Chillin'Competition

With this short article, my ambition is to explain why individuals with an interest in antitrust, the digital economy, and policy design using LaTeX (the user-unfriendly software that most economists use for modeling reality…) should dive into Nicolas’ new book entitled Big Tech and the Digital Economy. More specifically, I want to discuss the book’s fifth chapter, “Antitrust in Moligopoly Markets.” To that end, this short piece will proceed as follows: firstly, it will briefly describe the existing structural framework of competition law. It will then discuss Nicolas’ proposals to update that framework (as summarized with the drawing right below, true story). Finally, it will draw upon some concrete lessons that can be taken from it.

1- “Good old” rivalry

The Oxford Dictionary defines rivalry as “a state in which two people, companies, etc. are competing for the same thing.”  Today, the protection of rivalry has become the main function of antitrust law, a fact that Nicolas substantiates with numerous references to doctrine and case study analyses. He underlines, for example, that “EU courts have indeed subjected dominant firms to strict behavioral constraints, including duties of assistance to rivals” (p. 183). Similarly, the European Commission has several times expressed its concerns with protecting rivalry in merger control.

Because such policy leads to structural (static) analyses and policies where “rivalry trumps efficiency,” Nicolas challenges the state of affairs; and so do I. Indeed, protecting rivalry brings limited contribution to the common good in digital markets, even though LaTeX economics might advise otherwise. To paraphrase, the great Shaquille O’Neal, promoting rivalry in digital markets is ‘more of a TV-rating rivalry than a real rivalry’. In other words, it is a policy that prefers to look at itself in the mirror, rather than at how it can increase welfare. Against this background, Nicolas proposes to “abandon, or at least radically alter, traditional antitrust principles modelled on rivalry in digital markets” (p. 177).

2- Do you feel the pressure?

It has been fashionable in recent years to call for a transformation of antitrust law, more specifically, for the replacement of the “consumer welfare” standard with a “protection of competition” standard. These calls are structuralist, for the most part.

Though Nicolas’ book is an invitation to update antitrust, he does not follow the structuralist trend. Instead, he makes a clear, substantive, proposal: “the main function of antitrust should not be to promote rivalry … but a pressure equivalent to it” (p. 187). In particular, Nicolas draws a fundamental distinction between tipped and untipped markets. Tipped markets are those where one firm has “won” the game. This is where antitrust vigilance is needed. Untipped markets, on the other hand, describe all of the other markets. This is where antitrust forbearance is warranted.

Nicolas in turn analyzes the extent to which specific markets are already tipped and concludes that “[b]ig tech firms are moligopolies. Each of them enjoys a monopoly in an origins market (…) [a]nd direct entry in their market is more the exception than the rule, owning to tipping effects.” Meanwhile, “[t]ech giants practice exploration competition. Indirect entry is their dominant strategy, especially in untipped market.” This observation is of utmost importance for antitrust agencies and courts. Unfortunately, past and current initiatives do not appear willing to consider the multimarket dimension of competition amongst moligopoly firms.

3. “And so what”?

Nicolas draws two key lessons from his findings. First, “antitrust should focus on cases of harm to competition in digital markets that have tipped” (p. 187). Second, “antitrust should be agnostic toward conduct or transactions by both incumbent and new firms in untipped markets” (p. 187). Implementing them would change the face of antitrust enforcement, for the better.

Let me add three proposals on the basis of Nicolas’ findings.

First, competition in the market should not be (systematically) preferred to competition for the market (or, dare I say it, incremental innovation should not automatically be favoured over disruptive innovation). We often hear about this distinction, and whilst often considered a buzzword, this formula also has practical implications which are often ignored. For example, in 2007, the General Court (GC) confirmed the European Commission’s (“EC”) decision requiring Microsoft to provide information to its competitors to ensure protocol interoperability. The EC decision and GC judgment certainly fostered competition within the existing technology paradigm, and even more so, within Microsoft’s ecosystem. If Microsoft’s rivals had not been able to access this information, some would have disappeared – which would have been detrimental to “rivalry”. But others would have competed with the Microsoft ecosystem (from the outside) by creating a new one. Given that the economic literature indicates that both sustaining and disruptive innovations are essential, it is interesting that a Court would almost always prefer one innovation over another. Let us consider that before imposing similar remedies, such as “data portability”.

The second lesson relates to the interaction between tipped and untipped markets, specifically when these markets compete with each other. We know from the work of Clayton Christensen that disruptive innovations engender new markets. It follows that little relevance should be given to analysing barriers to entry existing markets. There is, however, one exception to this where access to an existing technology is essential in introducing a new disruptive one. In such a scenario, the dominant undertaking can prevent disruption, for example, by way of predatory innovation. In short, power in the tipped market could sometimes be used to eliminate competition coming from an untipped market. One may want to analyse, on a case-by-case basis, whether dominant firms hold such a capability. The tipped and untipped market distinction should not lead to a novel form of artificial market partitioning.

The third lesson concerns competition policy. Nicolas recommends that competition agencies intervene in tipped markets because dominant firms may cause lasting damage. But, on top of antitrust enforcement, I would like to point out the need for antitrust agencies to consider fixing market failures by encouraging market responses. Let me take blockchain as an example. In many ways, blockchain is superior to GDPR in terms of privacy protection. Blockchain apps can also supplant centralized products and services thanks to what I have called “token effects.” As I recently defended in an article co-authored with Vitalik Buterin, agencies must provide comfort zones to these technologies. By doing so, agencies will ensure dynamism rather than protect a market structure decided in LaTeX.

Overall, my reading of Nicolas’ book suggests that the role of competition agencies should be to promote bottom-up innovation. It should not be to design markets on the basis of “ideal” static rivalry models which are decided using software relying on assumptions and variables encapsulating a limited vision of complex economic orders. Competition agencies and courts should embrace Darwin’s findings about evolutionary processes, selection pressure, and biological dynamism

To close this short piece, I want to thank Nicolas for introducing a fundamental framework to the (expanding) world of antitrust. It is a rare thing to read a work in the field of digital antitrust where intuition (vision?!) is converted into a scientific inquiry guided by hypotheses, testable propositions and empirical facts. I suspect that every reader will appreciate the wealth of groundbreaking ideas that appear in his book.