IGF 2016 – Subtheme: Emerging Issues
#digitaleconomy #competition #innovation
COMPETITION IN THE DIGITAL AGE: BETWEEN STATUS-QUO & UNKNOWN
OECD/THE WORLD BANK
Abstract
Online firms, such as Uber, Safaricom and Alibaba ,are providing new opportunities for businesses,
workers and consumers while, at the same time, creating the risk of bringing up new divides, such as
between large and small firms, offline and online workers, etc.
To enable inclusive and sustainable growth in the digital economy, policymakers need to develop new
forms of regulations that address the following issues:
(i) Create a level the playing field between incumbents and new entrants
(ii) Remove regulatory uncertainty in sectors where both online and offline firms deliver the same
services; and
(iii) Prevent the rise of digital monopolies.
A group of world-renowned experts—from public policy, the technology sector, academia and the
development community—will debate the future of competition policy in the digital age. Panelists will
share their views on how the race between technology and regulation is likely to play out in the future.
The panel will discuss how policymakers can meet these challenges and sketch the main traits of new
regulation models in the digital economy.
Context
As many new businesses use digital technology to provide traditional services—Uber delivering
transport services, Safaricom providing financial services, and Alibaba offering a market for trading and
commerce activities, to name a few—regulators worldwide are struggling to adapt competition policies
to the digital age. The internet companies confound conventional competition law because, while they
have considerable market power, they do not act as traditional monopolies. They benefit from stronger
scale economies and network effects than traditional firms, and they often operate on exclusive digital
platforms and draw much of their revenue from personalized data they collect.
At the same time, despite many clear benefits, adoption of digital technologies by non-ICT sector is
lower than expected even in high-income countries. For example, fewer than 20 percent of firms in high
income countries purchase or sell goods or services online. Only 8 percent use cloud computing services
to acquire management software and computing power. And only 3 percent use radio frequency
identification devices (RFIDs), which connect machines or products with one another (the “internet of
things”). The digital adoption rate for businesses in developing countries is even lower, often
discouraged by regulations that protect incumbent firms.
In order to support faster growth through increased innovation, the current regulatory regime therefore
needs to improve on two fronts. First, by facilitating the entry of new and disruptive firms in all sectors
of the economy. And second, by ensuring that when extraordinarily dominant platforms emerge in
many parts of the digital economy, that they promote rather than inhibit market entry.
Does the ‘new economy’ needs new form of regulations?
To maintain the rapid growth of the digital economy, regulators need to address the following issues: (i)
Create a level the playing field between incumbents and new entrants; (ii) Remove regulatory
uncertainty in sectors where both online and offline firms deliver the same services; and (iii) Prevent the
rise of digital monopolies. In addition, they need to reduce the complexity that arises from enforcing
intellectual property laws in the digital age, where finding the right balance between protecting the
copyrights and easing the entry of digital disruptors has proven to be regulatory minefield.
i.
Leveling the playing field
There are increasing instances where incumbent firms seek protection against new entrants under the
guise of regulation. Consider Tesla, an electric car manufacturer, which has eliminated dealers by
operating its own showrooms and selling directly to consumers through the internet. Dealers in some US
states responded to this threat by lobbying for the enforcement of old regulations that were designed to
ban direct distribution by auto manufacturers, and in some states, for new regulations that would
eliminate any exceptions that might allow Tesla to circumvent the ban. While dealers have argued that
such restrictions are necessary for public safety and to protect consumers, Tesla contends that the
regulations are now obsolete, having nothing to do with public safety or protecting consumers and
everything to do with protecting dealers.
There are also instances where existing firms complain that online firms enjoy regulatory advantage. For
example, Independent Community Bankers of America (ICBA), a trade group for more than 6,000 small
banks in the US, recently wrote to Comptroller of the Currency that it is very concerned about the
regulatory advantage enjoys by the online marketplace lenders and demanded that the regulatory
framework for online lenders be no less stringent than the framework that applies to community banks.
Should regulators be dealing with each of these instances, case-by-case and country-by-country, or are
there are certain common principles that could apply to many of them?
ii.
Removing regulatory uncertainty
