In order to promote competition in digital markets,[1] Latin American countries should not copy and paste “solutions” from other jurisdictions, but rather design their own set of policies. In short, Latin American countries—like my own, Peru—should not “put the cart before the horse” and regulate markets that are not yet mature.
Digital or “tech” markets are the “new shiny thing,” and policymakers, regulators, and competition agencies around the world are rushing to introduce regulations inspired primarily by the European Union’s Digital Markets Act (DMA). This global race has been intensified by various western powers each trying to promote their own vision of regulation abroad. For instance, the European Commission has been trying to influence policy in Latin America with former European Commissioner for Competition Margrethe Vestager making the rounds at several events in 2023 (see, e.g., here and here).
Don’t get me wrong—I am totally in favor of cooperation between competition authorities. Competition authorities from developed countries have more resources, technical knowledge, and greater experience with a wider range of cases, which in turn increases their expertise. Bigger, more mature markets tend to have more developed antitrust law and regulations, and more expansive institutional frameworks. Jurisdictions like the United States and the European Union also have the best universities and think tanks in the world, so they are often the best sources of knowledge.
But despite all that, countries should not reflexively import regulations. They should instead make a serious and thorough attempt to analyze the impact of proposed rules, including whether the regulation is even necessary in the first place. What problems (i.e., “market failures”) are we trying to solve? What specific harms do the proposed regulations address? Will this regulation improve things? Could it have unintended consequences? Who will enforce these regulations?
In my view, the kinds of market failures that justify imposing ex ante regulations are not present—at least, not with the intensity that would justify their costs. Regulation would thus do more harm than good.
This is particularly troublesome for developing economies, which cannot bear the cost of yet another inefficient regulation. Governments in Latin America would do far better to concentrate their regulatory efforts—and relatively modest resources—on more fundamental enforcement priorities, such as upholding laws and institutions that enable the basic conditions for entrepreneurship, in order to promote investment and innovation in the first place.
Ex Ante Regulation of Digital Markets Is Unwarranted
Despite all the talk of so-called “Big Tech” and “monopolies,” digital markets are competitive. Google, Amazon, Facebook, Apple, and Microsoft are not monopolies, and there is little actual evidence that they have harmed consumers.[2] To be sure, there can be some competition problems, but this can be addressed under existing antitrust laws. The European Commission has initiated investigations and even imposed fines against Google (see a list here), and the UK Competition and Markets Authority has settled cases with negotiated remedies against Amazon (see here). In the United States, both the Federal Trade Commission (FTC) and the U.S. Justice Department (DOJ), as well as several states, have initiated cases against Google, Facebook and Amazon.
Of course, proponents of ex ante regulations would claim that antitrust law is slow, and cases are hard to win (the cases mentioned above are not sure wins for the government). These are reasonable points. Competition agencies and courts could have more resources and faster procedures to adjudicate cases before markets and market structures change, thereby rendering any potential remedy useless.
The fact that cases are hard to win, however, merits further consideration. That might be a feature, not a bug, of antitrust law; especially regarding “abuse of dominance” or monopolization cases.[3] Regulations like the DMA—which replace the concepts of “relevant markets” and “market power” or “dominant position” with “core platforms services” and “gatekeepers”—provide regulators with shortcuts to condemn business-model practices. But shortcuts often take us to bad places.
Digital markets also do not present the kinds of “market failures” that warrant ex ante regulation. They do not present natural-monopoly issues, severe externalities, public-goods problems or informational asymmetries—at least, not of such magnitude that they could not be corrected through market-competition (actual or potential) and data-protection or consumer-protection laws.[4]
A common counterargument raises the specter of network effects in online platforms. If a firm moves fast and attracts customers first, those customers attract still more customers and sellers, who would in turn attract even more, and so on. This growth will result in a single firm owning the market forever, or so the story goes. “The winner takes it all,” as ABBA once sang. As David Evans and Richard Schmalensee have pointed out, however, that result is far from inevitable.
In addition to lacking a solid rationale, ex ante regulation of digital markets could have unintended consequences. As Lazar Radic has pointed out:
At the same time, there are a range of risks and possible unintended consequences associated with the DMA, such as the privacy dangers of sideloading and interoperability mandates; worsening product quality as a result of blanket bans on self-preferencing; decreased innovation; obstruction of the rule of law; and double and even triple jeopardy because of the overlaps between the DMA and EU competition rules.
The per se prohibitions against certain business practices included in the DMA or the American Innovation and Choice Online Act (AICOA) would certainly harm consumers. Randy Picker provides a good example: a ban on self-preferencing would make the iPhone experience worse, not better, for consumers.
