Presentation to students at Sydney University in the competition law course on competition between digital platforms and whether ex ante regulation of those platforms is needed.

1. Competition between digital
platforms
Dr Luke Wainscoat
11 October 2023
Sydney University

2. Regulators/governments proposing new ex ante regulations across
the world for digital platforms
• Digital Markets Act is now in force in Europe
› Designated six large firms as gatekeepers
› Gatekeepers face a range of prohibitions and obligations from March 2024
 Interoperate; access to data; verification of adverts etc
• UK government recently completed consultation process for new competition
regime for ‘digital markets’
• House Judiciary Committee in the US published investigation of competition in
digital markets in 2020. Four bills proposed since to address competition
concerns in digital markets
• ACCC proposed mandatory codes of conduct for certain platforms and
services
› Government undertook consultation earlier this year
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3. Outline
• Characteristics of digital platforms
• Examining whether regulation of digital platforms is needed
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4. Characteristics of digital platforms

5. Network effects are key to understanding digital platforms
• One user’s benefit from joining or using a platform depends on
›the number and characteristics of other users belonging to the platform
›their actual or prospective usage
• Direct (same-side) network effects
› positive direct network effects (eg social media)
› negative direct network effects (eg ride share)
• Indirect (other side) network effects
› positive indirect network effects (eg ride share)
› negative indirect network effects (eg social media?)
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Platform
Users
(type B)
Users
(type A)

6. Network effects lead to unusual results
• Throw your economics 101 books out the window (please do not actually do
this)
• Pricing to customers on each side of a platform must balance the
interdependencies of demand
• Optimal pricing on one side of the platform could be less than the cost of
providing an additional unit, could be zero, or it could be negative (eg offering
rewards for use)
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7. Network effects can lead to tipping, whereby largest firm grows at
expense of others
• Two identical free social media platforms
• Only possible to be on one platform – no multi-homing
• Enjoyment of platform depends on number of other users on the platform – there
are positive direct network effects
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Platform A
gains
customers
Some
customers
switch to
platform A
What happens next?

8. Will network effects always lead to tipping, and increased market
power for incumbents?
• Are network effects always positive?
› Do young people want to be on Facebook?
• How big are network effects? How do they vary with the number of users?
› How much more do you value Facebook if it has one more user? What if it was your
lecturer?
• What happens when a firm with network effects loses some users?
• Firms have always benefitted from economies of scale, which are similar to
network effects
• Network effects can increase competition. They can lead to small firms
growing quickly, especially with multi-homing and differentiation
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…authorities have also recognised that the potential contribution of network
effects to market power should be assessed in context [OECD]

9. So what is a digital platform?
• Platforms bring together two or more groups of customers
• who rely on each other in some way
• who rely on the platform to intermediate transactions between them
• Platform internalises indirect network externalities between the
two (or more) groups
• platform benefits from network externality and takes it into account in pricing
structure
• Volume of interactions depends on price structure
Platform
Users
(type B)
Users
(type A)

10. Can you name some digital platforms?
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11. What are the similarities and differences between various digital
platforms?
• Transactions vs non-transaction platforms
› Transaction platform involves a transaction between the two types of users eg, Ride share
and app stores
› Non-transaction platforms include social media and other advertising platforms
• Different products and services
• Different sizes
• Different customers
• Some offer many products, some focus on just one or two
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Huge variation in digital platforms

12. Assessing the ACCC’s evidence of a
problem

13. ACCC: some large digital platforms have substantial and enduring
market power
The market power of some large digital platforms is (i.e.
non-transitory). The market positions and power of these platforms appear unlikely to be
challenged, at least in the foreseeable future. This is due to the
described above that have raised barriers to entry and expansion, which have in some cases
been reinforced by the conduct of the large digital platforms.
The ACCC has observed and entrenched market power in relation
to app store (Google and Apple), search (Google), ad tech (Google) and social media (Meta)
services
• ACCC’s evidence
• Economic characteristics of digital platforms contribute to market power
• Market structure for specific firms
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substantial and enduring
characteristics of digital platforms
high levels of concentration

14. Three types of evidence on market power
1. Competitive constraints
2. Conduct of a firm, ie, what firms actually do
3. Market outcomes, eg, total output and profits
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ACCC’s focus is here

15. 1. Competitive constraints

16. Competitive constraints – dynamic competition
• Digital platforms often competing to provide new products/services
› Google glass (2013-2023)
› Smart home devices (Amazon Echo (2014)/Google Home (2016))
› Metaverse ‘services’
› AI chatbots, eg, ChatGPT and Bard (Google)
• Huge sums invested (and potentially lost)
› Meta lost(?) $20bn in the last two years on metaverse
› Over $10bn invested by Microsoft in OpenAI (ChatGPT)
• Important element of competition for firms involved and consumers
› Some new products/services lead to huge welfare gains
• Relevant because
› Any market power is hard earned
› Want firms to earn a return from risky investments
› Markets move on quickly to the next thing
• Not clear if ACCC given this weight
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17. Competitive constraints – competition in the market
• Competitive constraints come from
› Firms in the market
› Firms that could enter the market
› Customers
• Strength of competitive constraints from rivals depends on
› The form and nature of competition
› The substitutability of the products/services from existing firms
› The effect of losing customers on the profits of the firm in question
› The ability and incentive of existing firms to expand sales
› Consumer search and switching costs
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18. ACCC’s approach (1) – Characteristics of digital platforms contribute
to market power
• Strong network effects
• Economies of scale and sunk costs
• Expansive ecosystems
• Barriers to switching
• Access to data
• But
› Not all digital platforms have these characteristics, and many other ‘non-digital’ markets do
have these characteristics
› Effect of these characteristics depends on the particular market in question
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[They] ‘…can contribute to high barriers to entry and expansion and high
degree of concentration in digital platform markets.’

