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Since the beginning of the so-called digital economy, the development of digital
markets has shown unique and peculiar features which make these markets
dramatically different from traditional ones.
The growth of digital markets players is incredibly fast and rapid, companies like
Amazon and Google have witnessed a growth rate that has always been
impossible in traditional markets. The competition game tends to be a winner-
takes-all one, where a player reaching a dominant position is able to enforce its
position and prevent the entrance in the market of other competitors. However,
this monopolization is someway toned down by the fact that in digital markets,
innovation is often disruptive and, thus, monopolistic companies may lose their
revenues for the rise, from one day to another, of a substitutable product or
service.
These features have been deeply analysed by many economists in the view of
reaching a better understanding of the structure of digital markets, which are
constantly getting more importance and relevance in the economy1.
Before explaining what the network effect is and how it affects the digital markets
structure, it has to be considered that most digital services are offered through
platforms where users do not exclusively interact with the service provider but
also with each other. Since cooperation between users has a great importance in
the digital economy, the utility the users are able to take from a service provider is
related to the number of the users of the platform itself. Thus, the network effect is
the tendency of the users to choose the platform which has many users. In this
Due to the network effect and to the high investment required by digital markets,
potential competitors face big barriers to entry. The only possible strategy to
breach the position of a monopolized player in digital markets is to invest a
discouraging amount of resources in marketing. Most of the time, it is simply not
worth.
On the other hand, very often the monopolistic trend of digital markets is
counterbalanced by the low switching costs. The value users lose when they
switch from a digital service to another is often very low or null. The case of the
search engines is emblematic: a user which is usually using Google for online
searches does not face any switching cost if he start using the Bing search engine.
In the last ten years the number of services and products offered without requiring
the users to pay a fee has grown enormously. This has been made possible by two
If the first factor, the reduction of the incremental cost, does not imply a radical
change in the traditional market paradigms since it is a common and well known
tendency of the innovation on the production processes, the value acquired by
personal data is something completely new requiring a deep analysis.
Personal data are, today, a key feature of digital markets since it is through
personal data that market players are able to monetize their businesses. Personal
data gathered by digital companies are used and re-used for so many purposes
(including personalization of services, targeted marketing, etc.) that data are now
considered as the currency of the digital age.
Today, processing and storing Big Data represent a way bigger added value
compared to what was processing and storing data few years ago. It is not only
possible to store and process bigger volume of data, but also to analyse them
through forecast models and algorithms, making it the most powerful tool of
information5.
This huge amount of data, the “Big Data”, are gathered by digital services
providers. Google, which is the biggest player in digital markets, is able to easily
hold its dominant position due to the incredible amount of data it is able to gather
and then, eventually, reuse or resell.
The goals and the foundations of competition law have always been disputed. If
competition has always been felt like a value to preserve in liberal market
economies, the reason of such protection has been subject to debate. European
competition law is traditionally oriented towards consumer protection and the
promotion of market integration between EU members. However, much criticism
has been brought to the methods of assessment of EU competition law violation
by the European Commission. Such criticism have been widely underlined in a
book edited by Schimdtchen, Albert and Voigt6, which opened a deep debate on
the tools used in competitive proceedings assessment by the European
competition authority. Such debate pushed the European Commission to follow a
more strictly economic approach and be more careful about economic efficiencies,
similarly to what the US Federal Trade Commission (FTC) has always done.
Whereas the monopolization of a market is not a violation per se, still the
presence of a monopoly is considered to be a negative feature of a market. Such
negative qualification, based on the economic approach adopted by competition
authorities, seems to ignore the possibilities of innovation in dynamics market
such as the digital ones7.
An example of this kind of disruptive innovation is the one regarding the way
Facebook dethroned the incumbent of MSN and Myspace, which were incumbent
in their own markets, through the creation of a completely new service and, thus,
a completely new market.
Another more recent example is the case of Spotify. Spotify is a software allowing
free on demand streaming of a big catalogue of music9. Spotify libraries includes
almost all main stream music, including new exit. Prior to the enter of Spotify in
the market, Apple’s Itunes, a digital platform distributing music for paid
download, was the leader in the market. Itunes it is now struggling to survive in
the market and, for this reason, Apple is now trying to slow down Spotify using its
power on side markets where Apple is dominant10.
Even though the disruptivness of the Spotify case is not based on a technological
improvements only, but mostly on a new revolutionary business model which
smartly leveraged on the poor situation of the mainstream music industry, it
clearly show how players in dominant positions may be subject to a fast and rapid
reduction of market share to the final disappear from the market. Thus in these
markets typical inefficiencies caused by monopolies are reduced.
Such deep differences between digital markets and traditional ones, expecially
when it comes to assessing competition and its effects, led some academics to
open a debate about a new approach that should be used when applying
1) Innovation should be put at the center of the analysis and each behaviour
on the markets should be assessed with innovation as first parameter.
5) The role of regulation should be reviewed in the light of the fact that
trends of digital markets are hardly foreseeable.
The first challenge of the application of competition law to digital markets is the
definition of the relevant market. The major issue comes up from the fact that
digital economy is mainly based on platforms acting as intermediaries between
different categories of users. If we take, for example, the Google search engine, it
is clear that it is a platform operating in a market which has more sides: one is the
side of the users of the search engine service and the other one is the market of the
advertisers.
Thus, digital markets are usually multi-sided markets, but tools so far developed
to define the relevant market for competition law purposes are not completely
efficient to include in such analysis the effect of the interplay between the
different sides of the market13.
The price on one side of the market cannot be set without affecting deeply the
supply and demand on another side of the market. For such reason, market power
on one side does not unilaterally means a dominant position, since an arbitrary
raise of the prices might lead to a reduction of the prices on the other side of the
market, nullifying the benefits for the incumbent14.
