EC Expert Group calls for changes to antitrust enforcement in digital markets

By Francine Cunningham, Baptist Vleeshouwers

04-2019

In these final months of Margrethe Vestager's mandate as European Competition Commissioner, she is pursuing a serious reflection on whether or not traditional competition rules and principles are fit for purpose in this new, digitised era. The most comprehensive input to this discussion to date has been the publication of a Report on 4 April 2019, prepared by three special advisors appointed by Commissioner Vestager to explore how competition policy should evolve to continue promoting pro-consumer innovation in the digital age.  

The authors of this 133-page report entitled "Competition policy for the digital era" are three academics:  Jacques Crémer, professor of economics at the Toulouse School of Economics; Heike Schweitzer, professor of law at the Humboldt University of Berlin; and Yves-Alexandre de Montjoye, assistant professor of data science at Imperial College London.  Their final Report, which is a culmination of one year spent as special advisors to the Commissioner, asserts that the fundamental goals of competition law remain the same in the context of the digital environment. However, they recommend significant changes to the manner in which the EU enforces competition rules, especially in relation to online platforms, data-sharing and mergers and acquisitions in the digital field. They also suggest a re-evaluation of certain established concepts in competition law.

Characteristics of the digital economy

In the course of the Report, the advisors focus on what they have identified as three essential characteristics of the digital economy:

  • Extreme returns to scale: the cost of production of digital services is much less than proportional to the number of customers served. This extreme return to scale can result in a significant competitive advantage for incumbents.
  • Network externalities: the convenience of using a technology or a service increases with the number of users that adopt it. Network effects could prevent a superior platform from displacing an established incumbent, resulting in an "incumbent advantage".
  • The role of data: the evolution of technology has made it possible for companies to collect, store and use large amounts of data. The ability of companies developing artificial intelligence and other online services to use data to develop new services and products is an increasingly important competitive parameter.

Against this backdrop, the advisors make suggestions regarding the application of competition rules to online platforms, data and mergers and acquisitions, including so-called "killer" acquisitions of promising start-ups in the technology sector.

One of the overarching themes is the authors' insistence on the so-called "error cost" of competition law enforcement in the digital sector. The authors argue that, in the context of highly concentrated markets characterised by strong network effects and barriers to entry, authorities should err on the side of disallowing types of conduct which are potentially anti-competitive, and to shift the burden of proof for showing pro-competitiveness on the incumbent. If adopted, this highly controversial recommendation would constitute a Copernican revolution in EU competition law.

Dominant Platforms acting as quasi-regulators

The Report notes that in markets where network externalities and returns to scale are strong, the market might only be able to accommodate a limited number of platforms. As a result, it is essential to protect competition "for" the market in order to provide incentives to supply goods and services on reasonable conditions and to innovate. The authors however deem it equally essential to protect competition "on" a dominant platform, since a dominant platform may effectively constitute the market. In this respect, the advisors argue that platforms play a form of regulatory role as they determine the rules according to which users, including consumers, business users and providers of complementary services, interact and, when they are dominant, have a responsibility to ensure that competition on their platforms is fair, unbiased and pro-users.

While a case-by-case analysis is always required, the advisors believe that actions taken by a dominant platform that hinder rivals from attracting a critical mass of users, or raise their costs, should be suspect under competition law. Such "suspect" actions could take the form of Most Favoured Nation (MFN) or best price clauses, or restrictions on multi-homing, switching and complementary services. Furthermore, the report suggests that because many platforms function as quasi-regulators, dominant platforms have a special responsibility to ensure that their rules do not impede free, undistorted and vigorous competition without objective justification.

The Report also underlines that although the Platform to Business Regulation, which is due to be voted by the European Parliament plenary session on 16 April 2019, sets out a transparency regime for certain aspects of the digital economy, competition law can, and should, continue to accompany and guide the evolution of the platform economy as the "background regime". As it is difficult to define general, over-arching principles in all areas of the digital world, competition law will continue to play a role and should focus on large platforms "leveraging" their strong competitive advantage and self-preferencing in the form of providing special treatment to their own products or services when they are in competition with those offered by other entities using the platform. Where self-preferencing has significantly benefitted a platform's subsidiary by improving its market power position in relation to rivals, the advisors suggest that remedies might need to include a restorative element.

