Author: CFI.co Blogger

Competition law and policy can help ensure open and accessible markets with fair and reasonable terms for businesses

Digital platforms are at the centre of the global economy and daily lives of consumers.

A handful of these platforms have become dominant in specific markets without facing meaningful competition. They include Amazon as a marketplace, Facebook in social networking, Google in search engines and Apple and Google in application stores.

Digital platforms rely on big data and are characterized as multisided markets with economies of scale, network effects and winner-takes-all features.

These firms offer their products for “free” on one side of the market and earn revenues from online advertising and selling user data on the other side of the market.

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• Restoring competition in “winner-took-all” digital platform markets

The growing market power of these platforms raises concerns not only for consumers and smaller businesses but also for competition authorities.

Consumers not in control

Consumers can no longer control the use of their data.

Smaller businesses face unfair market conditions, where they compete with big platforms that offer services by self-preferencing their own products. It is now widely recognized that these markets cannot self-correct.

What needs to be done?

One effective response is competition law and policy that promotes open and accessible markets with fair and reasonable terms for businesses.

This goal is more pronounced in highly concentrated digital markets, where large platforms’ market power is enduring.

The most important competitive threats to monopolists are likely to come from new entrants, which are vulnerable to exclusionary conduct or anticompetitive acquisitions.

Governments should have in place relevant policies and legal frameworks to overcome different challenges of the platform economy. These include competition, consumer protection and data protection policies and legislation.

Adapt to new realities

There is a need for adapting competition law enforcement tools to new business realities by revising laws like in Germany and Austria or issuing regulations or guidelines as has been done in Kenya and Japan.

A 2017 law revision in Germany incorporated in the assessment of the market power of firms in the digital economy such criteria as direct and indirect network effects, parallel use of services from different providers and switching costs for users.

It also factored in economies of scale in connection with network effects, access by firms to data relevant for competition and innovation-driven competitive pressure.

This amendment allowed the Federal Cartel Office in Germany to consider these criteria in analyzing Facebook’s dominance in the social network market during its investigation into Facebook between March 2016 and February 2019. 

Merger control regimes should enable competition authorities to scrutinize the acquisition of start-ups by major platforms.

Merger analysis needs to incorporate the role of data in acquiring and sustaining market power and establishing entry barriers to new firms, thereby affecting future competition and innovation.

Not only free but also fair competition

It is important to ensure not only free but also fair competition. This is more so in digital markets, where smaller firms face challenges in their contractual relationship with big platforms.

Competition law provisions on unfair trade practices and abuse of superior bargaining position, as found in competition laws of Japan and the Republic of Korea, would empower competition authorities in protecting the interests of smaller firms vis-à-vis big platforms. 

Developing countries could consider this policy measure in revising their competition legislation or introduce a separate regulation concerning digital platforms’ dealings with their business users.

Such measures could facilitate entry of local small and medium-sized enterprises (SMEs) to platform markets, thereby allowing developing countries to reap the benefits of the digital economy.

This is important as SMEs are crucial to job creation and innovation.

Both the implementation of fair competition legislation and review of acquisitions of startups by dominant platforms could play an important role in maintaining an inclusive, competitive and fair business environment in the digital economy. This might eventually enhance innovation.

Apt taxation policy needed

Another critical element needed to ensure fair competition is an appropriate taxation policy. A significant proportion of the value created in the digital economy results from users who provide data.

The current international corporate tax system is not adapted to the digital economy. There is not yet a common understanding of “value creation” for taxation purposes in the digital economy.

This leads to a disconnect between where value is generated and where taxes are paid. According to the UNCTAD Digital Economy Report 2019, taxes paid abroad by Facebook represented only 2.9% of the profits it generated outside the United States in 2017.

Ideally, an international taxation system, which is agreed upon by all countries, and recognizes the main aspects of digital businesses that have significant implications for taxation, should be put in place.