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Summary

• The Digital Markets, Competition and Consumers Bill (DMCC or ‘the Bill’) endows the UK’s Competition and Markets Authority (CMA) with extensive new powers to tackle alleged anticompetitive practices in digital markets.
• The CMA will be able to both prohibit or require a wide array of conduct at an incipient stage and impose far-reaching remedies with limited accountability or consideration of consumer benefits.
• The DMCC’s powers are defined broadly, meaning the CMA will have significant discretion to direct the development of digital markets; this is unlike the European Union’s Digital Markets Act, which, although still far-reaching, contains more clearly defined thresholds, requirements and prohibitions.
• The CMA will be able to designate any large company satisfying certain criteria and undertaking ‘digital activity’ as having Strategic Market Status (SMS). That could bring hundreds of companies into the scope of the regime, empowering the CMA to exert substantial control over broad swaths of the economy over time.
• The DMCC empowers the CMA to take crucial decisions at every step of the process—g., in designating relevant activities, imposing conduct requirements and pro-competition interventions, investigating breaches, adjudicating wrongdoing and imposing significant fines — without full merits review.
• It will only be possible to challenge the CMA on process grounds under the judicial-review standard, giving it great power.
• The DMCC ignores important tradeoffs inherent to the proposed prohibitions and obligations, such as the privacy and security implications of requiring ‘interoperability’ or the convenience to users of ‘self-preferencing’.
• The ‘final offer mechanism’ backstop enforcement power marks a fundamental incursion on freedom of contract for private businesses, which could find themselves required to accept unfavourable terms in relation to third parties. The CMA will be asked to arbitrate commercial conflicts between large digital firms and their competitors, leading to a significant risk of rent-seeking behaviour by third parties, regulatory capture, and politicised decision-making.
• The regime will undermine investment in the UK digital sector, and associated innovation, because of the risk of cumbersome, unclear and ever-changing rules—along with a lack of accountability. New features could be delayed or not introduced for British users as firms seek to minimise the risk of falling afoul of the new regime and incurring hefty fines and stringent remedies. The UK’s position as a ‘science and technology superpower’ will thus be undermined.

Introduction

The Digital Markets, Competition and Consumers Bill (DMCC), introduced into parliament in April 2023, is the UK government’s response to alleged anticompetitive practices in digital markets.[1] But in its current form, the Bill threatens to do more harm than good.

In this paper we address Part 1 of the Bill, which concerns its provisions on digital markets.[2] In this area, the government’s underlying concern is that network effects, economies of scale and the accumulation of user data have led to the creation of monolithic technology giants that can exercise market power in ways that lead to higher prices and poor outcomes for consumers, and furthermore, that their power is entrenched, in the sense that their market position is very hard for new entrants to challenge. Advocates of the legislation believe that new regulatory powers are necessary to address these competition issues. The particular point that digital companies are heavily entrenched has been questioned elsewhere, for example by Baye and Prince (2020: 1287). They argue that technology markets are highly dynamic and that, while it may be tempting for policymakers to intervene in an attempt to remedy an immediate concern, history suggests that competition often permits new and superior technologies to supplant entrenched ones. This paper, however, is more narrowly focused on the DMCC, the powers it gives to regulators, the lack of procedural protections, and the issues this raises for the UK economy.

Part 1 of the DMCC will:

1. empower the CMA to designate companies as having ‘strategic market status’ (SMS) with respect to designated digital activities;
2. allow the CMA to design bespoke ‘conduct requirements’ for each SMS firm, dictating important aspects of the operation of its service, how customers are treated, and relations with other businesses in relation to designated activities (g., preventing a search engine from prioritizing its services in results);
3. allow the CMA to undertake what are presumed to be pro-competition interventions (g., requiring open data sharing);
4. mandate transparency in relation to mergers;
5. equip the CMA with extensive enforcement powers, including the imposition of large fines and a ‘final offer mechanism,’ as a backstop enforcement tool.

In practice, it endows the CMA, acting through the newly created Digital Markets Unit (DMU), with extensive new powers to categorically prohibit certain types of conduct at an incipient stage and impose far-reaching remedies with limited consideration of countervailing consumer benefits.

