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Archive for January 26th, 2021

Be careful what you wish for: why discretion to fine-tune digital markets may not be in the interest of authorities (or the public interest at large)

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Thibault Schrepel has been kind enough to invite me to write a piece for his Concurrentialiste (see here). It was a good chance to explore some of the themes that are central to my ongoing research projects and to share my thoughts on some of the proposals to regulate digital markets that are doing the rounds. My message? Regulatory design is key, and there are instances in which giving discretion to an authority might not be in the latter’s interest (or the public interest at large). I reproduce my post below, and very much look forward to your comments. Thanks again for the invitation, Thibault!

Emerging regimes for the regulation of digital markets share a common philosophy. They are grounded on the belief that, if authorities enjoyed more discretion and, in the same vein, if the constraints to which they are subject were reduced, they would be in a position to intervene fast, and adopt the sort of far-reaching remedies which, the argument goes, digital markets demand. In this sense, the new instruments represent, first and foremost, a departure from the limits of competition law systems. Establishing the anticompetitive object or effect of a practice and ensuring that the theories underpinning intervention reflect mainstream views are seen, from this perspective, as a burden that may dangerously delay much-needed action.

There are reasons to question whether this philosophy will deliver on its promises. Granting discretion to an authority to fine-tune digital markets whenever it deems it necessary does not address the fundamental challenges raised by the measures proposed. The phenomenal difficulty that comes with the latter does not relate to the lack of discretion, but to the very nature of the intervention expected from authorities. Redesigning products (as in Google Shopping), altering business models (as in Android) and re-allocating rents across the supply chain (is a 30% commission too much or just about appropriate?) are complex tasks, prone to errors, which are not made any easier by doing away with the need to show the anticompetitive object and/or effect of a practice (or the need to weigh such effects against any pro-competitive gains). The lengthy aftermath of the Google saga, and the aura of limbo and uncertainty that surrounds the remedies implemented in those cases, provides eloquent evidence in this sense.

This piece, however, makes a different point. It is submitted that granting discretion to an authority to fine-tune digital markets does not necessarily do it any favours. On the contrary. Depending on the design of the regime, discretion may in fact weaken it vis-à-vis stakeholders. One of the most precious powers of an administrative authority (and all of us, really) is the ability to say no. The ability, in other words, to see off pressure from firms and governments and take a decisive stand on a particular issue (or not take a stand at all). Paradoxically, the problem with discretion is that it empowers the authority to reach virtually any decision it desires from a policy-making standpoint. Once this impression is created, it may be difficult for an authority to justify why it favours certain outcomes and why it does not opt for the maximalist (or minimalist) positions allowed under the regime.

It is not difficult, on the other hand, to anticipate the behaviour of stakeholders potentially benefitting from regulatory intervention. It is natural for them to try and secure the outcomes that, within the boundaries of what is possible, best serve their interest. Where, for instance, a break-up of Big Tech firms is allowed under the regime, there is no downside, from their perspective, in pushing for structural action. An authority that is serious about meeting the objectives set in legislation, stakeholders would claim, should seek the most effective remedy, and the one that genuinely preserves competition on adjacent markets. If the regime requires intervention, and allows for the break-up of firms, all the pressure lies with the authority.

The aftermath of Google Shopping and Android gives a flavour of how these stakeholders may react to authorities’ newly found discretion. In the first of these cases, the European Commission imposed a duty of neutrality regarding the way in which the relevant search results are displayed. Ostensibly, the firm’s chosen path complies with the obligation, even if it just one of many ways to align its behaviour with the decision’s requirements. Rivals and their advisers, however, have been repeatedly pushing – again, as one would logically expect – for interpretations of the non-discrimination duty that are more favourable to their own interests. These attempts have little chance of success (and so the European Commission has signalled) because of the very constraints that come from the competition law system. The point of remedies under Regulation 1/2003 is to bring the infringement to an end, not to reshape markets to optimise rivals’ chances of success. Now think of how different the picture would be – and how much more powerful rivals would – if this constraint disappeared and every approach – from the minimalist to the maximalist – were in theory possible and left in the hands of the authority.

If you want another example of an area of the law where the European Commission enjoys broad discretion and is, as a result, subject to pressure to reach certain outcomes, think of State aid. Under Article 107(3) TFEU, the authority is empowered to define, as it sees fit, the instances in which subsidies and similar measures are in the interest of the EU as a whole. And it is not necessary to explain at any length why lobbying by EU Member States awarding aid can be just as formidable as the calls for action coming from dozens of firms operating in the digital sphere.

Of particular interest are the insights to draw from the way in which the European Commission has chosen to exercise its discretion in the field. Years of enforcement have taught the authority that it is unlikely to withstand pressure from EU Member States with a stake in a particular measure. It just does not trust itself. In this sense, it knows that its discretion is most powerful and best used when it is constrained ex ante and thus leaves minimum (if any) scope for manoeuvre in individual cases. Just like Ulysses when he reached the Land of the Sirens, the European Commission has tied its hands tightly to ensure that its decisions are in the public interest (and it is able to say no).

If you have never done so, take a look at State aid instruments implementing Article 107(3) TFEU – say for instance the Guidelines on regional aid, or the General Block Exemption Regulation. The most apparent feature of most of this body of law is its infinite dullness: pages and pages of figures detailing to the millimetre the intensity of the aid that is allowed. Beneath the dullness, however, lies the fundamental lesson to draw for the future regulation of digital markets: once the European Commission is freed from the constraints coming from the EU competition law system, it will have to devise a set of sound, effective and meaningful constraints to make sure it acts in the public interest. If it does not do so, it risks losing control of policy-making altogether.

Written by Pablo Ibanez Colomo

26 January 2021 at 3:22 pm

Posted in Uncategorized