17 Aug 2021 Articles

Q&A: Competition and antitrust issues in digital markets

29 minute read


Expert economists Salvatore Piccolo, Patricia Lorenzo, Guillaume Duquesne, Kadambari Prasad, and Paul Reynolds discuss competition and antitrust issues in digital markets with Financier Worldwide.

Could you provide an overview of how the digital marketplace has developed in recent years?

Piccolo: Recent years have witnessed the emergence of an increasing number of online marketplaces with new innovative business models. Platforms provide the infrastructure for the development of such marketplaces and change retailing logic as they do not handle the entire supply and logistics chain themselves. The key function of a platform-based marketplace is to match supply with demand – online or offline – exploiting network effects. As the number of users increases, the benefits increase for the owner and individual users. Since new users bring in more benefits than they receive, total benefits increase exponentially with each additional user. Beyond the direct network effects, indirect network or ecosystem effects occur in these markets: the more sellers on one side, the more benefits for buyers, and vice versa. The network becomes even more valuable when its supply-side grows, with more application developers, service providers, content providers and device makers, among others. Therefore, over the years, platforms have built their business strategies around the concept of network externalities, adapting these strategies to consumer needs, technology and prevailing competitive constraints. Business models based on a digital platform differ significantly from traditional product-oriented business models. Many innovative and successful platforms today operate under a hybrid business model. Hybrid platforms combine elements of traditional retail channels with the advantages of the web. They enter one side of their platforms with their retail arms – selling so-called ‘private labels’ – to improve the appeal of their range of product offerings and promote their competitiveness with other marketplaces or distribution channels, such as Amazon Retail and Apple Music, among others. Thus, many hybrid marketplaces will have the incentive to distribute a wide range of product varieties, including some which may be regarded as close substitutes, both to increase product choice and encourage price competition within the marketplace. Those stores will naturally seek to offer a wider selection of products and everyday lower prices than their competitors.

Lorenzo: The first examples of digital marketplaces were focused on the business-to-consumer (B2C) retail market, but in recent years the marketplace model has become more popular within the sharing economy. Uber or Airbnb are examples of mutations of a marketplace model tailored to cover new services and new clients. At the same time, the evolution of digital technologies has had a huge impact on other types of industries and services. The main disruption was the introduction of the platform business model, where online platforms have emerged to provide digital services that facilitate interactions between two or more sets of users who interact through the service via the internet. Online platforms have a strong presence in the entertainment industry, transportation and accommodation, social media, retail, the app economy, job seeking and mobile payments, among many others.

Duquesne: The rapid growth of FinTechs offers enhanced customer experiences, cheaper services and more operationally efficient businesses. Now, Big Tech, such as Google, Apple, Facebook, Amazon and Ant Financial, are also gaining ground. In many ways, they amplify the FinTech proposition with their global scale, large customer bases and cutting-edge technology. Big Tech firms provide their financial services either in competition with traditional banks or in partnership as overlays on top of their products and infrastructure, with Big Tech only providing the customer-facing layer. If Big Tech presence in finance is still nascent, mainly focused on payment services, such as Google Pay and Apple Pay, in a fast-evolving world in which data, digital and customer-centric capabilities are key to winning, it is reasonable to posit that they could quickly make inroads into finance beyond payment services, including credit, banking, crowdfunding, asset management, and insurance. Big Tech could focus on distribution services, while avoiding activities involving significant fixed costs, such as regulatory charges, physical network and payment infrastructures.

What concerns have been raised about the extent to which larger tech companies and platforms currently dominate the digital marketplace? What kinds of potentially anticompetitive behavior have been highlighted?

