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Just before Christmas, the European Commission published a draft implementing regulation (DIR) of the Digital Markets Act (DMA), establishing procedural rules that, in the Commission’s own words, seek to bolster “legal certainty,” “due process,” and “effectiveness” under the DMA. The rights of defense laid down in the draft are, alas, anemic. In the long run, this will leave the Commission’s DMA-enforcement decisions open to challenge on procedural grounds before the Court of Justice of the European Union (CJEU).

This is a loss for due process, for third parties seeking to rely on the Commission’s decisions, and for the effectiveness of the DMA itself.

Detailed below are some of the significant problems with the DIR, as well as suggestions for how to address them. Many of these same issues have been highlighted in the comments submitted by likely gatekeepers, law firms, and academics during the open-consultation period. You can also read the brief explainer that Dirk Auer & I wrote on the DIR here.

Access to File

The DIR establishes that parties have the right to access files that the Commission used to issue preliminary findings. But if parties wish to access other documents in the Commission’s file, they will need to submit a “substantiated request.” Among the problems with this approach is that the documents cited in the Commission’s preliminary reference will be of  limited use to defendants, as they are likely to be those used to establish an infringement, and thus unlikely to be exculpatory.

Moreover, as the CJEU has stated, it should not be up to the Commission alone to decide whether to disclose documents in the file. The Commission can preclude documents unrelated to the statement of objections from the administrative procedure, but that isn’t the same as excluding documents that aren’t mentioned in the statement of objections. After all, evidence might be irrelevant for the prosecution but relevant for the defense.

Parties’ right to be heard is unnecessarily circumscribed by requiring that they must “duly substantiate why access to a specific document or part thereof is necessary to exercise its right to be heard.” A party might be hard-pressed to argue convincingly that it needs access to a document based solely on a terse and vague description in the Commission’s file. More generally, why would a document be in the Commission’s file if it is not relevant to the case? The right to be heard cannot be respected where access to information is prohibited.

Solution: The DIR should allow gatekeepers full access to the Commission’s file. This is the norm in antitrust and merger proceedings in the EU where:

undertakings or associations of undertakings that receive a Statement of Objections have the right to see all the evidence, whether it is incriminating or exonerating, in the Commission’s investigation file. [bold in original]

 There is little sense in deviating from this standard in DMA proceedings.

No Role for the Hearing Officer

The DIR does not spell out a role for the hearing officer, a particularly jarring omission given the Commission’s history of acting as “judge, jury and executioner” in competition-law proceedings (see here, here and here). Hearing officers are a staple in antitrust (here and here), as well as in trade proceedings more generally, where their role is to enhance impartiality and objectivity by, e.g., resolving disputes over access to certain documents. As Alfonso Lamadrid has noted, an obvious inference to reach is that DMA proceedings before the Commission are to be less impartial and objective.

Solution: Grant the hearing officer a role in, at the very least, resolving access-to-file and confidentiality disputes.

Cap on the Length of Responses

The DIR establishes a 50-page limit on parties’ responses to the Commission’s preliminary findings. Of course, no such cap is imposed on the Commission in issuing its preliminary findings, designation decisions, and other decisions under the DMA. This imbalance between the Commission’s and respondents’ duties plainly violates the principle of equality of arms—a fundamental element of the right to a fair trial under Article 47 of the EU Charter of Fundamental Rights.

An arbitrary page limit also means that the Commission may not take all relevant facts and evidence into account in its decisions, which will be based largely on the preliminary findings and the related response. This lays the groundwork for subsequent challenges before the courts.

Solution: Either remove the cap on responses to preliminary findings or impose a similar limit on the Commission in issuing those findings.

A ‘Succinct’ Right to Speak

The DIR does not contemplate granting parties oral hearings to explain their defense more fully. Oral hearings are particularly important in cases involving complex and technical arguments and evidence.

While the right to a fair trial does not require oral hearings to be held in every case, “refusing to hold an oral hearing may be justified only in rare cases.” Given that, under the DMA, companies can be fined as much as 20% of their worldwide turnover, these proceedings involve severe financial penalties of a criminal or quasi-criminal nature (here and here), and are thus unlikely to qualify (here).

Solution: Grant parties the ability to request an oral hearing following the preliminary findings.

Legal Uncertainty

As one commenter put it, “the document is striking for what it leaves out.”  As Dirk Auer and I point out, the DIR leaves unanswered such questions as the precise role of third parties in DMA processes; the role of the advisory committee in decision making; whether the college of commissioners or just one commissioner is the ultimate decision maker; whether national authorities will be able to access data gathered by the Commission; and whether there is a role for the European Competition Network in coordinating and allocating cases between the EU and the member states.

Granted, not all of these questions needed to be answered in the DIR (although some—like the role of third parties—arguably should have been). Still, the sooner they are resolved, the better for everyone. 

Solution: Clarify the above questions—either with the final version of the implementing regulation or soon thereafter—in a manual of procedures or best-practice guidelines, as appropriate.

Conclusion

Unless substantive changes are made, the DIR in its current form risks running afoul of a well-established line of jurisprudence highlighting the importance of fundamental rights in antitrust law, which is guaranteed to apply in DMA proceedings as well. One of these is the general principle that judicial and administrative promptness cannot be attained at the expense of parties’ right of defense (here). Ignoring this would not only result in a loss for the rights of defense in the EU, but would also drive a wedge in the effectiveness of the DMA—thereby staining the Commission’s credibility.

As 2023 draws to a close, we wanted to reflect on a year that saw jurisdictions around the world proposing, debating, and (occasionally) enacting digital regulations. Some of these initiatives amended existing ex-post competition laws. Others were more ambitious, contemplating entirely new regulatory regimes from the ground up.

With everything going on, it can be overwhelming even for hardcore antitrust enthusiasts to keep pace with the latest developments. If you have the high-brow interests of a scholar but the jam-packed schedule of a CEO, you have come to the right place. This post is intended to summarize who is doing what, where, and what to make of it.

Status of Tech Regulation Around the World

European Union

In the European Union—the patient zero of tech regulation—two crucial pieces of legislation passed this year: the Digital Markets Act (DMA) and the Digital Services Act (DSA).

But notably, the EU is just now—i.e., six months before the act is set to apply in full to all digital “gatekeepers”—launching a consultation on the DMA’s procedural rules (a draft is available here). Many of those procedural questions remain exceedingly fuzzy (substantive ones, too), such as, e.g.—the role of the advisory committee, the role of third parties in proceedings, national authorities’ access to data gathered by the Commission, and the role to be played (if any) by the European Competition Network. Further, only now is a DMA enforcement unit being created within the Commission, although it is also unclear whether it will have the staffing capacity to satisfy the tight deadlines.

Whether or not the implementing regulation ultimately resolves all of these questions, they should have been settled much sooner. But as is becoming customary in tech regulation, it seems that the political urge to “do something” has once again prevailed over careful consideration and foresight.

United Kingdom

In the United Kingdom, legislation to empower the Competition and Markets Authority’s (CMA) Digital Markets Unit (DMU) is set to be brought to Parliament this term, meaning that it may be discussed in the next two months. Of all the “pending” antitrust bills around the world, this is probably the most likely to be adopted. Although it dropped an earlier dubious proposal on mergers, there remain several significant concerns with the DMU (see here and here for previous commentary). For example, the DMU’s standard of review is surprisingly truncated, considering the expansive powers that would be bestowed on the agency. The DMU would apply the strategic market significance (SMS) tag to entire firms and not just to those operations where the firm may have market power. Moreover, the DMU proposal shows little concern for due process.

One looming question is whether the UK will learn from the EU’s example, and resolve substantive and procedural questions well ahead of imposing any obligations on SMS companies. In the end, whatever the UK does or doesn’t do will have reverberations around the globe, as many countries appear to be adopting a DMA-style designation process for gatekeepers but imposing “code of conduct” obligations inspired by the DMU.

United States

Across the pond, the major antitrust tech bills introduced in Congress have come to a standstill. Despite some 11th hour efforts by their sponsors, neither the American Innovation and Choice Online Act, nor the Open App Markets Act, nor the Journalism Competition and Preservation Act made the cut to be included in the $1.7 trillion, 4,155-page omnibus bill that will be the last vote taken by the 117th Congress. With divided power in the 118th Congress, it’s possible that the push to regulate tech might fizzle out.

What went wrong for antitrust reformers? Republicans and Democrats have always sought different things from the bills. Democrats want to “tame” big tech, hold it accountable for the proliferation of “harmful” content online, and redistribute rents toward competitors and other businesses across the supply chain (e.g., app developers, media organizations, etc.). Republicans, on the other hand, seek to limit platforms’ ability to “censor conservative views” and to punish them for supposedly having done so in the past. The difficulty of aligning these two visions has obstructed decisive movement on the bills. But, more broadly, it also goes to show that the logic for tech regulation is far from homogenous, and that wildly different aims can be pursued under the umbrella of “choice,” “contestability,” and “fairness.”

South Africa

As my colleague Dirk Auer covered yesterday, South Africa has launched a sectoral inquiry into online-intermediation platforms, which has produced a provisional report (see here for a brief overview). The provisional report identifies Apple, Google, Airbnb, Uber Eats, and South Africa’s own Takealot, among others, as “leading online platforms” and offers suggestions to make the markets in which these companies compete more “contestable.” This includes a potential ex ante regulatory regime.

But as Dirk noted, there are certain considerations the developing countries must bear in mind when contemplating ex ante regimes that developed countries do not (or, at least, not to the same extent). Most importantly, these countries are typically highly dependent on foreign investment, which might sidestep those jurisdictions that impose draconian DMA-style laws.

This could be the case with Amazon, which is planning to launch its marketplace in South Africa in February 2023 (the same month the sectoral inquiry is due). The degree and duration of Amazon’s presence might hinge on the country’s regulatory regime for online platforms. If unfavorable or exceedingly ambiguous, the new rules might prompt Amazon and other companies to relocate elsewhere. It is notable that local platform Takealot has, to date, demonstrated market dominance in South Africa, which most observers doubt that Amazon will be able to displace.

India

No one can be quite sure what is going on in India. There has been some agitation for a DMA-style ex ante regulatory regime within the Parliament of India, which is currently debating an amendment to the Competition Act that would, among other things, lower merger thresholds.

More drastically, however, a standing committee on e-commerce (where e-commerce is taken to mean all online commerce, not just retail) issued a report that recommended identifying “gatekeepers” for more stringent supervision under an ex ante regime that would, e.g., bar companies from selling goods on the platforms they own. At its core, the approach appears to assume that the DMA constitutes “best practices” in online competition law, despite the fact that the DMA’s ultimate effects and costs remain a mystery. As such, “best practices” in this area of law may not be very good at all.

Australia

The Australian Competition and Consumer Commission (ACCC) has been conducting a five-year inquiry into digital-platform services, which is due in March 2025. In its recently published fifth interim report, the ACCC recommended codes of conduct (similar to the DMU) for “designated” digital platforms. Questions surrounding the proposed regime include whether the ACCC will have to demonstrate effects; the availability of objective justifications (the latest report mentions security and privacy); and what thresholds would be used to “designate” a company (so far, turnover seems likely).

On the whole, Australia’s strategy has been to follow closely in the footsteps of the EU and the United States. Given this influence from international developments, the current freeze on U.S. tech regulation might have taken some of the wind out of the sails of similar regulatory efforts down under.

China

China appears to be playing a waiting game. On the one hand, it has ramped up antitrust enforcement under the Anti-Monopoly Law (AML). On the other, in August 2022, it introduced the first major amendment since the enactment of the AML, which included a new prohibition on the use of “technology, algorithms and platform rules” to engage in monopolistic behavior. This is clearly aimed at strengthening enforcement against digital platforms. Numerous other digital-specific regulations are also under consideration (with uncertain timelines). These include a platform-classification regime that would subject online platforms to different obligations in the areas of data protection, fair competition, and labor treatment, and a data-security regulation that would prohibit online-platform operators from taking advantage of data for unfair discriminatory practices against the platform’s users or vendors.

South Korea

Seoul was one of the first jurisdictions to pass legislation targeting app stores (see here and here). Other legislative proposals include rules on price-transparency obligations and the use of platform-generated data, as well as a proposed obligation for online news services to remunerate news publishers. With the government’s new emphasis on self-regulation as an alternative to prescriptive regulation, however, it remains unclear whether or when these laws will be adopted.

Germany

Germany recently implemented a reform to its Competition Act that allows the Bundeskartellamt to prohibit certain forms of conduct (such as self-preferencing) without the need to prove anticompetitive harm and that extends the essential-facility doctrine to cover data. The Federal Ministry for Economic Affairs and Climate Action (BMWK) is now considering further amendments that would, e.g., allow the Bundeskartellamt to impose structural remedies following a sectoral inquiry, independent of an abuse; and introduce a presumption that anticompetitive conduct has resulted in profits for the infringing company (this is relevant for the purpose of calculating fines and, especially, for proving damages in private enforcement).

Canada

Earlier this year, Canada reformed its abuse-of-dominance provisions to bolster fines and introduce a private right of access to tribunals. It also recently opened a consultation on the future of competition policy, which invites input about the objectives of antitrust, the enforcement powers of the Competition Bureau, and the effectiveness of private remedies, and raises the question of whether digital markets require special rules (see this report). Although an ex-ante regime doesn’t currently appear to be in the cards, Canada’s strategy has been to wait and see how existing regulatory proposals play out in other countries.

