To regulate digital platforms, focus on specific business sectors

The logos of Amazon, Apple, Facebook and Google are seen in a combination photo from Reuters files.    REUTERS/File Photos - RC196FE450D0

The Department of Justice, the Federal Trade Commission, and state attorneys general have grabbed headlines over potential antitrust cases against digital platforms. But advocates calling for expanded sector-specific regulatory controls are playing the longer game. They benefit from widespread skepticism that antitrust actions under current jurisprudence and resource constraints will justify society’s interest in the proper operation of big technology companies. Phil Verveer, a seasoned antitrust expert whose career began with the antitrust case against the Bell System, describes the practical and legal obstacles facing a new big monopolization case in a recent report. This masterful summary explains why so many advocates and commentators are looking for a regulatory alternative.

Defining “Digital Platforms”

Proponents of a new regulatory regime include Harold Feld, Senior Vice President of the public interest group Public Knowledge, Jason Furman, former head of the Council of Economic Advisors and principle author of a recent report to the UK government on the digital market, and Fiona Scott Morton, a Yale University economist and co-author of a report on digital platforms. They each seek to define the scope of a new regulatory regime based on the standard conception of digital platforms as digital companies that provide service to two different groups of customers and experience strong indirect network effects.

The bad news is that this conception will not work. It is either too inclusive and covers vast swaths of U.S. industry, or so porous that it allows companies to escape regulation at their own discretion by changing their mode of business operation.

These problems were noted in the Ohio v. American Express Supreme Court case by antitrust traditionalists and neo-Brandeisian reformers who objected to a weaker antitrust rule for platforms. These critics thought the notion of a digital platform upon which the court relied was an opaque get-out-of-jail-free card for companies seeking to avoid antitrust liability. But if the notion of a digital platform is not workable for a special antitrust rule, it is certainly not workable as the basis for a fundamentally new regulatory regime.

“Digital platform” is too broad

The key idea in all these proposals is a digital platform subject to network effects. In its standard economic meaning, as defined by French economists Jean-Charles Rochet and Jean Tirole and the antitrust economists David Evans and Richard Schmalensee, a platform links two (or more) sides of a market in ways that are increasingly valuable to those on one side of the market as the number of participants on the other side increases.

But two-sided businesses are ubiquitous in the economy and have been for generations. A payment system is a two-sided digital platform. Indeed, the notion of a two-sided business was invented in large part to apply to payment systems. These systems operate digitally to connect different kinds of users, merchants, and cardholders, and are subject to strong network effects.

Platforms are everywhere. Newspapers, broadcasters and cable companies link advertisers to an audience. Taxi companies and Uber both link drivers and riders. Communications networks link senders and receivers of messages. Record companies and streaming music services link artists and listeners. Multiple listing services connect housing buyers and sellers. E-prescription companies link doctors and pharmacies. Retail outlets link manufacturers and book publishers to final customers. Once they go online, they are all digital platforms.

All these businesses exhibit to one degree or another the classic indirect network effect where a large number of people on one side of the market (usually suppliers) creates demand for a large number of people on the other (usually buyers). Under above proposals, they would all be digital platforms subject to the jurisdiction of the new agency. For this reason, such a new agency would not be “sector-specific” like the Securities and Exchange Commission or the Federal Communications Commission. Instead, it would be another general-purpose regulator like the Federal Trade Commission with broad powers to regulate virtually the entire economy.

Focus regulation on the business or technology of a company

The notion of a platform company will not bear the weight of a criterion for a new regulatory authority. Instead, lawmakers need to pick out a concrete, tangible line of business or a technology that, because of its centrality to our economic, social, cultural, and political lives, and its economic characteristics, is deserving of special regulatory attention. This is what lawmakers did in setting up earlier regulatory agencies such as the FCC, the SEC, and the Food and Drug Administration.

Social media might qualify for such treatment today. As Harold Feld notes, social media companies pass this test of centrality because their decisions “can bankrupt businesses, sway federal elections, and change the ways we think and feel about ourselves and others without our even realizing it.” Moreover, social media markets will never settle on their own into a competitive state. Network effects and economies of scale will drive these markets toward concentration, and once in a concentrated state will create barriers preventing new entry. Antitrust law in its current state might countenance permanent monopoly, but a complete and durable absence of alternatives is a failure of competition. As Jason Furman puts it, “Ensuring that competition is vibrant requires ensuring that there are competitors.”

But competition isn’t always enough even if it could be achieved. Perfectly competitive markets are not perfect. As antitrust economist Carl Shapiro puts it: “Indeed, it is not even clear that more competition would provide consumers with greater privacy, or better combat information disorder: unregulated, competition might instead trigger a race to the bottom, and many smaller firms might be harder to regulate than a few large ones.”

Rules of transparency and accountability for the content moderation activities of social media platforms would be one example of such public interest regulation that goes beyond competition promotion and would be the responsibility of a new sector-specific agency focused on social media companies. The good news is that more and more citizens, policymakers and even presidential candidates are realizing that democratic control of technology means an active and alert government agency with a strong mandate to protect the public interest. The task now is to define carefully the scope and responsibilities of such a new regulator.