Piccolo: Most of the leading tech giants operate hybrid marketplaces. Being rather complex and touching several sides of the market, this business model is a delicate object from an antitrust and competition policy perspective. First, since hybrid platforms run their own business, sometimes in competition with the same third-party sellers listed in their marketplaces, one concern, often referred to as self-preferencing, is that these platforms may have the incentive to marginalize third-party rivals within their marketplaces. For example: does Apple have an incentive to favor Apple Music by worsening the contractual terms offered to rivals, such as Spotify, in the App Store? Does Amazon have an incentive to increase the commissions required to third-party sellers so as to make Amazon Retail’s products more appealing to consumers? Second, being at the gate of the market, these platforms have access to, and can even collect, critical market information that might be used for anti-competitive purposes. For example, while access to customer data can help platforms to improve the quality of services and align product variety to consumer needs, it may also be used to favor platforms’ retail arms and their subsidiaries. For example, distorting the access of third-party sellers to the customer base, systematic manipulation of the information disclosed to them about past purchasing patterns may enable platforms to charge prices that are more tailored to consumers’ tastes and steal business from rivals. Although rather intuitive, these are de facto complex questions. Recent research conducted by our researchers shows that the incentives to enact self-preferencing strategies, their effectiveness and their impact on consumer welfare depend on several factors, such as the nature of the goods and services traded in the marketplace, the regulatory environment in place, the relative bargaining position of the parties and the competitive constraints imposed by competing platforms. Concerns about platforms strategies are therefore certainly justified by tech giants’ crucial gatekeeper positions, but a well-grounded assessment of their conduct cannot abstract from these considerations.

Prasad: Digital companies are structurally and functionally different from traditional markets, and as such the particular concerns in these markets are also, to a large extent, different. These markets are characterized by possible network effects, economies of scale, endogenous sunk costs and a dynamic ‘winner takes all’ competition. At the same time, there is a heavy reliance on data, not as an output of the competitive process, which it traditionally has been, but as an input of the process, as giant datasets are used to create new products and monetize platforms effectively. Moreover, these firms have several new tools like artificial intelligence (AI) and algorithms to be able to use that data, to understand and make decisions based on it. Finally, the major digital firms typically offer an ecosystem of interrelated products and services, are present in multiple markets, and are constantly changing and evolving at a fast pace. These structural and functional advantages enjoyed by many digital firms can show up in several different types of behaviors. A number of these digital firms act as gatekeepers to their ecosystems, and there is a concern that they are either self-preferencing their downstream arm, and so playing both referee and player, or exploiting customers due to their unique gatekeeping position. There is also a concern that, due to their presence in various interrelated markets, they can leverage data from one market to another, and can use envelopment strategies to capitalize on their strong position in one market to soften competition in another. Finally, there is the very novel issue of privacy, which traditionally has not been an antitrust concern, and whether these firms can hide behind the garb of privacy to deny data to competitors which could be essential to compete effectively. However, the specific nature of these markets does not automatically imply that there is necessarily dominance and abuse since there is a range of mitigating factors that limit both the extent of market power and the incentive to engage in anticompetitive behavior. In particular, we might expect market power to be kept in check if customers multi-home, or if products are differentiated, or if data is portable. Moreover, to the extent the companies’ business models are different, and the way they monetize their platforms are different, we may expect there to be different incentives to abuse market power. All this could mean that even with the structural and functional differences, we could be in a world where there is strong dynamic ‘moligopoly’ competition, and where temporary leadership can be offset when markets tip toward new entrants or competitors.