Turkey

Turkey is considering a DMA-inspired amendment to the Competition Act that would, however, go beyond even the EU’s ex-ante regulatory regime in that it would not allow for any objective justifications or defenses.

Japan

In 2020, Japan introduced the Act on Improving Transparency and Fairness of Digital Platforms, which stipulates that designated platforms should take voluntary and proactive steps to ensure transparency and “fairness” vis-a-vis businesses. This “co-regulation” approach differs from other regulations in that it stipulates the general framework and leaves details to businesses’ voluntary efforts. Japan is now, however, also contemplating DMA-like ex-ante regulations for mobile ecosystems, voice assistants, and wearable devices.

Six Hasty Conclusions from the Even Hastier Global Wave of Tech Regulation

  • Most of these regimes are still in the making. Some have just been proposed and have a long way to go until they become law. The U.S. example shows how lack of consensus can derail even the most apparently imminent tech bill.
  • Even if every single country covered in this post were to adopt tech legislation, we have seen that the goals pursued and the obligations imposed can be wildly different and possibly contradictory. Even within a given jurisdiction, lawmakers may not agree what the purpose of the law should be (see, e.g., the United States). And, after all, it should probably be alarming if the Chinese Communist Party and the EU had the same definition of “fairness.”
  • Should self-preferencing bans, interoperability mandates, and similar rules that target online platforms be included under the banner of antitrust? In some countries, like Turkey, rules copied and pasted from the DMA have been proposed as amendments to the national competition act. But the EU itself insists that competition law and the DMA are separate things. Which is it? At this stage, shouldn’t the first principles of digital regulation be clearer?
  • In the EU, in particular, multiple overlapping ex-ante regimes can lead to double and even triple jeopardy, especially given their proximity to antitrust law. In other words, there is a risk that the same conduct will be punished at both the national and EU level, and under the DMA and EU competition rules.
  • In light of the above, global ex-ante regulatory compliance is going to impose mind-boggling costs on targeted companies, especially considering the opacity of some provisions and the substantial differences among countries (think, e.g., of Turkey, where there is no space for objective justifications).
  • There are always complex tradeoffs to be made and sensitive considerations to keep in mind when deciding whether and how to regulate the most successful tech companies. The potential for costly errors is multiplied, however, in the case of developing countries, where there is a realistic risk of repelling “dominant” companies before they even enter the market (see South Africa).

Some of the above issues could be addressed with some foresight. That, however, seems to be sorely lacking in the race to push tech regulation through the door at any cost. As distinguished scholars like Fred Jenny have warned, caving to the political pressure of economic populism can come at the expense of competition and innovation. Let’s hope that is not the case here, there, or anywhere.

The blistering pace at which the European Union put forward and adopted the Digital Markets Act (DMA) has attracted the attention of legislators across the globe. In its wake, countries such as South Africa, India, Brazil, and Turkey have all contemplated digital-market regulations inspired by the DMA (and other models of regulation, such as the United Kingdom’s Digital Markets Unit and Australia’s sectoral codes of conduct).

Racing to be among the first jurisdictions to regulate might intuitively seem like a good idea. By emulating the EU, countries could hope to be perceived as on the cutting edge of competition policy, and hopefully earn a seat at the table when the future direction of such regulations is discussed.

There are, however, tradeoffs involved in regulating digital markets, which are arguably even more salient in the case of emerging markets. Indeed, as we will explain here, these jurisdictions often face challenges that significantly alter the ratio of costs and benefits when it comes to enacting regulation.

Drawing from a paper we wrote with Sam Bowman about competition policy in the Association of Southeast Asian Nations (ASEAN) zone, we highlight below three of the biggest issues these initiatives face.

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.

While other tech firms—such as Alphabet, Meta, and Apple—are already active in most emerging jurisdictions, regulation might still have a similar deterrent effect to their further investment. Indeed, the infrastructure deployed by big tech firms in these jurisdictions is nowhere near as extensive as in Western countries. To put it mildly, emerging-market consumers typically only have access to slower versions of these firms’ services. A quick glimpse at Google Cloud’s global content-delivery network illustrates this point well (i.e., that there is far less infrastructure in developing markets):

Ultimately, emerging markets remain relatively underserved compared to those in the West. In such markets, the priority should be to attract tech investment, not to impose regulations that may further slow the deployment of critical internet infrastructure.

Growth Is Key

The potential to boost growth is the most persuasive argument for emerging markets to favor a more restrained approach to competition law and regulation, such as that currently employed in the United States.

Emerging nations may not have the means (or the inclination) to equip digital-market enforcers with resources similar to those of the European Commission. Given these resource constraints, it is essential that such jurisdictions focus their enforcement efforts on those areas that provide the highest return on investment, notably in terms of increased innovation.

This raises an important point. A recent empirical study by Ross Levine, Chen Lin, Lai Wei, and Wensi Xie finds that competition enforcement does, indeed, promote innovation. But among the study’s more surprising findings is that, unlike other areas of competition enforcement, the strength of a jurisdiction’s enforcement of “abuse of dominance” rules does not correlate with increased innovation. Furthermore, jurisdictions that allow for so-called “efficiency defenses” in unilateral-conduct cases also tend to produce more innovation. The authors thus conclude that:

From the perspective of maximizing patent-based innovation, therefore, a legal system that allows firms to exploit their dominant positions based on efficiency considerations could boost innovation.

These findings should give pause to policymakers who seek to emulate the European Union’s DMA—which, among other things, does not allow gatekeepers to put forward so-called “efficiency defenses” that would allow them to demonstrate that their behavior benefits consumers. If growth and innovation are harmed by overinclusive abuse-of-dominance regimes and rules that preclude firms from offering efficiency-based defenses, then this is probably even more true of digital-market regulations that replace case-by-case competition enforcement with per se prohibitions.

In short, the available evidence suggests that, faced with limited enforcement resources, emerging-market jurisdictions should prioritize other areas of competition policy, such as breaking up or mitigating the harmful effects of cartels and exercising appropriate merger controls.

These findings also cut in favor of emphasizing the traditional antitrust goal of maximizing consumer welfare—or, at least, protecting the competitive process. Many of the more recent digital-market regulations—such as the DMA, the UK DMU, and the ACCC sectoral codes of conduct—are instead focused on distributional issues. They seek to ensure that platform users earn a “fair share” of the benefits generated on a platform. In light of Levine et al.’s findings, this approach could be undesirable, as using competition policy to reduce monopoly rents may lead to less innovation.

In short, traditional antitrust law’s focus on consumer welfare and relatively limited enforcement in the area of unilateral conduct may be a good match for emerging nations that want competition regimes that maximize innovation under important resource constraints.

Consider Local Economic and Political Conditions

Emerging jurisdictions have diverse economic and political profiles. These features, in turn, affect the respective costs and benefits of digital-market regulations.

For example, digital-market regulations generally offer very broad discretion to competition enforcers. The DMA details dozens of open-ended prohibitions upon which enforcers can base infringement proceedings. Furthermore, because they are designed to make enforcers’ task easier, these regulations often remove protections traditionally afforded to defendants, such as appeals to the consumer welfare standard or efficiency defenses. The UK’s DMU initiative, for example, would lower the standard of proof that enforcers must meet.

Giving authorities broad powers with limited judicial oversight might be less problematic in jurisdictions where the state has a track record of self-restraint. The consequences of regulatory discretion might, however, be far more problematic in jurisdictions where authorities routinely overstep the mark and where the threat of corruption is very real.

To name but two, countries like South Africa and India rank relatively low in the World Bank’s “ease of doing business index” (84th and 62nd, respectively). They also rank relatively low on the Cato Institute’s “human freedom index” (77th and 119th, respectively—and both score particularly badly in terms of economic freedom). This suggests strongly that authorities in those jurisdictions are prone to misapply powers derived from digital-market regulations in ways that hurt growth and consumers.

To make matters worse, outright corruption is also a real problem in several emerging nations. Returning to South Africa and India, both jurisdictions face significant corruption issues (they rank 70th and 85th, respectively, on Transparency International’s “Corruption Perception Index”).

At a more granular level, an inquiry in South Africa revealed rampant corruption under former President Jacob Zuma, while current President Cyril Ramaphosa also faces significant corruption allegations. Writing in the Financial Times in 2018, Gaurav Dalmia—chair of Delhi-based Dalmia Group Holdings—opined that “India’s anti-corruption battle will take decades to win.”

This specter of corruption thus counsels in favor of establishing competition regimes with sufficient checks and balances, so as to prevent competition authorities from being captured by industry or political forces. But most digital-market regulations are designed precisely to remove those protections in order to streamline enforcement. The risk that they could be mobilized toward nefarious ends are thus anything but trivial. This is of particular concern, given that such regulations are typically mobilized against global firms in order to shield inefficient local firms—raising serious risks of protectionist enforcement that would harm local consumers.

Conclusion

The bottom line is that emerging markets would do well to reconsider the value of regulating digital markets that have yet to reach full maturity. Recent proposals threaten to deter tech investments in these jurisdictions, while raising significant risks of reduced growth, corruption, and consumer-harming protectionism.

Under a draft “adequacy” decision unveiled today by the European Commission, data-privacy and security commitments made by the United States in an October executive order signed by President Joe Biden were found to comport with the EU’s General Data Protection Regulation (GDPR). If adopted, the decision would provide a legal basis for flows of personal data between the EU and the United States.

This is a welcome development, as some national data-protection authorities in the EU have begun to issue serious threats to stop U.S.-owned data-related service providers from offering services to Europeans. Pending more detailed analysis, I offer some preliminary thoughts here.

Decision Responds to the New U.S. Data-Privacy Framework

The Commission’s decision follows the changes to U.S. policy introduced by Biden’s Oct. 7 executive order. In its July 2020 Schrems II judgment, the EU Court of Justice (CJEU) invalidated the prior adequacy decision on grounds that EU citizens lacked sufficient redress under U.S. law and that U.S. law was not equivalent to “the minimum safeguards” of personal data protection under EU law. The new executive order introduced redress mechanisms that include creating a civil-liberties-protection officer in the Office of the Director of National Intelligence (DNI), as well as a new Data Protection Review Court (DPRC). The DPRC is proposed as an independent review body that will make decisions that are binding on U.S. intelligence agencies.

The old framework had sparked concerns about the independence of the DNI’s ombudsperson, and what was seen as insufficient safeguards against external pressures that individual could face, including the threat of removal. Under the new framework, the independence and binding powers of the DPRC are grounded in regulations issued by the U.S. Attorney General.

To address concerns about the necessity and proportionality of U.S. signals-intelligence activities, the executive order also defines the “legitimate objectives” in pursuit of which such activities can be conducted. These activities would, according to the order, be conducted with the goal of “achieving a proper balance between the importance of the validated intelligence priority being advanced and the impact on the privacy and civil liberties of all persons, regardless of their nationality or wherever they might reside.”

Will the Draft Decision Satisfy the CJEU?

With this draft decision, the European Commission announced it has favorably assessed the executive order’s changes to the U.S. data-protection framework, which apply to foreigners from friendly jurisdictions (presumed to include the EU). If the Commission formally adopts an adequacy decision, however, the decision is certain to be challenged before the CJEU by privacy advocates. In my preliminary analysis after Biden signed the executive order, I summarized some of the concerns raised regarding two aspects relevant to the finding of adequacy: proportionality of data collection and availability of effective redress.

Opponents of granting an adequacy decision tend to rely on an assumption that a finding of adequacy requires virtually identical substantive and procedural privacy safeguards as required within the EU. As noted by the European Commission in the draft decision, this position is not well-supported by CJEU case law, which clearly recognizes that only “adequate level” and “essential equivalence” of protection are required from third-party countries under the GDPR.

To date, the CJEU has not had to specify in greater detail precisely what, in their view, these provisions mean. Instead, the Court has been able simply to point to certain features of U.S. law and practice that were significantly below the GDPR standard (e.g., that the official responsible for providing individual redress was not guaranteed to be independent from political pressure). Future legal challenges to a new Commission adequacy decision will most likely require the CJEU to provide more guidance on what “adequate” and “essentially equivalent” mean.

In the draft decision, the Commission carefully considered the features of U.S. law and practice that the Court previously found inadequate under the GDPR. Nearly half of the explanatory part of the decision is devoted to “access and use of personal data transferred from the [EU] by public authorities in the” United States, with the analysis grounded in CJEU’s Schrems II decision. The Commission concludes that, collectively, all U.S. redress mechanisms available to EU persons:

…allow individuals to have access to their personal data, to have the lawfulness of government access to their data reviewed and, if a violation is found, to have such violation remedied, including through the rectification or erasure of their personal data.

The Commission accepts that individuals have access to their personal data processed by U.S. public authorities, but clarifies that this access may be legitimately limited—e.g., by national-security considerations. Unlike some of the critics of the new executive order, the Commission does not take the simplistic view that access to personal data must be guaranteed by the same procedure that provides binding redress, including the Data Protection Review Court. Instead, the Commission accepts that other avenues, like requests under the Freedom of Information Act, may perform that function.

