Competition Is Like Adidas Stripes, More Is Not Always Better

Georgie Cobbs via Unsplash

The European Commission is preparing a new regulation of internet companies called the Digital Markets Act (DMA). It is supposed to require or prohibit a number of activities from platforms, all under the slogan: “more fair, competitive and innovative business on the internet”.

However, good intentions are not enough. Creating good regulation is usually a superhuman feat for politicians. Creating good regulation in the dynamic and innovative environment of the internet, where often politicians and officials do not understand the business models of platforms at all, is even multiply more difficult.

And that is why it has so far almost always ended in fiasco. All indications are that it will be no different for DMA regulation.

Take one area of regulation being pushed through by the European Commission – to create fair third party access to platforms. The business model of many platforms is built on the creation of ‘digital marketplaces’, i.e. they manage a space where service providers and their customers can meet. But at the same time, the platforms themselves often offer different services and thus compete with the aforementioned providers.

Sometimes it even happens that a service previously provided by a third party on the platform becomes a feature of the platform itself. In economic jargon: vertical integration takes place, or we can call it ‘bundling’. That is to say, the platform gradually packs on new and new functions that were previously somebody else’s services.

You can imagine, for example, a smartphone operating system which, when you switch it on, has calendar, browser or weather forecasting app installed on it. However, all of these features are also provided by many independent mobile app developers.

Or you can imagine a web searcher where you search for restaurants and it shows you straight away, in addition to a list, its map of where the restaurants are and how their customers have rated them. But these are also features that some Internet companies provide as separate services.

And, of course, the platforms provide these features to their customers on a priority basis. They don’t create a “perfect market” on their platforms where their features can compete with other providers’ services.

And this is the point that the European Commission does not like. It wants to open up the platforms and make them publicly regulated domains where everyone can happily compete on a level playing field until they die (are uninstalled by customers).

The problem with this negative view of bundling, or vertical integration, is that it is based on an incorrect view of the role of competition in society. Competition is not there to allow as many service providers as possible to operate and compete ‘fairly’ for customers.

Competition is there so that customers can get quality, innovative and inexpensive services. And this can be achieved, under certain conditions, by turning a number of providers’ services into platform features. We have seen this many times in the past.

If you installed a word processor or spreadsheet on your desktop computer 30-40 years ago, you wouldn’t have got features like word counting, or creating footnotes or charts with it. Not even a print function. These were all separate services from separate companies that you could buy separately for tens to hundreds of dollars.

Hence, bundling software in the form of today’s applications like MS Word or Excel has killed a lot of service providers. But should we weep for them? A few individuals may have shed a tear, but the vast majority of customers today can be happy that the European Commission did not create regulations back then and did not try to create a “fair, open and competitive” market in the provision of word-counting services in word processors.

However, the topic of bundling is not only about the Internet, but also about cars, for example. Back in the 1950s, it was common for a car not to have turn signals, but you could buy them separately and install them yourself later.

There was even a lawsuit against Ford in the 1960s for bundling a car with a car radio, which logically the car radio manufacturers didn’t like.  Does this mean that today the car companies should create a “fair, open and competitive” market in the choice of accessories on cars coming out of their factories?

Competition is like Adidas stripes. More is not always better. Forcing intra-platform competition where inter-platform competition would not result will inevitably lead to unintended consequences. And those will be fewer quality, innovative and low-cost services for customers. Less of what real competition brings.

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Robert Chovanculiak