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The Internet of Platforms and Two-Sided Markets: Legal and Regulatory Implications for Competition and Consumers

 |  October 16, 2017

Posted by Social Science Research Network

The Internet of Platforms and Two-Sided Markets: Legal and Regulatory Implications for Competition and Consumers

By Rob Frieden (Pennsylvania State University)

Abstract:     This article examines developments in the Internet marketplace that favor embedded intermediaries that have significant market power and the ability to install a platform that both upstream sources of content and applications as well as downstream consumers need to access. Ventures such as Amazon, Facebook and Google have exploited, “winner take all” networking externalities resulting in the creation of seemingly impenetrable barriers to market entry even by innovative companies. Courts and regulatory agencies recognize the substantial market shares these ventures have acquired, but refrain from imposing sanctions on grounds that consumers accrue ample benefits when platform operators use upstream revenues to subsidize downstream services. Consumers also benefit when platform intermediaries eschew short term profits in the quest for greater product diversity and “shelf space” in the Internet marketplace. Additionally, courts and regulators may over-estimate the opportunities for consumers to migrate to alternatives, but underestimate the harms to competition and consumers occurring on either or both sides of an intermediary’s platform.

The article identifies four types of government responses to price and quality of service discrimination that exploits choke points within the Internet ecosystem where large volume of traffic has to traverse a single digital, broadband carrier’s network, or service provider’s platform. Governments can refrain from regulating access and accept aspects of market concentration as proper rewards to ventures offering desirable content and carriage services. Alternatively, they can impose access sanctions for antitrust violations, unfair trade practices, consumer harms and unreasonable access discrimination to offset market-driven concentration and dominance. Between these poles, governments can apply antitrust/competition policy remedies, or rely on expert regulatory agencies to respond to complaints.

The article examines digital broadband platform operators with an eye toward assessing the aggregate benefits and costs to both upstream firms and downstream consumers. The article notes that in some instances, government-imposed, ex ante safeguards anticipate and attempt to resolve transitory, comparatively insignificant, or possibly nonexistent problems. In other instances, governments have stated an intention to rely on ex post remedies, but they never get around to refining procedures to reduce the potential for false negatives that ignore or underestimate significant marketplace harm.

The article concludes that governments have failed to revise and recalibrate tools that examine potential marketplace distortions and assess the potential for damage to competition and consumers. The article demonstrates how the Justice Department, Federal Trade Commission and the Federal Communications Commission have relied on economic and legal doctrine ill-suited for digital broadband market assessments. These agencies have generated false positives, resulting in market intervention where not major problem exists and false negatives, where undetected major problems cause harm without remedy. Additionally these agencies appear to misallocate their resources and attention on insignificant matters when more compelling problems exists.

The article recommends that courts and government agencies consider both sides of an intermediary’s market when assessing current and prospective harms, commit to more accurate estimates of the potential for consumers to change platform allegiances and consider the overall impact of two-sided market domination instead of simply dismissing market concentration as necessary and harmless.

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