Commentary III: Towards the Practical Regulation of Digital Markets

September 27, 2021

Paul MacDonnell, executive director, Global Digital Foundation
 

GENERAL INTRODUCTION

This is the third of three short commentaries which, combined, serve as a general introduction to, and discussion of, anti-trust / competition regulation of digital markets in Europe. Set against the backdrop of the EU’s proposed Digital Markets Act (DMA), they will serve as a primer for European policymakers and legislators who are unfamiliar with, yet interested in, the economic background and key issues at stake in this important area of emerging regulation. The first commentary, Digital Markets and Their Discontents, summarised key aspects of the growth of digital markets and the associated practices undertaken by some of their dominant platforms that have become the focus of dispute in the EU, and introduced the Union’s proposed Digital Markets Act (DMA) as both a response to perceived abuses and a significant contribution to the Union’s industrial policy in its own right.1 The second, New Ideas about Regulating Platforms, reviewed platforms’ practices in the light of historical and recent antitrust / competition theory and key provisions in the proposed DMA. The third, and final commentary, Towards the Practical Regulation of Digital Markets, presented here, proposes practical steps for the regulation of the relationships between digital platforms and digital market participants in Europe. This project has been undertaken with the support of Google Europe whom we would like to thank.

Views expressed in this series are the author’s and neither those of Global Digital Foundation (which holds no corporate views) nor its supporters.

Towards the Practical Regulation of Digital Markets

INTRODUCTION

Given that the DMA would be both a competition-law instrument and an industrial policy it is worth recapping the broader economic and political background against which it is set—the European single market. Much of the motivation for establishing the single market and, later, Europe’s single currency, the Euro, has been to facilitate economic reforms leading to greater productivity across the EU.2 Apart from the successful implementation of a single market in goods, however, EU economic policy has been largely restricted to setting standards affecting technologies and trade while also laying down competition policy. Of much greater importance have been the changes wrought by the globalization and, in particular, digitization of the economy. Europeans have, like their American and Asian counterparts, felt the experience of living in fast-changing times. Elected representatives and policymakers in the Union have, accordingly, grown wary of technological forces they cannot control and, in particular, have begun to pay more attention to the practices of dominant digital platforms.3 Since the development of information technologies, political anxieties and digital innovation have coevolved. In the 1970s the adoption of mainframe computers by governments in Europe sparked anxiety about the potential for state abuse of privacy, launching the continent’s privacy movement.4 By the early 1990s, this coevolution had incorporated an emergent economic anxiety that the U.S. was trailing Europe in technological innovation. This led to the fear that U.S. technology companies motivated by profit, and not would-be authoritarian European governments motivated by a desire to control, were the main threat.5 Today, this anxiety has broadened into concern that U.S.-dominated hyper-capitalist, hyper-globalist, and hyper-technological forces are converging to threaten privacy, economic sovereignty, and, even, democracy. Underlying these anxieties is a European economy much more reliant than the United States on small-scale enterprises.

POLICYMAKERS AND REGULATORS ARE NOT DEFINING DIGITAL MARKETS CORRECTLY

Platforms have peculiar characteristics, not found in other business models, which warrant closer scrutiny. In particular, platform owners have access to data that, in an offline commercial setting, would be unavailable to a commercial distributor which, to their business users, is what many of them are. Here is where we can expect competition authorities to examine matters in more detail. But there is no reason for them to treat platforms as fundamentally dissimilar to other models of business organization. A sign of policymakers’ misunderstanding on this point, on both sides of the Atlantic, is the deliberately, sometimes absurdly, narrow definitions of markets they propose when it comes to considering competition policy within technology platforms.

We can see this with Lina Khan’s assertion that U.S. courts should have disaggregated the ebook market into both a ‘market for bestsellers’ and a market for ‘new releases’.6 It is obvious to any reasonable person that the market in which ebooks are being sold is the market for all books and other print media that carry the same content.7 We also saw it in the decision made by the European Commission to fine Google €4.3bn for competition violations concerning the mobile Android open-source operating system of which Google is the de facto curator. The Commission identified markets that no European consumer had ever heard of, including: “general internet search services”, “licensable smart mobile operating systems”, and “app stores for the Android mobile operating system”. The salient market was clearly mobile smart phones and mobile smart-phone contracts in Europe over which Google exerts little power and from which it earns, compared to Apple and the mobile phone operators, tiny revenues. Google’s offence was to adopt a strategy of preventing Android fragmentation by disincentivizing smartphone manufacturers from forking the OS. Not even tangentially related to any identifiable consumer harm, the EU’s analysis was predicated on the idea that forked smartphone operating systems would be good for consumers—a manifestly absurd idea.8

WHAT IS THE BEST APPROACH TO REGULATING DIGITAL PLATFORMS?

