Service on WTO and Trade Issues (Jul19/22)
control of consumer data raises concerns
Geneva, 11 Jul (Kanaga Raja) - Large technology companies have penetrated many aspects of people's lifestyles, with such digital platforms providing many benefits, but also gaining significant control of consumer data, which confers market power, raising not only competition-related concerns, but also concerns related to consumer protection and privacy.
This is one of the main conclusions highlighted by the United Nations Conference on Trade and Development (UNCTAD) in a Secretariat Note for the eighteenth session of the Intergovernmental Group of Experts on Competition Law and Policy taking place from 10-12 July.
In its Secretariat Note, UNCTAD has said that many countries are studying the negative effects of the market power of these platforms and seeking ways to deal with the related challenges.
UNCTAD noted that technological developments have provided consumers with new products and services, often provided free of charge.
Digital platforms are at the centre of such developments and have had disruptive effects in many economic sectors.
The platforms provide a digital infrastructure for a variety of services, including marketplaces (Amazon), application stores (Apple), social networking sites (Facebook) and search engines (Google).
Platformization has implications not only for the nature of transactions in certain economic sectors but also for the ability of firms to scale rapidly, thereby affecting the structure of sectors.
Large technology companies have changed the global business landscape. The top 10 global companies by market capitalization in 2009 included only one technology company and three oil and gas companies; in 2018, the list included five technology companies and two consumer services companies that are both large and online marketplaces.
The UNCTAD document has listed the top ten global companies (as at 31 March 2018) in terms of market capitalization as follows: Apple, Alphabet (the parent company of Google), Microsoft, Amazon.com, Tencent Holdings, Berkshire Hathaway, Alibaba, Facebook, JPMorgan Chase, and Johnson and Johnson.
With regard to specific sectors, Amazon held an over 90 per cent share in five different product markets in the first quarter of 2018; Facebook is the leading social networking site, with a 68.95 per cent share as at February 2019; and Google dominates the search engine market, with an 89.95 per cent share as at January 2019.
A preliminary report on an inquiry into digital platforms by the Australian Competition and Consumer Commission has found that, in Australia, 50 per cent of traffic to Australian news media websites comes from Facebook or Google.
The market power and dominance in certain markets of key platforms affect small innovative companies and their access to and survival in these markets.
Dominant platforms such as Amazon, Apple and Google may own and operate infrastructure or provide a service on which traders and developers depend, and they must compete with the service provider in these markets.
Focusing on competition concerns arising from big technology, the UNCTAD document noted that digital platforms have new business models and function with algorithms, which are designed to collect and process data, with decisions made based on that data. Such platforms require high up-front sunk costs and have low marginal costs.
The technologies required to store and process data can be costly but, once a system is operational, the marginal costs related to additional data are low, and the data can help improve the algorithms to provide better and more personalized services to consumers.
This cost structure "is characterized by high economies of scale and scope and can therefore facilitate market concentration of big data in the hands of a few players".
Data-driven network effects are one of the features that characterize digital platforms. A network effect "refers to the effect that one user of a good or service has on the value of that product to other existing or potential users".
For example, people may wish to use Facebook for social networking simply because their friends do so. The value of using digital platforms directly depends on the number of users.
Over 75 per cent of online consumers in the United States of America shop on Amazon most of the time.
Data is a crucial component of the business models of digital platforms, and control of data confers market power to such platforms, said UNCTAD.
Economies of scale and scope, data-driven network effects and control of data create high barriers to entry.
For example, Google can use the search data of users to improve its search engine algorithms; new entrants to the market do not have this advantage.
According to UNCTAD, establishing a successful platform that can attract sufficient online traffic is a significant challenge for newcomers.
Even if start-ups enter the market, they soon face competitive pressure and may eventually be acquired by dominant platforms.
Google has acquired 212 business entities since its founding in 1998 and the value of these acquisitions exceeds $17 billion.
Digital platforms have challenged the neoclassical approach to doing business, which defined the goal of a private company as maximizing profits.
The new business models prioritize growth over profits in the short to medium terms, that is, the maximization of the number of users rather than profits.
Dominant platforms can afford such a business strategy given leeway to incur losses by investors. For example, Amazon was permitted by investors to grow without pressure to show profits, and thereby expanded its business and entrenched its dominance as an electronic commerce (e-commerce) marketplace.
