Ioannis Lianos: "Mind The (Institutional) Gap: Digital Economy, Competition Law and The Toolkit Approach"

Dear readers, the Network Law Review is delighted to present you with this month’s guest article by Ioannis Lianos, Professor of Global Competition Law and Public Policy at the University College London, and President of the Hellenic Competition Commission.

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The world of yesterday¹

Far from its depiction as a well-defined and linear techno-social phenomenon that developed incrementally over the last three decades following a consistent masterplan, the Internet of today has been transformed beyond recognition from its original version. The initial conditions under which the Internet developed were characterised by its distributed technological structure, which relied on an interconnected system of thousands of individual networks enabling people to connect directly with each other through desktop computers. In this system, people were able to create and use new peer-to-peer services without needing to seek permission from any third party.² The Internet dream was depicted as ‘decentralised’, ‘democratic’, and profoundly inspired by the ‘hacker ethic’ of freedom.³ This anarchic or libertarian, depending on whom you ask, vision of the Internet welcomed the lack of a centre and underpinned a preference for this being a space of atomistic competition where no private or public actor would be able to own or control the medium and its content.

In reality, its technological foundations favoured a distributed, and not decentralised as such, structure of control.⁴ Despite the emphasis put on decentralisation, a few tens of networks providing international connectivity spanning countries and continents occupy central positions in the global internet topology; constituting, from a technical perspective, distributed points of control. However, even if technology was not exactly decentralised, the ethos of this first-generation Internet was profoundly marked by the decentralisation narrative. As Benkler, one of the leading legal commentators on Internet-related issues, explained it offered “no control points through which an entity could exclude or constrain another discrete entity attempting to use it”.⁵

This portrayal of the Internet, however, soon became antiquated, as the shift to proprietary, controlled devices, software but also networks led to the emergence of a number of intermediaries and additional points of control, in both technical and economic senses. This led to the accumulation of power by a limited set of influential players that re-shaped Internet’s architecture thereby countering the initial decentralisation dynamic. This re-shaping first resulted from the strategies (and, thus, the agency) of a few players that soon came to control the vast amounts of information generated by Internet use. Resources (including control over data) move away from end-users, towards centralized systems that possess huge processing power and storage capacities. The shift towards the Internet of Things (‘IoT’) will further revolutionize the medium as it makes possible, for the first time, an ‘unconscious’ use of the Internet and offers a new point of control, to the extent that most of the Internet use will occur through smart devices taking action on their own without direct human intervention.

Value generation and capture in the digital economy

This development also led to the emergence of different loci of value generation and capture than the traditional “corporation” as the development of the digital economy rested on broader communities of co-production of value, in the form of ‘heteromated labor’ and business ecosystems or broader alliances between the public and the private sectors that enabled this fourth industrial revolution to occur.⁶ The underlying theory of value of the ‘shareholder value maximization’ principle, which dominated traditional thinking about corporations, almost uniquely focuses on the interests of the shareholders of the corporation. All other stakeholders such as workers, business partners (e.g. suppliers of inputs), consumers, the local community, citizens, are ignored in this process of value generation (for shareholders). At best, it is considered that they may benefit indirectly from the economic prosperity of the shareholders that would trickle down to them, for instance in the form of better job and trade opportunities or by additional tax income for the State and consequently higher levels of social welfare transfers. This reductionist theory of value does not however adequately describe the new processes of value generation in the digital economy. The development in the era of digital capitalism of organizations beyond the core corporation, such as supply chains, integrated value systems, value chains and/or business ecosystems, also enables firms “to capture value created by others, such as suppliers, customers and distributors. These may help co-create value by appreciating (valuing) and/or improving and promoting the product or service in question”,⁷ as they develop investments in assets complementary to those of the organization. By “orchestrating” ecosystems and controlling “industry architectures”, firms essentially aim to reach some balance between organizational value generation/creation and individual value capture based on their “architectural competitive advantage”.⁸