Overall, the Commission presents a sophisticated, yet uncynical, picture of U.S. law and practice. The lack of cynicism, e.g., about the independence of the DPRC adjudicative process, will undoubtedly be seen by some as naïve and unrealistic, even if the “realism” in this case is based on speculations of what might happen (e.g., secret changes to U.S. policy), rather than evidence. Given the changes adopted by the U.S. government, the key question for the CJEU will be whether to follow the Commission’s approach or that of the activists.

What Happens Next?

The draft adequacy decision will now be scrutinized by EU and national officials. It remains to be seen what will be the collective recommendation of the European Data Protection Board and of the representatives of EU national governments, but there are signs that some domestic data-protection authorities recognize that a finding of adequacy may be appropriate (see, e.g., the opinion from the Hamburg authority).

It is also likely that a significant portion of the European Parliament will be highly critical of the decision, even to the extent of recommending not to adopt it. Importantly, however, none of the consulted bodies have formal power to bind the European Commission on this question. The whole process is expected to take at least several months.

European Union officials insist that the executive order President Joe Biden signed Oct. 7 to implement a new U.S.-EU data-privacy framework must address European concerns about U.S. agencies’ surveillance practices. Awaited since March, when U.S. and EU officials reached an agreement in principle on a new framework, the order is intended to replace an earlier data-privacy framework that was invalidated in 2020 by the Court of Justice of the European Union (CJEU) in its Schrems II judgment.

This post is the first in what will be a series of entries examining whether the new framework satisfies the requirements of EU law or, as some critics argue, whether it does not. The critics include Max Schrems’ organization NOYB (for “none of your business”), which has announced that it “will likely bring another challenge before the CJEU” if the European Commission officially decides that the new U.S. framework is “adequate.” In this introduction, I will highlight the areas of contention based on NOYB’s “first reaction.”

The overarching legal question that the European Commission (and likely also the CJEU) will need to answer, as spelled out in the Schrems II judgment, is whether the United States “ensures an adequate level of protection for personal data essentially equivalent to that guaranteed in the European Union by the GDPR, read in the light of Articles 7 and 8 of the [EU Charter of Fundamental Rights]” Importantly, as Theodore Christakis, Kenneth Propp, and Peter Swire point out, “adequate level” and “essential equivalence” of protection do not necessarily mean identical protection, either substantively or procedurally. The precise degree of flexibility remains an open question, however, and one that the EU Court may need to clarify to a much greater extent.

Proportionality and Bulk Data Collection

Under Article 52(1) of the EU Charter of Fundamental Rights, restrictions of the right to privacy must meet several conditions. They must be “provided for by law” and “respect the essence” of the right. Moreover, “subject to the principle of proportionality, limitations may be made only if they are necessary” and meet one of the objectives recognized by EU law or “the need to protect the rights and freedoms of others.”

As NOYB has acknowledged, the new executive order supplemented the phrasing “as tailored as possible” present in 2014’s Presidential Policy Directive on Signals Intelligence Activities (PPD-28) with language explicitly drawn from EU law: mentions of the “necessity” and “proportionality” of signals-intelligence activities related to “validated intelligence priorities.” But NOYB counters:

However, despite changing these words, there is no indication that US mass surveillance will change in practice. So-called “bulk surveillance” will continue under the new Executive Order (see Section 2 (c)(ii)) and any data sent to US providers will still end up in programs like PRISM or Upstream, despite of the CJEU declaring US surveillance laws and practices as not “proportionate” (under the European understanding of the word) twice.

It is true that the Schrems II Court held that U.S. law and practices do not “[correlate] to the minimum safeguards resulting, under EU law, from the principle of proportionality.” But it is crucial to note the specific reasons the Court gave for that conclusion. Contrary to what NOYB suggests, the Court did not simply state that bulk collection of data is inherently disproportionate. Instead, the reasons it gave were that “PPD-28 does not grant data subjects actionable rights before the courts against the US authorities” and that, under Executive Order 12333, “access to data in transit to the United States [is possible] without that access being subject to any judicial review.”

CJEU case law does not support the idea that bulk collection of data is inherently disproportionate under EU law; bulk collection may be proportionate, taking into account the procedural safeguards and the magnitude of interests protected in a given case. (For another discussion of safeguards, see the CJEU’s decision in La Quadrature du Net.) Further complicating the legal analysis here is that, as mentioned, it is far from obvious that EU law requires foreign countries offer the same procedural or substantive safeguards that are applicable within the EU.

Effective Redress

The Court’s Schrems II conclusion therefore primarily concerns the effective redress available to EU citizens against potential restrictions of their right to privacy from U.S. intelligence activities. The new two-step system proposed by the Biden executive order includes creation of a Data Protection Review Court (DPRC), which would be an independent review body with power to make binding decisions on U.S. intelligence agencies. In a comment pre-dating the executive order, Max Schrems argued that:

It is hard to see how this new body would fulfill the formal requirements of a court or tribunal under Article 47 CFR, especially when compared to ongoing cases and standards applied within the EU (for example in Poland and Hungary).

This comment raises two distinct issues. First, Schrems seems to suggest that an adequacy decision can only be granted if the available redress mechanism satisfies the requirements of Article 47 of the Charter. But this is a hasty conclusion. The CJEU’s phrasing in Schrems II is more cautious:

…Article 47 of the Charter, which also contributes to the required level of protection in the European Union, compliance with which must be determined by the Commission before it adopts an adequacy decision pursuant to Article 45(1) of the GDPR

In arguing that Article 47 “also contributes to the required level of protection,” the Court is not saying that it determines the required level of protection. This is potentially significant, given that the standard of adequacy is “essential equivalence,” not that it be procedurally and substantively identical. Moreover, the Court did not say that the Commission must determine compliance with Article 47 itself, but with the “required level of protection” (which, again, must be “essentially equivalent”).

Second, there is the related but distinct question of whether the redress mechanism is effective under the applicable standard of “required level of protection.” Christakis, Propp, and Swire offered a helpful analysis suggesting that it is, considering the proposed DPRC’s independence, effective investigative powers,  and authority to issue binding determinations. I will offer a more detailed analysis of this point in future posts.

Finally, NOYB raised a concern that “judgment by ‘Court’ [is] already spelled out in Executive Order.” This concern seems to be based on the view that a decision of the DPRC (“the judgment”) and what the DPRC communicates to the complainant are the same thing. Or in other words, that legal effects of a DPRC decision are exhausted by providing the individual with the neither-confirm-nor-deny statement set out in Section 3 of the executive order. This is clearly incorrect: the DPRC has power to issue binding directions to intelligence agencies. The actual binding determinations of the DPRC are not predetermined by the executive order, only the information to be provided to the complainant is.

What may call for closer consideration are issues of access to information and data. For example, in La Quadrature du Net, the CJEU looked at the difficult problem of notification of persons whose data has been subject to state surveillance, requiring individual notification “only to the extent that and as soon as it is no longer liable to jeopardise” the law-enforcement tasks in question. Given the “essential equivalence” standard applicable to third-country adequacy assessments, however, it does not automatically follow that individual notification is required in that context.

Moreover, it also does not necessarily follow that adequacy requires that EU citizens have a right to access the data processed by foreign government agencies. The fact that there are significant restrictions on rights to information and to access in some EU member states, though not definitive (after all, those countries may be violating EU law), may be instructive for the purposes of assessing the adequacy of data protection in a third country, where EU law requires only “essential equivalence.”

Conclusion

There are difficult questions of EU law that the European Commission will need to address in the process of deciding whether to issue a new adequacy decision for the United States. It is also clear that an affirmative decision from the Commission will be challenged before the CJEU, although the arguments for such a challenge are not yet well-developed. In future posts I will provide more detailed analysis of the pivotal legal questions. My focus will be to engage with the forthcoming legal analyses from Schrems and NOYB and from other careful observers.

[This post is a contribution to Truth on the Market‘s continuing digital symposium “FTC Rulemaking on Unfair Methods of Competition.” You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

Federal Trade Commission (FTC) Chair Lina Khan has just sent her holiday wishlist to Santa Claus. It comes in the form of a policy statement on unfair methods of competition (UMC) that the FTC approved last week by a 3-1 vote. If there’s anything to be gleaned from the document, it’s that Khan and the agency’s majority bloc wish they could wield the same powers as Margrethe Vestager does in the European Union. Luckily for consumers, U.S. courts are unlikely to oblige.

Signed by the commission’s three Democratic commissioners, the UMC policy statement contains language that would be completely at home in a decision of the European Commission. It purports to reorient UMC enforcement (under Section 5 of the FTC Act) around typically European concepts, such as “competition on the merits.” This is an unambiguous repudiation of the rule of reason and, with it, the consumer welfare standard.

Unfortunately for its authors, these European-inspired aspirations are likely to fall flat. For a start, the FTC almost certainly does not have the power to enact such sweeping changes. More fundamentally, these concepts have been tried in the EU, where they have proven to be largely unworkable. On the one hand, critics (including the European judiciary) have excoriated the European Commission for its often economically unsound policymaking—enabled by the use of vague standards like “competition on the merits.” On the other hand, the Commission paradoxically believes that its competition powers are insufficient, creating the need for even stronger powers. The recently passed Digital Markets Act (DMA) is designed to fill this need.

As explained below, there is thus every reason to believe the FTC’s UMC statement will ultimately go down as a mistake, brought about by the current leadership’s hubris.

A Statement Is Just That

The first big obstacle to the FTC’s lofty ambitions is that its leadership does not have the power to rewrite either the FTC Act or courts’ interpretation of it. The agency’s leadership understands this much. And with that in mind, they ostensibly couch their statement in the case law of the U.S. Supreme Court:

Consistent with the Supreme Court’s interpretation of the FTC Act in at least twelve decisions, this statement makes clear that Section 5 reaches beyond the Sherman and Clayton Acts to encompass various types of unfair conduct that tend to negatively affect competitive conditions.

It is telling, however, that the cases cited by the agency—in a naked attempt to do away with economic analysis and the consumer welfare standard—are all at least 40 years old. Antitrust and consumer-protection laws have obviously come a long way since then, but none of that is mentioned in the statement. Inconvenient case law is simply shrugged off. To make matters worse, even the cases the FTC cites provide, at best, exceedingly weak support for its proposed policy.

For instance, as Commissioner Christine Wilson aptly notes in her dissenting statement, “the policy statement ignores precedent regarding the need to demonstrate anticompetitive effects.” Chief among these is the Boise Cascade Corp. v. FTC case, where the 9th U.S. Circuit Court of Appeals rebuked the FTC for failing to show actual anticompetitive effects:

In truth, the Commission has provided us with little more than a theory of the likely effect of the challenged pricing practices. While this general observation perhaps summarizes all that follows, we offer  the following specific points in support of our conclusion.

There is a complete absence of meaningful evidence in the record that price levels in the southern plywood industry reflect an anticompetitive effect.

In short, the FTC’s statement is just that—a statement. Gus Hurwitz summarized this best in his post:

Today’s news that the FTC has adopted a new UMC Policy Statement is just that: mere news. It doesn’t change the law. It is non-precedential and lacks the force of law. It receives the benefit of no deference. It is, to use a term from the consumer-protection lexicon, mere puffery.

Lina’s European Dream

But let us imagine, for a moment, that the FTC has its way and courts go along with its policy statement. Would this be good for the American consumer? In order to answer this question, it is worth looking at competition enforcement in the European Union.

There are, indeed, striking similarities between the FTC’s policy statement and European competition law. Consider the resemblance between the following quotes, drawn from the FTC’s policy statement (“A” in each example) and from the European competition sphere (“B” in each example).

Example 1 – Competition on the merits and the protection of competitors:

A. The method of competition must be unfair, meaning that the conduct goes beyond competition on the merits.… This may include, for example, conduct that tends to foreclose or impair the opportunities of market participants, reduce competition between rivals, limit choice, or otherwise harm consumers. (here)

B. The emphasis of the Commission’s enforcement activity… is on safeguarding the competitive process… and ensuring that undertakings which hold a dominant position do not exclude their competitors by other means than competing on the merits… (here)

Example 2 – Proof of anticompetitive harm:

A. “Unfair methods of competition” need not require a showing of current anticompetitive harm or anticompetitive intent in every case. … [T]his inquiry does not turn to whether the conduct directly caused actual harm in the specific instance at issue. (here)

B. The Commission cannot be required… systematically to establish a counterfactual scenario…. That would, moreover, oblige it to demonstrate that the conduct at issue had actual effects, which…  is not required in the case of an abuse of a dominant position, where it is sufficient to establish that there are potential effects. (here)

    Example 3 – Multiple goals:

    A. Given the distinctive goals of Section 5, the inquiry will not focus on the “rule of reason” inquiries more common in cases under the Sherman Act, but will instead focus on stopping unfair methods of competition in their incipiency based on their tendency to harm competitive conditions. (here)

    B. In its assessment the Commission should pursue the objectives of preserving and fostering innovation and the quality of digital products and services, the degree to which prices are fair and competitive, and the degree to which quality or choice for business users and for end users is or remains high. (here)

    Beyond their cosmetic resemblances, these examples reflect a deeper similarity. The FTC is attempting to introduce three core principles that also undergird European competition enforcement. The first is that enforcers should protect “the competitive process” by ensuring firms compete “on the merits,” rather than a more consequentialist goal like the consumer welfare standard (which essentially asks how a given practice affects economic output). The second is that enforcers should not be required to establish that conduct actually harms consumers. Instead, they need only show that such an outcome is (or will be) possible. The third principle is that competition policies pursue multiple, sometimes conflicting, goals.

