Are Free Digital Services by Large Platforms a Broken System for Competition?

There has been a significant shift in the past two years about the way large online platforms, e.g. Amazon, Apple, Facebook, Google, Microsoft, should be dealt with. The initially uncontested views about their benefits to consumers and the economy has been tainted by allegations of anti-competitive and other behavior that, it is argued, harms startups and small businesses, competition, consumers, among others. A key aspect of their business model is that they offer highly popular services worth “thousands of dollars” to end users ‘for free’. End users are, it is alleged, paying for such ‘free’ services through the back door, in money and not just with their personal data as it is common to hear. There are concerns that their business models can lead to higher consumer prices and less choice for the products sold or advertised on their platforms. Many have argued that competition among platforms is ‘for the market’: they compete in innovation and the most innovative gain monopoly positions until they are toppled. There are, however, growing concerns that some large platforms will be very difficult to challenge any time soon, let alone dislodge. I argue that a key reason is their ‘free services’, which:

(i) makes it almost impossible for startups to generate revenues whether from end users or businesses, even if they had full access to their data; and, more importantly

(ii) they might not have done absent entry concerns, i.e. they might have sold ads or levy commissions and charge (some) end users for their services.

I argue that governments/regulators should target interventions that incentivise platforms with certain characteristics to recover part of their costs from end users (characteristics of digital markets mean that prices for products can never be ‘high’). This would enable startups to grow by generating revenues from end users, address the data collection ‘race’ and privacy issues by reducing all platforms’ reliance on advertising revenues, hence stimulate competition among platforms. It would also increase market transparency and competition in other markets by reducing what customers potentially repay through the back door. Both Competition Policy (a modified ‘predation’ test) and, as a last resort, regulation are other options. While I do not specifically advocate for the digital tax which many governments have announced, I argue that it is the best opportunity outside Competition Policy and regulation to fix the problem, if well-designed. Promoting the funding of startups, especially for scaling up ‘successful’ ones is equally important.