In a series of two entries Stavros Makris*, Lecturer in Competition Law at the University of Glasgow and member of CREATe, will be exploring how innovation competition connects EU competition law and the DMA and how it could streamline their application in digital markets. Part of this research was presented on 24 October 2023, at the Brazilian Institute of Competition and Innovation (IBCI)’s 6th International Conference on Competition and Innovation. CREATe contributed to the conference with a panel chaired by Konstantinos Stylianou where Amy Thomas, Aline Iramine, Kris Erickson and Stavros Makris presented their research into innovation and regulation in creative industries. IBCI has made a recording available on YouTube.
Photo by Steije Hillewaert on Unsplash
The Digital Markets Act (DMA) constitutes one of the EU’s regulatory flagships in shaping digital markets (the others being the Digital Services Act and the AI Act). The declared objectives of the Act are to ensure fairness and contestability. For this purpose, the Act imposes a set of ‘dos and don’ts’ on digital gatekeepers. By ‘gatekeepers’, the Act refers to large, systemic digital platforms providing core platform services that have significant impact, enjoy intermediation power (‘important gateway’) and have (or are about to have) an entrenched and durable market position. So far, the European Commission (Commission) has designated six gatekeepers – Alphabet, Amazon, Apple, ByteDance, Meta, and Microsoft – in 22 core platform services (see here for the designated decisions).
The special features of digital markets – e.g. extreme returns to scale, network effects, big data and AI, lock-in effects, multi-sidedness, new business models, and monetization strategies – made the Commission worry about the strong intermediation or ecosystem power of digital gatekeepers (for a brief overview of DMA, see here). These concerns led to the adoption of the DMA to protect and promote fairness and contestability in digital markets, and to make sure that digital gatekeepers continue to deliver all their remarkable products and services without choking competition. These objectives are distinct from EU competition law’s objective, namely the protection of ‘effective competition’. Therefore, the two legal regimes are complementary and should be applied without prejudice to each other (see Recitals 10 and 11 DMA).
There is, however, a common thread that connects the DMA with EU competition law: most DMA provisions reflect the outcome of competition law enforcement in cases where innovation was one of the main issues considered, and both regimes seek to protect innovation competition. The DMA could, therefore, be viewed as an attempt to protect and promote innovation competition in light of EU competition law’s limitations, shortcomings, and failures. If that is the case, it is worth considering what kind of innovation each regime seeks to protect. Such an analysis can identify how EU competition law and the DMA can complement each other, and exemplify benchmarks for operationalizing the DMA obligations and assessing their implementation.
Does EU competition law care about innovation?
In current day competition discourse, innovation is all the rage, particularly in the economy of the ‘intangibles’ – where digital products and intellectual property assets take on an outsized role, and consumers evidence their choice for a product by giving them attention or data. Yet this is in stark contrast with the origin of competition law. Generally speaking, competition law (despite its pedigree in ancient or medieval laws) is the birthchild of the economy of the tangibles: manufacturing was the key driver of the economy and consumer satisfaction was measured in terms of low prices and wide output.
Very much inspired by classical and neoclassical economics, competition law seeks to maintain competition on the market to promote economic growth and enhance the well-being of consumers and society at large. For this reason, it seeks to prevent the anticompetitive accumulation of market power and to control its collective or individual exercise, so that the typical benefits of competition – lower prices, greater choice, higher quality, and innovation – are fully realised.
To this end, the EU’s law on competition prohibits agreements that restrict competition, abusive practices of dominant firms, and mergers and acquisitions likely to significantly impede competition. The underlying premise is that market power exercised collectively or individually can harm allocative efficiency (optimal distribution of resources based on consumers’ preferences), productive efficiency (producing maximum output at the lowest costs), and dynamic efficiency (the pace of innovation).