    In short, the FTC is trying to roll back U.S. enforcement to a bygone era predating the emergence of the consumer welfare standard (which is somewhat ironic for the agency’s progressive leaders). And this vision of enforcement is infused with elements that appear to be drawn directly from European competition law.

    Europe Is Not the Land of Milk and Honey

    All of this might not be so problematic if the European model of competition enforcement that the FTC now seeks to emulate was an unmitigated success, but that could not be further from the truth. As Geoffrey Manne, Sam Bowman, and I argued in a recently published paper, the European model has several shortcomings that militate against emulating it (the following quotes are drawn from that paper). These problems would almost certainly arise if the FTC’s statement was blessed by courts in the United States.

    For a start, the more open-ended nature of European competition law makes it highly vulnerable to political interference. This is notably due to its multiple, vague, and often conflicting goals, such as the protection of the “competitive process”:

    Because EU regulators can call upon a large list of justifications for their enforcement decisions, they are free to pursue cases that best fit within a political agenda, rather than focusing on the limited practices that are most injurious to consumers. In other words, there is largely no definable set of metrics to distinguish strong cases from weak ones under the EU model; what stands in its place is political discretion.

    Politicized antitrust enforcement might seem like a great idea when your party is in power but, as Milton Friedman wisely observed, the mark of a strong system of government is that it operates well with the wrong person in charge. With this in mind, the FTC’s current leadership would do well to consider what their political opponents might do with these broad powers—such as using Section 5 to prevent online platforms from moderating speech.

    A second important problem with the European model is that, because of its competitive-process goal, it does not adequately distinguish between exclusion resulting from superior efficiency and anticompetitive foreclosure:

    By pursuing a competitive process goal, European competition authorities regularly conflate desirable and undesirable forms of exclusion precisely on the basis of their effect on competitors. As a result, the Commission routinely sanctions exclusion that stems from an incumbent’s superior efficiency rather than welfare-reducing strategic behavior, and routinely protects inefficient competitors that would otherwise rightly be excluded from a market.

    This vastly enlarges the scope of potential antitrust liability, leading to risks of false positives that chill innovative behavior and create nearly unwinnable battles for targeted firms, while increasing compliance costs because of reduced legal certainty. Ultimately, this may hamper technological evolution and protect inefficient firms whose eviction from the market is merely a reflection of consumer preferences.

    Finally, the European model results in enforcers having more discretion and enjoying greater deference from the courts:

    [T]he EU process is driven by a number of laterally equivalent, and sometimes mutually exclusive, goals.… [A] large problem exists in the discretion that this fluid arrangement of goals yields.

    The Microsoft case illustrates this problem well. In Microsoft, the Commission could have chosen to base its decision on a number of potential objectives. It notably chose to base its findings on the fact that Microsoft’s behavior reduced “consumer choice”. The Commission, in fact, discounted arguments that economic efficiency may lead to consumer welfare gains because “consumer choice” among a variety of media players was more important.

    In short, the European model sorely lacks limiting principles. This likely explains why the European Court of Justice has started to pare back the commission’s powers in a series of recent cases, including Intel, Post Danmark, Cartes Bancaires, and Servizio Elettrico Nazionale. These rulings appear to be an explicit recognition that overly broad competition enforcement not only fails to benefit consumers but, more fundamentally, is incompatible with the rule of law.

    It is unfortunate that the FTC is trying to emulate a model of competition enforcement that—even in the progressively minded European public sphere—is increasingly questioned and cast aside as a result of its multiple shortcomings.

    With just a week to go until the U.S. midterm elections, which potentially herald a change in control of one or both houses of Congress, speculation is mounting that congressional Democrats may seek to use the lame-duck session following the election to move one or more pieces of legislation targeting the so-called “Big Tech” companies.

    Gaining particular notice—on grounds that it is the least controversial of the measures—is S. 2710, the Open App Markets Act (OAMA). Introduced by Sen. Richard Blumenthal (D-Conn.), the Senate bill has garnered 14 cosponsors: exactly seven Republicans and seven Democrats. It would, among other things, force certain mobile app stores and operating systems to allow “sideloading” and open their platforms to rival in-app payment systems.

    Unfortunately, even this relatively restrained legislation—at least, when compared to Sen. Amy Klobuchar’s (D-Minn.) American Innovation and Choice Online Act or the European Union’s Digital Markets Act (DMA)—is highly problematic in its own right. Here, I will offer seven major questions the legislation leaves unresolved.

    1.     Are Quantitative Thresholds a Good Indicator of ‘Gatekeeper Power’?

    It is no secret that OAMA has been tailor-made to regulate two specific app stores: Android’s Google Play Store and Apple’s Apple App Store (see here, here, and, yes, even Wikipedia knows it).The text makes this clear by limiting the bill’s scope to app stores with more than 50 million users, a threshold that only Google Play and the Apple App Store currently satisfy.

    However, purely quantitative thresholds are a poor indicator of a company’s potential “gatekeeper power.” An app store might have much fewer than 50 million users but cater to a relevant niche market. By the bill’s own logic, why shouldn’t that app store likewise be compelled to be open to competing app distributors? Conversely, it may be easy for users of very large app stores to multi-home or switch seamlessly to competing stores. In either case, raw user data paints a distorted picture of the market’s realities.

    As it stands, the bill’s thresholds appear arbitrary and pre-committed to “disciplining” just two companies: Google and Apple. In principle, good laws should be abstract and general and not intentionally crafted to apply only to a few select actors. In OAMA’s case, the law’s specific thresholds are also factually misguided, as purely quantitative criteria are not a good proxy for the sort of market power the bill purportedly seeks to curtail.

    2.     Why Does the Bill not Apply to all App Stores?

    Rather than applying to app stores across the board, OAMA targets only those associated with mobile devices and “general purpose computing devices.” It’s not clear why.

    For example, why doesn’t it cover app stores on gaming platforms, such as Microsoft’s Xbox or Sony’s PlayStation?

    Source: Visual Capitalist

    Currently, a PlayStation user can only buy digital games through the PlayStation Store, where Sony reportedly takes a 30% cut of all sales—although its pricing schedule is less transparent than that of mobile rivals such as Apple or Google.

    Clearly, this bothers some developers. Much like Epic Games CEO Tim Sweeney’s ongoing crusade against the Apple App Store, indie-game publisher Iain Garner of Neon Doctrine recently took to Twitter to complain about Sony’s restrictive practices. According to Garner, “Platform X” (clearly PlayStation) charges developers up to $25,000 and 30% of subsequent earnings to give games a modicum of visibility on the platform, in addition to requiring them to jump through such hoops as making a PlayStation-specific trailer and writing a blog post. Garner further alleges that Sony severely circumscribes developers’ ability to offer discounts, “meaning that Platform X owners will always get the worst deal!” (see also here).

    Microsoft’s Xbox Game Store similarly takes a 30% cut of sales. Presumably, Microsoft and Sony both have the same type of gatekeeper power in the gaming-console market that Apple and Google are said to have on their respective platforms, leading to precisely those issues that OAMA ostensibly purports to combat. Namely, that consumers are not allowed to choose alternative app stores through which to buy games on their respective consoles, and developers must acquiesce to Sony’s and Microsoft’s terms if they want their games to reach those players.

    More broadly, dozens of online platforms also charge commissions on the sales made by their creators. To cite but a few: OnlyFans takes a 20% cut of sales; Facebook gets 30% of the revenue that creators earn from their followers; YouTube takes 45% of ad revenue generated by users; and Twitch reportedly rakes in 50% of subscription fees.

    This is not to say that all these services are monopolies that should be regulated. To the contrary, it seems like fees in the 20-30% range are common even in highly competitive environments. Rather, it is merely to observe that there are dozens of online platforms that demand a percentage of the revenue that creators generate and that prevent those creators from bypassing the platform. As well they should, after all, because creating and improving a platform is not free.

    It is nonetheless difficult to see why legislation regulating online marketplaces should focus solely on two mobile app stores. Ultimately, the inability of OAMA’s sponsors to properly account for this carveout diminishes the law’s credibility.

    3.     Should Picking Among Legitimate Business Models Be up to Lawmakers or Consumers?

    “Open” and “closed” platforms posit two different business models, each with its own advantages and disadvantages. Some consumers may prefer more open platforms because they grant them more flexibility to customize their mobile devices and operating systems. But there are also compelling reasons to prefer closed systems. As Sam Bowman observed, narrowing choice through a more curated system frees users from having to research every possible option every time they buy or use some product. Instead, they can defer to the platform’s expertise in determining whether an app or app store is trustworthy or whether it contains, say, objectionable content.

    Currently, users can choose to opt for Apple’s semi-closed “walled garden” iOS or Google’s relatively more open Android OS (which OAMA wants to pry open even further). Ironically, under the pretext of giving users more “choice,” OAMA would take away the possibility of choice where it matters the most—i.e., at the platform level. As Mikolaj Barczentewicz has written:

    A sideloading mandate aims to give users more choice. It can only achieve this, however, by taking away the option of choosing a device with a “walled garden” approach to privacy and security (such as is taken by Apple with iOS).

    This obviates the nuances between the two and pushes Android and iOS to converge around a single model. But if consumers unequivocally preferred open platforms, Apple would have no customers, because everyone would already be on Android.

    Contrary to regulators’ simplistic assumptions, “open” and “closed” are not synonyms for “good” and “bad.” Instead, as Boston University’s Andrei Hagiu has shown, there are fundamental welfare tradeoffs at play between these two perfectly valid business models that belie simplistic characterizations of one being inherently superior to the other.

    It is debatable whether courts, regulators, or legislators are well-situated to resolve these complex tradeoffs by substituting businesses’ product-design decisions and consumers’ revealed preferences with their own. After all, if regulators had such perfect information, we wouldn’t need markets or competition in the first place.

    4.     Does OAMA Account for the Security Risks of Sideloading?

    Platforms retaining some control over the apps or app stores allowed on their operating systems bolsters security, as it allows companies to weed out bad players.

    Both Apple and Google do this, albeit to varying degrees. For instance, Android already allows sideloading and third-party in-app payment systems to some extent, while Apple runs a tighter ship. However, studies have shown that it is precisely the iOS “walled garden” model which gives it an edge over Android in terms of privacy and security. Even vocal Apple critic Tim Sweeney recently acknowledged that increased safety and privacy were competitive advantages for Apple.

    The problem is that far-reaching sideloading mandates—such as the ones contemplated under OAMA—are fundamentally at odds with current privacy and security capabilities (see here and here).

    OAMA’s defenders might argue that the law does allow covered platforms to raise safety and security defenses, thus making the tradeoffs between openness and security unnecessary. But the bill places such stringent conditions on those defenses that platform operators will almost certainly be deterred from risking running afoul of the law’s terms. To invoke the safety and security defenses, covered companies must demonstrate that provisions are applied on a “demonstrably consistent basis”; are “narrowly tailored and could not be achieved through less discriminatory means”; and are not used as a “pretext to exclude or impose unnecessary or discriminatory terms.”

    Implementing these stringent requirements will drag enforcers into a micromanagement quagmire. There are thousands of potential spyware, malware, rootkit, backdoor, and phishing (to name just a few) software-security issues—all of which pose distinct threats to an operating system. The Federal Trade Commission (FTC) and the federal courts will almost certainly struggle to control the “consistency” requirement across such varied types.

    Likewise, OAMA’s reference to “least discriminatory means” suggests there is only one valid answer to any given security-access tradeoff. Further, depending on one’s preferred balance between security and “openness,” a claimed security risk may or may not be “pretextual,” and thus may or may not be legal.

    Finally, the bill text appears to preclude the possibility of denying access to a third-party app or app store for reasons other than safety and privacy. This would undermine Apple’s and Google’s two-tiered quality-control systems, which also control for “objectionable” content such as (child) pornography and social engineering. 

    5.     How Will OAMA Safeguard the Rights of Covered Platforms?

    OAMA is also deeply flawed from a procedural standpoint. Most importantly, there is no meaningful way to contest the law’s designation as “covered company,” or the harms associated with it.

    Once a company is “covered,” it is presumed to hold gatekeeper power, with all the associated risks for competition, innovation, and consumer choice. Remarkably, this presumption does not admit any qualitative or quantitative evidence to the contrary. The only thing a covered company can do to rebut the designation is to demonstrate that it, in fact, has fewer than 50 million users.

    By preventing companies from showing that they do not hold the kind of gatekeeper power that harms competition, decreases innovation, raises prices, and reduces choice (the bill’s stated objectives), OAMA severely tilts the playing field in the FTC’s favor. Even the EU’s enforcer-friendly DMA incorporated a last-minute amendment allowing firms to dispute their status as “gatekeepers.” While this defense is not perfect (companies cannot rely on the same qualitative evidence that the European Commission can use against them), at least gatekeeper status can be contested under the DMA.

    6.     Should Legislation Protect Competitors at the Expense of Consumers?

    Like most of the new wave of regulatory initiatives against Big Tech (but unlike antitrust law), OAMA is explicitly designed to help competitors, with consumers footing the bill.

    For example, OAMA prohibits covered companies from using or combining nonpublic data obtained from third-party apps or app stores operating on their platforms in competition with those third parties. While this may have the short-term effect of redistributing rents away from these platforms and toward competitors, it risks harming consumers and third-party developers in the long run.

