Digital platforms must engage with regulators

Viswanath Pingali / D Daniel Sokol | Updated on August 02, 2019

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Explaining how their business models change in response to emerging tech will help curb over-regulation and financial risk

In the US, Europe, Japan, Australia, India and elsewhere “competition” concerns are being raised that increasingly would treat platforms as regulated utilities, force their breakup, limit their ability to participate in acquisition of smaller companies, or otherwise create significant limits to their behaviour.

Antitrust laws in various jurisdictions seem to be playing a key role in regulating and altering how these platforms perform their businesses. The risks may be significant: high monetary penalties, limits to certain types of business practices, and the ability to possibly break-up tech companies, mandating data portability and/or interoperability, or prevent mergers in the tech space. While at the moment it may seem as if they are targeted at platform “giants,” it is only a matter of time before emerging platform businesses are the subject of such tight scrutiny.

It is increasingly becoming clear that there is no consensus among the antitrust authorities on how to approach these markets. Who is to be blamed for such a situation and how can such risk be mitigated for business managers? We argue that the platforms can mitigate this risk by constructively and proactively engaging with antitrust regulators.

In fact, given the benefits platforms create to the end-consumer, antitrust regulators themselves could become the champions for these firms vis-à-vis other parts of government that might push for more severe regulatory responses such as tech platform regulation akin to public utilities.

Common allegations

When one reviews the lawsuits, a few themes seem to emerge predominantly:

Size is often conflated with dominance. In a market whose fundamental business model is predicated on ‘network effects,’ firms with significant size seems to be natural. This leads to a follow-up question: when network effects are so significantly present, is it possible for firms to leverage dominant position (if any) in a way that harms the consumers?

What about the other side of the issue — how do network effects create significant value to consumers? It is this more positive message that has been lost within policy discussions and in the media.

There sometimes seems to be a thin line between product improvement and potential negative effects for consumers, particularly as articulated on issues of concern for privacy.

Are consumers really harmed? In many cases, the end-consumer might have benefited from the practices that are alleged to be anticompetitive. A relatively close corollary to this question is, is the current law protecting competitor or competition? Does a fear of platforms suggest the need for industrial policy, particularly for non-domestic platforms?

Proactive engagement

Some of these antitrust concerns might be emerging from incomplete understanding of emerging business models in platform markets, and the economic principles that govern these. By proactively engaging with the authorities and educating them on the emerging business models, the digital firms can substantially cut down risks and financial burden.

If there is a possibility of antitrust violation, it is more likely that the platform markets more generally are likely to come under investigation. Platforms’ traditional response followed thus far, when it confronts an antitrust violation is to ‘lawyer up’; that is, employ a battery of lawyers to look at various legal angles.

A multi-disciplinary approach involving lawyers, economists and data scientists actively looking for benefits that platforms bring to the table would be more effective. Therefore, broader engagement with antitrust authorities through conferences, information sessions, etc., and explaining to them how business models change in response to emerging technologies becomes crucial.

At the outset, a more fundamental question that needs to be answered is: What benefit has a given platform provided to the end-consumer? In order to answer this question, the platform companies need to be able to answer two fundamental questions that go to “non-market” strategy: i) Can you quantify the benefits of the platform to consumers? and ii) Can you explain when populist arguments are not informed by evidence and can you offer such explanations to multiple types of audiences (regulators, political figures, the population at large)?

If platforms cannot adequately answer these questions, they will face a host of new regulations, legislation, and government enforcement that may even threaten their core business models.

Pingali is with IIM Ahmedabad, and Sokol is with the University of Florida

Published on August 02, 2019

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