Platforms at the gate? Initial reactions to the Commission's digital consultations - Oxera
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Advancing economics in business June 2020 Platforms at the gate? Initial reactions to the Commission’s digital consultations
and design of both initiatives?
Contact Figure 1 The four options under the
Felipe Flórez Duncan proposal for an NCT
It is clear that whichever options contained
Partner
in these consultations are implemented
(assuming at least one is implemented),
there will be a major step-up in enforcement
action, both ex ante and ex post, in the
digital sector.
We have two main observations on how
On 2 June 2020, the European
this enhanced enforcement action can be
Commission launched a consultation
given the best possible chance of achieving
on proposals for a new competition
its intended aims (i.e. ensuring a fair trading
tool (NCT) and the Digital Services
environment and increasing the innovation
Act (DSA) package. If enacted, they Source: Oxera.
potential in the EU digital single market).
would represent a significant change
in competition enforcement in the EU, 2.2 Ex ante platform regulation
•First, the principles and evidentiary
and a major step-up in the regulatory
standards of competition law should
rules and oversight of the digital In parallel, the Commission is consulting
remain at the heart of any ex ante or
economy. In this article, we set out on options to introduce an ex ante
ex post framework. In practice, this
some initial thoughts on the proposals regulatory framework for large platforms
would mean rejecting regulatory options
from an economic perspective and with ‘significant network effects acting as
involving per se prohibitions (e.g.
discuss some relevant considerations gatekeepers’. This initiative arises from
blacklisting certain practices) absent
for consistent, proportionate and a range of concerns which, according
unambiguous evidence that a practice
effective policies that may lead to to the Commission, may lead to risks
is proven to be harmful and favouring
better consumer outcomes. of reduced social gains from innovation
a case-by-case analysis of platform
and large-scale unfair trading practices.5
business models, their incentives and,
1 Introduction
ultimately, the effects on consumers.
Three options are discussed for ex ante
This would also mean seeking to align
The recent Commission impact platform regulation.
the rationale for intervention (both in
assessment publications cover
the NCT and ex ante regulation) with
three distinct regulatory initiatives. 1. Revising the P2B Regulation,
well-understood concepts such as
One proposes an ex ante regulatory by extending its scope to include
dominance and robust evidence of
framework for ‘large online platforms prescriptive rules on certain practices
actual or likely effects on competition
benefitting from significant network effects (such as certain forms of self-
and consumers.
and acting as gatekeepers’ (henceforth, preferencing, data access policies and
‘ex ante platform regulation’),1 while the unfair contract terms). Importantly, this
•Second, to the extent that fairness
second contains modifications to the option would have a broad ‘horizontal’
goals are pursued through one or more
liability rules around content, goods and scope and would not be targeted only
of these tools, the primary focus should
services available from online platforms.2 at large platforms considered to be
be on fairness of process (as in the
Together, these two impact assessments gatekeepers.
existing P2B Regulation) as opposed
cover the main options for reform that are
to fairness of outcomes. If fairness of
being considered under the DSA package 2. Collection of data from large
outcomes is pursued, this must also
announced in February 2020. platforms by a dedicated regulatory
take account of the efficiencies and the
body, the goal being to gain further
value created by platforms’ business
The third is an impact assessment on insights into the business practices of
models and practices, for consumers
options for a NCT to complement the these platforms. This option would not
and other platform users.
traditional tools of Articles 101 and 102 include any power to impose remedies.
TFEU that the Commission can use to
address competition concerns. While 3. Adopting a new ex ante regulatory
2 What are the Commission’s
the first two initiatives specifically target framework for gatekeepers, where
proposals?
digital markets, the NCT is potentially gatekeepers would be identified by a yet-
a broader tool that would apply to all to-be-agreed set of criteria.6 Two sub-
2.1 New competition tool
sectors.3 options are discussed as to how such a
framework could be structured:
The NCT initiative is motivated by the
We focus on two specific questions raised
possibility of structural risk or lack of
by the ex ante platform regulation and the a. blacklisting certain practices by
competition which cannot be easily
NCT initiative. gatekeepers, and setting out clear
resolved through Articles 101 or 102
obligations (e.g. blacklisting self-
TFEU.4 The Commission presents four
•First, whether there is currently preferencing);7
options for the potential NCT, which
an ‘enforcement gap’ that requires
vary according to the threshold and
granting authorities new tools, and, if b. tailor-made remedies for specific
scope. The threshold for using the NCT,
so, what is the appropriate threshold gatekeepers on a case-by-case
discussed further below, might be based
for intervention in digital markets? basis. These remedies could include
on: dominance or structural features of
blacklisting practices as above,
markets; whereas the scope might be
•Second, as regards the relationship as well as others such as (non-
‘limited’ (focused on digital or digitally
and possible tension between the personal) data access obligations,
enabled markets) or ‘broad’ (across the
goals of competition (economic personal data portability or
economy as a whole).
efficiency) and ‘fairness’—an explicit interoperability requirements.
goal of the ex ante regulation—what
are the implications for the analysis
June 2020 1and competitors and can therefore dictate competition law alone is insufficient to
the parameters of competition. At the address the market failure(s) identified.