Duquesne: Although the overall impact of Big Tech entry into financial services is still unclear, Big Tech firms have the potential to make the financial sector more efficient, lead to improved customer outcomes and aid financial inclusion. This may, however, put financial stability and consumer protection at risk and presents challenges for competition, data privacy and cybersecurity. For instance, there is no doubt that the impact of digital disruption will be to erode the margins of traditional banks and increase the competitive pressure and contestability of banking markets. This stands to benefit customers in the short run. However, it will eventually threaten financial stability over the longer term. One reason is that traditional banks may take excessive risks in an effort to counterbalance the downward pressure on their profits. Another reason is that Big Tech may act as an intermediary between traditional banks and end customers, therefore taking little or no stake in the loans they help to originate and distribute. Big Tech may, therefore, have incentives to reduce the quality of the loan pool to maximize loan origination volume and fees revenue. When Big Tech fund the loans they originate, they may still have incentives to expand credit in order to bolster their other platform businesses. This would inevitably increase financial instability. Should the forces behind Big Tech entry have to do with market power, taking advantage of regulatory loopholes and bandwagon effects of network externalities for exclusionary purposes, then the banking system’s efficiency could suffer in the long run. This risk is real. There is a broad range of conduct that may enable Big Tech to expand their market power from core activities into financial markets, such as self-preferencing leveraging and cross-subsidization, to list only a few examples. Importantly, Big Tech firms often control customers’ access to financial products. They control what those customers see and can nudge them to react in certain ways. For instance, Apple and Google are able to include ergonomic shortcuts on mobile phones to which their competitors would not have access, such as the ability to confirm payments via Apple Pay by double-clicking a button on the side of an iPhone. Similarly, a traditional bank whose products are listed lower down Google’s search results page will be severely disadvantaged, particularly if Google’ competing product is more prominent. Big Tech may also engage in bundling strategies, combining their existing offerings with traditional banking products – for example, Amazon could offer cheap credit to customers who subscribe to purchases on its e-commerce sites. They may thus outbid incumbents unable to replicate those bundles. Though these strategies have the potential to exclude competitors, they cannot be presumed to be anticompetitive, though they may deserve attention. They may exclude only relatively inefficient competitors, thus failing to distort effective competition, especially if competition between Big Tech is fierce. And they may give rise to efficiencies, thus benefitting consumers on balance.

How would you characterize key measures being taken to regulate and protect competition in the sector? How are authorities approaching the issue and exploring new initiatives?

Piccolo: The policy measures that have been proposed to regulate and protect competition in the sector have a common and broad objective: promote a level playing field for competition. The intent is to guarantee fair trading and transparency in digital markets, e-commerce, finance and closely related sectors. Since gatekeeper platforms can exploit their privileged position through several channels – contractual vs informational – different types of interventions are under consideration. Actual regulations are considering restricting the ability of platforms that organize marketplaces to increase commissions or degrade the quality of services offered to third-party rivals. Clearly, while this type of intervention would be key with monopolistic platforms, it becomes less relevant as inter-platform competition should erode opportunities to engage in self-preferencing conduct of this kind. The information aspects associated with the concept of fair trading are slightly more complex. Policymakers are considering adopting mandatory disclosure rules according to which hybrid platforms should share their market knowledge, such as about competitors and customers, with the same third-party sellers with whom they compete in their marketplaces. Merger policy in the digital sector is another area where regulators seem to be rather active in recent years. Mergers in the tech industry are somewhat different than those in traditional sectors. The reasons are rather obvious: in these markets, network and ecosystem externalities are fundamental. Hence, the standard foreclosure logic that usually makes vertical mergers anticompetitive is limited by the presence of these externalities and the imperative to increase supply, product variety, and expand capacity to make marketplaces more attractive to their potential users, including final consumers, as well as developers and sellers.

Lorenzo: The key measures that are applied to protect competition and consumers in the digital environment are twofold. On the one hand, existing competition law is applied, as in any non-digital market, as an ex-post regulation instrument to prevent that online platform enjoying a dominant position which could incur anticompetitive behavior. Similarly, competition authorities all over the globe apply existing merger regulation frameworks to assess potential anticompetitive concerns around proposed joint ventures and mergers among online platforms. However, traditional competition instruments used to prevent anticompetitive behavior and the creation of super-dominant positions have proven to be insufficient. To complement competition law instruments, several governments and institutions are implementing ex-ante regulation mechanisms. This is, for instance, the case of the Digital Markets Act (DMA) in the European Union (EU). The objective of those initiatives is to pre-empt certain practices, which might also be prohibited under competition law. In the particular case of the DMA, to ensure contestable and fair markets in the digital sector, the new regulation outlines a list of obligations and prohibitions that would be applied to gatekeepers in relation to specific core platform services.

In your opinion, what can regulators do to promote innovation on one hand, while protecting consumers on the other? What challenges exist – particularly those unique to the digital marketplace?

