Does competition policy need to adapt to the digital age?

29 November 2016

By Luisa Affuso and George Hall

This year’s Beesley Lecture series began on 6th October with an insightful talk by Hal Varian, Chief Economist of Google. The topic was competition policy in the digital age – a pertinent subject given the ongoing investigations into Google’s conduct by the European Commission, and the recent publication of their preliminary report on e-commerce. The response by Philip Marsden, Inquiry Chair at the Competition and Markets Authority (CMA), which has recently launched a market study in Digital Comparison Tools, made the debate all the more relevant.

While Hal Varian’s stance was that the digital revolution has largely been pro-competitive, Philip Marsden’s response was to err on the side caution in the analysis of specific conduct in the digital space and its impact on consumers.

The benefits of the digital age are clear to see. Innovation from firms such as Google, Apple, Amazon and Facebook has transformed the way we live and work. However, the scale reached by these companies, and the inevitable result that their disruptive model of competition has replaced some traditional operators, has raised questions on the ability of competition policy to discipline any form of anticompetitive behaviour in the digital space.

A large market share, however, is not tantamount to market power, let alone abuse. Although Google, Apple, Amazon and Facebook have different core competencies which make them leading operators in different areas– i.e. Google’s search, Facebook’s social media, Amazon’s retail platform and Apple’s devices- examples of entry into each other’s market are also quite prevalent (e.g. Google trying to enter social media with G+, Amazon entering the market with devices such as the Kindle and Fire, etc.). The fact that some of these entries have not been successful at eroding the market share of the key player in a meaningful way, Hal Varian argued, has been the result of these new products/services not being perceived by consumers as any better (and perhaps in some instances not as good) as the incumbents’. Whilst this is true, and indicates that barriers to entry in digital markets might be lower than in traditional markets, there are other important considerations to make.

For example, in markets where consumers use only one firm (known as single-homing), consumers technically can switch, but network effects mean they generally do not switch. For example, few people signed up to Google+ as all their friends and conversations remained on Facebook. Is ease of switching enough, if switching does not actually happen? Competition authorities need to consider what impediment, if any, is preventing switching from happening. Interestingly, in some instances, innovation has led new competitors to facilitate switching so much so that, where consumers previously ‘single-homed’, multi-homing has become more prevalent (social media is again a relevant example, with the use of diverse platforms for different functions and networks). However, most importantly, the disruptive nature of competition in digital markets is such that large shares and potential “dominant” positions can easily be eroded. Even in instances where consumers single-home, a new prevalent platform, service or device can emerge and displace the incumbent. The example of the evolution of smartphones and the disappearance of Nokia’s leading market position is a clear case in point. Blackberry’s loss of market share is another example of the impact of product innovation: new devices without a physical keypad emerged and rapidly made the previous generation of devices obsolete.

Importantly, in the digital age many products are available to consumers with the price set at zero: for example, Google search, Facebook or YouTube. The two-sided nature of the market implies that consumers (one side of the market) obtain the service for free whilst users on the other side of the market, such as advertisers, are charged. The important challenge for competition authorities in this space is to guarantee that competition is preserved by preventing genuine exclusionary or exploitative types of practice, and guaranteeing that no artificial barriers to entry (or switching) are created. None of this is new to competition policy. Even the ‘big data’ issue, which has seen some claim that the amount of consumers’ data held by some operators might raise new competition problems, is in reality more of a ‘privacy’ concern. Privileged access to consumers’ data for some operators is not a new issue for competition policy (think of loyalty cards).

Competition authorities face a greater challenge in instances where vertical restraints are needed to promote efficiencies. For example for established platforms which have committed significant investment to achieve a ‘go-to’ status, there is a risk that other websites free-ride on the platform’s service and popularity by undercutting its price. In such circumstances pricing parity arrangements may be agreed to prevent this free-riding. Without the ability to agree these terms, the incentives for the platform to invest and innovate in new customer services are removed, and the market is less efficient. The next challenge is to ensure that competition authorities, which have not been generally amenable to engaging on a full efficiency-defence line of argument to date, engage more constructively in the analysis of efficiencies. Though the analysis of digital markets can be complex, fundamentally the approaches needed are well-established in the analysis and antitrust responses to vertical restraints.

So it seems there is no real need to rethink competition policy for now. If abuses occur, or restraints lead to a softening of competition, existing tools can be adapted to enable competition authorities to respond.

Luisa Affuso and George Hall
Tel: 07747 115797 or 07843 371018

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