There are a substantial number of studies and investigations that highlight a wide range of theories of harm that may arise in the digital economy. However, significantly less attention has been given to the theories of benefit and value creation relating to online platforms.
Having an in-depth understanding of how platforms create value for their users and wider society is critical as policymakers seek to design regulatory interventions in these markets. This study aims to help provide this understanding by explaining how some of the practices that may be restricted by the European Commission’s proposal for a Digital Markets Act (DMA) can enable value creation, both online and offline.
At their most basic level, platforms act as intermediaries, connecting one or more types of users to facilitate an interaction, and are often characterised by positive direct and/or indirect network effects. However, most modern-day platforms generate significant value over and above that offered by intermediation alone, playing active roles as:
- aggregators: helping to unlock scale economies for businesses while reducing transaction costs and increasing quality and trust for consumers (‘value from aggregation’);
- innovators: realising economies of scope as they extend their user offering by adding new features and services, thereby fostering innovation and dynamic competition both within and between ecosystems (‘value from innovation and dynamic competition’).
This study, commissioned by the Computer and Communication Industry Association (CCIA), examines the academic literature (including economics, management science, and information technology) on platform markets and platform management to shed light on how practices involving bundling and tying, self-preferencing, and leveraging are used by platforms to help create this value for their users. We illustrate this with a large number of examples and case studies from both online and offline markets. Our infographic booklet summarises the the key findings from the report.
Value from aggregation
The bundling and tying of different features and services by a platform can boost the efficiency of a market by reducing transaction costs, increasing choice for consumers, and helping businesses achieve scale economies while avoiding duplication costs. This can be observed both offline (for example, in the range of services offered by supermarkets) and online (such as with social media platforms or app stores).
Like offline businesses, online platforms can use self-preferencing to promote quality and trust. Furthermore, self-preferencing by dual-mode operators (i.e. platforms that offer their own products or services alongside those of third parties) can lead to greater user discovery and choice.
Helping consumers find the content and products that are most relevant to them is a fundamental way in which platforms add value as aggregators. To match users to the most relevant options and provide convenience through personalisation, platforms can leverage data. However, these practices are not new, with marketeers, credit reference agencies and private-label retailers all using data to help reach customers.
The study brings this form of value creation to life with a detailed case study involving Google Maps, which illustrates how the combination of these different practices can create aggregation value for consumers and business users alike.
Value from innovation and dynamic competition
Tying and bundling of additional features, services, or tools can incentivise innovation by platforms, as well as enabling third parties to innovate on platforms. Users benefit from these behaviours that, directly or indirectly, increase the features and functionalities available. For instance, the bundling and tying of additional features and services by Facebook is a good example of continual innovation by the platform, redefining the scope of a social media service. On the other hand, Google’s bundling of developer tools and marketing services with the Play Store for use by third-party Android developers promotes innovation on the platform.
Self-preferencing can also play a positive role in fostering dynamic competition by enabling platforms to offer consumers a choice between business models, such as the more ‘closed’ ecosystem of Apple iOS competing with the more ‘open’ ecosystem of Google’s Android.
Similarly, both online and offline businesses can leverage their data and know-how to create new innovations that spur dynamic competition in the market and offer alternatives to the status quo. For example, detailed data allows cloud kitchens to better meet underserved demand, while AWS leverages Amazon institutional know-how to provide flexible cloud computing services to third-party businesses.
Apple’s decision to self-supply processors for its desktop and laptop computers has also led to a closer integration of hardware and software, and illustrates how a platform can generate additional value for consumers and businesses by facilitating dynamic competition in its roles as an innovator, and as an enabler of innovation.
Implications for the DMA
The European Commission proposals for the Digital Markets Act (DMA) will impose a series of 18 obligations and prohibitions on any firm identified as a ‘gatekeeper’. These will cover a range of practices that are common among both offline and online businesses, which, as this study has shown, can create significant value for consumers and business users.
A key concern we have identified is that the DMA’s excessive focus on short-run efficiency (favouring the protection of contestability and fairness) may come at the expense of value creation for consumers in the long term through innovation and dynamic competition, both on and between platforms. As a result, the DMA creates a risk of over-enforcement by restricting a series of common business practices, found offline as well as online, that can have net positive effects for society. In particular, the DMA’s ‘catch-all’ and ‘per se’ approach to prohibiting a range of value creating behaviours risks stifling the growth of Europe’s digital economy.
At the heart of the DMA’s shortcomings is the departure from the legal principles and economic analysis required under competition law. This is manifested in a proposed regulatory framework that neither includes a requirement to undertake a formal analysis of dominance or market power, nor an effects-based assessment of the conduct and remedies to be imposed. Nor does it provide a route to an appeal on the merits of any aspect of the process. We therefore recommend that the EU develops a more flexible and tailored framework, seeking alignment and consistency with the principles of competition law. It could draw inspiration from the European telecoms regulatory framework (in particular, the ‘checks and balances’ that come from the three-criteria test to identify markets susceptible to ex ante regulation, as well as the opportunity to appeal decisions to specialist courts ‘on the merits’), as well as the Digital Markets Taskforce’s proposals in the UK, which require a holistic assessment of market features such as quality, innovation, and other non-price indicators before tailored remedies can be imposed.
On Wednesday 12 May 2021, Oxera hosted an event: ‘How can the DMA promote value creation in Europe’s digital economy?’ which included a presentation of the report’s finding and a panel discussion with expert academics and policymakers on how the European Commission’s proposal for a Digital Markets Act (DMA) can be adapted in order to promote value creation in Europe’s digital economy. You can read our post event insights and watch the recording here.