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Will the DMA deliver on its promises? Part I: substantive aspects (or markets do not become contestable by decree)

with 7 comments

How Tech Companies' Election Promises Have Held Up – The Markup

As the legislative train carries on its journey towards the adoption of the Digital Markets Act (DMA), academics, stakeholders and consultants have produced a great deal of work examining how the future regime can be improved and made more effective, whether from an institutional or a substantive standpoint.

One of the questions that is far less prominent in these debates is whether the DMA can actually deliver on its promises. Put differently: is it realistic to expect that the regime will achieve every one of its ambitious aims? It seems to me that this question is, at the end of the day, more relevant. Achieving the optimal design of the regime would be a futile effort if it appears that it is expected to achieve an impossible task.

A regime that promises what it will be exceedingly unlikely to deliver is bound to create frustration (and even the false impression that failure is not a function of the regime’s structural inability to achieve its aims, but rather the regulator’s lack of willingness to meaningfully enforce it).

Against this background, I thought it might be a good idea to start a debate along the abovementioned lines, if only because managing expectations about what regulation can and cannot achieve is always a good idea.

The DMA is not particularly explicit about how it intends to transform digital markets. Contestability and fairness are, in this sense, more high-level aspirations than operational principles. Beneath Articles 5 and 6, I identify the following three goals (which I discussed in this paper of mine too):

Address the risk of leveraging from bottleneck segments to neighbouring ones: this is a traditional goal in competition law and sector-specific regulation (think of telecoms regimes, for instance). The idea is simple: ex ante intervention seeks to avoid the possibility of the extension of dominant position from one market to adjacent ones.

Re-allocate rents (away from so-called gatekeepers to firms in neighbouring markets): there should be little dispute that the ambition (arguably the single most important ambition) of the DMA is to redistribute rents within and across digital ecosystems. This goal is achieved through several mechanisms. A straightforward technique is to ban or water down gatekeepers’ monetisation strategies (for instance by allowing the side-loading of applications). Another one is to limit gatekeepers’ ability to fight free-riding (for instance, by banning altogether MFN clauses).

Inject competition in bottleneck segments: the final, and most ambitious, goal of the DMA is to inject competition within bottlenecks (that is, markets where a gatekeeper enjoys a dominant, if not superdominant, position). In this regard, the regime seeks to change the structure of platform markets to introduce and preserve effective rivalry. For instance, the DMA does not hide its ambition to inject competition on the market for search engines.

So: can the DMA deliver on these promises? When it comes to the first two goals, I am ready to guess that the consensus is that they are, in theory and practice, at least achievable. Preventing leveraging and re-allocating rents is what utilities regulation has routinely done for decades.

The real question, in relation to these first two goals, is whether they are necessary and/or desirable. I am not uncovering any secret when I say that there is no consensus on this front. Some believe ex ante intervention in this sense is both necessary and desirable, some do not. My views are also well known, and I developed them in this paper.

The third goal is far more interesting. As far as I can see, the DMA has probably set itself an impossible, or virtually impossible, task. If a market is a natural monopoly (or displays extreme returns to scale, to use the expression found in the Special Advisers’ Report), regulation, alone, cannot change the tendency of a market towards concentration (or, more precisely, towards the emergence of dominant or superdominant positions).

The above is also true, by the way, of competition law. No matter how forcefully one may want to preserve rivalry on a market, if it does not structurally allow for it, it will not happen (which is why we have, for instance, the failing firm defence in the field of merger control, and the reason why dominance is not prohibited as such under Article 102 TFEU). It is important to bear this point in mind when debating whether competition law is working or is being applied effectively in digital markets: are some stakeholders frustrated with recent enforcement because competition law is now expected to achieve something it cannot and was never designed to do?

At most, competition law and regulation can intervene at the margin, and act against any practices that may accelerate the natural tendency of the market towards concentration (by acting, for instance, against exclusivity obligations). Ultimately, however, they will have to deal with the reality that the economic context allows: they cannot force, by regulation, different features.

Effective competition in a market that is structurally unsuited for it will come from technological and economic change, not from regulation. Regulation can, at most, accompany the process and perhaps reduce the scope of the bottleneck segment (not eliminate it). Telecommunications is a wonderful example in this regard (and the EU Regulatory Framework for electronic communications is the gold standard, in my view, of how regulation is to engage with changing realities).

