Competition policy in the digital age

 Multisided markets

where digital product acts as a platform, bringing different  groups of consumers together. For example, a digital content platform may feature content creators on one side, viewers of content on another, and advertisers on another.

 Strong network effects

meaning that as the number of users grows, the value of the product to users increases. In the extreme, these network effects may lead to markets “tipping” into a monopoly.

 Substantial economies of scale and scope

since many digital markets exhibit high fixed costs and low or zero variable costs. Firms can therefore rapidly scale up, expand their geographic coverage, or potentially use their assets in one market to enter another.

 Reliance on large amounts of user data

that can be difficult to replicate and costly to analyse.

 Switching costs

for example users may have invested time and effort to create a profile on a social network or a reputation as providers on an exchange platform, which they may lose by switching.

 Often important intellectual property rights

including patents which grant the owner a limited-term monopoly over the use of a technology or method. 

 Low or zero prices

associated with business models that earn revenue from the collection of consumer data, the sale of advertising or the use of customer relationships to sell “premium” or other paid products. These business models are of increasing importance: seven of the ten largest global companies provide zero price products and services in digital markets. 

 Disruptive innovations 

that dramatically reduce transaction and intermediary costs, and may be offered outside of regulatory frameworks that limit competition by incumbents.

 Vertically-integrated and conglomerate business models

which may give rise to specific concerns about anticompetitive conduct. Digital platforms that act as “gatekeepers” between downstream firms and their customers may be the subject of competition concerns if they provide advantages to their own downstream operations. Further, firms may seek to leverage their market power from one market into another, for example with bundling and tying strategies that foreclose competition for a digital “ecosystem” of products. 

 A dominant firm behaves anticompetitively

for example using its position to exclude competitors from a market, or acquiring potential emerging competitors simply to prevent their products from reaching the market

 Competition is distorted by regulation

that allows incumbent firms to maintain a dominant position for reasons unrelated to the attractiveness of its products to consumers

 Features of demand or supply prevent entry by new firms, or expansion by dominant firms’ competitors

including very strong network effects or economies of scale and scope,  information asymmetries between firms and consumers, switching costs, or consumer behavioural biases (such as framing bias - being influenced by the way different options are presented -, salience bias - focusing on the most prominent choice item - , and default bias - a low tendency to switch to unambiguously better offers)

 Digital markets exhibit a range of characteristics that may lead to concentration, market power, and winner-takes-most dynamics...

including network effects, consumer lock-in, and economies of scale and scope, among others.

 Concentration (or share of revenue) statistics must be interpreted with caution in a competition context. 

In particular, measures of sector concentration may give misleading indications about the intensity of competitive conditions in markets, although they may be relevant to other policy issues such as systemic risk and lobbying power. That being said, a range of other indicators, including mark-ups, suggest that durable market power is on the rise in digital markets.

 The markets for many digital products are multisided.  

Digital platforms, like any other multisided market, feature cross-platform network effects, which mean that a firm’s decisions in one side of a market, for example on pricing, affect demand on another. These network effects can lead to market power and amplify the impacts of anticompetitive conduct, but they may also make generate significant consumer benefits, for examply by enabling cross-subsidisation. Advertising plays a particularly important role in many of these multisided digital markets, especially when services are provided to consumers free of charge, as is often the case for search engines and social networks.

 Many digital business models involve some degree of vertical integration and conglomerate structures. 

Data are a central element many digital markets, as a competitive asset, potential entry barrier, and even dimension of quality. They have also led to new markets, and enabled new business models as well as strategies such as personalised pricing.

• A particular focus of recent competition policy discussions regarding vertical integration is the gatekeeper position of some digital platforms. This refers to the position that digital platforms have when firms rely on them for access to consumers, and may give rise to complaints of anticompetitive conduct (for example if the platform also competes downstream in the marketplace it operates).
• Conglomerate business models also play a significant role in digital markets, given the rise of digital ecosystems of interconnected products. These competitive dynamics in these ecosystems will depend on their degree of opennness to third parties and the potential for competition among ecosystems. Where intra-ecosystem network effects are sufficiently strong, there is a risk that the core platform and related markets will tip into a monopoly position.

