Japan published late last year an interim study on digital platforms and a number of Fundamental Principles for Improvement of Rules Corresponding to the Rise of Digital Platform Businesses (sic), both available here.

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The study, which was produced by a working group, is structured as follows.

Section I and II review the characteristics of digital platforms and the legal regime to which they are subject.

The study begins by outlining the characteristics of online platforms and the various benefits they bring in terms of innovation, ease of market entry and consumer welfare. The study also notes how digital platforms benefit from direct and indirect network effects and from economies of scale. These features can raise switching costs between different platforms, which would tend to facilitate monopolisation or oligopolisation. Further, once a business model based on using and accumulating data is established data, a virtuous cycle may be created, where the competitive advantage of such business is maintained and strengthened through further accumulation and utilisation of data network effects.

Some digital platform operators have grown rapidly not only organically, but also by acquiring different businesses and forming conglomerated corporate groups, and oligopolising or eventually monopolising the market – for all practical purposes, becoming essential facilities. Such platforms often design, operate and manage markets where many consumers (individuals) and businesses interact. However, unlike stock exchanges or wholesale markets, online markets are not subject to any industry-specific regulations on how to design, operate and manage the market. Furthermore, online platforms rely on algorithms, AI and machine learning. When taken together with the platforms’ market power, this makes the markets set up by online platforms extremely non-transparent. Digital platform operators can easily change the rules governing the platform and are able to provide seemingly neutral information which may be personally targeted and highly manipulative.

This has led to an international movement towards establishing legal rules to govern digital platforms. Examples include the European Commission’s “Proposal for a Regulation on Promoting Fairness and Transparency for Business Users of Online Intermediation Services” and China’s “E-commerce Law”.  There is also a global trend towards targeting digital platform operators as points of control of regulation or as gatekeepers. In addition, some consider that online platforms should be subject to special responsibilities or duties by reference to the essential facilities or public utilities doctrines.

Still, in Japan, the prevailing view has been that digital platform operators merely provide a forum for transactions and, as such, do not have specific responsibilities towards consumers.

Sections III and IV discuss how to regulate market-leading digital platforms.

A challenge with regulating digital platforms is that traditional industry regulation, which focuses on vertically integrated industry segments, does not map well into their business model of digital platforms. This has led to traditional industry-specific regulations becoming obstacles to conducting platform businesses, while simultaneously failing to exert adequate control over these same platforms. This raises a number of important questions regarding how to appropriately regulate digital platform businesses.

A particular concern is that lack of transparency in trade practices will lead to unfair trade practices and, eventually, to anticompetitive effects in the market. This is backed up by a number of regulatory interventions, such as the results of the European Commission’s large-scale questionnaire with respect to B2B transactions, and Japan’s “Joint Hearing Survey with respect to Internet-related Businesses”, which identified numerous issues that businesses and consumers face on online platforms.

In order to address this, regulators should conduct large-scale, comprehensive and thorough surveys with stakeholders. In addition, one may want to consider establishing an expert organization to deal with digital platforms. Such z body should have expertise and professional capability not only in law but also in economics, information processing and system engineering, in order to be able to support law enforcement and policymaking. Furthermore, the law should ensure transparency and fairness in trade practices between digital platform operators and users of digital platforms. This could be achieved, inter alia, by obliging digital platform operators to make available and disclose the essential elements of their platform architecture to businesses; by developing co-regulation mechanisms that combine state regulation and self-regulation; and by adopting mechanisms to ensure effective disclosure of information.

Section V explores how to ensure free and fair competition in digital markets.

A particular challenge for competition law is that its application to digital platforms is made more complicated by difficulties with identifying the relevant market and the existence of cross-market effects, and with assessing the impact of data accumulation on competition. There is an ongoing international discussion about whether a variety of ex ante regulatory mechanisms such as consumer protection law, data privacy protection or other regulatory tools should be deployed alongside or in addition to competition law. Japan may want to consider this debate, and whether digital platforms should be subject to special duties as essential facilities. Ultimately, these difficulties may require “reviewing the operation of competition law, as well as [discussing] rules concerning data transfer and releasing data.”

Other challenges identified in the study include how to deal with killer acquisitions; and how to evaluate possible impacts on competition brought about by a merger as a consequence of the accumulation of data, the  concentration of research and development investments (e.g., intellectual properties including patents with respect to AI), and of human resources and know-how.

Section VI is devoted to data transfer and open data rules.

Rules on data transfer and open data, such as data portability or open APIs, are being developed globally. It would be important to discuss the necessity and the content of such rules for effective competition.

Section VII focuses on the international dimension of online platforms.

The Japanese authorities have faced difficulties with enforcing its rules to foreign businesses. As such, Japan should consider how best to apply Japanese laws outside Japan, so that domestic and foreign businesses providing equivalent services will be subject to equivalent rules.

Further, given that digital platform operators conduct businesses globally, it may be necessary to seek to harmonise the regulation of digital platform operators at an international level. This is particularly pressing given the manifold regulatory initiatives being pursued around the world.

A short summary of the conclusions of this study was published here as Fundamental Principles for Improvement of Rules Corresponding to the Rise of Digital Platform Businesses.

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