The CMA will also be able to take crucial decisions at every step of the process—e.g., in designating relevant activities, imposing conduct requirements and pro-competition interventions, investigating breaches, adjudicating wrongdoing and imposing significant fines—without full merits review. It will only be possible to challenge the decision-making on process grounds under the judicial review standard. In simple terms, courts will not assess whether the CMA was ‘right’, but whether the correct procedures were followed.

In addition, the procedural safeguards contemplated by the Bill may enable overenforcement in ways that hurt consumers. In practical terms, this could mean new products will not be developed in the UK and that new features could be delayed or not introduced for British users, as firms seek to minimise the risk of falling afoul of the new regime and incurring hefty fines and stringent remedies. This could, in turn, deter post-Brexit investment in the British economy and damage job creation in high-tech industries.

Granting extreme executive powers without sufficient oversight marks a departure in British governance from the rule of law in favour of expansive regulatory discretion, which is ill-advised on both principled—i.e., respect for the rule of law as a guiding democratic principle—and practical grounds.

To avoid turning the UK into a ‘tech turn-off’, it is vital that the DMCC be revised to narrow the CMA’s discretion and that meaningful procedural guardrails are incorporated to counterbalance its far-reaching powers. Absent this, the damage caused to the British economy may be hard to reverse.

[1] These issues were outlined in the government’s Digital Competition Expert Panel, also known as the Furman (2019) report, and the consultation on a new pro-competition regime for digital markets (DCMS and BEIS 2022).

[2] Shalchi and Mirza-Davies (2023) describe Part 2, and Conway, Fairbairn, and Pyper (2023) describe Parts 3-6.

Abstract

Compensation claims for competition infringements are a form of private enforcement of prohibitions against anti-competitive conduct. The proper understanding of this kind of enforcement requires taking into consideration the particularities of these offences, which influence the right of the injured parties to obtain compensation for the harm suffered and other possible remedies provided for in the law. Although the right of injured parties to claim damages is built on the typical foundations of non-contractual liability (tort), a dozen judgments of the EU Court of Justice have altered the rules and principles according to which victims are entitled to seek damages compensation. Directive EU/2014/104 codifies this jurisprudential acquis and introduces other novelties, which are currently being tested in the incipient follow-on litigation in Spain following several decisions of the national and European competition authorities. The new rules and the forceful projection of the principle of effectiveness of EU law have limited the autonomy of Member States and lead to an actualised approach to the rules on standing (active and passive), causation, statute of limitations and harm proof/quantification. Surprisingly, the progress made on the above issues contrasts with the lack of adequate mechanisms for class actions, which -given the dispersion and fragmentation of the damage in many of these cases- severely limits the effectiveness of the rights of injured parties and the efficiency of these proceedings.

(Paper is in Spanish.)

In March 2023, the European Commission announced new guidelines on exclusionary abuses and amended its 2008 guidance on enforcement priorities concerning exclusionary abuses.

According to the Commission, the initiative aims at reflecting the EU courts’ case law, as well as the extensive experience gained in the enforcement of Article 102 of the Treaty on the Functioning of the European Union (Art. 102 TFEU).

The International Center for Law & Economics (ICLE) hosted a Sept. 18, 2023 panel in Brussels to discuss the changes made to the guidance paper, the most pressing challenges that the new guidelines need to address, and the interplay between Art. 102 TFEU and the Digital Markets Act. Video of the full event is embedded below.

Abstract

Depending on implementation details, the EU Digital Markets Act (DMA) may have negative consequences regarding information privacy and security. The DMA’s interoperability mandates are a chief example of this problem. Some of the DMA’s provisions that pose risks to privacy and to the protection of personal data are accompanied either by no explicit safeguards or by insufficient safeguards. The question is then: how to interpret the DMA consistently with Articles 7-8 of the EU Charter of Fundamental Rights which ground the rights to privacy and the protection of personal data? Using the example of the prohibition on restricting users from switching and subscribing to third-party software and services (Article 6(6) DMA), I show that Charter-compatible interpretation of the DMA may depart from the intentions of the DMA’s drafters and even be perceived by some as significantly limiting the effectiveness of the DMA’s primary tools. However, given that—unlike the GDPR—the Charter takes precedence over a mere regulation like the DMA, such policy objections may have limited legal import. Thus, the true legal norms (legal content) of the DMA may be different than what a superficial reading of the text could suggest or, indeed, what the drafters hoped to achieve.

