Digital Economy – Competition Policy Enters New Territory

Since the beginning of March 2016, the Federal Cartel Office has been investigating one of the giants of the digital economy on suspicion of misuse of market power – Facebook. Indeed, since the end of 2010, the European Commission has been looking into Google’s suspected anti-competitive practices. So will a stop finally be put to the anti-competitive behaviours of large internet corporations? This at least is what some commentators are hoping. Is competition policy even capable of adequately addressing the growing market power of large corporations in the digital economy? In order to answer these and further questions, one must consider the particular characteristics of digital markets.

One important characteristic of the internet economy is its dynamism. Neither Facebook nor Google have celebrated their twentieth anniversary, and yet both are worth more than most German industrial firms. The rate at which new firms are established in the ICT sector is far above average. Inefficient firms find it difficult to assert themselves in the market. Innovation processes proceed more quickly.

Big Data Applications Grow Fast

A further particularity of the internet economy is the enormous amount of data which accumulates online. The collection and analysis of such data is known under the term Big Data. With a rate of growth of over 50 per cent, Big Data applications constitute one of the overall fastest growing markets. Big Data and the technologies behind it enable products and advertising to be specifically tailored to individual customers. Such tailoring is based on the personal data which internet users provide indirectly, when, for example, they input a search query or access content online. Whilst in many cases, this increase in available information can be helpful, it sometimes brings about new issues. The availability of more and better information increases our ability to estimate risks for example. This, however, can lead to a situation in which persons with higher risk factors must pay higher insurance premiums, or are unable to find insurance at all.

The third characteristic of the digital economy are its double and multi-sided markets and the associated network effects. Google, for example, is a multi-sided market; alongside users of the search engine, advertisers also make use of the platform. In such multi-sided markets, it is not uncommon for webpages to be provided for free for one side of the market. Profits are made on the other side on the same platform. Network effects come into play in social networks such as Facebook, where the value for the individual increases with the number of participating individuals. Many of these platform markets show a trend toward increasing market concentration, whereby often one dominant market provider develops. In such “winner takes all” environments, concentrated market power is common; identifying its misuse, however, is difficult.

Market Boundaries Change

When it comes to investigating internet corporations, competition authorities must take all of the particularities discussed above into account. The high degree of dynamism in the ICT sector necessitates quick reaction times. Market boundaries change, so that in the proceedings the given market cannot necessarily be determined simply on the basis of historic data. Data is increasingly becoming a factor of competition which cannot be overlooked. In the data-based economy, limited access to data may potentially constitute a barrier to market entry. It is also conceivable that market power will be misused with respect to data acquisition. Multi-sided markets pose a challenge to authorities, in that they must adequately determine which pages belong to a given platform. Whilst the large market share held by the Google search engine is relatively easy to determine, for example, determining the market share of the advertising side is much more difficult.

The Federal Cartel Office, as well as the EU Commission, must consider these questions in more detail. Determining the limits of the relevant markets, providing evidence of potential misuses of market power as well as the development of sanctions requires new measures and standards. In this respect, we are entering new territory in terms of competition policy.