AAI Issues Report: Market Power and Digital Business Ecosystems: Assessing the Impact of Economic and Business Complexity on Competition Analysis and Remedies

The American Antitrust Institute has issued the report: Market Power and Digital Business Ecosystems: Assessing the Impact of Economic and Business Complexity on Competition Analysis and Remedies. The AAI report takes an important, multidisciplinary approach to evaluating competition issues raised by the digital business ecosystems (DBEs), filling an important analytical gap, and informing the enforcement and legislative debate over reining in the market power of the large DBEs. The report was co-authored by Diana Moss, President, American Antitrust Institute; Gregory T. Gundlach, Professor of Marketing, Coggin College of Business, University of North Florida; and Riley T. Krotz, Assistant Professor of Marketing, Texas Tech University. The report was made possible by a grant from the Omidyar Network Fund, Inc.

Introduction

“Digital business ecosystems” (DBEs) reflect the culmination of progressive changes in business models and organizational structure over the last 40 years. The ubiquity of many large DBEs in our economy, society, and political system is troubling, as is their significant market power, which is the subject of competition investigations in the U.S. and abroad. But the DBE business model, which far surpasses other models and structures in its scope, scale, and complexity, remains largely under-analyzed. DBEs feature unique economic, technological, and business characteristics that increase their opacity to consumers, competition enforcers, and lawmakers. These include information as the currency of exchange and a range of market failures such as positive network effects, information asymmetries around user data and privacy, and data externalities. As the “engine” of commerce and growth in DBEs, cloud computing technology adds further complexity to the analysis of market power. This is particularly true of data analytics, supported by artificial intelligence (AI) and machine learning, which powers the DBE “value proposition” of maximizing user engagement and monetizing user data.

This report examines the unique characteristics of DBEs and assesses their implications for competition enforcement and policy. This analysis raises numerous questions around the adequacy of conventional competition analysis in evaluating market power concerns. The widening gap between the complexity and growth of DBEs—and the likely inadequacy of policy responses to the market power problems they raise—elevates the importance of such questions. However, they cannot be answered by relying solely on a legal-economic framework. We therefore adopt a multidisciplinary approach, incorporating economics, law, and business theory and research in our analysis. Not surprisingly, it reveals important caveats and cautions regarding the application of conventional competition analysis to DBEs, with implications for how competition enforcers and legislators assess market power and design remedies, particularly in the merger and monopolization contexts.

The report begins with the evolution of the DBE business model and its rapid and expansive growth. We then turn to an analysis of the major structural and behavioral features of DBEs. Next are implications for competition analysis, such as how markets are defined, how market power is exercised, and remedies. The final section concludes with recommendations. As public and private antitrust cases against large DBEs mount, the U.S. Department of Justice (DOJ), Federal Trade Commission (FTC), state Attorneys General, and courts will continue to grapple with their unique features. This report provides important analysis, insights, and recommendations for enforcers and policymakers as they explore the full complement of tools available to rein in the market power of DBEs.

Conclusions and Recommendations

The body of scholarship and policy analysis surrounding the competition problems raised by DBEs is relatively saturated. Many countries are now actively framing public policy solutions and are poised to act through some combination of legislation and competition enforcement. This study fills an important void in the body of competition research on DBEs through multidisciplinary analysis of their unique economic, technological, and business characteristics. These include significant market failures on both the demand and supply sides, and other economic anomalies. Because they have an outsized effect on the analysis of competition and remedial approaches involving DBEs, these features should receive important attention from policymakers. The conclusions outlined below inform the debate over proposals to regulate the digital technology sector, antitrust agency guidance on digital technology markets, potential FTC rulemakings involving the digital sector, or other mechanisms that would affect how the antitrust agencies, the courts, and a potential sector regulator assess competitive issues involving DBEs.

• In light of the distinct economic, technological, and business features exhibited by the DBEs, agency guidance on how enforcers will evaluate competition concerns involving them is urgently needed. The antitrust agencies have issued guidance over the years on a number of specific issues and sectors, including healthcare and others. This report reveals how those unique features challenge conventional competition analysis, as applied to DBEs. The public, consumers, and businesses would thus be well served by dedicated agency guidance on how enforcers propose to address competition issues raised by DBEs.
• The centrality of data to the DBE business model reveals the under-recognized but strategic importance of cloud infrastructure as the engine of DBE growth and expansion. Analysis in this report fully reveals the centrality of data analytics, supported by AI and machine learning, to the DBE value proposition and associated market power concerns. Significant and unrestrained growth in the large DBEs’ cloud infrastructure over the last decade has reinforced this capability, reinforcing platforms, setting the stage for further expansion, and enhancing incentives to extend market power throughout larger DBEs. Antitrust enforcers should more closely scrutinize cloud infrastructure acquisitions by the large DBEs.
• Consumers do not engage with DBEs in ways that accurately reflect their preferences for privacy, with significant implications for conventional competition analysis. Consumers lack information regarding how DBEs collect and deploy their data, creating a misalignment between users’ preferences and actions. This information asymmetry strains key economic assumptions that underpin conventional analysis of consumer behavior. The vital role of demand as the ultimate arbiter of market power amplifies this concern. Antitrust enforcers should consider how these features affect critical issues such as market definition and competitive effects in cases involving DBEs.
• Unique characteristics of DBEs shift the mode of interaction between the firm and consumers to algorithmic preference-shaping, with significant implications for conventional competition analysis. The DBE value proposition is driven by maximizing user engagement throughout an interconnected, multiproduct ecosystem. DBEs exploit numerous market failures and economies of scale to create value through algorithmic preference-shaping. But users’ choices based on curated, personalized algorithmically generated suggestions may be inferior. Moreover, DBEs can use such algorithms to steer users to the services provided by their affiliated or preferred providers, at the expense of rivals operating on a platform. Antitrust enforcers should consider the mechanisms through which such conduct occurs, and the evidence needed to support a showing of adverse effects.
• Policymakers should consider the need for “hybrid” remedies and close coordination between competition enforcement and regulation to address market power problems raised by DBEs. Structural remedies do not entirely address the unique economic, technological, and business characteristics of DBEs that give rise to market power problems. Post-breakup, DBEs could be expected to continue to exploit anomalies and potentially re-emerge as dominant market players. Disrupting the DBE value proposition with conduct regulation will likely lead to imperfect regulation. As such, a hybrid structural-behavioral approach to reining in the market power of DBEs is likely to emerge as the best policy approach. This should be implemented through a broader regulatory regime, with careful thought given to how antitrust and regulation will coordinate, not conflict.