Building an efficient regulation in the digital economy

You probably expect a discussion about the forthcoming Digital Markets Act (DMA). The DMA is a legislative proposal that will merge into a single legislative framework the New Competition Tool (NCT) and the Digital Service Act (DSA). The former is a market investigation instrument to deal with structural competition problems. The latter is an ex-ante asymmetric regulation that governs the behavior of large online platforms acting as “gatekeepers” with a list of interdictions and obligations. Initially scheduled to be released on December 2, 2020, then on December 9, 2020, the DMA is finally expected to be published on December 15, 2020. A wonderful Christmas gift. So, you are right to expect a discussion, but wait a few days and prepare (or cancel) your holidays to the Maldives. But, let’s still discuss platform regulation.

Since 2019, numerous reports around the world have been published on the need to adapt competition law to the digital economy and to regulate online platforms (Furman et al, Crémer et al, Schallbruch et al, ACCC report, Stigler report, and the House Judiciary Antitrust Subcommittee report).

Following them, regulators and legislators have proposed to regulate large online platforms acting as “gatekeepers” (France, Germany, European Commission) or with a “Strategic Market Status” (the United Kingdom).

Accordingly, dominant online platforms are likely to be regulated in the future. An asymmetric regulation (applicable to only some firms against objective criteria) is thus on the table, as opposed to a symmetric regulation (applicable to all firms). The main goals are to ensure an efficient and fair competition and to promote market contestability in digital markets. The former implies a list of interdictions (e.g., interdiction of certain forms of self-preferencing). The latter implies a list of obligations (e.g., data interoperability). But, is an asymmetric regulation the right path?

As a reminder, regulation is only needed in case of market failures (market power, asymmetric information, negative externalities, and collective goods).[1] In the digital economy, two market failures can be identified: (i) market power in the hand of just a few firms in some digital markets; and (ii) asymmetric information faced by consumers and businesses about the terms and conditions (e.g., about the collection and processing of data).

First, an asymmetric regulation will only solve the conduct of large online platforms, namely the market power issue. The regulation will thus only address the alleged dominance (the outcome), but not why a firm became or can become dominant (the cause). Accordingly, a similar problem (e.g., new domination by another firm) cannot be excluded.

Second, the proposed regulations seem to address asymmetric information only to a limited extent as regards unfair terms and conditions by large online platforms. However, consumers and businesses faced unfair terms irrespective of the firm's size.

Last but not least, the proposed regulations seem to be limited to a geographic area (e.g., EU level). However, online platforms are without borders. A global level playing field is therefore the preferred option.

Hence, the regulations might well be imperfect to address market failures in the digital economy. So, what can be an efficient and fair regulation?

The regulation should be symmetric, namely applicable to all firms like the GDPR for three main reasons:

(i) A non-dominant firm can leverage structural market features such as network effects, data-driven network effects, access to data, economies of scope and scale to become dominant;

(ii) The alleged harmful conducts are not limited to dominant firms (e.g., sharing of data within the firm’s group without the user’s voluntary consent); and

(iii) Consumers would like to enjoy the same rights irrespective of the firm’s size (e.g., consumers would like to port their real-time data in an interoperable format from one provider to another one (so-called data interoperability) irrespective of whether the firm is a “gatekeeper”).

Accordingly, from (i) and (ii) an asymmetric regulation does not prevent the behavior that enables to achieve a dominant position, and therefore another market failure cannot be excluded as noted above. From (iii), it is unfair to deprive consumers control over their data.

The institutional set-up should be at the worldwide level. A World Digital Organization (WDO) should be created. It will be in charge to define common principles and guidelines (e.g., a common interoperability standard) and a participative pro-competitive code of conduct with all stakeholders. It will be able to monitor, and in case of non-compliance of the code, to fine firms.

The participative pro-competitive code of conduct should be based on three principles: (i) efficient competition; (ii) fair competition; and (iii) transparency and choice. It should include the following rules:

- Privacy standards terms and conditions: To ensure effective consent and choice.

- Common metrics on the value of data: To determine the willingness to pay with data to use the services.

- A single personal online identity: To lower transaction and switching costs. Consumers will enable firms to access their data and to track the use of their data thanks to a blockchain.

- Fair, reasonable and non-discriminatory terms and conditions: To ensure fair competition (transparency and non-discriminatory requirements).

- Access to data by business users: To enable business users to compete on a level playing field with the products/services supplied by the online service provider (only to data provided and generated from the business user and its consumers (under the conditions of users’ voluntary consent)).

Finally, consumers should be able to control their data, to switch seamlessly from one provider to another one, and to enjoy the benefit of complementary products/services. Data interoperability, interoperability, and in exceptional cases, data-sharing (only to volunteered data to avoid free-riding and the adverse effects on the incentive to innovate) are required.

Now we must wait for the Commission’s publication on December 15, 2020. Meanwhile, you can read the full paper on which this opinion is based on SSRN.

(your expectation before the DMA)

[1] Pacces, M. A. and Visscher, T. L., Law and Economics – Methodology, Bart van Klink and Sanne Taekema (Eds.), Law and Method. Interdisciplinary research into Law (Series Politika, nr 4), Tübingen: Mohr Siebeck, 2011, pp. 85-107.


Digital Competition


©2020 by Dr. Christophe Carugati (LL.M; M.A)