    Platforms’ ability to integrate such data is part of what allows them to bring better and improved products and services to consumers in the first place. OAMA tacitly admits this by recognizing that the use of nonpublic data grants covered companies a competitive advantage. In other words, it allows them to deliver a product that is better than competitors’.

    Prohibiting self-preferencing raises similar concerns. Why wouldn’t a company that has invested billions in developing a successful platform and ecosystem not give preference to its own products to recoup some of that investment? After all, the possibility of exercising some control over downstream and adjacent products is what might have driven the platform’s development in the first place. In other words, self-preferencing may be a symptom of competition, and not the absence thereof. Third-party companies also would have weaker incentives to develop their own platforms if they can free-ride on the investments of others. And platforms that favor their own downstream products might simply be better positioned to guarantee their quality and reliability (see here and here).

    In all of these cases, OAMA’s myopic focus on improving the lot of competitors for easy political points will upend the mobile ecosystems from which both users and developers derive significant benefit.

    7.     Shouldn’t the EU Bear the Risks of Bad Tech Regulation?

    Finally, U.S. lawmakers should ask themselves whether the European Union, which has no tech leaders of its own, is really a model to emulate. Today, after all, marks the day the long-awaited Digital Markets Act— the EU’s response to perceived contestability and fairness problems in the digital economy—officially takes effect. In anticipation of the law entering into force, I summarized some of the outstanding issues that will define implementation moving forward in this recent tweet thread.

    We have been critical of the DMA here at Truth on the Market on several factual, legal, economic, and procedural grounds. The law’s problems range from it essentially being a tool to redistribute rents away from platforms and to third-parties, despite it being unclear why the latter group is inherently more deserving (Pablo Ibañez Colomo has raised a similar point); to its opacity and lack of clarity, a process that appears tilted in the Commission’s favor; to the awkward way it interacts with EU competition law, ignoring the welfare tradeoffs between the models it seeks to impose and perfectly valid alternatives (see here and here); to its flawed assumptions (see, e.g., here on contestability under the DMA); to the dubious legal and economic value of the theory of harm known as  “self-preferencing”; to the very real possibility of unintended consequences (e.g., in relation to security and interoperability mandates).

    In other words, that the United States lags the EU in seeking to regulate this area might not be a bad thing, after all. Despite the EU’s insistence on being a trailblazing agenda-setter at all costs, the wiser thing in tech regulation might be to remain at a safe distance. This is particularly true when one considers the potentially large costs of legislative missteps and the difficulty of recalibrating once a course has been set.

    U.S. lawmakers should take advantage of this dynamic and learn from some of the Old Continent’s mistakes. If they play their cards right and take the time to read the writing on the wall, they might just succeed in averting antitrust’s uncertain future.

    The practice of so-called “self-preferencing” has come to embody the zeitgeist of competition policy for digital markets, as legislative initiatives are undertaken in jurisdictions around the world that to seek, in various ways, to constrain large digital platforms from granting favorable treatment to their own goods and services. The core concern cited by policymakers is that gatekeepers may abuse their dual role—as both an intermediary and a trader operating on the platform—to pursue a strategy of biased intermediation that entrenches their power in core markets (defensive leveraging) and extends it to associated markets (offensive leveraging).

    In addition to active interventions by lawmakers, self-preferencing has also emerged as a new theory of harm before European courts and antitrust authorities. Should antitrust enforcers be allowed to pursue such a theory, they would gain significant leeway to bypass the legal standards and evidentiary burdens traditionally required to prove that a given business practice is anticompetitive. This should be of particular concern, given the broad range of practices and types of exclusionary behavior that could be characterized as self-preferencing—only some of which may, in some specific contexts, include exploitative or anticompetitive elements.

    In a new working paper for the International Center for Law & Economics (ICLE), I provide an overview of the relevant traditional antitrust theories of harm, as well as the emerging case law, to analyze whether and to what extent self-preferencing should be considered a new standalone offense under EU competition law. The experience to date in European case law suggests that courts have been able to address platforms’ self-preferencing practices under existing theories of harm, and that it may not be sufficiently novel to constitute a standalone theory of harm.

    European Case Law on Self-Preferencing

    Practices by digital platforms that might be deemed self-preferencing first garnered significant attention from European competition enforcers with the European Commission’s Google Shopping investigation, which examined whether the search engine’s results pages positioned and displayed its own comparison-shopping service more favorably than the websites of rival comparison-shopping services. According to the Commission’s findings, Google’s conduct fell outside the scope of competition on the merits and could have the effect of extending Google’s dominant position in the national markets for general Internet search into adjacent national markets for comparison-shopping services, in addition to protecting Google’s dominance in its core search market.

    Rather than explicitly posit that self-preferencing (a term the Commission did not use) constituted a new theory of harm, the Google Shopping ruling described the conduct as belonging to the well-known category of “leveraging.” The Commission therefore did not need to propagate a new legal test, as it held that the conduct fell under a well-established form of abuse. The case did, however, spur debate over whether the legal tests the Commission did apply effectively imposed on Google a principle of equal treatment of rival comparison-shopping services.

    But it should be noted that conduct similar to that alleged in the Google Shopping investigation actually came before the High Court of England and Wales several months earlier, this time in a dispute between Google and Streetmap. At issue in that case was favorable search results Google granted to its own maps, rather than to competing online maps. The UK Court held, however, that the complaint should have been appropriately characterized as an allegation of discrimination; it further found that Google’s conduct did not constitute anticompetitive foreclosure. A similar result was reached in May 2020 by the Amsterdam Court of Appeal in the Funda case.  

    Conversely, in June 2021, the French Competition Authority (AdlC) followed the European Commission into investigating Google’s practices in the digital-advertising sector. Like the Commission, the AdlC did not explicitly refer to self-preferencing, instead describing the conduct as “favoring.”

    Given this background and the proliferation of approaches taken by courts and enforcers to address similar conduct, there was significant anticipation for the judgment that the European General Court would ultimately render in the appeal of the Google Shopping ruling. While the General Court upheld the Commission’s decision, it framed self-preferencing as a discriminatory abuse. Further, the Court outlined four criteria that differentiated Google’s self-preferencing from competition on the merits.

    Specifically, the Court highlighted the “universal vocation” of Google’s search engine—that it is open to all users and designed to index results containing any possible content; the “superdominant” position that Google holds in the market for general Internet search; the high barriers to entry in the market for general search services; and what the Court deemed Google’s “abnormal” conduct—behaving in a way that defied expectations, given a search engine’s business model, and that changed after the company launched its comparison-shopping service.

    While the precise contours of what the Court might consider discriminatory abuse aren’t yet clear, the decision’s listed criteria appear to be narrow in scope. This stands at odds with the much broader application of self-preferencing as a standalone abuse, both by the European Commission itself and by some national competition authorities (NCAs).

    Indeed, just a few weeks after the General Court’s ruling, the Italian Competition Authority (AGCM) handed down a mammoth fine against Amazon over preferential treatment granted to third-party sellers who use the company’s own logistics and delivery services. Rather than reflecting the qualified set of criteria laid out by the General Court, the Italian decision was clearly inspired by the Commission’s approach in Google Shopping. Where the Commission described self-preferencing as a new form of leveraging abuse, AGCM characterized Amazon’s practices as tying.

    Self-preferencing has also been raised as a potential abuse in the context of data and information practices. In November 2020, the European Commission sent Amazon a statement of objections detailing its preliminary view that the company had infringed antitrust rules by making systematic use of non-public business data, gathered from independent retailers who sell on Amazon’s marketplace, to advantage the company’s own retail business. (Amazon responded with a set of commitments currently under review by the Commission.)

    Both the Commission and the U.K. Competition and Markets Authority have lodged similar allegations against Facebook over data gathered from advertisers and then used to compete with those advertisers in markets in which Facebook is active, such as classified ads. The Commission’s antitrust proceeding against Apple over its App Store rules likewise highlights concerns that the company may use its platform position to obtain valuable data about the activities and offers of its competitors, while competing developers may be denied access to important customer data.

    These enforcement actions brought by NCAs and the Commission appear at odds with the more bounded criteria set out by the General Court in Google Shopping, and raise tremendous uncertainty regarding the scope and definition of the alleged new theory of harm.

    Self-Preferencing, Platform Neutrality, and the Limits of Antitrust Law

    The growing tendency to invoke self-preferencing as a standalone theory of antitrust harm could serve two significant goals for European competition enforcers. As mentioned earlier, it offers a convenient shortcut that could allow enforcers to skip the legal standards and evidentiary burdens traditionally required to prove anticompetitive behavior. Moreover, it can function, in practice, as a means to impose a neutrality regime on digital gatekeepers, with the aims of both ensuring a level playing field among competitors and neutralizing the potential conflicts of interests implicated by dual-mode intermediation.

    The dual roles performed by some platforms continue to fuel the never-ending debate over vertical integration, as well as related concerns that, by giving preferential treatment to its own products and services, an integrated provider may leverage its dominance in one market to related markets. From this perspective, self-preferencing is an inevitable byproduct of the emergence of ecosystems.

    However, as the Australian Competition and Consumer Commission has recognized, self-preferencing conduct is “often benign.” Furthermore, the total value generated by an ecosystem depends on the activities of independent complementors. Those activities are not completely under the platform’s control, although the platform is required to establish and maintain the governance structures regulating access to and interactions around that ecosystem.

    Given this reality, a complete ban on self-preferencing may call the very existence of ecosystems into question, challenging their design and monetization strategies. Preferential treatment can take many different forms with many different potential effects, all stemming from platforms’ many different business models. This counsels for a differentiated, case-by-case, and effects-based approach to assessing the alleged competitive harms of self-preferencing.

    Antitrust law does not impose on platforms a general duty to ensure neutrality by sharing their competitive advantages with rivals. Moreover, possessing a competitive advantage does not automatically equal an anticompetitive effect. As the European Court of Justice recently stated in Servizio Elettrico Nazionale, competition law is not intended to protect the competitive structure of the market, but rather to protect consumer welfare. Accordingly, not every exclusionary effect is detrimental to competition. Distinctions must be drawn between foreclosure and anticompetitive foreclosure, as only the latter may be penalized under antitrust.

    After years of debate and negotiations, European Lawmakers have agreed upon what will most likely be the final iteration of the Digital Markets Act (“DMA”), following the March 24 final round of “trilogue” talks. 

    For the uninitiated, the DMA is one in a string of legislative proposals around the globe intended to “rein in” tech companies like Google, Amazon, Facebook, and Apple through mandated interoperability requirements and other regulatory tools, such as bans on self-preferencing. Other important bills from across the pond include the American Innovation and Choice Online Act, the ACCESS Act, and the Open App Markets Act

    In many ways, the final version of the DMA represents the worst possible outcome, given the items that were still up for debate. The Commission caved to some of the Parliament’s more excessive demands—such as sweeping interoperability provisions that would extend not only to “ancillary” services, such as payments, but also to messaging services’ basic functionalities. Other important developments include the addition of voice assistants and web browsers to the list of Core Platform Services (“CPS”), and symbolically higher “designation” thresholds that further ensure the act will apply overwhelmingly to just U.S. companies. On a brighter note, lawmakers agreed that companies could rebut their designation as “gatekeepers,” though it remains to be seen how feasible that will be in practice. 

    We offer here an overview of the key provisions included in the final version of the DMA and a reminder of the shaky foundations it rests on.

    Interoperability

    Among the most important of the DMA’s new rules concerns mandatory interoperability among online platforms. In a nutshell, digital platforms that are designated as “gatekeepers” will be forced to make their services “interoperable” (i.e., compatible) with those of rivals. It is argued that this will make online markets more contestable and thus boost consumer choice. But as ICLE scholars have been explaining for some time, this is unlikely to be the case (here, here, and here). Interoperability is not the panacea EU legislators claim it to be. As former ICLE Director of Competition Policy Sam Bowman has written, there are many things that could be interoperable, but aren’t. The reason is that interoperability comes with costs as well as benefits. For instance, it may be worth letting different earbuds have different designs because, while it means we sacrifice easy interoperability, we gain the ability for better designs to be brought to the market and for consumers to be able to choose among them. Economists Michael L. Katz and Carl Shapiro concur:

    Although compatibility has obvious benefits, obtaining and maintaining compatibility often involves a sacrifice in terms of product variety or restraints on innovation.

    There are other potential downsides to interoperability.  For instance, a given set of interoperable standards might be too costly to implement and/or maintain; it might preclude certain pricing models that increase output; or it might compromise some element of a product or service that offers benefits specifically because it is not interoperable (such as, e.g., security features). Consumers may also genuinely prefer closed (i.e., non-interoperable) platforms. Indeed: “open” and “closed” are not synonyms for “good” and “bad.” Instead, as Boston University’s Andrei Hagiu has shown, there are fundamental welfare tradeoffs at play that belie simplistic characterizations of one being inherently superior to the other. 

