Coping with digitization and China: two important advances for the E.U.’s international competitiveness

The Digital Services Act (DSA) and the Digital Markets Act (DMA)

The European single market provides market access to some 450 million citizens and, with its economic output, is one of the major players on world markets. However, digitization and the competition with China are shaking up established structures.

The European Union has to prove that it is maneuverable on the global stage, especially regarding two cornerstones of its single market: fair competition and free market access. Two major projects show that the Union is willing to do just that.

A new legal framework for the digital economy

The dominance of platform companies has long been a thorn in the side of competition authorities. Due to network and scale effects, platform markets often tend to be more concentrated than traditional markets. Amazon, for example, is more attractive the more sellers and buyers there are, further cementing Amazon’s supremacy.

The digitization push triggered by the Corona pandemic is likely to accelerate these trends. A few platforms determine the rules of the Internet. The Digital Services Act (DSA) and the Digital Markets Act (DMA) are intended to provide the digital economy with a new legal framework.

The DSA is primarily about consumer protection and improved transparency. The DMA includes a catalog of competitive obligations for so-called gatekeepers, Internet platforms that have become particularly powerful.

So far, the options for European competition authorities to take action against the supremacy of U.S. platforms have been limited. The competition policy tools could not keep pace with the dynamics of the markets in the digital economy. The classic instruments to limit market power include antitrust law and regulation. Broadly speaking, the two instruments differ in time horizon and scope of application.

• Regulation restricts the behavior of companies in certain sectors ex-ante. This is classically done in so-called natural monopoly markets. In these markets, one or a few companies control access to essential facilities, without which effective competition is hardly possible. Classic examples are energy or telecommunications networks. Operators of these networks are typically required by regulation to grant competitors access to their networks – in return for a fee.
• On the other hand, antitrust law generally applies to all sectors and is designed to prevent unlawful restriction of competition. It is based on the three pillars of antitrust, merger control, and abuse of dominance. The latter has the greatest similarities to regulation. Abuse of dominance is designed to sanction anti-competitive behavior by companies with market power. The main difference to regulation is that this control only takes place ex-post.

Because of this difference – the proof of anti-competitive behavior and the intervention after the fact – antitrust law is proving to be a blunter sword in the digital economy than regulation.

The European Commission has now conducted three major antitrust proceedings – more precisely, abuse of dominance proceedings – against Google. After years of litigation, it has won all the cases and imposed record antitrust fines in each case, now totaling 8.25 billion euros.

Evidence of anti-competitive behavior had to be provided in each individual case and took a correspondingly long time. In digital markets, often too long. Due to the winner-takes-all dynamics, concentration tendencies have an uneven effect, and the companies accused of abuse of dominance can cement their market power position further and further even in the course of the proceedings. In any case, the proceedings have done little to change Google’s dominant position.

The European Commission has recognized this and is now planning to take action much earlier and more swiftly against behavior by the platforms that is already potentially damaging to competition.

On December 15, 2020, it presented the Digital Markets Act, a set of rules similar to regulation, which is intended to shape the digital space for the next decades, according to Internal Market Commissioner Thierry Breton.

The core of the plan is to limit the behavior of “gatekeepers” more in advance. Exactly who this will include has yet to be defined. But the big tech companies will undoubtedly be among them. With their ecosystems, they already determine the rules of competition and decide who is economically successful and who is not.

So, similar to traditional regulation, the proposed law aims to facilitate competitors’ access to digital ecosystems and prohibit certain dominant platforms’ practices in advance. This is a promising approach. Strict and case-by-case examination in antitrust proceedings can hardly limit the market power of platforms anymore. Instead, the aim is to limit platforms’ behavior in advance with measures similar to regulation, thus enabling more competition again.

It still remains to be determined what the sources of market power are. In traditional natural monopolies, it is usually access to physical networks. In the digital economy, the sources seem more diverse. In any case, access to data is likely to play an important role. The implementation in detail is still pending.

The member states still have to discuss the proposals before they eventually result in a legislative procedure. It is to be feared that this will still be a long and stubborn process. The E.U. Commission has delivered. The ball is now in the member states’ court to implement the proposals quickly before the platforms’ supremacy is irrevocably cemented.