3 The perceived enforcement gap
same time, competition law recognises See the figure below.
and the appropriate threshold for
that acquiring a dominant position can be
intervention
the result of significant investments and Figure 2 The ex ante SMP
innovative behaviour, as well as a reflection framework for electronic
As can be seen, both consultations
of the efficiencies, and value created communications in Europe
aim to tackle very similar concerns in
and shared with business partners and
digital markets, as also articulated in a
consumers. Therefore, being dominant by
wide range of reports (most notably, the
itself does not result in presumptions of
Special Advisers Report, the Furman
guilt or wrong-doing.
Review and the Stigler Centre Report). In
fact, these reports also argued that the
existing toolbox of competition authorities
3.2 The European SMP framework for
and regulators is not sufficient to deal
electronic communications (telecoms)
with these concerns effectively, and that
networks
changes and additions to the toolbox are
necessary. In other words, the case for
There are examples where a position of
reform is predicated on the existence of
dominance has been a cause for concern
an enforcement gap.
due to the risk of harmful practices. This
has led to the creation of ex ante regulatory
3.1 Mind the gap
frameworks to deal with problems before
they give rise to harm.
It is therefore worth probing the nature
of this alleged gap in more detail. There
The most prominent example in this regard
are at least two aspects that are relevant Source: Oxera.
is the ex ante regulatory framework for
here.
the electronic communications sector in
While there are a number of important
Europe, which has been referred to by the
• Timing of harm: has the harm differences in the economics of the
Commission as a source of inspiration
to consumers materialised, or is it telecoms and digital sectors, the success
for regulation in digital markets. This
hypothesised to happen in the future if and longevity of the ex ante SMP regime
framework, which has been in place since
there is no intervention? owes a great deal to its close alignment
2002, is based on identifying whether one
with the legal principles and economic
or more operators hold significant market
•Cause of harm: is the harm arising analysis required under competition law.
power (SMP)—a position equivalent to
or likely to arise because of the This is an important lesson for the design
dominance under competition law. If such
unilateral actions of dominant firms, or of new regulatory tools for the digital
a finding is made, the regulator is given
because of structural market failures economy.
powers to impose remedies. The remedies
(including unilateral practices by one
are chosen from a specific list, aimed at
or more non-dominant firms)? 3.3 Platforms at the gate?
addressing the most common problems
that may arise in the telecoms sector, such
Given that Article 102 TFEU typically The similarity of Option 2 of the NCT
as excessive retail or wholesale prices, or
seeks to address (alleged) harm arising consultation to the ex ante SMP
refusal to provide access to third parties.
from historical/ongoing conduct of framework in telecoms suggests that it
dominant firms, three potential ‘gaps’ arguably should have been presented as
As can be seen, the SMP framework in
could be conceived. an additional option (or possibly even a
electronic communications addresses gap
replacement) to the gatekeeper options
#1 identified above.8
• Gap #1: harm that is hypothesised (3a and 3b) of the ex ante platform
to happen in the future because of the regulation. Not only is it clear that Option
Among the Commission’s initiatives, the
risk of future practices by dominant 2 of the NCT more closely resembles an
options that share the greatest similarities
firms. ex ante regulatory intervention than an
with the SMP framework are Options 1
ex post competition tool, there is also the
and 2 of the NCT. Under these options,
• Gap #2: harm that is hypothesised question of the relationship between the
the Commission would be able to impose
to happen in the future because of concepts of dominance and the definition
behavioural and, where appropriate,
existing structural market failures. of a gatekeeper.
structural remedies on dominant
companies before any harmful practice
• Gap #3: harm that is already In particular, it may be the case that being
has taken place, as in the SMP telecoms
happening because of structural dominant in a market is a necessary
framework.
market failures. condition for being a gatekeeper.
