On Thursday the 19th of September the University of Melbourne hosted the inaugural John Freebairn lecture titled ‘Governing the ungovernable: the market, technology and you’, presented by Professor Stephen King from Monash University. I had the opportunity to attend what was an insightful lecture about how the growing complexity, pace of change and use of technology has brought about a conundrum for market regulators. Stephen King’s speech was broken up into three parts: how regulation has adapted in the context of new technology, how some of the old rules will need remaking as technology has changed many business models, and finally regulating big data and the information revolution. This article will provide a recap of the lecture for those who could not attend the event.
Old wine in new bottles
Stephen started his first point off with the example of the ACCC pursuing Google for putting up sponsored links and advertisements of misleading and deceptive businesses. Google used the existing rule of the ‘publishers defence’, meaning that they would not be liable for any ads they had no reason to suspect were illegal. Meanwhile the ACCC argued, because Google used its ‘AdWords’ algorithm to display the ads relevant to the search, they were part of the misleading and deceptive conduct. The High Court sided with Google and the result of this case made the rules clear that internet publishing can be handled by the same rules that hold for traditional publishing. It also meant that some of the existing laws can be applied in the modern technological world. Stephen also went on with another example of where Apple, Amazon and other publishers tried to push up the price of eBooks, and were all found guilty of anti-competitive behaviour. The point was that because some of the laws were neutral to technological change, anti-competitive behaviour along with misleading and deceptive behaviour were still caught under existing laws and regulations.
Where regulation is inadequate
In this section Stephen talked about how regulation was failing to keep up with changes to technology, which affected businesses within an industry. One specific area where this has occurred is the surge in electricity prices. In summary, the rising network charges have possibly been the result of network owners’ decisions (both public and private owned), but also the rules surrounding the calculation of network charges by the electricity regulator. To be more specific, the regulator has turned the fixed cost of the network into a variable cost charged to the customer, which has been fine up until solar panels came into play. As less power is required, the remaining consumers who use the grid are burdened with more of the fixed network costs than before, which increases the incentive to install solar panels and thus begins an upward spiral in electricity prices. The disruption to electricity prices by solar panels may or may not have been significant but it exposed a problem in the existing regulations and a need for change in regulation.
Stephen pointed out that this was a shortcut by the regulator: although fixed costs should have a fixed charge on consumers, this was constrained due to equity reasons (e.g. the poorest people would have to pay the same as the richest on electricity), and also the political reason that solar panel subsidies were a government initiative.
The second example presented was a two-sided market, where technological change had resulted in old competition regulation being made irrelevant. Examples of a two-sided market include the classifieds section of the newspaper, and realestate.com.au or carsales.com.au. It is where sellers care about the number of buyers who look at the site, while buyers care about the number of sellers who list on the site. Another example of a two-sided platform is a television network that provides entertainment/content for viewers but also provides advertising space to businesses. This can lead to outcomes like mobile phone call termination charges, where there is an incentive to raise prices charged by one network to another (e.g Telstra to Optus) and have all the customers gather on a single network. Although they are regulated, there are both pros and cons to high and low termination charges, thus regulators face a policy dilemma. The point Stephen was making was that regulation could not keep up in some areas of business where technology made it difficult to regulate and that old policies need a remake or a new approach in order to regulate effectively.
With the internet and the collection of data by businesses, both customers and businesses have more information to make better informed decisions about their buying and selling in the market. This however affects the efficiency of the markets, as businesses could potentially price discriminate (not illegal) and exploit a higher price on targeted customers. Stephen argues that regulators could help consumers by providing better information; this is not the same as overwhelming them with information, which would likely lead to inefficient outcomes. Regulators could simply improve the flow of information; Stephen presented the example of the reforms to the surcharge fee for using an ATM of a competing bank. So instead of a hidden surcharge on your bank statement it is now presented on the screen, which has led to more ATMs being deployed in areas otherwise thought unprofitable. He argues that if we can change the way information is provided, it can lead to improved consumer decision making without heavy-handed regulation.
A great quote from Stephen was:
‘Traditionally regulators … regulated. They had a set of rules that they enforced. If prices were too high, the regulators set the price. If quality was too low, the regulators set the quality.’
He made the point that regulators need to increase the level of economic sophistication and have a change of mindset in order to properly regulate markets affected by change in technology:
‘Just as technology has revolutionised our approach to business it needs to revolutionise our approach to business regulation.’
My final thoughts after the lecture were that, it seems that regulators need to almost take things case by case because technological change is diverse across industries, and that the traditional regulation approach is no longer the standard to rely upon. An interesting question also came up during question time, which was about how regulators approached patents for technology. Stephen’s reply was that it was a mess for regulators as patents allow better products whilst being anti-competitive in nature; again, a policy dilemma. Overall I felt the lecture was well presented, where Stephen was well prepared and didn’t refer much to his notes. You can additionally check out some of Stephen’s ESSA articles here.