Exploring ‘digital’ competition

As the process of reviewing and renewing the Block Exemption regulations that govern franchise distribution in the automotive and other sectors steps up a gear, the European Commission is busy soliciting views and data from interested stakeholders.  At the same time, broader issues in the policy environment that may need to be reflected in the new regulations are coming more firmly into focus.

One of the major questions facing the regulators in updating the legal frameworks is how to handle the rapid growth of ‘digital’ competition, and the emergence of powerful online platforms connecting producers, retailers, and consumers.  A recent study conducted for the European Commission, “Competition policy for the digital era”, has done much to illuminate these challenges.  The study talks about three aspects of ‘digital’ in particular that are distinctive from ‘traditional’ competition, and which have readily-discernible impacts on competition:

• Extreme scale benefits

  • When compared with ‘manufactured’ products, digital services have a low cost of production but potentially massive market reach.  This in turn can give a strong competitive advantage for the players who have developed them against competition from alternatives.  The hotel booking portals are good examples.

• Network externalities

  • The value of a digital service or platform grows as more people start to use it.  This value then serves as a defence against competition because, once a strong platform is established, it is not enough for a new entrant competitor simply to offer better quality or lower prices, they also have to find a way of persuading a critical mass of users to switch.  Facebook and other social media platforms are good examples.

• The role of data

  • Access to data is now a crucial input not just to the digital services built upon it, but the manufacturing and logistics processes of physical products.  In this environment, it is not surprising that those operators who have collected data have a strong incentive to retain it as best they can.  The European Commission’s recent announcement of an investigation of Amazon’s collection of shopping journey-related data from its Marketplace sellers is a good example.

The study goes on to talk about four goals that future competition policy should aim at:

• Making it as easy as possible for customers to switch between digital services or platforms

• Making dominant operators, particularly online platforms which are able to set the rules for other businesses to be present on their platform, responsible for ensuring that their actions are pro-competitive

• Assessing the significance of data access to a market on a case by case basis, and coming up with sector-specific rules where needed

• Updating the approaches taken to merger control to pick up cases where turnover might be relatively small, but the potential for market power high

This exploration of ‘digital’ competition is the subject of a new Management Briefing, which is available for ICDP programme members to read here.

This interplay between digital and physical competition, underpinned by the role of data, will be at the core of the sorts of issues the automotive sector will raise, and will be looking for answers to, in the Block Exemption review, and are issues that we will continue to explore in future research.