Dominance refers to the ability to
However, despite these similarities,
There is also a debate about whether the act independently of other market
Options 1 and 2 are being proposed by
existing toolkit is sufficiently agile to allow participants, including customers and
the Commission as new competition
the Commission to act quickly enough, competitors. It is open to debate whether,
tools, rather than as ex ante regulatory
providing an additional motivation for and in what contexts, a platform can be
instruments. This is surprising because
introducing new tools. a gatekeeper capable of causing harm if
the SMP framework in electronic
it cannot act independently of the market
communications is explicitly not considered
There are good legal and economic participants, including users on either
to be a part of the EU competition law
reasons why Article 102 primarily focuses side of the platform.
toolkit. Indeed, electronic communications
on actual or potential harm caused by
markets can be regulated only if they
specific ongoing practices by dominant Alternatively, the Commission may be
pass the three-criteria test for markets
firms. Firms in a dominant position can conceiving of gatekeepers as large
susceptible to ex ante regulation and,
behave independently of consumers
in particular, the third criterion: that
June 2020 2platforms having a position of power one that most closely resembles the UK that any imbalances of bargaining power
relative to smaller trading partners, such market investigations regime. It is beyond will not necessarily be resolved for all
that they could impose trading conditions the scope of this article to discuss whether customers by more competition, nor are
that would not be observed in normal this option is appropriate to address the they necessarily caused by structural
market circumstances. This would be perceived concerns regarding the digital competition problems.
similar to the concept of economic sector. Much will depend on what is the
dependence that exists in some EU precise threshold for finding evidence of Furthermore, the P2B Regulation
member states’ competition law, which harm and adverse effects, as well as the recognises that many terms and
effectively lowers the threshold of standards of judicial review and appeal that conditions that may appear unfair from
intervention to situations of ‘relative investigated firms will have recourse to.11 the perspective of one party, are actually
dominance’ (i.e. a position of power central to the functioning of the platform
relative to a trading partner) rather than If they are set at levels equivalent to what and therefore create significant value and
‘absolute dominance’ (i.e. a position of currently exists under EU competition law, efficiencies for the system as a whole.
power across a relevant market as a this could become an important new tool As a result, the P2B Regulation does not
whole). in DG Competition’s armoury. There is a ban practices, nor limits commercial and
risk, however, that the new tool is designed contractual freedom. Instead, it requires
The Commission cites a number of to address not only harm that is already transparency and other safeguards for
factors and criteria that may be used to happening due to structural market failures business users of platforms.
determine when a platform is deemed and can therefore be evidenced (gap
to be a gatekeeper. Interestingly, being #3), but also harm that is hypothesised In any discussion of fairness, it is
dominant, or even having a position of to happen in the future due to structural important to recognise that it is a relative
economic dependence vis-à-vis trading features of the market (gap #2). concept with various different dimensions
partners in a market, does not appear to (as we discussed in a previous Agenda
be one of them. In the latter case, this would go well article).13 In particular, fairness might
beyond the scope of the UK’s market relate to the process or the outcome.
Given the potentially highly intrusive investigations regime and start to resemble
nature of the remedies that could flow the prospective analysis that is required If fairness focuses on the process, there
from a gatekeeper finding, including under the significant impediment to is less likely to be a tension between
per se prohibitions on practices effective competition (SIEC) test in merger fairness and competition objectives,
(blacklisting), it is crucial to clarify how control. The key difference is that, unlike since, for example, fair processes tend
the definition of a gatekeeper can be merger control, there would be no concrete to involve higher transparency, which in
aligned with well-understood concepts transaction or change in market structure to turn promotes competition. However, if
such as dominance and SMP. This is focus the analysis on. the concept of fairness primarily focuses
particularly important as the Commission on the outcome, there can be a tension
has said that it may take inspiration with competition law, because there
from the telecoms sector regulatory are likely to be many instances where
framework in the design of remedies, 4 Competition and fairness: friends or practices could be considered to be
but, as noted above, remedies in foes? pro-competitive due to long-run dynamic
telecoms can only be imposed with a efficiency reasons but they could be
finding of SMP.9 A close read of the NCT and ex ante perceived to be unfair to a group of
platform regulation proposals reveals that customers in the short run. For example,
3.4 Inspiration from the UK market they are in pursuit of both competition price discrimination can be efficient
investigations regime? (economic efficiency) and fairness as policy (especially when it leads to a market
goals. expansion and the recovery of risky
The other concrete regime that these investment costs), but under the lens of
proposals draw inspiration from is the There can, however, be some tension ‘fair outcomes’ it might be seen as unfair
UK market investigations regime. In between these two objectives, to charge different prices to different
place since the early 2000s, this tool depending on how one defines fairness. consumers for the same good or service.
has been used to probe competition Commissioner for Competition Margrethe
issues that would not be caught under Vestager articulated this well in her speech In this regard, some of the more
Articles 101 and 102 (or their national at the 2018 GCLC Annual Conference: interventionist proposals by the
equivalents). Indeed, the UK market Commission (such as blacklisting
investigations regime is specifically … in the end, that’s what the practices) appear to be guided more
aimed at addressing gap #3, i.e. competition rules are for. […] to make by the desire to achieve a certain
harm that is already happening due to sure that our markets stay competitive fairness in outcome. A concern with
structural market failures. enough to give consumers the power such an approach is that it runs a
to demand a fair deal. [But] It doesn’t high risk of adopting a partial view of
In order to be able to impose remedies mean that just because something is fairness, without taking into account
under the market investigations regime, unfair, it’s automatically also against the the efficiencies and value created, for
the UK authority must be able to competition rules.12 both consumers and business users, by
demonstrate the existence of an adverse different platforms’ business models and
effect on competition (AEC), defined as As explicitly stated in many publications, their practices.
