With a study on exclusionary conduct by digital gatekeepers for the Dutch Government we contribute to the European competition policy debate
Together with Radicand Economics
A report feeding the Dutch position on digital platforms
2019 and 2020 saw regulators and governments across the world rethinking the effectiveness of existing competition rules in digital markets. Platforms tend to become very large. Moreover, they often act as private regulators setting the rules of the game on markets they control. Sometimes they take a central position in the digital economy. Consequently, they are of critical importance for many users and SMEs. The question is whether they have become too big and powerful? Can governments can still control that power (and how)?
There is a risk that competition law no longer deters digital platforms from behaving anti-competitively. Competition cases take a long time. Meanwhile a platform may monopolise a downstream market and the situation may become irreversible due to network effects. As such, the benefits of anti-competitive behaviour remain positive even after authorities have condemned and prohibited the platform’s behaviour.
The Dutch Ministry of Economic Affairs and Climate Policy asked e-Conomics to write a paper about this. The purpose of the paper is to feed the Dutch position on platforms with a (dominant) gatekeeper position. The paper explores if, when and which type of ex ante regulation may be desirable in such cases. We are aware that ex ante rules is a heavy tool and may stifle innovation. For this reason, the report also explores alternative solutions for containing market power within the context of European Competition Law.
What are digital gatekeepers?
Digital gatekeepers can be defined as digital intermediaries that are difficult to bypass. They are platforms in the sense that their business models are based on network effects, data-analysis and scope-economies. As other platforms, they act as private regulators setting the rules of the game on their platform. But not all platforms can subjectively change these rules at will. Neither can all of them act in ways that harm consumers, competition, or innovation. Such risks only arise if one or more user groups are locked in such a way that they can only be reached via the platform. Identifying gatekeeper positions thus requires mapping how particular products or services reach particular groups of customers. The question is whether certain nodes along that route can be bypassed.
This brings us to the notions of intermediation and disintermediation. Traditional firms typically compete horizontally in terms of similar products or services. Digital platforms, however, tend to compete vertically in terms of intermediation and disintermediation. This competitive process is about controlling and challenging access to essential content, data or user groups. Rivalry does not necessarily involve offering similar services but rather alternative routes to reach content, data or user groups. In relation to this, Nicolas Petit coined the concept of ‘moligopolistic competition’. This is a form of competition between digital monopolists challenging each other from different parallel markets.
A gatekeeper ≈ a dominant firm
Gatekeeper positions are equivalent to the concept of dominance in competition law, but they are not entirely the same. Dominance implies that a firm can behave independently from customers, suppliers and (potential) competitors. This does not necessarily apply to all digital gatekeepers. To understand this point, consider that the core functionality of a platform is to facilitate interactions between users. By doing so, it aims to maximise value creation taking place on the platform. The platform subsequently makes money by skimming some of that value, like a tax.
A platform is thus in a way comparable to a government. Both should minimise the extent to which they meddle with the economy such that the tax base is maximised. The fact that a platform holds a gatekeeper position does change this logic. Arbitrary discrimination between users lowers the overall value created on the platform and thus reduces the revenue base.
When do digital gatekeepers become problematic?
The previous makes clear that discriminatory and exclusionary behaviour reduces the revenue potential of platforms. However, digital gatekeepers may be tempted to engage in discriminatory and exclusionary behaviour when this protects their current gatekeeping positions from being (dis)intermediated. For example, Microsoft discriminated against against rival browsers and media players. By doing so, Microsoft prevented the disintermediation of Windows as an intermediary between end-users and apps and content. Similarly, Android discriminated against rival browsers and search engines as to cut them off from data essential for developing search engine technology.
When a platform discriminates for non-objective reasons, this is suspect behaviour and indicates that the platform is dominant. One can draw this conclusion without defining a market. If it did not have a dominant position, it would not engage in non-objective discrimination. Afterall, that would weaken its position and scare away users. The previous suggests that we can simply forbid non-objective discrimination by digital platforms. However, such a general rule ignores that non-objective discrimination can have pro-competitive effects. Consider, for sake of the argument, that Google is the only company to successfully challenge Amazon’s online marketplace. But to do so, it would need to leverage network effects of its search engine into the business of online shopping. Of course, this goes at the expense of other comparison-shopping sites. The question is, however, whether these would have survived otherwise, given Amazon’s growth.
Competition law can be effective
Note that existing competition law can often repair situations of anti-competitive exclusionary behaviour by platforms. However, the traditional analytical steps followed by competition authorities (defining the relevant market, identifying competitors in that market, and establishing dominance – in that order) have difficulty to account for dynamic moligopolistic competition across market boundaries. As a result, competition cases take too long and the market may already have changed or the damage has become irreversible by the time of a verdict.
Ex ante regulation akin to the telecom framework does not really solve the problem. It still requires (something like) a market definition and (something like) an assessment of dominance. It will still take many years to complete these analytical steps when based on the traditional approach. Moreover, competitive situations in digital markets are subject to constant changes. This implies that regulators must regularly (say every two to three years) review their decisions, as well as their underlying analysis of competition. Furthermore, every (review of a) decision will be subjected to critical and lengthy judicial reviews. The latter notably results from the absence of a clear analytical framework for assessing digital competition. An ex ante regulatory framework may thus result in even more and lengthier court cases.
Our paper suggests that one can establish dominance without defining a market and analysing market shares. It may suffice to analyse the business model and the behaviour of a platform, and to assess whether that behaviour is natural for the business model in a competitive setting. This approach breaks with traditional market analysis, but it is less susceptive to market dynamics and helps to quickly draw robust conclusions.
Gatekeepers controlling access to the digital economy
In many cases, ex ante regulation may be an overly heavy tool. This is particularly the case when it concerns platforms with a dominant position without considerable spill-overs to the rest of the economy. However, there are also such things as conglomerates of complementary platforms. These may occupy a key position, controlling access to a large part of the internet. The associated concerns are then no longer limited to competitive market outcomes. They rather extend to the functioning of the economy as a whole and the concentration of political power. This brings us back to origins of anti-trust policy as described in Tim Wu’s The Curse of Bigness. It may requires measures beyond competition policy, aimed at protecting fundamental rights (privacy) and democracy. A digital platform may be like a government, but it is not democratically chosen.
Impact
Based on the e-Conomics report, the Ministry of Economic Affairs has been able to develop a well balanced vision on digital platforms. The Dutch vision echoes in policy proposals suggested by the European Commission as well as in a Dutch-French non-paper on digital gatekeepers.
Client
Dutch Ministry of Economic Affairs and Climate Policy
Results
Economic foundation for the Dutch position on regulating Digital Gatekeepers
Impact
Based on the e-Conomics report, the Ministry of Economic Affairs has been able to develop a well balanced vision on how to deal with digital platforms. The Dutch vision is reflected in policy proposals suggested by the European Commission as well as in a Dutch-French non-paper on digital gatekeepers.
Document
- The report can be found here
- The Dutch Position on digital gatekeepers can be found here
- A non-paper by the Dutch and French government on digital gatekeepers can be found here
Team
- Nicolai van Gorp
- Paul de Bijl