Reasonable people may disagree about their merits, but digital-competition regulations are now the law of the land in many jurisdictions, including the EU and the UK. Policymakers in those jurisdictions will thus need to successfully navigate heretofore uncharted waters in order to implement these regulations reasonably. In recent comments that we submitted to the UK’s Competition and Markets Authority on the recently passed Digital Markets, Competition and Consumers (DMCC) bill, we tried to outline precisely that sort of “positive agenda” for digital-competition enforcement.
Most digital-competition regulations—including the DMCC and the EU’s Digital Markets Act (DMA)—give competition authorities new and far-reaching powers. Ultimately, this affords them far greater discretion to shape digital markets according to what they perceive to be consumers’ best interests. But as a famous quote from Spider-Man’s Uncle Ben has it, “with great power comes great responsibility”.
That competition authorities have gained vast new powers does not mean they should wield them indiscriminately. Precisely because these new powers are so broad, they have the potential to deteriorate market conditions if deployed carelessly. While this will undoubtedly be an iterative process, some overarching regulatory and enforcement principles appear essential:
- Prioritize consumers: Measure success by assessing outcomes for consumers, including price, quality, and innovation;
- Establish clear metrics and conduct regular assessments: Design specific, measurable indicators of success, and evaluate outcomes frequently to ensure implementation remains effective and relevant;
- Respect platform autonomy: Ensure that firms remain the primary designers of their platforms;
- Implement robust procedural safeguards and evidentiary standards: Minimize unintended consequences through sound legal processes and evidence-based decisionmaking;
- Foster innovation and technological progress: Ensure regulations do not stifle innovation, but rather, encourage it across the digital ecosystem.
These principles are discussed in greater detail below.
Prioritize Consumers
Consumers’ well-being should be the metric by which digital-competition enforcement and compliance are ultimately assessed.
This will mean distinguishing conduct that “harms” competitors, because a rival brings superior products to the market, from conduct that harms consumers by distorting competition and foreclosing rivals. Preventing the former would penalize consumers by forcing so-called “designated” firms to degrade their products and by dampening their incentives to continue to improve them.
Some simple procedural and substantive guardrails could ensure that enforcement ultimately delivers the goods for consumers. For example, allowing defendants to make the case that increases in size, scope, or popularity are due to competition on the merits, rather than a chronic and entrenched position of market power. This would be useful even in jurisdictions that have rejected effects analysis (like the EU), if for nothing else but to determine whether remedies are succeeding or failing.
Likewise, favoring light-touch remedies over more intrusive alternatives would reduce the risk that DMCC enforcement leads firms to degrade their platforms in order to comply with its provisions.
Establish Clear Metrics and Conduct Regular Assessments
A second important point is that the deployment of new regulation is a discovery process.
Regulators (including the CMA and the European Commission) ought to require multiple iterations of new rules, learning from each as they proceed. Indeed, despite some similarities with competition law, the DMA and DMCC largely rest on untested rules and procedures. This is not inherently bad or good, but it does increase the scope for enforcement errors that could harm stakeholders, including consumers and small businesses.
Errors can largely be avoided by defining clear metrics for success, repeatedly assessing whether they are met, and learning from identified successes and/or failures to improve the legal regime in the future. In short, digital-competition enforcement should be dynamic, with repeated reassessments of its effectiveness.
There are many ways that positive feedback loops can be incorporated into digital-competition enforcement. These include establishing clear metrics for success; creating processes to test rules, and to identify and impute potential failures,such as regulatory sandboxes, experiments, and structured regulation; and defining procedures that enable enforcers to act on previously unavailable information and change their regulatory stance accordingly.
A look at the European experience with the DMA may prove enlightening in this respect. At the time of writing, European users still cannot directly click on Google Maps locations from the Google search-engine results page.
In a perfect world, regulations like the DMCC need to identify such failures (ideally before the rules are rolled out to hundreds of millions of users), and then determine whether they are inherent in the legal regime or whether they amount to noncompliance by firms. Depending on the answer, this may lead the regulator either to open noncompliance proceedings (if firms are to blame) or to rethink implementation (if degraded service is a direct consequence of the rule).
This is much easier said than done. But creating processes that facilitate such assessments, and using them to improve the rules going forward, is essential to maximize positive outcomes for consumers.
Respect Platform Autonomy
A third guiding principle is that designated firms—rather than regulators or (even moreso) competitors—should remain the platforms’ central designers.
