Commentary I: Digital markets and their discontents

August 18, 2021

Paul MacDonnell, executive director, Global Digital Foundation
 

General introduction

This commentary is the first of three which, combined, will serve as a general introduction to, and discussion of, the anti-trust / competition regulation of digital markets in Europe. Set against the backdrop of the EU’s proposed Digital Markets Act (DMA), they will serve as a primer for European policymakers and legislators who are interested in the economic background and key issues at stake in this important area of emerging regulation. This first commentary, Digital Markets and Their Discontents, summarises key aspects of the growth of digital markets, the associated practices undertaken by some of their dominant platforms, that have become the focus of dispute in the EU, and introduces the Union’s proposed Digital Markets Act (DMA) as both a response to perceived abuses and a significant industrial policy in its own right. 1 The second, New Ideas about Regulating Platforms, will view platforms’ practices in the light of historical and recent antitrust / competition theory and the proposed DMA. Finally, the third, Towards the Practical Regulation of Digital Markets, will propose practical steps for the regulation of the relationships between digital platforms and digital market participants in Europe. This project has been undertaken with the support of Google Europe whom we would like to thank.

Digital markets and their discontents

The growth of digital markets

The worldwide online business to consumer (B2C) market was valued at $3.67 trillion in 2020 and is expected to grow at a compound annual growth rate (CAGR) of 9.7% from 2021 to 2028.2 In the United States, Amazon’s own platforms, including Amazon Marketplace, will account for 50% of all e-commerce by the end of 2021.3 In Europe, retail e-commerce revenue is set to be at $465.4bn in 2021 and is forecast to reach $469.2bn by 2025.4

These developments are reflected in worldwide trends. Measured by monthly visits, the world’s top ten marketplaces in descending order are: Amazon (Global), eBay (Global), Mercado Libre (Latin America), Rakuten (Japan), AliExpress (Global), Shopee (S.E. Asia), Walmart.com (U.S.A.), Etsy (Global), Taobao (China), and Pinduoduo (China). Between them these have 6.9 billion estimated monthly visits while the next 145 online marketplaces have just under 4.5 billion monthly visits between them. However, the dominance of Amazon is marked. It accounts for 45% of global monthly visits to online marketplaces.5 In Europe, Amazon and eBay between them account for 56% of monthly visits to online marketplaces.6

Some of these platforms are at the front end of supply chains that stretch across the world. Their efficiency results from a combination of technologies that support better logistics and third-party supplier management, with a political-legal environment that is friendly to global trade. Nothing that is so successful so quickly comes without economic disruption and, in their role as disruptors, digital platforms have compounded other, longer-term, trends that weigh on traditional industries. The immediate impact has been on the high street where stores are unable to compete with the lower prices and delivery service of online retailers.7 But other industries, including publishing and advertising, feel threatened by digital platforms. The fact that the use of new technologies, such as artificial intelligence, promises to eliminate a large number of jobs and to transform even more adds to the sense of uncertainty in economic policymaking.8

Within the platform economy itself, winners have emerged who have become the de facto gatekeepers to much of the digital economy. It is in the nature of consumers’ relationship with multi-sided platforms that one or just a few of them have come to dominate in certain areas. Platforms have expanded the range of economic activity that economists say are subject to natural concentration or, potentially, natural monopoly.9 Smaller platform businesses have begun to complain that gate-keeper platforms have acquired significant market power and are, in some cases, charging extractive fees for giving online-content providers access to their own customers.10

The proposed EU Digital Markets Act (DMA) is partly a response to this issue and partly a move to bind platforms into a broader EU industrial policy.

More economic uncertainty means more political uncertainty

When it comes to how policymakers see platforms we should not forget that cultural factors are also at play in how they function and are perceived as economic systems. For example, the major retail and social networking platforms are led by strong engineering cultures which have a tendency to use data — based on both employee performance and customer behaviour as a guide to how both should be treated. Employees work in an environment of HR management by data which has spread beyond digital companies to many other digitised organisations, leading to a revival of Taylorism, or ‘scientific management’.11 Employees who leave digital firms are more likely to cite unfair treatment (42%) than employees who leave other sectors (32%) as reasons for their departure.12 The chief experience of those who complain about their jobs in such companies is the lack of positive feedback. This may be because doing the job ‘properly’, just like happy customers, doesn’t constitute actionable data to middle-managers who are looking only for problems. Meanwhile, consumer behaviour is analysed and ‘nudged’ to encourage purchases or, otherwise, greater engagement with the platform. Digital firms are, naturally, the most devoted to such technologies. These experiences bleed into the political sphere and contribute to a discourse of distrust and anxiety about the digital economy.13

Practices of digital platforms that are the focus of dispute in the EU and the US

Platforms break down into two kinds: aggregators and marketplaces.14 Aggregators collect large amounts of information and render it accessible to users while charging a fee to advertisers whose ads will be associated with specific search terms. These advertising slots are ranked and auctioned to organisations interested in reaching consumers who are searching for specific terms—Google Search is the largest example. Marketplaces, on the other hand, match product and service suppliers and their goods to consumers. Amazon Marketplace and eBay are the two best-known examples in Europe and the U.S. Google also runs a marketplace for digital advertising, AdX.

