Issue 60

Privacy and industry concentration

Delivered on 14 January 2020 by Justin Pyvis. About a 4 min read.

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 Here it is visualised (the data are out of date but it's the best I've got):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.

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:

Issue 60: Privacy and industry concentration was compiled by Justin Pyvis and delivered on 14 January 2020.