Information rules (Part 4: Regulating platforms – Paradigms for competition)
Phuah Eng Chye (19 December 2020)
Platformed corporations challenge the law’s capabilities and legislators’ willingness to sustain checks and balances in both global and national markets, noting, for instance, that current competition law fails to address the kind of issues raised. This has sparked debates about a so-called platform economy, suggesting that the rise of data-driven platforms generates new types of affordances for citizens, users, consumers, customers, corporations, self-employed service providers, governments, legislators, regulators, publishers, advertisers, and others. Some proclaim the advent of a new type of capitalism, coining it platform capitalism, building on earlier work concerning informational and surveillance capitalism. The issue with platforms is that they have become constitutive of human society in a number of ways and will continue to reconfigure and reconstitute employment, education, political discourse and decision making, healthcare and medicine, and the supply and distribution of energy. The extent to which everyday life has become rooted in an onlife world run by a set of global platforms raises the question to what extent our agency is being diminished, overruled and tweaked in function of a corporate profit that is based in the quest for ever more behavioral data to further approximate the mathematical functions that supposedly determine our interactions. Platforms redefine the space (1) for generating new meaning, and (2) for experimenting and playing around with new ways of seeing the same thing. They also redefine (3) the space for resistance against old and new ways of addressing us as parents, employees, students, employers, passengers, drivers, consumers, citizens, or service providers. As a result of combining a seamless data-driven pseudo-omniscience with a sequence of market failures, we may be facing the loss of semantic discontinuity that is key to a society that fosters and protects the capabilities of individual human beings, their participation in a viable democracy, and the checks and balances of an effective Rule of Law. Mireille Hildebrandt (July 2018) “Primitives of legal protection in the era of data-driven platforms”.
Rising political heat and policy reviews[1] heralded a flurry of regulatory initiatives that aim to reduce conflicts of interest through structural separations and line of business restrictions; prevent discrimination, favoritism, and self-preferencing; restrict mergers and take-overs; prohibit abuse of bargaining power and require due process; and promote interoperability, open access and data portability. Draft legislation has been rolled out in the EU[2], India and China[3] while US states have launched a spate of lawsuits against the tech giants.
The remedies being sought however are still largely based on the traditional paradigms. There is still an ongoing debate on the need to re-conceptualise competition theories to make it more meaningful in an information paradigm. The BRICS Competition Law and Policy Centre suggests “the current policy responses to these challenges posed by advances of the digital economy are often falling into a mechanistic trap, the mechanistic legal tradition established during the previous stages of the industrial development. This often leads to fragmented and disconnected legal regimes for each of the digital economy phenomena (i.e. big data, digital platforms, social networks and AI), without any effort to define an integral vision for a digital future that is desirable from a social contract perspective. This mechanistic approach helps to retain the status-quo without establishing strong, transnational, countervailing regulatory regime(s) for the digital giants”.
K. Sabeel Rahman notes the “various mechanisms – regulatory oversight, antitrust laws, corporate governance, and the countervailing power of organized labor – together helped create a relatively tame, and economically dynamic, twentieth-century economy. But today, as technology creates new kinds of power and new kinds of scale, new variations on these strategies may be needed”. He suggests the new forms of power “are more subtle than explicit control: each of these types of power enable a firm to exercise tremendous influence over what might otherwise look like a decentralized and diffused system. This is the paradox of technological power in a networked age. Where a decade or two ago, these technologies may have seemed intrinsically decentralizing, they have in fact enabled new forms of concentrated power and control through transmission, gateways, and scoring. These forms of power, furthermore, often operate in the background, opaque and hidden from view. This makes them harder to challenge and contest…we must also create new forms of countervailing civic power. We must build a new civic infrastructure that imposes new kinds of checks and balances. But where new firms, however innovative, outstrip our ability to assure their accountability, then we have to ask hard questions about whether we want to pursue such innovation in the first place”.
