Digital Giants: The Evolving Landscape of Competition
The widespread discussion surrounding competition in digital markets stems from a confluence of factors that highlight both the immense benefits and potential harms of these dominant platforms.
The Dual Nature of Digital Platforms
Digital platforms like iPhones, search engines, and social media have become indispensable to modern life, driving growth and innovation in GDP and fundamentally changing how we interact with the world. They offer convenience for communication, shopping, and accessing information. However, their very importance has led to significant market concentration, creating "gatekeeper" platforms that control access to consumers for many businesses. These platforms can then extract a substantial portion of the surplus value that end-users would otherwise gain if there were more competition. This dual role—as facilitators of innovation and growth and as potential bottlenecks—makes them a constant subject of debate.
Economic and Political Power
Beyond their economic influence, these digital giants wield considerable political power. Many are still under the control of their founders, even as publicly traded entities, giving them a unique ability to influence democratic processes and societal discourse. This concentration of power, both economic and political, raises concerns about its impact on fair competition, innovation, and the distribution of economic benefits.
A Lag in Regulation
While the issue of digital market monopolies has been a concern, regulatory responses, particularly in the United States, have lagged. European authorities, for instance, initiated their first case against Google Search a decade before the U.S. Department of Justice. The recognition of this problem intensified around 2019, with significant reports published in the UK, Europe, and the U.S., which aimed to define the issues and translate them into actionable antitrust approaches. However, it became apparent that antitrust enforcement alone might not be sufficient, leading to increased interest in specialised regulation, as exemplified by the European Union's Digital Markets Act (DMA).
Timeless Economic Principles at Play
Several enduring economic principles contribute to the unique challenges of digital markets:
Network Effects: The more people that use one of these platforms, the more valuable it becomes to all other users and to other "sides" of the platform, such as merchants or app developers.
Economies of Scale: Larger companies benefit from lower unit costs.
Data-Driven Advantages: An increase in user data often causes an improvement in the quality of the service, which in turn increases the number of people using the product, again increasing the amount and quality of data, creating a virtuous circle.
Ecosystem Business Models: The platform offers a package of complements that are more valuable together than any one of them apart. For example, a mobile OS can stimulate demand by providing or getting others to provide a handset, a map, a browser, and an app store.
These principles contribute to the creation of "moats" around these businesses, which, while beneficial for the company, can become problematic when they lead to monopoly power, lessening competition and harming consumers. An example of a problematic moat is the limited choice in mobile operating systems, where only two dominant players exist, allowing them to impose conditions that control revenue and limit functionality in adjacent markets. This can result in businesses being forced to pay high fees, even for services they developed, simply to access consumers through these indispensable gatekeepers.
The Path Towards Healthier Competition
Governments are beginning to grapple with these issues through legislation like the EU's DMA and the UK's Digital Markets, Competition and Consumers Act (DMCC). The DMA, which began enforcement in March 2024, aims for fairness and contestability.
Contestability means that entry is possible and entry barriers are low, making it entirely possible for a new firm to enter, connect, compete, and not be disadvantaged.
Fairness for an economist is about ensuring that productive activity gets a competitive return so that innovators can capture the returns from their innovation and not face expropriation from a monopolist they cannot avoid.
Examples of unfair behaviour under the DMA include a platform not allowing other developers to have rival app stores on its handset or charging high percentages (e.g., 30% or 15%) for music subscriptions without having invested in creating the service. While platforms are entitled to monetise their ecosystem and intellectual property through avenues like handset sales or accessories, imposing high fees on businesses that rely on their platforms for customer access can stifle investment and growth in other parts of the economy. Such restrictions also hinder the development of "middleware"—applications that can reduce user switching costs across operating systems, thereby increasing competitive pressure on the dominant platforms.
Ultimately, healthier competition in digital markets would mean lower entry barriers. When a new firm with a good idea can enter the market and compete, consumers get the benefit of new choice, and existing competitors must work harder, perhaps by cutting prices or innovating. This would lead to entry and more competition, causing market shares that are close to monopoly to fall. This process delivers more profit to consumers in the form of lower prices or better quality and rewards businesses that transact through a platform with more favourable terms, incentivising innovation.
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