Competition policy for the digital era

This report explores how competition policy should evolve to continue to promote pro-consumer innovation in the digital age.

What are the main specific features of digital markets ?

3 key characteristics of the digital economy:

  • The cost of production of digital services is much less than proportional to the number of customers served. The digital world pushes it to the extreme. This can result in a significant competitive advantage for incumbents.
  • The convenience of using a technology or a service increases with the number of users that adopt it. Consequently, it is not enough for a new entrant to offer better quality and/or a lower price than the incumbent does; it also has to convince users of the incumbent to coordinate their migration to its own services. Network effects could thus prevent a superior platform from displacing an established incumbent. The size of this “incumbency advantage” depends on a number of factors, including the possibility of multi-homing, data portability, and data interoperability.
  • The evolution of technology has made it possible for companies to collect, store, and use large amounts of data. Data is a crucial input to many online services, production processes, and logistics. Therefore, the ability to use data to develop new, innovative services and products is a competitive parameter whose relevance will continue to increase.

A consequence of these characteristics is the presence of strong “economies of scope”, which favour the development of ecosystems and give incumbents a strong competitive advantage. Large incumbent digital players are very difficult to dislodge. There is also a reasonable concern that dominant digital firms have strong incentives to engage in anti-competitive behaviour.

 

What should be the goals of EU competition law in the digital era ?

The basic framework of competition law, as embedded in Articles 101 and 102 of the TFEU, continues to provide a sound and sufficiently flexible basis for protecting competition in the digital era.

BUT:

  • even where consumer harm cannot be precisely measured, strategies employed by dominant platforms aimed at reducing the competitive pressure they face should be forbidden in the absence of clearly documented consumer welfare gains;
  • in digital markets, we should put less emphasis on analysis of market definition, and more emphasis on theories of harm and identification of anti-competitive strategies;
  • even in an apparently fragmented marketplace, there can be market power  linked to the concept of “unavoidable trading partner” and has sometimes been called “intermediation power” in the area of platforms. If data that is not available to market entrants provides a strong competitive advantage, its possession may lead to market dominance. Therefore, any discussion of market power should analyse, case by case, the access to data available to the presumed dominant firm but not to competitors, and the sustainability of any such differential access to data.

What is the application of competition rules to digital platforms and data ?

In order to encourage exploration by consumers and to allow entrant platforms to attract them through the offer of targeted services, it is key to ensure that multihoming and switching are possible and dominant platforms do not impede it. Data regulation can play an important role to foster multihoming, the offering of complementary services, and therefore competition:

  • data portability, i.e. the ability of users to transfer elsewhere the data that a platform has collected about them;
  • interoperability (in its various specifications, namely protocol interoperability, data interoperability, full protocol interoperability).

What is the role of merger control in preserving competition and innovation ?

This issue deal with acquisitions by dominant platforms of small start-ups with a quickly growing user base and significant competitive potential.

Many of these acquisitions may escape the Commission’s jurisdiction because they take place when the start-ups do not yet generate sufficient turnover to meet the thresholds set out in the EUMR. The best way to handle these acquisitions is to inject some “horizontal” elements into the “conglomerate” theories of harm and try to answer the following questions:

(i) Does the acquirer benefit from barriers to entry linked to network effects or use of data?
(ii) Is the target a potential or actual competitive constraint within the technological/users space or ecosystem?
(iii) Does its elimination increase market power within this space notably through increased barriers to entry?
(iv) If so, is the merger justified by efficiencies?

The test proposed here would imply a heightened degree of control of acquisitions of small start-ups by dominant platforms and/or ecosystems, to be analysed as a possible strategy against partial user defection from the ecosystem.

 

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