‘any feature, or combination of features, the Commission considers that the
of each relevant market [which] prevents, position of some online platforms may For example, a key concern of the
restricts or distorts competition in have become so strong that they are able Commission is that platform markets
connection with the supply or acquisition to impose unfair commercial conditions might ‘tip’ to one player. However, being
of goods or services’.10 on businesses that have become large is often central to the platform
economically reliant upon them. This was business model. Indeed, such tipping,
In terms of the options proposed by the indeed one of the prime motivations for where it occurs, is often the result of
Commission, Option 3 of the NCT is the the P2B Regulation, which recognised network effects, which give rise to
June 2020 3significant efficiencies and value for the 1 European Commission (2020), ‘PROPOSAL Competition and markets Authority (CMA) carries
users of the platform. Tipping happens FOR A REGULATION: Digital Services Act out very in-depth economic analyses of the market
because consumers and/or businesses package – ex ante regulatory instrument of very for 18 months, to identify competition concerns and
prefer to be on platforms that other large online platforms acting as gatekeepers’. potential remedies rooted in empirical evidence.
consumers or businesses are using, In a number of cases, the Competition Appeal
regardless of whether these are one-sided 2 European Commission (2020), ‘PROPOSAL Tribunal has in turn carried out in-depth ‘on the
or multi-sided platforms. FOR A REGULATION: Digital Services Act – merits’ reviews of CMA decisions.
deepening the internal market and clarifying
Furthermore, platform markets prone responsibilities for digital services’. 12 Speech on fairness and competition by
to tipping are also arguably more Margarethe Vestager at GCLC Annual Conference,
likely to remain contestable relative to 3 European Commission (2020), ‘PROPOSAL Brussels, 25 January 2018.
traditional natural monopolies. Indeed, FOR A REGULATION: Single market – new tool
such platforms still need to ensure that to combat emerging risks to fair competition’. 13 Oxera (2019), ‘Fairness and competition in
they remain attractive to their users at online markets: friends or foes?’, Agenda, April.
all times, since the presence of network 4 These include structural risks to competition
effects means that networks can implode (i.e. the market may be about to tip); and 14 See Oxera (2019), ‘Death of an old star…
as rapidly as they can explode.14 A close structural lack of competition (i.e. high evolution of a new one?’, Agenda, February.
case-by-case examination of different concentration, entry barriers and consumer lock-
platforms’ business models and their in). For example, the Commission could use the
competitive dynamics will therefore be NCT to intervene in markets that it perceives as
required to make a proper assessment of at risk of ‘tipping’ and it could also intervene in
the overall fairness of current and future (unilateral) practices by non-dominant firms in
market outcomes. an oligopolistic market.
5 The concerns noted by the Commission
include: the economic dependence of traditional
Contact businesses on large platforms; difficulties
for innovative startups to compete due to the
Felipe Flórez Duncan incontestable position of some large platforms;
Partner and the ability of the large platforms to enter
Felipe.Florez.Duncan@oxera.com adjacent markets with relative ease and the risk
that those adjacent markets tip towards them
Dr Avantika Chowdhury as well.
Partner
Avantika.Chowdhury@oxera.com 6 The criteria used as examples do include the
presence of significant network effects; the size
Dr Andrew Mell of the user base; and the ability to leverage data
Technical Adviser across markets.
Andrew.Mell@oxera.com
7 These might be principles-based, applying to
gatekeepers in whichever sector they operate
(e.g. ban on self-preferencing in all markets
in which the gatekeepers are present); and/
or issue-specific rules for particular markets or
practices (e.g. operating systems, algorithmic
transparency, online advertising).
8 This was justified at the time, given that the
telecoms sector had been recently liberalised
and many of the largest players were formerly
state-owned monopolies. Hence, a tool that
allowed regulators to act quickly to prevent harm
as well as to actively promote competition was
seen as crucial for the future development of the
sector.
9 ‘While recognising the many differences,
experience from the targeted and tailor-made ex
ante regulation of telecommunications services
can serve as an inspiration in this regard, given
the similarities deriving from network control
and network effects.’ See p. 4 of European
Commission (2020), ‘PROPOSAL FOR A
REGULATION: Digital Services Act package
– ex ante regulatory instrument of very large
online platforms acting as gatekeepers’.
10 UK Enterprise Act 2002, Section 134(1).
11 In the UK market investigations regime, the
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