Recent European digital regulation surrenders traditional key guideposts of European competition law and policy. The over-centralization of European Union antitrust authority and EU legislation risks undermining member state laws and competences. This may privilege platforms and eventually harm competition and consumers, writes Jörg Hoffmann.
European economic law in the age of digitalization is undergoing a paradigm shift. Traditional principles borrowed from the consumer welfare approach of American antitrust is giving way to a more interventionist attitude that has led to new regulations targeting the digital economy. These new regulations also attempt to centralize European Union member states’ regulatory frameworks. One such regulation is the Digital Markets Act, enacted in September 2022, which seeks to design contestable and fair markets for core platform services. The DMA raises questions and challenges regarding the demarcation of member states’ competences and the ability of individual member state to enforce national competition laws.
The limits of competition law and the wave of digital regulation in the EU
Historically, European competition policy has been heavily influenced by Ordoliberal theory, which coined German competition law. Ordoliberalism emphasizes market actors’ economic freedoms and thus focuses on market structural considerations. Ordoliberalism also considers democratic values and ideals and embedded these considerations in the legal toolbox of European competition law. This led to a much more interventionist stance from European competition authorities.
But around the turn of the century, Europe began to reorient its competition law and enforcement around economic theory and effects-based analysis. This “more economic approach” led to an increasing alignment with antitrust policy and the welfarist approach of the U.S. In the 1980s, the administration of U.S. President Ronald Reagan strongly supported the idea that governments should have a minor role in ordering the economy and pursued a laissez-faire approach to antitrust enforcement. Inspired by the Chicago School scholarship on law and economics that elevated efficiency over other considerations, such as competition, the U.S. based its antitrust law on consumer welfarist considerations (generally meaning lower consumer prices and larger product quantities) and avoided intervening in the markets.
The new emphasis on economic theory in European competition law meant normative legal considerations concerning market structure and democracy took the backseat. The new laissez-faire approach and the legal uncertainty that accompanied uncertain economic evaluations of competition cases resulted in protracted legal procedures that left both public and private antitrust enforcement at a minimum level. Many scholars still refer to consumer welfare as the guidepost of European competition law practice.
This has had a particularly strong impact in digital markets. The application of an error-cost-framework, which prefers non-intervention in cases of doubt, has permitted large tech conglomerates to amass economic power and dominate digital markets through strong network effects, economies of scale and scope, data-related knowledge advantages, and entrenchment strategies. This has led to the creation of high entry barriers and a tipping of digital markets, i.e. when a winner takes most—if not all—of the market. European competition law has been unable to prevent the increasing incontestability of digital markets. As a result, the European Commission admitted in its latest policy brief that the very vague and unclear “more economic approach,” including the starring role of consumer welfare in antitrust assessment, needs revisiting.
The DMA as novel type of regulation in need of an identity
The limited role of European competition law for tackling emerging power concentrations in digital markets has paved the way for multiple new regulations. One of them is the Digital Markets Act, which aims to design contestable and fair digital markets. This general shift in competition law envisions a more active role for European antitrust authorities. The DMA abstains from the welfarist competition policy that hitherto guided European antitrust and favors instead per se obligations and prohibitions, such as inter alia vast data sharing obligations or prohibitions to obstruct interoperability, which a company may pursue to facilitate self-preferencing. The DMA replaces the effects-oriented ex-post regime of consumer welfare with preventive and future-oriented ex-ante mechanisms, including the surrender of a market-based case-by-case analysis based on market dominance, sound economic understanding, and the deletion of efficiency defences. Consumer welfare is not the guidepost for legal intervention anymore. Clear-cut rules replace the legal uncertainties of the “economics-based approach.”
These drastic changes in antitrust policy have been the subject of controversial debates, and many questions remain unanswered. Is the DMA a novel type of competition law? What is the scope of the DMA? The DMA builds on the internal market competence, Article 114 TFEU. This competence norm transfers legislative powers to the European legislature to harmonize rules in Europe in order to establish an internal market. The DMA’s goal is to harmonize rules pertaining to fair and contestable core platform services. It is unclear however, what “contestable” and “fair” really means and to what extent there is a fragmented legal reality in the various member states with regard to those goals. The development of the DMA and its real impact remains a discovery process. This holds particularly true in light of the vast regulatory competences of the European Commission.
From decentralization towards centralization—to what extent though?
Another aspect where the DMA’s regulatory design departs from traditional European competition law is its institutional design. Contrary to the established decentralized mechanism of Regulation 1/2003, the DMA pursues a centralized approach. Articles 1(5), 1(6), and 1(7) of the DMA outline the interplay between the DMA and other current and future laws. National laws that pursue similar or the same goals as the DMA are no longer applicable under a broad primacy of EU law principle. European and national competition law, however, remain applicable. There is a guarantee of coherent decision-making by outlining that decisions of national regulatory authorities should not contradict the DMA. All of these provisions make sense under the internal market rationale, at first sight. Avoiding legal fragmentation is a key consideration of the DMA and heavily builds on bad experiences under the very fragmented realities that the 2016 General Data Protection Regulation enforcement caused. As the GDPR does not fully harmonize the European data protection legal framework, there remains legal uncertainty, legal fragmentation, and under-enforcement in Europe. Varying regulatory approaches from national legislatures can be detrimental to the integration of the internal market and create disparities between the competitive conditions for the users of gatekeepers’ core platform services. Approximating diverging national laws—and particularly the way they are interpreted and enforced—may indeed eliminate obstacles to the freedom of providing and receiving services within the internal market.
However, the devil lies in the details. A too broad centralized approach that follows a full harmonization rationale will cause certain tensions with regard to multiple already existent laws, as the scope of the DMA is not clear. This may cause the DMA to overextend and block national rules, with the unintended consequence of privileging gatekeepers by leaving national laws inapplicable and jeopardizing future national legislative initiatives. Laws that remain applicable to non-gatekeepers may no longer bind gatekeepers. This ultimately obstructs the achievement of contestability and fairness in digital markets. A complementary application of the competition rules and effective enforcement of the DMA is, in particular against this backdrop, crucial. Yet, there is uncertainty over the scope of Article 1 (6), which outlines the applicability of national competition laws, and administrative enforcement mechanisms. Moreover, it is unclear what role private enforcement plays in the current legal design of the DMA.
The position statement of the Max Planck Institute for Innovation and Competition, together with a scholarly paper I wrote with two colleagues of mine, identifies and examines those challenges in the implementation of the DMA, along with recommendations for overcoming them. It stresses that the implementation of the DMA requires a narrow interpretation of Article 1 (5) DMA, which outlines that member states shall not impose further obligations on gatekeepers that pursue the same contestability and fairness goals of the DMA. This should not mean that any national law that deals with those concepts in the broadest sense cannot be applicable anymore. Decentralization and maintaining member states’ competences must remain a key consideration in the implementation of the DMA. Accordingly, one must interpret Article 1 (6) as broadly as possible. National competition laws must remain applicable. Private enforcement mechanism of the DMA is paramount. Without more decentralization, there is a risk that the potentially overly broad blocking effects of the DMA, together with a lack of effective DMA enforcement, may reduce the level of protection instead of increasing it. This may be an impediment to the achievement of the DMA’s goal of establishing fair and contestable digital markets for core platform services.
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