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European regulation of digital markets puts future innovation at risk

Oxera’s latest report shows that regulation of digital markets risks disadvantaging European consumers and businesses.

In June 2020, the European Commission made a series of proposals affecting digital markets. These proposals include a form of ex ante regulation, which has become known as the Digital Markets Act and is likely to target large global digital players. In a report issued today (“The impact of the Digital Markets Act on Innovation”), Oxera considers if the proposed ex ante regulatory regime would have an impact on innovation, and to what extent such regulation could have implications for consumers and the wider EU economy.

Oxera’s research highlights that ‘innovation is an important driver of long-term economic growth’ meaning that less innovation would harm the long-term interests of EU consumers, businesses, and other stakeholders. Innovation also provides tangible social benefits over and above general economic progress, generating crucial advances and improvements across society, the report states.

Oxera’s analysis concludes that the ex ante regulation proposals from the Commission would reduce the ability and incentive of any firms caught within the regulations’ scope to provide innovative products to consumers and businesses.

The report raises that the implicit assumption from the Commission, that alternative online players will compensate for reduced innovation by larger players, is unlikely to the be the case because:

  • incentives to innovate for smaller players would be limited if they anticipate that their success will be accompanied by significant regulation;
  • innovation efforts by firms are driven, in part, by access to larger global markets, and EU regulation won’t make global markets more accessible to small firms; and
  • it’s uncertain that businesses not subject to ex ante regulation would fill the gap if global players were to cut back on their innovation efforts.

The proposal to introduce ex ante regulation in digital services is likely to lead to unintended consequences of reduced innovation overall—to the disadvantage of European consumers and businesses.

Matthew Johnson, the Oxera expert who led the study said:

“Innovation is crucial to the European economy as it drives long term growth. Our research has looked at the likely impact of the Digital Markets Act on innovation in the EU. Drawing on a large body of established economic research, we have concluded that the Digital Markets Act regulation being considered by the Commission is expected to reduce rather than increase innovation. Reduced innovation is a real concern as the harm will be felt not just by the large global tech companies that would be subject to the regulation, but also by EU businesses and consumers.”

Dr Andrew Mell, the lead Technical Advisor on the study, said:

“The Digital Markets Act initiative needs more consideration as it is likely to reduce the benefits of innovation for European consumers and businesses. The Commission has made promising proposals in relation to digital liability rules which could make the EU an attractive market for digital start-ups. However, the initiatives being suggested as part of the Digital Markets Act do not account for why firms innovate, and could ultimately drive innovation out of the EU.”

The independent research, which was commissioned by Amazon, can be downloaded here

Contact: Stevie Dixon, Senior Marketing and Business Development Manager