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Strategic Reactions to the DMA: will prices rise?

With the entry into force of the Digital Markets Act (DMA), regulation comes to big tech. The DMA introduces obligations for gatekeepers to regulate digital industries and tackle potential market failure. If the DMA is successful, it will have a significant impact on the business models of such gatekeepers; it will limit their capabilities to leverage their market power and data advantages to gain foothold in adjacent markets. We expect that gatekeepers will react strategically to these limitations, and will likely use their advantages in a more direct way as a result; on their core platform itself.

The DMA does not impose any restrictions on prices charged by gatekeepers for their main service on core platforms. Therefore, gatekeepers are free to set any price within the boundaries of Article 102 TFEU. We see this lack of price regulation as a potential weakness in the DMA. Time will tell if in its current form, the DMA is effective in establishing properly functioning digital markets.

Regulation traditionally rests on three main pillars; (non-discriminatory) access, transparency of conditions and prices, and price regulation.

Regulation: access, transparency and pricing

Regulation traditionally rests on three main pillars; (non-discriminatory) access, transparency of conditions and prices, and price regulation.

  • Non-discriminatory access is necessary to enable business users to effectively compete with products offered by the owner of the core platform (“gatekeeper”) on its core platform. This is also covered by the DMA. For example, to comply with the DMA, gatekeepers need to apply fair and non-discriminatory general conditions of access for business users to its software application store.[1]
  • Transparency is required in some digital markets in which prices are currently not transparent, such as the intermediary markets that connect advertisers with publishers. The DMA covers this by introducing the obligation on gatekeepers to provide information about the prices paid by the advertisers and publishers, to the advertisers and publishers to which it supplies advertising services.[2]
  • Intuitively, regulation of prices would also be necessary to prevent gatekeepers from squeezing the margins of its business users that compete directly with the gatekeeper and avoid exploitation of these business users. Although the DMA does include certain obligations for gatekeepers to provide certain services free of charge, it does not pose any restrictions on the pricing of the main services on the core platform.

Additionally, the DMA includes restrictions on the use of data, and aims to prevent gatekeepers from leveraging their market power in one market to other markets.

For example, the DMA restricts the use of data generated through the activity of business users through the core platform in competition with business users. [3] These restrictions are based on the current business model of most big tech firms, which is mainly focused on growing their business by vertical integration and/or diversification of their product portfolio. For example, Google once started as a search engine, but currently also exploits a mobile operating system, holds a position in each link of the value chain for the distribution of ads to websites and develops (mobile) apps. Amazon started as a webstore, but is now also a book publisher, a movie producer, a streaming service and much more. It also integrated vertically by manufacturing its own consumer product lines and setting up its own distribution network.

Big tech firms have been able to successfully implement these strategies by using their data advantage and leveraging the market power of their core platform(s). Google , after acquiring DoubleClick for Publishers (“DFP”), a platform that publishers use for the display of ads, tied DFP to AdX, Google’s platform to run auctions for ads to be displayed on the website of publishers, by introducing features on DFP that were only available in combination with AdX.[4]

Amazon offers a variety of consumer products that it sells on its own platform, for which it can use sales data generated by their competitors on their platform to their benefit.[5]

The Commission notes that core platforms “feature an ability to connect many business users with many end users through their services which, in turn, allows them to leverage their advantages, such as their access to large amounts of data, from one area of their activity to new ones”. The combination of lack of contestability of core platforms and their ability to leverage their (data) advantages increases the likelihood that underlying markets do not function well or will soon fail to do so, resulting in higher prices, lower quality and/or less choice and innovation. [6]

In its current form, without any restrictions on price, the DMA may therefore lead to price increases on core platforms.

Effects on pricing of core platform services

With respect to the pricing of core platform services, it is important to take the two-sided nature of these platforms into account. Higher prices on one side of the platform may result in less users on this side of the platform, diminishing the value of the platform for users on the other side of the platform. For example, if Google increased the fees for app developers on Android and this would result in fewer apps, it would decrease the value of the Play Store to end users.

Economic theory suggests that, in general, higher prices on two-sided platforms will be charged to those who are the least price sensitive, which are typically the business users. For example, manufacturers and retailers have become so dependent on Amazon for their online sales, that it is probably not an option for them to bypass Amazon. Amazon would therefore be in a position to significantly increase (access) fees to their core platform. Now that the DMA imposes restrictions on Amazon’s current strategy to use their core platform to expand their business portfolio, it becomes more likely that Amazon and other big tech firms will monetize their core platforms more directly.

In its current form, without any restrictions on price, the DMA may therefore lead to price increases on core platforms. While excessive pricing can be addressed by Article 102 TFEU, competition authorities do not have a good track record with this type of cases and the burden of proof has proven to be extremely high. The DMA addresses hazards relating to the current business models of gatekeepers, but it is unclear to what extent the potential strategic response of these gatekeepers is taken into account.

Core platforms already generate very high profits. The US House of Representatives estimates that Apple’s App Store revenues of access fees alone amount to $2.67 billion worldwide, while they estimate that the costs for running the App Store is less than $100 million.[7] This implies a profit margin of 96%, excluding the revenues from the 15-30% commission that Apple charges to app developers for every app purchase and in-app purchase of digital goods, which account for the vast majority of App Store revenues.

If gatekeepers start to monetize their core platforms more directly, the costs for business users on these platforms may increase significantly, making it harder for them to compete with products of the gatekeeper on downstream markets. In addition, the price increases may result in businesses refraining from providing their services on the gatekeeper’s platform or higher costs for consumers if these higher prices are passed on by the business users. Passing on the higher cost to end-users is generally more likely than discontinuing the use of the gatekeeper’s platform, as viable alternatives do not exist. With price competition between business users, they will not be able to (fully) absorb the cost increase in another way. If the gatekeeper is itself active on the same downstream market, it can gain an important cost advantage over its rivals.In the absence of price regulation, pricing policy seems to give gatekeepers opportunities to maintain their position and continue expansion strategies by means other than ‘competition on the merits’. They may also be expected to find other loopholes in the DMA. The implication is that competition law will still have an important role to play in the years before us. The DMA in its current form is unlikely to be the end of the battle between regulators and Big Tech.[8]

Link to the DMA

Any opinions expressed in this communication are personal and are not attributable to Competition Economists Group.

[1] DMA, Article 6.1(c). Available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32022R1925&from=EN
[2] DMA, Article 5(g). Available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32022R1925&from=EN
[3] E.g. DMA, Article 6.1(a). Available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32022R1925&from=EN
[4] For example, a feature called “dynamic allocation” was introduced on DFP that improved the auction process only for auctions on AdX and could not be used for competing services.
[5] Khan (2018), “Amazon’s Antitrust Paradox”, The Yale Law Journal. Available at: https://www.yalelawjournal.org/note/amazons-antitrust-paradox.
[6] DMA, paragraph 3. Available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32022R1925&from=EN
[7] US House of Representatives, subcommittee on antitrust commercial and administrative law of the committee on the judiciary (6 October 2020), “Investigation of competition in digital markets”, page 354. Available at: https://judiciary.house.gov/issues/issue/?IssueID=14921.
[8] Cf. Linde Bremmer and Eline Grondman, ‘Toezicht op Big Tech, David tegen Goliath?’ [in Dutch], Tijdschrift voor Toezicht 2022 nr. 4, pp. 137-141.

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