Jasper van den Boom provides a synopsis of his new book, Regulating Competition in the Digital Network Industry, which comes out at Cambridge University Press in December. The book can be pre-ordered here.
The regulation of digital markets is taking off globally. The European Union and United Kingdom have been frontrunners in introducing ex ante regulation establishing principles to guide competitive behavior in the digital economy. However, the true first mover in the area of regulating digital markets was Germany, which introduced an amendment to their competition law in 2021. The German reform specifically addressed the rise of digital product ecosystems, which are the platforms and products offered by a single firm. These ecosystems form their own networks of products that support one another and actors that co-generate value. They also compete with one another in the broader digital network industry. Ecosystems defy traditional market analysis and underpin Big Tech platforms’ market power.
Despite German efforts to highlight the importance of digital ecosystems, attention for ecosystem competition remains limited in antitrust and competition law enforcement in other jurisdictions. Even if the concept is used in competition law decisions, it is used more as a metaphor and less as an analytical framework. Theories on ecosystem competition have insufficiently found their way into competition law practice, and especially digital enforcement.
Traditional market analysis focuses on specific markets and products. Ecosystem analysis focuses on how markets are interconnected: when users are choosing their smartphone, they can choose an Android Samsung or an iPhone. Once they make this purchase, they enter into one of two ecosystems of connected applications, programs, and interfaces. Each purchase strengthens the entire product ecosystem: Google collects user data to enhance search and advertising services, while Apple gains customers likely to buy complementary products like AirPods and MacBooks within its “Walled Garden.” More users attract app developers, creating a virtuous cycle that enhances ecosystem appeal. In modern digital markets, competitive effects span connected markets, fundamentally changing how ecosystems compete. Regulators and competition authorities have yet to effectively capture and regulate these ecosystem dynamics.
In my new book Regulating the Digital Network Industry, forthcoming from Cambridge University Press, I propose a regulatory framework called “progressive ecosystem regulation.” Progressive ecosystem regulation looks beyond the market or platform paradigm focusing on specific markets like online search or the ecosystems of specific tech giants like Meta and Amazon. Rather, it explores how the presence of digital ecosystems divides and shapes competition across markets that are all connected in a digital network industry. In this view, digital ecosystems are not just collections of products and actors but segments of the digital network where Big Tech firms rule as the de facto regulator, extracting value from every interaction between parties. This broad view on the power of digital firms inspires a wholly different approach to regulation, where the focus is not on monopoly within a market or a set of connected markets, but rather on the ability of large firms to broadly pre-empt entry and prevent disruption of the status quo.
At its foundation, the new paradigm I suggest shifts away from the idea that we should look at markets and moves toward a notion of how the presence of different entrants, mature ecosystems, and incumbent ecosystems impacts the competitiveness of not just their occupied markets but the digital network industry as a whole. Interventions are focused not on reducing market power, but rather on opening up bottlenecks, removing perverse incentives to behave anticompetitively, and making resources available so that a next generation of disruptors can enter and flourish in new or existing digital markets.
The book justifies the proposal through an in-depth exploration into digital ecosystems and the competitive dynamics of the digital network industry. The book consists of three parts: (1) The Competitors; (2) The Competition, and (3) The Regulation. These parts form a narrative that help us to understand what digital ecosystems are, why they are so prevalent in digital markets, their efficiencies, how the presence of digital ecosystems changes the role of monopoly within a market, and how to ensure that the digital network industry as a whole stays competitive and innovative by introducing regulation that is specifically aimed at creating an environment where disruptive innovation is both facilitated and encouraged.
The Competitors: what exactly are digital ecosystems and how do they generate value?
In the first part, The Competitors, the book relies on insights from economic literature to define digital ecosystems and to explain why they are prevalent and likely unavoidable. It looks into the key components that cause concentration in individual platform markets and why the logical next step is evolution into digital ecosystems. One of these components is economies of scale, in which firms accumulate data and supply-side efficiencies with increases in demand. Firms with market power or an initial advantage thus often maintain that advantage.
