Digital markets present policymakers with a quandary. This arises partially from the fact that, in the grand scheme of things, they remain a relatively recent phenomenon, and so, unlike many other markets, decades of data and evidence on how they typically develop and operate are still lacking.
The contours of the debate were neatly set out in 2019 by an expert review of digital markets and competition commissioned by the British government and authored by Jason Furman. It does seem as though the economics of digital platforms may involve a market tipping point at which point one or a handful of successful firms are capable of becoming dominant. As the report noted:
Digital markets vary greatly so no general rules apply to all of them. But in many cases tipping can occur once a certain scale is reached, driven by a combination of economies of scale and scope; network externalities whether on the side of the consumer or seller; integration of products, services and hardware; behavioural limitations on the part of consumers for whom defaults and prominence are very important; difficulty in raising capital; and the importance of brands.
Some have gone as far as to argue that the economics of such markets resemble those of a natural monopoly and should be regulated as such. Others argue that whilst platforms may occasionally appear dominant, this is a fast-moving sector in which new players entering the market can rapidly change the picture. There was, after all, a time when MySpace appeared to be a leading social media player.
The best approach to regulating such markets remains contentious. The European Union’s Digital Markets Act, the framework for regulating such activities since 2022, represents a heavier-handed approach than that found in the United States. Firms seen as dominating platforms are defined as gatekeepers (a designation currently applied to Alphabet, Apple, Amazon, ByteDance, Meta, and Microsoft) and are subjected to specific requirements, notably around the treatment of business and consumer customers, the interoperability of services and tech, and the use of personal data.
To its supporters, the Digital Markets Act was a welcome recognition that the economics of digital markets vary from those of most goods and services, and so such markets require their own regulatory framework. It is, by this way of thinking, a recognition that unusually dominant firms require close watching. To its critics, the Act is an unnecessary burden on both firms and innovation, which starts from the premise that simply because a firm has been successful, it requires more regulation. Market share alone, argue the critics, is a poor guide to the true state of competition as it can change rapidly in such markets.
Last week, the Clark Center’s US Experts Panel offered its own views. The panel was first asked whether “The current antitrust laws and regulations in the United States are inadequate for preventing digital platform firms from engaging in acquisitions and exclusionary conduct that harm competition”,
Here, weighted by confidence, there was broad agreement. 14% of respondents strongly agreed and 47% agreed. As Larry Samuelson of Yale put it, ‘current antitrust law and practice, more than a century old, are not equipped to deal with digital markets’.
Amongst those who were uncertain about the issue, some noted that US antitrust laws may simply operate very slowly.
Robert Shimer of the University of Chicago, one of those who disagreed, argued that ‘while there are large digital platform firms, this reflects the value of size in the industry due to network effects and learning-from-big-data. Even so, entry remains a potent threat, with TikTok, Zoom, Shopify as recent examples’.
But if there was broad agreement that the current shape of US antitrust laws and regulations were not adequate to regulate the new tech giants, there was less agreement that the European model was appropriate to the United States.
Asked whether ‘digital markets would work better if, in a manner broadly similar to the European Union’s Digital Markets Act, criteria were established to designate some large firms as ‘gatekeepers’ and a regulatory body was established to govern the business practices of those gatekeepers’?, the responses were more mixed.
Again, weighted by confidence, 37% of those responding either agreed or strongly agreed with the statement, whilst 26% either disagreed or strongly disagreed. A narrow plurality of 38% were uncertain.
As one of those expressing uncertainty, Aaron Edlin of Berkeley, put it, ‘it depends entirely upon how responsibly the regulator would behave. Too much government power can create its own problems’. A point echoed by Richard Schmalensee of MIT, who argued that ‘everything would depend on the “regulatory body,” which, like all regulators, would be imperfect’.
The lack of strong support for the European alternative is not a surprise, polls of both the US and European Experts Panels on the Digital Markets Act type approach in 2023 showed high levels of uncertainty.
Taken together, the view of the panel is that the current state of US antitrust and regulation is inadequate to the task of regulating modern digital markets, but the European approach, embodied in the Digital Markets Act, may not be a more useful alternative.
