16 February 2022

Vox: The Digital Markets Act: An economic perspective on the final negotiations

This column covers five key sets of issues that remain under debate and provides an economic perspective. The authors support several of the proposed amendments, such as extending the prohibition on parity clauses and introducing new rules to address the anti-competitive use of default settings.

They also agree with the intention of the latest proposals on self-preferencing, interoperability and data portability, and remedy options, but suggest some modifications.

The Digital Markets Act (DMA) will influence many aspects of our daily life and economic activity. In setting out key rules of conduct for the very largest digital platforms, it will impact European consumers directly and significantly, and may well have global impact too, not least through its impact on innovation (Crémer et al. 2021).

The precise design of the DMA is, however, critical. It has the potential to generate huge pro-competitive benefits but also carries significant risks. The legislative process in Brussels has reached the final stage of negotiations, known as ‘trilogues’, during which the European Commission, the European Parliament, and the Council of Ministers debate proposed amendments, before the legislation is finally enacted.1 Below, we provide an economic perspective on selected key issues still subject to debate.

Prohibition of parity clauses

Parity clauses are used by platforms to prevent business users from offering different terms (such as lower prices) either through different platforms or through their own site. The draft DMA already prohibits such clauses insofar as they refer to other platforms, but there is a debate over whether this ban should be extended to clauses which limit how business users sell through their own sites.

We believe such an extension is merited. The rationale for such parity clauses is that allowing firms to finalise a sale ‘off-platform’ can lead to free riding, whereby business users gain the benefit of being on a platform without having to pay for it. This can in turn harm a platform’s incentives to invest in the first place. Where there is plenty of competition between platforms, this argument may have merit. However, the DMA will apply only to the very largest platforms, which have entrenched market positions. For these, the risk of free riding dampening investment incentives seems low, while business users’ own sites provide a degree of much-needed competition (Schnitzer et al. 2021). The benefits of such clauses therefore seem highly unlikely to exceed their anti-competitive harm in this instance. 

Requirement for adjustable default settings

Platforms frequently employ default settings to steer consumers towards their own services. This can have a huge impact on consumer behaviour and therefore on competition. For example, over 90% of mobile phone users tend to use the default browser that is pre-installed and prominent, with rival browsers struggling to gain a foothold. 

The current draft of the DMA does not address the issue of default settings at all. Amendments now proposed would require platforms to allow consumers to adjust these default settings, or even to proactively ask consumers who download an app or app store whether they wish to make this a default. We believe it is critical to take real consumer behaviour into account when considering competition issues in this sector (Fletcher et al. 2021) and support these proposals.

Prohibition of self-preferencing

Self-preferencing occurs where a vertically integrated platform favours its own related services. The draft DMA already includes a prohibition on self-preferencing within ranking services. The current debate is whether this ban should be extended to ‘other settings’.

Such an extension seems attractive in principle, since any sort of self-preferencing can be highly anti-competitive. However, it may prove challenging to enforce in practice. Identifying self-preferencing conduct should be easier in the context of organic rankings, where no payments are made and rankings are designed to be ‘consumer-centric’. It becomes more complex in a context where business users pay (directly or indirectly) for positioning or prominence. 

The economic difficulty that arises is that a vertically integrated service can always pay more for such positioning, knowing that it will retain the fees elsewhere within the firm. As such, a process that appears fair, such as an open auction mechanism, can always be won by the vertically integrated firm. One option (included in a proposed amendment to the DMA) is that such bids should be made ‘as if’ the vertically integrated service is an independent standalone entity. But this may hard to implement in practice. The vertically integrated service cannot help but know it is part of a larger organisation, or prevent its conduct from being influenced by this knowledge.

As such, caution may be merited in relation to extending the self-preferencing ban to ‘other services’, at least until the Commission identifies a clear way of enforcing such a rule. However, we note that the same concerns apply to any ‘paid for’ rankings. We therefore propose that the largest digital platform services, covered by the DMA, should be prohibited from charging for rankings completely. This would make it far easier to enforce the self-preferencing ban. And since payment-based ranking can be thought of as a form of advertising, this would enhance consumer protection by creating a clearer distinction between informative rankings and persuasive advertising (Fletcher 2021)....

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