Competition in the digital sphere

Tech companies now make up seven of the ten largest companies in the world by market capitalization. Regulators, it seems, have taken the size and ubiquity of digital platforms to mean they must be acting against consumers’ interests – but this is not necessarily the case.

Our latest paper on competition, published on December 7, 2021, with the Hinrich Foundation is part of an ongoing series on digital trade issues in Asia. This paper examines current approaches and proposed responses to the growing power of digital firms in the region and beyond. As the digital economy comes to occupy a more and more critical role in supporting economic growth and development, regulators face a growing risk of “getting it wrong.”

Digital platforms – big and small – are increasingly a part of daily life, transforming how we do business, interact with friends and family, and make purchases. This rapid digital transformation, along with the associated growth and increasing market concentration, has prompted renewed interest in the sector from competition regulators.

But as business models evolve in the digital space, current approaches to competition regulation risk harming both the consumers and firms that these regulations seek to benefit. This is not to say that regulations are never needed, nor that competition concerns are unjustified. But it is a call for caution in the types of tools and approaches used to tackle worries and careful consideration of the consequences—intended and otherwise—of different options to manage competition.

The term ‘Digital Platform’ can refer to a number of different things. This includes marketplace services, application marketplaces, social networking sites, and search engines. Broadly, these platforms connect distinct user categories to achieve the purpose of the particular platform. Uber, for example, connects drivers with riders, facilitating the transaction. As a result, such platforms experience an indirect network effect, wherein the value of the platform for one category of users increases as more users from the other category join. To continue the Uber example, this means the utility of the platform for riders increases when there are more drivers, and vice versa.

In the tech industry, first-movers often come to occupy large market shares, potentially leading to a natural monopoly in the given market. Firms might also vertically and horizontally integrate, acquiring other businesses in pursuit of efficiency gains or a competitive edge. Though maybe a red flag for competition regulators, whether such efforts by digital platforms cause measureable harms to consumers is not always easy to determine.

At its heart, competition regulation seeks to limit the harms of monopoly – limited choice, high prices, and lack of innovation. This is done with the aim of maximizing consumer welfare.  Regulators, in pursuing digital platforms, believe that they are doing just that. But platforms, even those that are very large, rarely fit neatly into the monopoly box. Platforms might offer unpriced services to users, and competitors are just a click away. Further, the pace of innovation is often break-neck. Firms that do not change with the times quickly lose market share –  evidenced by the fact that the tech landscape of today is vastly different from even five years ago.

Despite the unique nature of tech markets, competition regulation is generally pursued with traditional regulatory tools. But this leads to insufficiently dissuasive enforcement actions, with litigation processes that move slowly compared to the pace of change in the digital economy. Whether these efforts to rein in digital platforms actually boost consumer welfare – which should be a guiding question for regulators – is unclear. This is especially true where digital platforms ‘disrupt’ traditional markets with low prices, efficiency gains, and innovation.

Without adequate prioritization of consumer welfare, those seeking to regulate digital platforms risk pursuing policy that does not fit with their goals. As governments around the world step up their efforts to police competition in the digital sphere, they should take care to consider both their means and their ends. Addressing these challenges will require close collaboration between government, industry stakeholders, and academia, balancing the ever-present need for innovation in the digital sphere with preserving consumer choice.