Moreover, regulations—even where they are warranted—create barriers to entry and regulatory risks, and restrict the monetization of business assets. Both make targeted markets less attractive and could deter potential competitors from entering them. It is possible that the DMA is already having such consequences. As Alba Ribera has explained:
One of the greatest examples of the dichotomy that arises between the different types of consequences that can be generated by the regulatory capture of digital ecosystems can be found in Meta’s recent decision not to launch its new service Threads in the European Economic Space. To the extent that its service could be interpreted as falling within the definition of a “core platform service” belonging to the category of “online social networks” (listed by the DMA), Meta decided to refrain from entering the European market, due to the disproportionate burden that the demanding obligations imposed by the DMA would entail. It should be noted that Threads is still an entrant service in the online social networking market, in contrast to the predominant position occupied by X (previously known as Twitter). In this way, we observe that the categorization as a core platform service unifies and eliminates all the nuances that free competition entails with respect to incoming services in the markets.”[5]
Ex Ante Regulation Could Be Even Worse for Developing Economies
In addition to the aforementioned, we should bear in mind that DMA-like regulation could be even worse for a developing economy (or, at least, for most of them) where digital markets are not yet mature. Ex ante regulation of digital markets, of course, may not be warranted even in mature markets, but bigger and more developed economies may be able to afford the inefficiencies that would be generated.[6]
From the perspective of users, regulation could make services and products more expensive. Facebook has already rolled out a new business model in the EU where the consumer would have no ads (and therefore, no data collection or less collection of data for marketing purposes, at least), but would have to pay a subscription. Some American and European privacy-minded users may prefer said model and they probably would be able to afford it. That is hardly the case of Latin American consumers, who have less than a third the income of their European counterparts.
From the perspective of companies that own and operate digital platforms and services, if regulations like the DMA make markets less profitable, some companies could choose not to enter or leave such markets. As Geoffrey Manne and Dirk Auer have explained with respect to South Africa (but totally relevant to Latin America), “to regulate competition, you first need to attract competition”:
Perhaps the biggest factor cautioning emerging markets against adoption of DMA-inspired regulations is that such rules would impose heavy compliance costs to doing business in markets that are often anything but mature. It is probably fair to say that, in many (maybe most) emerging markets, the most pressing challenge is to attract investment from international tech firms in the first place, not how to regulate their conduct.
The most salient example comes from South Africa, which has sketched out plans to regulate digital markets. The Competition Commission has announced that Amazon, which is not yet available in the country, would fall under these new rules should it decide to enter—essentially on the presumption that Amazon would overthrow South Africa’s incumbent firms.
It goes without saying that, at the margin, such plans reduce either the likelihood that Amazon will enter the South African market at all, or the extent of its entry should it choose to do so. South African consumers thus risk losing the vast benefits such entry would bring—benefits that dwarf those from whatever marginal increase in competition might be gained from subjecting Amazon to onerous digital-market regulations.
It’s also important to take institutional structures into account. Who would enforce the “Latin American DMA”? Agencies that are already constrained with limited resources should prioritize conduct that most harms consumers (like cartels) and markets that could be growth multipliers, like transportation and logistics. As the World Bank has emphasized:[7]
While there are many ways to promote competition, tackling cartels can yield immediate and tangible benefits, especially for poor households, with little risks of unintended consequences for the business environment. Worldwide, much of the recent policy dialogue on competition issues has focused on information technology, especially social networks and online commerce platforms, as well as the broader rise of global corporate market power. Policies designed to address the potential anticompetitive impacts of these developments are complex and risk undermining the business environment by weakening incentives for firms to innovate and grow. By contrast, cartels can be identified and eliminated, or prevented from forming, through relatively simple, well-established policies and enforcement mechanisms” (emphasis added).
In that regard, a recent report on Peru from the Organisation for Economic Co-operation and Development (OECD) points out that Indecopi—the Peruvian competition agency—lacks the resources to exercise even its more basic functions:
The resources dedicated to Indecopi’s competition branch seem insufficient to perform its required functions. With 46 staff, or about 1.4 per 1 million inhabitants, the competition division is significantly smaller than the average competition agency in the region (4 per million) and the OECD (9 per million) (OECD, 2022). In addition, members of the commission that decides on cases elaborated by the technical secretariat only work part-time, which hampers specialisation and professionalisation of their role and also poses risks about their independence. While the competition branch’s budget increased by 60% to cover the additional responsibility of ex-ante merger review, its budget per staff member (around €50,000) is still only half of the Latin American and a third of the OECD average” (citations omitted).
First the Horses, then the Cart
Before considering new regulations, Latin American countries should think carefully about what we want. Do we really need to “tame” big internet companies? Are they somehow a constraint on growth and innovation? Are they creating inefficiencies or inequities? That is hardly the case. If anything, we need more access and use of digital platforms to enable our citizens to get access to education and expanded markets.
I ask myself: why can’t we aspire to have novel services and platforms, developed in our region? It was 23 years ago that Hernando de Soto asked this about Bill Gates:[8]
Apart from his personal genius, how much of his success is due to his cultural background and his “Protestant ethic”? And how much is due to the legal property system of the United States?
How many software innovations could he have made without patents to protect them? How many deals and long-term projects could he have carried without enforceable contracts? How many risks could he have taken at the beginning without limited liability systems and insurance policies?”