Identifying the right market, therefore, is of central importance to any intervention by competition authorities. Policymakers and regulators must keep in mind that markets are defined by consumers, including—in the case of some digital platforms—business consumers. But, as outlined in Commentary II, relevant markets are often unknown—even to the digital platform’s owners and players themselves.

But, given that the EU is determined to intervene in digital platforms, we must weigh up the strengths and weaknesses of its choice of instrument, the DMA. In principle, policymakers have two choices when it comes to the regulation of markets to ensure that dominant players do not abuse their position.

NATIONAL OR SECTORAL REGULATION

Either a national / supranational competition authority can treat digital platforms as just another part of the regular economy over which it has overall jurisdiction, or policymakers can give the job of regulating digital platforms to a sectoral regulator. Up until now digital platforms have been subject to the former regime. What has caused policymakers to rethink their approach, however, is the fact that new practices have emerged which have no precedent within a traditional economic regulatory paradigm.

As an attempt to address these practices, the DMA is much closer to the sectoral regulatory paradigm. Sectoral regulators are much more common in traditional monopoly or near-monopoly sectors such as gas, electricity, or transport, where companies, viewed as utilities, receive licenses to operate within reviewable pricing frameworks and according to terms of service delivery. There is no doubt that some policymakers in Europe believe that digital platforms constitute this kind of dominant player.

A common feature of sectoral regulation is regulatory capture—where the regulated entity exerts undue influence over the regulator. Regulatory capture can be a cognitive rather than a transactional process.9 In other words it has a psychological element whereby the regulator and the regulated entity develop a sense of shared goals. Such shared goals will likely arise when a broader political objective is understood as part of a shared aim. Because the DMA would also be an industrial policy it is more likely to lead to regulatory capture than national competition regulation that aims at competition issues from a strictly economic perspective. As part of a broader programme to develop a digital single market the DMA is likely to encourage regulators to view a regulated digital sector as key infrastructure within its own broader policy goals. Hence, the DMA could be the first step in what will become a mutual regulatory arrangement whereby platforms are conditioned by regulators to become what the regulators have defined them as: monopolistic or oligopolistic utilities.

Because of the difficulty, if not impossibility, of defining the correct markets in question when it comes to digital platforms, it is by no means obvious that any digital platform is functioning as a natural monopoly in this sense.10 The best candidate for a natural monopoly among digital platforms is Facebook. But even here we are confronted with uncertainty. There is an assumption amongst some EU regulators that Facebook dominates something called the ‘market for social networks’ for which its users ‘pay’ by contributing their data.11 This appears to be another example of regulators conjuring markets out of thin air in order to apply competition rules in anomalous situations. Facebook does have a relevant market and, despite its business model, it is not social networks. The salient market for Facebook is the market for advertising and consumer data. This includes those businesses who choose, in the face of alternatives, to pay money for these services. And it is clear that Facebook does not have a monopoly of either advertising space or consumer data. Its users are more akin to individuals who are allowed, in return for contributing their data, to meet in a business-to-business market where they exchange gossip, comment, photographs, and personal news.

A possible approach to regulating digital platforms is to view them as vertically integrated businesses that should be broken up.12 Previous examples of this approach are the breakup of Standard Oil in 1911 into 34 independent companies and the breakup of Bell System in 1982 into several ‘Baby Bells’. In the case of Amazon or Google for example, a regulator could take the view that these companies are vertically integrated and sufficiently dominant to foreclose competition. However, given that the benefits of digital platforms are passed on to consumers it would seem that the cost of such a break up would force consumers to forgo the benefits of their economies of scale.13

WHAT IS THE RIGHT APPROACH?

The best approach to competition regulation of digital platforms in the EU is to treat them just like other businesses. Ideally, complaints of anti-competitive behaviour should be heard in courts comprising competent judges which, in this case, means judges with a good understanding of economics. However, it is clear that European regulators and the courts have not been able to keep up with rapid developments in digital technology and an associated rise in seemingly anomalous or novel situations that test the saliency of traditional competition doctrine. Therefore, ex ante regulations, such as some of those contained in the DMA, would seem to be a reasonable response so long as they are discrete, narrowly-targeted and, of course, subsequently testable in the European Court.