Among the regulatory tools created by the European Union’s Digital Markets Act (DMA)—landmark competition legislation that took effect across the EU last November—is a mandate that the largest digital-messaging services must be made interoperable. In the name of promoting fairness in digital markets, these gatekeeper services are asked to allow external services to connect with them, enabling new and smaller players to compete.

Read the full piece here.

The European Commission early last month published its draft template for DMA-compliance reports. This is the document that gatekeepers will periodically need to fill out, and which subsequently will be used to determine whether they comply with the European Union’s Digital Markets Act (DMA).

Read the full piece here.

Abstract

The complexity of the European Union’s Digital Markets Act (DMA) raises various difficult interpretative questions. Chief among them is whether the EU law is effective in achieving its purpose of harmonizing the national laws of EU member states. The issue is not just of academic concern; if the DMA falls short in this regard, it could be viewed as having been founded on flawed legal grounds, potentially rendering it null and void. In this context, we examine recent actions by the German Federal Cartel Office (Bundeskartellamt; FCO) regarding large technology-sector firms that the DMA would regulate as “gatekeepers.” This issue brief outlines two competing legal interpretations of potential relevance. One option is that the FCO’s actions may contravene EU law. Alternatively, the recent German actions could indicate that the DMA fails in its purpose as a harmonizing measure, thereby casting doubts on the law’s validity.

I. The DMA Must Be a Harmonizing Measure

Every law enacted by the EU legislature must have a legal basis in the EU treaties. Without an appropriate treaty basis, the law would be invalid. The DMA’s drafters chose Article 114 of the Treaty on the Functioning of the European Union (TFEU) as its legal basis. Notably, unlike Article 352 TFEU, Article 114 does not require unanimity among EU member states for a law to be enacted. Because the provision has a lower threshold of member-state consent, it is more limited in its scope.

Article 114 TFEU allows adoption of “the measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market.” In other words, it empowers the creation of harmonizing measures: EU laws that address diverging rules among the member states that “are such as to obstruct the fundamental freedoms and thus have a direct effect on the functioning of the internal market or to cause significant distortions of competition.”[1] Given that the DMA was adopted with Article 114 as its legal basis, it must satisfy those requirements. If it does not, then it risks invalidation by the EU Court of Justice.

II. The DMA’s Potential Ineffectiveness in Harmonization

As Alfonso Lamadrid de Pablo & Nieves Bayo?n Ferna?ndez have persuasively argued, an interpretation of the DMA that rendered it ineffective as a harmonization measure would, in turn, threaten the law’s validity,[2] a concern that has also been noted by Jasper Van den Boom.[3] In a similar vein, Giuseppe Colangelo has argued that the European legal framework could become more fragmented because of overlaps between, and the potential dual application of, the DMA and competition law.[4] Further, Marco Cappai & Colangelo have warned that such overlaps raise the risks of double or even triple jeopardy for defendants in competition cases.[5]

As Lamadrid & Ferna?ndez argued, the initial threshold question is whether there are, or are likely to arise, sufficient significant divergences among national laws to justify invoking Article 114 TFEU. Provided that they exist, the follow-up question is whether the DMA addresses those divergences effectively. According to Lamadrid & Ferna?ndez, if courts interpret the DMA rules meant to ensure harmonisation narrowly—namely, Article 1(5)-(7)—there is a risk that they will fail to pre-empt the very fragmentation that the law is supposed to address.[6]

The Impact Assessment for the DMA proposal gave several examples of diverging national laws, including Section 19a of the German Act Against Restraints of Competition (Gesetz gegen Wettbewerbsbeschra?nkungen; GWB).[7] Most recently amended in 2021, the GWB is intended to apply to businesses with “paramount cross-market significance”—a designation defined differently than the DMA’s “gatekeepers” but which likely would be applied to essentially the same set of companies. Colangelo cited the amended GWB—describing it as a kind of “Germanexit”—in arguing that the potential for overlapping enforcement of the DMA and national competition rules is exacerbated where member states strengthen their antitrust-enforcement tools with platform-specific provisions.[8]