    Further, as Sam Bowman observed, narrowing choice through a more curated experience can also be valuable for users, as it frees them from having to research every possible option every time they buy or use some product (if you’re unconvinced, try turning off your spam filter for a couple of days). Instead, the relevant choice consumers exercise might be in choosing among brands. In sum, where interoperability is a desirable feature, consumer preferences will tend to push for more of it. However, it is fundamentally misguided to treat mandatory interoperability as a cure-all elixir or a “super tool” of “digital platform governance.” In a free-market economy, it is not—or, it should not—be up to courts and legislators to substitute for businesses’ product-design decisions and consumers’ revealed preferences with their own, based on diffuse notions of “fairness.” After all, if we could entrust such decisions to regulators, we wouldn’t need markets or competition in the first place.

    Of course, it was always clear that the DMA would contemplate some degree of mandatory interoperability – indeed, this was arguably the new law’s biggest selling point. What was up in the air until now was the scope of such obligations. The Commission had initially pushed for a comparatively restrained approach, requiring interoperability “only” in ancillary services, such as payment systems (“vertical interoperability”). By contrast, the European Parliament called for more expansive requirements that would also encompass social-media platforms and other messaging services (“horizontal interoperability”). 

    The problem with such far-reaching interoperability requirements is that they are fundamentally out of pace with current privacy and security capabilities. As ICLE Senior Scholar Mikolaj Barczentewicz has repeatedly argued, the Parliament’s insistence on going significantly beyond the original DMA’s proposal and mandating interoperability of messaging services is overly broad and irresponsible. Indeed, as Mikolaj notes, the “likely result is less security and privacy, more expenses, and less innovation.”The DMA’s defensers would retort that the law allows gatekeepers to do what is “strictly necessary” (Council) or “indispensable” (Parliament) to protect safety and privacy (it is not yet clear which wording the final version has adopted). Either way, however, the standard may be too high and companies may very well offer lower security to avoid liability for adopting measures that would be judged by the Commission and the courts as going beyond what is “strictly necessary” or “indispensable.” These safeguards will inevitably be all the more indeterminate (and thus ineffectual) if weighed against other vague concepts at the heart of the DMA, such as “fairness.”

    Gatekeeper Thresholds and the Designation Process

    Another important issue in the DMA’s construction concerns the designation of what the law deems “gatekeepers.” Indeed, the DMA will only apply to such market gatekeepers—so-designated because they meet certain requirements and thresholds. Unfortunately, the factors that the European Commission will consider in conducting this designation process—revenues, market capitalization, and user base—are poor proxies for firms’ actual competitive position. This is not surprising, however, as the procedure is mainly designed to ensure certain high-profile (and overwhelmingly American) platforms are caught by the DMA.

    From this perspective, the last-minute increase in revenue and market-capitalization thresholds—from 6.5 billion euros to 7.5 billion euros, and from 65 billion euros to 75 billion euros, respectively—won’t change the scope of the companies covered by the DMA very much. But it will serve to confirm what we already suspected: that the DMA’s thresholds are mostly tailored to catch certain U.S. companies, deliberately leaving out EU and possibly Chinese competitors (see here and here). Indeed, what would have made a difference here would have been lowering the thresholds, but this was never really on the table. Ultimately, tilting the European Union’s playing field against its top trading partner, in terms of exports and trade balance, is economically, politically, and strategically unwise.

    As a consolation of sorts, it seems that the Commission managed to squeeze in a rebuttal mechanism for designated gatekeepers. Imposing far-reaching obligations on companies with no  (or very limited) recourse to escape the onerous requirements of the DMA would be contrary to the basic principles of procedural fairness. Still, it remains to be seen how this mechanism will be articulated and whether it will actually be viable in practice.

    Double (and Triple?) Jeopardy

    Two recent judgments from the European Court of Justice (ECJ)—Nordzucker and bpost—are likely to underscore the unintended effects of cumulative application of both the DMA and EU and/or national competition laws. The bpost decision is particularly relevant, because it lays down the conditions under which cases that evaluate the same persons and the same facts in two separate fields of law (sectoral regulation and competition law) do not violate the principle of ne bis in idem, also known as “double jeopardy.” As paragraph 51 of the judgment establishes:

    1. There must be precise rules to determine which acts or omissions are liable to be subject to duplicate proceedings;
    2. The two sets of proceedings must have been conducted in a sufficiently coordinated manner and within a similar timeframe; and
    3. The overall penalties must match the seriousness of the offense. 

    It is doubtful whether the DMA fulfills these conditions. This is especially unfortunate considering the overlapping rules, features, and goals among the DMA and national-level competition laws, which are bound to lead to parallel procedures. In a word: expect double and triple jeopardy to be hotly litigated in the aftermath of the DMA.

    Of course, other relevant questions have been settled which, for reasons of scope, we will have to leave for another time. These include the level of fines (up to 10% worldwide revenue, or 20% in the case of repeat offenses); the definition and consequences of systemic noncompliance (it seems that the Parliament’s draconian push for a general ban on acquisitions in case of systemic noncompliance has been dropped); and the addition of more core platform services (web browsers and voice assistants).

    The DMA’s Dubious Underlying Assumptions

    The fuss and exhilaration surrounding the impending adoption of the EU’s most ambitious competition-related proposal in decades should not obscure some of the more dubious assumptions which underpin it, such as that:

    1. It is still unclear that intervention in digital markets is necessary, let alone urgent.
    2. Even if it were clear, there is scant evidence to suggest that tried and tested ex post instruments, such as those envisioned in EU competition law, are not up to the task.
    3. Even if the prior two points had been established beyond any reasonable doubt (which they haven’t), it is still far from clear that DMA-style ex ante regulation is the right tool to address potential harms to competition and to consumers that arise in digital markets.

    It is unclear that intervention is necessary

    Despite a mounting moral panic around and zealous political crusading against Big Tech (an epithet meant to conjure antipathy and distrust), it is still unclear that intervention in digital markets is necessary. Much of the behavior the DMA assumes to be anti-competitive has plausible pro-competitive justifications. Self-preferencing, for instance, is a normal part of how platforms operate, both to improve the value of their core products and to earn returns to reinvest in their development. As ICLE’s Dirk Auer points out, since platforms’ incentives are to maximize the value of their entire product ecosystem, those that preference their own products frequently end up increasing the total market’s value by growing the share of users of a particular product (the example of Facebook’s integration of Instagram is a case in point). Thus, while self-preferencing may, in some cases, be harmful, a blanket presumption of harm is thoroughly unwarranted

    Similarly, the argument that switching costs and data-related increasing returns to scale (in fact, data generally entails diminishing returns) have led to consumer lock-in and thereby raised entry barriers has also been exaggerated to epic proportions (pun intended). As we have discussed previously, there are plenty of counterexamples where firms have easily overcome seemingly “insurmountable” barriers to entry, switching costs, and network effects to disrupt incumbents. 

    To pick a recent case: how many of us had heard of Zoom before the pandemic? Where was TikTok three years ago? (see here for a multitude of other classic examples, including Yahoo and Myspace).

    Can you really say, with a straight face, that switching costs between messaging apps are prohibitive? I’m not even that active and I use at least six such apps on a daily basis: Facebook Messenger, Whatsapp, Instagram, Twitter, Viber, Telegram, and Slack (it took me all of three minutes to download and start using Slack—my newest addition). In fact, chances are that, like me, you have always multihomed nonchalantly and had never even considered that switching costs were impossibly high (or that they were a thing) until the idea that you were “locked-in” by Big Tech was drilled into your head by politicians and other busybodies looking for trophies to adorn their walls.

    What about the “unprecedented,” quasi-fascistic levels of economic concentration? First, measures of market concentration are sometimes anchored in flawed methodology and market definitions  (see, e.g., Epic’s insistence that Apple is a monopolist in the market for operating systems, conveniently ignoring that competition occurs at the smartphone level, where Apple has a worldwide market share of 15%—see pages 45-46 here). But even if such measurements were accurate, high levels of concentration don’t necessarily mean that firms do not face strong competition. In fact, as Nicolas Petit has shown, tech companies compete vigorously against each other across markets.

    But perhaps the DMA’s raison d’etre rests less on market failure, but rather on a legal or enforcement failure? This, too, is misguided.

    EU competition law is already up to the task

    As Giuseppe Colangelo has argued persuasively (here and here), it is not at all clear that ex post competition regulation is insufficient to tackle anti-competitive behavior in the digital sector:

    Ongoing antitrust investigations demonstrate that standard competition law still provides a flexible framework to scrutinize several practices described as new and peculiar to app stores. 

    The recent Google Shopping decision, in which the Commission found that Google had abused its dominant position by preferencing its own online-shopping service in Google Search results, is a case in point (the decision was confirmed by the General Court and is now pending review before the European Court of Justice). The “self-preferencing” category has since been applied by other EU competition authorities. The Italian competition authority, for instance, fined Amazon 1 billion euros for preferencing its own distribution service, Fulfilled by Amazon, on the Amazon marketplace (i.e., Amazon.it). Thus, Article 102, which includes prohibitions on “applying dissimilar conditions to similar transactions,” appears sufficiently flexible to cover self-preferencing, as well as other potentially anti-competitive offenses relevant to digital markets (e.g., essential facilities).

    For better or for worse, EU competition law has historically been sufficiently pliable to serve a range of goals and values. It has also allowed for experimentation and incorporated novel theories of harm and economic insights. Here, the advantage of competition law is that it allows for a more refined, individualized approach that can avoid some of the pitfalls of applying a one-size fits all model across all digital platforms. Those pitfalls include: harming consumers, jeopardizing the business models of some of the most successful and pro-consumer companies in existence, and ignoring the differences among platforms, such as between Google and Apple’s app stores. I turn to these issues next.

    Ex ante regulation probably isn’t the right tool

    Even if it were clear that intervention is necessary and that existing competition law was insufficient, it is not clear that the DMA is the right regulatory tool to address any potential harms to competition and consumers that may arise in the digital markets. Here, legislators need to be wary of unintended consequences, trade-offs, and regulatory fallibility. For one, It is possible that the DMA will essentially consolidate the power of tech platforms, turning them into de facto public utilities. This will not foster competition, but rather will make smaller competitors systematically dependent on so-called gatekeepers. Indeed, why become the next Google if you can just free ride off of the current Google? Why download an emerging messaging app if you can already interact with its users through your current one? In a way, then, the DMA may become a self-fulfilling prophecy. 

    Moreover, turning closed or semi-closed platforms such as the iOS into open platforms more akin to Android blurs the distinctions among products and dampens interbrand competition. It is a supreme paradox that interoperability and sideloading requirements purportedly give users more choice by taking away the option of choosing a “walled garden” model. As discussed above, overriding the revealed preferences of millions of users is neither pro-competitive nor pro-consumer (but it probably favors some competitors at the expense of those two things). 

    Nor are many of the other obligations contemplated in the DMA necessarily beneficial to consumers. Do users really not want to have default apps come preloaded on their devices and instead have to download and install them manually? Ditto for operating systems. What is the point of an operating system if it doesn’t come with certain functionalities, such as a web browser? What else should we unbundle—keyboard on iOS? Flashlight? Do consumers really want to choose from dozens of app stores when turning on their new phone for the first time? Do they really want to have their devices cluttered with pointless split-screens? Do users really want to find all their contacts (and be found by all their contacts) across all messaging services? (I switched to Viber because I emphatically didn’t.) Do they really want to have their privacy and security compromised because of interoperability requirements?Then there is the question of regulatory fallibility. As Alden Abott has written on the DMA and other ex ante regulatory proposals aimed at “reining in” tech companies:

    Sorely missing from these regulatory proposals is any sense of the fallibility of regulation. Indeed, proponents of new regulatory proposals seem to implicitly assume that government regulation of platforms will enhance welfare, ignoring real-life regulatory costs and regulatory failures (see here, for example). 

    This brings us back to the second point: without evidence that antitrust law is “not up to the task,” far-reaching and untested regulatory initiatives with potentially high error costs are put forth as superior to long-established, consumer-based antitrust enforcement. Yes, antitrust may have downsides (e.g., relative indeterminacy and slowness), but these pale in comparison to the DMA’s (e.g., large error costs resulting from high information requirements, rent-seeking, agency capture).

    Conclusion

    The DMA is an ambitious piece of regulation purportedly aimed at ensuring “fair and open digital markets.” This implies that markets are not fair and open; or that they risk becoming unfair and closed absent far-reaching regulatory intervention at EU level. However, it is unclear to what extent such assumptions are borne out by the reality of markets. Are digital markets really closed? Are they really unfair? If so, is it really certain that regulation is necessary? Has antitrust truly proven insufficient? It also implies that DMA-style ex ante regulation is necessary to tackle it, and that the costs won’t outweigh the benefits. These are heroic assumptions that have never truly been seriously put to the test. 

    Considering such brittle empirical foundations, the DMA was always going to be a contentious piece of legislation. However, there was always the hope that EU legislators would show restraint in the face of little empirical evidence and high error costs. Today, these hopes have been dashed. With the adoption of the DMA, the Commission, Council, and the Parliament have arguably taken a bad piece of legislation and made it worse. The interoperability requirements in messaging services, which are bound to be a bane for user privacy and security, are a case in point.

    After years trying to anticipate the whims of EU legislators, we finally know where we’re going, but it’s still not entirely sure why we’re going there.

    As the European Union’s Digital Markets Act (DMA) has entered the final stage of its approval process, one matter the inter-institutional negotiations appears likely to leave unresolved is how the DMA’s the relationship with competition law affects the very rationale and legal basis for the intervention. 

