By Marlon Struver
Edited by Andrzej Drzewieniecki & Andrada Bozianu
The rapid growth of tech giants, while providing new levels of convenience and innovation, has lately raised concerns about market dominance and fair competition. As markets evolve, so must the regulatory framework. Enter the Digital Markets Act (DMA), the European Commission’s attempt to tackle current regulatory shortcomings. This article analyses the challenges of regulating digital markets while providing a critical analysis of the DMA.
©Marlon Struver
Economic and Regulatory Issues in Digital Markets
In recent years, tech companies' perceived increased economic and political power has triggered an increase in cries for new and tighter anti-trust rules. The current debate often focuses on increased mark-ups, and the bigness of tech firms as proof of increased market power and competition loss. This is, however, where the current regulatory problems start to appear.
Neo-classical competition frameworks are not well suited to analyse the market power of digital markets, where defining the specific markets is arduous.
Markets are normally defined using product substitutability tests but the dynamic nature of digital markets, stemming from extreme returns to scale, network externalities, and the special role of data make this difficult.
Additionally, conglomerate firm structures and simultaneous online and offline markets for identical goods make defining markets more troublesome.
Another distinction in digital markets is the lack of static competition in favour of dynamic competition which focuses on generating disruptive innovations that increase quality.
Dynamic competition results from the importance of intangible assets, like data, information, and knowledge levels, which create extreme returns to scale. The importance of intangible assets creates high fixed costs but close to zero marginal costs which create decreasing average costs and increasing returns to scale.
With increasing returns-to-scale, perfect competition, as assumed by neoclassical models, is suboptimal as firms would not cover their average costs. Static or price competition, is, therefore, rarely observed in digital markets.
Overemphasising the importance of market shares would not capture the more important dynamic competitive pressures from related or not-yet-established markets and could be problematic.
Mergers and Acquisitions
Competition in digital markets should come from dynamic sources, like disruptive innovations from new start-ups. Therefore, the behaviour of larger firms towards smaller start-ups is vital. The nature of Mergers & Acquisitions, or M&A deals, has been proposed as partly to blame for the perceived competition loss in digital markets.
An M&A deal depends on whether the buying company and the other company agree on the “to-be-paid price” which reflects the probability of success that a new firm has in disrupting the status quo. In digital markets, this is determined by a firm's access to value-creating data.
Larger companies currently hold an advantage in collecting value-creating data, while data laws incentivize withholding data from potential disruptors. Facebook has already used this information asymmetry in data to assess start-ups’ potential to challenge them.
This unlevelled playing field favours status-quo companies in M&A deals with potential entrants, potentially reducing dynamic competitive pressures.
Surprisingly, around 97 per cent of M&A deals in digital markets were never vetted. This failure stems from both the inclusion of turnover thresholds in Regulation 4064/89 of the European Commission and the need to first establish relevant markets to analyse dominant positions, as under Article 2(3) of Regulation 4064/89.
European Competition Policy
European Competition Policy deviates from other Western approaches through the influence of German Ordo-Liberalism. The Ordo-liberal influence on European competition policy fostered the main aims of European policy which are: to promote the well-being of its citizens, establish an internal market, promote the sustainable development of Europe, and ensure an open market with free competition.
This influence creates a wider scope for European Competition policy since it should not solely be focussed on economic efficiency, as is more the case in the U.S., but also on additional norms like equality and fairness. Critics, however, argue that it makes the regulatory framework not clearly defined.
In the U.S. monopoly power and pricing are seen as “an element of the free market”. Yet, EU law deviates from this, because of its wider scope. These differences are closely connected to theories of innovation.
Whereas the U.S. follows more traditional Neo-classical reasoning, seeing investment as a substitute for innovation, EU law sees innovation as a much more complex system.
The Digital Markets Act
The Digital Markets Act (DMA) became EU law in 2022. It hopes to amend the previous failures and “ensure fair and contestable markets”. The characteristics of digital markets make it hard to repair competitive damages once they have occurred, leading to the European Commission choosing an ex ante regulatory approach.
The DMA aims to regulate gatekeeper core-platform services (CPSs). A list of ten CPSs, which includes most large tech firms like Google, Amazon, and Facebook, is part of the DMA.
The inclusion of most tech giants justifies this focus on CPSs. Gatekeepers are defined using quantitative thresholds like active monthly end- and business-users, and EU turnover.
The DMA imposes data use and share obligations to gatekeepers. Article 5 prohibits gatekeepers from combining personal data across platforms or services unless there is an opt-out option for end users. Article 6 also prohibits the use of non-public data in competition with business users on platform(s).
Regarding mergers, Article 12 forces gatekeepers to notify the Commission of any planned concentration, involving another core service or digital service provider.
The DMA’s Shortcomings
The DMA’s shortcomings stem mostly from underdeveloped definitions and the seeming lack of understanding by the Commission about innovation processes, especially disruptive innovation.
Continuing the focus on neo-classical theory and models, even with adaptations, will continue to bring problems in understanding digital markets.
The focus on fairness and contestability in the DMA, although in line with the European Commission's precedent, can create difficulties during the regulatory process.
The DMA fails to provide clear definitions for both, resulting in uncertainty regarding when fairness and contestability goals are violated. This ambiguity in competition law interpretation often leads to lengthy litigations, extinguishing the DMA objectives of certainty and speedy proceedings.
While the DMA rightly highlights the importance of innovation for consumer welfare, it still employs a traditional price-centric view, excluding considerations of quality levels.
This approach is inadequate in zero-price markets, where it cannot fully capture the impact of regulation or firm behaviour on consumer welfare. If the DMA's obligations discourage dynamic enhanced service quality, the effects may not be adequately addressed within a price-centric consumer welfare framework.
Moreover, the DMA touches upon the significance of disruptive innovations in digital markets but misinterprets the concept. The obligations within the DMA, particularly those related to data, align more with the protection of incremental innovations as they do not facilitate data access for disruptive start-ups.
However, disruptive innovations hold greater relevance for maintaining competition in digital markets. The lack of understanding regarding dynamic competition may impede the Commission's assessment of M&A deals in digital markets, which will become increasingly necessary as the old merger thresholds are eliminated.
Although the DMA addresses some of the previous regulatory failures with the removals of the importance of specifying markets, market shares, and the removal of merger oversight thresholds.
However, the underdevelopment of the Commission’s understanding of dynamic competition and disruptive innovations will continue to bring new issues in ensuring free and open digital markets.
Sources: Competition policy for the digital era (Cremer et al), EUR-Lex, EU competition law goals and the digital economy (Ezrachi), Big tech mergers (Motta), OECD, Platform mergers and antitrust (Parker).
Written by Marlon Struver
November 2023
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