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The Paradox of EU Ex-Ante Market Regulation for Gatekeepers

· May 19, 2020

There is an ongoing campaign by tech competitors urging governments to do something about big tech, and then showering them with praise when they do. But basing policy choices on shallow rhetoric and special interests instead of sound evidence risks unintended consequences for the broader economy. The risk is greatest where justifications for policy choices are incoherent. The paradox of ex-ante market regulation as applied to digital “gatekeepers” is the latest example.

In February the European Commission publicly prioritised the study of “ex-ante rules to ensure that markets characterised by large platforms with significant network effects acting as gate-keepers, remain fair and contestable for innovators, businesses, and new market entrants.” Similar phrasing has been used by the Council of the European Union and the European Parliament. But these statements leave unanswered questions of justification: what markets are these platforms gatekeepers to, which exhibit such market failures justifying new ex-ante regulation? Are they really “gatekeepers” to these markets? There are three possible interpretations and three accompanying policy prescriptions, all three of which are, to put it bluntly, paradoxical.

“Regulating Gatekeepers to All Markets”

A broad interpretation of the statement posits that platforms are gate-keepers to commerce as such, that they are holding-up supply chains and harming consumer welfare, and that current antitrust enforcement has been insufficient. Accordingly, the increasing competitive threat means that Governments should put a straight-jacket on big tech. While popular amongst the anti-tech lobbies, this prescription is paradoxical in light of evidence.

In 2010,  the OECD was telling us that internet intermediaries “stimulate employment and entrepreneurship by lowering the barriers to starting and operating small businesses and by creating opportunities for ‘long-tail’ economic transactions to occur that were not previously possible, whereby businesses can sell a large number of unique items, each in relatively small quantities.” Has this changed? Digital technologies are disrupting existing gatekeepers, lowering transaction costs and opening markets to global choices. Big and small suppliers can reach customers directly through the internet. Creators no longer have to rely on a radio station to play their song, a TV exec to tell their story, a publisher to approve of their talent, or a retailer to sell their creations. The long-tail of supply increases competition. Increasing competition lowers prices, increases availability, and spurs innovation. Consumers can more easily read reviews, compare offers, and choose what’s right for them. It also means that traditional gatekeepers in these industries, like legacy incumbents, have been under intense competitive pressure, and may use political influence to produce new regulations that cripple entrants chipping away at their businesses. 

Hitchens’s razor states that what can be asserted without evidence can also be dismissed without evidence (“quod grātīs asseritur, grātīs negātur”). Accepting that digital intermediaries are raising entry barriers and acting as gatekeepers despite the evidence, and then restraining digital intermediaries would paradoxically result in raising entry barriers, shielding large incumbents from competition from the long-tail of supply, harming SME suppliers, and ultimately, reducing consumer welfare. The European Commission has previously acted on behalf of competition, efficiency and the wider economy, against the interests of large incumbents, why change course now?

Regulating Gatekeepers to E-Commerce”

Another interpretation is that digital platforms are gatekeepers to e-commerce, that the efficiencies of their features and services and their value to suppliers and consumers are so great that they are unavoidable online trading partners. Their according market power must be restrained so that the increasingly important online world remains open, fair and contestable. This interpretation is a bit more reasonable, but the prescription is still paradoxical.

The interpretation is reasonable because, for most of us, the familiar names have been around since the internet began. We might correlate that with market power and anticompetitive leveraging. We might not know that those familiar technology companies are the biggest spenders on research and development. They do this because they have to compete for success, they have to compete with other options. The traditional competition law framework posits that antitrust should not punish the successful competitor. It is success that drives companies to compete and improve, whether large US platforms, or smaller innovative European ones. Competition stimulated by digital technologies has also driven incumbent industries to improve their offers to the benefit of consumers, and introduced new choices that weren’t available before digital disruption (with recent examples in audiovisual content, retail, and consumer goods). Some players have been slower to respond, but where demand exceeds the capability of existing services, we see  the rapid growth of recent technologically adept entrants. Altogether, this suggests that large digital players have a lead due to their past investments, that older industry players are catching up, and that new players are pushing the envelope with new features and functionalities. In a world where technology companies are lowering entry barriers and introducing consumers to untapped sources of supply, and where new entrants are able to scale and compete effectively, what is the policy concern? In a system that seeks to promote innovation, competitive efficiency, open markets and level playing-fields, regulating a handful of companies, absent any evidence of anticompetitive conduct, would be a paradoxical prescription. Surely, the Commission’s commitment to these core principles has not waivered?

“Regulating their Marketplace

Lastly, there is the interpretation that digital intermediaries are gatekeepers to their proprietary marketplaces. They build and manage multi-sided ecosystems that benefit both the suppliers and the buyers participating in that marketplaces, and they control what suppliers get in, and what rules they have to follow inside the marketplace. This control means their decisions can distort competition, particularly where they themselves compete with the suppliers. It’s the most familiar. And yet paradoxical: while platform operators may have the ability to distort competition on their platform, they do not have the motive. 

After all, digital intermediaries compete vigorously with incumbent businesses by matching demand to the long-tail of supply. If they aren’t meeting some customer demand, customers can go directly to the suppliers they prefer. Any action that is harmful to suppliers would be self-defeating and irrational because intermediaries rely on attracting and keeping a vibrant and active supply-side. Stimulating supply-side competition, spurring innovation, may be the most efficient way to improve the service for the demand-side. As the Competition Policy for the Digital Era Report readily admits, “because its economics are not yet completely understood, it is extremely difficult to estimate consumer welfare effects of specific practices. … our insights into possible countervailing efficiencies are still evolving“. Distinguishing between legitimate competitive activity and anticompetitive foreclosure should probably be done on a case-by-case basis. There is an existing, globally recognised, multilateral framework for doing so. In March,  the US FTC Commissioner Christine Wilson advised that “[a]s antitrust regulators, when we encounter new products that are changing the landscape, we must resist the temptation to declare a state of crisis, to heed the populist clamoring to act first and ask questions later. In today’s dynamic markets, abandoning our antitrust principles can cause real harm”. 

The EU should be careful not to abandon its core antitrust principles absent objective evidence of systemic market failure. The OECD reminds us that “efficiency should be promoted and that competition should be stimulated and maximised except in cases of market failure.” We should avoid distorting internal markets and unintended side-effects. That’s not to say all regulation is necessarily problematic. The EU already regulates platforms to address market failures with respect to data usage and various other dimensions. New rules and obligations (incl. at national level) are imposed on digital companies on an almost daily basis. Traditional competition policy appears to be working, but that doesn’t mean intervention can’t make markets work better, whether through consistent competition enforcement, or regulation that is well-designed and responsive to evidence. There aren’t really two sides to this debate; everyone should want markets to work better, for companies and for consumers. To that end, and given the paradoxes outlined above, one can legitimately be concerned that the contemplated ex-ante market regulation risks unintended consequences.

European Union

DisCo is dedicated to examining technology and policy at a global scale.  Developments in the European Union play a considerable role in shaping both European and global technology markets.  EU regulations related to copyright, competition, privacy, innovation, and trade all affect the international development of technology and tech markets.