Dominant platforms have also expanded into other related businesses, with the objective of accessing more data.
For example, Google gives its Android operating system free of charge to mobile telephone manufacturers, thereby enabling it to collect user data.
In addition, Google provides many other services, including video sharing, price comparison, cloud computing and online payment system services, and these have provided additional consumer data, increasing the quality of, on the one hand, its search engine services, and on the other hand, the value of data sold to advertisers for better- targeted advertising.
Facebook and Google are the dominant digital advertising companies, and had a combined share of 58 per cent of the $111 billion market in the United States in 2018; Amazon, the world's largest online retailer, has a 4.2 per cent market share.
These figures highlight the key linkages between control of data, market power and the increasing monetization of data through digital advertising in the business models of digital platforms, said UNCTAD.
According to UNCTAD, the quick pace of technological development has changed the nature of markets and business models.
This has posed some challenges for competition law and policy, which need to be adapted to the new market realities and business models. This is crucial to ensure competitive and contestable markets.
The current dominant approach in anti-trust is the consumer welfare standard, which is based on measuring benefits or harm to consumers in the form of lower or higher prices, respectively.
Under this framework, there is no concern over practices such as predatory pricing, which is a key element of the business strategy of dominant platforms providing an online marketplace, to grow and monopolize their market.
This practice results in lower prices for consumers in the short to medium terms, until competitors are driven out of the market. Afterwards, prices may increase, and choice decreases due to there being less or no competition.
However, such practices do not come under anti-trust scrutiny since, given the lower prices, they seem to be to the benefit of consumers at the start.
Consumer welfare should therefore be broadened to include other criteria such as consumer privacy and choice, personal data protection, switching costs and the lock-in effects of dominant platforms, said UNCTAD.
It noted that some scholars have proposed a new approach to competition investigations that focus on the anti-competitive effects of the control of personal data by platforms, and others have suggested reforms of privacy and competition policy, considering the relationship between market share and the control of data.
Adjustments to the anti-trust framework and tools need to be made to be able to address twenty-first century challenges, said UNCTAD.
Digital platforms are characterized by their network effects and by being multi-sided, as well as by having high switching costs, economies of scale and levels of control of data, all of which are pertinent in the definition of the relevant market.
Small but significant non-transitory increase in price and hypothetical monopoly tests rely on price mechanisms and may therefore not be appropriate tools for providing a relevant market definition in cases involving digital platforms, as the latter provide free products or services in exchange for data.
To define a multi-sided market, competition authorities need to consider not only monetary transactions but also data flows that may be observed in the market.
Competition authorities need to employ additional criteria for the definition of the relevant market in digital sectors, said UNCTAD.
Market power assessment in the context of digital platforms requires analysing different criteria. Access to and control of data is crucial and confers market power, and this feature is further reinforced by network effects.
According to UNCTAD, digital platform market power is further entrenched through vertical integration.
Dominant platforms such as Amazon and Apple have engaged in expanding their businesses vertically into upstream and downstream markets, and become competitors to traders or application developers that use their platforms.
Such expansion improves their capacities to collect more data and increase their competitiveness and confers on them the role of gatekeepers of online stores and application markets, in which they are both owners and users.
This situation may at any time give rise to abusive and exclusionary conduct by dominant platforms.
For example, said UNCTAD, Amazon started as an online bookstore but later diversified, and sells music, audio-books and other consumer goods, and has also moved into manufacturing and retailing its own brands, competing with other traders on its marketplace, thereby making it possible for the dominant platform to discriminate against independent traders that are its clients and competitors at the same time.
Sellers have become dependent on Amazon to the extent that they perform most of their sales on Amazon despite fees of 6-50 per cent.
According to UNCTAD, Amazon's quasi-monopoly position could potentially give rise to abusive conduct through, for example, predatory pricing and discrimination against rivals at the retail level.
It is essential to ensure that the particularities of digital platforms are either reflected in competition law or considered in competition law enforcement.
Competition law and enforcement need to integrate the interface between competition law, consumer protection and data protection.
These areas have become more intertwined due to market power, which consumer data provides for digital platforms.
There is a need for a more flexible approach to abuse of dominance assessments in the data-driven digital economy, said UNCTAD.
There are growing concerns about the abuse of market power by key platforms, the extent of their control of data and the harm not only to consumers but also to society.