Jacques Crémer, Yves-Alexandre de Montjoye and Heike Schweitzer points out “changes in the competitive landscape…have revived some long-standing debates about competition policy – debates about goals and about the interpretation and implementation of competition rules in the light of these goals; about how to consider innovation in applying competition rules, about methodologies that help us to determine relevant markets, market power and harm to competition; about the right degree of enforcement and the risks and cost of enforcement errors; about possible adjustments to procedural rules to ensure efficient enforcement in fast-moving times; and finally about the role of competition policy within the wider set of public policies, including data protection rules and fair trading rules. Despite the differences between the economics of the digital sector and those of other sectors of the economy, it is widely accepted, and we concur, that vigorous competition continues to be the best way to serve the interests of consumers and the economy as a whole…However…The specificities of platforms, digital ecosystems and the data economy require adaptation and refinement of established concepts, doctrines and methodologies, and competition law enforcement itself”. Some key areas of the debate are as follows.
Anti-trust and size
Anti-trust, a concept underpinning competition regulation, is closely tied to exploitation of size or concentration. K. Sabeel Rahman notes early 20th century reformers feared size “as a fundamental threat to liberty, opportunity, and democracy. By virtue of their control over these foundational goods and services, private firms could extract greater profits from the public. If the essence of arbitrary, authoritarian governance was the concentration of unchecked power, then these firms represented a profoundly oligarchical mode of social order, where the public good remained dependent on the will and whims of chairmans and chief executives”. Remedies include introducing “structural limits on technologies with the goal of precluding dangerous concentrations of power”, antitrust-style restrictions to reduce problematic conflicts of interest, and “the conversion of infrastructures into public options” or state managed alternatives operating “on equitable, inclusive, and nondiscriminatory principles…supplying a public option would put competitive pressures on private providers”.
However, as size[5] is an information effect and an inevitable outcome, this changes the context of the debate. Jean Tirole[6] explains “at the platform level, competition confronts the existence of large returns to scale and/or network externalities, leading to natural monopoly situations and a winner-take-all scenario…Natural monopoly situations lead to widespread market power, and a concomitant willingness to lose money for a long time to buy the prospect of a future monopoly position…Here we need to distinguish between statics and dynamics, or between a transient monopoly and a permanent one. Large economies of scale as well as substantial network externalities imply that we often have monopolies or tight oligopolies in the new economy. The key issue is that of contestability. Monopolies are not ideal, but they deliver value to the consumers as long as potential competition keeps them on their toes. They will then be forced to innovate and possibly even to charge low prices so as to preserve a large installed base and try to make it difficult for the entrants to dislodge them. But for such competition to operate, two conditions are necessary: Efficient rivals must, first, be able to enter and, second, enter when able to. In practice, they may find it difficult to enter a market. And if they successfully enter, they may find it more profitable to be swallowed up by the incumbent rather than to compete with it. In economics parlance, such entries for buyout create very little social value as they are mainly a mechanism for the entrant to appropriate a piece of the dominant firm’s rent”.
Jean Tirole points out “breaking up firms only for the sake of reducing their power may fail to accomplish our goals. For example, breaking up Facebook into five Facebooks would do little to address privacy concerns…Regarding internet platforms…First, it takes time to implement divestitures. Railroads and electricity, and to a large extent telecoms in 1984, were simple and stable technologies. By contrast, the current platforms are rapidly evolving. We must make sure that the intervention is not obsolete by the time it is implemented. Second…to break up a firm, we must identify the essential facility – characterized by natural monopoly features – that separates it from potentially competitive segments, and make sure that the essential facility does not succeed in monopolizing back these potentially competitive segments. This can happen either through a line-of-business restriction or the monitoring of fair access to the essential facility. An electricity company can be broken up in relatively clear segments, like generation, transmission, and distribution, with the transmission grid clearly being the essential facility…Let us assume that we identify Google’s search engine as the essential facility and sever it from YouTube, Waze, and Gmail. One issue is whether the search engine would be as efficient at answering our requests if deprived of the data gleaned from other services. Overall, if structural remedies should not just be swept aside, much more thought needs to be given before using them”.