The basic issue is that it is the platforms themselves whose incentives are the most (though not perfectly) aligned with consumers. Indeed, direct competitors will generally stand to benefit if a platform becomes highly degraded, as this may cause consumers to switch platforms. Similarly, while regulators do not benefit from degrading a “strategic market status” (SMS) firm’s services, nor are they likely to suffer severe repercussions if it happens.
The same does not hold for platforms. To a first approximation, when consumers are dissatisfied, even a monopoly platform may suffer significant losses. Consumers may switch platforms or reduce their time on the platform, either of which harms the firm’s bottom line and gives it an incentive to avoid offering a degraded service.
In short, platforms have better—though certainly not perfect—incentives than anyone else to design services that are optimal for users. This does not mean other stakeholders shouldn’t have any input into the scope and shape of remedies or how they are rolled out, but rather that key platform-design decisions should ultimately reside with a platform’s owner.
In practice, this behooves policymakers to exhibit some deference toward platforms’ product-design philosophy and key product differentiators. For instance, if a platform has built its success on features like a frictionless user interface or data security, then enforcers should favor remedies that preserve these key differentiators, even if this might entail less than optimal competition at the margin.
This is simply a recognition that, if a platform has become highly successful by offering certain features to users, there is a high likelihood that users value them, and enforcers should thus attempt to preserve them. In other words, there may be tradeoffs between bolstering competition (or contestability) and certain platform features. The optimal balance is unlikely to be one where no weight is given to platform features.
Robust Procedural Safeguards and Evidentiary Standards
Fourth, enforcers should bear in mind the maxim: “first, do no harm.” Indeed, while unintended consequences are largely unavoidable when intervening in complex systems like digital-platform markets, some procedural and evidentiary safeguards can minimize these undesired consequences.
In general, these safeguards should guarantee:
- That enforcers intervene only when necessary; and
- That, when interventions occur, they are as surgical as possible.
In practice, this means enforcers should ensure that remedies do not degrade the usability of online services, as has arguably been the case in the EU under DMA.
This can be achieved by, among other things, granting firms the time (in terms of compliance deadlines) and flexibility (by testing multiple iterations of remedies) to roll out effective remedies. Similarly, enforcers should generally favor simple remedies that affect just one part of an online platform, rather than more complex remedy packages that could have wider-reaching unintended consequences. A corollary is that enforcement actions are only appropriate when enforcers have a clear sense that remedies would enable markets to function better than the status quo.
In general, enforcers should also be open to the notion that enforcement could have potentially unintended and undesirable effects on consumers (contra). After all, other digital-market regulations—notably, the EU’s General Data Protection Regulation (GDPR)—have been shown to harm innovation and competition (here and here). There is no reason to assume digital-competition regulations like the DMA or DMCC wouldn’t suffer similar issues if enforcers are reckless.
Finally, enforcers should intervene only when there is a clear sense that the market is not sufficiently disciplining SMS firms; this, in turn, implies that services should only be designated when there is clear evidence that competition is failing, and that a platform has significant market power.
Foster Innovation and Technological Progress
Finally, we have not reached the end of digital history. Online platform markets, including those services designated under digital-competition regulations, could (and likely will) continue to evolve and improve dramatically over the coming decades. This is likely to be especially true as generative artificial-intelligence technology continues to augment these services.
Ensuring this innovation continues apace will require that enforcers preserve (designated) firms’ incentives to invest in their services. These incentives may sometimes be enhanced by boosting competition, but they also depend on firms (even designated services) being able to earn risk-adjusted returns on their investments.
Enforcers should thus be particularly vigilant that DMCC enforcement does not expropriate designated firms, or else their incentives to continue innovating may be severely diminished (and these weakened incentives may have a knock-on effect on rivals’ efforts if innovation is seen as a strategic complement). The bottom line is that, pushed to their limits, mandated competition and transfers of rents away from gatekeepers could have dramatic effects on the innovative output of some of the world’s leading innovators.
Conclusion
Legitimate concerns were raised when the DMA and DMCC were passed into law.
Indeed, if executed poorly, these regulations have the potential to significantly degrade consumers’ online experience, with little to no benefits to competition. This is arguably what has occurred in the EU under the DMA.
That these regulations are now the law of the land should not obscure such challenges. Instead, these early warning signs suggest it is essential to fine-tune guidance and other policy documents that will drive enforcement in the months and years to come.