Access to data: interoperability, sharing and pooling

It is noted that access to data and use of data is often an important input for online services, production processes, logistics, smart products and AI. While the significance of data for competition will always depend on the specificities of a given market, in general terms the competitiveness of firms relies increasingly on timely access to relevant data. Regarding access to personal date, the General Data Protection Regulation (GDPR) can facilitate the switching between data-driven services, through data portability. The advisors maintain that under the risk-based approach taken in the GDPR, a more stringent data portability regime can be imposed on a dominant firm in order to overcome particularly pronounced lock-in effects. More far-reaching regimes of data access, including data interoperability, can also be imposed via sector-specific regulation, such as the Payment Services Directive (2015/2366/EU), or under Article 102 of the Treaty on the Functioning of the European Union (TFEU) in relation to dominant firms.

The advisors note that data sharing and data pooling arrangements will frequently be pro-competitive since they enhance data access, may resolve data bottlenecks and help to realise the innovative potential inherent in data. Nevertheless, such arrangements can become anti-competitive in some situations, for example when competitors who are denied access might be foreclosed from the market. A competition law assessment will necessarily depend on the type of data share, the precise form of a data sharing arrangement or data pool, as well as on the market position of the relevant parties. In order to provide more guidance in this relatively new and under-researched topic in competition law, the advisors recommend a scoping exercise of the different types of data pooling, followed by an analysis of their pro- and anti-competitive aspects.

With respect to data access as a remedy under Article 102 TFEU, the report notes that a thorough analysis will be required as to whether such access is truly indispensable. In this context, the legitimate interests of both parties need to be considered. Moreover, it is necessary to distinguish between different forms of data, levels of data access, and data uses. The advisors recommend a cautious approach, noting that, in a number of settings, data access will not be indispensable to compete and public authorities should then refrain from intervention. However, there are other circumstances in which duties to ensure data access – and possibly data interoperability – may need to be imposed. In such cases, competition authorities or courts will need to specify the conditions of access. There is also the possibility that sector-specific regulation may still be needed in this area.

In addition, the advisors note that the traditional competition law analysis of the aftermarket does not in its present form take into account the specificities of data with respect to the potential foreclosure of secondary markets. They therefore propose some directions for an update of the aftermarket doctrine.

Mergers and Acquisitions: assessing 'killer' acquisitions

Particular attention is focused on one specific aspect of the current debate on the role of merger control in the digital era: acquisitions by dominant platforms of small start-ups with a quickly growing user base and significant competitive potential, dubbed "killer acquisitions".  The report considers whether the existing EU Merger Regulation (EUMR) needs to be revised to address concerns with respect to early elimination of potential rivals by dominant firms through such acquisitions. It notes that many of these acquisitions may escape the Commission's jurisdiction because they take place when the start-ups do not yet generate sufficient turnover to meet the thresholds set out in the Regulation. Since many digital start-ups attempt first to build a successful product and attract a large user base, while sacrificing short-term profits, the competitive potential of such start-ups may not be reflected in their turnover.

To fill this gap, some Member States, such as Germany and Austria, have introduced alternative thresholds based on the value of the transaction, but their practical effects still have to be verified. In view of the need for legal certainty and to avoid the introduction of additional administrative burdens, the advisors conclude that it is too early to change the EUMR's jurisdictional thresholds, but instead recommend monitoring the performance of the transaction value-based thresholds recently introduced by certain Member States. However, if systematic jurisdictional gaps are observed in the future, they suggest that a "smart" amendment to the Regulation's thresholds may be justified.

Additionally, while the EUMR's "significant impediment to effective competition" test remains a sound basis for assessing mergers in the digital economy, the advisors believe that there is a need to revisit the substantive theories of harm to properly assess certain cases. This concerns specifically cases where a dominant platform and/or ecosystem, which benefits from strong positive network effects and data access that acts as a significant barrier to entry, acquires a target with a currently low turnover but a large and/or fast-growing user base and high future market potential.  The advisors propose that the best way to handle these "killer acquisitions" is to inject some "horizontal" elements into the "conglomerate" theories of harm, rather than limiting the analysis to the impact of the incumbent's rivals' access to inputs.

Conclusion

While not challenging the fundamental goals of EU competition law, this Report does propose significant changes to the way in which the Union enforces the current rules. If implemented, such proposals could lead to more companies being deemed dominant and thereby subject to more stringent rules about the services they provide and their pricing strategy. Notably, the advisors also suggest re-visiting certain established concepts of antitrust law that may need to be recalibrated for the digital environment. In that regard, a particularly far-reaching recommendation is the suggestion to reverse the burden of proof in some cases.

Commissioner Vestager has praised the Report for being "full of important insights" into the way that markets are evolving and how competition policy can respond to such changes. She stated that she will take time to discuss and debate its suggestions before any conclusions are reached. However, if Commissioner Vestager and her eventual successor are minded to respond proactively to the challenges outlined in this Report, it could be used to justify adjustments to the way competition law is applied to the digital economy.

The Report on Competition Policy for the Digital Era can be accessed here