Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

The digital economy’s antitrust problem

Existing understanding of market power and monopolies is ill-suited to the digital economy

Mark Zuckerberg’s testimony before the US congress last week was distinctly underwhelming. There was broad signalling about the US political establishment’s increasing discomfort with some aspects of the dominance of home-grown tech giants, true. But lawmakers were rarely able to make telling points in the 5 minutes that each was allotted to question the Facebook co-founder. That said, a few lines of questioning did discomfit Zuckerberg. One was when Senator Lindsey Graham proposed that Facebook did not have any significant competitors and was, in fact, a monopoly. This points to an important issue: How does the existing understanding of monopolies and market dominance, and the antitrust regulation that springs from it, apply to the digital economy?

In their seminal 2003 paper, Platform Competition In Two-Sided Markets, Jean Tirole and Jean-Charles Rochet defined some of the core competition issues created by the digital ecosystem. Multi-sided markets are not new. But the ubiquity, size and complexity of multi-sided digital platforms raise questions that competition regulators around the world are struggling to come to terms with. When a company like Google is a platform, service provider and marketplace rolled into one, how does it fit into regulatory frameworks? How do Amazon’s retailer and marketplace functions interact? In many instances, the services provided to one side of the market are functionally free, subsidized by consumers facing the other side. This further complicates matters.

There are three main issues here that are going to increasingly concern regulators. The first is that digital platforms can achieve market dominance because of network effects in a manner that rarely happens in traditional sectors. As the dissenting opinion in the Competition Commission of India’s antitrust case against Google—concluded with a fine of around Rs136 crore in February—has pointed out, dominance due to network effects is not in itself a concern. But it raises concerns that traditional criteria for assessing market power—financial power, access to demand and supply markets, market entry barriers for other countries—don’t address.

For instance, when the network effects of a multi-sided platform are strong, they form rapidly growing feedback loops. Take Uber. More drivers available on the platform, ensuring quicker, smoother service, attract more passengers, which means more earning opportunities, thus attracting more drivers, and so on. Research has shown that when these cross-platform effects and loops are strong, they change the responsiveness of demand. Demand elasticity is often used as a measure to gauge market power. Would failure to take the strength of such network effects into account then lead to faulty assessments of market power and the closeness of competition? If it is to be factored in, how should this be done? And should regulators also look at the existence of multiple platforms offering similar services and the costs to users of switching?

Secondly, the role of data as a source of market power for digital business models poses several headaches for regulators. Network effects amplify the access to data that larger businesses have. Start-ups and smaller competitors lack similar access. This can be a de facto market barrier—particularly when big tech no longer just offers services and products but increasingly provides the infrastructure of the digital ecosystem. Should the ability of companies to access data themselves or via third parties be taken into consideration?

And here’s a radical possibility that is becoming increasingly concrete. The Cambridge Analytica and Facebook brouhaha has brought the issue of data privacy into the limelight. The European Union, in particular, is taking the lead here. One criteria for antitrust regulators is consumer benefit or harm. Should they then factor in lack of data privacy as intrinsic consumer harm when assessing a company’s market position and practices?

The third issue is mergers and acquisitions. Big tech’s dominance is partly due to the manner in which it has systematically acquired start-ups. This has been due to several reasons. A start-up could be working on technologies and patents that would be useful in expanding in a new market—say, Artificial Intelligence. It could be offering a service that would allow it to become a competitor down the line. Or, it could have access to data streams that would benefit the acquiring company. Traditionally, regulators look at the combined revenue of the parties in a merger. In the case of start-ups, particularly in the early stage, this can be pointless. Should antitrust regulators look to Germany, where the regulations have now been changed to look at the valuation of the start-up for the deal to get a better idea of how the acquisition would affect future market dominance?

It would be very easy to get the answers to these questions wrong. Big Data and the market dominance of big tech have created enormous benefits for consumers. They have fuelled innovation and allowed consumers to access a growing range of products and services for a negligible cost—or no cost at all. That, however, doesn’t mean that regulators can ignore the issues. They are in an unenviable position. Countries like Germany that are leading the charge in adapting antitrust regulation to the digital economy could show the way—or fail spectacularly and cause significant economic harm in the process. There are lessons to be learnt either way.

Are monopolies in the digital economy a matter of concern? Tell us at views@livemint.com

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