experience based on your book purchasing preferences. This is a very simple example of a much more powerful trend. It may be impossible to enter into any sort of competition with large information companies after the next 20 years.

You can already see it beginning to happen: Yahoo builds from scratch any web business that seems to make sense. Then because of its existing market coverage, and the ability to integrate new businesses with existing businesses and data, Yahoo is able to capture so much synergistic value that they gain an insurmountable competitive advantage. In this way, I think that Yahoo and the other major aggregators and integrators are great companies.

There are risks. Big ones. And the FTC may not be able to do anything about it.

It may be inevitable that the consolidation will lead to a stable equilibrium under monopoly – where there would be no reason to be a competitor because the types of services being provided rely on historical information and broad business integration that is impossible to recreate or beat. Then this monopolist would have virtually limitless pricing discretion, and the ability to manipulate markets and cultures in unprecedented ways. Humanity, in many ways, would be at the mercy of the monopolist. (I hope that its leaders are benevolent democrats with philosophically sound motivations and long time horizons – but what if they are not?)

The only way to eliminate this market dynamic is to eliminate the factors that make it possible, namely, the opportunity to use your market dominance in one field to create dominance in another field. More specifically, eliminate the competitive advantage created by archival data. This can be accomplished by sharing archival data freely. But what about my privacy? Good question. We have a big problem here. The private information about you and your preferences plays a large role in creating the value that leads to this consolidation. If you want to eliminate this competitive advantage, then you either eliminate the value or you share private information.

There is another way.

What if users owned their own archival data? Amazon could still track my click streams, and do whatever they wanted with them. But I would also be tracking my own use, and have control over my own preferences and historically available data. Amazon would quickly learn that the personalization algorithms produce much more valuable customization using the users’ data than the Amazon archives. Market entry for this standard benefits from this implication. Now what happens if you go to a small competitor – one with little history, but better value than the others? They would be able to provide you with services that took advantage of your archival data, just as the monopolist would have. Competition is restored, and the advantages for humanity are regained as well.

Somebody should create a standard – probably using an XML document editable from within your browser. I’d love to help. Somebody has to do it eventually, and the sooner the better for all of us (except the monopolist, of course!)