How effective is dynamic competition in the markets for digital platforms in delivering good economic outcomes, and what would be the effect of more intervention

The high level aim of this project is to build the evidence to inform the UK’s position on the EU consultation on online platforms. In particular, there are two questions that this research needs to address. 1. How much competition, and in particular dynamic competition and innovation, is there in the digital platforms industry? 2. Given the features of this market, is there a need to go beyond existing competition law and what would the likely effect be of additional ex ante regulation on innovation and dynamic competition? We have undertaken internal research to create a theoretical framework of ‘how’ and ‘where’ competition takes place in these industries. The first part of our internal research involved reviewing much of the theoretical literature on two-sided platforms and industries with significant network effects to come to an initial view on how these markets are working. The second part of this research involved testing these ideas with academic and other expert economists. We will share this research with the successful bidder. This research has enabled us to develop a number of hypotheses. We would now like to test the extent to which these hold in practice. The hypotheses we have developed as a result of this research are that:

• Competition in these industries may be less obvious, but just as effective in terms of delivering positive consumer outcomes. In particular the use of innovation to enter and re-define the boundaries of markets, competition for the market, and stronger competition on one side of the market than on the other (in multi sided markets) may all be able to produce positive competitive outcomes. Furthermore it may be hard to define the boundaries of a market or of a sector if current and future competitive constraints on firms may come from sectors that may traditionally be thought of as not part of the same market. • Whilst network effects and tipping points may make market entry more difficult, they may also make the reward for a successful market entry greater, and encourage competition for the market. More generally, the large rewards on offer may encourage innovation and investment. Moves to lessen the impact of tipping points may reduce this incentive. BIS would be interested to see how the combination of risk and reward associated with entry compares with other industries. • The same practices employed by different firms may lead to very different competitive outcomes due to subtle differences in market characteristics. • Regulatory interventions may stifle innovation in one of two ways. Firstly, there is a risk of reducing the ability to innovate by increasing the direct cost of innovation or by mandating certain standards. Secondly, there is a risk of reducing the incentive to innovate by expropriating investments made in novel products, and allowing free riding.

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