The Digital Markets Act: An economic perspective on the final negotiations

Jacques Crémer, David Dinielli, Amelia Fletcher, Paul Heidhues, Monika Schnitzer, Fiona Scott Morton 11 February 2022

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The Digital Markets Act (DMA) will influence many aspects of our daily life and economic activity. In setting out key rules of conduct for the very largest digital platforms, it will impact European consumers directly and significantly, and may well have global impact too, not least through its impact on innovation (Crémer et al. 2021).

The precise design of the DMA is, however, critical. It has the potential to generate huge pro-competitive benefits but also carries significant risks. The legislative process in Brussels has reached the final stage of negotiations, known as ‘trilogues’, during which the European Commission, the European Parliament, and the Council of Ministers debate proposed amendments, before the legislation is finally enacted.1 Below, we provide an economic perspective on selected key issues still subject to debate.

Prohibition of parity clauses

Parity clauses are used by platforms to prevent business users from offering different terms (such as lower prices) either through different platforms or through their own site. The draft DMA already prohibits such clauses insofar as they refer to other platforms, but there is a debate over whether this ban should be extended to clauses which limit how business users sell through their own sites.

We believe such an extension is merited. The rationale for such parity clauses is that allowing firms to finalise a sale ‘off-platform’ can lead to free riding, whereby business users gain the benefit of being on a platform without having to pay for it. This can in turn harm a platform’s incentives to invest in the first place. Where there is plenty of competition between platforms, this argument may have merit. However, the DMA will apply only to the very largest platforms, which have entrenched market positions. For these, the risk of free riding dampening investment incentives seems low, while business users’ own sites provide a degree of much-needed competition (Schnitzer et al. 2021). The benefits of such clauses therefore seem highly unlikely to exceed their anti-competitive harm in this instance. 

Requirement for adjustable default settings

Platforms frequently employ default settings to steer consumers towards their own services. This can have a huge impact on consumer behaviour and therefore on competition. For example, over 90% of mobile phone users tend to use the default browser that is pre-installed and prominent, with rival browsers struggling to gain a foothold. 

The current draft of the DMA does not address the issue of default settings at all. Amendments now proposed would require platforms to allow consumers to adjust these default settings, or even to proactively ask consumers who download an app or app store whether they wish to make this a default. We believe it is critical to take real consumer behaviour into account when considering competition issues in this sector (Fletcher et al. 2021) and support these proposals.

Prohibition of self-preferencing

Self-preferencing occurs where a vertically integrated platform favours its own related services. The draft DMA already includes a prohibition on self-preferencing within ranking services. The current debate is whether this ban should be extended to ‘other settings’.

Such an extension seems attractive in principle, since any sort of self-preferencing can be highly anti-competitive. However, it may prove challenging to enforce in practice. Identifying self-preferencing conduct should be easier in the context of organic rankings, where no payments are made and rankings are designed to be ‘consumer-centric’. It becomes more complex in a context where business users pay (directly or indirectly) for positioning or prominence. 

The economic difficulty that arises is that a vertically integrated service can always pay more for such positioning, knowing that it will retain the fees elsewhere within the firm. As such, a process that appears fair, such as an open auction mechanism, can always be won by the vertically integrated firm. One option (included in a proposed amendment to the DMA) is that such bids should be made ‘as if’ the vertically integrated service is an independent standalone entity. But this may hard to implement in practice. The vertically integrated service cannot help but know it is part of a larger organisation, or prevent its conduct from being influenced by this knowledge.

As such, caution may be merited in relation to extending the self-preferencing ban to ‘other services’, at least until the Commission identifies a clear way of enforcing such a rule. However, we note that the same concerns apply to any ‘paid for’ rankings. We therefore propose that the largest digital platform services, covered by the DMA, should be prohibited from charging for rankings completely. This would make it far easier to enforce the self-preferencing ban. And since payment-based ranking can be thought of as a form of advertising, this would enhance consumer protection by creating a clearer distinction between informative rankings and persuasive advertising (Fletcher 2021).

Requirements for data portability and interoperability

Data portability and interoperability are valuable pro-competitive tools, with the potential to create competition in the market and not just for the market (Scott Morton et al. 2021). While the draft DMA already includes some provisions relating to these areas, there is debate over whether these should be extended.