The task is even more difficult as far as the DMA is concerned: dealing with natural monopolies is hard enough when the issues are well known and have been researched inside out (as in telecommunications or electricity). Just think of how much harder it is when the drivers of markets and technologies are not fully understood (and, as the Special Advisers point out in their Report, market dynamics in digital markets are not yet fully grasped).

I tell myself that a task for academics, moving forward, is to manage expectations: I just hope that the success or the failure of the DMA will not be measured against its ability to deliver deconcentration in bottleneck segments controlled by one or two gatekeepers. This point does not justify, alone, changing the regime, but it is a powerful reason to be realistic and to understand that the DMA will most probably underdeliver (and will do so by design).

(As you know, I have nothing to disclose in this or indeed any other matter).

Written by Pablo Ibanez Colomo

20 October 2021 at 12:27 pm

Posted in Uncategorized

7 Responses

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  1. Let’s be realistic, the main (only) purpose of DMA is what it can truly achieve: to redistribute rents.
    DMA is the perfect example of coordinated lobyying from, mostly, the legacy industries in the European Union. The discussions of the proponents rarely – if at all – mention the consumers. The focus is on ”competition”, understood as the players in industries who are fighting with the big tech companies for a larger share of the pie.

    Valentin Mircea

    22 October 2021 at 9:05 am

  2. The EU Commission in DG 4 days and later in DG 13 recognised the issue you identify many years ago. Most recently it was widely discussed in the i2010 initiative and the DG 13 ( now connect ) policy papers from 2009. That issue – of some markets having returns to scale, scope and externalities that tend toward monopoly is not new. I disagree that competition law is not about preventing monopolisation of markets from happening though. Competition law can restrain abuse and support dynamic competition – and interconnection and tipping points can be policed and prevented. It is not a reactive tool that requires the authority to watch the car crash. Continental Can identified the fact that mergers could enhance dominance and the merger regulation requires prenotification to prevent harm arising. From Camera Care to Broadcom the law has allowed preventive action to be taken by way of interim measures. The problem is one of under enforcement not lack of tools. Then, going back to the i 2010 discussions, and the debate on the deregulation of telecoms in the 1990’s the issue of the market structure that could arise was widely discussed. Absent strict enforcement of competition law to impose access and interoperability on all platforms/dominant players, as is essential in telecoms and any network business – and had been done to Microsoft, the likely forward looking scenario, absent enforcement of the law, was a world dominated by digital dinosaurs. Absent enforcement they could eat up potential competitors and buy up innovators. In this “dis-connected” world the systems of different players are not fully interconnected and not fully interoperable. If abuse was not policed then mergers enhancing dominance could increase the problem and absent the policing of foreclosure and strategies to prevent interoperability and access dominance could also be enhanced. The lack of access allows silos or walls gardens to be created – where consumers are captured. By contrast, a connected world, one where interoperability and access is policed and the law enforced frequently, could be one where apps are available on a cross platform basis, the most popular apps adding the grates value for app creators and consumers having the freedom to choose. The world we live in is the one that happened because of a lack of anti trust enforcement – not because of a lack of tools.

    The DMA is a regulatory tool that is and should be designed to address the failure of enforcement action under competition law to promote
    competition. The same fate will await the DMA – if it isn’t enforced then dominance will increase.

    Tim Cowen

    22 October 2021 at 1:51 pm

    • There has been lot of enforcement in the last decades, getting stronger and tougher in the last years. What you suggest is taking the competition authorities to a race to the bottom, with enforcement for the sake enforcement. When will the enforcement be enough?
      As for ”eating-up” the potential competitors, this is the most fallacious argument in competition law, never proved but often repeated. It implies that the large tech companies are throwing their money out in the attempt to smash a myriad of potential competitors. This shows not only a disconnect from the real life and prohibiting acquisitions by certain companies is very likely to deter investment in start-ups, who need large amounts of capital in order to grow and compete with the incumbents. It would be a lose-lose situation.

      valentinmircea73

      22 October 2021 at 3:54 pm

      • Surprising and quite a defensive response?

        Tim Cowen

        22 October 2021 at 4:41 pm

      • @Tim Cowen, if you refer to my answer, why it is surprising? Defensive, certainly not. I have no interest in this area, I do not assist any client in a matter concerning the digital markets, these are just my personal thoughts, right or wrong. Do you?

        valentinmircea73

        22 October 2021 at 5:31 pm

      • To your question about whether I have an interest in the area the answer is – yes – very much so. I have a long experience in digital markets and have worked for many different players over the past 35 years, initially for businesses in data markets like EDS, and for many years at BT building global networks, later for clients such as Microsoft and Vodafone and so many others where I have been “on the record” as an advocate. Given that I am a Barrister it is my job to represent the views of my clients in cases where I am instructed to do so. For example I was one of the founders of the global “merger streamlining” project with Bill Rowley QC that put in place consistent procedures for assessing mergers world wide during the 1990’’s.

