Competition Law for the Digital Economy
OpinionZEW President Achim Wambach on the GWB Reform
The Federal Ministry for Economic Affairs and Energy has submitted a draft proposal for the 10th Amendment to the German Competition Act (GWB) – the cornerstone of the social market economy. Otherwise referred to as the ‘GWB Digitalisation Act’, the amendment reflects how digitalisation is dramatically changing the way we do business. But one important step remains. After a long delay, the draft proposal has been published, and opinions from professional associations and the states will soon be heard. This is the second amendment aimed at integrating the special features of the digital economy into competition law. While the 9th amendment to the GWB integrated the terms ‘data’ and ‘platform’ into the GWB, the present draft shows how radically these concepts have altered our economy.
The direct and indirect ‘network effects’ that result from a digital platform are a key aspect of its function. Amazon attracts buyers because so many merchants can be found on the platform, and the platform appeals to merchants because it allows them to reach many buyers. It has already been known for a fact that these network effects lead to concentration. But now in some markets, that concentration has practically eliminated competition. Outside their PR departments, few believe that in the near future Google, Amazon, Facebook or Apple (GAFA) will follow Yahoo’s example some years ago and succumb to competitive pressure. The market also appears convinced that these companies remain dominant. The four GAFA companies are among the most highly valued companies in the world.
At the same time, competition law has proven inadequate to reign in misuse of this position of dominance. The German Federal Cartel Office’s suits against Facebook and the European Commission’s suit against Google demonstrate the potentials and limits of abuse control. Abusive behaviour is subject to control, and competition authorities have the power to sanction or discourage it, such as banning discriminatory preference for advertising. They exercise these powers in a range of ways. But these remedies are limited to specific aspects of competition, and the glacial speed in the processing of abuse cases (which take between three and seven years at the regulatory authorities, and additional years in the courts) do not take the dynamics of digitisation adequately into account.
Regulating dominant companies
Given the foregoing, it would be wise to impose additional rules on the dominant platform companies. The commission of the British Chancellor of the Exchequer has suggested creating a separate regulatory authority for this purpose. The German ‘Competition Law 4.0’ commission has recommended rules for dominant platform companies, including a ban on self-favouritism, to be enforced by the competition authorities. The draft proposal for the 10th amendment to the GWB strikes a balance between the two.
In a first step, the German Federal Cartel Office will identify companies that have ‘exceptional cross-market significance’. In the second step, it can ban these companies from engaging in critical activities such as disadvantaging competitors or hindering interoperability. So the Cartel Office will take on a regulatory role, a highly significant change. But this proposal raises a number of legal issues. For example, ‘exceptional cross-market significance’ is not clearly defined. As a result, it will probably take years for the courts to hear arguments and determine its definition. In the meantime, the digital economy will be neglected.
Besides the dominant platforms, another key feature of the digital economy is that many companies engage in cross-market activities. This is what is called the ‘digital ecosystem’. Data plays a key role in these activities. Companies take data from one market and use it in neighbouring markets to offer customers products and services specifically tailored to their needs. For example, Google is a search engine. But the company is also active in the areas of video streaming, online advertising, smartphone operating systems, smart homes and self-driving cars.
Legal certainty for partnerships
In several sections, the draft proposal addresses developments in digital ecosystems. The proposal states that data are important and may even be ‘essential’. The draft proposal explicitly compares data to an ‘essential facility’ like the railway system. Data owners must grant other companies access to the facility in return for payment. The goal is to prevent market foreclosure resulting from data hoarding. It is also crucial to provide companies intending to cooperate by sharing data or creating a platform with greater legal certainty. Companies will have a legal right to receive information from the German Federal Cartel Office on whether their partnerships may violate competition law.
But the 10th amendment to the GWB cannot address one essential aspect of the digital economy. Digital markets are primarily international. In addition, the European Commission’s plan to develop the single digital market will make them even more international. That means that the Brussels Commission will become the relevant competition authority. If businesses need legal certainty, then Brussels will have to provide it. But the rules for dominant platforms must apply beyond the German border as well. The German government should use its EU Council Presidency in the second half of the year to adapt EU law for the digitalised economy. The recommendations of the Commission ‘Competition Law 4.0’ are an excellent start.
This article was published in a shortened version in the Rheinische Post on 27 February 2020.