Businesses and consumer concerns about platforms are focused on marketplaces. In particular, concerns stem from: platforms’ panopticon view of the product, pricing and sales information of third-party sellers, and of the preferences and online behaviour of consumers. Together with their role as gatekeepers between content or product providers and consumers, this confers major advantages to platform owners who wish, as traders, to compete in their own markets. Past and current complaints by policymakers and regulators against platforms included:

Google uses its digital ad technology to compete in the digital advertising market

In June 2021 the European Union announced a probe into Google’s advertising auction and display technology. The bulk of Google’s revenue comes from its digital advertising business which in 2020 was $147bn. Google has leveraged its online ad technology to dominate digital advertising. Publishers wishing to sell ad space on their websites must, if they wish to benefit from Google’s own advertising exchange, use Google’s AdManager, which combines the former DoubleClick for Publishers and DoubleClick Ad Exchange into a single product. Google’s critics accuse the company of preventing other exchanges from competing with its exchange, AdX, and of opacity in how it manages the marketplace.

Amazon provides marketplace services while competing in that same marketplace

Amazon is both the owner of its own marketplace, Amazon Marketplace, and a participant in that market. The company uses aggregate data provided by sellers and consumers in the marketplace to determine offers and prices for its own products. Amazon markets products under Lark & Ro (womens fashion), AmazonBasics (general products), WholeFoods and other brands. Third-party sellers and legislators have accused Amazon of selectively raising the costs of doing business on Amazon Marketplace platform while subsidising its own products and delivery services in a way that prevents fair competition.15 Furthermore, legislators have proposed that Amazon’s Whole Foods Market and AmazonBasics businesses be sold off because of alleged conflicts of interest between these and the services the company provides to retailers on its platform.16

Amazon subsidized ebooks in order to gain dominance at the expense of publishers of printed books

Policymakers and competitors accused Amazon of selling best-selling books as ebooks below cost when it launched its Kindle in 2007. When, in 2009, publishers responded by eliminating the (approximately) 20% wholesale discount Amazon absorbed the cost and kept prices of bestsellers at $9.99.17

Google imposed illegal restrictions on Android device manufacturers and mobile network operators to cement its dominant position in general internet search

Google required phone manufacturers to pre-install Google Search and Chrome as a condition for licensing the Google's Play Store; Google paid manufacturers and mobile network operators to exclusively pre-install Google Search on their devices and insisted that they not install forked versions of Android on devices. The European Commission deemed this to be anti-competitive and fined Google $4.3bn.

Apple’s mandatory in-app purchase rules for rival music-streaming app developers distort the market for streaming services in the EU

The EU alleges that Apple’s requirement that music-streaming app developers, such as Spotify, use only Apple’s own in-app purchase system to buy content, imposes an unfair penalty—of 30% commission—on a service that competes with its own Apple Music.18 Furthermore the EU alleges that Apple prevents services like Spotify from directly contacting its own customers on the platform.

The Digital Markets Act

The EU’s proposed Digital Markets Act (DMA) is a response to perceived anti-competitive threats posed by digital platforms to competition and to the stability and integrity of the European economy. It is also a recognition that the process of resolving complaints about anti-competitive behaviour in Europe’s courts is too slow for Europe’s new fast-evolving digital economy. Accordingly, the DMA is premised on the belief that the status of very large platforms as ‘gatekeepers’ in the economy will, without the imposition of rules, cause platforms to treat business customers unfairly and that this, in turn, will lead to market inefficiencies and higher prices. However, as an ex-ante measure designed to foreclose anti-competitive behaviour before it occurs, the DMA goes beyond the targeting of specific practices and the speedy resolution of complaints, to form the spearhead of a policy to mould Europe’s digital economy according to a broader industrial strategy. Its important details are as follows:

Article 5 requires that platforms get explicit consent before combining data from ‘core services’ with non-core, or third party, services. It also requires that platforms allow business users to make direct, independent, offers to their customers, via the platform, or by other means, without any hindrance or retaliation. Also, end-users, or customers must be allowed to access features of the business user either via the platform or directly even if these features were not acquired or purchased on the platform. Platforms must give advertisers or publishers details of the cost of any ads or rate of fees for relevant services.