Prasad: This is a very difficult question, and an important one since a lot of long-term growth is driven by innovation. As a matter of economics, the relationship between competition and innovation is complicated. On the one hand, the ‘Schumpeterian’ view suggests that greater competition and contestability mean that the benefits of innovation will be competed away too easily, and so too much competition may reduce innovation. On the other hand, the ‘Arrow’ view suggests that in highly competitive markets, firms are more likely to use innovation as a means to distinguish themselves, and so greater competition can generate greater innovation. None of this is new and has formed a part of the debate in recent mergers as well as in patent protection literature. However, digital markets pose some unique challenges. First, the nature of innovation in these markets is different, as it is largely radical and disruptive, rather than incremental. This is driven by underlying competition for the market and the large ‘prize’ if a company manages to tip the market. In addition, much of the innovation may be done by start-ups, whose goal is to be innovative for a short period and then be bought. Policies that limit this strategy may then prevent such companies from being set up in the first place, and so quite directly reduce innovation. However, regulators have to ask themselves whether the gains from the increased innovation in these markets are, in effect, clawed back by firms with market power. Second, the trade-off between contestability and appropriability is likely different across different markets, different business models and across players. For example, a lot of the innovation in digital markets is around developing a product that can be the market leader, so we might see a lot of innovation by smaller firms, but then there is a concern it could be reduced when they eventually become market leaders. Third, it is not resolved whether innovation efforts by competitors are strategic substitutes or strategic complements and whether increasing competition can have a different impact on the innovation incentives for entrants and incumbent firms. Moreover, there is a need to assess the impact on total innovation as a result of policy changes, because, as we have seen in mergers, a decrease in innovation by the incumbent is not necessarily compensated fully by the increase in innovation by smaller firms. Regulators have to therefore walk the tightrope and design policies that optimally increase contestability while preserving the innovators’ ability to reap the benefits of those innovations.

Duquesne: Digital disruption poses a formidable challenge for regulators. They must adapt to the fast-moving digital world by facilitating competition and allowing the benefits of innovation to permeate the system while protecting financial stability. For instance, whether traditional banks and Big Tech end up being head-to-head competitors likely will depend on the regulatory framework in place. Head-to-head competition will be more likely if regulation facilitates a true level playing field. This may imply eliminating regulatory asymmetries. One source of asymmetry is that Big Tech firms manage to remain generally unrestricted by risk and compliance obligations as they enter retail banking. Established thresholds for the imposition of financial regulation, such as the solicitation of customers, deposit-taking, pooling of assets, or discretion over client assets, directly constrain and in fact limit the traditional model of relationship banking. However, these thresholds often fail to subject Big Tech to the relevant financial regulation. Big Tech firms, therefore, avoid the rules that apply to their competitors and so operate with more freedom and lower costs. Another source of asymmetry relates to data. There have been some regulatory innovations in recent years – notably the EU’s second payment services directive (PSD2) and the UK’s Open Banking project – which have stimulated competition in financial services by mandating interoperability between customers’ accounts with the incumbent banks and new FinTech products, and by allowing competitors access to customers’ banking data in order to give these competitors the opportunity to offer customers products that better suit their needs. These innovations were meant to facilitate FinTech's entry into financial services. But they also benefit Big Tech, placing traditional banks at a disadvantage relative to Big Tech benefitting from the non-reciprocal access to valuable data. In the long run, a big challenge is that of discrimination and exclusion. Digital payment platforms, such as Google Pay, Apple Pay and Samsung Pay, gather more and more information about our spending habits through mobile and online payments. They combine that data with other individual data, including internet browsing, location, circle of friends, occupation, age and family, to develop better targeted retail financial services. Market power, and rents, shift from traditional banks to digital platforms that intermediate credit, investment products or insurance. Financial products can be targeted to a customer’s needs in accordance with their ability to pay. This may result in better and, at first, cheaper financial services for high-income customers, with superior access to digital services. However, the more financially, physically or mentally vulnerable in society may be left out. This will exacerbate income inequality and feed political and social instability.