19. Economic characteristics ‘can’contribute to concentration and barriers to
entry and range of conduct ‘may’ have anti-competitive impacts
In combination, these characteristics can contribute to high barriers to entry and
expansion and high degrees of concentration in digital platform markets
The ACCC has identified a range of conduct undertaken by dominant digital
platforms across numerous services that may have anti-competitive impacts.
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ACCC’s conclusions do not appear to be
strong

20. ACCC’s approach (2) – market structure of specific platforms
• Evidence presented by the ACCC focuses on market shares and barriers to entry
• But, market shares are a particularly poor tool for assessing market power between
digital platforms
› Need to define markets – ACCC not presented detailed evidence
› Market shares can change quickly due to network effects and multi-homing
› Market shares ignores closeness of competition – a key metric
› Market shares are backwards looking and cannot take into account competition from new
entrants
› Hard to interpret market shares when there are multiple sides to a market
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21. ACCC’s approach (2) – When are ‘advantages’of digital platforms a
problem?
Google’s dominance is underpinned by multiple factors including its data advantage, access to exclusive
inventory and advertiser demand, and integration across its services
…Facebook is insulated from dynamic competition by barriers to entry and expansion, advantages of
scope, and its acquisition strategies
• Not all market power is a problem
› We want firms to benefit from improving their products/services
› Advantages that firms have created that benefit consumers should not be a problem
• Is better customer service an advantage that adds to a coffee shop’s market
power, and is that bad?
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22. 2. Firm conduct

23. Conduct of digital platforms – ACCC’s assessment
• How firms behave can provide information on whether they are using market
power
• ACCC assessed prices of Apple and Google
…are higher than they would be if the supply of ad tech services was more competitive, and likely reflect
the market power that Google is able to exercise in its dealings with both advertisers and publishers.
While the ACCC considers the market power of Apple and Google is highly likely to mean that the
commission rates are higher than otherwise would be the case, it is difficult to know by how much
• Observations appear to be based on conclusion that these firms have market
power based on their market shares, not evidence of actual firm conduct
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24. What else could the ACCC/government do to assess firm conduct?
• Comparison of the conduct (eg, prices or services) of digital platforms with conduct
that would be expected in an effectively competitive market
› How have social media services changed in the last few years?
› Are digital platforms enjoying Sir John Hicks’ ‘quiet life’
› What investments are digital platforms making?
› Do firms pay attention to conduct of rivals?
• How conduct has changed (or not) in response to changes in cost or demand
› Firms can be expected to respond to changes in demand/cost in competitive markets
› How have firms reacted to the introduction of services by rivals?
 Instagram responding to TikTok
 Google responding to ChatGPT
› How have advertising prices on Facebook changed in response to other forms of advertising?
• An assessment of whether the conduct of a firm would be profitable in an effectively
competitive market
› Alternatively, is the conduct unprofitable in the absence of substantial market power?
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25. 3. Market outcomes

26. Outcome of digital platform markets – ACCC’s assessment
Reduced competition in the supply of digital platform services harms Australian businesses and
consumers through increased prices for business-facing services (which may be passed on to
consumers), reduced incentives to innovate and improve quality, reduced choice, and increased non-
monetary costs of using digital platforms such as greater exposure to advertising and greater use of
personal data. Significant market power can also be leveraged across different services, leaving
consumers with less choice, higher prices and/or lower quality products and services across many
interrelated markets. Ultimately, this can lead to reduced productivity and innovation in the supply of digital
platform and related services
• ACCC: outcomes can be worse, rather than evidence they are worse
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27. Further analysis of market outcomes to assess market power
• Outcomes consistent with competition?
› Level of profits, value consumers place on services, costs
› Compare to countries/time where there is effective competition
• Outcomes profitable in the absence of market power?
› Would firms provide this level of service if they did not have market power?
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28. Summary
• Ex ante competition regulation only needed when there is substantial and
enduring market power
• ACCC evidence is not sufficient to prove that one or more platforms have such
market power
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Evidence not yet sufficient to support the need
for ex ante economic regulation

29. Reasons given by ACCC recently for digital platform regulation
• Competition cases take too long, eg, many years
• Court judgment don’t address widespread conduct – court cases focus on
specific conduct
• Platforms required to make changes in some jurisdictions don’t make those
changes in others
• Complex services, technologies and companies
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