Should antitrust policy do more to promote competition in digital platform markets? Is antitrust law sufficient to address competition problems in digital platforms, or are those problems so common and widespread that they require more pervasive public control?
This article, available here, argues that sustainable competition in platform markets is possible, and that the individualised approach of the antitrust laws is better for consumers and most other affected interest groups than more intrusive regulation. Antitrust intervention will be less likely to reduce product or service quality, limit innovation, or reduce output than other regulatory alternatives. To achieve these outcomes, antitrust law needs to treat digital platform markets for what they are: markets that have some unique characteristics, but markets nonetheless. As a result, for the most part competition problems in them can be controlled with the antitrust tools we have.
Section I considers digital platform monopoly.
Antitrust policy is concerned with exercises of market power. The power question for digital platforms is complex because each platform does business in a variety of products or services, and employs diverse technologies. Two-sided platforms pose particular problems because one cannot estimate power on one side without considering effects on the other side. Today, economists use both direct and indirect methodologies for assessing power in digital markets. They also urge caution, however, that traditional market definition and market share measurements can be particularly unreliable in this context. For both indirect and direct methodologies, power assessments on two-sided platforms require consideration of reactions that occur on the opposite side.
Notwithstanding overwhelming evidence to the contrary, the market for digital platforms is often said to be winner-take-all. This is rarely true. Even assuming that some platforms are winner-take-all, however, the policy consequences are unclear. Winner-take-all status may entail less antitrust enforcement because the market is a natural monopoly, which would instead call for utility-style regulation. However, since few platforms are natural monopolies, antitrust law properly applied will be superior in most cases to broad legislative regulation.
Section II discusses remedies against digital platforms.
The purpose of an antitrust remedy is to “restore competitive conditions”. Whether this goal is achieved should be evaluated by the remedy’s success in increasing output, decreasing prices, improving product quality, or spurring innovation – that is, by the same criteria that we generally adopt as goals for the antitrust laws.
For most antitrust problems that do not involve acquisitions, structural breakup is not a promising way to remedy anticompetitive behaviour. The structural breakup problem is more severe for digital firms, which are often highly integrated. Further, breaking up any platform subject to significant scale economies would be socially costly. Instead, one should consider more narrowly focused antitrust injunctions.
A properly designed injunction can have more predictable effects, and sometimes can accomplish more than a divestiture would. In cases of significant economies of scale or network externalities, promising remedies include compelled interoperability and information pooling. Interoperability or pooling can take many forms, depending on the industry’s technology and the kind of sharing that will improve the participants’ performance. Another possible non-structural remedy is removal of defaults, i.e. presumptive product choices that a user can change.
A number of more creative alternatives would seek to change the nature of ownership, managerial decision-making, contracts, intellectual property licenses, or information management. One alternative to divestiture is to leave the firm’s physical assets intact but change the structure of ownership or management so as to make it more competitive.
Section III looks at platform acquisitions.
Given that most digital platforms are not natural monopolies, they must engage in strategic exclusionary behaviour in order to maintain their dominant positions. One of the biggest threats to the major digital platforms comes from small firms that resemble the dominant platforms themselves in their earlier years. An all-too common phenomenon today is for one of the dominant platforms to acquire a young start up before it has a chance to emerge as a viable competitor. Capital markets reflect this phenomenon: it is easier to get capital for a new firm that is highly likely to be acquired rather than for a firm with a technology that is promising on its own terms.
Something must be done to make it more likely that start-ups will develop into viable independent firms rather than disappear into one of the large digital platforms. One possibility is to use antitrust merger laws. However, this may require new legislation governing platform acquisitions, given that the acquired firms are often very small and do not sell competing products. Alternatively, one may try to rely on Section 7 of the Clayton Act, which reaches all acquisitions whose effect may be substantially to lessen competition.
The threat raised by systematic platform acquisitions of tech start-ups is more akin to an exclusionary practice. Most of these acquisitions are not reasonably calculated to produce price increases or innovation reductions in the short run, but rather to prevent the emergence of substantial rivals. There is legal authority for treating mergers as exclusionary practices, but very little recent enforcement history. Considered by itself, the integration value of these transactions is typically a social good. Further, if the firms are not competitors, no competition between them is being eliminated. The exclusion value is another story. The task for policy makers is to find ways to manage acquisitions so as to permit socially positive integration values while minimising the harm caused by exclusion. One promising remedy is to limit any acquisition to a nonexclusive license. An alternative is to permit the acquisition only on the condition that the acquiring firm license the acquired technology to others on fair and reasonable terms. Limiting the dominant firm’s acquisition to a nonexclusive licence of all relevant intellectual property rights essentially permits the firm to acquire the integration value of the target, but not the exclusion value.
A different situation arises for killer acquisitions, where a merger occurs merely to remove a productive asset from the market. A variation of the same problem occurs when a firm acquires exclusive rights in a patent and declines to practice it but then sues rivals for infringement. The reason we permit most mergers rather than making them unlawful per se is because of their potential to generate efficiencies. However, a killer acquisition yields no efficiencies because the acquiring firm never puts the acquired assets to any use. Economically a merger plus-shutdown is no different than the output reduction that attends a cartel.
This review will necessarily fail to do justice to this piece even more than is usually the case – it is just impossible to synthesise all the ideas in this 122 page article. Suffice to say that the paper provides an impressive panoramic of many of the issues plaguing antitrust as regards digital businesses.
The discussion on how to measure market power is particularly clear. The paper also includes an extensive discussion of why we should not consider digital platforms ‘natural monopolies’, and a description of the various waves of innovation that displaced previously impregnable corporate behemoths. Finally, the discussion on alternative remedies is ‘learned’ in the best sense of the word – identifying historical parallels and using them to illuminate how the remedies might operate in practice.
Finally, I would be remiss if I did not refer you to the thorough discussion on different dating sites options ensconced in the middle of the paper (to provide an example of how product differentiation operates).