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  • digital era A report by Jacques Crémer Yves-Alexandre de Montjoye Heike Schweitzer

    for the Competition policy

    Competition

  • EUROPEAN COMMISSION

    Directorate-General for Competition E-mail: [email protected]

    European Commission B-1049 Brussels

  • [C atalogue num

    ber]

    Competition Policy for the digital era

    Final report

  • LEGAL NOTICE

    The information and views set out in this report are those of the author(s) and do not necessarily reflect the official opinion of the Commission. The Commission does not guarantee the accuracy of the data included in this report. Neither the Commission nor any person acting on the Commission’s behalf may be held responsible for the use which may be made of the information contained therein.

    More information on the European Union is available on the Internet (http://www.europa.eu).

    Luxembourg: Publications Office of the European Union, 2019

    Catalogue number: KD-04-19-345-EN-N ISBN 978-92-76-01946-6 doi: 10.2763/407537

    © European Union, 2019 Reproduction is authorised provided the source is acknowledged. The reproduction of the artistic material contained therein is prohibited.

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  • Authors:

    Jacques Crémer

    Yves-Alexandre de Montjoye

    Heike Schweitzer

  • COMPETITION POLICY FOR THE DIGITAL ERA

    1

    CONTENTS

    EXECUTIVE SUMMARY ............................................................................................................................................................. 2

    CHAPTER 1 INTRODUCTION ............................................................................................................................................ 12

    CHAPTER 2 DIGITISATION AND COMPETITION ................................................................................................ 19

    CHAPTER 3 GOALS AND METHODOLOGIES OF EU COMPETITION LAW IN THE DIGITAL ERA ................................................................................................................................. 39

    CHAPTER 4 PLATFORMS ..................................................................................................................................................... 54

    CHAPTER 5 DATA ..................................................................................................................................................................... 73

    CHAPTER 6 MERGERS AND ACQUISITIONS IN THE DIGITAL FIELD .............................................. 110

    CHAPTER 7 CONCLUSION .............................................................................................................................................. 125

  • EXECUTIVE SUMMARY

    2

    EXECUTIVE SUMMARY CHAPTER 1: INTRODUCTION

    Commissioner Vestager has asked us to explore how competition policy should evolve to continue to promote pro-consumer innovation in the digital age.

    We structured our report as follows. First, we describe the digital world and what we see as the main ways in which markets function in the digital era (Chapter 2). We then outline our views of the goals of EU competition law in the digital era and the methodologies it should use (Chapter 3). Second, with this framework as background, we discuss the application of competition rules to platforms (Chapter 4) and data (Chapter 5), and we inquire whether European merger control needs an update (Chapter 6). We finally provide our conclusions.

    An important caveat at the outset: we make general suggestions, but of course digital services can be very diverse and the ways they compete require, as always under competition law, a case-by- case analysis.

    CHAPTER 2: DIGITISATION AND COMPETITION

    We focus on three key characteristics of the digital economy:

    a) Extreme returns to scale. The cost of production of digital services is much less than proportional to the number of customers served. While this aspect is not novel as such (bigger factories or retailers are often more efficient than smaller ones), the digital world pushes it to the extreme and this can result in a significant competitive advantage for incumbents.

    b) Network externalities. The convenience of using a technology or a service increases with the number of users that adopt it. Consequently, it is not enough for a new entrant to offer better quality and/or a lower price than the incumbent does; it also has to convince users of the incumbent to coordinate their migration to its own services. Network effects could thus prevent a superior platform from displacing an established incumbent. The size of this “incumbency advantage” depends on a number of factors, including the possibility of multi-homing, data portability, and data interoperability.

    c) The role of data. The evolution of technology has made it possible for companies to collect, store, and use large amounts of data. Data is not only one of the key ingredients of Artificial Intelligence but also a crucial input to many online services, production processes, and logistics. Therefore, the ability to use data to develop new, innovative services and products is a competitive parameter whose relevance will continue to increase.

    A consequence of these characteristics is the presence of strong “economies of scope”, which favour the development of ecosystems and give incumbents a strong competitive advantage.

  • COMPETITION POLICY FOR THE DIGITAL ERA

    3

    Indeed, experience shows that large incumbent digital players are very difficult to dislodge, although there is little empirical evidence of the efficiency cost of this difficulty. From a competition policy point of view, there is also a reasonable concern that dominant digital firms have strong incentives to engage in anti-competitive behaviour. All these factors heavily influence the forms that competition takes in the digital economy; they require vigorous competition policy enforcement and justify adjustments to the way competition law is applied.

    CHAPTER 3: GOALS AND METHODOLOGIES OF EU COMPETITION LAW IN THE DIGITAL ERA

    There is no need to rethink the fundamental goals of competition law in the light of the digital “revolution”. Vigorous competition policy enforcement is still a powerful tool to serve the interests of consumers and the economy as a whole.

    Over the last 60 years, EU competition rules have provided a solid basis for protecting competition in a broad variety of market settings. Competition law doctrine has evolved and reacted to various challenges and changing circumstances case by case, based on solid empirical evidence. At the same time, the stable core principles of EU competition rules have ensured consistent enforcement. We are convinced that the basic framework of competition law, as embedded in Articles 101 and 102 of the TFEU, continues to provide a sound and sufficiently flexible basis for protecting competition in the digital era.

    However, the specific characteristics of platforms, digital ecosystems, and the data economy require established concepts, doctrines and methodologies, as well as competition enforcement more generally, to be adapted and refined.

    a) The consumer welfare standard. The term “consumer welfare” encompasses all “users” in a broad sense. This is particularly relevant in the digital economy, where “business users” are also affected by the practices of platforms. In a fast-changing world, we need to rethink both the timeframe and the standard of proof in the light of likely error costs. Also, what economists would call the “expected” impact on consumers will be too complicated to compute in many cases. Under-enforcement in the digital era is of particular concern because of the stickiness of market power caused by the factors discussed in Chapter 2. Therefore, we believe that even where consumer harm cannot be precisely measured, strategies employed by dominant platforms aimed at reducing the competitive pressure they face should be forbidden in the absence of clearly documented consumer welfare gains.

    b) Market definition. In the digital world, market boundaries might not be as clear as in the “old economy”. They may change very quickly. Furthermore, in the case of multi- sided platforms, the interdependence of the "sides" becomes a crucial part of the analysis whereas the traditional role of market definition has been to isolate problems. Therefore, we argue that, in digital markets, we should put less emphasis on analysis of market definition, and more emphasis on theories of harm and identification

  • EXECUTIVE SUMMARY

    4

    of anti-competitive strategies. At the same time, even if in some consumer-facing markets – according to their own account – firms compete to draw consumers into more or less comprehensive ecosystems, markets for specific products or services will persist from a consumer’s perspective, and should continue to be analysed separately, alon