While the digital economy thrived during the COVID-19 pandemic, it raised deep concerns about the increasing concentration in its key markets, the gaps in privacy regulations and its broader distributional repercussions. This piece by Pantelis Koutroumpis discusses the digital resilience and challenges that come with this.
The COVID-19 pandemic has accelerated the use of digital communications across the world: data traffic flowing through internet exchanges has increased by 40%, the cumulative time spent on major video-conferencing applications has seen a 20-fold increase, and cloud services in the EU27 countries grew by 50% since 2018, largely due to smaller firms adoption. These changes highlight the resilience that the digital economy provides in times of need and may also shape longer-term trends, particularly in the form of remote or hybrid work models.
As the digital economy thrived, it also raised deep concerns about the increasing concentration in its key markets, the gaps in privacy regulations and its broader distributional repercussions. As the world gradually became “digital”, investment shifted towards intangible capital and business models changed in order to accommodate the collection, curation and analysis of data-products. Unlike the conceptual similarity with information-products (like software and multimedia records), which have been traded for decades, data monetization depends on strong network effects affecting the competitive landscape of the digital economy. As a result, some key markets including online search, social networks and e-commerce have turned into platform monopolies by leveraging massive inflows of inexpensive data collection and building data-products as tradeable commodities.
As a result, some key markets including online search, social networks and e-commerce have turned into platform monopolies
There are two main reasons behind the current levels of market concentration in the data economy. The first is a regulatory shift of the antitrust doctrine that appeared in the US in the 1970s and spread around other developed countries ever since. At that time, the old “structuralist” approach of antitrust authorities which was based on the premise that concentrated markets promote anticompetitive forms of conduct, was replaced by a consumer welfare toolkit that primarily focussed on prices. The incoming president of the US Federal Trade Commission, Lina Khan, noted this regulatory transition: “Due to a change in legal thinking and practice in the 1970s and 1980s, antitrust law now assesses competition largely with an eye to the short-term interests of consumers, not producers or the health of the market as a whole; antitrust doctrine views low consumer prices, alone, to be evidence of sound competition” (Khan, 2016). The failures of the antitrust doctrine in the broader economy may be directly linked to the rise in mark-ups over this period (De Loecker et. al., 2020) and the decline in allocative efficiency (Baqaee et. al, 2020; Goldin, et. al., 2020). In the digital economy, this approach has allowed the large monopolists to acquire hundreds of firms with valuable data and complementary assets without much scrutiny.
The second reason for the increased concentration in the digital economy is linked to the actual properties of the data-products. From a naive perspective, if data were traded as traditional, non-excludable goods, we would have expected a textbook type of perfect competition. Instead, a handful of digital platforms have emerged, representing the “gatekeepers” for these markets, a term used in the proposal for the EU Digital Markets Act (DMA) in December 2020. The reason for this – apart from the regulatory dimensions described before – is that the monetization of data-products hinges on the excludability of competitors and the complementarities that a platform can provide or acquire (Koutroumpis, 2020), in the form of data or other infrastructures. Whether a “winner-takes-all” effect dominates depends on the existence of substitute services and the individual choices towards multi-homing (Sun and Tse, 2007) which is the ability to migrate across platforms providing similar services. The “gatekeepers” have solidified their dominance by implanting bottlenecks and making these options irrelevant, inferior and costly. Meanwhile, companies that have historically had access to valuable data such as financial intermediaries, telecommunications operators and utilities have struggled to profit from their data products.
Whether a “winner-takes-all” effect dominates depends on the existence of substitute services and the individual choices towards multi-homing (the ability to migrate across platforms providing similar services).
Acknowledging the implications of concentration in digital markets, ministries, antitrust authorities and regulators in the US, Europe and other countries have drafted new frameworks for intervention with varying degrees of flexibility, firm targeting and ways to avoid unintended harm from the interventions themselves. The details of these proposals vary and can make a real difference, only if they are finally adopted and implemented. As our lives and societies increasingly rely on the services of the digital economy, we need to ensure that these interventions will improve the competitive landscape and prevent other major challenges that have already started to manifest their presence.
This blog was originally posted as a Think Piece by the UNESCO Inclusive Policy Lab on 22nd June 2021. Read the original here.
This opinion piece reflects the views of the author, and does not necessarily reflect the position of the Oxford Martin School or the University of Oxford. Any errors or omissions are those of the author.