Don’t shackle digital giants

Viswanath Pingali/D Daniel Sokol | Updated on March 04, 2021

They generate ‘network effects’ for the economy

Globally, regulators have been expressing concerns regarding digital platforms. One concern is the size of these platforms, as they can influence the daily lives of people and may even harm consumers. In some cases, the allegation is that the platforms give undue preference to their own products and services — the so-called “self-preferencing” claim.

What is missing in these criticisms is that each factor also has a positive side and it is for regulators to undertake a careful case-by-case analysis. An important question from a regulatory standpoint is: To what extent is user experience improved or compromised by these platforms?

Overall, what is lacking in the debates is the value creation aspect of platforms. Regulation is inevitable, but what is needed is smart regulation to target potential problems without destroying the value of platforms.

Each platform has a different business model and a different way of orchestrating the relationships of users and third-party companies. Ultimately, a balanced approach to understanding platforms is imperative to ensure that there are no unintended consequences of harming innovation and growth.

Spurring growth

One overarching point is tech’s contribution in spurring growth and innovation. For instance, in the US, according to a 2019 Progressive Policy Institute report, the top 25 investment heroes invested $226 billion in the US in 2018, where four of the five so-called “GAFAM (Google, Apple, Facebook, Amazon and Microsoft) companies appeared in the top 10 and all were in the top 25.

There’s no equivalent stats for India, but this past year has witnessed massive investment flows into India, particularly in the technology sector. Such investment is the bloodline of economic growth. The global and Indian mobile app ecosystem continues to grow, offering more choices to consumers. As more choices have emerged, consumers have greatly benefited. In App Annie’s recent report titled ‘Mobile App Evolution’, India’s mobile app downloads growth rate is higher than the worldwide average. India has catapulted into 2nd place (after China) globally since 2017.

Platforms have the potential to positively impact physical and mental health. Covid is a recent example where physical distancing and shutdowns have meant citizens and businesses rely on technologies to connect and to continue doing business. Also, social networking websites contributed a lot towards safety efforts and fund-raising activities during Chennai floods last year.

Open source software and mobile phone operating system (Android) have played a key role in tackling the Covid pandemic, by ensuring faster information dissemination which is highly essential in such circumstances. Therefore, some of the solutions that are being proposed to limit the influence of these platforms need to be understood better.

A Harvard Business Review article argues that the oft-repeated term, network effects, is alone not sufficient in creating and sustaining a dominant position; a differentiating edge is almost always essential for the platforms to survive over a period of time.

In markets where switching costs are low, multi-homing (usage of multiple platforms for same services) platforms invest heavily in innovation and create mechanisms through which user experience improves. This raises an important question: Is the distinction between innovation and self-preferencing behaviour clear enough? If platforms are broken up, the synergies that exist between the platform and the products it creates could be disrupted.

A proposed second solution is that a competitor should have the right to access the data. While this may seem attractive, such a solution opens up other issues on data privacy. For example, who is responsible if the data is misused?

Finally, there is the proposal to limit acquisitions by these platform companies. Acquisitions help in mitigating innovation-related risk and allow platforms to acquire a team of skilled employees. Platforms acquire other companies for various reasons, including increasing the size and offerings of the network.

Therefore, regulators should investigate the user experience and weigh the potential benefits against the potential concerns about platforms. Platform businesses and regulators need to come together to understand the emerging business models and the resulting user experiences.

Pingali is a faculty member in the economics area at IIM Ahmedabad, and Sokol is a law professor at the University of Florida

Published on March 04, 2021

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