Brussels’ Digital Plan Leaves the Key Issue Unaddressed

On 15 December 2020, the European Commission will publish its proposal to address excessive power in digital markets. Zeroing in on the digital sector makes little economic sense: new limits to Big Tech’s leverage will not give the European economy the dynamism it needs to foster technological development.

Whether you are the mother of a teenager, a business owner or a worker, it is likely that you have never felt more powerless in the digital space. Most, if not all, of our online activity takes place on large platforms, the ‘gatekeepers’ of what happens beyond our screens. Like it or not, the price of boycotting these platforms is too high. Slipping to the second results page of a Google search can wreck a family-owned business. Opt out of WhatsApp and you might never know what parents are planning to say to the director of your child’s school. Job-seekers know that their social media profiles will be checked by their employers.

The Commission is concerned that online gatekeepers are becoming arbiters of destiny for individuals and that society will bear the cost if their power remains unchecked. Its plan to deal with this will comprise the Digital Services Act and the Digital Market Act. The proposals will reshape the boundaries of the liability of online platforms, ban practices by gatekeepers granting them an unfair advantage, such as using competitors’ data, and put forward new powers to identify failures in digital markets.

The economics is not straightforward: limiting data collection or the ability of platforms to promote their own services (self-preferencing) might make Amazon and Google less useful to their users. Likewise, greater interoperability and data portability may increase privacy risks. But, there is merit in embracing some uncertainty and accepting that the new framework may need adjusting in the future. This political leap of faith is long overdue.

Yet, the decision to restrict action to the digital domain is a political choice that can be considered wrong from the outset. Last summer, when it sought stakeholders’ feedback on possible new antitrust powers, the Commission asked whether it should propose a broad, horizontal approach, addressing potential issues in any sector of the economy. Against the advice of influential academics, the Commission is set to go for a watered-down solution: antitrust enforcers will only be able to investigate digital markets (and will not be able to propose remedies when issues are identified).

This is all the more frustrating when we know that cross-sectoral antitrust investigative and remedy powers have already proved useful in some countries. The United Kingdom, for example, has been using similar tools to lower the likelihood of tacit collusion in the cement industry, favour entry in air transport markets and increase transparency in favour of hospital competition, lowering prices for both in-patient and out-patient procedures.

The Commission’s choice is unwelcome. First, it will make implementation difficult. With digital infrastructure so pervasive, defining what is digital and what is not is a cumbersome and subjective task. This will increase regulatory uncertainty and make long-term investment in Europe less attractive.

The second reason is geopolitical. With a new US President, the EU will want to rebuild burnt bridges. Areas such as digital taxation or data transfer will remain contentious, but will be worth fighting for. New regulation tailored to the digital market is too easy a target: it may be legitimately questioned why EU legislators consider market power excessive only where markets are dominated by American companies.

Finally: the problem with the economy is broader than digital. Competition enforcement is failing in many areas of the economy: 77% of European industries became more concentrated between 2000 and 2014, including manufacturing. Where market power is greater, workers earn less and investment in innovation is lower, as is take-up of advanced digital technologies. Today three out of four enterprises in Europe have low or very-low levels of digitisation.

So even solving all potential problems in the digital sector will not create the dynamism that the economy needs. Concentrated industries will still be less likely to digitise, even if the Commission clears all the bottlenecks in the digital pipelines. If companies do not catch up, workers will not either: wage inequality manifests itself mostly between companies, and not within them. To be sure, competition is not the only factor affecting corporate investment in innovation (access to risk capital, for example, is a major barrier, particularly in Europe). But it is a crucial one.

The asymmetry in power distribution is apparent in digital markets. It is therefore legitimate for users to demand action to be empowered to unlock competitive dynamics that would lead to a fairer distribution of value. But to promote well-being and shared prosperity, EU decision-makers will need to show the same desire for competition beyond the boundaries of digital markets.

This blog was produced within the project “Future of Work and Inclusive Growth in Europe“, with the financial support of the Mastercard Center for Inclusive Growth.