Whereas in one-sided market is the direct network effect having impact on the
competition process, in multi-sided markets network effects are defined as
indirect. Direct network effect, as explained in the introduction of this essay,
refers to the phenomenon according to which a service becomes more attractive as
the number of users of that service grows. Indirect network effect refers, on the
other hand, to the phenomenon according to which the number of users of one
side of a multi-sided market makes another side more attractive.
Some digital markets are subject only to direct network effect, some others only to
indirect one and others to both of them. Google search engine, for example, is
The market of the social network like Facebook, on the other hand, is subject to
both direct and indirect network effects.
Indirect network effect play a consistent role on price formation, giving often rise
to price asymmetries15. When indirect network effect occur prices are differently
set for the different sides of the market, giving the operators the possibility to
charge heavily the market side which is less sensitive to price fluctuation, with the
result that one side of the market will be subsidized by another side16.
Due to these mechanism, in digital markets has became always more and more
common to deliver free goods and service in one side of multi-sided markets. The
delivery of free good makes even harder to use standard tools of competition law
enforcement. For example, the so called SSNIP – Small but significant non
transitory increase in price - test to define the relevant market, cannot be applied
since the price of the goods and services is zero17. Moreover, if some more recent
decision regarding a Google case recognized the existence of a search engine
market18, a previous decision of a US Court simply disregarded this recognition
due to the lack of financial consideration19.
The aforementioned mechanism of the direct and indirect network effect may
lock-in users and, thus, represent an important obstacle for competition. However,
according to a traditional approach, the lock-in effect generated as such are
counterbalanced since in digital markets switching costs are usually very low or
zero and users have the possibility of multi-homing 20. The switching costs are the
costs that a user have to pay to switch from a service or a product offered by a
company to the service or a product offered by a competitor. The higher are the
switching costs the more the competition process is hindered. Multi-homing is the
possibility for the user to use, in the same moment, different and in competition
services or product to satisfy the same demand.
If it is true that monetary switching costs are often low or zero, still has been
noted that there are sometimes switching costs that are not strictly monetary and
that have to be taken into consideration in a competitive analysis. Even though
users do not face any monetary costs for switching, they are yet subject to brand
effect and user adaptation21. User habituation is especially relevant when the
quality of the service provided cannot easily evaluated. For example, in the online
searches engine market the kind of service provided is not easy to evaluate and
users usually use a specific online search engine based on its trustworthiness.
Thus, even though the monetary switching costs are equal to zero, users will tend
not to switch to other service since they are adapted and trust a specific service
provider. For these reasons, according to some author user habituation has to be
considered between non-monetary switching costs in a competition assessment 22
As already exposed in the introduction, the importance of data for the digital
economy has recently grown enormously, so much that data can be today be
addressed as the new currency of the digital age. Whereas the definition of data is
self-evident, the definition of the term “Big Data” is somehow unclear and not
precise. Nonetheless, this buzzword is crucial for economy and deserves the
attention of the scholars.
It is a shared truth that future of business lies in the big data. For this reason,
business studies are focusing more than other field of studies on the topic of big
data. A company willing to enter in a digital market, today, is not competitive if
does not have a strong strategy on data.
In business, information has always been crucial. However, before the arrival of
digital technology, the possibility of gather, store and process information
regarding consumers was limited. Thus, obtaining a competitive advantage
through information was not easy and required a strong investment. As the
technology kept improving and service and product became always more and
more digitalized, the possibility to gather, store and process data got increasingly
cheaper.
The type of data which has the greatest impact on market structure and
competition is personal data. Personal data is collected in three main ways 23: by
voluntary disclosure, by observing users behaviour or by inferring new
information from already existing data.
Personal data, in the framework as set above, can be considered as a crucial asset
for digital market players. The relevance of data can be observed from three
different point of view related to three different functions that data can have:24
c) Data commodities. Data is also collected, stored and then eventually exchanged
as a commodity. Many players of traditionally non-digital markets are interested
in the data collected by digital companies. These operations are regulated by
privacy law, to which the scholars are giving more and more attention. Terms and
limits of data reuse is currently on debate in the light of the new privacy rules
adopted by UE. On the competition law side, the debate is open on whether there
may be an interplay between privacy law and competition law itself. This debate
will be reported in a following paragraph.
The hypothesis of the application of the essential facility doctrine to data, even
though has never occurred in any case, is becoming always more likely due to the
growing importance of data for digital markets. According to this trend, thus, it is
likely that personal data will fall into the definition of the Court. This is
demonstrated by the recent decision of the European Commission on the
Microsoft/Linkedin merger. One of the reason that made the Commission clear the
merger was that “[…] access to the full LinkedIn database is not essential to
compete on the market.”29. The attention paid by the commission on the database
of Linkedin show that the watchdog of the European Competition Law
investigated the possibility that database of Linkedin may be an essential facility
for its competitors.
This clear cut position emerged both in USA and in Europe with respect to the
Facebook/Whatsapp merger. The US FTC cleared the transaction excluding that
privacy concern were relevant for a competitive assessment and sending a letter to
the Bureau of Consumer Protection, which the FTC considered to be the only
authority with jurisdiction on privacy issues 31. On the other side of the Atlantic,
the European Commission cleared the transaction on the same basis, stating that:
“Any privacy-related concerns flowing from the increased concentration of data
within the control of Facebook as a result of the Transaction do not fall within the
scope of the EU competition law rules but within the scope of the EU data
protection rules."32
Even though the distinction between the scope of privacy law and the one of
competition law has been made clear by competition authorities, still data
protection and privacy has a role on competition proceeding as important element
of non-price competition33.