Pro-competition Structural Obligations

Breaking-up platforms is a structural measure of controlling market power in digital markets. It is structural because it either puts an end to market power, if a horizontal divestiture is imposed, or, in the case of vertical unbundling, eliminates the risk of leveraging into connected downstream markets.

Divestiture can be identified as the most radical regulatory measure against winner-takes-all dynamics in network industries. Divestiture is the ultimate antitrust remedy: it forces a company to sell off some of its assets. Divestiture was imposed a century ago against the largest industrial trusts, such as Rockefeller’s Standard Oil?6 It was also imposed in the 1980s on the Bell System that ran telecommunications in the US, which kicked off deregulation,37 and it has been proposed as a solution to market power in the platform economy.

In November 2014 the European Parliament voted in favor of a non-enforceable declaration to “unbundle search engines from commercial services.” Even if Google was not specifically mentioned, the divestiture of Google was in the mind of the members of Parliament. It was only a declaration, with non-binding effects, and no further action was taken after the declaration. In March 2018, the European antitrust Czar, Margrethe Vestager, insisted that the possibility of breaking up Google was “open and on the agenda.” This possibility has been increasingly discussed in the US.

There have been growing criticisms of the weak antitrust enforcement in the digital world,38 particularly the approval of previous mergers that have reinforced the largest multi-platforms.39 For example, reversing previously approved mergers could be applied to the acquisition of Instagram and WhatsApp by Facebook and to YouTube and DoubleClick by Google. Reversing these mergers is an increasingly common proposition,40 even by candidates for the US Presidency such as Elizabeth Warren.41

The antitrust suit filed by the Federal Trade Commission against Facebook in December 2020 formally request the divestiture of Facebook’s Instagram and WhatsApp. The FTC identified that the scope of both acquisitions was to obstacle the growth of potential competitors.

Divestiture might be a sound policy when a company reaches a position of extraordinary market power that becomes an obstacle in itself to competition, particularly when it affects markets related to the monopolized activity. Antitrust law prohibits such dominant positions being built by merging previously independent companies. Divestiture builds on the same reasoning, but it is more intrusive as it goes against an established venture, interfering in the exercise of the ownership and free enterprise rights.

Horizontal divestiture - that is, the break-up of a company to diminish its size - is rarely a good decision in the network industries. While divestiture is certainly an effective measure to reduce market power also in network industries, horizontal divestiture affects the source of market power, the scale that ignites the network effects that provide the ultimate competitive advantage in the network industries. However, by reducing or even by eliminating the network effects, value is destroyed not only for the divested company, but also for users and society as a whole. The divestiture of digital platforms is not recommended as a policy, as it is not recommended in general for the network industries. It removes the network effects and the value they create.

Furthermore, horizontal divestiture might be useless if a market naturally leads to concentration as it creates a competitive advantage, since the market leader with the largest network effects has lower costs or another competitive advantage. The market will again concentrate. The experience of the break-up of the Bell System shows that even though the monopoly was broken into to seven regional monopolies (the Baby Bells), they ended up concentrated again a couple of decades later in the form of two carriers.

There are some cases in which horizontal divestiture might have beneficial effects. For example, this could occur with multi-platforms active in different multi-sided markets. Full network effects might be exploited in each market without the need to mutually reinforce them with the position in another market. Furthermore, efficiency and the creation of economic value is not the only reason to intervene in the market. There are other values that justify public intervention against the concentration of power, both economic and other kinds. Pluralism has justified in the past public intervention against concentration in media. The same logic could apply to the concentration of advertising revenue in the largest non-transactional platforms.

Vertical separation is a more nuanced approach to fighting some of the negative effects of market monopolization. Digital platforms would be allowed to intermediate in the provision of good and services, but they would not be allowed to provide the underlying service in competition with third parties. Separation can be total, when activities would be undertaken by independent companies, or only functional, in the sense that different corporations are required to provide the intermediation and the underlying service, even if they belong to the same business group.

Vertical separation is a regulatory measure adopted in Europe in different network industries, particularly railways (separation of infrastructure management and transport service provision) and electricity (separation of electricity production, transmission, and distribution).42

Vertical unbundling does not always reduce network effects. They are fully protected, so separation does not reduce value for users and society as a whole. Vertical unbundling does not have the negative effects of horizontal divestiture. On the contrary, the scope of vertical unbundling is to structurally impede the extension of market power generated by network effects downstream to connected markets. For example, a company managing an app store would not be allowed to commercialize its own apps.

Vertical unbundling is the structural obligation to be adopted when behavior obligations do not work. Discrimination in favor of the downstream arm is excluded (ownership separation) or at least made more transparent (functional separation) as the unbundled arms have to keep separate accounts, managers, incentives, etc. As data is key for digital platforms, data separation has been proposed as a remedy. Specific units in a platform company would not be allowed to share data. This was the remedy imposed by the German antitrust authority on Facebook, forbidding it from pooling together data from Facebook and data from WhatsApp.43

Vertical unbundling has been called for in the Amazon market place.44 For example, authorities in India enacted a regulation, effective in February 2019, prohibiting e-commerce marketplaces such as Amazon from selling their own inventory. Amazon is only allowed to operate marketplace platforms where other parties sell goods to retail consumers. In this way, the authorities expected to put an end to Amazon’s supposedly predatory practices of duplicating successful products commercialized by third parties and then discriminating in favor of such products.

Vertical separation is not limited to matchmakers; it has also been proposed for nontransaction platforms. Google would have to separate the ad exchange platform it manages from the underlying ad display ventures, such as the search engine and YouTube.

In conclusion, horizontal divestiture is not recommended as a regulatory policy in network industries such as platforms in multi-sided markets, because this measure not only reduces market power but also the value created by network effects, reducing consumer welfare. On the contrary, vertical separation does not necessarily affect network effects and is therefore not a threat to the value generated by network effects. Vertical separation, known as unbundling in the traditional network industries, is the ultimate instrument against the expansion of market power stemming from the intermediation activity.

 
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