Jean Tirole says “this difficulty is compounded by measurement issues…there are many potential future dominant firms, and regulators cannot monitor their expenditures at the start-up stage. The second measurement issue is on the revenue side, associated with the international nature of the platforms’ activity. Platforms already choose the location of their intangibles – patents, data, and so on – to minimize taxes. They could do so to derail utility-style regulation as well. Overall, public utility regulation does not seem an option”.
While platforms share some features with traditional monopolies such as dominance and reach, other features are dissimilar. First, traditional monopolies largely arose from vertical integration in a physical environment. In contrast, platforms achieve scale by aggregating information across many fronts. This provides platforms an advantage, even against large competitors who operate in single or fewer dimensions. Platforms also enjoy substantial flexibility in terms of configuring the physical operations.
Second, concentration occurs simultaneously with fragmentation[7]. For example, it is intermediation function that becomes concentrated while there is a fragmentation of market venues and product permutations; reflecting long tail effects[8]. It should be recognised these trends are transient rather than permanent; sometimes favouring big players and consolidation and, at other times favouring small players and fragmentation. Platform competition concerns can therefore be tiered into the market and product, and the intermediation levels. Market and product competition issues relates to the end-consumer and are commonly addressed by differential or tiered regulation. Intermediation competition issues revolve around the distribution of market share and value among (usually large) intermediaries and players and a light regulation approach is usually adopted in the wholesale segment. Competition can also be supported by conducive policies to encourage new entrants.
Third, platforms comprise a diverse range of business models which are dynamic and constantly changing. This makes it difficult to apply industry or uniform regulation as the incentives, strategies, concerns and circumstances vary substantially. Fourth, platform dominance is global rather than national or segmented. Therefore, regulation too needs to be globally aligned; otherwise gaps and overlaps will emerge.
The fact that the threats to competition work differently from those described in traditional anti-trust theories makes it difficult to find evidence to prove that size creates harm. Breaking up the platform giants may come to naught given the innate tendency towards rapid scalability and concentration. Hence, it may be more effective to address the platforms ability to aggregate and use information directly to check anticompetitive behavior.
Competition and information
Traditional competition policy tools appear outdated; in particular the consumer welfare standard. In traditional models, monopolistic intent is easily detected through higher prices. In contrast, platforms seek to achieve dominance by lowering prices which is considered to deliver benefits to consumers.
Jean Tirole argues “old-style regulation has a hard time finding its footing…For example, cost-of-service regulation looks at realized cost and sets prices so as to enable the firm to recoup its cost. It is very hard to implement in tech industries, despite the fact that they are high-fixed-cost industries like utilities. To enable cost recovery, one must estimate and factor in the estimated low and, more importantly, unobserved probability of success. Because most platforms fail, a non-negligible profit is needed to recoup costs, but one has little information about how much is needed. A good analogy is here provided by the case of drugs: also a high fixed cost, low probability of success, low marginal cost activity”.
In this context, many platforms were loss-making for a lengthy period of time but nonetheless continued to received funding from investors. The high rate of corporate casualties has neither discouraged investments nor lessened competitive intensity in these businesses.
Jean Tirole concludes “first, we need to reconsider our burden of proof in antitrust decisions…The suppression of competition in the absence of data is hard to prove…Second, economists must help antitrust authorities to identify harmful behaviors and design simple remedies. For example, best-price guarantees, also called most-favored-nation or price parity clauses, guarantee that the consumer will benefit from the lowest price on a good or service when using the platform…Third, jurisdictional issues have become more acute with the digital economy. We must insist on a level playing field and not impose different regulations on different competitors on the basis of an arbitrary industry classification and industry-specific regulations. For instance, traditional media are more constrained in editorial responsibility and advertising than social media. To create a level playing field as well as to increase efficiency, we must also insist on international harmonization of intellectual property rights and taxation, and make sure that global companies are not exposed to a large number of heterogeneous and incoherent regional regulations”.