How would you describe recent monitoring and enforcement activity to safeguard competition in the digital marketplace? What kinds of penalties are being imposed on those found to have breached competition laws?

Lorenzo: According to a recent survey by the International Competition Network (ICN), the most commonly investigated conducts in digital markets are related to refusals to deal, followed by tying and exclusive dealing. Most of the abuses investigated can be categorized as exclusionary abuses, practices that aim to foreclose current competitors and prevent entry to new ones, but exploitative abuses, for example, practices related to applying excessive prices or to reduce quality, are receiving increasing attention. The European Commission (EC) has been very active on technology markets and digital markets’ related cases in the past 10 years. Some of the most famous cases involve investigations of Google’s practices in three separate cases: the Google Shopping case, which is related to the preferential treatment of Google Shopping products versus competitors, Google AdSense, related to abusive practices in online advertising, and Android operating system, which is mainly to do with forcing smartphone makers to pre-install Google apps exclusively. Google was fined in all three cases, with €2.4bn in November 2010, €1.49bn in March 2019 and €4.3bn in July 2018, respectively. The first and third fines were the largest antitrust fines issued by the EC at the time. Finally, regarding ongoing large cases, the EC is currently investigating Apple for potential anticompetitive practices related to its music streaming services. There is also a formal antitrust investigation to assess whether Facebook infringes EU antitrust rules in relation to data collected for advertising purposes. In addition, Epic has filed an antitrust complaint against Apple in the EU, expanding the company’s fight in other jurisdictions.

Reynolds: As well as specific antitrust cases and investigations, there have also been heightened monitoring activities. For example, the Competition and Markets Authority (CMA) has completed market studies into online platforms and digital advertising, and into digital comparison tools. The online platforms and digital advertising study, in particular, identified the need for new powers which the UK government has taken forward with the establishment of the Digital Markets Unit. Other countries have also undertaken wide-ranging investigations into the impact of digital platforms on competition, including the Federal Trade Commission’s hearings on competition and consumer protection in the 21st century and the Australian Competition and Consumer Commission’s digital platforms inquiry. The Autorité de la Concurrence and the Bundeskartellamt undertook a joint study into the specific competitive risks of algorithms. In relation to mergers, the recognition that digital platforms have achieved entrenched positions in some markets is seeing an increased focus on acquisitions by digital players with respect to the loss of potential competition and the importance of data. For example, the EC cleared Google’s acquisition of Fitbit on the basis of a set of commitments restricting Google’s use of data collected from wearable devices, providing third-party access to data available in the Fitbit Web application programming interface (API), and the licensing of APIs of wrist-worn devices to interoperate with Android smartphones. These commitments were sought despite Fitbit’s limited market share in Europe and very limited horizontal overlaps with Google. Authorities have also been active in relation to consumer protection, such as the CMA’s actions to combat fake and misleading online reviews and inadequate disclosure of social media endorsements.

Prasad: There has been a lot of recent activity in enforcement across almost all jurisdictions. The existing legal and economic framework has already been used to address some of these novel concerns that arise with digital markets and resulted in both large, billion-dollar fines, as well as behavioral remedies. However, in many ways, we are in the middle of a sea change, a shift in thinking and appetite of competition authorities. There is an increasingly popular narrative that existing interventions have not been timely or even effective. This might be because there is a gap in the existing legal and economic framework, which makes it insufficient to address the entire set of issues that may arise. For example, it could be that problematic conduct may not fall under Article 101, because there is no contract, or Article 102, because the firm may not be dominant by traditional competition law standards, but could have significant market power, particularly if there is single homing on the customer side. In addition, there is concern about intermediation bias, driven by the trade-off between the revenue an intermediation platform may earn per interaction and the quality of interaction for the customer. For example, intermediary platforms prioritize revenue generation over customers’ interests and therefore do not present a neutral ranking of options, rather one that is driven by their own monetary concerns. There is also concern about ‘killer’ acquisitions, where large digital firms acquire nascent firms, which do not get antitrust scrutiny because the acquisitions are too small. Finally, there have also been concerns that existing remedies are ineffective, that the large fines imposed are insufficient to properly curtail abusive behavior by large digital conglomerates that are ‘too big to care’, and that the existing behavioral remedies have been vague and do not necessarily generate outcomes that are in the interest of consumers. Therefore, the authorities are now increasingly looking to develop a more efficient way to address some of the problems that we have seen in these markets, for example by setting up rules for certain firms in a particularly powerful position, and at the limit, possible structural remedies too. However, on the flip side, there is a concern that this comes at the expense of rigorous analysis, and that a ‘one size fits all’ model may be going too far in the other direction. Ultimately, the value of any new measures has to reflect the trade-off between efficiency and accuracy.