On one hand, Article 1(5) states that member states “shall not impose further obligations on gatekeepers by way of laws, regulations or administrative measures for the purpose of ensuring contestable and fair markets.” But on the other hand, it qualifies this mandate by excluding prohibition measures that are “outside the scope of this Regulation,” so long as gatekeepers are not targeted explicitly for being gatekeepers. Lamadrid & Ferna?ndez suggest that the effect of this qualification may be to “exempt, permit, and leave unchanged all of the rules identified in the Commission’s Impact Assessment as sources of existing or likely regulatory fragmentation.”[9]

Article 1(6) states that the DMA is without prejudice to the application of EU competition law (Articles 101-102 TFEU); national rules analogous to EU competition law (letter (a)); rules on merger control (letter (c)); and also “national competition rules prohibiting other forms of unilateral conduct insofar as they are applied to undertakings other than gatekeepers or amount to the imposition of further obligations on gatekeepers” (letter (b)). Lamadrid & Ferna?ndez note:

Under this provision, Member States would remain free to enact new rules overlapping with those in the DMA, or even establish ‘additional obligations’, provided that these are enacted as part of their national competition rules and do not only target gatekeepers as defined in the DMA.[10]

Without questioning that a narrow interpretation is possible, Van den Boom argued that there should be a way to interpret the DMA’s pre-emptive provisions more broadly to ensure effective harmonization.[11] Van den Boom concludes that national laws like the German Section 19a GWB may need to be revised in the light of a broader, harmonization-preserving interpretation of the DMA.[12]

III. FCO Objections to Google’s Data Processing Across Services

In December 2022, the FCO issued a statement of objections regarding Google’s processing of user data across services, which noted that, under Google’s current terms, data from many services can be combined to construct user profiles for advertising and other purposes.[13] The data is collected and processed across such platforms as Google Search, YouTube, Google Maps, and even third-party sites, as well as Google’s background services, with the company periodically drawing data from Android devices.

The FCO tentatively concluded that these terms did not offer users adequate choice regarding the extensive cross-service data processing, deeming the current options insufficiently transparent and overly broad. In announcing that they would require Google to modify the choices available to users, the FCO relied on Section 19a GWB, the same provision that the DMA Impact Assessment offered as an example of the kind of legal fragmentation that the DMA was meant to address. Moreover, and crucially, the object of the FCO’s investigation—combining user data across services—is covered by the DMA in its Article 5(2). This suggests that the FCO’s may actions are prohibited by the DMA (in Articles 1(5)-(6)).

In addressing concerns that their actions were pre-empted by the DMA, the FCO claimed that they were applying domestic competition law, which would suggest that Article 1(5) DMA does not apply. The FCO also noted that no “core platform services” have been designated under the DMA, and thus we do not yet technically have any “gatekeepers” for the purposes of the DMA’s pre-emption rules. Finally, the FCO asserts that the domestic legal basis (Section 19a GWB) of their investigation “partially exceeds the future requirements of the DMA” and, moreover, that “the Bundeskartellamt is in close contact with the European Commission.”[14]

IV. The FCO Versus the DMA

By its own admission, the FCO is pursuing Google for conduct to which the European Commission is likely to apply the DMA. The FCO thus appears to be trying to beat the Commission to the chase and impose its own regulatory vision before the Commission has time to act.

The Google investigation is part of the FCO’s broader agenda for large tech firms. The agency has already used Section 19a GWB to designate Alphabet, Amazon, Apple, and Meta as having “paramount significance for competition across markets,” while an investigation to similarly designate Microsoft is pending.[15] Some, if not all, of those companies are likely to also be deemed “gatekeepers” by the European Commission under the DMA.

