Children, the internet and the theory of perfect markets

 

When I did economics it was drummed into me that the only justification for any kind of state intervention in the operation of markets, in the affairs of businesses, was where there were imperfections in those markets and they worked against the public interest.

This idea was crystallised into what I thought was a rather neat sound bite which one of the political parties in the UK tried to popularise

markets wherever possible, regulation wherever necessary

What does a perfect market look like?

Adam Smith, he of the invisible hand, originated the theory of perfect markets back in 18th century Scotland. Things were simpler then. In the modern world it can sometimes be quite difficult to pinpoint precisely which products or services make up which markets. But let’s assume for now that we can get over these definitional hurdles.

In a perfect market there would always be lots of buyers and sellers. In this blog I’m going to focus more on the position of buyers, otherwise normally referred to as end users in the internet world. So for these purposes in a perfect market we would be looking for lots of choice for the consumer, the end user. 

There should be no barriers to switching. No lock ins or lock outs. You should be able to decide to buy or use a service from X rather than Y without any penalty. A penalty would not just be measured in terms of price. It could include things like delay or inconvenience. Anything that might put someone off switching. If you hear more talk about data portability, this is why.

Also crucial to the definition is the notion that all buyers are well informed.  End users should have a good knowledge of what it is they are buying into or using and be aware of  the like for like alternatives. 

There are several other rather technical aspects of the definition but the last really important one states that the costs of entry into or exit from the market should not be such as to discourage new players coming in to it in the first place.

Few, if any, perfect markets actually exist

At the time I was a student my tutor could only think of one example of a perfect market, and even then he qualified it to some degree. It was for specialist legal services. Not exactly what every vibrant economy turns on, but there you go.

In point of fact the arrival of the internet has probably helped make some markets work a lot better: think about price comparison web sites. It is likely we now have a larger number of near perfect markets than ever before but please don’t ask me to name one.

Perfect markets are an ideal, a  theoretical model or a standard against which we measure imperfection. The greater the degree of deviation from perfection the stronger the reason to intervene and regulate.

Ethical and other limitations 

One of the most obvious problems with all markets, perfect or not, is generally they lack the capacity to make ethical judgements. Not their job. If people want something and are willing to pay or barter for it, other things being equal you’re in business. That is the starting point of all commerce.

Thus, even if an entirely perfect market did exist, for example for guns, society would still be entitled to impose limits. We could perfectly legitimately ban sales to anyone with a conviction for a crime of violence. This has nothing to do with the laws of supply and demand. It’s a common sense public protection perspective.

There are also some areas of economic activity, such as the generation of nuclear power where the potential hazards are such that we simply cannot just take the companies’ word for it that they will not cut costs or corners thereby endangering the rest of us. We impose regulatory and inspection regimes that we can all sleep easier in our beds. The same might apply in relation to an industry which was of strategic importance to our national interest for some reason or other.

The imperfections of some markets are all too obvious

It should be fairly obvious how very far from perfect many of the markets are in the online space. It is hard to see how some of the imperfections work in the public interest, but it is easy to see how they benefit the companies involved. On the face of it therefore the case for regulation in those markets is both clear and overwhelming.

Think about how difficult it typically is to change your ISP. Or how hard it is in many countries, and was until very recently even in the free-market loving UK, to change your telephone company, either fixed or mobile, particularly if you wanted to retain your existing number.

If you want to join or advertise on a social networking site how much choice is there really in the English-speaking world? Buying books? Does a large South American river instantly spring to mind? The costs of entry into several key markets are now phenomenally high, which is a major reason why the behaviour of the handful of firms that dominate them needs to be kept under constant review.

Looking at traditional child protection concerns the clearest shortcomings in respect of the way the market operates are to do with consumers’ knowledge and understanding, or lack of it. The businesses which developed all the great online products and services we are all so familiar with have not been equally successful in explaining key aspects of them to very many of their users.

How easy is it for a typical parent or carer to find and configure safety settings or set up a filtering programme for their child? What duty of care do companies owe to atypical parents or carers? There are substantial numbers who fall outside the bell curve.

If a parent is considering letting their child use a location service do they always know how the child’s location data will be used? Do parents understand and feel comfortable with their children being exposed to online behavioural advertising? Do they realise that, essentially, exposing their child to ads is the price paid for the services which they believed were free? Do parents know how to turn the advertising off? 

If a child is being bullied or stalked online do parents know how to act? There are many more examples. I won’t labour the point.

Privacy failures which have safety or other undesirable implications, cases of failing to obtain informed consent, are being reported in the technical and mainstream press almost daily. These are every bit as much failures of the operation of the market as are decisions about prices, in fact they are intimately tied in with the idea of prices because such practices generate the revenues to make the whole thing work.

Moving the focus away from parents, lest we forget, because of the COPPA laws many companies allow 13 year olds to join without any reference to their parents. 13 year olds are their customers, their market. But then on top of that we also know that huge numbers of 9-12 year olds have accounts with companies which specify 13 as their minimum age. 

So where do children and young people, how do 9 year olds, fit into this overall picture? On the whole they are unlikely to be faring any better than their adult counterparts yet companies’ obligations to children and young people very definitely are that much greater.

Against this sort of background it seems little short of miraculous that there is still so little state sponsored regulation in the internet space. That is because, up to now, self-regulation has been the preferred model but it is definitely fraying at the edges. 