Some of these platforms have become dominant and almost indispensable to consumers, who have little choice, tend to use the same platforms and show an unwillingness to switch.
Such platforms are often compared to utilities in the sense that users feel they cannot do without them and so have limited choice but to accept their terms of service.
There is a need for further reflection on whether competition law enforcement is the most appropriate or best placed tool to address concerns arising from digital platforms.
It may be more effective to regulate such platforms to ensure open and fair access for all businesses and provide for a level playing field rather than trying to address competition problems ex post under competition law.
Another concern with dominant digital platforms is neutrality, said UNCTAD.
One way to ensure neutrality may be to apply the essential facilities doctrine to dominant platforms, similar to the regulation of the telecommunications sector, in which an incumbent firm usually owns or operates the infrastructure and has its own telephone and/or mobile telephone operator, yet is required to provide access to other telecommunications operators at a fair rate.
Application of the essential facilities doctrine could help prevent the abuse of dominance by platforms operating similar infrastructures, such as the Apple application store or Amazon marketplace, while allowing them to maintain the benefits of scale.
One much-debated idea is to break up dominant digital platforms, including large technology companies, to mitigate the concentration of power in a single platform.
This subject has moved beyond competition circles to, for example, election campaigns in some countries, with proposals for breaking up large technology companies to promote competition and safeguard small businesses.
Policy measures such as specific legislation adopted by ministries in charge of trade and the economy may have a positive effect on competition in the digital economy, said UNCTAD.
For example, the Government of India introduced new e-commerce rules in 2018 to promote competition and prevent restrictive practices by online e-commerce platforms such as Amazon and Flipkart.
The new rules, which came into effect on 1 February 2019, prohibit e-commerce platforms from selling products from companies in which they have an equity interest; platforms are required to provide services, including fulfilment, logistics, warehousing, advertisement and marketing, payments and financing to sellers on the platform at arm's length and in a fair and non-discriminatory manner; and platforms are not permitted to mandate any seller to sell any product exclusively in their marketplaces.
These rules were established following complaints from retailers and traders that large e-commerce platforms used their control of inventory from their affiliates and through exclusive sales agreements to create an unfair marketplace that allowed them to sell some products at low prices.
The new rules are expected to prevent anti-competitive and abusive practices, as well as predatory pricing by large e-commerce platforms to the detriment of local small and medium-sized online traders.
Most developing countries have relatively young and small competition authorities with limited resources for taking on competition cases in an increasingly concentrated global economy.
If the rules of the game for platforms are clearly set out through regulation, there may be less need for ex post competition law enforcement by competition authorities, as regulations should have pre-empted some of the competition concerns ex ante.
Considering the limited resources of competition authorities, in particular in developing countries, it is worth reflecting on such a policy response, said UNCTAD.
For example, given the growth of e-commerce, if appropriate e-commerce policies and regulations are put in place in developing countries, as for example through the new rules in India, to ensure open access to platforms under fair terms and conditions by local small and medium-sized enterprises, they could derive more benefits from the digital economy.
Small and medium-sized enterprises will have more chances to grow if they have fair and equal access to e-commerce platforms.
Another challenge in developing countries relates to supporting local start-ups in a digital world where the small usually end up being acquired by the large, said UNCTAD.
Developing countries could join together at the regional level within trade and economic frameworks. Such regional arrangements could facilitate intra-regional trade and help ensure larger markets for local companies.
E-commerce, competition and consumer protection polices and rules at the regional level may be more effective in dealing with abusive practices by global digital platforms and the mergers of digital companies and ensuring that dominant platforms remain fair and open to local and regional companies under fair terms and conditions.
Recent competition cases show that competition law frameworks and enforcement need to be adapted to the features and business models of digital platforms.
Traditional anti-trust cases involve price competition and competition for higher market shares in the same or upstream or downstream markets, while in the digital economy, the scale and scope of data confers market power and erects entry barriers for competitors.
Digital platforms controlling consumer data have a responsibility to ensure privacy and respect individual rights to data protection and privacy.
There is a need, therefore, to adapt the competition framework by broadening the consumer welfare standard beyond price and market share considerations, as consumer welfare involves not only lower prices but also choice, privacy, data protection and innovation.
Monopolization in the digital economy may not only harm economies but also societies and democracies.
Competition authorities in both developed and developing countries need to be vigilant and forward-looking, said UNCTAD.