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Issues of Competition within Digital Markets

by Shrisha Sapkota

case management software, practice management software, legal accounting software, legaltech, technology for lawyers, case management, immigration, london, united kingdom

Digital Markets

The European Commission has defined an online platform as “an undertaking operating in two (or multi) sided markets, which uses the Internet to enable interactions between two or more distinct but interdependent groups of users so as to generate value for at least one of the groups”[1]. “Digital markets” can be defined as online platforms which develop and apply new technologies to existing businesses or create new services using digital capabilities[2]. The backbone of the digital economy is hyperconnectivity that means the growing interconnectedness of people, organisations and machines that results from the Internet, mobile technology and the internet of things (IoT)[3]. The new economy or digital economy is based more in the form of intangibles, information, innovation and creativity, in expanding economic potential[4]. The digital economy is taking shape and undermining conventional notions about how businesses are structured, how firms interact and how consumers obtain services, information and goods[5].

Digitalisation has transformed how we live, learn, earn, work, spend, trade, communicate, invest and innovate[6]. Competition enforcers acknowledge the huge benefits of digitalisation, such as new employment opportunities, greater convenience, personalised products and services, rapid delivery of products, easier social connections, ease of reaching scale for smaller companies and more[7]. Multi-sided, digital platforms are the key players in the digital economy which generate numerous user benefits by lowering transaction costs, introducing new products, enabling new types of transactions and improving the “match” between parties to an exchange[8]. They also facilitate value generation from previously dormant resources, thereby expanding the economy[9]. The characteristics of the digital economy that distinguish them from regular forms of economy are as follows:

a) Extreme Returns to Scale

The cost of production of digital services is much less than proportional to the number of customers served. The digital world pushes it to the extreme and this can result in a significant competitive advantage for incumbents.

b) Network Externalities

 The convenience of using technology or service increases with the number of users that adopt it. Consequently, it is not enough for a new entrant to offer better quality and/or a lower price than the incumbent does; it also has to convince users of the incumbent to coordinate their migration to its own services. Network effects could thus prevent a superior platform from displacing an established incumbent.

c) The Role of Data

The evolution of technology has made it possible for companies to collect, store and use large amounts of data. Data is a crucial input to many online services, production processes and logistics. Therefore, the ability to use data to develop new, innovative services and products is a competitive parameter whose relevance will continue to increase. The nature and characteristics of the digital economy, within which big data is often described as a great economic asset, have changed the fundamental nature of products and services[10]. Data have often become a central element in business models, posing fresh challenges to researchers and policymakers alike[11] Data-enabled businesses are companies that have developed fully digital business models, that would not exist without access to large amounts of data and advanced data analytics(e.g. Amazon, Uber, Twitter, Booking.com and Airbnb)[12]. Data is a new commodity which spawns a lucrative, fast-growing industry, prompting antitrust regulators to step in to restrain those who control its flow. A century ago, the resource in question was oil[13]. Now, similar concerns are being raised by the giants that deal in data, the oil of the digital era[14]. A key difference is that, while oil is obviously a finite and non-reusable resource, data can be infinite and reused – with account taken of ownership and access rights[15].

Digital Market and the Economy

Digital media consumes a large and growing share of our waking lives, but these goods and services go largely uncounted in official measures of economic activity such as the Gross Domestic Product (GDP) and productivity (which is simply GDP per hour worked)[16]. We listen to more and higher quality music, navigate with ease, communicate with coworkers and friends in a rich variety of ways, and enjoy myriad other benefits we couldn’t have imagined forty years ago[17]. But the digital revolution is not indicated clearly in the GDP numbers as the contribution of the information sector as a share of total GDP has barely budged since the 1980s, hovering between four percent and five per cent annually and reaching a high of only five and a half per cent in 2018[18]. To paraphrase the economist Robert Solow, we see the digital age everywhere except in the GDP statistics[19]. Thus, digitalisation now affects almost all aspects of the economy and new digital goods pose great challenges to our current measures of consumer welfare and GDP[20].

Policy makers use GDP data to make decisions about how to invest in everything from infrastructure and R&D to education and cyberdefense[21]. Regulators use it to set policy that affects technology firms and other organisations[22]. Because the benefits of digitisation are dramatically underestimated, those decisions and policies are being made with a poor understanding of reality[23]. Moreover, the current fragmented data landscape fails to capture value that could accrue from digital technologies and it may create more space for substantial harms related to privacy breaches, cyberattacks and other risks.

Effective management of the digital economy depends on our ability to accurately assess the value of free digital goods and services[24]. One challenge is that new digital services are often free at the point of use, especially for data-enabled businesses that rely on network effects for gathering data (i.e. social networks)[25]. However, this does not mean that the data has no value[26]. For example, the market capitalisation of Facebook, which also owns WhatsApp and Instagram, exceeded USD 600 billion in mid-2018 illustrating the considerable value the market believes that revenue streams are based on data collected via “implicit” or “barter” transactions can generate[27].