Can you describe what policymakers are currently doing to regulate the impact of digital platforms in other industries?

Reynolds: Digitalization has facilitated competition in industries across the economy, including through making entry and expansion easier, improving customers’ access to information, and by new digital players increasing competition to traditional firms. However, there is concern that policy and regulatory changes are needed to better manage the impact of digital platforms outside their core markets. The news media sector has seen initiatives that are aimed at addressing unequal bargaining power between news media and digital platforms. For example, the European Copyright Directive includes measures to provide for better remuneration of news publishers when they negotiate the use of their content by online services. The Australian News Media Bargaining Code goes further to require designated digital platforms to submit to final offer arbitration if they do not reach an agreement with news publishers for payment for use of news content. The extent to which the current measures will lead to more and better journalism remains to be seen, although other countries have announced that they are considering similar initiatives. The heightened antitrust and merger regulation vigilance of Big Tech and potential new ex-ante regulatory tools will also help guard against leverage of market power from the core markets of the digital platforms into other sectors. In this regard, the establishment of specialist units in competition authorities focused on the digital platforms can be expected to review the impact of the platforms on other sectors, such as the UK Digital Markets Unit beginning a review of the relationships between platforms and content providers. In industries with existing sector regulation, the growing position of digital platforms is also likely to see measures to ensure that existing regulation does not become ineffective or inefficient through uneven application between existing providers and new digital players.

Piccolo: While it is fairly obvious why platforms in declining industries may have incentives to foreclose rivals and substitute the products of these firms with their own private labels, there is also a somewhat broad consensus on the idea that platforms have little or no incentive to marginalize rivals through unfair contractual rules in marketplaces where products are sufficiently differentiated – both vertically and horizontally – and where consumers have a strong taste for variety and enjoy considerable network externalities. The challenge, from a regulatory perspective, is therefore to identify testable conditions under which the business expansion incentives generated by the bright side of digital marketplaces dominate the forces that the standard foreclosure economic literature has already identified in traditional retail markets. Matters are slightly more complicated when touching information policies. The subtle point here is that a rule which improves market symmetry, bringing potential benefits to consumers, may also impact platforms’ ex-ante incentives to collect information. When social and private incentives to gathering information are misaligned, promoting a level playing field of competition through mandatory disclosure rules may actually exacerbate the gap between these incentives. A recent article by our researchers shows that this may result in under- or over-investment in information – a problem that depends on the intensity of competition within a marketplace and the extent to which its actors benefit from the ecosystem and network externalities. As a result, when designing regulatory rules that limit the property rights over the information collected by platforms and extend the access to this information to third-party players, regulators should factor in the effects of these rules on ex-ante incentives to collect information and the impact of lower or higher incentives to acquire information on the investments that platforms undertake to improve the quality of the services they offer.

