Digital platforms and blockchain – is the same abuse of dominance bottle good for so different wines?

The features of so-called “digital platforms” have grabbed the headlines of competition law specialised publications for the last years: (i) easy internalisation of positive externalities generated by a user group on one side of the platform though their selling to a group on the other side; (ii) reduced transaction costs – which further increase the ability to channel positive externalities between platform sides; (iii) the exacerbated intensity of increasing returns to scale because of minimal marginal costs; or (iv) the greater value of data thanks to developments in storing and analysis technology.

These characteristics make certain economic laws applicable to digital platforms, the corollary of which seems to be a natural tendency toward monopolistic positions that maximise positive externalities arising in the form of network effects – often spilling over into neighbouring markets and producing economies of scope. This is the setting where platform operators having a quasi‑regulatory control over important, or even essential, bottlenecks to arrays of related markets (gatekeepers) emerge – which does not have to pose any concerns from the competition point of view where bottlenecks are free from permanent and significant barriers to entry.

However, the economic principles behind blockchain (so-called crypto-economics) are quite different due to its specific characteristics: (i) decentralisation (ii) transparency as regards executed transactions and opacity as regards content and parties; (iii) automaticity; (iv) immutability; and (v) multi-layer structure. Therefore, well-targeted abuse of enforcement needs the wheat to be separated from the chaff in the digital world beforehand. With many thanks to Alastria for allowing me to participate in the second issue of Alastria Legal, the purpose of my contribution (pages 41-43 – pages 38-40 in Spanish) is to shed some light on this distinction.

Abuse of dominance in digital platforms and blockchain: Is the same bottle good for so different wines?

The Spanish competition authority on the Commission’s proposed New Competition Tool and Digital Service Act. A few thoughts

The CNMC’s position paper seems to take a balanced stance in that it emphasizes the risks of across-the-board enforcement in rapidly evolving settings as digital markets where type I errors feature a particularly large potential for nipping in the bud business models that could grow very beneficial for competition and consumers. Likewise, it insists on the need not to duplicate legal frameworks – e.g. express reference is made to the overlap between tailor-made remedies addressed to large online platforms acting as gatekeepers in the Digital Service Act proposal and their imposition under the New Competition Tool, and the importance of clear rules for allocating this competence between the Commission and Member State’s authorities – maybe because they want to secure a piece of the enforcement cake.

However, the most important concerns of those flagged by the CNMC, for their implications on operators, appear to be, firstly, the setting of legal and economic criteria for intervention that guarantee at the same time a legally certain threshold and a fair balance between of the interests at play in competition rules and case law. Secondly, extreme care should be taken regarding remedies. Indeed, the quest for a level playing field should not be construed as a blind crusade on poorly defined structural risks for competition and market failures, thereby turning the new tools into a dangerous instrument of industrial policy. The focus should then be on when to intervene rather than how or who, as the CNMC rightly puts forward.

In particular, it must be noted that ‘markets prone to tipping’ are very different beyond usual characteristics such as being platform-based or data-intensive. Therefore, a dynamic market-by-market analysis focusing on the intervention gap with current competition rules and ex ante regulation. In this regard, the CNMC proposes a three-criterion test inspired by telecom regulation and already proposed by other commentators which conditions action on the prior identification of (i) high barriers to entry, (ii) market not trending towards effective competition, and (iii) insufficiency of competition law to deal with these issues. This economic side of the test must be complemented with legal safeguards, such as the burden of proof on authorities or the objective of consumer protection.

A single horizontal tool triggered on the basis of a test as the foregoing is preferable for the CNMC than ad hoc instruments reserved only for indeterminate instances such as ‘gatekeepers’ or ‘digital markets’. A different question is that proportionate and flexible ex ante regulation for operators like gatekeepers may be appropriate – but to ensure accountability, user protection and platform responsibility rather than limiting market power.

This approach seems sensible overall but it would need better design of the criteria for intervention not to impair the delicate balance between intervention in the public interest and companies’ rights and freedoms by lowering the different standards that case law has developed for each type of infringement according to its potential harm to welfare. Such outcome would have far-reaching consequences from the legal perspective (e.g. the restriction of rights that even dominant companies enjoy under national constitutions and the Charter of Fundamental Rights of the European Union) and the economic perspective (e.g. stifling of nascent innovations or underming of business incentives).

More specifically, in my opinion, at least when it comes to ‘gatekeepers’ concerns, intervention should have as pre-conditions that

i) there is an unavoidable (or at least very important) point of entry or bottleneck (as the market for client PC operating systems was deemed to be for access to the market for work group server operating systems in case T-201/04 Microsoft);

ii) there are significant and permanent barriers to entry and expansion in the bottleneck (even if the European Commission decides not to make dominance a requirement); and

iii) effective competition either in the bottleneck market or for the adjacent market is distorted (e.g. dominant company’s leveraging the in the bottleneck market or self-preferencing its business in the adjacent market, to put it in terms of dominance).