Contestability and fairness are the central goals of the Digital Markets Act (DMA), one of Europe’s latest attempts to wrestle with the challenges of the digital revolution. To contribute to the success of the DMA’s implementation, TSE’s Jacques Crémer has published a new paper1 in a special issue of Yale Journal on Regulation on the digital economy. With his coauthors, he shows how contestability and fairness can be defined through standard economic concepts and help to implement the regulation in a way that increases competition, encourages innovation, and benefits the business users that the DMA is intended to protect.
What does the DMA attempt to regulate?
The DMA is a very targeted piece of legislation, which regulates some of the behavior of a few of the very large firms of the digital economy that it calls “gatekeepers”. Currently, there are only six gatekeepers: Amazon, Apple, Google, Meta, Microsoft and TikTok. It seems that Booking.com might join their ranks in the not-too-distant future.
It is also important to note that because its main aim is to foster competition, the DMA is mostly focused on the relationship between these gatekeepers and their business users. Other European regulations are more focused on consumer protection in the digital realm and the relationship between platforms (large and small) with individuals.
Why are regulators eager to intervene in the digital sector?
The development of the digital sector has brought enormous benefits, but it has also created barriers to competition. New technologies can provide firms with large profits because they are highly valued by consumers, but also because they lead to the formation of natural “moats” that protect incumbent firms from potential competitors. The business users which connect to consumers through these firms may then suffer from higher prices and lower quality, either because new, more innovative, or more efficient firms are not able to develop and/or because the incumbent firm has less incentives to provide superior services.
The DMA is a prominent example of government efforts to change bargaining power and increase choice, imposing new obligations on the largest firms. However, regulators must be careful not to kill the golden goose of digital innovation. Our paper attempts to provide them with technical guidance to ensure that the DMA fulfils its goals of increasing fairness and contestability for all the business users of these firms.2
Why is it important to clarify the concepts of “fairness” and “contestability”?
These are the DMA’s main aims. Clear definitions make it easier to understand the obligations imposed by the DMA, and the results they are intended to generate. This will help regulators, firms, and courts to more effectively interpret and implement the DMA, including its amendment processes.
Our paper defines fairness as the organization of economic activity so that users are justly rewarded for their contributions and business users are not restricted in their ability to compete. Contestability is defined as the ability of non-dominant firms to overcome barriers to entry and expand to the benefit of users.
To choose well-targeted policies, it is important to distinguish between lack of contestability due to the fundamentals of the technology and of the demand and lack of contestability caused by platforms’ behavior. For instance, lack of multi-homing can be due to users’ preference for one platform, but also due to anti-competitive contractual or technical choices by the incumbent.
If users freely join platforms, how are they unfairly treated?
To answer this question, we must begin by analyzing the benefits of platforms. In their purest form, (two-sided) platforms put business users and customers into contact. The benefits that these users derive from the platform are due not only to the investments and the technology deployed by the platform owner, but they are also, and very often mainly, due to the presence of the users “on the other side”. There are therefore three parties who contribute to the value of the platform: its owner, the business users, and the consumers. After the platform is well established, business users and customers are in some sense stuck on the platform and find it very difficult to migrate to another one, which gives the owner disproportionate power, large profits and lower incentives for innovation. It is in this sense that the users can be unfairly treated.
Of course, this simple sketch is very much a caricature, and the analysis would have to be adapted for each of the large platforms. It is also important to remember that, with all their faults, the gatekeepers have been very innovative firms over the years.
All these effects change the analysis of whether surplus is shared fairly. Firms should receive rewards equal to their contribution to the welfare of their clients, but a dominant platform can generate profits far in excess of this contribution. A large part of the platform’s value is created by the users, who should not bear the brunt of their limited bargaining power.
Beyond surplus sharing, how can the DMA promote fairness?
Fairness in process and practices implies that the rules made by gatekeeper platforms should be communicated in a transparent, clear, and reasonable way, with easily accessible procedures to mediate disputes. Given the exceptional importance of the core services, users should not be excluded except in accordance with fair procedures.
The DMA should promote fairness through similar treatment of users who use the platform in different ways, particularly when differences affect contestability. In particular, we support the following policies:
• There should be no discrimination between users who multi-home and users who do not.
• There should be no discrimination between users who compete with the platform and users who do not.
• When the platform is also a user of the platform—for instance, when it is a seller on its own marketplace—it must treat its own activities at arm’s length.
Why should the DMA focus on competition in the market?
Economists distinguish between competition for the market and competition in the market. Competition in the market is the standard form of competition where competition occurs at the margin: from year to year, market shares vary up and down.
Competition for the market occurs when returns to scale and network effects leave room for very few competitors. Entrants can only succeed by attracting quite rapidly a significant number of consumers. Encouraging competition for the market is difficult and may have only limited success. It requires extremely good competition enforcement or regulation to protect small nascent entrants in a context of uncertain technological trends.
Regulators can also intensify competition by imposing or encouraging interoperability. This can shift network effects from benefiting solely a proprietary platform, such as a social networking site, to accruing instead at the market level. Some of the obligations of the DMA are intended to do just that.
How can data regulation improve efficiency?
The use of data has “pro-competitive” as well as “anti-competitive” aspects. Regulation should not focus on limiting the amount of data, but on ensuring it is collected, treated, and protected appropriately. Data should also be shared between service providers, for the benefit of users. A mix of regulations, including interoperability requirements, will therefore be required to improve data sharing, transparency, and data protection, while preserving an appropriate level of privacy.
Is the DMA a threat to innovation?
The knee-jerk view that any regulation will kill innovation is not supported by economic theory and empirical evidence. The largest tech platforms continue to be fantastic innovators. The question is not whether the level of innovation by today’s platforms is high, but whether the level of innovation by platforms and other firms would be higher and more targeted to the benefits of their users if they faced more competition.
The type of innovation matters too. Incumbents have incentives to innovate in ways that limit contestability, extract more rents from consumers, displace other useful innovations, and leverage their market power into adjacent markets. The DMA seeks to reduce these incentives by regulating interoperability and portability of data, as well as access to real-time data.
Policy recommendations
• The DMA should clearly define contestability and fairness.
• The implementation of the DMA should focus on encouraging competition in the market and not just competition for the market.
• The platform economy leads to “unfair” outcomes when users are not rewarded for their contribution to the success of the platform. Regulation should aim at correcting this distortion.
• If well implemented, regulations based on the concepts of fairness and contestability can be favorable to innovation.
FURTHER READING ‘Fairness and Contestability in the Digital Markets Act’ and other publications by Jacques are available to view on the TSE website.
1 “Fairness and Contestability in the Digital Markets Act”, Jacques Crémer, Gregory S. Crawford, David Dinielli, Amelia Fletcher, Paul Heidhues, Monika Schnitzer, & Fiona M. Scott Morton. Yale Journal on Regulation, 40(3), Fairness and Contestability in the Digital Markets (yale.edu)
2 The DMA is intended to protect business users against the incumbents. It only indirectly protects the individual consumers. (Other European regulations are intended to protect individuals.)
Article published in TSE Reflect, March 2024
