First thoughts: Its been almost exactly 1 year since my last blog post, which is disappointing. There have been a few ideas gestating in my head, but so far none have made it to (metaphorical) paper. Now that I’ve finally settled down to write something, I’m finding it difficult. While the topic – how to protect and promote competition in digital industries – is fascinating, I don’t think there is a clear answer. It’s also tricky to say anything “new” because, partly due to my own procrastination, I’m not the first to write about this issue. Over the last year I’ve read a number of interesting articles, some of which I will draw on below. Links to the original sources can be found on my “Further Reading” page.
Digital platforms are going viral. Is this a problem?
Historians looking back on the second decade of the second millennium will surely be struck by a few things. The backlash in the Western world against globalisation, manifested in the “Donald Trump phenomenon” and the UK’s unexpected vote for “Brexit”; the Arab Spring, the tragedy in Syria, and the Middle East, North African and European refugee crisis. And, less dramatically, but perhaps as importantly, the rise of digital platforms and their reshaping of developed economies.
It’s difficult to believe that Uber – so ubiquitous that “To Uber” is now as much as a verb as “To Google” – didn’t exist until 2009 and most people in Australia hadn’t heard about it until 2014. Other new digital platforms, including, Airbnb, Airtasker and Deliveroo, not to mention the more established giants Google and Facebook, continue to fundamentally reshape the way we travel, work, eat, socialise and, quite simply, live.
Most people (taxi drivers and hotel owners excluded) think of these innovations as largely a good thing. This is particularly so amongst the young, professional, metropolitan class to which I somewhat awkwardly acknowledge I belong. I still revel in (but also shiver at) the almost grotesque convenience of catching an Uber home, while ordering dinner from Deliveroo en route. I’m not the only person who feels guilty about using these “on demand” apps, especially when one considers that the relatively affordable luxury they provide must be coming at a cost to someone – possibly the person waiting for you to press the “deliver now” button. This is despite the fact that economic research claims to show that in 2015, UberX delivered almost $7 billion in consumer surplus (i.e. the app is providing consumers with services at prices lower than those they would be willing to pay).
But what if, as well as changing the way we live and work, these digital platforms are also changing the structure of the economy? And what if these structural changes do not benefit consumers, but rather, benefit the increasingly large companies who dominate the new digital markets?
A blog post on the Financial Times entitled “Do digital industries break capitalism”? raises the question of what happens when network effects lead to dominance of digital markets by a few online platforms – dominance not only over the economy but also, potentially, over information and culture. Meanwhile, as part of a Special Report into the global economy, an article in this week’s issue of the Economist notes that the economic ills currently being blamed on too much globalisation (including income inequality) may in fact result from not enough competition, particularly in new, digital industries characterised by network effects.
“Network effects” are the self-perpetuating economic force driving the growth of most digital platforms, particularly those operating in two-sided markets, including Uber and Airbnb. The more drivers Uber has on the road, the more people will download its app, and vice-versa.
These markets are characterised by brief , early periods of brutal “competition for the market”. The stakes are high because in these markets “winner takes most”. Consumers benefit as competitors invest all their financial resources in providing low prices, discounts, and even free services, in order to attract consumers to their platforms. A fascinating long-read article in the Guardian on “How Uber Conquered London” describes the tactics used by Uber in its early days in the city. Until recently, Uber was engaged in a vicious price war to gain market share in China, before capitulating to its Chinese rival Didi Chuxing.
The issue is what happens when the battle for the market has been won. What we see today in many digital markets is a few large firms whose platforms have become the only way to gain access to the market. If, as is often argued, digital markets are characterised as much by disruptive innovation as they are by network effects, temporary monopoly by dominant firms is not a cause for concern. Soon enough technology will move on, the incumbent giant will become irrelevant and everyone will be interested in the “next big thing”. Competition for the market will begin again, this time for a market that no one could have predicted would even exist a few years before.
And yet…there is increasing evidence that the current technology giants (Facebook, Google, Amazon etc) are using their market power to shape the direction of such innovation themselves. In so doing they are assisted not only by vast reserves of capital but also other resources such as “Big Data”.
A couple of weeks ago, another Special Report in the Economist focused on the emergence of giant “superstar firms”, with an article stating:
The age of entrepreneurialism that started in the early 1980s is giving way to a new age of corporatism. This has been particularly true in the world’s most advanced economy, America, and in the world’s most knowledge-intensive industries. Big companies have been getting bigger and putting down deeper roots. In the technology industry a handful of companies have grown into giants in a couple of decades and are now making sure they stay on top, hoovering up talent, buying up patents and investing in research. At the same time the rate of small-business creation is at its lowest level since the 1970s.
Meanwhile, economists such as Maurice Stucke and Ariel Ezrachi have theorised that the combined impact of network effects and Big Data is allowing technology firms to raise barriers to entry and engage in anti-competitive behaviours including collusion and price discrimination. For example, algorithms may allow competitors to detect and respond to each others pricing patterns, while also using vast troves of consumers data to target prices directly and precisely at individual customers – all this taking place entirely in the realm of computers and artificial intelligence. The “invisible hand” is replaced by the “digitised hand”.
