EU Digital Market Regulations Under Scrutiny
Economists weigh in on the merits — and limits — of proposed European standards
While the unending COVID-19 pandemic and U.S. presidential election turmoil stole headlines late last year, the European Union (EU) was also making news in the heated area of digital markets. Online platform regulation, access, and oversight were center stage as economic experts reviewed the European Commission (EC) proposal for a Digital Markets Act (DMA).
The panel offered an economic opinion on the DMA and Digital Services (DSA) Acts, which were unveiled by the EC in December 2020. The acts were described as “a paradigm shift in the regulation of online platforms in Europe,” calling for “robust regulation that will stimulate debate, innovation, and fairness in the digital economy, as well as ensure a safer and trusted Internet where fundamental rights are respected.” The panel’s response, The EU Digital Markets Act: A report from a Panel of Economic Experts, was issued in February. The goal is described as follows. “This report presents an independent economic opinion on the DMA, from a high-level Panel of Economic Experts, established by the JRC [Joint Research Centre] and based on existing economic research and evidence.”
MIT IDE research fellows, Geoffrey Parker and Marshall Van Alstyne, and IDE post-doctoral associate, Georgios Petropoulos, served on the panel along with other global platform experts. The authors believe that the DMA proposal is heading in the right direction but they also make concrete suggestions on how the European Parliament and the Council should improve the proposal to make the rules more flexible and responsive, and how to make enforcement and oversight more cooperative.
Parker explained the findings and their significance in a recent interview with MIT IDE Content Manager, Paula Klein.
IDE: Explain a bit about the DMA report itself and your role on the panel. What is particularly significant and timely about this proposal in the EU?
Geoff Parker: The idea was to have a panel explain the economics behind the DMA and to comment on the proposals. It’s very timely in light of the recent problems with fake news during elections as well as accountability by social media such as Facebook and Twitter. Under the proposal, all online intermediaries offering services and content in the EU, whether they are established in the EU or not, have to comply with the new standards. Small companies will have obligations proportionate to their ability and size, but also remain accountable.
The rules will spell out requirements for transparency, codes of conduct, data sharing, and responsibility for consumers, businesses, and platforms.
Q: What were the major recommendations of the panel?
GP: The panel broadly agreed with the DMA and its goals. However, there are many details that need further attention. We proposed refinements and clarifications to the act’s “white” list of allowable activities, and “black” list of prohibited activities. In particular, we proposed a “grey” list of activities that we believe should be prohibited, but where we could envision a pro-competitive argument. The burden of proof for these grey-list activities would be on the largest of the technology firms--those with more than 45 million users, such as Amazon--which are designated as “gatekeeper platforms.” For example, the panel would prohibit platforms from self-preferencing (e.g., putting their own products at the top of search results without justification). On the other hand, product bundling would be a grey-list activity where justification could be made for the practice.
Secondly, we focused considerable attention on data sharing and the obligation for gatekeeper platforms to allow equal data access to all market entrants at the point of collection — known as “in situ.” Such a mechanism avoids the need for consumers, or firms that are authorized to access consumer data, to download data. Instead, an in situ mechanism brings algorithms to the data instead of bringing data to the algorithms, which is both more secure and more equitable. It basically allows entrants to access consumer data on an equal footing with the gatekeeper platforms that collect it.
IDE: The EU has taken a more restrictive and consumer-driven approach to platforms compared to the U.S., yet competition and regulation are hot-button issues here, as well. What are the implications of the EU report for the U.S.?
GP: We expect some “jurisdiction hopping” from Europe to the U.S. There is growing scrutiny of Big Tech at the state and federal levels and some of the proposed regulations in the DMA might make their way into U.S. law. It will be interesting to see the degree to which platforms might standardize practices across the EU and U.S. to reduce complexity. Additionally, state and federal regulations could fragment the regulatory landscape. We have already seen evidence of this in different state rules for firms such as Uber and Lyft.
One can imagine states such as California drawing on regulatory ideas from the EU for future adoption in the U.S.
IDE: The panel describes two economic perspectives of platforms-- their potential for social and economic gains, as well as concerns about winner-take-all dominance. What solutions does the panel offer to maintain a healthy balance?
GP: The key tradeoff is the efficiency gains from aggregating large data sets and the value of increased network effects versus the problems of creating monopolies. The in situ data access mechanism is designed to help balance those tradeoffs by keeping data in one place but allowing other firms access to that data so they can create useful services and products. Another area we explored was the idea of having someone from the relevant regulatory authorities in residence at the gatekeeper platform firms to verify that the platforms are adhering to their own governance principles. A common way to handle the problem is to create firewalls between a company’s divisions, but there is always the concern that those firewalls get pierced, which would be anticompetitive. In Europe, the European Commission would be the regulating body to enforce the DMA.
IDE: How will the new policy work for platform providers [say, Google or Amazon] as well as for users? Will there be better services overall?
GP: The data access proposal provides a case where additional benefits can be created. For example, we proposed that market-level data be disclosed so that entrants can better plan possible products and services. This would increase the level of competition on the gatekeeper platform markets such as those operated by Amazon, which should benefit consumers. The in-situ proposal would also increase the variety of services on platforms such as Google and Amazon by giving additional firms access to user level data which is subject to greater levels of privacy protection. This provision allows firms that have been allowed (by consumers) to access consumer data on gatekeeper platforms to use contextual information (such as the relationships with other users in a social network) to tailor product and services-- much the way that gatekeepers themselves already operate. The advantage to in situ is that data leakage is minimized and contextual information is preserved.
IDE: What are the next steps and when will the changes go into effect?
GP: The next step for the proposed legislation to become law is approval by the European Council and the European Parliament. This process might take as long as two years, according to some estimates. Commentary such as our report should help legislators and their staffs better understand the underlying economics and tradeoffs.
