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Designing competition in digital markets

The internet giants need smart regulation, says Passau Information Systems Professor Jan Krämer. He and his team are developing models for this.

The future of digital markets is designed offline. In a room at Professor Jan Krämer's Chair at the University of Passau, two doctoral researchers are sketching formulas on a whiteboard and discussing them. At the edge of the whiteboard, the following is written: "Research never sleeps". 

There is a startup mentality here at the Chair of Internet and Telecommunications Business, or “iBusiness” for short. The team occupies a niche in the information systems field. "I prefer to call our discipline information systems economics”, says Professor Krämer. In Brussels, where he is part of the CERRE (Centre on Regulation in Europe) think tank, they call him the "Digital Economist". Krämer and his team are researching the laws in digital markets. 

The DFG project “Platform neutrality and data-driven business models: Data in return for a prominent placement of providers on online platforms” is currently being launched at his Chair. It deals with how paying with data changes the balance of power. Janina Hofmann is the new researcher who will be doing her doctorate as part of the project.

The current project, explained by the team

Data sharing for prominent placement

Large online platforms such as Amazon, Facebook or Google mediate between companies and customers by placing products in such a way that users can find them quickly. Recently, the platforms have been offering companies this service in exchange for data. 

One example is Google's Accelerated Mobile Pages service. Websites that use this turbo news service receive - because of the much shorter loading times - a prominent place in the results of the mobile web search. In return, the search engine gets access to connection data and usage statistics of the website. A similar model is behind "Fulfillment by Amazon": Online shops can use this service to outsource their entire shipping operations to Amazon. In return, the world's largest online retailer receives valuable insights outside its marketplace into shops, product popularity and customer behaviour.

Prof. Dr. Krämer und Doktorandin Janina Hofmann machen eine Übersicht auf einem Whiteboard zum DFG-Projekt: Plattformneutralität und datengetriebene Geschäftsmodelle: Daten als Gegenleistung für eine prominente Platzierung von Anbietern auf Onlineplattformen“

Professor Krämer and doctoral researcher Janina Hofmann

Complex impact on competition and welfare

"The perfidy of this is that the entrepreneurial risk is completely outsourced to the individual retailers," says Professor Krämer. The large online platforms can observe what works and offer successful products themselves. Sharing data therefore has much more complex effects on competition and welfare than paying with money.

Professor Krämer has recognised that there is a need for basic research and has successfully raised funds from the German Research Foundation (DFG) to finance Janina Hofmann's doctoral position. Hofmann studied economics in Nuremberg and Mannheim and her master's thesis deals with the modelling of rational ignorance from the company's point of view. Specifically, with the trade-offs that a company has when seeking to invest in new products. First of all, information against uncertainties can help you make a decision. At a certain point, however, the company has to weigh up: Does it still benefit from additional information or is the effort involved too high, i.e. are the (opportunity) costs too high?

New legalities in digital markets

The decision to remain uninformed in certain respects is called rational ignorance in economics. Such cost-benefit considerations also exist in digital markets, but algorithms and large amounts of data change the analysis process. Over the next two years, Hofmann will develop theories for the complex relationship between digital platforms, smaller online companies and users. Hofmann's first step will be to gather information on the topic. This is followed by the modelling stage. Professor Krämer calls this "the gift of economists": to abstract complex, socio-technical systems to the essential effects to such an extent that it becomes clear where the decisive determining factors are.

Hofmann benefits from the knowledge already available at the Chair and the ZD.B data policies junior research group, which is closely linked to the team surrounding Professor Krämer. All of the Chair's researchers are concerned with the future of the digital markets, some with a stronger focus on information systems, others in the field of economics. An international orientation is important to the team: Courses are held in English. Professor Marc Bourreau, economist at the Institut Polytechnique de Paris, is currently visiting the chair. Together with him, Professor Krämer and Hofmann develop a first draft of the model.

Janina Hofmann's start coincided with the bi-annual offsite event of the Chair in Upper Austria; a mini-conference with a team-building rationale. For three days, all eight employees presented their topics. Each of them had a two-hour slot consisting of a lecture first, followed by a discussion. For Hofmann, it was an intensive crash course: "It was very exciting," she says. "I immediately got an overview of what's going on at the Chair." 

Particularly when it comes to the question of regulation, many people reflexively want to do something. But we want to improve things; not make them worse.

Professor Jan Krämer, University of Passau

On the pulse of EU competition policy

Krämer, the “Digital Economist”, gets his inspiration for the topics directly from Brussels: The CERRE think tank closely follows the political issues there. "You can tell where there are gaps in research," says Krämer. “I am taking many inspirations with me to Passau.” In turn, he feeds his findings from Passau into the debates in Brussels. “Particularly when it comes to the question of regulation, many people reflexively want to do something,” says Prof. Krämer. “But we want to improve things; not make them worse.”

To achieve this, the team in Passau relies on the same tools used by developers in Silicon Valley: whiteboards and open doors.

Keep up to date with project developments, open positions, and other news in the Chair of Internet and Telecommunications Business by following them on Twitter

Author: Kathrin Haimerl

 

Prof. Dr. Jan Krämer

Professor Jan Krämer

researches the regulation of the Platform Economy

What conditions are required on the internet to create competition and innovation?

What conditions are required on the internet to create competition and innovation?

Professor Jan Krämer has held the Chair of Internet and Telecommunications Business of the University of Passau since 2014 and is a Research Fellow at the Centre on Regulation in Europe (CERRE), a Brussels-based think tank.