Hence, “organization value” cannot be limited to “shareholder value” but should also include the “value” generated by all the other socio-economic agents involved in the value creation/capture process. Such value may be “realized”, not because of any ownership rights the agents dispose of the assets/infrastructure, but through their participation in the process of value creation. Business ecosystems provide the “experience space” in which “socio-economic value” is co-created and “co-captured” by the different actors involved. Hence, we need to embrace a broader “ecosystemic mindset” that is very much based on the social relationships that develop between the ecosystems’ actors (but also those outside it). This likewise leads to a multidimensional definition of “value” recognizing the subjective assessment of the various socioeconomic dimensions in play.⁹

Furthermore, in today’s financialized digital economy, the most important driver of value creation is related not to present scarcity but to future expected scarcity that will result from the control of bottlenecks which may become a source of expected monopolistic rents in the future: ‘futurity’ being the term coined to describe this reorientation of economies towards the future and its underlying theory of value.¹⁰ Digital platforms have seen their financial markets’ valuation skyrocket in less than a decade. This valuation is, however, not justified by their current cash flow. Their tremendous value results from financial markets’ expectations for high profits derived from their position as gatekeepers controlling important bottlenecks in the networks that power and shape the digital economy (e.g. operating systems, search engines, app stores, the cloud), as well as their ability to canalize the activity of their broader ecosystems and users for their own use.¹¹

Indeed, digital platforms capture a significant part of the value generated from the capital invested by independent firms that co-create value (with them) and form part of their business ecosystem. These are often technologically dependent on the platform for their access to the final consumers. The constitution of business ecosystems has become a distinct characteristic of modern digital capitalism.¹² This shift from competition and value capture to more complex mixed strategies of value capture and value creation, involving strategies of co-opetition, have added an additional ‘field’ of competition-related activity, the ‘eco-system’.¹³

Ecosystems may be distinguished from supply chains or value chains, because the value of the ecosystem (the complements and the core functions) is greater than the sum of the values of the different parts and their development. There is a balance to achieve between the centripetal forces that push the firms exercising these various related activities toward integration because of greater complementarity and the centrifugal forces that pull the units of the ecosystem apart, because, for instance, of dispersed knowledge and the dominance of a logic of individual profit maximization rather than ecosystemic profit maximization.¹⁴ Also, contrary to supply and value chains, there is not always the equivalent of the “lead firm” in value chains,¹⁵ as an ecosystem may be characterized by a looser structure, in which value is optimized internally through external interaction across the ecosystem,¹⁶ and in which various firms may compete for dominance. Most studies on eco-systems focus on the role of the eco-system as a ‘hub’ of inter-firm relations taking place within the context of a platform, often referred to as the ‘lead firm’ or ‘ecosystem captain’, which ‘defines the hierarchical differentiation of members’ roles and establishes standards and interfaces, a number of formal mechanisms, such as the management of standards and interfaces, platform governance, IP rights, etc. forming the ‘key tools that hubs use to discipline and motivate ecosystem members’.¹⁷ However, ecosystems may also be considered as ‘value systems’,¹⁸ where different firms producing mostly complementary products cooperate in order to produce surplus value, by using their capital (including physical, human, and organizational assets), and idiosyncratic capabilities in order to implement the ecosystem’s strategy and achieve a sustainable competitive advantage that could constitute a source of abnormal profits. The contribution of each of the parties in the value system may be mapped by drawing a value chain in which all contributions to the input and output process can be included.¹⁹ Such a map may provide a picture of the process of vertical competition of the various actors within the ecosystem for capturing the highest percentage of the surplus value generated by the ecosystem.

The capture capacity is determined by (i) diminished horizontal competition at a specific segment of the value chain, thus providing the ability to a firm to increase prices while squeezing the margin of its vertical competitors upstream and downstream (reducing horizontal competition), (ii) the control of a bottleneck, or of an indispensable asset or competence, outside the core competences of the other members of the ecosystem, or protected through ownership rights (including IP rights), which may provide this firm absolute or relational power vis-à-vis its partners in the ecosystem (thus limiting both horizontal and vertical competition), (iii) the capacity to determine the architecture of the ecosystem, enabling the industry architect to capture the largest percentage of the surplus value generated by the value chain for a considerable period of time (diminishing vertical competition).