    The DMA is explicitly grounded on the questionable assumption that competition law alone is insufficient to rein in digital gatekeepers. Accordingly, EU lawmakers have declared the proposal to be a necessary regulatory intervention that will complement antitrust rules by introducing a set of ex ante obligations.

    To support this line of reasoning, the DMA’s drafters insist that it protects a different legal interest from antitrust. Indeed, the intervention is ostensibly grounded in Article 114 of the Treaty on the Functioning of the European Union (TFEU), rather than Article 103—the article that spells out the implementation of competition law. Pursuant to Article 114, the DMA opts for centralized enforcement at the EU level to ensure harmonized implementation of the new rules.

    It has nonetheless been clear from the very beginning that the DMA lacks a distinct purpose. Indeed, the interests it nominally protects (the promotion of fairness and contestability) do not differ from the substance and scope of competition law. The European Parliament has even suggested that the law’s aims should also include fostering innovation and increasing consumer welfare, which also are within the purview of competition law. Moreover, the DMA’s obligations focus on practices that have already been the subject of past and ongoing antitrust investigations.

    Where the DMA differs in substance from competition law is simply that it would free enforcers from the burden of standard antitrust analysis. The law is essentially a convenient shortcut that would dispense with the need to define relevant markets, prove dominance, and measure market effects (see here). It essentially dismisses economic analysis and the efficiency-oriented consumer welfare test in order to lower the legal standards and evidentiary burdens needed to bring an investigation.

    Acknowledging the continuum between competition law and the DMA, the European Competition Network and some member states (self-appointed as “friends of an effective DMA”) have proposed empowering national competition authorities (NCAs) to enforce DMA obligations.

    Against this background, my new ICLE working paper pursues a twofold goal. First, it aims to show how, because of its ambiguous relationship with competition law, the DMA falls short of its goal of preventing regulatory fragmentation. Moreover, despite having significant doubts about the DMA’s content and rationale, I argue that fully centralized enforcement at the EU level should be preserved and that frictions with competition law would be better confined by limiting the law’s application to a few large platforms that are demonstrably able to orchestrate an ecosystem.

    Welcome to the (Regulatory) Jungle

    The DMA will not replace competition rules. It will instead be implemented alongside them, creating several overlapping layers of regulation. Indeed, my paper broadly illustrates how the very same practices that are targeted by the DMA may also be investigated by NCAs under European and national-level competition laws, under national competition laws specific to digital markets, and under national rules on economic dependence.

    While the DMA nominally prohibits EU member states from imposing additional obligations on gatekeepers, member states remain free to adapt their competition laws to digital markets in accordance with the leeway granted by Article 3(3) of the Modernization Regulation. Moreover, NCAs may be eager to exploit national rules on economic dependence to tackle perceived imbalances of bargaining power between online platforms and their business counterparties.

    The risk of overlap with competition law is also fostered by the DMA’s designation process, which may further widen the law’s scope in the future in terms of what sorts of digital services and firms may fall under the law’s rubric. As more and more industries explore platform business models, the DMA would—without some further constraints on its scope—be expected to cover a growing number of firms, including those well outside Big Tech or even native tech companies.

    As a result, the European regulatory landscape could become even more fragmented in the post-DMA world. The parallel application of the DMA and antitrust rules poses the risks of double jeopardy (see here) and of conflicting decisions.

    A Fully Centralized and Ecosystem-Based Regulatory Regime

    To counter the risk that digital-market activity will be subject to regulatory double jeopardy and conflicting decisions across EU jurisdictions, DMA enforcement should not only be fully centralized at the EU level, but that centralization should be strengthened. This could be accomplished by empowering the Commission with veto rights, as was requested by the European Parliament.

    This veto power should certainly extend to national measures targeting gatekeepers that run counter to the DMA or to decisions adopted by the Commission under the DMA. But it should also include prohibiting national authorities from carrying out investigations on their own initiative without prior authorization by the Commission.

    Moreover, it will also likely be necessary to significantly redefine the DMA’s scope. Notably, EU leaders could mitigate the risk of fragmentation from the DMA’s frictions with competition law by circumscribing the law to ecosystem-related issues. This would effectively limit its application to a few large platforms who are demonstrably able to orchestrate an ecosystem. It also would reinstate the DMA’s original justification, which was to address the emergence of a few large platforms who are able act as gatekeepers and enjoy an entrenched position as a result of conglomerate ecosystems.

    Changes to the designation process should also be accompanied by confining the list of ex ante obligations the law imposes. These should reflect relevant differences in platforms’ business models and be tailored to the specific firm under scrutiny, rather than implementing a one-size-fits-all approach.

    There are compelling arguments against the policy choice to regulate platforms and their ecosystems like utilities. The suggested adaptations would at least acknowledge the regulatory nature of the DMA, removing the suspicion that it is just an antitrust intervention vested by regulation.

    European Union (EU) legislators are now considering an Artificial Intelligence Act (AIA)—the original draft of which was published by the European Commission in April 2021—that aims to ensure AI systems are safe in a number of uses designated as “high risk.” One of the big problems with the AIA is that, as originally drafted, it is not at all limited to AI, but would be sweeping legislation covering virtually all software. The EU governments seem to have realized this and are trying to fix the proposal. However, some pressure groups are pushing in the opposite direction. 

    While there can be reasonable debate about what constitutes AI, almost no one would intuitively consider most of the software covered by the original AIA draft to be artificial intelligence. Ben Mueller and I covered this in more detail in our report “More Than Meets The AI: The Hidden Costs of a European Software Law.” Among other issues, the proposal would seriously undermine the legitimacy of the legislative process: the public is told that a law is meant to cover one sphere of life, but it mostly covers something different. 

    It also does not appear that the Commission drafters seriously considered the costs that would arise from imposing the AIA’s regulatory regime on virtually all software across a sphere of “high-risk” uses that include education, employment, and personal finance.

    The following example illustrates how the AIA would work in practice: A school develops a simple logic-based expert system to assist in making decisions related to admissions. It could be as basic as a Microsoft Excel macro that checks if a candidate is in the school’s catchment area based on the candidate’s postal code, by comparing the content of one column of a spreadsheet with another column. 

    Under the AIA’s current definitions, this would not only be an “AI system,” but also a “high-risk AI system” (because it is “intended to be used for the purpose of determining access or assigning natural persons to educational and vocational training institutions” – Annex III of the AIA). Hence, to use this simple Excel macro, the school would be legally required to, among other things:

    1. put in place a quality management system;
    2. prepare detailed “technical documentation”;
    3. create a system for logging and audit trails;
    4. conduct a conformity assessment (likely requiring costly legal advice);
    5. issue an “EU declaration of conformity”; and
    6. register the “AI system” in the EU database of high-risk AI systems.

    This does not sound like proportionate regulation. 

    Some governments of EU member states have been pushing for a narrower definition of an AI system, drawing rebuke from pressure groups Access Now and Algorithm Watch, who issued a statement effectively defending the “all-software” approach. For its part, the European Council, which represents member states, unveiled compromise text in November 2021 that changed general provisions around the AIA’s scope (Article 3), but not the list of in-scope techniques (Annex I).

    While the new definition appears slightly narrower, it remains overly broad and will create significant uncertainty. It is likely that many software developers and users will require costly legal advice to determine whether a particular piece of software in a particular use case is in scope or not. 

    The “core” of the new definition is found in Article(3)(1)(ii), according to which an AI system is one that: “infers how to achieve a given set of human-defined objectives using learning, reasoning or modeling implemented with the techniques and approaches listed in Annex I.” This redefinition does precious little to solve the AIA’s original flaws. A legal inquiry focused on an AI system’s capacity for “reasoning” and “modeling” will tend either toward overinclusion or toward imagining a software reality that doesn’t exist at all. 

    The revised text can still be interpreted so broadly as to cover virtually all software. Given that the list of in-scope techniques (Annex I) was not changed, any “reasoning” implemented with “Logic- and knowledge-based approaches, including knowledge representation, inductive (logic) programming, knowledge bases, inference and deductive engines, (symbolic) reasoning and expert systems” (i.e., all software) remains in scope. In practice, the combined effect of those two provisions will be hard to distinguish from the original Commission draft. In other words, we still have an all-software law, not an AI-specific law. 

    The AIA deliberations highlight two basic difficulties in regulating AI. First, it is likely that many activists and legislators have in mind science-fiction scenarios of strong AI (or “artificial general intelligence”) when pushing for regulations that will apply in a world where only weak AI exists. Strong AI is AI that is at least equal to human intelligence and is therefore capable of some form of agency. Weak AI is akin to  software techniques that augment human processing of information. For as long as computer scientists have been thinking about AI, there have been serious doubts that software systems can ever achieve generalized intelligence or become strong AI. 

    Thus, what’s really at stake in regulating AI is regulating software-enabled extensions of human agency. But leaving aside the activists who explicitly do want controls on all software, lawmakers who promote the AIA have something in mind conceptually distinct from “software.” This raises the question of whether the “AI” that lawmakers imagine they are regulating is actually a null set. These laws can only regulate the equivalent of Excel spreadsheets at scale, and lawmakers need to think seriously about how they intervene. For such interventions to be deemed necessary, there should at least be quantifiable consumer harms that require redress. Focusing regulation on such broad topics as “AI” or “software” is almost certain to generate unacceptable unseen costs.

    Even if we limit our concern to the real, weak AI, settling on an accepted “scientific” definition will be a challenge. Lawmakers inevitably will include either too much or too little. Overly inclusive regulation may seem like a good way to “future proof” the rules, but such future-proofing comes at the cost of significant legal uncertainty. It will also come at the cost of making some uses of software too costly to be worthwhile.

    Early last month, the Italian competition authority issued a record 1.128 billion euro fine against Amazon for abuse of dominance under Article 102 of the Treaty on the Functioning of the European Union (TFEU). In its order, the Agenzia Garante della Concorrenza e del Mercato (AGCM) essentially argues that Amazon has combined its Amazon.it marketplace and Fulfillment by Amazon (FBA) services to exclude logistics rivals such as FedEx, DHL, UPS, and Poste Italiane. 

    The sanctions came exactly one month after the European General Court seconded the European Commission’s “discovery” in the Google Shopping case of a new antitrust infringement known as “self-preferencing,” which also cited Article 102 TFEU. Perhaps not entirely coincidentally, legislation was introduced in the United States earlier this year to prohibit the practice. Meanwhile, the EU’s legislative bodies have been busy taking steps to approve the Digital Markets Act (DMA), which would regulate so-called digital “gatekeepers.”

    Italy thus joins a wave of policymakers that have either imposed heavy-handed decisions to “rein in” online platforms, or are seeking to implement ex ante regulations toward that end. Ultimately, the decision is reminiscent of the self-preferencing prohibition contained in Article 6a of the current draft of the DMA and reflects much of what is wrong with the current approach to regulating tech. It presages some of the potential problems with punishing efficient behavior for the sake of protecting competitors through “common carrier antitrust.” However, if this decision is anything to go by, these efforts will end up hurting the very consumers authorities purport to protect and lending color to more general fears over the DMA. 

    In this post, we discuss how the AGCM’s reasoning departs from sound legal and economic thinking to reach a conclusion at odds with the traditional goal of competition law—i.e., the protection of consumer welfare. Neo-Brandeisians and other competition scholars who dispute the centrality of the consumer welfare standard and would use antitrust to curb “bigness” may find this result acceptable, in principle. But even they must admit that the AGCM decision ultimately serves to benefit large (if less successful) competitors, and not the “small dealers and worthy men” of progressive lore.

    Relevant Market Definition

    Market definition constitutes a preliminary step in any finding of abuse under Article 102 TFEU. An excessively narrow market definition can result in false positives by treating neutral or efficient conduct as anticompetitive, while an overly broad market definition might allow anticompetitive conduct to slip through the cracks, leading to false negatives. 

    Amazon Italy may be an example of the former. Here, the AGCM identified two relevant markets: the leveraging market, which it identified as the Italian market for online marketplace intermediation, and the leveraged market, which it identified as the market for e-commerce logistics. The AGCM charges that Amazon is dominant in the former and that it gained an illegal advantage in the latter. It found, in this sense, that online marketplaces constitute a uniquely relevant market that is not substitutable for other offline or online sales channels, such as brick-and-mortar shops, price-comparison websites (e.g., Google Shopping), or dedicated sales websites (e.g., Nike.com/it). Similarly, it concluded that e-commerce logistics are sufficiently different from other forms of logistics as to comprise a separate market.

    The AGCM’s findings combine qualitative and quantitative evidence, including retailer surveys and “small but significant and non-transitory increase in price” (SSNIP) tests. They also include a large dose of speculative reasoning.

    For instance, the AGCM asserts that online marketplaces are fundamentally different from price-comparison sites because, in the latter case, purchase transactions do not take place on the platform. It asserts that e-commerce logistics are different from traditional logistics because the former require a higher degree of automation for transportation and storage. And in what can only be seen as a normative claim, rather than an objective assessment of substitutability, the Italian watchdog found that marketplaces are simply better than dedicated websites because, e.g., they offer greater visibility and allow retailers to save on marketing costs. While it is unclear what weights the AGCM assigned to each of these considerations when defining the relevant markets, it is reasonable to assume they played some part in defining the nature and scope of Amazon’s market presence in Italy.

