Why Data Is the New Oil: Market Power in the Age of Information Capitalism

It’s long been said that knowledge is power.  Today, with the Internet allowing companies to advertise directly to individual consumers, this saying is truer than ever.  Firms that can pinpoint the most likely customers with tailored advertising and products stand to make a much higher volume of sales than in previous decades.  They know what customers like, how much they have traditionally been willing to pay, and their browsing habits.  

Market Power From Control of Consumer Data

A Sustainable Business Advantage:  Competitive Moats 

Also known as an economic moat, a competitive moat is a continual, significant advantage that one firm has over its rivals.  It usually refers to an ability to keep the competition out, similar to a moat around a castle or fortress.  In generations past, a competitive moat could have been control of physical real estate, such as a company purchasing all the desirable commercial property in a town square or at a highway exit.  Any rival companies would be forced to purchase commercial lots further from the action, putting them at a distinct disadvantage.  Today, most competitive moats are digital in nature.

Data Sets as Competitive Moats

Whenever you use a website, you leave behind some of your digital data, including browsing habits and history.  Some of this data may be valuable to sellers, who may pay handsomely to know which ads are most successful at attracting customers.  Websites that experience high volumes of Internet traffic, such as social media sites, may sell their data sets to online retailers or entertainment streams.  These firms can use those data sets to create products and content that are highly appealing to those social media users.  They can also analyze data sets to discover which offerings by their competitors are appealing to Internet users, and seek to counter them.

Firms that cannot buy data sets, such as cash-strapped start-ups, are at a disadvantage.  Their lack of recent consumer knowledge can be considered a barrier to entry to that market.  Lack of insight into the popularity of rival firms may not be a barrier to entry per se, but could be a significant advantage after starting operations.  The market will be less clear, and many entrepreneurs may choose not to enter a market if they fear they do not understand the dynamics.  This allows established firms, which can afford vast data sets and high-quality analysis of that data, to remain relatively unchallenged.

Data as Efficiency Optimizer

Vast sets of data can help firms compare available options quickly and minimize costs by choosing the most effective options for resources, labor, utilities, etc.  Start-ups that cannot afford data sets may have to spend hours or days searching piecemeal for the best deals on inputs, while larger firms with data sets can find those deals in minutes.  When it comes to the ability to analyze large amounts of data, firms that can do so have an advantage at minimizing their operating costs by eliminating redundancy and detecting fraud.

Data Allows for Extracting Consumer Surplus

Large data sets about consumer behavior and past purchases can help sellers set the highest price that consumers are willing to pay.  This reduces consumer surplus (the positive difference between what consumers are willing to pay and the market-clearing, or equilibrium, price) and transfers that surplus to the seller.  With online sales, sellers can increase this ability by engaging in price discrimination through market segregation: selling the same goods at different prices based on venue.

Through data analysis, sellers can determine in which venues they can raise the prices of various goods and services without losing many customers.  For example, fast food restaurants and gas stations can charge higher prices in high-traffic areas, especially those frequented by travelers.  How much higher they can set their prices before they lose sales can be learned through analyzing data sets.  Smaller companies without access to these data sets or ability to effectively analyze the data have to rely on estimates or trial-and-error, potentially harming their revenue.

Ultimately, companies with the ability to perform good data analysis of customers can engage in personalized pricing through direct advertising.  Potential customers will receive targeted ads through email or text based on their combined “consumption profile” and “customer profile”.  Individuals with higher incomes and who have purchased similar goods and services in the past - especially if they reviewed them positively - will be quoted a higher-than-average price.  The cost of producing the good or service is the same for the seller, meaning extra profit.

Ethics of “Big Data” and Companies’ Control of It

Is it ethical for companies to use data sets to engage in personalized pricing?  Some argue that data analysis, if used fairly, can benefit lower-income consumers by allowing them to purchase goods and services for lower prices.  Others praise data analysis’ ability to improve customer service when firms heed the advice of feedback and reviews.  Similarly, this attention to feedback and reviews leads to better products enjoyed by more consumers, with popular features enhanced and less-popular features removed.

Ethical:  Improved Societal Welfare Through More Equitable Distribution of Goods

While it is unlikely that most firms will charge low-income consumers less, there is arguably some societal benefit to charging high-income consumers more.  Wealthy consumers may purchase more goods and services than they need, resulting in a shortage for everyone else and driving up prices.  If firms can use data analysis to charge wealthy customers higher prices, the higher remaining supply for non-wealthy consumers may result in lower prices.  The firm, making ample profits from engaging in price discrimination toward wealthy customers, may have less incentive to do the same to the middle class.  In fact, firms may seek to widen their customer base by lowering prices for those with lower incomes, with those prices subsidized by extra profits gained from wealthy customer price discrimination.

Unethical:  Consumer Manipulation

Advertisers can be argued as often using some degree of manipulation to convince us to buy, playing on our notions of vanity, nostalgia, fear, etc.  Our emotions are manipulated by ads to encourage us to buy something to make us feel happy, safe, bold, attractive.  With data analysis, sellers can do this to a far more effective degree than ever before, perhaps even to the point of personalized ads incorporating our individual traits and backgrounds.  Many would argue that sophisticated data analysis will inevitably cross into breaches of privacy, with AI software learning our medical history, romantic pasts, and private records to incorporate into decisions about advertising and personalized pricing.

Unethical:  Removing Consumer Choice

Some argue that personalized pricing is unethical because it removes consumers’ ability to shop around for better deals.  For goods with few available substitutes, this can eliminate consumers’ ability to use the substitution effect to maximize their utility.  If the seller is a monopoly, such as a local utility company, the consumer is effectively punished for having a profile that indicates he or she can pay more money for electricity, water, gas, etc.  If monopolies are considered unethical, then price discriminating monopolies are even more so.  They can completely eliminate consumer surplus by charging every consumer the highest price he or she is willing to pay.  Consumers who refuse to pay are prevented from using the good or service.