THE FUTURE BELONGS TO DIGITAL PLATFORMS
FAS arrived to this conclusion after analyzing the role and impact of network effects upon digital economy
On 15 May 2018, the Antimonopoly Experts Association organized a plenary session at St Petersburg International Legal Forum on transformation of antimonopoly law and enforcement in the digital economy. Head of FAS Legal Department, Artem Molchanov, highlighted network effects as an underlying factor of market power.
First, Artem Molchanov emphasized that his report covers the positions of his colleagues and antimonopoly experts on influence of network effects.
In the context of antimonopoly policy, modern IT-markets are characterized by three main distinctive features: dynamics related to significance of innovations for company’s operations on the market; modularity, based on complementarities of production or consumption; and demand-side effects, when the product value for consumers increases with an increasing number of products users.
“Direct network effects can be formed through direct physical influence of the number of buyers upon the goods quality”, pointed out Artem Molchanov. “For example, benefits for consumers from buying a phone depend directly on the number of other users of this particular phone network”.
Indirect network effects, according to Head of FAS Legal Department, encourage consumption growth. As an example, for an individual, purchasing a PC the number of consumers buying similar equipment is important because software and its diversity supplied to be used with the PC depends on it.
What characterized the markets with network effects? They demonstrate a trend to maintain a high seller’s market share even in the absence of any actions by the buyer designed to prevent market entry of competitors. High prices set by the incumbent seller may be contrary to entry incentives. The products are often provided to a particular group of consumers free-of-charge. The speaker also underlined market interrelations: cross network effects are of considerable importance.
Artem Molchanov stressed that the market structure is changing in the digital economy: “The role of platforms is increasing strongly – digital platforms shrank the roles of intermediaries. The role of information is growing. Geographical market boundaries cease to exist as such, and global markets emerge. “Breakthrough technologies” are changing the attitude towards traditional [at least a year long] time interval of market research”.
FAS has concluded that digital platforms based on multi-sided network effects lead to a considerable reduction of production and transactions costs so the future belongs to them. Network effects can influence the general conditions of goods turnover and can ensure market dominance”.
“Such a position can be used to pursue illegal purposes and restrict competition”, summed up Artem Molchanov.
Head of FAS Department for Regulating Communications and Information Technologies Elena Zaeva continued discussing performance specifics of “digital” markets. Looking at the first “digital” cases, she reviewed practical aspects of their investigation and analysis.
The main features of markets in digital economy include multi-sidedness, tying, network effects, the global nature of turnover, apparent gratuitousness of goods. The new value of digital markets is data on consumer conduct.
With the examples of “Microsoft”, “Google”, “Yandex.Taxi – Uber” and “Bayer-Monsanto” mergers, Elena Zaeva demonstrated how network effects and other specifics of digital markets are taken into account in conducting market analysis and drafting inunctions.
Elena Zaeva emphasized that such market feature as network effect can be a market entry barrier but in some circumstances it can be a deterring factor for possible abuses, as established, for instance, in “Yandex.Taxi – Uber” merger. In view of the market specifics, FAS order was aimed at preserving a possibility for consumers to switch.
Upon investigating the “Google” case, FAS issued an injunction designed to “break” IT-systems where network effects are very important for dominance because users are not inclined to switch or to parallel use.
Under the injunction, “Google” must stop the violation and do not condition pre-installment of Google Play applications store with the requirements aimed at excluding competing services from the most efficient pre-installment channel.
FAS also issued a warning to “Microsoft” designed to “break” IT-systems. “Microsoft” had to ensure working interaction and testing its new OS versions with third-party vendors of antivirus software, thus allowing market entry of its competitors – vendors of antivirus software. With an example of “Bayer-Monsanto” merger, Elena Zaeva demonstrated formation of systemic closed complex.
“Our task is to prevent system lock-in. The injunction issued by the antimonopoly body is aimed at opening the entire system for various our consumers, specialized software vendors as well as agricultural producers”, summed up her speech Head of FAS Department for Regulating Communications and Information Technologies.
In the second part of the discussion, Head of FAS Anti-Cartel Department, Andrey Tenishev and representatives of expert community held a practical game “Investigating a criminal case against a cartel”. In the course of “criminal proceedings” participants analyzed a criminal case accusing top-executives and staff of competing companies and a representative of a government customer of participating in a cartel. During the “court hearing, they gave criminal assessment of bid-rigging collusion of competitors and concerted actions of bidders and the government customer.