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Smart regulation is key for creating a new digital economy in MENA

Andrea Barone's picture
Also available in: Français | العربية

The call for the transformation of the role of the state contained in the latest MENA Economic Monitor (MEM) cannot be overemphasized. For the "moonshot approach" to the new digital economy to succeed in generating equitable growth and creating millions of jobs, public authorities in the region must become effective regulators. Indeed, digitization poses a set of unique economic, political, and social challenges that require defining clear "rules of the game."

Limiting the discussion to the economic dimension, a salient feature of the digital economy is the emergence of the so-called multi-sided platforms. Instead of selling their own services, the function of these platforms is to allow different types of participants (at least two) to get together and enter into value-increasing exchanges that could not happen outside the platform because it would be impossible for each party to collect and process individually all the necessary information. The groups of agents that are connected by the platform constitute the different "sides." Prominent examples are digital marketplaces linking retailers; consumers and possibly advertisers, such as Amazon or Souq.com; apps connecting users directly to suppliers, such as AirBnB or Careem; or social media sites allowing individuals to interact among themselves, access content, and be reached by advertisers.

This business model rests on the ability to analyze a combination of very large datasets concerning individual behavior (so-called "big data"), which has been made possible by the exponential growth of computing capacity, the constant improvements of algorithms, and the advancements in artificial intelligence. 

From an analytical point of view, multi-sided platforms display several distinctive features. First of all, the utility of each side increases with the number of agents belonging to the other side(s) – thus there exist what economists call "indirect network externalities." For example, consumers appreciate an e-commerce website when it gives them access to a large pool of retailers from which to choose from; at the same time, a seller is willing to participate in such a platform if it increases the potential demand it can serve. Moreover, since the valuation of the transaction differs among the participating sides, it is optimal to subsidize the groups with lower willingness to pay and charge the sides that benefit most from the platform. With the e-commerce example, consumers do not pay anything for the platform services, which are remunerated through commissions levied on sellers and sometimes advertisers, like with Souq.com.

The presence of network effects tend to lead to very concentrated industries. In many instances, "the winner takes all" and its behavior is not constrained by effective competitors. Therefore, in such cases, business practices must be heavily scrutinized by MENA competition authorities so that the different participants in the platforms are not exploited and new entrants are not discouraged by unlawful strategies of the incumbent (like tying, exclusive dealing, loyalty rebates, predation) aimed at preventing them from reaching the scale necessary to succeed. In addition, competition authorities must also ensure that startups keep their incentive to compete and are not enticed by the possibility of being acquired by incumbents (so-called "entry buyouts"). Finally, authorities must upgrade their technological expertise to be able to detect cartels that might be sustained entirely using algorithms without any human interaction.

The use of personal data in the digital economy poses some further regulatory concerns. One issue is the allocation of property rights between the individual and the tech company. From an economic point of view the answer is quite straightforward: ownership should hinge on how much the tech firm has invested to collect and process the user's data.

If the amount is substantial, to preserve incentives to innovate and avoid expropriation, the data should belong to the company. For example, hotel ratings on online travel agency platforms, which cost the platform a lot to vet, should be owned by the travel platform and not by the hotel itself.

On the contrary, if the process was sufficiently easy and inexpensive, to facilitate switching among platforms, personal data should clearly belong to the user. For example, the reputations of drivers and passengers on ride hailing platforms should belong to the user. In practice, companies processing data should develop their software in such a way that raw personal data provided by users (or the personal information automatically generated) can be easily separated from the website or app features (which are intellectual property rights owned by the company).

A second major issue is privacy and the way tech companies share the personal data they obtain. Indeed, confidentiality might be at risk, especially in extraordinary circumstances like mergers or bankruptcies.

Considering consumer protection, digital businesses can potentially exploit cognitive biases in powerful new ways. Therefore, MENA countries should develop rules ensuring that users fully understand how personal information they provide will be used. Secondly, when platforms sell services, their rankings and suggestions should be made trustworthy by alerting consumers to whether there are potential conflicts of interest, such as higher commissions on the sales of specific brands. Similarly, social media providers should take effective actions to limit the spread of misinformation, or "fake news".

Finally, users need to be protected against cybercrime. Although platforms are investing substantial resources to prevent data breaches, more needs to be done due to their frequency (such as the theft of credit card data from millions of customers at large retailers). Liability laws must be made more stringent, so that platforms internalize the huge damage suffered by victims of stolen personal information, which is often not only economic, but also reputational and can even result in physical injury.

Every country in the world is addressing these new challenges posed by the digital economy, but no consensus has yet been reached on how to best implement the principles outlined above. MENA countries must therefore analyze the different experiences, adopting the features that are relevant for their own reality and defining original solutions when that is not possible. Only in this way can they succeed in leapfrogging to a smart regulatory state and create a new digital economy that works for all.