In the words of Mr Ezrachi:
The new market dynamic, new technologies, and start-ups have captivated our attention and created a welfare mirage—the fantasy of intensified competition. Yet, behind the mirage, there operates an increasingly well-oiled machine that can defy the free competitive forces we rely on. What appears to be a competitive environment may not be the welfare-enhancing competition that we know. New technologies changed the dynamics of competition as we know it and gave rise to a new environment, which may display the characteristics of competitive markets but is driven by different forces.
A software update for competition law
The above discussion leads to one important question. Are our current laws equipped to deal with market concentration caused by network effects, tacit collusion via algorithms and the utilisation of Big Data to shape and then respond to consumer demand? Or does competition law itself – developed in the age of factories, shop floors and boardroom meetings – need a software update to make it relevant in a world where widgets have been replaced by digits?
I don’t have the answer to that question. Its one that I want to consider and explore going forward. However, here are some brief thoughts:
- In theory, merger review is based on a consideration of “the future with” and “the future without” the merger. However, in most cases the counterfactual which regulators use to consider the competitive impact post-merger is the status quo. Arguably such an approach does not give sufficient consideration to the dynamics of competition in innovative digital industries. For example, where a large company such as Facebook is looking to purchase a smaller rival such as WhatsApp the focus should be not only on what competitive restraint WhatsApp places on Facebook today, but what sort of restraint it may place in 5 years time. Similarly, market share guidelines may need to be rethought. A small but promising start up with only 5% market share may grow to 20 – 50% in a few years time if it is not defensively acquired by one of the large incumbents. Such acquisitions should face greater scrutiny. Obviously, predicting the future is difficult and many decisions will be controversial – but the cost of ignoring such dynamics and continuing with conservative analysis may be greater than the cost of a few wrong decisions.
- When considering whether firms are abusing their market power, the analysis of what constitutes “market power” also needs some imaginative rethinking. Market share is important but is not everything. Competition authorities are already aware of the importance of network effects, but greater thought needs to be given to the power of data and algorithms, as well as financial power and strategic barriers to entry. Again – these are all controversial topics, but increasingly relevant in the digital world.
- In the future, cartels may not be formed intentionally by individuals but rather tacitly by computers with algorithms and AI. Such collusion is not currently covered by competition law and its not clear how the law could be amended to capture this conduct. It might be necessary to engage in greater ex ante regulation rather than rely purely on ex post enforcement in order to avoid such collusion from being possible in the first place. More discussion on this topic by Maurice Stucke and Ariel Ezrachi can be found here.
- Finally, as well as using competition law to avoid the emergence and abuse of concentrated markets we may also be able to use consumer protection law and laws against unfair trading to protect smaller players. For example, an interesting question is whether the law against unconscionable conduct, both in relation to business-to-consumer transactions and business-to-business transactions may be able to deal with firms using Big Data to manipulate transactions.
Some governments, particularly in Europe are already beginning to think about these issues.
In May of this year, the European Commission released a Communication entitled “Online Platforms and the Digital Single Market: Opportunities and Challenges for Europe”. This document was focused primarily on discussing how Europe could compete more effectively with the US in regard to the development of online platforms, as well as considering the most appropriate regulatory framework to ensure consumer protection and promote fairness between businesses. Policy suggestions included the development of common standards for data transfers between platforms, and the promotion of a general principle of portability or transferability of consumer data. The Communication concluded:
Online platforms play a key role in innovation and growth in the Digital Single Market. They have revolutionised access to information and have made many markets more efficient by better connecting buyers and sellers of services and goods. While there are some online platforms that reach historic numbers of users across the world, and that expand continuously into new areas of the economy, there are also still many opportunities for competitive European platforms to emerge. Effectively stimulating innovation in these areas, while adequately protecting the legitimate interests of consumers and other users, is perhaps the most important challenge the EU faces today in terms of securing its future competitiveness in the world.
In this respect, this Communication underlines the need to adopt policy and regulatory approaches that respond directly to the challenges, and which are flexible and future-proof.
Similarly, the European Union Committee of the UK House of Lords released a report on 20 April entitled “Online Platforms and the Digital Single Market“. The 109 page report is well worth reading as it includes detailed analysis on most of the issues raised in the blog post.
Interestingly, the report identifies the downgrading of privacy standards by online platforms as a potential abuse of dominance. The report also notes that “There is a widespread lack of transparency in how platforms rank and present information to their users. We recommend that existing regulation be altered to require online platforms clearly to communicate the basis on which they rank results, and also to inform consumers when ‘personalised pricing’ is taking place.”
However, ultimately the House of Lords concluded that “despite the challenges competition authorities face when dealing with online platforms, we find that the flexibility of competition law means that it should be well-suited to addressing the subtle and complex abuses of dominance that may arise.”
It will be interesting to see just how flexible competition law can be.