Opening up digital platforms and reducing anticompetitive risks

Regulation of online platforms in China, the European Union and the United States is, for first time, moving in the same direction: regulators are pushing platforms to open up their infrastructure to increase consumer choice and to give more options to their business users.

Most recently, following Chinese government intervention, China’s two largest tech platforms, Tencent and Alibaba, agreed to open up their digital infrastructures to accommodate competitors’ services. For nearly a decade, Tencent and Alibaba had been blocking all interoperability between their platforms to protect their market power by reducing the ability of consumers and businesses to move from one platform to the other (they blocked each other’s payment systems, for example). With this agreement, the platforms are obliged to allow consumption of competing services and to accommodate links, in-app sales and payment services from third-party providers. This is good for consumers by increasing choice and making the market more open to competitors.

Opening up platforms can potentially address competition concerns related to vertical integration and market barriers (eg market foreclosure). Vertical integration, in principle, can provide many benefits along the production line, which can contribute to market efficiency and consumer welfare. But competition risks can also emerge, especially when interoperability is limited.

The main concern for competition authorities is whether a dominant platform will use its market power over the selling of products and services to increase its market share in a vertical service market (eg payment services). If competing payment services are blocked, users are obliged to use the platform’s service when making purchases. Hence a dominant e-commerce platform with many users can also increase its share of the online payment service market.

By allowing platform users to access competing payment systems, consumers can benefit from lower prices arising from the increased competition between payment services (payment services charge a fee which is partly passed on to consumers). Introducing competition at each vertical layer of digital markets is probably the best way to address concerns over vertical integration.

Moving in the same direction

China is not alone in opening up platforms to limit the potential anticompetitive effects of vertical integration. Both the EU and the US, with the proposed Digital Markets Act (DMA), and legislative proposals and court decisions respectively, are also moving in that direction. South Korea is the frontrunner in adopting this approach.

The proposed DMA includes provisions that would allow third parties to operate alongside platforms’ own services. Independent sellers would be given the freedom to conclude contracts with end-users regardless of whether or not they use the platform’s core services (Article 5c). In the US, if the Ending Platform Monopolies Act is passed by Congress, big platform vertical integration will be more difficult to sustain as the Act asks for vertical break-ups[1]. This is another way to open up vertical services and structures. In parallel, the proposed US Open App Markets Act aims to give app developers more freedom to use their own (or third party) services (eg in-app payment systems) in online platform markets. South Korea, meanwhile, has become the first jurisdiction to pass a law that gives users the right to pay developers directly for their apps, without the intermediation of platforms in the payment process.

The 10 September Californian court decision Epic vs. Apple, on the right of independent app developers to use their own payment services in Apple’s App Store, is in line with these legislative initiatives. While the decision affirms that Apple is not an illegal monopoly (Judge Yvonne Gonzalez Rogers wrote that “success is not illegal”), the ruling states that independent sellers should be free to choose their own payment service.

Three steps to greater competition

To make regulatory measures more effective against competition concerns related to vertical integration, three steps should be taken.

First, digital markets should be required to adopt minimum compatibility standards so that interoperability is less costly and the risk of fragmentation is mitigated. Ideally sellers and app developers would only need to develop a single software application per service they provide for all platforms they join.

Second, even if competitors are fully accommodated on a platform, it is still likely that third-party providers will not have access to important information about platform market (demand and supply) conditions, which would allow them to design their services more efficiently. Service providers vertically integrated into a platform have access to exclusive information that can be translated into a competitive advantage. This can distort competition in the vertical markets that run on platforms, as evidenced by the European Commission’s ongoing antitrust case (and particularly its statement of objections) against Amazon.

The proposed DMA tries to address this by imposing an obligation on the platform not to use of data generated by its business users’ activity to compete with those business users, unless that data is publicly available (Article 6a). This creates a ‘Chinese wall’ within the platform. Information flows from the platform to its vertically integrated parts are prohibited, unless that information is shared with all business users.

There are better solutions than Chinese walls which can be difficult to enforce in practice. A mechanism that obliges big platforms to share information with their business users and competitors would be more effective, so that the platform’s information structure is more symmetric and competition distortions are minimised. This information typically involves data on interactions between platform users, consumers and businesses. Some of these platform users are typically individuals (eg consumers), implying the sharing of personal data, and this mechanism should be in line with privacy regulations.

The most developed privacy regulations are EU’s General Data Protection Regulation (GDPR) and California’s Consumer Protection Act (CCPA). Both grant privacy rights to individuals, including the right to data portability that can facilitate information sharing. The proposed DMA would extend this right to business users. However, data portability faces a number of challenges that reduce its efficacy as a vehicle for information sharing. For example, it removes data from context, reducing the value of information that can be shared. Consider the following example: an individual wants to port their Facebook data to another platform. But if they respond to another individual’s posts that then becomes that second individual’s data which, according to GDPR rules, cannot be ported. By porting only partial data to another firm, without the post the user reacted to, the context is lost. As a result, some value is lost and it is therefore more difficult for data portability to generate pro-competitive effects.

The European Parliament’s proposed DMA amendments (see specifically Amendment 17) include an alternative mechanism for information sharing (first proposed by the European Commission’s High-level Panel of Economic experts on the DMA – with Bruegel input). It can apply both to individuals and business users.

If the Parliament’s amendment is adopted, rather than taking the data from the platform, as the GDPR portability right implies, users could instead be granted the right to use their data in situ, namely, where it resides on the original platform: bringing the algorithms to the data instead of bringing the data to the algorithms. Users would have the power to determine when and under what conditions third parties might access their in-situ data in exchange for new kinds of benefits. Users can revoke access at any time and third parties must respect that. This would overcome the data-portability problems. In-situ data retains its context, for example. Exchanges between users would remain intact. Privacy could even improve relative to portability if data never leaves the system because third parties need not receive one’s personal data, but rather only the output of the algorithm. Encryption can capture the context benefits without incurring privacy costs.

Third, opening up the platform’s infrastructure by accepting new applications and services may create concerns about the quality and safety of newly-introduced applications. Vetting will be needed so the user experience and the benefits from use of the platform do not diminish. Competition authorities should evaluate vetting quality issues and security risks on a case-by-case basis when investigating the opening up of a platform’s infrastructure. When needed, the proper market design exercise should reveal how the vetting of apps can be done, once the platform’s infrastructure has been opened up.

The world’s largest and most influential markets are regulating platforms to increase competition for services offered via big platforms. This should give smaller firms greater opportunities to use platforms to become visible and grow. This, in turn, has the potential to increase consumer choice and welfare. The pace of this regulatory transformation in each of these regions depends on many factors: legislative procedure and pre-existing legislation, intensity of lobbying and governance models in decision making. However, the current convergence in measures leaves a door open to some form of international coordination.

Recommended citation:

Petropoulos, G. (2021) ‘Opening up digital platforms and reducing anticompetitive risks’, Bruegel Blog, 22 September