Duquesne: Financial regulation has not caught up with the challenges posed by Big Tech. Following the emergence of Big Tech, no generalized adjustments have been made to the perimeters of financial regulations in order to accommodate their activities as providers of financial services. A few exceptions are the introduction of the category of digital banks in some jurisdictions or regulations on crowdfunding platforms. The new regulatory categories – initially designed for FinTech but now also applied to Big Tech – do not always aim to control the specific risks they pose. Rather, they sometimes seek to promote increased competition or financial inclusion by imposing lighter requirements. Today, regulatory treatment of Big Tech depends on their specific business model, in particular the type of financial activities they are engaged in. Big Tech firms are subject to a combination of regulations specific to the financial industry, and which therefore apply to the types of services provided, such as banking, extending credit or transmitting payments, such as finance-specific regulations, and general laws and regulations that apply to financial and non-financial activities, including cross-industry regulations. Catalyzed by Big Tech’s foray into financial services, regulators are rethinking their oversight of Big Tech. This is evidenced by recent initiatives such as the US congressional report on the biggest American technology companies, the EU Digital Markets Act and Digital Services Act, and the recent antitrust actions by China’s banking and market regulators. Still, the unique risks posed by Big Tech in the financial sector are not comprehensively dealt with. There is still a long way to go: discussions are in their infancy and no consensus has emerged yet, and given the pace of technological development, regulators may always be playing catch-up.

With new trends, priorities and opportunities constantly emerging in the digital marketplace, what are your predictions for how competition regulation may evolve in the years ahead?

Prasad: We are in the midst of a philosophical shift of the principles underlying competition policy. Where the focus has previously been on the consumer welfare standard, and conduct has been traditionally assessed on the basis of the impact it has on the direct welfare of consumers, there are concerns now that this consumer welfare standard is underinclusive because it allows conduct that results in some of these novel concerns. Therefore, we appear to be seeing a shift in focus more toward fairness and contestability, not just when they improve consumer welfare in the traditional sense – as has previously been the case – but as end goals in their own right. There is also a recognition that concerns of competition policy are closely intertwined with other concerns regarding democracy, privacy, media freedom and consumer protection. However, whether the pendulum has now swung too far in the other direction, and whether fairness and contestability are achieved at the expense of consumer welfare, is something we will have to wait and see.

Reynolds: A clear immediate focus will be the translation of proposals that have been announced into law. In this regard, the European Digital Markets Act’s fairly prescriptive approach may move to a more principles-based approach, so as to allow for more targeted, proportionate interventions. The US House Report on Competition in Digital Markets put forward an ambitious set of proposed reforms, including revitalizing the essential facilities doctrine, breaking up dominant platforms, non-discrimination provisions, and shifting presumptions for future acquisitions by dominant platforms. These proposals are likely to be significantly wound back as they seek to gain bipartisan support, although there is Republican support for some reform. Even once legislation is enacted, there is likely to be a significant period during which authorities will grapple with implementation issues, such as defining what constitutes self-preferencing in practice, and in refining the use of their new powers. New approaches in dynamic markets will inevitably lead to some trial and error. In some digital markets, market changes and the impact of interventions may lead to the erosion of current market power. If the dominance of platforms remains entrenched in particular markets, then we may see increasing access regulation to protect or promote competition in adjacent markets.

Duquesne: Digital disruption could be a game-changer in terms of increasing competition and contestability in banking markets, with potentially a large impact. As digital platforms expand into retail banking services, they will gather more and more current and relevant data on each individual customer, and banking products and services will be increasingly customized. Traditional banks will have to adapt, imitate or die. But, in doing so, the risk of adverse selection leading to financial exclusion may become ever more severe. Moral hazard in credit intermediation may be exacerbated among banks that fail to adapt at the necessary pace. This may undermine financial stability, at least in the short term. With Big Tech knocking at the gates, regulators must strive to ensure level playing fields so that systemic risk does not gradually build up in some corner of the market, as was the case in the years leading up to the 2008 financial crisis. In the aftermath of the financial crisis, regulators favored activity-based regulation over entity-based regulation. But the threat of Big Tech would justify a hybrid model in which digital platforms must comply with additional requirements irrespective of whether or to what extent they engage in traditional retail banking activities.

This Q&A was originally published by Financier Worldwide and is available on their website. The views expressed are those of the authors only and do not necessarily represent the views of Compass Lexecon, its management, its subsidiaries, its affiliates, its employees, or clients.

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