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Opinion 20 November 2020

The EU leads the way in regulating the platform economy

Edward Corcoran, from BBVA’s Digital Regulation team, reflects in this op-ed on the new roadmap for the platform economy in the European Union. “The EU has been at the forefront of the debate on the implications of the growth of the digital economy and its importance to firms and consumers alike. It now has the opportunity to introduce new rules that ensure markets remain fair and create the opportunities for all participants to thrive“, he says.

The digital revolution has upended many of the old rules. Business models have been disrupted, firms and consumers interact in new ways, and new corporate giants have emerged. The way that these changes are transforming our economy is a source of both hope and concern for policymakers.

Hope because the innovation brought about by the information age is undeniable: new technologies are now in the hands of every consumer and firm. And as economies have faced headwinds, including as a result of the coronavirus pandemic, digital markets have offered new opportunities. The next generation of technologies could help to continue this trend.

At the same time, there is concern that the way digital markets have transformed may have harmed competition, and with it the prospects for future innovation. As the heart of this transformation is the rise of online platforms. This is the economic model on which some of the most successful firms of the 21st century have been built, connecting users to one another in order to build marketplaces, communication tools, social networks, and online advertising empires.

But the nature of these platforms now troubles policymakers. As the digital economy has matured, a small number of firms have become the largest and most influential, often connecting together multiple platform businesses into powerful ecosystems and emerging as “gatekeepers” through which almost all participants in the digital economy need to pass.

In retrospect, this outcome shouldn’t be surprising. The economic laws behind digital markets encourage rapid growth and a handful of winners, as economies of scale and network effects – where users value a service more highly as other users join it – allow firms to expand quickly and drive out competitors. And once in a prominent position, a platform firm can leverage its user base, its data collection, and its gatekeeper role to expand into new markets.

The risk is that, with a handful of powerful firms setting the rules of the game for both consumers and other firms, it may undermine competition and tomorrow’s innovation, particularly if antitrust interventions can only react slowly, after the horse has bolted. Authorities around the world are looking at what can be done, and none more actively than the European Commission, which consulted over the summer on whether to introduce new competition policy powers and new regulatory rules for platform businesses with a gatekeeping role. Concrete proposals are expected by the end of this year.

Clear, well-designed regulation for large digital platforms would offer the most effective response. Drawing on the long experience of regulating other industries, policymakers have an opportunity to comprehensively address the structural problems at the heart of digital markets.

But to do this effectively at least three things are needed. First, the right scope, ensuring that all large platforms which can dictate conditions in digital markets are covered. New rules should apply to both online platforms, like marketplaces and social or communication networks, and the hardware and software through which end-users access all of those services, in the form of a mobile device and operating system.

Second, straightforward rules need to apply from the outset to address the key issues of access to digital infrastructure and users’ control over their data. Providers of digital infrastructure, such as smartphones, should have to ensure that all functionality is available to all developers on equal terms. And platforms should offer all users portability of their data, so that they can easily and safely move it whenever they wish, reducing data lock-in effects and helping to drive innovation through the reuse of data.

Third, given that digital platforms typically extend across borders, the supervision and enforcement of new rules needs to be coordinated, avoiding fragmentation in approaches across EU member states.

The EU has been at the forefront of the debate on the implications of the growth of the digital economy and its importance to firms and consumers alike. It now has the opportunity to introduce new rules that ensure markets remain fair and create the opportunities for all participants to thrive.

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