Substantial restrictions to vertical competition may impact productivity, as an overwhelming percentage of the total surplus value is captured by ‘superstar’ large firms that enjoy tremendous levels of profitability, without however these accumulated profits being always used for productive investments, that could ultimately generate value.²⁰ These abnormal profits are instead distributed to shareholders or used to buy back stocks in order to inflate corporate management compensation. They can also suppress the incentive and capacity of the other members of the eco-system to invest in R&D or increase their productivity. Checking who exercises power in the ecosystem and how this power may impact, not just on consumers, but also on all those that contribute socio-economic value to the ecosystem, requires the development of new approaches that do not only focus, as mainstream consumer-welfare competition law does, on the assessment of the outcomes of the exercise of power in terms of prices or output, but also, more pragmatically, emphasize the relational element of power, to the extent that ecosystems “are based on social relationships that generate value through knowledge sharing and social experiences”.²¹

The silence of the law: Framing the institutional gap

This brings attention to another explanatory factor for the important asymmetries we currently observe with regard to the allocation of the surplus value captured by the different players in a business ecosystem: the role of State power and the legal system. As the example of the business ecosystem shows, one should not only recognize the active contribution of the legal system in recognizing and implementing rights and liabilities that is of importance for the generation and capture of value, but also the lack of such, or, more generally, the silence of the law, that also plays an important role in shaping the balance of power in these competitive struggles.

With its focus on competition in relevant markets and eventually inter-platform competition, traditional competition law left the regulation of intra-platform or intra-ecosystem competition for other areas of law (e.g. contract law, transparency regulation),²² or to the development of codes of conduct and soft law regulation.²³ The concept of “market power” employed in competition law does not also take into account other dimensions of power than power over price and output, in particular in the context of the digital economy, and ignores its impact on agents other than producers and consumers, which may also extract and/or capture value in business ecosystems,²⁴ these ecosystems bringing together a heterogeneous group of agents.

Competition law did not embrace upfront the complexity of business ecosystems orchestrated by digital platforms and the distributive politics of their power, this impact being ignored by the mainstream model of competition law, as opposed to approaches that re-conceptualize competition law as a tool of social regulation.²⁵ An approach that would take a “simple economics” perspective and would focus, for instance, on output restrictions takes a limited perspective that from a descriptive standpoint, does not account for the process of value creation and extraction in the digital economy characterized by financialization, futurity, network/learning effects and tipping points, and second, from a normative standpoint, does not account for the significant negative externalities (including pecuniary externalities/distributional effects) that this process of value creation has on some stakeholders in situations of economic and technological dependence.²⁶ The fact that the legal system did not specifically address these challenges by adapting its existing scope or expanding it accordingly cannot be conceptualized as embracing neutrality or passivity. The state’s monopoly of force is often replaced by private governance regimes based on relations of trust or power.

What was missing from the picture was the study of the legal institutions of digital capitalism: legal institutionalists emphasize the constitutive role of law in empowering or taming actors, and therefore, highlight the influence of law on the distribution of power in the economy.²⁷ They start from the premise that “(c)apitalism is much more than material objects and forces, it is a complex system for processing information and allocating and protecting rights to tangible and intangible assets”.²⁸ Indeed, regulatory strategies of action (or inaction) have important implications for the balance achieved between the interests of the various stakeholders and presumably the weight of their claims to capture a more significant part of the surplus value generated by digital innovation. The pre-eminent role of digital platforms in digital capitalism and the subsequent implications this had on the falling labor share and the resulting economic inequality may indeed be explained by a conscious choice to expand the scope of application of a specific area of law, while receding from implementing another, or even adopting policies that would completely exclude the specific field from the legal forms of adjudication of disputes in favor of some other forms of self-regulation or self-governance.²⁹

As a result of this lack of appropriate intervention, markets characterized by platform competition are horizontally concentrated, sometimes to such an extent that the second or third player may not offer a viable competitive alternative to an established platform. Inter-platform competition remains weak, and there is significant inequality in the distribution of market shares among horizontal competitors.