 

The Need for Regulation of Digital Technologies

The COVID-19 pandemic has accelerated the process of digital transformation which has challenged governments to govern and harness the surge in digital data for the global good[28]. It has been estimated that global Internet traffic in 2022 will exceed all the Internet traffic up to 2016[29]. It is more important than ever to embark on a new path for digital and data governance. Nevertheless, the stakes are high; adopting the wrong approach risks jeopardizing the benefits that digitalisation can deliver[30]. Innovative approaches to governing data and data flows to ensure more equitable distribution of the gains from data flows while addressing risks and concerns are needed[31].

Use of Data and Problems with Competition

The global debate on the extent to which current competition policy rules are sufficient to deal with the fast-moving digital economy has never been more pertinent[32]. An important part of this debate concerns the market power of large high-tech companies that dominate many online markets[33]. Data-dependent markets are also characterised by a high level of concentration and, according to many experts, high entry barriers relating to access to and ownership of data which make it difficult to challenge the incumbent companies[34]. As power in digital markets originates from obtaining data, the current methodology used by competition authorities within industrial markets and applying them to mergers becomes challenging. While large players such as Google and Amazon are generally considered to be very productive and innovative, some studies show that the diffusion of know-how and innovation between the market leaders and the rest of the economy may be affecting competitiveness in general[35].  In the digital space, it is not only goods that are being bought and sold, but our personal data as well, and without being curbed by European law, ‘Big Tech’ companies such as Google, Facebook and Amazon have been able to exploit our presence online by accumulating vast amounts of our personal data, through their own apps and websites in addition to third-party aggregates.

For example, when the Facebook/WhatsApp merger took place, the turnover thresholds of the EC Merger Regulation were not triggered. Nevertheless, national competition authorities and the referral system ensured that a merger of such dominant firms could not take place without evaluation[36].  This regulation was established by the European Union to prevent mergers that may reduce competition in a market, usually by creating or strengthening a dominant player[37]. However, if the European Commission is unaware, then many issues of competition may slip through and harm the internal market. The problem is that the digital markets have challenged the definition of traditionally powerful firms, and thresholds  designed for industrial markets seem to be failing to attain the objectives of EU merger control since more value is being placed on data as an economic asset and merger control thresholds fail to take this into account[38].

Some experts believe that holding a large pool of user data generated by certain digital platforms confers substantial advantages to established companies as they are able to acquire a competitive advantage by means of a mechanism known as a feedback loop, which means improving the quality and value of a firm’s products and services either by using data already at its disposal or by using revenue generated from business users, such as from targeted online advertising[39]. These improvements in turn draw users attracted by higher quality and better-targeted products and services, creating a virtuous cycle that makes it hard for small players to challenge large companies[40]. The exclusive ownership of data may therefore lead to weaker competition. Consequently, the benefits from the feedback loop may not be fully shared with customers, whether there is foul play on the part of large companies or not. The OECD notes that ‘the dominant platform may not do anything that can be properly qualified as anti-competitive, and yet the feedback loop can reinforce dominance and prevent rival platforms from gaining customers’[41].

According to the OECD,  “market power in digital markets is frequently linked to a firm’s ability to accumulate the personal information of users[42].” Additionally, there are a number of recognised market failures due to data ownership and analysis, such as exploiting consumers’ behavioural biases, consumers not able to choose the best course of action, and information asymmetry, consumers not knowing or understanding what data they share[43]. Furthermore, users may be locked into a company if their data cannot be easily transferred, because of the risk of losing it and because many dominant players in the data economy cover the entire online value chain. They link multiple online markets, combining data and generating valuable datasets that cannot be easily replicated[44]. Such ‘ecosystems’ may raise barriers to entry if they integrate complementary services without making them inter-operable with alternative offers, given that potential competitors are then forced to duplicate the broad offer[45].  An example of how data can create entry barriers in the market is the merger case of Bazaarvoice and its rival Power-Reviews, which was questioned by the US Department of Justice in 2014[46]. These two companies operate in the market for ‘rating and review platforms’ and their merger would definitely result in a near monopoly on that specific market, due to network effects, switching costs and high entry barriers which were discussed earlier[47].

Big data and algorithms enable firms to fine-tune their pricing strategies and predict market trends[48] as well, due to which they are at a greater advantage than other firms. Data also becomes an important issue when competitors merge, creating larger datasets and significantly increasing their market power[49]. Moreover, data can be used with the intention of excluding competitors, leading to instances of abuse of a dominant position[50].

Thus, besides the limitation of access to data, the two-sided nature and the control over data which competitors cannot approach, are two additional factors which crucially lead to market concentration and, consequently, to market power[51]. Therefore, there are many issues rising in the digital economy due to data and its uses, affecting competition and without sufficient current laws to regulate it.

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References

[1]https://ec.europa.eu/digital-single-market/en/news/public-consultation-regulatoryenvironment-platforms-online-intermediaries-data-and-cloud.

[2] CMA Digital Markets Strategy.