    In all of these instances, however, while the AGCM carefully delineated superficial distinctions between these markets, it did not actually establish that those differences are relevant to competition. Fetishizing granular but ultimately irrelevant differences between products and services—such as between marketplaces and shopping comparison sites—is a sure way to incur false positives, a misstep tantamount to punishing innocuous or efficient business conduct.

    Dominance

    The AGCM found that Amazon was “hyper-dominant” in the online marketplace intermediation market. Dominance was established by looking at revenue from marketplace sales, where Amazon’s share had risen from about 65% in 2016 to 75% in 2019. Taken in isolation, this figure might suggest that Amazon’s competitors cannot thrive in the market. A broader look at the data, however, paints a picture of more generalized growth, with some segments greatly benefiting newcomers and small, innovative marketplaces. 

    For instance, virtually all companies active in the online marketplace intermediation market have experienced significant growth in terms of monthly visitors. It is true that Amazon’s visitors grew significantly, up 150%, but established competitors like Aliexpress and eBay also saw growth rates of 90% and 25%, respectively. Meanwhile, Wish grew a massive 10,000% from 2016 to 2019; while ManoMano and Zalando grew 450% and 100%, respectively.

    In terms of active users (i.e., visits that result in a purchase), relative numbers seem to have stayed roughly the same, although the AGCM claims that eBay saw a 20-30% drop. The number of third-party products Amazon offered through Marketplace grew from between 100 and 500 million to between 500 million and 1 billion, while other marketplaces appear to have remained fairly constant, with some expanding and others contracting.

    In sum, while Amazon has undeniably improved its position in practically all of the parameters considered by the AGCM, indicators show that the market as a whole has experienced and is experiencing growth. The improvement in Amazon’s position relative to some competitors—notably eBay, which AGCM asserts is Amazon’s biggest competitor—should therefore not obscure the fact that there is entry and expansion both at the fringes (ManoMano, Wish), and in the center of the market for online marketplace intermediation (Aliexpress).

    Amazon’s Allegedly Abusive Conduct

    According to the AGCM, Amazon has taken advantage of vertical integration to engage in self-preferencing. Specifically, the charge is that the company offers exclusive and purportedly crucial advantages on the Amazon.it marketplace to sellers who use Amazon’s own e-commerce logistics service, FBA. The purported advantages of this arrangement include, to name a few, the coveted Prime badge, the elimination of negative user feedback on sale or delivery, preferential algorithmic treatment, and exclusive participation in Amazon’s sales promotions (e.g., Black Friday, Cyber Monday). As a result, according to the AGCM, products sold through FBA enjoy more visibility and a better chance to win the “Buy Box.”

    The AGCM claims this puts competing logistics operators like FedEx, Poste Italiane, and DHL at a disadvantage, because non-FBA products have less chance to be sold than FBA products, regardless of any efficiency or quality criteria. In the AGCM’s words, “Amazon has stolen demand for other e-commerce logistics operators.” 

    Indirectly, Amazon’s “self-preferencing” purportedly also harms competing marketplaces like eBay by creating incentives for sellers to single-home—i.e., to sell only through Amazon Marketplace. The argument here is that retailers will not multi-home to avoid duplicative costs associated with FBA, e.g., storing goods in several warehouses. 

    Although it is not necessary to demonstrate anticompetitive effects under Article 102 TFEU, the AGCM claims that Amazon’s behavior has caused drastic worsening in other marketplaces’ competitive position by constraining their ability to reach the minimum scale needed to enjoy direct and indirect network effects. The Italian authorities summarily assert that this results in consumer harm, although the gargantuan 250-page decision spends scarcely one paragraph on this point. 

    Intuitively, however, Amazon’s behavior should, in principle, benefit consumers by offering something that most find tremendously valuable: a guarantee of quick delivery for a wide range of goods. Indeed, this is precisely why it is so misguided to condemn self-preferencing by online platforms.

    As some have already argued, we cannot assume that something is bad for competition just because it is bad for certain competitors. For instance, a lot of unambiguously procompetitive behavior, like cutting prices, puts competitors at a disadvantage. The same might be true for a digital platform that preferences its own service because it is generally better than the alternatives provided by third-party sellers. In the case at hand, for example, Amazon’s granting marketplace privileges to FBA products may help users to select the products that Amazon can guarantee will best satisfy their needs. This is perfectly plausible, as customers have repeatedly shown that they often prefer less open, less neutral options.

    The key question, therefore, should be whether the behavior in question excludes equally efficient rivals in such a way as to harm consumer welfare. Otherwise, we would essentially be asking companies to refrain from offering services that benefit their users in order to make competing products comparatively more attractive. This is antithetical to the nature of competition, which is based on the principle that what is good for consumers is frequently bad for competitors.

    AGCM’s Theory of Harm Rests on Four Weak Pillars

    Building on the logic that Amazon enjoys “hyper-dominance” in marketplace intermediation; that most online sales are marketplace sales; and that most marketplace sales are, in turn, Amazon.it sales, the AGCM decision finds that succeeding on Amazon.it is indispensable for any online retailer in Italy. This argument hinges largely on whether online and offline retailers are thought of as distinct relevant markets—i.e., whether, from the perspective of the retailer, online and offline sales channels are substitutable (see also the relevant market definition section above). 

    Ultimately, the AGCM finds that they are not, as online sales enjoy such advantages as lower fixed costs, increased sale flexibility, and better geographical reach. To an outsider, the distinction between the two markets may seem artificial—and it largely is—but such theoretical market segmentation is the bread-and-butter of antitrust analysis. Still, even by EU competition law standards, the relevant market definitions on which the AGCM relies to conclude that selling on Amazon is indispensable appear excessively narrow. 

    This market distinction also serves to set up the AGCM’s second, more controversial argument: that the benefits extended to products sold through the FBA channel are also indispensable for retailers’ success on the Amazon.it marketplace. Here, the AGCM seeks a middle ground between competitive advantage and indispensability, finally settling on the notion that a sufficiently large competitive advantage itself translates into indispensability.

    But how big is too big? The facts that 40-45% of Amazon’s third-party retailers do not use FBA (p. 57 of the decision) and that roughly 40 of the top 100 products sold on Amazon.it are not fulfilled through Amazon’s logistics service (p. 58) would appear to suggest that FBA is more of a convenience than an obligation. At the least, it does not appear that the advantage conferred is so big as to amount to indispensability. This may be because sellers that choose not to use Amazon’s logistics service (including offline, of course) can and do cut prices to compete with FBA-sold products. If anything, this should be counted as a good thing from the perspective of consumer welfare.

    Instead, and signaling the decision’s overarching preoccupation with protecting some businesses at the expense of others (and, ultimately, at the expense of consumers), the AGCM has expanded the already bloated notion of a self-preferencing offense to conclude that expecting sellers to compete on pricing parameters would unfairly slash profit margins for non-FBA sellers.

    The third pillar of the AGCM’s theory of harm is the claim that the benefits conferred on products sold through FBA are not awarded based on any objective quality criteria, but purely on whether the seller has chosen FBA or third-party logistics. Thus, even if a logistics operator were, in principle, capable of offering a service as efficient as FBA’s, it would not qualify for the same benefits. 

    But this is a disingenuous line of reasoning. One legitimate reason why Amazon could choose to confer exclusive advantages on products fulfilled by its own logistics operation is because no other service is, in fact, routinely as reliable. This does not necessarily mean that FBA is always superior to the alternatives, but rather that it makes sense for Amazon to adopt this presumption a general rule based on past experience, without spending the resources to constantly evaluate it. In other words, granting exclusive benefits is based on quality criteria, just on a prior measurement of quality rather than an ongoing assessment. This is presumably what a customer-obsessed business that does not want to take chances with consumer satisfaction would do. 

    Fourth, the AGCM posits that Prime and FBA constitute two separate products that have been artificially tied by Amazon, thereby unfairly excluding third-party logistics operators. Co-opting Amazon’s own terminology, the AGCM claims that the company has created a flywheel of artificial interdependence, wherein Prime benefits increase the number of Prime users, which drives demand for Prime products, which creates demand for Prime-eligible FBA products, and so on. 

    To support its case, the AGCM repeatedly adduces a 2015 letter in which Jeff Bezos told shareholders that Amazon Marketplace and Prime are “happily and deeply intertwined,” and that FBA is the “glue” that links them together. Instead of taking this for what it likely is—i.e., a case of legitimate, efficiency-enhancing vertical integration—the AGCM has preferred to read into it a case of illicit tying, an established offense under Article 102 TFEU whereby a dominant firm makes the purchase of one product conditional on the purchase of another, unrelated one. 

    The problem with this narrative is that it is perfectly plausible that Prime and FBA are, in fact, meant to be one product that is more than the sum of its parts. For one, the inventory of sellers who use FBA is stowed in fulfillment centers, meaning that Amazon takes care of all logistics, customer service, and product returns. As Bezos put it in the same 2015 letter, this is a huge efficiency gain. It thus makes sense to nudge consumers towards products that use FBA.

    In sum, the AGCM’s case rests on a series of questionable assumptions that build on each other: a narrow relevant market definition; a finding of “hyper-dominance” that downplays competitors’ growth and expansion, as well as competition from outside the narrowly defined market; a contrived notion of indispensability at two levels (Marketplace and FBA); and a refusal to contemplate the possibility that Amazon integrates its marketplace and logistics services in orders to enhance efficiency, rather than to exclude competitors.

    Remedies

    The AGCM sees “only one way to restore a level-playing field in e-commerce logistics”: Amazon must redesign its existing Self-Fulfilled Prime (SFP) program in such a way as to grant all logistics operators—FBA or non-FBA—equal treatment on Amazon.it, based on a set of objective, transparent, standard, uniform, and non-discriminatory criteria. Any logistics operator that demonstrates the ability to fulfill such criteria must be awarded SFP status and the accompanying Prime badge, along with all the perks associated with it. Further, SFP- and FBA-sold products must be subject to the same monitoring mechanism with regard to the observance of Prime standards, as well as to the same evaluation standards. 

    In sum, Amazon Italy now has a duty to treat Marketplace sales fulfilled by third-party operators the same as those fulfilled by its own logistics service. This is a significant step toward “common carrier antitrust.” in which vertically integrated firms are expected to comply with perfect neutrality obligations with respect to customers, suppliers, and competitors

    Beyond the philosophical question of whether successful private companies should be obliged by law to treat competitors analogously to its affiliates (they shouldn’t), the pitfalls of this approach are plain to see. Nearly all consumer-facing services use choice architectures as a means to highlight products that rank favorably in terms of price and quality, and ensuring consumers enjoy a seamless user experience: Supermarkets offer house brands that signal a product has certain desirable features; operating system developers pre-install certain applications to streamline users’ “out of the box “experience; app stores curate the apps that users will view; search engines use specialized boxes that anticipate the motives underlying users’ search queries, etc. Suppressing these practices through heavy-handed neutrality mandates is liable to harm consumers. 

    Second, monitoring third-party logistics operators’ compliance with the requisite standards is going to come at a cost for Amazon (and, presumably, its customers)—a cost likely much higher than that of monitoring its own operations—while awarding the Prime badge liberally may deteriorate the consumer experience on Amazon Marketplace.

    Thus, one way for Amazon to comply with AGCM’s remedies while also minimizing monitoring costs is simply to dilute or even remove the criteria for Prime, thereby allowing sellers using any logistics provider to be eligible for Prime. While this would presumably insulate Amazon from any future claims against exclusionary self-preferencing, it would almost certainly also harm consumer welfare. 

    A final point worth noting is that vertical integration may well be subsidizing Amazon’s own first-party products. In other words, even if FBA is not fully better than other logistics operators, the revenue that it derives from FBA enables Amazon to offer low prices, as well as a range of other benefits from Prime, such as, e.g., free video. Take that source of revenue away, and those subsidized prices go up and the benefits disappear. This is another reason why it may be legitimate to consider FBA and Prime as a single product.

    Of course, this argument is moot if all one cares about is how Amazon’s vertical integration affects competitors, not consumers. But consumers care about the whole package. The rationale at play in the AGCM decision ultimately ends up imposing a narrow, boring business model on all sellers, precluding them from offering interesting consumer benefits to bolster their overall product.

    Conclusion

    Some have openly applauded AGCM’s use of EU competition law to protect traditional logistics operators like FedEx, Poste Italiane, DHL, and UPS. Others lament the competition authority’s apparent abandonment of the consumer welfare standard in favor of a renewed interest in punishing efficiency to favor laggard competitors under the guise of safekeeping “competition.” Both sides ultimately agree on one thing, however: Amazon Italy is about favoring Amazon’s competitors. If competition authorities insist on continuing down this populist rabbit hole,  the best they can hope for is a series of Pyrrhic victories against the businesses that are most bent on customer satisfaction, i.e., the successful ones.

    Some may intuitively think that this is fair; that Amazon is just too big and that it strangles small competitors. But Amazon’s “small” competitors are hardly the “worthy men” of Brandeisian mythology. They are FedEx, DHL, UPS, and the state-backed goliath Poste Italiane; they are undeniably successful companies like eBay, Alibaba – or Walmart in the United States. It is, conversely, the smallest retailers and consumers who benefit the most from Amazon’s integrated logistics and marketplace services, as the company’s meteoric rise in popularity in Italy since 2016 attests. But it seems that, in the brave new world of antitrust, such stakeholders are now too small to matter.