Firms are supposed to operate on predefined markets for goods or services where they compete against similar firms that offer substitutable products or services. All economic agents are assumed to be profit-maximisers that will not sell below average variable costs. However, this is not how the digital economy operates. As a result, many of the traditional tools used by competition authorities to assess relevant markets, or the intensity of competition between firms, are difficult to use or inadequate to assess competition issues between ecosystems in the digital world.
Further economic thinking, and an understanding of the business models of digital ecosystems, are needed to allow competition authorities to make informed decisions about competition on digital markets. This article, available here, reviews some of the challenges competition agencies face.
Section 2 looks at digital markets.
Digital markets differ from traditional markets in a number of ways. The digital world has low costs and no-distance, which means that the delivery of services is organised differently in the digital sector than in traditional markets. Digital markets also are multisided more often than traditional one-sided markets. Further, digital technologies allow firms and platforms to gather real time data on users and on the products they offer, and to store and analyse this data in great detail. Digital technologies thus offer enhanced opportunities for firms to develop insights on individual customers and help firms develop products or services customised to customer preferences.
Because of their multi-sided nature, the assessment of the market power of digital platforms is likely to be more complex than the assessment of the market power of a firm operating on a traditional market. In addition, price competition may be meaningless where a service is delivered free of charge on one side of a platform in order to attract a large number of other (paying) users on other side(s) of the platform. Traditional competition law instruments used to assess dominance in traditional markets, such as market shares or concentration ratios, cannot be easily used when it comes to platforms because of the multiplicity of services they simultaneously offer to different groups of consumers. Market power indicators based on a comparison of price and cost (such as price–cost margins or the Lerner index) cannot be used on each side of a platform to assess its market power. The characterisation of an abusive practice by a platform may be either different or more complex than in traditional markets – e.g. below-cost pricing cannot be assumed to be predatory, and infringements may often involve hard-to-measure quality degradation.
Section 3 looks at ecosystems.
A number of platforms have evolved into multi-product or multi-service consumption eco-systems, which creates additional challenges for competition law enforcement. The concept of ‘ecosystem’ comes from the strategic management literature. It refers to a platform which uses modular technology to produce a set of services, which is combined with other services offered by third parties (complementors) in such a way that the attractiveness of each service is enhanced by the others. The role of the core platform in a digital ecosystem is to provide, through the use of modular technology, the distinctive core services or products which will provide the basis for an attractive offer of complementary services or products. As a result, within an ecosystem, there can be a complex combination of competition and cooperation between the platform and the complementors.
The economic literature has largely focused on the role that network effects, scale and learning economies, and data accumulation play as sources of success by first mover platforms and as causes of the natural tendency of markets to tip. The business literature offers a more nuanced view. Being a first-mover is neither a necessary nor a sufficient condition for success. Some economists have also called into question the importance of these elements, and argue that the advantage of large platforms is mostly due to their ability to benefit from inter-market network externalities which allow them to have more users and operate on more markets.
A number of insights can be derived for competition law enforcement from these observations. First, technical barriers to entry associated with ecosystem size do not suffice to explain the dominance of a few highly successful platforms. Platform design and organisational capacities may be equally important drivers of success, which means that measures of potential competition other than market shares or size should be taken into account. Second, while production ecosystems tend to remain within in the confines of their value chain, consumption ecosystems – where the digital platform seeks to develop the combination of complementary services or products which will maximise its value for its consumers – are open-ended and encompass all complementary markets. As a result, market definition is often inaccurate and market shares are poor indicators of market power. Third, competition on innovation and on quality is the rule between digital platforms and ecosystems, rather than competition on prices. This raises difficult questions for competition authorities, e.g. related to the relationship between competition and innovation, and to the relationship between the size of ecosystems and the quality of their services.
Section 4 looks at privacy and data protection issues.