More importantly, at least some ongoing Section 19a investigations relate to matters covered by the DMA. For example, the FCO’s investigation of Apple’s app-tracking transparency framework focuses on so-called “self-preferencing,” a practice that the Commission could determine the DMA covers.[16] The FCO commenced that investigation after final agreement on the DMA in March 2022. Similarly, the FCO’s ongoing investigation of Meta similarly concerns the processing of user data across services, which is clearly covered by the DMA, provided that the relevant Meta services will be designated under the DMA as gatekeepers.[17]

If the Commission designates Google and its services under the DMA, the company would be subject to Article 5(2) DMA, which would require that Google obtain user consent to:

(a) process, for the purpose of providing online advertising services, personal data of end users using services of third parties that make use of core platform services of the gatekeeper;

(b) combine personal data from the relevant core platform service with personal data from any further core platform services or from any other services provided by the gatekeeper or with personal data from third-party services;

(c) cross-use personal data from the relevant core platform service in other services provided separately by the gatekeeper, including other core platform services, and vice versa; and

(d) sign in end users to other services of the gatekeeper in order to combine personal data.

The key notions of “specific choice” and “consent” in Article 5 DMA pose difficult technical and legal questions. Exactly how Google would implement such cross-service processing of data in compliance with the DMA will be a matter for discussion between Google and the European Commission.

Different authorities are likely to reach different conclusions as to how to approach such problems. But given that the DMA is based on Article 114 TFEU and thus intended as a harmonization measure, its chief purpose must be to prevent fragmentation of regulatory approaches to issues clearly covered by the DMA. This is true irrespective of whether a national authority purports to rely on national competition rules or on other national law.

The FCO noted that Section 19a GWB “partially exceeds” the DMA’s requirements, which is a curious choice of phrase. It would appear to admit that the national law overlaps with the DMA. To the extent that such an overlap exists, application of the law to designated gatekeepers is pre-empted by Articles 1(5)-(6) DMA. Even if the FCO could show that some requirements they intend to impose on Google “exceed” what the Commission would do under the DMA, this would not render that FCO’s actions outside the scope of DMA’s pre-emptive provisions.

The FCO’s stated intent is to impose its own interpretation of what constitutes “sufficient choice” as to whether and to what extent “users agree to cross-service data processing.” Based on these assertions, it is difficult to see how the FCO’s action would either be “outside the scope” of the DMA (Article 1(5) DMA) or constitute a “further obligation” (Article 1(6) DMA). If the DMA is to be an effective harmonizing measure, then the mere fact that a national authority has an idiosyncratic interpretation of user choice and consent in the context of cross-service data processing cannot be sufficient for its actions to constitute a “further obligation.”

Any other reading of the DMA would serve to nullify Articles 1(5)-(6). Whenever any national authority disagrees with how the Commission enforces the DMA, they could simply adopt national measures that “exceed” the DMA in that they differ from the Commission’s approach. Given the scope of Article 5(2) DMA, interpreting Articles 1(5)-(6) not to preclude the FCO’s actions would jeopardize the DMA’s validity as a harmonising measure under Article 114 TFEU.

As the FCO itself has noted, the Commission has not yet designated any “gatekeepers” or their “core platform services.” The FCO has, however, conceded that its actions against Google concern services that are “likely” to be designated and therefore covered by the DMA. To preserve the DMA’s validity, actions like the FCO’s against services that are within the DMA’s scope must be pre-empted. With services that are not yet—but are likely to be—designated, actions by a national authority that will be illegal once the services are designated should also be considered illegal while a designation is imminent. This reading follows both from the DMA’s function as a harmonizing measure under Article 114 TFEU and from the principle of sincere cooperation (Article 4 TEU).

Pre-emption does not have to render Section 19a GWB and similar national rules a dead letter. As Gunnar Wolf & Niklas Brüggemann argue, there is space for “complementarity” between the DMA and national law.[18] If, however, the DMA is to remain an effective harmonizing measure, the scope for national action in areas regulated by the DMA must be narrow. It does not appear that the FCO’s proposed action is “complementary” to the DMA. Rather, it is a brazen attempt to circumvent the DMA’s harmonizing function.