The proposed amendments would make data portability more effective by requiring that data can be ported directly to a third party, at an end user’s request, and that it should be free of charge. For interoperability, the amendments would require that access and interoperability conditions should be fair, reasonable, and non-discriminatory, and that quality should not be degraded. There is also debate over how wide a set of core services the interoperability provisions should apply to, and whether it should be free of charge. 

We support these various extensions, which will help to ensure that the portability and interoperability mandates are effective in practice. We are concerned, though, that there are no specific requirements that the gatekeepers use commonly agreed interface standards. The interfaces they employ will be critical to the effectiveness of these measures, and it is unwise to allow the platforms to design these alone. Their incentives are to foreclose competitors, not enable their entry. While there is a suggestion in the DMA that data portability and interoperability “could be facilitated by the use of technical standards”, we think more is needed. The DMA should require the use of such standards and the Commission should have a role in overseeing a standard-setting process which involves a group of industry participants, but also competitors and potential entrants. 

We also support the more controversial proposal that interconnection be mandated for both number-independent messaging and social networks. The UK Competition and Markets Authority interim report has identified the lack of interoperability between Apple’s iMessage and other messenger apps as being one driver of Apple facing limited competition in operating systems and devices (Competition and Markets Authority 2021. For social network services, interconnection has much-needed potential to enhance competition (Scott Morton et al. 2021).

Remedies

The draft DMA already allows for both behavioural and structural remedies in case of ‘systematic non-compliance’. Proposed amendments would put both forms of remedy on an equal footing and enhance the process around behavioural remedies by enabling the Commission to require remedy-testing, to revisit remedies where they prove ineffective, and to impose a ban on acquisitions for a limited period. 

The proposed amendments are in line with our view that behavioural remedies can be complex and resource-intensive to design, implement, and enforce, and that structural remedies can thus be a valuable alternative (Schnitzer et al. 2021). Our only concern relates to the potential to ban acquisitions. While supporting the intention, we are concerned that it could prove impossible for the Commission to ever demonstrate that so complete a ban is proportionate. We propose an alternative – to simply reverse the burden of proof for acquisitions for a limited period. Such an approach would be more proportionate, and thus more likely to be employed in practice.

Authors’ note: Many thanks to Alexandre de Streel for helpful comments.

Conclusion

The legislative process can be used to make the DMA as robust and comprehensive as possible, and therefore more able to achieve its goals of fairness and contestability in digital markets. Careful economic analysis can – and should – contribute to those goals. 

References

Crémer, J, G S Crawford, D Dinielli, A Fletcher, P Heidhues, M Schnitzer, F M Scott Morton, and K Seim (2021), “Fairness and contestability in the Digital Markets Act”, Policy Discussion Paper No. 3, Digital Regulation Project, Yale Tobin Center for Economic Policy.

Competition and Markets Authority (2021), Mobile Ecosystems Market Study Interim Report.

Fletcher, A, G S  Crawford, J Crémer, D Dinielli, P Heidhues, M Luca, T Salz, M Schnitzer, F M Scott Morton, K Seim, and M Sinkinson (2021), “Consumer protection for online markets and large digital platforms”, Policy Discussion Paper No. 1, Digital Regulation Project, Yale Tobin Center for Economic Policy.

Schnitzer, M, J Crémer, D Dinielli, A Fletcher, P Heidhues, F M Scott Morton, and K Seim (2021), “International coherence in digital platform regulation: an economic perspective on the US and EU proposals”, Policy Discussion Paper No. 5, Digital Regulation Project, Yale Tobin Center for Economic Policy.

Scott Morton, F M, G S Crawford, J Crémer, D Dinielli, A Fletcher, P Heidhues, M Schnitzer, and K Seim (2021), "Equitable Interoperability: the “super tool” of digital platform governance”, Policy Discussion Paper No. 4, Digital Regulation Project, Yale Tobin Center for Economic Policy.

Endnotes

1 The amendments proposed by the European Parliament are listed here.

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Topics:  Competition policy EU policies

Tags:  Digital Markets Act, digital platforms, default settings, self-preferencing, data portability, data interoperability

Professor of Economics, Toulouse School of Economics

Visiting Clinical Lecturer in Law, Yale Law School; Senior Policy Fellow, Tobin Center for Economic Policy

Professor of Competition Policy, Norwich Business School; Deputy Director, Centre for Competition Policy, University of East Anglia

Düsseldorf Institute for Competition Economics, Henrich-Heine University

Chair in Comparative Economics at the University of Munich; CEPR Research Fellow

Theodore Nierenberg Professor of Economics,Yale University School of Management

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