Guest blog post by Kay Jebelli, CCIA Europe competition counsel, Computer & Communications Industry Association
Proposals to punish or control bigger tech companies get headlines in the news. But making policy based on simplistic solutions rather than sound evidence risks unintended consequences.
The risk is greatest where the justifications for policy choices are internally inconsistent. The paradox of the proposed ex-ante market regulation aimed at digital “gatekeepers” is the latest example.
In February the European Commission publicly prioritised studying rules aimed at large platforms they consider gatekeepers so that platforms “remain fair and contestable for innovators, businesses, and new market entrants.”
There are three possible interpretations of the issue, and three accompanying policy prescriptions, all three of which are, to put it bluntly, paradoxical. There is concern that ignoring these paradoxes will lead to intervention with harmful side-effects for the wider economy.
“Regulating Gatekeepers to All Markets”
A broad interpretation of the statement posits that platforms are gate-keepers to all commerce — holding-up supply chains and harming consumer welfare, and that current antitrust enforcement is lacking. The proposed solution to this misperception is to put a straight-jacket on big tech. While popular amongst the anti-tech lobbies, this prescription doesn’t match the evidence.
Digital technologies are disrupting existing gatekeepers, lowering transaction costs and opening markets to global choices. Big and small suppliers can reach customers directly through the internet. Creators no longer have to rely on a radio station to play their song, a TV exec to tell their story, a publisher to approve of their talent, or a retailer to sell their creations.
Online options have also empowered consumers as the long-tail of supply increases competition. Increasing competition lowers prices, increases availability, and spurs innovation. Consumers can more easily read reviews, compare offers, and choose what’s right for them. As a consequence, traditional gatekeepers in these industries have been under intense competitive pressure, and may blame tech companies for their losses.
The European Commission has previously acted on behalf of competition, efficiency and the wider economy, against the interests of large incumbents, why change course now?
“Regulating Gatekeepers to the Digital Market”
Another interpretation is that digital platforms are gatekeepers to e-commerce, that the efficiencies of their features and services and their value to suppliers and consumers are so great that they are unavoidable online trading partners. Their according market power must be restrained so that the increasingly important online world remains open, fair and contestable.
This interpretation is a bit more reasonable, as the features and functionalities offered by big tech continue to widen, but the prescription is still paradoxical.
What most don’t know is those familiar technology companies are the biggest spenders on research and development. They continue to offer new features and services because they have to compete with other options.
Some players have been slower to respond, but where demand exceeds the capability of existing services, we see the rapid growth of recent technologically adept entrants. Altogether, this suggests that even where large digital players have a lead due to their past investments, older industry players are catching up, and new players are pushing the envelope with new features and services. In other words, the market already appears to be open, fair and contestable.
“Regulating their Marketplace”
Lastly, there is the interpretation that digital intermediaries are gatekeepers to their proprietary marketplaces. They build and manage multi-sided ecosystems that benefit both the suppliers and the buyers participating in the marketplace, and they control the rules for suppliers that can access the marketplace. This control means their decisions can distort competition, particularly where they themselves compete with the suppliers. It’s the most familiar, and yet paradoxical. While platform operators may have the ability to distort competition on their platform, they do not have the motive.
After all, digital intermediaries compete with incumbent businesses by matching demand to the long-tail of supply. If they aren’t meeting some customer demand, customers can go directly to the suppliers they prefer. Action that is harmful to suppliers would be self-defeating and irrational because intermediaries’ success relies on attracting and keeping a vibrant and active supply-side.
As the Competition Policy for the Digital Era Report readily admits, “because its economics are not yet completely understood, it is extremely difficult to estimate consumer welfare effects of specific practices. … our insights into possible countervailing efficiencies are still evolving”. Distinguishing between legitimate competitive activity and anticompetitive foreclosure should probably be done on a case-by-case basis.
The EU should be careful not to abandon its core antitrust principles absent objective evidence of systemic market failure. The OECD reminds us that “efficiency should be promoted and that competition should be stimulated and maximised except in cases of market failure.”
The EU already regulates platforms to address market failures with respect to data usage and various other dimensions. New rules and obligations (incl. at national level) are imposed on digital companies on an almost daily basis. Competition policy appears to be working. We should avoid further internal market distortions and the unintended side-effects that a simplistic approach based on anti-tech rhetoric would entail.