Chillin'Competition

Discussions about the ex ante regulation of platforms are becoming ever more prominent. I do not think any reader is unaware of yesterday’s announcements by the European Commission relating to the development of new tools in the competition and the ex ante regulation arena (see here and here).

As these debates gather momentum, the OECD has set up a panel on an issue that is central to them. You will be able to find here all the info on the upcoming round table (Monday of next week), including a background note and a set of videos featuring, among others, yours truly (feedback most welcome!). The presentation I used in the video can be found here. Big thanks, by the way, to Chris Pike (OECD), who also prepared the background note.

The panel is devoted to line of business restriction, that is, the different regulatory techniques used to limit the ability of a firm to take part in an adjacent activity. It is a topic address in Martin Cave‘s legendary ‘Six Degrees of Separation’, still one of the best titles of all time for a paper (see here).

The topic is a classic one in utilities regulation. A substantial fraction of debates in telecoms relates to the separation of the local loop from other activities (in particular, retail activities like broadband). In the energy sector, the separation of natural monopoly segments (transmission and distribution) from the rest of the activities (generation and supply) is also a central aspect.

The idea of separation has made a comeback. Some advocate the same approach to separation in relation to online platforms. Some advance the idea that Big Tech firms like Google or Amazon should be subject to some form of separation across their different activities.

In my presentation, I introduce the various degrees of separation as points along a spectrum: from the least intrusive (transparency obligations) to the most intrusive (structural divestiture). This is how I see it:

The fundamental point I make in the presentation is that the choice between one end of the spectrum or the other seems to depend on two factors: the rate of innovation and the efficiencies resulting from the activity.

In particular, the greater the degree of innovation on a particular market or industry, the greater the reluctance to go for the most intrusive options. It is not a surprise that telecoms authorities have so far been very cautious about mandating the structural separation of the local loop from the rest of activities.

What about online platforms? What lessons can we draw from utilities regulation?

First, they are closer to telecoms in terms of innovation than to any other network industry. Thus, we should be greatly cautious about structural separation.

Second, online platforms makes the task of separation much more difficult. For all the innovation and the efficiencies, the set of problems in telecoms is relatively narrow and well-defined, and similar solutions make sense across the board.

In the context of online platforms, on the other hand, markets are much more heterogeneous. An online platform can be dominant in its core segment and have a marginal role in an adjacent one. As a result, the adoption of regulatory solutions can be considerably trickier. It is not clear how they can be crafted.

And with that open question, I leave it for the panel discussion…

I look forward to your comments!