Article 6 prevents platforms from using data contributed by business users to compete with them; platforms must allow third-party apps to interoperate with the Operating Systems of the gatekeeper; platforms must not favour their own products over those of their business users; platforms must allow business users / advertisers to use performance monitoring tools to measure ad campaign effectiveness.

Conclusion

There is no doubt that the economic and social impact of the major technology platforms has far exceeded the visions of their founders. Combined with other economic developments, such as the huge growth in global trade, their impact has been to disrupt long-established economic patterns. These developments have come with some practices that appear to be oppressive while, at the same time, falling outside the experience of competition regulators.

The DMA not only targets certain platform practices but also aims to reconfigure the relationship between digital platforms and the business that depend upon them. In that sense it is both a set of targeted regulations and a significant economic policy in its own right. The question is: will it lead to the consequences intended by its authors? The next commentary will examine the economic questions raised by the DMA.

End


Views expressed in this article are those of the author and not those of the Global Digital Foundation which does not hold corporate views.

Notes

  1. Michaels D. and Kendall B. (2021). 'U.S. Competition Policy Is Aligning With Europe, and Deeper Cooperation Could Follow'. Wall Street Journal, 15th July, 2021; and Espinoza J. (2021) 'EU tech policy is not anti-American, says Vestager'. Financial Times, 20th June, 2021; and Stacey K. and Politi J. (2021). 'Joe Biden styles himself as a 21st century ‘trust buster’'. Financial Times, 13th July, 2021.

  2. Grand View Research (2021). B2C E-commerce Market Size, Share & Trends Analysis Report By Type (B2C Retailers, Classifieds), By Application (Clothing & Footwear, Media & Entertainment), By Region, And Segment Forecasts, 2021 - 2028.

  3. Chevalier S. (2021). U.S. Amazon retail e-commerce GMV share 2016-2021. Statista, 7th July, 2021.

  4. Rotar A. (2021). Total retail e-commerce revenue in Europe 2017-2025. Statista.

  5. Merton K. (2021). The World’s Top Online Marketplaces 2021. Webretailer.

  6. Merton K. (2021).

  7. Wolfson S. (2020). 'Online shopping makes many high street jobs unviable, says Next boss'. The Guardian. 25th September, 2020.

  8. Mühleisen M. (2018). The Long and Short of The Digital Revolution. International Monetary Fund.

  9. Ducci, F. (2020). Natural Monopolies in Digital Platform Markets. Cambridge: Cambridge University Press (Global Competition Law and Economics Policy), pp. 1–9.

  10. White A. (2021) 'Apple Set to Get EU Antitrust Complaint Over Spotify'. Bloomberg.com. 27th April, 2021.

  11. Economist (2015) Digital Taylorism: a modern version of “scientific management” threatens to dehumanise the workplace. The Economist. 10th September, 2015; Salame R. (2018). 'The New Taylorism'. Jacobin. 20th February, 2018.

  12. Scott A. et. al (2017). Tech Leavers Study. Ford Foundation and Kapor Center for Social Impact.

  13. Madrigal A. C. (2019). 'The Coalition Out to Kill Tech as We Know It'. The Atlantic. 4th June, 2019; Kelly J. (2021) 'As Jeff Bezos Is Heading Into Space, The Teamsters Are Attempting To Unionize Amazon Warehouse Workers'. Forbes. 25th June, 2021.

  14. Parker G. et. al. (2020). Digital Platforms and Antitrust. Working Paper 06/2020. Brussels: Bruegel.

  15. Weise K. (2019) Prime Power: How Amazon Squeezes the Businesses Behind Its Store. New York Times. 19th December, 2019; Palmer A. (2020) 'What the EU’s investigation of Amazon means for U.S. antitrust probes'. CNBC. 11th November, 2020.

  16. Herndon, A. W. (2019). ‘Elizabeth Warren Proposes Breaking Up Tech Giants Like Amazon and Facebook (Published 2019)’. New York Times. 8th March, 2009.

  17. Khan L. (2017). p.757.

  18. Schechner S. (2021) 'EU Charges Apple With App Store Antitrust Violations in Spotify Case'. Wall Street Journal. 30th April, 2021; Lomas N. (2021). Europe charges Apple with antitrust breach, citing Spotify App Store complaint. TechCrunch. 30th April, 2021.