Understanding Online Platform Competition: Common Misunderstandings

Posted by Social Science Research Network

Understanding Online Platform Competition: Common Misunderstandings

Daniel H O’Connor (Computer & Communications Industry Association)

Abstract:      The Internet is arguably the most powerful force in the global economy. Similar to the printing press, electricity and the steam engine, the Internet has become, in the words of the OECD, a “general purpose technology enabler,” a once-in-a-generation technology that reorganizes world economic activity and spurs productivity. Although the positive effects of this reorganization are apparent, the rapid pace of innovation and the subsequent restructuring of economic activity have placed pressure on regulators to understand this vital but rapidly changing new economic sector.

Currently, there is a robust debate on how to police a relatively new economic actor: the online platform. While there is often a lack of clarity involving exactly what is considered an online platform, the term generally refers to any online service that can function as an intermediary between two or more clearly identified groups. Examples include Amazon, eBay, Facebook, Google and Uber. Both the number and size of Internet platforms, many of which displace parts of the brick-and-mortar economy, have grown rapidly in recent years.

One area of debate involves questions about how existing laws should be applied to regulate the behavior of online platform operators. Another area of debate is more fundamental and controversial. It questions the adequacy of existing bodies of law to deal with the challenges presented by online platforms, and raises the prospect of new ex ante regulation of online platforms.

In this paper, I examine common mistakes that policymakers, regulators, and competition enforcers make when evaluating Internet competition, particularly in regards to online platforms. Defining markets based on a static view of competition, applying one-sided analysis to multi-sided markets, not recognizing the limits of network effects, and an overemphasis on the role of big data are common pitfalls that often lead observers to conclude that the Internet is far less competitive than it actually is. These mistakes lead to the misapplication of competition law itself, and fuel the perception that competition law is not sufficient and additional regulation is needed to police online platforms.