 The demand-side characteristics of a market can play a crucial role in competitive dynamics, and should be incorporated into competition analysis.

Particular considerations that may be warranted in digital markets are those related to zero-priced products, search and switching costs, and choice and information overload. These characteristics may be incorporated into firms’ strategies and could contribute to further entrenching market power.

 Network effects

Competition analysis in digital markets should include an assessment of the importance of network effects. These effects can generate significant benefits for consumers and may be a source of potential efficiencies, but on the other hand could constitute an entry barrier that makes markets less contestable. In some situations, network effects may be sufficiently important to create a risk of tipping into monopolies, such as when network effects and associated data collection give rise to self-reinforcing feedback loops.

 Multi-sided platform markets

The relationship between different sides of a platform gives rise to cross-platform network externalities, the term used to refer to the advantages obtained on one side from an increase in participation on the other side of a market. For example, consumers using an online marketplace benefit when more sellers offer their services, and similarly sellers benefit when more consumers use the platform. Competition analysis must take into account these externalities when they play a determinative role in the market (e.g. in terms of price structure), since failing to do so will lead to erroneous conclusions about the responsiveness of demand. For instance, SSNIP tests must be modified to take into account the relationship between demand on different sides of the platform during the market definition process. Further, the assessment of market power will also need to be adapted, potentially using adjusted Lerner indices.

 Rapid change in the competitive landscape

Analysis rooted in defined digital markets will need to be interpreted with caution, given that many digital markets exhibit rapid change. Further, the boundaries of product markets may be blurred – even if products are not perfect functional substitutes, for example, do they still directly compete for consumer time, attention and data? Competition analysis must also grapple with the potential entry of new competitors in a market, and new product development pipelines. To do so, they may need to consider the innovation capacity of firms, which may provide a different picture from current product markets (existing competitors may undertake limited innovation, and there may be the threat of entry from innovators in related markets).

 Non-price competition

Many digital markets feature important dimensions of non-price competition, and thus analysis focused on prices (for example when measuring the responsiveness of demand) may not present a complete picture – especially when consumers are currently obtaining products at a price of zero. Competition analysis is needed to both uncover the relevant non-price dimensions of competition and assess the potential impact of the conduct or merger on these dimensions.

 

Digital markets may be notionally borderless, but analysis will be needed to uncover limitations to the geographic scope of markets (such as regulatory or linguistic limitations).

 The prominence of vertical and conglomerate theories of harm in recent discussions about digital markets. 

Many competition concerns in digital markets appear to feature a vertical component, namely foreclosure strategies focused on access to a given platform, technology or dataset. Digital sector mergers may also be conglomerate in nature (they bring together firms that are not currently competitors or in a supply relationship). However, the distinction between these categories and horizontal mergers is becoming blurred. Downstream consumers may one day become a large platform’s rival in some markets, and incumbents may rapidly enter related markets by building off their knowledge and resources. Competition authorities must grapple with this complexity, and may need to consider vertical and conglomerate mergers, which previously captured little attention, given the particular characteristics of digital markets, in addition to potential future horizontal concerns.

 New merger and acquisition strategies may need to be considered in merger review...

and may require adaptations to existing frameworks. In particular, authorities are increasingly exploring acquisitions by incumbents of nascent competitors, which may not have attracted significant attention, or even been notified, in the past.

 The effects of mergers on dynamic competition, and non-price dimensions of competition, may require ...

particular attention and adapted analytical tools. In particular, competition authorities may find the effects of a merger on innovation abilities and incentives to be especially important in some digital markets, requiring them to grapple with long-term considerations and the associated uncertainty. Careful attention will also be needed to the validity, and merger specificity, of claimed efficiencies when there is a risk of these harms.

