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The problems of regulating digital markets

Modern competition policies are poorly equipped to deal with the unique nature of digital markets.

analysis Updated: Jun 12, 2019 08:27 IST
Vikram Sinha
Vikram Sinha
digital markets,Facebook,EU
Digital markets have unique characteristics. The network externalities that help an Uber attract more cab drivers as its user base grows, and vice versa, or the feedback loops that let Google improve its search engine the more search data it captures, mean that market concentration is inevitable(Getty Images)

In his recent call to break up Facebook, co-founder Chris Hughes argued that Mark Zuckerberg couldn’t fix the company, but the government can. He is part of a growing chorus. Big tech’s long honeymoon period is winding down. The European Union (EU) has been less than sanguine about tech giants’ market dominance and practices for some years now. The US Federal Trade Commission and Justice Department, markedly more forgiving than their European counterparts, are also divvying up competition investigations into the tech giants. Calibrating competition policy to regulate digital markets will be a tricky business. But there are opportunities here, particularly for India, where such policy is still a relatively greenfield area.

US judge Robert Bork’s 1978 work, The Antitrust Paradox, redefined competition regulation. He argued for economic efficiency: regulators should protect competition and the consumer, not competitors. Focusing on the latter can prevent companies from achieving economies of scale and benefiting consumers via lower prices. This made intuitive sense. It had the added attraction of bringing economic rigour to the delicate business of regulating markets. Bork influenced multiple jurisdictions, not just the US. The EU had its own imperatives — market integration, for one — but the consumer welfare standard is foregrounded in India’s Competition Act, 2002. As the Supreme Court put it in Excel Crop Care vs. CCI, “The ultimate goal of competition policy is to enhance consumer well-being.”

But something is lost in translation when applying the consumer welfare standard to digital markets. Products like Google’s search engine or Facebook operate in zero-price markets. The user benefits are immense and obvious. And in the absence of a price, there is no quantifiable user harm by the lights of conventional competition logic. Focusing on price, however, ignores what law professor, Daniel Solove, has dubbed “architectural harms” — long term, non-monetary drops in consumer well-being in markets where they surrender excessive data and attention in return for a free product. A small but growing body of jurisprudence and regulatory action is beginning to recognise these costs. The Competition Commission of India, for instance, has noted that users pay an “implicit price in form of personal data” when accessing online platforms.

There are other architectural harms as well. Over the past decade, the world’s five largest tech companies have made over 400 acquisitions globally. None have been blocked and few have had riders attached to them. This creates an unhealthy innovation dynamic. Promising startups that could be potential rivals are snapped up. Alternatively, they are run out of town as Amazon did with Quidsi. Venture capital has learnt to invest accordingly. Thus, genuine competition takes place for the most part in areas that are not dominated by a monopoly or duopoly — workplace productivity, say, or urban transportation. Such competition stands a better chance of improving consumer choice in everything from pricing models to privacy protection.

Regulators globally are starting to grapple with these issues. There have been some innovative measures. Take Germany’s Bundeskartellamt. It has ruled that Facebook cannot make access conditional on users allowing it to link non-Facebook data to their accounts. When it demands consent to this loss of control of personal data, it is abusing its dominant position given the lack of social network alternatives. Other cases merely need closer scrutiny. There are clear issues with Amazon or any e-commerce site serving as a platform for sellers and also using the data thus gathered to compete with them via its own products.

Equally, there is overreach. Calls like Hughes’s to break up big tech make little sense. Digital markets have unique characteristics. The network externalities that help an Uber attract more cab drivers as its user base grows, and vice versa, or the feedback loops that let Google improve its search engine the more search data it captures, mean that market concentration is inevitable. Admittedly, regulators could have taken a harder look at tech giants’ acquisition spree. But post hoc attempts to remedy this would be long and not necessarily successful. It took US regulators a decade to break up AT&T. IBM held out for 13 years, and then the case against it was dropped. Nor would such attempts be appropriate for all tech giants. Apple is a juggernaut of vertical integration. Facebook has expanded horizontally. The others are conglomerates.

India has an advantage in some ways. The recent vintage of its competition regulation and lack of precedent mean that it has more room for manoeuvre when grappling with such thorny questions. How should pricing dynamics for multisided platforms that undercharge one side and recover costs from the other be assessed? How should relevant product markets and dominance be measured in digital markets? If information is to be considered an implicit cost that users pay for accessing “free” products, how much qualifies as abuse of a dominant market position?

Tech giants’ abuse of market power is the symptom, not the problem. The problem is regulatory frameworks that haven’t caught up with digital markets. Addressing it requires a measured approach, not blunt force solutions.

Vikram Sinha is junior fellow and head, Strategic Communication, IDFC Institute)

(This is the first in a four part series on data governance in India by the Data Governance Network).

The views expressed are personal

First Published: Jun 12, 2019 08:27 IST