Jacques Crémer, Yves-Alexandre de Montjoye and Heike Schweitzer note “generally speaking, theories of consumer harm can relate to any type of negative effects, whether on price, output, choice, quality or innovation. In its broad principles, the consumer welfare standard only states that real harm to real people is the reason competition should be defended. In practice, however, the effects analysis has often focused on identifiable consumer harm, and in particular on likely short-run and price-based effects. Another problem of market definition arises when a dynamic market environment leads to fluid, quickly-changing relationships of substitutability and possibly partial overlaps of varying significance between different services, sometimes combined with practices of multihoming and/or changing perceptions of consumer needs. Many experts argue, for example, that demand for cars is turning into a broader demand for mobility…The digital economy is characterised by a high degree of innovation and rapid changes in the markets. Furthermore, its economics are new and very different from those of standard industries. As a consequence, it is clear that there will be uncertainty about the consequences of any competition policy intervention or non-intervention”.
Non-price effects are significant for platforms and this makes quantification difficult. Cristina Caffarra, Federico Etro, Oliver Latham and Fiona Scott Morton argue “a platform might want to undermine certain complementary services because they constitute potential dynamic threats to the platform’s core monopoly… understand how pricing constraints – e.g. the need to set a zero price on certain consumer-facing services – can generate inefficiencies which incentivise colonisation of adjacent markets on the part of platforms. It is important to set a proper basis for non-price regulation because it points to the type of remedies that would be appropriate as well as practical.
In this context, platforms generally make economies more transactional. This suggests platforms should be regulated like market venues. Market regulation aims to ensure markets are fair and orderly; and that participants, especially the small players, are protected. The relevant regulators should exercise oversight to ensure platforms do not engage in abusive conduct such as unfair contracts (with customers, suppliers, labour and competitors) or anticompetitive conduct (exclusionary agreements, lock up distribution channels and block rivals). Potential remedies include the standardisation of contracts, disclosures, governance structures and audits.
Cristina Caffarra, Federico Etro, Oliver Latham and Fiona Scott Morton note the dual role of platforms in setting “the rules of the game for third parties that operate and create joint value on their ecosystem…where the platform owner also supplies services in competition with these third parties” are being scrutinised. In this regard, “business models matter fundamentally when one is evaluating the dual role of platform owners as umpires and players in their ecosystem. At a general level, platforms that monetise on the consumer side (through the sale of a product, or consumer-side commissions on transactions) are those that best internalise the interest of consumers in their interactions with third-party players, relative to ad-funded platforms. This fundamental distinction is important to explain why we cannot just assume that, if internet businesses/aggregators like Google were found to have strong incentives to engage in self-preferencing, other platforms that operate a very different business model also inevitably have the same incentives – i.e. we cannot map the exact same concerns merrily across all internet businesses and platforms. Rather, economists will have to create models that capture the incentives of each platform and rigorously evaluate the concerns”.
The distribution of information is also critical in promoting competition. The question of whether platform ecosystems are competitive enough can be replaced by the question of whether they are transparent enough. Information-based remedies include disclosure and data sharing as means of addressing information asymmetries and promoting two-sided markets.
Jacques Crémer, Yves-Alexandre de Montjoye and Heike Schweitzer highlights “the consequences of the economics of data for competition policy. Data is an indispensable input for providing digital services. However, data markets, data sharing and data pooling arrangements are not fully developed. The shape these markets will take, and the extent to which they will allocate data access efficiently, will depend on a general legal framework that is yet to be clearly defined, and on the emergence of institutions that facilitate the management of consent into the processing of personal data. A good legal framework will take much of the pressure away from competition law. Legislation should give guidance to firms on what is allowed and not allowed if we want them to share data pro-actively…a dominant firm must provide data access, under some form of data portability or interoperability requirements…we believe it to be one of the instruments that can keep markets open”.
Dina Srinivasan adds “Google dominates advertising markets by engaging in conduct that lawmakers prohibit in other electronic trading markets: Google’s exchange shares superior trading information and speed with the Google-owned intermediaries, Google steers buy and sell orders to its exchange and websites (Search & YouTube), and Google abuses its access to inside information”. He notes equity exchanges are required “to provide traders with fair access to data and speed”, “manage intermediary conflicts of interest”, and “provide trading disclosures to help police the market”. He suggests market principles can be applied to protect the integrity of advertising on platforms.