        No client has instructed me on merger policy since I stepped down from the role of Chair of the Competition Panel at the CBI when I left BT in 2010.

        There is no secret about these things. Please do check out my Cv and details on the website at Preiskel & Co. If you were not aware of it, I am a co-founder of the Movement for an Open Web and previous founder of The Open Computing Alliance, I act for the Initiative for an Open Competitive Market.

        I am not suggesting for a moment that my views are anything other than my own. My clients don’t instruct me to make comments on academic websites!

        I have nevertheless represented many clients on many cases which helps to inform my views that may be relevant to the issue at hand.

        For example I acted on the Facebook/WhatsApp case for third parties pointing out that Facebook was taking out a competitor. This was later proved to be unquestionably true from documents revealed in the U.K. parliamentary enquiry. It is a shame that the EU Commission refused to look more closely into that transaction, looking at it only because it wasn’t “referred up” by 3 member states, and only then in a first phase review, which coincided with Commissioner Almunia’s retirement. A matter hat looked to be connected to me.

        To the issue you raise about tech platforms’ merger strategy, I researched and co-wrote a paper with Will Hutton and Philip Blond originally submitted to the House of Lords and later published in 2019 as “Technopoly and what to do about it”. That looked at mergers in digital a markets and the problems raised – both of elimination of horizontal competition and also the concern about buying up innovations and integrating complimentary products which impact others in secondary markets are then stifled- think Google buying Where to ? And Others to make Google maps and put it at the top of SERPS. The impact on smaller tech firms was discussed with the then U.K. Chancellor of the Exchequer: The RT Hon Phillip Hammond MP. The report extensively referenced Professor Furman’s work when he was Chair of the US President’s Council of Economic Advisors. That was the basis on which the Treasury subsequently appointed Professor Furman to chair the enquiry into “Unlocking Digital Competition”. I gave evidence to that enquiry. That enquiry produced a report which contains a section on mergers and their anticompetitive consequences. One reference is to a strategy we uncovered of deliberately identifying acquisition targets beneath the merger filing thresholds to avoid regulatory scrutiny. Jason Furman made firm recommendations on more closely assessing digital platform mergers because of the anticompetitive issues that are raised in mergers.

        More recent evidence of the issue can be found from Koski et al (2020) and Kamepalli et al (2020) showed that big technology firm acquisitions can create a so-called “kill zone” effect. In other words technology giants’ buyouts subsequently reduced market entry rates and decreased the supply of venture capital funding and investment available to start-ups that operate in the target product markets of tech giants’ acquisitions. The intuition from this result is two-fold. First, once a big tech firm has acquired a start-up in a specific, closely adjacent, complementary or conglomerate market, it has a negative effect on other small firms in that market because they find it harder to compete with the technology giant. This occurs because of economic forces including network effects, economies of scale and data-driven economies of scope that are significant in big platform markets.

        I recommend the Lear Report from 2019 /20 that was commissioned by CMA that also details a series of tech transactions which should have been blocked or conditioned.

        Bruegel has recently published a paper on the subject and I think it was a matter on which the Federal Trade Commission took evidence recently.

        As a lawyer and member of the British Institute of International and Comparative Law, I am deeply concerned about non compliance and what appears to be a dysfunctional legal system that does not address the harms it was designed to address, and clearly needs to be reformed.

        Tim Cowen

        22 October 2021 at 6:27 pm

  3. Will the DMA achieve its intended effects? The Commission’s DMA Impact Assessment Report is quite honest on this point (at para. 155): “For some of the practices [treated as per se illegal under the DMA and] … there is no decision or judgment confirming its effects on the market. Nevertheless, the multiple complaints, investigations and studies raising awareness, and suggesting solutions, to those practices are a strong indication of their relevance and of their negative impact on the internal market.” (https://ec.europa.eu/info/sites/default/files/impact-assessment-dma_en.pdf) If this is the evidentiary rigor with which dramatic structural changes are to be imposed, I daresay the effects will be rather unexpected.

    Kay

    26 October 2021 at 11:56 pm


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