If we would like to have entrepreneurs and creators like Bill Gates, Steve Jobs, Sergey Brin, Larry Page, Mark Zuckerberg, and the like, why don’t we start with the basics: rule of law, protecting property rights, and enforcing contracts. Let’s create a friendly business environment. For those of you outside Latin America: this is not the case now. The best-positioned Latin American country in the World Bank’s Ease of Doing Business ranking is Chile, in 59th place.
A 2019 report by the OECD about the digital transformation of Latin America lists the key policy areas that the countries in the region should consider:
…in order to create and maintain a healthy digital environment that promotes diversity and helps seize the benefits of the digital transformation, including productivity growth. These include: enhancing access to broadband networks to reduce digital divides, strengthening the diffusion of digital technologies, fostering healthy business dynamism and efficient resource reallocation to enable the growth of digitally intensive firms and SMEs, supporting the development of skills and finally, creating new opportunities for trade. (emphasis in the original).
Among all these policy reforms, the one that may be most urgent—especially considering the implementation time it needs—is to reform telecommunications regulation in order to promote more investment in infrastructure and universal access. Although in recent years the number of people in Latin America with mobile-internet access has nearly doubled, there is still a significant gap in terms of coverage and usage. According to GSMA Intelligence:
Some 190 million people across the region (of the 230 million unconnected), in both urban and rural areas, live in locations with mobile internet network coverage but do not access the internet. Despite a continued decline in service prices, this usage gap remains due to a lack of affordability. Low income levels in some population segments are an important factor, but regressive, short-termist tax policies also artificially raise the price of internet connectivity for low-income populations.
Sometimes, it’s necessary to state the obvious. We cannot think about regulating markets that are not yet developed, and with little information about how they will develop and evolve. Importing rules that will likely be counterproductive even in developed markets like Europe and the United States would be even worse for developing countries, with incipient digital ecosystems.
In the best-case scenario—if I am wrong and the regulation of digital markets does not deter entry—we would be promoting the generation of regional services mounted on the platforms that already exist. In the worst-case scenario, we would deprive our consumers of digital platforms and the benefits they bring.
[1] It is, of course, debatable whether search engines, e-commerce platforms, and social networks are in the same industry or “market,” with the same dynamics, benefits, and problems.
[2] Of course, one can point to problems associated with these platforms—such as the proliferation of “fake news” or the misuse of personal data—but these are not directly related to competition (or its absence).
[3] Indeed, we often run the risk of condemning business practices and models we don’t fully understand. Sometimes even the business that implement such models don’t fully know or understand the impact of such practices. See Frank Easterbrook’s classic “The Limits of Antitrust.”
[4] See: COOTER, Robert and Tomas ULEN. Law and Economics. New York: Addison, Wesley, Longman, 2000. pp. 40-43; VISCUSI, W. Kip, Joseph E. HARRINGTON, Jr. and John M. VERNON. Economics of Regulation and Antitrust. The MIT Press: Cambridge, 2005. pp. 376-379.
[5] Free translation of the following text: “Uno de los mayores ejemplos de la dicotomía que se erige entre los distintos tipos de consecuencias que se pueden generar por la captura regulatoria de los ecosistemas digitales lo podemos encontrar en la reciente decisión de Meta, de no lanzar su nuevo servicio Threads en el Espacio Económico Europeo. En la medida en que su servicio podría interpretarse de forma que cayera dentro de la definición de un “servicio básico de plataforma” perteneciente a la categoría de redes sociales en línea” (listada por la LMD), Meta decidió abstenerse de entrar en el mercado europeo, por la carga desproporcionada que le supondría las exigentes obligaciones impuestas por la LMD. Cabe notar que Threads es aún un servicio entrante en el mercado de redes sociales en línea, en contraste con la posición predominante ocupada por la actual X (anteriormente conocida como Twitter). De esta forma, observamos que la categorización como servicio básico de plataforma unifica y elimina todos los matices que el propio juego de la libre competencia opera respecto de servicios entrantes en los mercados”.
[6] “While perhaps the EU—the world’s third largest economy—can afford to impose costly and burdensome regulation on digital companies because it has considerable leverage to ensure (with some, though as we have seen, by no means absolute, certainty) that they will not desert the European market, smaller economies that are unlikely to be seen by GAMA as essential markets are playing a different game”. RADIC, Lazar. Digital-Market Regulation: One Size Does Not Fit All. April 17, 2023. Available at: https://truthonthemarket.com/2023/04/17/digital-market-regulation-one-size-does-not-fit-all.
[7]WORLD BANK. Fixing Markets, Not Prices. Policy Options to Tackle Economic Cartels in Latin America and the Caribbean (2021) p. 8. Available at: https://documents1.worldbank.org/curated/en/148021625810668365/pdf/Fixing-Markets-Not-Prices-Policy-Options-to-Tackle-Economic-Cartels-in-Latin-America-and-the-Caribbean.pdf.
[8] DE SOTO, Hernando. The Mistery of Capital. Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic Books, 2000. pp. 223-224.