One interesting dilemma is the confusion over whether transparency aids or hinders collusion. If data is visible or easily accessible, competitors could easily figure out cooperative strategies that are beneficial to them and detrimental to customers. This is analysed in a report by the Autorité de la concurrence and Bundeskartellamt which highlights the “potential detrimental effects of such algorithms on competition and the different ways in which they may affect strategic interactions between companies, potentially leading to horizontal collusion”. Ariel Ezrachi and Maurice E. Stucke note “as pricing mechanisms shift to computer pricing algorithms, so too will the types of collusion. We are shifting from the world where executives expressly collude in smoke-filled hotel rooms to a world where pricing algorithms continually monitor and adjust to each other’s prices and market data”. Hence, there was a need to consider “the application of competition law to an advanced computerised trade environment”.
Jacques Crémer, Yves-Alexandre de Montjoye and Heike Schweitzer argue platforms need to be more forthcoming or transparent about their functioning as “there exist many aspects of their functioning which are not well understood, either by academics or by competition authorities…While respecting business secrets, public authorities should arguably find ways to ensure a sufficient understanding of how platforms work…The information needed for this endeavour might need to reach beyond the already existing possibilities to get full access to data and algorithms in the context of competition law cases…While direct data access or algorithmics and boxing might not always be possible, action by platforms to actively prevent research in the public interest – from technical measures purposely designed to prevent transparency to legal measures such as making studies contractually inadmissible (e.g. against Terms of Service) or criminal (e.g. under the U.S. Computer Fraud Act) – should be viewed with great suspicion”.
Overall, Jacques Crémer, Yves-Alexandre de Montjoye and Heike Schweitzer “do not think that there is a need to rethink the fundamental goals of competition law in the light of the digital revolution. But we argue that we have to adapt its methodologies and analytical tools, economic theories of harm and legal doctrines to the new environment. This is to take account not only of the development of new entrepreneurial strategies of firms in reaction to the new ways markets function but also in the light of a change in error costs. Where particularly strong positions of market power are protected by high and non-transitory barriers to entry, competition policy has reason to err rather on the side of those who propose to challenge such market power and/or to innovate independently”.
Conclusions
The main rationale for regulating platforms is its impact on competition. A handful of global platforms have become dominant across markets and countries. While policy-makers in many countries are applying traditional competition regulation, this is likely to prove insufficient. The ills of platform dominance are not limited to competition. Platforms are the mainstay of the information society. Currently, they are controlled by the private sector which means they are used to maximise trade and profit rather than public objectives. From a risk perspective, platform concentration gets amplified into economic inequalities while platform failure poses systemic risks.
Regulatory reform of platforms should therefore not be confined to resetting competition rules. The regulatory agenda needs to be broadened to address platform domination of information and to achieve public policy goals. In this context, there is a need to address platform monopoly from an information perspective. Platforms should not be allowed to hoard data and regulations should ensure that regulators and other stakeholders get fair access to the information they need. The other area that requires much attention is the regulation of content because of its importance to a democracy.