The lack of an appropriate institutional framework has led to under-enforcement of competition law, or significant delays in competition cases against digital platforms, which was highlighted in various reports commissioned by competition authorities around the world.³⁰ This “institutional gap” results from the lack of understanding over the need for a complex economy setting, that would account for the value creation process in the ecosystem economy, and would enable the achievement of the institutional goals of contestability and fairness. This requires the mix and match of various institutional devices that transcends the boundaries of different fields of law and establishes a pluralistic legal order: “the law of the platform economy”,³¹ which presents a different pole than the non-state law-norm-generating communities that emerged during the first decades of the digital revolution.³² This law of the platform economy needs to be pluralistic in essence, almost as if the complexity of the ecosystem economy needs be matched by the complexity of its regulatory scaffolding and polycentric in its focus.³³

Legal pluralism and the law of the platform economy

This law embraces different paradigms for legal action, some coming from the past, some others to develop in the future. As the traditional competition law tool did not bring the expected results, major jurisdictions have been framing in recent years an elaborate regulatory framework for the digital economy, inspired and combining various first principles/values: those of public utilities law,³⁴ the Schumpeterian focus on the role of the entrepreneur and dynamic competition,³⁵ the precautionary principle but also the need for experimentalism,³⁶ the need to protect the weak actors from bargaining disequilibria,³⁷ the paradigm of personalized law,³⁸ or even some industrial policy considerations.³⁹ The institutional mix and match varies from jurisdiction to jurisdiction and is still in the process of being formed. At the EU, which moved first, the new regulatory compass includes, in addition to competition law, the General Data Protection Regulation,⁴⁰ the Platform to Business Regulation,⁴¹ the ePrivacy Directive (soon to become the ePrivacy Regulation),⁴² and following the promulgation of the European Strategy for Data,⁴³ a series of regulatory initiatives, including the Digital Markets Act (DMA),⁴⁴ the Digital Services Act (DSA),⁴⁵ the Data Governance Act,⁴⁶ the Artificial Intelligence Act⁴⁷ and the Data Act.⁴⁸ These provisions create a complex system of substantive rules and institutional structures, whose interplay is not yet easy to fully comprehend, as a number of implementing texts are still subject to the legislative dialogue, and the EU Courts will certainly also assess the way this regulatory system will interact with traditional competition law tools, at the EU and national levels.

In the US, following a long period of antitrust enforcement silence, both federal and State antitrust law enforcers have launched a number of cases challenging the conduct of digital platforms.⁴⁹ As with the EU, there is also discussion of enacting specific regulatory statutes that would complete antitrust enforcement, through the development of new legal standards and presumptions, the identification of specific exclusionary conduct and the enhancement of powers of the Federal Trade Commission and private antitrust enforcement.⁵⁰ Another option is to adopt some light touch transparency regulation of how platforms organize their relations with their complementors within the ecosystem, eventually by adopting as was suggested in the UK a code of conduct for specific digital platforms: this would result from a concerted effort of the digital platforms and unidentified “stakeholders” and would complement antitrust enforcement with a clearer and more easily applied set of standards defining the boundaries of undesirable conduct in digital markets.⁵¹ Similar approaches seem to prevail in Australia.⁵² Significant developments also occur in China, a jurisdiction that enabled, through the absence and non-implementation, until recently, of its competition law to the digital economy, the emergence of large digital platforms. This trend is now changing with the publication by the SAMR of specific guidelines regarding digital platforms,⁵³ which divides platforms into three broad categories⁵⁴ and imposing them bespoke regulatory obligations, recent amendments to the AMR⁵⁵ and subsequent enforcement action.⁵⁶

This toolkit approach may rely on different institutional devices in each jurisdiction, depending on the existing institutional capabilities and the relative efficiency of the various regulatory alternatives. The next challenge will be to develop the global regulatory networks that would avoid the fragmentation of the digital economy and will establish regulatory interoperability between the various regulatory regimes while ensuring an appropriate level of accountability for digital giants across the globe.

Ioannis Lianos

The views expressed are personal and do not engage the Hellenic Competition Commission.

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Citation: Ioannis Lianos, Mind The (Institutional) Gap: Digital Economy, Competition Law and The Toolkit Approach, Network Law Review, Fall 2022.

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