Commission releases report on competition policy in the digital era

European Commission’s competition policy report focuses on platforms, data and dominance.

On 04 April 2019, the European Commission (EC) published a report commissioned by the EU’s Competition Commissioner, Margrethe Vestager. The report looks at how competition policy should continue to evolve in the digital age and is written jointly by an economist, a lawyer and an engineer. The report follows the European Commission’s recent conference on competition policy and digitisation and forms part of the European Commission’s ongoing interest in the digital space.

The report opens by describing how digitisation has affected traditional competition analysis. It then goes on to explore what the goals of EU competition law should be in the digital space and how to achieve those goals. The report focuses on the role of platforms and data and how both of these shape competition dynamics. It then assesses if the current EU merger control rules are appropriate for the digital space.

There are some common themes between this report and that produced by Professor Furman at the request of the UK Government.

Digitisation & competition

The authors believe that traditional methods of competition do not always take place in digital markets and that this can give larger providers a competitive advantage, which the authors consider is hard to shift. For example: 

  • Returns to scale in a digital market are always very high in comparison to typical goods/services. The cost of producing a digital product (over time), is much lower in proportion to the customers it serves and costs of production/maintenance do not increase as quickly as customer bases do. This makes it easier for incumbent providers. 
  • Network externalities mean new entrants find it difficult to enter the market by simply offering a lower price or better quality. Instead, they also need to persuade users of the incumbent provider to migrate – a provider which users have found convenient and which many people use. 
  • Data is used, stored and collected by companies and this can offer significant competitive advantages to providers of digital services.

Having made these observations, however, the report also cautions against excessive regulation to address the competition issues that arise. Instead, the report encourages enforcers to use existing EU competition tools and adapt them, in order to retain flexibility in changing market surroundings. The report outlines three principal ways in which the traditional analysis changes:

1. A change to enforcement timeframes and standard of proof needed to address consumer harm - the report encourages enforcers to “err on the side of disallowing potentially anti-competitive conducts, and impose on the incumbent the burden of proof for showing pro-competitiveness of its conduct”. The suggestion is that competition authorities should intervene more frequently and early on in order to prevent consumer harm (a theme that was brought out in Andrew Tyrie’s recent letter to the UK Government on the UK competition authority’s powers), potentially at the expense of companies who have done no wrong.

2. Market definition is increasingly less helpful in assessing competition issues - digital markets often feature products which have zero prices, so using traditional methods of assessing market limitations will not be as useful. Moreover, digital markets move very quickly; too quickly for traditional market definition. Instead, the report indicates that enforcers’ focus should be on theories of harm and identifying anti-competitive strategies - an approach which risks removing an element of consistency from enforcement and making it more difficult for companies to defend any charges of anti-competitive behaviour.

3. Market power is also increasingly difficult to measure - traditional approaches to market power and dominance, such as market shares, do not work as prices/volume of sales in the digital space do not necessarily represent the value of the good/service to the consumer (particularly when dealing with zero-price products or markets).

Platforms as regulators

The report considers in some detail how platforms have grown and the role they play in digital markets.
The report acknowledges that platforms compete with each other and the report outlines ways to encourage this competition: facilitating multi-homing so consumers can use more than one platform; assessing the roles of MFNs; and interoperability between platforms.

However, the report’s main focus is assessing how platforms themselves act as regulators and how that hinders competition. For example, Amazon has rules that its sellers must abide by, which can ultimately shape the relationship between the Amazon seller and consumer and directly affect how that seller competes on Amazon. The authors highlight that this rule-setting function of platforms is important and should be acknowledged in assessing competition issues.
They note that it is particularly important to consider platform rules where dealing with dominant platforms, who could:

  • have incentives to limit competition between sellers/platform users eg by selling ‘top’ spots to sellers on listings, thereby reducing the ability of other sellers to compete, and
  • who could leverage their power to promote their own services (including by making different rules for their own services).

In order to resolve these issues, the authors believe that dominant platforms should be placed under specific obligations to ensure their rule setting is pro-competitive, as well as permitting suppliers of complementary services to operate by sharing data with them.

The issues the authors identify can be seen in Spotify’s current complaint against Apple in front of the European Commission. Spotify alleges Apple is leveraging its App Store (the only app marketplace for iPhone users) rules to promote Apple Music at the expense of Spotify, as Apple Music does not need to comply with certain App Store rules which Spotify does, and Spotify alleges these rules make Spotify less attractive to consumers. This report will therefore no doubt feature in the European Commission’s investigation of the complaint.

Data

The authors stress the necessity of data for firms in digital markets and that dominant, data-rich firms might refuse access to other firms - an issue which the authors think competition law should address outside of the scope of Article 102 (the prohibition on abuse of a dominant position by a company). Article 102 in the authors’ eyes, is “not the best tool” where data is needed for uses that are not linked to the market served by the dominant firm (eg creating an AI algorithm) and suggest that in these specific cases, courts/authorities should specify conditions of access, or even sector-specific regulation.

The report also notes that competition law raises legitimate issues for competitors who seek to share their data or enter into a data pool, and that the law should provide more guidance on when data sharing and data pools can be considered pro-competitive.

Mergers

The report notes that the current turnover-based EU merger control thresholds mean competition authorities do not have sight of significant transactions in the digital space - where companies often have minimal turnover but have significant market positions or are expected to grow very quickly.

However, the authors caution against updating existing EU merger control rules to include non-turnover based thresholds, as the benefits of doing so do not appear to them to outweigh the harm. Both Austria and Germany recently introduced additional merger control thresholds so as to capture high-value digital mergers. The report advises the European Commission to assess how these regimes play out before doing anything to its own thresholds.

The authors do consider that more probing questions should be asked at the substantive merger assessment stage in order to assess the competition issues in digital mergers (although the report appears to disregard the fact that such mergers might not even be eligible for competition review under current thresholds).

The report also considers ‘killer’ acquisitions - where start-ups are bought by a large market player, effectively ‘killing off’ that start-up’s potential to compete with the buyer. In these circumstances, the authors suggest that the buyer bears the burden of showing the adverse effects of removing a competitor are outweighed by the merger’s efficiencies. However, this again assumes the merger is caught by the relevant merger control rules and therefore actually undergoes assessment by a competition authority. The report also does not acknowledge the practical difficulties of evidencing the lack of adverse effects of an acquisition, given the fast-changing nature of digital markets and the inability to predict the target company’s likely impact on the market. For example, it would have been very difficult to predict which of the 200 or so companies Google has acquired would have flourished and which would have floundered.

Is the Commission going to target dominance?

The overarching theme to come out of the report is that the authors believe digitisation allows companies to create solid - even dominant - market positions that are very hard to shift. The report suggests actions be taken to ensure dominant companies are unable to abuse that position and prevent new market entry.

At this stage, it is not clear if the European Commission will act on any of these suggestions. Commissioner Vestager has noted (in a speech she gave on the day the report was published) that the report needs to be discussed and debated, in order to ensure that the European Commission ‘gets it right’, which indicates that there is still some way to go before all of the report’s recommendations are adopted whole-heartedly.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.