References
Adriana Nunez (11 November 2020) “Amazon, Google, and Alibaba face anticompetitive investigations from governments in the EU, China, and India”. Business Insider. https://www.businessinsider.com/amazon-google-alibaba-face-antitrust-probes-from-eu-china-india-2020-11
Allison Schrager (27 June 2018) “A Nobel-winning economist’s guide to taming tech monopolies”. Quartz. https://qz.com/1310266/nobel-winning-economist-jean-tirole-on-how-to-regulate-tech-monopolies/?utm_source=reddit.com
Ariel Ezrachi, Maurice E. Stucke (April 8, 2015) “Artificial intelligence & collusion: When computers inhibit competition”. University of Illinois Law Review Vol. 2017; Oxford Legal Studies Research Paper No. 18/2015; University of Tennessee Legal Studies Research Paper No. 267. https://ssrn.com/abstract=2591874 or http://dx.doi.org/10.2139/ssrn.2591874
Autorité de la concurrence, Bundeskartellamt (2019) “Algorithms and competition”. https://www.bundeskartellamt.de/SharedDocs/Publikation/EN/Berichte/Algorithms_and_Competition_Working-Paper.pdf?__blob=publicationFile&v=5
BRICS Competition Law and Policy Centre (2019) “Digital era competition: A BRICS view”. http://bricscompetition.org/upload/iblock/6a1/brics%20book%20full.pdf
Cristina Caffarra, Federico Etro, Oliver Latham, Fiona Scott Morton (4 June 2020) “Designing regulation for digital platforms: Why economists need to work on business models”. Voxeu. https://voxeu.org/article/designing-regulation-digital-platforms
Dina Srinivasan (December 9, 2019) “Why Google dominates advertising markets”. Stan. Tech. L. Rev. https://ssrn.com/abstract=3500919
Jacques Crémer, Yves-Alexandre de Montjoye, Heike Schweitzer (2019) “Competition policy for the digital era”. Directorate-General for Competition, European Commission. http://ec.europa.eu/competition/publications/reports/kd0419345enn.pdf
K. Sabeel Rahman (April 2018) “The new octopus”. Logic. https://logicmag.io/04-the-new-octopus/
Mark Scott, Thibault Larger, Laura Kayali (15 December 2020) “Europe rewrites rulebook for digital age”. Politico. https://www.politico.eu/article/europe-digital-markets-act-services-act-tech-competition-rules-margrethe-vestager-thierry-breton/
Mireille Hildebrandt (July 2018) “Primitives of legal protection in the era of data-driven platforms”. Georgetown Law Technology Review. https://georgetownlawtechreview.org/wp-content/uploads/2018/07/2.2-Hildebrandt-pp-252-73.pdf
Phuah Eng Chye (2015) Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.
Phuah Eng Chye (10 October 2020) “Hayek: The coordination problem, prices and information”. http://economicsofinformationsociety.com/hayek-the-coordination-problem-prices-and-information/
Phuah Eng Chye (24 October 2020) “Hayek: Economic models in the pandemic and information society”. http://economicsofinformationsociety.com/hayek-economic-models-in-the-context-of-a-pandemic-and-the-information-society/
Phuah Eng Chye (7 November 2020) “Information rules (Part 1: Law, code and changing rules of the game)”. http://economicsofinformationsociety.com/information-rules-part-1-law-code-and-changing-rules-of-the-game/
Phuah Eng Chye (21 November 2020) “Information rules (Part 2: Capitalism, democracy and the path forward)”.
Phuah Eng Chye (5 December 2020) “Information rules (Part 3: Regulating platforms – Reviews, models and challenges)”.
Sofia Baruzzi (16 December 2020) “China releases anti-monopoly guidelines for its platform economy”. China Briefing. https://www.china-briefing.com/news/china-releases-anti-monopoly-guidelines-for-its-platform-economy/
Subcommittee on Antitrust Commercial and Administrative Law of the Committee on the Judiciary (2020) “Investigation of competition in digital markets: Majority staff report and recommendations”. https://int.nyt.com/data/documenttools/house-antitrust-report-on-big-tech/b2ec22cf340e1af1/full.pdf
[1] See Subcommittee on Antitrust Commercial and Administrative Law of the Committee on the Judiciary.
[2] See Mark Scott, Thibault Larger and Laura Kayali on EU’s proposed Digital Markets Act and Digital Services Act; and Adriana Nunez on anticompetition investigations in the EU, China, and India.
[3] See Sofia Baruzzi on draft “Guidelines for anti-monopoly in the platform economy” issued by China’s State Administration for Market Regulation (SAMR).
[5] From information effects such as size and convergence. See Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society
[6] Jean Tirole’s comments are based on his interview by Allison Schrager.
[7] See Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.
[8] Long tail effects are created by falling production, storage and distribution costs and is a feature of digitalization.