Online platforms and the bad economics of politicians

EurActiv reports that the Italian Parliament is scheduled to vote on legislation which would regulate online platforms. The measure has been proposed by a parliamentarian from Civic Choice, a small centrist party which forms part of Prime Minister Renzi’s coalition and was – ironically or not – founded by former Competition Commissioner Mario Monti.

It comes as the European Commission considers its own set of regulations for these key players in the digital ecosystem. Examples of online platforms include Google, eBay, Uber and Facebook. The common trait they share is not that they’re American – although many of them are – but that they operate in two-sided markets, selling (for instance) advertising space to sellers, while they offer information to online users. Or bringing together drivers and passengers.

Earlier this month, I discussed some of the problems with proposals to regulate platforms. Here, I will address two claims made by European politicians in relation to the role that platforms play in the European economy, and the likely consequences if we do not regulate them.

First of all, it is alleged that we are moving towards a digital economy where market shares are increasingly concentrated in a new players – it’s not hard to guess who is meant – and which raises the danger of powerful monopolies emerging. It is true that successful online businesses are able to quickly increase their market shares, but this is primarily due to the fact that they tend to be first movers in their industry – see Uber and Amazon – and because consumers can quickly shift from worse to better options, something which is generally not true of physical markets.

Even then, the claim that market share constitutes market power is bizarre. The digital sector is one of the most competitive in modern economies – not least because government regulation is largely absent (for now). We constantly see new players emerging, not just competing in established segments of the market (horizontal search, social networks) but creating new segments (apps, vertical search, the sharing economy) in the process.

Secondly, politicians in the Member States and in Brussels often express the fear that U.S. tech dominance is going to lead to a lowering of standards. They rarely specify which standards they mean but they could be data protection, employment, tax, and others, depending on each individual case. A cursory look at the impact of digital technology on the economy – ride-sharing apps on transport, search engines on information provision – reveals that customer service standards have only risen, largely because tech allows feedback to be provided and to flow much more easily and quickly. Combined with fierce competition, it is a recipe for rising, not falling, standards. And employees seem to be happy and eager to work in the sector.

However, if one is concerned about privacy or tax issues as related to the digital sector, surely the way to go about it is to tackle those issues directly rather than attempt to fix them through wholesale regulation of a massive (and very diverse) group of platforms. The latter approach is a recipe for red tape, inefficiency and regulatory capture – precisely the things that have limited competition and hurt standards in the past.

Diego Zuluaga is Head of Research at EPICENTER.

EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).


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