Monopolies

I want to look briefly at the problem of monopolies. I grant this is not an obvious child protection issue but it is a further illustration of how businesses can end up being not quite as responsive as they might be if they were truly being forced by market conditions to compete to win or retain customers. It also reminds us that, at the end of the day, behind the sometimes contrived funky facade, in lots of ways internet companies are no different from many bricks and mortar businesses. They may have defied the laws of gravity once to get themselves off the ground but gravity will always reassert itself eventually.

Monopolies arise where one company controls a high share of a particular market. In the USA it is generally assumed that if your firm has 75% or more of a market on the face of it there is a monopoly. Other jurisdictions don’t always use a fixed percentage. They refer to  a firm having a dominant position. This can arise where a firm has a share of the market substantially less than 75% e.g. around 40%.

Some monopolies can arise naturally but all of them are sort of the antithesis of a perfect market so there is a presumption in favour of state scrutiny or intervention wherever it can be established that one exists. This is because too often in the past monopolies have resulted in unjustifiably higher prices or restrictive practices that are likely to inflate demand artificially. It is why we have anti-trust and competition laws. Think about companies that sell you a music track then seek to limit your right to copy it to another device which you also own.

Within very many industries there is an inevitable tendency towards monopoly. Firms compete against each other, the less successful go to the wall, mergers and takeovers happen and hey presto suddenly there’s a lumbering giant. Sometimes you hear firms complain this means they risk being penalised for being too good at their job. But that is far from being the case.

Google cannot be blamed for the fact that it has over 90% of the search market in most of Europe. Having 90% of any market ought to ring alarm bells but it does not of itself prove there is a monopoly that is working against the public interest. That’s what counts and that’s what regulators look at.

You just don’t understand. It’s all too difficult

When child safety people start raising issues about the far from perfect ways in which online companies behave or present their services in respect of children and young people we are told we don’t understand the technology or that, much as whoever is replying might agree with our underlying concerns, the risks to privacy, to free expression, to all sorts of other social, political and human rights values suddenly become insuperable stumbling blocks to doing anything that might address them.

There are two things to be said about that.

In relation to the point about technology, I am reminded of the story of the man who murdered both his parents, pleaded guilty at his trial then asked the court for leniency on the grounds he was an orphan. Such chutzpah. The same guys who create the problems then tell us they can’t solve them. The same guys who invent and market the most astonishing wizardry ask us to believe they are stumped when it comes to this stuff. 

On the point about social, political and human rights values: it is undeniably the case that many of the people who moved into the internet space in the beginning or helped to build it in the early days did so from the starting point of an overwhelming belief in the power of the technology to do good in the world. But then the suits moved in. The potential for diverging paths has been with us ever since. The bigger the company the greater the risk.

Steve Jobs is not Mother Theresa

Today in the main the internet is the property of companies who work it for money pursuant to legal obligations which they owe to their shareholders and investors. There is absolutely nothing wrong with that. I might be more worried if it was any other way but we ought not to fool ourselves into believing Steve Jobs is Mother Theresa.

True enough most bigger enterprises have significant corporate social responsibility programmes and will readily accept they have wider obligations which do not always translate directly into positive numbers on the profit and loss accounts or company balance sheets. All that is great and genuinely meant, especially by the staff who manage these initiatives within the firms, but it all takes place within a given framework.

When money is tight it is astonishing how rapidly long terms plans can give way to a pressing short term need to drag in more cash or cut costs, how easily soft projects can be put on hold because they are peripheral to the core business.

Several internet players we all know have recently laid off staff that worked on child protection and other consumer facing issues. It is unlikely this happened because the CEO felt their mission was complete. At one level we shouldn’t really complain too loudly about the lay offs because there were many more firms who never had such staff in the first place. But it does remind us of our place in the hierarchy.

Democracy or the Gulag! You choose

No question the internet and its associated technologies have played a critical role in helping to build and sustain or promote free speech and free expression, have helped the pro-democracy forces in several countries. It has aided whistle blowers to expose corruption and incompetence inside Governments and large corporations. Long may that continue but we should not conflate these things with other issues or allow them to blind us to the internet’s many failings.

We need to innovate our way out of this. It does not have to be a zero sum game where dealing effectively with online child protection issues inevitably leads to the Gulag or turns the internet into the equivalent of day time TV. People and groups who insist on characterising things in this way are propagandists. If we are not able to show some progress in putting things right on a voluntary basis, and soon, such voices will increasingly be marginalised as the great ship of state steams right through their moorings. 

The doctrine of unintended and unforeseen consequences

If the original designers of the internet could have foreseen the way their technological wunderkind was going to give birth to an explosion in fraud, identity theft, legal and illegal pornography, international paedophile networks and all the rest I feel completely certain they would have taken steps to head that off.

Marvellous though it is, the internet is the largest ever example of and is living proof that the doctrine of the unintended and unforeseen consequences is alive and well. And it’s living in your house, imperfectly. Please do not expect Governments to ignore it indefinitely. They are all catching up and catching on.

About John Carr

John Carr is a member of the Executive Board of the UK Council on Child Internet Safety, the British Government's principal advisory body for online safety and security for children and young people. In the summer of 2013 he was appointed as an adviser to Bangkok-based ECPAT International. Amongst other things John is or has been a Senior Expert Adviser to the United Nations, ITU, the European Union, a member of the Executive Board of the European NGO Alliance for Child Safety Online, Secretary of the UK's Children's Charities' Coalition on Internet Safety. John has advised many of the world's largest internet companies on online child safety. In June, 2012, John was a appointed a Visiting Senior Fellow at the London School of Economics and Political Science. More: http://johncarrcv.blogspot.com
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