Imagine a world where digital-competition policy was guided by a desire to foster startup activity, competitiveness and, ultimately, growth. Competition policymakers would promote market conditions that enable new digital services to rapidly launch, gain user traction, and achieve greater scale. All of this would improve productivity, drive down prices for existing services, and help to make the world a wealthier place.
This is not entirely different from what former Italian Prime Minister and European Central Bank President Mario Draghi proposed in his recent report calling on Europe to pare back its regulatory overreach. Unfortunately, there are growing signs the European Union is heading in the precise opposite direction with its rules pertaining to digital markets—including the General Data Protection Regulation (GDPR), the Artificial Intelligence (AI) Act, the Digital Markets Act (DMA), and EU competition law more generally.
The latest example of this unfortunate trend comes in the form of a recent competition decision in which the European Commission fined Meta close to €800 million. The Commission claims Meta tied its Facebook Marketplace service to its Facebook “personal social network”, thereby excluding rival “online classified ads services.”
But this reasoning has it backward. Preventing Facebook from prominently displaying its product will neuter an important source of differentiation and competition in the online-classifieds space, leaving users with a worse social-network experience (because Facebook can be expected to less functionality as a result) and less competition in online secondhand marketplaces.
In other words, this decision—the latest in a series of European policies that undermine the continent’s competitiveness in online markets—is antithetical to the sound pro-innovation policy that Europe urgently requires.
A Policy at War with Itself
If recent policy developments in the digital world have taught us anything, it is that users dislike unnecessary frictions that hamper their online experience. European consumers balked at changes imposed as a result of the DMA that forced users to go through more steps to obtain the same search results from Google Maps and Google’s other travel services. Given this, competition policy should, where possible, avoid standing in the way of platform-design choices that seamlessly integrate multiple services into a working ecosystem.
A second important starting point is that new online services generally require significant funding to scale and become profitable. Competition policy therefore should, other things equal, not actively prevent investments in new services that compete with established players. The Commission’s Facebook Marketplace decision unfortunately falls flat on both counts.
To start, the decision will degrade Facebook users’ online experience. Preventing Meta from displaying its marketplace favorably on the Facebook home page (see the picture below) means users will either have to go through a choice screen (to decide which secondhand marketplace is displayed by Facebook) or access their preferred secondhand marketplace via other means, such as URLs or apps.
This may sound like a trivial inconvenience, but it is not. Default placements and shortcuts matter in the online world. There is a reason why Amazon’s introduction of “1-click purchasing” was so successful.
Closer to the competition-policy world, the DMA’s requirement to remove hotel listings and maps from Google Search results marginally decreased total hotel bookings, and shifted significant European revenue from hotels to online travel agents like Booking and Expedia. This is because moving results a couple of clicks further away has significant impacts for users. Since then, Google has even experimented with removing specialized search units in order to comply with the DMA, which would be an even greater loss for consumers.
Online competition is all about designing better and more efficient ways to capture consumer attention. Allowing third parties to free ride on successful platforms or apps (by forcing incumbents to accommodate them) undermines their incentives to design such platforms in the first place. The result will be a poorer and less diverse online world.
Just as problematically, policies that prevent self-preferencing and other forms of favorable placement on popular platforms risk diminishing competition and investment even in the very edge services they seek to protect. Thanks to the Commission’s Facebook Marketplace decision, for example, Facebook will no longer be able to capitalize on the synergies between its social network and its marketplace. This nullifies a potentially important competitive advantage for Facebook, reducing its incentives to invest in that segment of the industry. It is good news for competitors, but much less so for consumers.
This might not be so problematic if other firms could pick up the slack, but current interventions also have a detrimental effect on these other players. As Geoffrey Manne has written, bans on self-preferencing also affect incumbent platforms’ incentives to acquire startups in adjacent markets, as it removes platforms’ ability to integrate those services into their ecosystems. This deprives startups of an important exit strategy, thereby reducing their investments.
This effect is further exacerbated by interventionist merger policy that prevents startups from being acquired in the first place. Removing incumbent platforms as a source of investment means new services must either rely on funding from competitively unrelated firms—where synergies tend to be more limited—or from the capital markets. This is particularly problematic in jurisdictions like the EU, where capital markets are seriously underdeveloped.
In short, the vision of competition policy advanced by the European Commission in its Facebook Marketplace decision (and other policies) will degrade online services, discourage incumbents from investing in new services, and cut off funding to startups.
This Is Not Even a Strong Case
The consequences discussed above might be less worrying if the Commission’s Marketplace decision (and other similar policies) delivered the goods in terms of increased competition. But this is extremely unlikely.
The Commission’s case hinges on a gerrymandered market definition that looks only at “personal social networks.” The goal is to present the Facebook social network as a unique and necessary gateway to allow other online secondhand marketplaces to attract consumers. In reality, however, there are countless other websites that could service this purpose (see here and here). Rivals thus have numerous other ways to reach consumers.
Even worse, the Commission overlooks the tremendous competition that already exists in the secondhand-marketplace sector. Contrary to what it claims, there is indeed little sense that the entry of Facebook Marketplace has led to lower competition in this industry. Not only is Meta’s marketplace nowhere near the biggest player in this space (here, here, and here), but newer players like Vinted have grown very rapidly in key segments like secondhand clothes, while established players like eBay have seen steady revenue over the period of alleged infringement.
In short, there is simply no sense in which Meta’s behavior actually harmed competition.
Conclusion
The bottom line is that Europe’s policies in digital markets miss the forest for the trees. They cause real and increasing harm to digital services in Europe in order to address hypothetical competition issues that do not pass the smell test.
Sound digital-markets policy would seek to remove online frictions that prevent new services from being integrated into existing ecosystems, while ensuring that these services can find the funding they require to prosper. Instead, Europe is going after a small group of “Big Tech” firms (nearly all American) because it has predetermined that they are somehow holding back competition in the Old Continent. But breaking existing ecosystems in the hopes that more open ones may emerge in the future is reckless.
All of this is underpinned by the assumption that consumers benefit more from competition within established platforms (several marketplaces competing on Facebook) rather than competition between, and innovation by, the platforms themselves. This vision is becoming increasingly hard to reconcile with market reality.
With the arrival of new leadership at the Commission, now is as good a time as any to chart a new course.