[3] Ibid

[4] https://www.researchgate.net/publication/271899702_The_Knowledge_Gap/citations

[5] https://www2.deloitte.com/mt/en/pages/technology/articles/mt-what-is-digital-economy.html

[6] https://www.weforum.org/whitepapers/competition-policy-in-a-globalized-digitalized-economy

[7] https://www.weforum.org/whitepapers/competition-policy-in-a-globalized-digitalized-economy

[8]  https://www.weforum.org/whitepapers/competition-policy-in-a-globalized-digitalized-economy

[9] https://www.weforum.org/whitepapers/competition-policy-in-a-globalized-digitalized-economy

[10]  Maurice Stucke and Allen Grunes, Big Data and Competition Policy (OUP 2016) 41.

[11]https://www.oecd-ilibrary.org/docserver/6345995e-en.pdf?expires=1636630018&id=id&accname=guest&checksum=B640FDD1EE2F9228EFE2A3120D9F5184

[12]https://www.oecd-ilibrary.org/docserver/6345995e-en.pdf?expires=1636630018&id=id&accname=guest&checksum=B640FDD1EE2F9228EFE2A3120D9F5184

[13] https://www.economist.com/leaders/2017/05/06/the-worlds-most-valuable-resource-is-no-longer-oil-but-data

[14] https://www.economist.com/leaders/2017/05/06/the-worlds-most-valuable-resource-is-no-longer-oil-but-data

[15]https://www.europarl.europa.eu/RegData/etudes/BRIE/2020/646117/EPRS_BRI(2020)646117_EN.pdf

[16] https://hbr.org/2019/11/how-should-we-measure-the-digital-economy

[17]https://hbr.org/2019/11/how-should-we-measure-the-digital-economy

[18]https://hbr.org/2019/11/how-should-we-measure-the-digital-economy

[19] https://hbr.org/2019/11/how-should-we-measure-the-digital-economy

[20]https://www.oecd-ilibrary.org/docserver/6345995e-en.pdf expires=1636630018&id=id&accname=guest&checksum=B640FDD1EE2F9228EFE2A3120D9F5184

[21] https://hbr.org/2019/11/how-should-we-measure-the-digital-economy

[22] https://hbr.org/2019/11/how-should-we-measure-the-digital-economy

[23] https://hbr.org/2019/11/how-should-we-measure-the-digital-economy

 

[24] https://hbr.org/2019/11/how-should-we-measure-the-digital-economy

[25]https://www.oecd-ilibrary.org/docserver/6345995e-en.pdf?expires=1636630018&id=id&accname=guest&checksum=B640FDD1EE2F9228EFE2A3120D9F5184

[26]https://www.oecd-ilibrary.org/docserver/6345995e-en.pdf?expires=1636630018&id=id&accname=guest&checksum=B640FDD1EE2F9228EFE2A3120D9F5184

[27]https://www.oecd-ilibrary.org/docserver/6345995e-en.pdf?expires=1636630018&id=id&accname=guest&checksum=B640FDD1EE2F9228EFE2A3120D9F5184

 

[28] https://unctad.org/system/files/official-document/der2021_overview_en_0.pdf

[29] https://unctad.org/system/files/official-document/der2021_overview_en_0.pdf

[30] https://www.weforum.org/whitepapers/competition-policy-in-a-globalized-digitalized-economy

[31] https://unctad.org/system/files/official-document/der2021_overview_en_0.pdf

[32]https://www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_BRI(2020)646117

[33] https://www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_BRI(2020)646117

[34] https://www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_BRI(2020)646117

[35] https://www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_BRI(2020)646117

[36] Eleonora Ocello, Cristina Sjödin and Anatoly Subočs, ‘What’s Up with Merger Control in the Digital Sector? Lessons from the Facebook/Whatsapp EU Merger Case’ [2015] Competition Merger Brief 2,

[37] https://ec.europa.eu/competition-policy/mergers_en

[38] 5 Sanem Koçak, ‘Alternative Merger Control Thresholds in Technology Markets’ (Master’s thesis, University of Amsterdam 2018) 8; Éva Miskolczi-Bodnár, ‘Big Data and Competition Policy in the European Union’ [2021] Baltic Yearbook of International Law 72, 73.

[39] https://www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_BRI(2020)646117

[40] https://www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_BRI(2020)646117

[41] https://www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_BRI(2020)646117

[42]  OECD, ‘The Digital Economy’, DAF/COMP (2012)22, 07 February 2013, p. 121. Available at http://www.oecd.org/daf/competition/The-Digital-Economy-2012.pdf

[43] https://www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_BRI(2020)646117

[44] https://www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_BRI(2020)646117

[45]https://www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_BRI(2020)646117

[46] DOJ, Antitrust Division, Competitive Impact Statement, 13-cv-00133 WHO, dated 08.05.2014, https://www.justice.gov/atr/case-document/file/488826/download

[47] ibid

[48]  https://www.weforum.org/whitepapers/competition-policy-in-a-globalized-digitalized-economy

[49]https://www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_BRI(2020)646117

[50]https://www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_BRI(2020)646117

[51] Competition and Markets Authority, ‘The commercial use of consumer data’, CMA 38, June 2015, p. 89.

Available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/435817/The_commercial_use_of_consumer_data.pdf