V. Conclusion

The FCO and other national authorities may be less concerned than the European Commission with preserving the DMA’s validity. In fact, the FCO’s actions suggest that they are chafing against the restraints imposed by the DMA and would prefer to act as if the restraints do not apply. It would be surprising if the Commission did not respond with a more assertive approach to such prima facie breaches of EU law by national authorities. The stakes are high. If the Commission tacitly accepts an interpretation of the DMA that gives national authorities free rein for these kinds of enforcement actions, then it will cease to be a harmonizing measure and, as such, would be invalid.

[1] Case C-58/08 Vodafone, O2 et al. v Secretary of State, EU:C:2010:321 ¶ 32.

[2] Alfonso Lamadrid De Pablo & Nieves Bayón Fernández, Why the Proposed DMA Might Be Illegal Under Article 114 TFEU, and How to Fix It, 12 J. Eur. Compet. Law Pract. 576 (2021).

[3] Jasper Van den Boom, What Does the Digital Markets Act Harmonize?–Exploring Interactions Between the DMA and National Competition Laws, 19 Eur. Competition J. 57, 69 (2023).

[4] Giuseppe Colangelo, The European Digital Markets Act and Antitrust Enforcement: A Liaison Dangereuse, Eur. Law Rev. 597 (2022).

[5] Marco Cappai & Giuseppe Colangelo, Applying Ne Bis in Idem in the Aftermath of BPost and Nordzucker: The Case of EU Competition Policy in Digital Markets, 60 Common Mark. Law Rev. (2023).

[6] De Pablo & Fernández, supra note 2.

[7] European Commission, Commission Staff Working Document Impact Assessment Report Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on contestable and fair markets in the digital sector (Digital Markets Act), Part 2, 112-113 (2020), https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52020SC0363.

[8] Colangelo, supra note 4.

[9] Id, 580.

[10] Id.

[11] Van den Boom, supra note 3.

[12] Id, 84.

[13] Bundeskartellamt, Statement of Objections Issued Against Google’s Data Processing Terms, (2023), https://www.bundeskartellamt.de/SharedDocs/Meldung/EN/Pressemitteilungen/2023/11_01_2023_Google_Data_Processing_Terms.html.

[14] Id.

[15] Bundeskartellamt, Proceedings against large digital companies – on the basis of Sec. 19a GWB – as of May 2023, (2023), https://www.bundeskartellamt.de/SharedDocs/Publikation/EN/Downloads/List_proceedings_digital_companies.pdf. Note that Amazon and Apple are disputing their designation under Section 19a and according to the FCO the court proceedings are not yet finalized.

[16] Bundeskartellamt, Bundeskartellamt reviews Apple’s tracking rules for third-party apps, (2022), https://www.bundeskartellamt.de/SharedDocs/Meldung/EN/Pressemitteilungen/2022/14_06_2022_Apple.html. As noted in the previous footnote, Apple is disputing their designation under Section 19a.

[17] Bundeskartellamt, Meta (Facebook) responds to the Bundeskartellamt’s concerns – VR headsets can now be used without a Facebook account, (2022), https://www.bundeskartellamt.de/SharedDocs/Meldung/EN/Pressemitteilungen/2022/23_11_2022_Facebook_Oculus.html.

[18] Gunnar Wolf & Niklas Brüggemann, Agenda 2025: the Digital Markets Act and Section 19a GWB, D’Kart (2022), https://www.d-kart.de/en/blog/2022/07/19/agenda-2025-der-digital-markets-act-und-§19a-gwb.

What should a competition law for 21st century look like? This point is debated across many jurisdictions. The Digital Markets, Competition, and Consumers Bill (DMCC) would change UK competition law’s approach to large platforms. The bill’s core point is to place the UK Competition and Markets Authority’s (CMA) Digital Markets Unit (DMU) on a statutory footing with relaxed evidentiary standards to regulate so-called “Big Tech” firms more easily. This piece considers some areas to watch as debate regarding the bill unfold.

Read the full piece here.

Background: The European Union’s Digital Markets Act (DMA), which went into effect in November 2022,  requires online platforms deemed to be “gatekeepers” to make their services interoperable. Interoperability refers to the ability of different systems, devices, or applications to communicate and exchange information. Importantly, the DMA envisions horizontal interoperability for messaging services, as well as vertical interoperability obligations. These include the ability to install third-party app stores and to install applications through sideloading, along with ensuring access to operating systems’ critical functionalities and specific devices’ hardware capabilities.