Large platform ecosystems may strategically deny access to their data to potential competitors (e.g. a competitor of the platform within the latter’s ecosystem, or a competing ecosystem) when access to this data is necessary for the competitors to match the quality level of that large ecosystem. In merger control cases among digital platforms, competition authorities may fear that the merger will allow the acquirer to get access to the data gathered and accumulated by the target, thus giving the merged firms an advantage which could not be duplicated by competitors. Authorities might also fear that the merged firms could degrade the privacy protection of their offerings, thus degrading the quality of their service to the detriment of consumers or implicitly increasing the price of their service.
A related and heated controversy concerns whether (and how) data and privacy issues should be integrated into the competition assessment of ecosystems. There is strong resistance in many jurisdictions to using competition law to deal with privacy issues, while in others this avenue is currently being explored.
Section 5 looks at competition within ecosystems.
In digital ecosystems, the core ecosystem platform may refuse access to applications that compete with its own applications. If third party applications are allowed, the platform may discriminate in favour of its own services to the detriment of the services offered by independent providers of complementary services; or it might exploit data created through the use of the platform by independent businesses to piggyback on their successful offers. In those cases, competition authorities tend to focus on the fact that the central ecosystem platform has a dominant position; and on the fact that the platform abused its market power either by restricting access to the market or by restricting the ability of its competitors to compete in these markets.
Such cases raise several perplexing issues. First, they assume specific markets for each key service, but ignore the effects of the practice on competition between ecosystems. Separating the two analyses, or ignoring competition between platforms, does not adequately reflect all of the competition implications of platform behaviour. Second, we cannot assume that forcing a platform to give access to a third-party application, or that prohibiting self-preferencing by the platform of its own application, will lead to an increase in consumer welfare in all cases. For example, when the quality of an app is related to the intensity of its use (e.g. through the better training of artificial intelligence algorithms), it is possible that the quality of both the platform application and the competing application(s) on the same platform may be decreased when they compete for users on an equal footing. Third, the usefulness of competition between applications on a platform (assuming they have equal access to the platform and are treated in a non-discriminatory way) will very much depend on whether or not there is effective competition between platforms.
Section 6 looks at competition between ecosystems.
Large multiproduct platforms have engaged in a buying spree, acquiring digital start-up firms with very low turnover at very high prices. This has given rise to concerns that such acquisitions may benefit incumbents by reducing competitive pressure of potential entrants on the periphery of the market or by preventing future entry and expansion by such start-up firms that could undermine the incumbent’s dominance.
An important question for competition authorities is how to analyse such mergers. Merger control, as it is traditionally implemented, is an ineffective tool to identify problematic mergers in the digital world. In particular, the static analysis of relevant markets, the narrowness of the consumer welfare standard, the high burden of proof to which risks that potential competition may be lessened need to be established, and the difficulty of integrating the inherent instability of digital ecosystems’ business models of into competition analysis all limit the effectiveness of traditional merger review. Unfortunately, competition tools which work satisfactorily in for the rest of the economy do not perform well in the digital world. Hence, this area requires additional work.
Section 7 looks at consumer status quo bias, and is a critique of the way consumers have been perceived in a number of antitrust cases.
Section 8 looks at gatekeepers.
This section describes the proposed EU’s Digital Markets Act (DMA), and in particular how the proposed regulation deals with within ecosystem relationships between platforms (integrated or not) and third party suppliers of complementary services. The proposed DMA would impose a number of constraints on ‘Gatekeepers’, both in terms of positive obligations and in terms of prohibited practices.
These obligations are designed to protect the businesses using the platform, and are somewhat difficult to follow from a competition standpoint. Gatekeepers are limited to core platform services in sectors dominated by very large platforms such as digital retail (with Amazon) or social networking (with Facebook), but as defined would also encompass sectors where competing platforms are each important gateways for businesses. Further, some of the obligations to be imposed on the ‘gatekeeper’ platforms could actually restrict competition between ecosystems in the name of fairness or of protecting competition within an ecosystem.
This paper, by the Chair of the OECD’s Competition Committee, is a good of example of some of his main virtues as a writer (and chair): an ability to synthetise complex topics and place them in a wider context. It is not appropriate for me to comment on the content of specific arguments, but I can nonetheless point out that this is yet another contribution to the growing debate on how to properly evaluate digital platform ecosystems (a topic to which the OECD devoted a roundtable last year).