V Regulating Platforms as the New Network Industries

Our analysis of the communications, transport, and energy platforms has shown that network effects are central for understanding the success of digital platforms. It has also shown that digital platforms are building network effects on top of the traditional network industries, as traditional players are being platformed. Finally, it has shown that massive value is being created by digital platforms.

However, it has become clear that the existing legal and regulatory framework is not ready to face the challenges that the digital platforms pose. Existing rules were defined for competition between firms integrating assets and employees in large organizations in order to avoid transaction costs in the market. When the integration is not done inside a firm, but by a platforms integrating third-party assets and employees, the existing legal framework does not know how to classify this new form of industrial organization. The mere application of the existing rules might be an obstacle for the creation of value by the platforms. In the specific case of the network industries, the existing regulation can benefit platforms, as traditional players are subject to strict regulations regarding market power, and platforms can benefit from competition in an unleveled playing field.

We have also shown that digital markets have a tendency towards concentration, winner-takes-all, as network effects require scale and only a few platforms can exhaust the economies of scale. In some cases, markets are tipping and one platform has become dominant. Platforms in a dominant position can abuse their power: access is denied, excessive prices are charged, there is a lack of transparency, discrimination, self-preferencing, and so on. The existing rules on competition and economic regulation do not provide solutions for the existing conflicts.

There are increasing calls for the regulation of the digital platforms. It can be taken for granted that some of them are the voices of the traditional players disrupted by the digital platforms. Recall how newspapers sued free newspapers for their use of the word “newspaper” and even for littering. However, it is already clear that there are valid reasons to increase the regulatory attention on digital platforms. Different regulatory authorities, particularly in Europe, have issued reports identifying market failures in the advertising market, in the app store market, and so on. Antitrust cases against the leading platforms proliferate, particularly in the European Union, shedding light on market dynamics and on abusive business practices.

Our analysis is structured into four different levels. First, digital platforms will be analyzed as providers of intermediation services. All jurisdictions have legislation, caselaw, and codes of conduct regulating intermediation services, as they have always been prone to conflict. Second, we will discuss how the scale at which digital platforms intermediate makes them superintermediaries, requiring extra protection for the intermediated parties. Third, we will analyze the special situation of digital platforms with market power. Finally, the need for regulation to consider the entire ecosystem around digital platforms will be underlined.

Overall, we propose that the regulation of the traditional network industries provides the best guide for regulating digital platforms, which we believe can and should be considered as the “new network industries.”

Chapter 20

 
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