Even though EU competition law understands market power in broad terms (including the ability to profitably dump quality or reduce innovation rates), the EU Courts and the Commission have been focusing on firms’ ability to raise and maintain prices above the competitive level for a sustained period of time (Guidance Paper, paras 10-11). In other words, even though EU competition law recognises the value of dynamic efficiency and innovation, it has been putting its emphasis on static efficiency by considering anticompetitive agreements or practices that reduce (or are likely to reduce) output and increase prices. This raises concerns from an innovation perspective since innovative activity might require or lead to some degree of market power and market concentration (which might however lead to static inefficiencies, e.g., higher prices).
That being said, it should be recognised that the Court of Justice has recognised the multi-dimensional nature of competition and sought to protect quality competition vis-à-vis price competition (Metro I, para 20; Pierre Fabre, paras 40-41; Coty, paras 24-28), opening the door to the consideration of other non-price parameters of competition such as innovation.
In addition, cases such as Microsoft (paras 240 and 653-659), Google Shopping (paras 67, 215, 443 and 451), and Google Android (paras 177, 281, 294, 514, 842 and 857-865) suggest that the General Court may find that practices – such as tying, self-preferencing, refusals to interoperate or exclusivity arrangements – are abusive when they significantly curtail rivals’ abilities and incentives to innovate, thereby harming consumers. Hence, the General Court is aware that dominant firms in digital markets can weaponise their assets, resources, technical capabilities, and commercial strength either to create moats around their castles in order to maintain unassailable positions, or to engage in strategic leveraging (e.g. a dominant firm or a gatekeeper can engage in ‘self-preferencing’ to leverage their position into adjacent markets).
Furthermore, the Commission has been showing increasing interest in incorporating innovation into its analysis. For instance, in Bayer/Monsanto and in Dow/Dupont it developed a novel theory of harm to assess to what extent innovation rivalry drives innovation efforts. These decisions focused on the impact of the mergers on the innovation efforts of the merging parties, albeit they downplayed their potential impact on innovation diversity. Nonetheless, they should be considered ground-breaking: for the first time the Commission developed a stand-alone (non-price-based) theory of harm revolving around the notion of innovation competition. Moreover, the Commission has opened numerous investigations revolving around digital competition concerns (see, for instance, recent probes into Amazon and Apple).
Much is left to be desired. It is not entirely clear how authorities and courts should treat an agreement or a practice that leads to some static efficiency losses by enhancing the parties’ market power (e.g., higher prices), but also holds the promise of dynamic efficiency gains. Even though the Commission and the Courts have grappled with this issue, we lack a comprehensive framework of analysis. In addition, digital markets have given rise to new business models, monetization strategies, types of products and commercial practices. Therefore, to ensure that EU competition law remains up to its task, the Commission and the Courts need to rethink how markets can be defined, how market power could be re-conceptualised, and what benchmarks and metrics can be used to make legal inferences. In addition, more clarity is needed in what constitutes anticompetitive and procompetitive effects under EU competition law. And, of course, the Commission needs to develop and test before the Courts new theories of harm that could better capture the threats that digital platforms pose to innovation competition.
Be that as it may, it would be misleading to say that EU competition law is solely concerned with static efficiency or that it is monolithically focused on price and output. Innovation concerns have found their way into the Commission’s enforcement practices, and in the EU Courts’ decisional output. Nonetheless, the various concerns and theories of harm seem to focus mainly on incremental and sustaining innovation (i.e., a series of small improvements or upgrades made to a firm’s existing products, services, processes, or methods) and only secondarily on disruptive innovation (see here, here and here).
In this setting, it is worth asking how the DMA understands innovation and its relation with competition. Does it follow EU competition law’s approach? Does it deviate from it and how? More on this on Part II.
These are questions we seek to answer, here at CREATe. We are sure to follow with some answers and many more questions on innovation, creativity, and the regulation of digital markets.
*Pursuant to the ASCOLA Transparency and Disclosure Declaration, the author declares not to have any conflicts of interest to disclose. He is grateful to Konstantina Bania, David Reader, Magali Eben, Alba Ribera Martinez, and Konstantinos Stylianou for their thoughtful suggestions. The usual disclaimer applies.