The Danish Competition and Consumer Authority publishes report on the nature of competition in markets with digital platforms
As still more of our economy and social activities move online, digital platforms – and competition in the markets on which these digital platforms operate – play an increasingly important role. In a newly published report, the Danish Competition and Consumer Authority presents an overview and discussion of a range of market characteristics that affect competition in markets with digital platforms. The report builds on the academic literature on digital platforms and two-sided markets, case studies and relevant antitrust cases.
Digital platforms play a large and increasing role in our society today. The rise of digital technologies has brought great benefits for companies and consumers but has also raised new challenges - also for competition.
Markets with digital platforms are often characterized by network effects and significant economies of scale. As a result, traditional well-functioning competition with many competing firms and low concentration is often not feasible. Instead, these markets will often tend towards a “winner takes it all” scenario in which one platform ends up dominating the market.
Competition in these markets can, however, in some circumstances still be well functioning. If entry barriers are sufficiently low, new platforms can enter and challenge an established platform. However, strong network effects and economies of scale can work as entry barriers and thereby allow incumbents to sustain market power. This can lead to longer-term societal losses in term of higher prices, less variety for consumers and less innovation.
As a result of these dynamics, digital platforms are receiving increased attention from competition authorities globally. The purpose of this report is to present an overview about competition in markets with digital platforms. In particular, the report focuses on a range of market characteristics such as network effects and multi-homing and discusses how these characteristics affect competition. The report builds on the academic literature, case studies and relevant antitrust cases. The report is a contribution to the literature on digital markets and does not contain recommendations or guidelines.
The main focus of the report is on network effects, economies of scale and multi-homing. Network effects and economies of scale each tend to support high concentration and barriers to entry. Multi-homing, on the other hand, can work to reduce these effects and make a “winner takes all” scenario less likely. The three market characteristics are typically interdependent and should not be viewed in isolation. Further, competition on any given market will also depend on a range of other factors, for example product heterogeneity, access to data and switching costs.