Is Uber a taxi company or a software firm? Uber views itself as a software platform that matches taxi
operators (sellers) with riders (buyers). It argues that regulations governing the traditional transport
services—a limited number of taxi drivers, licensed to operate by local governments, and charging
inflexible rates set by a regulator—are either obsolete or, if valid, don’t apply to Uber . It, like many
sharing economy businesses models, relies on self-regulation via ratings and reviews. Its prices fluctuate
to bring the demand and supply to equilibrium, reducing market inefficiencies where one sees long lines
of customers waiting at taxi stands at certain times of day and long lines of taxis waiting there at other
times.
The alternate view, held by taxi operators and supported by some politicians and at times upheld by
courts, is that Uber should be regulated as a taxi company. Its rating and reviews can suffer from
shortcomings such as low response rates, incomplete information, or misleading ratings, its surge pricing
system is opaque, it enjoys unfair advantage over taxis in terms of licensing and insurance requirements
and its drivers are not independent contractors but employees—justifying greater regulatory oversight
on the company.
The inconsistent response of policymakers to entry of Uber has exposed the dilemma they face. Uber
has been variously fined, banned, and targeted with new regulations in Canada, France, and Germany,
for example. At the same time, several competition agencies including those in Canada, France,
Germany, Italy, Spain and the US, have spoken up in favor of easing regulatory restrictions on Uber.
They have issued official letters and reports urging reviews of taxi regulations to identify which ones are
truly necessary, as well as reforms to permit app-based ride services to continue operating.
iii.
Preventing the rise of digital monopolies
The economics of the internet—with high fixed cost and low variable cost—favor natural monopolies
and we see the emergence of dominant firms in many parts of the digital economy. So far, this has
generally been good for consumers, but economic history has taught us that firms are sooner or later
tempted to exploit a dominant market position.
Many existing global internet companies have bene quick to spot and acquire disruptive entrants, well
before they become commercially successful and well before the competition authority have an
opportunity to assess whether such acquisition is likely to harm future innovation. Similarly, incumbents
may opt to use one or more of the potentially unlawful unilateral strategies that competition authorities
are accustomed to investigating, such as predatory pricing, exclusive dealing, closed platforms and
raising rivals’ costs.
What can competition authorities do?
Advocacy is always an option. Competition authorities have numerous ways to raise awareness of the
benefits of competition, both in general and in specific matters. By issuing comments on proposed or
existing regulations, appearing before lawmakers to discuss competition matters, conducting market
studies, and publishing brochures and pamphlets about the importance of competition laws and
compliance with them, competition agencies can influence legislators, regulators, and the general
public.
In cases where laws and regulations that unnecessarily block or deter disruptive innovation are not
immune to challenges by competition law, authorities can take enforcement actions to remedy them.
The European Commission, for example, uses its powers to challenge national laws that conflict with EU
competition law and could thwart disruption. The US antitrust agencies occasionally file lawsuits to
nullify anticompetitive rules imposed by trade associations and licensing boards.
The Panel
A group of world-renowned experts—from public policy, the technology sector, academia and the
development community—will debate the future of competition policy in the digital age. Panelists will
share their views on how the race between technology and regulation is likely to play out in the future.
Participants will learn what is at stake and what options are at the disposal of the policymakers.
Specifically, the discussion will provide answer to the following questions:

Do existing regulations favor stability (incumbents) over disruption (entrants)? Have the riskaverse regulators served the world well or cost it dearly?

Should online firms (Uber) be regulated differently from offline firms (taxis) operating in the
same sectors? What will appropriate regulation look in these sectors?

What will happen if regulation fail to keep pace with technology? What are the levers at the
disposal of regulators to protect consumers faced with winner-take-all markets and an
inevitable rise of digital monopolies?
Moderator:
Policy perspective:
Business perspective:
Development perspective:
Academic perspective:
Mr. Andy Wyckoff, Director, OECD
Mr. Toomas Ilves, Former President of Estonia
Ms. Fabienne Weibel, Head of Public Policy, Bla Bla Car;
Ms. Maud Garnier Bourrelly, Director, BIAC
Ms. Anabel Gonzalez, Senior Director, The World Bank
Prof. John Zysman, Professor Emeritus, UC Berkley;
Prof. Eli Noam, Director, Columbia Institute for Tele-Information.