Competition in Digital Markets: How can regulators incentivise investment and innovation?

Competition in Digital Markets: How can regulators incentivise investment and innovation?

On 9 August, Access Partnership convened an online dialogue to discuss the implications of regulation on innovation, investment and growth. Using the case of Australia’s online marketplaces, the conversation covered the main impacts for firms active in digital markets when regulatory intervention is being considered. The speakers shared their expertise and the most recent evidence available to inform future frameworks for digital platforms, including: how regulatory uncertainty affects business operations, how and to what extent regulation can prevent tipping and the unfair exercise of gatekeeper market positions, and how to preserve competition on merit to the benefit of consumers.

Moderator:

  • Kirsten Webb – National Competition Practice Group Lead, Clayton Utz.

Speakers:

  • Stephen King – Commissioner at Australia’s Productivity Commission.
  • Philip Williams – Legal and Competition Team Lead, Frontier Economics (Asia-Pacific).
  • John Yun – Associate Professor of Law at the Antonin Scalia Law School, George Mason University, and the Deputy Executive Director at the Global Antitrust Institute.

Jurisdictions across the world are currently debating what, if any, ex-ante competition regulation is needed for digital platforms. Tech platforms have delivered breakthroughs and innovations over the past decades, they have reduced costs and improved consumer welfare. As platforms play an increasingly significant role in our lives and in the marketplace, policy makers are considering whether regulation is needed. They are also having to consider the uncertainty new regulation would bring and the risks of stymieing investments and innovation.

Australia’s own digital ecosystem poses the same questions to policy makers. Even though brick-and-mortar retailers in Australia are still the largest market actors, online marketplaces have been competing against brick-and-mortar retailers, who have started selling online. Online marketplaces facilitate transactions between third-party sellers and consumers on a common platform. Any new regulation needs to consider individual characteristics of all parties involved in online transactions and the incentives driving all three participants: the digital market provider, the sellers and the consumers.

Underpinning every decision to introduce regulation must be a clear definition of the market. New business forms may shift focus away from how consumers make substitution choices. A different business model does not mean consumers do not perceive products as substitutes – consumers are able to multi-home, that is, buy at their discretion from both brick-and-mortar stores and from online marketplaces.

Digital marketplaces in Australia are growing, but at a much lower pace compared to brick-and-mortar, whose market size is also significantly larger. We have a retail market that includes brick-and-mortar retailers and digital marketplaces.Stephen King

Regulation seeks to prevent and address market failure; given the structure of some markets, there are no signals that ex-ante regulation is needed. There are a few signals that could indicate a gatekeeper would emerge and harm consumer welfare. One of these potential signals is the presence of single-homing platforms, where either sellers or consumers are locked into a single platform. In the current market, both consumers and sellers can choose between multiple platforms, and the switching costs are minimal. A second signal is evidence of direct network effects. However, in the case of Australia, there is no single digital platform benefitting from a degree of data network effects sufficient to position a given online retailer as a dominant market player. A third signal would be the existence of anticompetitive practices. However, there is little evidence to indicate that exclusive contracts are prevalent, for example, that require sellers not use competing digital platforms, or that sellers cannot practice differential pricing strategies on different platforms.


New laws require an understanding of the particular features of digital platforms. Current ex-post legislation should address the risk a firm with significant market power will abuse that position. New laws require an understanding of the particular features of digital platforms not covered by existing provisions. Blanket ex-ante presumptions and regulatory prohibitions on certain types of conduct that is commonly observed across markets and across jurisdictions that are indeed procompetitive will likely have harmful impacts to consumers.

New regulation for digital platforms cannot predict future abuse of market power. Market power does not imply a predisposition to act outside the boundaries of competition. The form of the business (brick-and-mortar versus digital) does not introduce a new risk. – John Yun


Introducing ex-ante targeted regulation brings uncertainty for firms. It can mean arbitrary thresholds, lack of clarity on how prohibitions will be applied, and how these prohibitions will change in the future. Businesses are then disincentivised to compete, grow and invest in innovation. And they would be unable to make long-term operational decisions in the absence of information on penalty risks.

New interventions need to consider the knowledge gaps when it comes to the impact of regulation on innovation. – Philip Williams

Regulation needs to preserve the incentives to innovate and retain competition on merit. Depending on the case, regulation can improve markets or make them less inefficient. But regulation can also damage certain markets if it shifts the focus away from a consumer welfare standard to the interests of third-party sellers. Certain ex-ante regulation risks slowing the pace of innovation and reducing the benefits to consumers. The design and deployment of any intervention will need to consider the current gaps in evidence, the uncertain impacts for firms, and the likelihood of successful outcomes.

In November, The Australian Competition and Consumer Commission (ACCC) released their half-way report into the five-year digital platforms inquiry. Our panel resumed discussions on 13 December to unpack the ACCC’s most recent recommendations for consumers, small businesses and innovation in Australia’s retail sector. A summary of this discussions is available here.

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