Why regulating online platforms is a bad idea

Diego Zuluaga // 21.12.2015

Today, EPICENTER releases its latest briefing, on the economics and regulation of online platforms. The prospect of regulatory intervention into the internet-based economy – whether through competition policy or sector-specific rules – has increased over the past two years. There is, at the moment, an ongoing consultation on the subject, which closes on 30 December. (You can find more details about how to submit a response here.) This briefing is a contribution to the debate on whether public interventions into online platforms as a separate category of firms – rather than using the existing tools according to the existing criteria – are warranted. Its conclusion is that they aren’t.

To make an informed decision, policymakers must answer the following questions:

1) What are online platforms? What characterises them and separates them from other types of online and offline businesses?

2) Do online platforms share enough to be classified as a single category for regulatory purposes? Are they different enough from offline platforms and online and offline non-platforms to deserve special and unique regulation?

3) Are ex ante rules better suited to the task than ex post enforcement of any perceived threats to the competitive process?

4) Is action of any sort – especially ex ante – likely to improve the existing situation, or is there reason to believe that it could do more harm than good?

So, let’s consider them briefly one by one:

1) Platforms, both on- and offline, emerge to bring together different types of users into an interdependent relationship from which both benefit. Typical examples of platforms include shopping malls, credit cards, free-to-air television and search engines.

The two characteristics of platforms from an economic perspective are: network externalities, meaning that having a larger number of users benefits the experience of existing users (on both sides of the transaction); and the ability to affect transaction volumes by changing the price structure, i.e. how much each side pays and/ or is paid.

Platforms create value by making transactions possible which otherwise would not take place.

2) Other than their common ability to bring interdependent users together, platforms share little. They operate in many different industries, with disparate business models and pricing structures. Importantly, they compete with non-platforms, both on- and offline. The differences between online platforms and the fact that they compete with non-platforms suggest that a special regulatory regime would be inappropriate.

3) In addition to the doubts about regulating online platforms according to a special regime, there are concerns that ex ante intervention could potentially slow down innovation and stunt the development of the internet economy. Alex Chisholm, head of the UK’s Competition and Markets Authority, has argued that ex post enforcement is better suited to the task of promoting innovation and competition at the same time.

4) There is also reason to believe that action of any sort could do more harm than good. The internet economy is highly dynamic and competitive, and the one thing we know is that we don’t know how things will change even five years from now. On the other hand, regulatory action could stifle innovation, and it is hard to reverse once implemented.

The upshot is that platform regulation is ill-defined and could have more costs than benefits. Policymakers should consider the long-term impact of legislative action on innovation and the dynamism of the online economy.

Diego Zuluaga is Head of Research of 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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