 While some claims have suggested past failures ...

in merger control are responsible for current trends in digital markets (for example with respect to mark-ups), evidence on this point is limited. In particular, relatively few past mergers have been identified as having had a substantial negative impact on competition. However, more ex-post assessments of mergers are needed to better understand the role of mergers in current digital market trends, and whether tools and concepts should change. Competition authorities should engage in these assessments, and may wish to explore co-operation with academia to gain insights on a larger number of past digital sector merger decisions.

  Structural remedies and line of business restrictions ...

remain the simplest to monitor andarguably most effective approach to anticompetitive mergers and conduct. However, they may not be feasible in digital markets, particularly when they are incompatible with platform business models and rely on unsupported conclusions about the source of market power (for example when they equate data inputs for which substitutes exist with the network monopolies of the past).

  Behavioural remedies require careful design and oversight, 

given the incentives of the firms subject to these remedies. Co-ordination with sector regulators and other authorities with such oversight functions may therefore be needed. Further, no single behavioural remedy is a single bullet in digital markets – conditions in a market must be suitable for data portability or interoperability measures, for example, to be effective.

  It is crucial for competition authorities to consider ...

dynamics on the demand side of digital markets. These dynamics can exacerbate harm, and may limit the effectiveness of any remedies imposed. The sources of demand-side problems in digital markets should be identified, and, while remedies to address these problems are particularly difficult to design and implement, should not be ignored.

While competition law enforcement occupies much of the discussion on digital competition issues, the role of regulatory barriers to competition is also crucial. In particular, regulatory frameworks that are out of date, unnecessarily restrictive, or premised on business models undergoing disruption can result in serious competition harms. They may prevent new innovations from emerging, or create an imbalanced playing field that favours incumbents and lead to disputes about compliance.

The OECD work on disruptive innovation has explored how these new business models, often based on digital technology, can fundamentally reshape markets. They can introduce new products and services, cut costs, limit intermediation, and improve quality – particularly in previously stagnant markets featuring a small number of large incumbents. Competition policy, including competition authorities, have a key role to play in identifying regulatory frameworks that unnecessarily restrict competition, and proposing alternatives. This process is not without challenges, as it involves balancing sometimes competing policy objectives (potentially including new concerns, such as data protection), and significant uncertainty in markets undergoing rapid changes. Some strategies, such as the use of regulatory sandboxes and close co-operation among regulators, can help.

The OECD has updated its Competition Assessment Toolkit to take account of the unique challenges that may emerge with respect to regulatory barriers to competition in digital markets. The Toolkit provides practical guidance on detecting, assessing, and identifying alternatives to regulatory barriers to competition.

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Access the full text of the toolkit

 Enhancing merger control frameworks...

including adjusting notification thresholds to capture anticompetitive acquisitions of emerging competitors, increasing the emphasis on innovation and dynamic competition issues, explicitly including digital-specific issues such as data access or intermediation power in merger legislation, and placing the burden of proof on merging parties to show the lack of competition harm in certain situations. Ex-post assessments of past merger decisions have also been pointed to as an important tool to learn from past experience in digital markets as it accumulated.

 Strengthening abuse of dominance (or monopolisation) enforcement...

in particular by either shifting the burden onto dominant firms to show the procompetitive effects of certain types of conduct, and by using more interim measures to preserve competition while a case is ongoing.

 Clear guidelines...

to help firms understand the situations in which digital-specific competition concerns may arise, and how they will be analysed. 

 Enhancing the digital tools and expertise available to competition authorities...

given the complex nature of these markets and the conduct that may arise. Authorities are establishing dedicated teams focused on digital markets, and are experimenting with new digital resources such as the use of artificial intelligence to monitor remedy implementation. 

 Deeper international co-operation among competition authorities

given the cross-border nature of digital markets and the common issues they pose. 

 Greater use of market studies to take a holistic view of competition problems in digital markets...

since they may emerge outside the context of a merger or enforcement case. Several authorities have used these tools to advocate for regulatory change and improve their knowledge in areas such as digital advertising, FinTech and patent assertion entities.