However… While interoperability requirements can reduce switching costs between platforms and possibly  help consumers avoid being “locked-in” to inferior products, the net effects on new technology and greater competition are mostly speculative. Claims that mandatory interoperability is a “super tool” for platform competition rely on excessive switching costs between platforms effectively serving as a barrier to entry. The rise of new social networks like TikTok and messaging services like Discord suggests that network effects may be less pervasive than previously thought. Many consumers are perfectly comfortable with “multi-homing” and using multiple platforms. 

Network Effects Are Everywhere; Network Harms Are More Specific

Consumers in any market—not exclusively or even predominantly digital markets—strike a balance between using multiple providers (multi-homing) and remaining loyal to just one. Network effects can give incumbents an advantage over challengers, but identifying that a given market has network effects does not, in itself, justify mandating interoperability. For any potential interoperability mandate, we must ask how costly it is for consumers to multi-home. 

For example, a consumer may find it low-cost to download multiple apps—such as Zelle, PayPal, or Venmo—that each allow one to send money to a friend. By contrast, it may be quite costly to gain followers on a new social-media platform. Interoperability mandates have tended to focus on markets that already have low switching costs, hence limiting potential gains.

Lock-In Can Increase Competition

We say a consumer is “locked-in” when high switching costs make it difficult for them to switch suppliers even when quality changes. But markets subject to lock-in may still see fierce competition for users. Companies compete upfront to attract such consumers through tactics like penetration pricing, introductory offers, and price wars. This “competition for the market” can effectively substitute for standard compatible competition and might even be more intense, as it reduces differentiation. It is not a simple linear relationship, where lower switching costs are always better for consumers.

Interoperability Isn’t Always Good

Interoperability proponents argue that it levels the playing field between tech giants and smaller competitors. The debate often imagines a low-quality incumbent using lock-in to keep a high-quality challenger at bay. But we don’t necessarily want everything to be interoperable. It would be a problem if, e.g., everyone’s door keys were interoperable. The analogous problem in tech is cybersecurity. More interconnected systems are more vulnerable to cyberattacks and data breaches. Mandating interoperability, such as between messaging services, can inadvertently expose users to greater security risks by creating additional points of access for bad actors.

Static Standards and Dynamic Markets

There are many examples of interoperability resulting from the voluntary adoption of standards. Credit-card companies manage vast, interoperable payment networks; screwdrivers work with screws made by various manufacturers; and U.S. colleges accept credits from other institutions. 

Interoperability also tends to evolve over time and regulators should not imagine the current system will last forever. Bluetooth was initially developed for wireless communication between devices like headsets and phones, but has evolved to also enable seamless connectivity among various speakers, keyboards, smartwatches, and so forth—all from different manufacturers. This standardization has greatly simplified wireless connections and improved user experience.

Calculate Costs in Addition to Benefits

While a literature review on switching costs and network effects by esteemed scholars Joseph Farrell and Paul Klemperer concluded that “firms probably seek incompatibility too often. We therefore favor thoughtfully pro-compatibility public policy,” they also recognize that competition to be the dominant platform “can adequately replace ordinary compatible competition, and can even be fiercer than compatible competition by weakening differentiation.”

Moreover, the theoretical papers they considered mostly ask whether increasing or decreasing switching costs increases consumer welfare. Mandates implemented through public policy tend to be more blunt and, after accounting for factors like increased security risks, are less likely to pass a cost-benefit test. Consumers often come across situations where interoperability might provide some benefits, but where the costs outweigh the gains. Policymakers should take the same approach.

For more on this issue, see “Antitrust Unchained: The EU’s Case Against Self-Preferencing” by Giuseppe Colangelo; “Privacy and Security Implications of Regulation of Digital Services in the EU and in the US” by Mikolaj Barczentewicz; and “Mandatory Interoperability Is Not a ‘Super Tool’ for Platform Competition” by Samuel Bowman.