The EU should divorce its industrial policy from competition regulation in the digital sphere just as it keeps them separate in other spheres. While the European Commission should take note of complaints from those who claim to have been harmed by anti-competitive behaviour on digital platforms, it should not lend additional weight to these on the basis that the complainants are either competitors against the complainee or that they are European businesses.

If the EU wishes to limit its intervention to: 1) outlawing the use by platforms of data contributed by businesses in order to compete against them; and 2) preventing a platform from favouring, without justification (such as actual consumer reviews), its own products ahead of third-party products then no significant harm is likely to result. The main concern with the DMA, however, is that it opens the door to the treatment of digital platforms as public utilities. This belies both the nature of the economic systems that gave rise to these platforms in the first place and their multiple, mostly indirect, beneficial effects on the economy.

Digital markets are, for many goods and services, more efficient than traditional bricks and mortar distribution and retail systems. The streaming of videos and music will always be more efficient than buying DVDs or CDs. The choice of books that Amazon offers will always be greater than the world’s largest high-street bookshops. It is partly thanks to highly-developed digital markets that the economies of Western Europe and the United States have proven resilient against restrictive social lockdowns during the past 18 months. While specific practices by digital platform owners raise legitimate concerns, digital markets are best seen as an innovation within traditional markets.

Panic about the social impact of new technology has combined with a futuristic belief that digital markets will help transform the EU economy and a faith in the efficacy of industrial policy to prompt EU policymakers to act. The consequence is a form of integrated policymaking that seeks both to further industrial policy and to prevent questionable practices. These two objectives are cogent but they cannot coexist within the same legislation. European legislators are right to examine the practices of digital platforms but the conclusions to be drawn from the first two commentaries in this series are that sweeping pre-emptive ex ante rules covering, as yet unknown, scenarios risk creating barriers to entry for future European platforms. It is better that European competition authorities, including the European Commission, adopt a case-law approach to competition questions or, where this is not practical, use only narrowly-targeted measures to regulate them.

End

NOTES

  1. European Commission (2020). Digital Markets Act. COM(2020) 842 final, 2020/0374(COD). Available: https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52020PC0842&from=en. Michaels D. and Kendall B. (2021). 'U.S. Competition Policy Is Aligning With Europe, and Deeper Cooperation Could Follow'. Wall Street Journal, 15th July, 2021; and Espinoza J. (2021) 'EU tech policy is not anti-American, says Vestager'. Financial Times, 20th June, 2021; and Stacey K. and Politi J. (2021). 'Joe Biden styles himself as a 21st century ‘trust buster’'. Financial Times, 13th July, 2021.

  2. Ross G. (1998). 'The Euro, The "French Model of Society," and French Politics’. French Politics and Society. 16(4), 1-16.

  3. Cohen R. (1997). 'France vs. U.S.: Warring Versions of Capitalism'. New York Times. 20th October, 1997.

  4. MacDonnell P. (2015). ‘The European Union's proposed equality and data protection rules: an existential problem for insurers?' Economic Affairs. June 2015.

  5. MacDonnell P. (2015).

  6. Khan L. (2017). ‘Amazon's Antitrust Paradox’. Yale Law Journal. 126:710-805.

  7. MacDonnell P. (2016). ‘Analysis: Android is a Platform, not a Commons’. Brussels: Global Digital Foundation.

  8. MacDonnell (2016); MacCarthy M. (2018). 'Open source mobile operating systems need to control fragmentation'. CIO. 12th July, 2018; Kogut B. and Metiu A. (2001). 'Open-Source Software Development and Distributed Innovation'. Oxford Review of Economic Policy. Vol. 17. No. 2.

  9. Rilinger G. (2016). 'Who captures whom? Regulatory Misperceptions and the timing of cognitive capture'. Köln: Max Planck Institute for the Study of Societies.

  10. Ducci, F. (2020) Natural Monopolies in Digital Platform Markets. Cambridge: Cambridge University Press. p.126.

  11. Heinz S. (2019). 'Bundeskartellamt hits „don’t like“-button on Facebook'. Kluwer Competition Law Blog. 11th February, 2019.

  12. Wu T. (2010). The Master Switch: The Rise and Fall of Information Empires. New York: Alfred A. Knopf.

  13. Ducci (2020). p.130.