The giant digital companies are reaching the end of their era of light touch regulation. One focus of the policy debate has been competition, or rather the lack of it, in markets dominated by just one major player, such as Google in search or Facebook in social media. If there were more effective competition, at least some of the negative behaviours by the titans, such as disregard for personal privacy or discrimination against other services, would be constrained.
Today brought the publication of the report into the operation of digital markets by an expert panel set up by the UK’s Chancellor of the Exchequer. I was a member of this panel, chaired by Professor Jason Furman of Harvard’s Kennedy School. The report, Unlocking Digital Competition, joins a series of recent inquiries in countries from Australia to Germany advocating policy measures to address the negative side of digital markets – not to mention the proposal from US presidential hopeful Elizabeth Warren last week that the companies should be broken up.
Our report describes some of the features of digital technology that help explain why these markets are in so many cases dominated by giant companies such as Google and Facebook. There are significant upfront costs in many cases, leading to large economies of scale. These are augmented by network effects, which mean the benefits for users of the technologies are greater the more users are already on the platform. In other words, massive scale brings large benefits as well as potential costs. These features mean digital markets are often winner-takes-all, or at least winner-takes-most.
In terms of competition and the economic effects (as opposed to other, non-economic, features of digital markets policymakers rightly care about) of a lack of competition, it is often the case that large current benefits for users need to be weighed against potentially larger future costs. These take the form of investment and innovation that may not happen, because new innovators cannot successfully enter the market and compete with a better service or technology. A related concern is the way large digital companies have taken over many – hundreds in fact – of small, innovative companies. None of these mergers, including examples such as Facebook acquiring Instagram and WhatsApp, has been blocked by competition authorities.
Effective policies to enable more effective competition in digital markets need to include therefore both a faster and more forward-looking process to police acquisitions, and measures to make it easier for new entrants to gain a foothold and grow. On the former, our report recommends an update of the UK’s Competition and Markets Authority (CMA), and a legal framework making it easier for the CMA to enforce forward-looking assessments of digital markets. For example, it ought to be able to take into account a succession of acquisitions rather than having to consider each on its own. If implemented by the Government, our proposals will mark a significant change in the competition framework.
In terms of making it easier for new entrants into the market, we recommend the creation of a digital markets unit, which will be able to designate some platforms as having ‘strategic market status’, requiring them to adhere to a code of conduct. The unit will also be charged with developing and enforcing open and interoperable standards for data and personal data mobility, to reduce the barrier to newcomers created by the accumulation and linking of personal data by the incumbents.
Competition policy is only one piece of the regulatory framework in which all businesses operate. Digital platforms are coming under scrutiny in many other ways too, and will need to change their behaviours significantly. In the UK, in addition to recent reports from the House of Lords and the Cairncross Review, a White Paper is due from DCMS on controlling digital harms. With a growing number of other countries also considering how to constrain the digital giants, the more international co-operation is possible in areas such as setting open data standards and developing a shared economic analysis of the competition dynamics in digital markets, the better.
The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.