As digital platforms are intermediaries, a second component, network externalities,shape the demand: As platforms like Facebook draw in users, more users will want to join the most popular sites where there are more users and content. Network effects self-propel demand for the platform. This can be true for non-digital platforms. A classic example is the telephone: the value of having a phone depends directly on the number of people you can call with it. If you had to choose between two competing networks, you would adopt the network that allows you to reach most of your friends, family, and colleagues. What sets digital markets apart, however, is that data-driven network externalities also create supply-side efficiencies: more interactions with a digital platform means more data, which in turn means more resources to improve quality, engage in personalization, and to improve competitive strategies on the basis of an informational advantage.
While platform markets tend to concentrate, establishing a monopoly in a digital platform market is rarely the end-goal for digital firms. In non-digital markets, a monopolist would generally lead a “quiet life,” reaping monopoly profits while minimizing innovative efforts. In digital markets, however, a monopoly in one market can be easily used as a jumping board to enter and monopolize the next market. This is not limited to just downstream markets, but also adjacent or even wholly unconnected markets: a monopoly in search can be the basis to capture smartphones, which in turn can be leveraged into apps and interfaces, which can then be leveraged into voice assistants and artificial intelligence. Each captured market presents new revenue sources, and new opportunities to steer users in the ecosystem from one proprietary service to another.
The required sunk and fixedcosts for entry are low in emerging platform markets, especially when compared to entering markets in non-digital network industries that may require building railroads or installing phone lines. Facebook started as Facemash in a Havard dorm room.
However, the required entry costs grow as the position of the incumbent platform operator becomes entrenched. Once there is an established firm—or several firms—ahead in terms of users on different sides of the market (such as content production and consumption), data, and financial means, it becomes harder for new firms to contest these advantages.
Entrenchment does not only happen by solidifying the firm’s position within the platform market, but also by anchoring it within a digital ecosystem consisting of various products and services. By engaging in on-platform and cross-platform expansion, the digital firm can leverage users and resources from one market to another, making their core platforms harder to contest. Before Facebook, there was MySpace. Before Google, there was AskJeeves. The difference between the Big Tech giants of today and their predecessors was their expansion into new markets and leveraging resources back and forth between their core markets and new products and services. Facebook now has the ability to acquire potential threats, starve them of users, or undercut the profitability of emerging business models by entering a market itself. Facebook’s $19 billion acquisition of WhatsApp was likely not as much about entering the market for person-to-person communications but keeping out a potential competitor in social networking.
Expansion from one market to another is a natural occurrence Through advantages in data and economies of scope, platform giants can offer goods and services in adjacent markets more efficiently, more cheaply, and at higher quality. I In the short-run, incumbency and expansion can be cost-efficient and offer consumer benefits.
In the long-run, however, ecosystems continue to grow at the cost of new firm entry, not only in the monopolized market but also in downstream and adjacent markets. Consequently, ecosystems that grow too large become likely to harm competition. The first part of the book concludes that the cure may be in the poison: while it is hard for firms focusing on a single product or service to compete with entrenched digital ecosystems, there is more opportunity if smaller firms successfully enter a potentially disruptive market (AI, virtual reality, automotive software). Voice assistants, had a disruptive entrant taken hold, could have disrupted Google’s hold on search on the smartphone, as the smartphone once disrupted internet search on the desktop. The cure, then, is encouraging firms to enter frontier markets and build their own ecosystems.
The Competition: how does competition within and between ecosystems take place
The second part of the book dives deeper into the dynamics of ecosystem competition. It first looks into where competition in digital ecosystems occurs, using the distinction between “inter-ecosystem competition” (between digital ecosystem operators horizontally across markets, like between Apple iOS and Google Android), “intra-ecosystem competition” (competition that happens between actors that offer their goods and services on the platforms that are part of the ecosystem, like two software developers for iOS or two Uber drivers), and “vertical ecosystem competition” (between the ecosystem operator and the actors that co-generate value within its ecosystem such as software developers and sellers. For instance, Amazon enters a downstream market to offer a popular product that one of their sellers offers on their marketplace).
The book explains how these forms of competition influence one another. In the early stages of establishing one’s position in a platform market, the ecosystem operator needsstrong intra-ecosystem competition. More competition between sellers and software developers makes the platform more attractive to users, and the more attractive it becomes to users, the more attractive it is to buyers and sellers. Digital firms that try to capture a platform market use abundance strategies: they give away products for free, handsomely reward complementors, and offer low prices and high quality to users. By engaging in loss-leading strategies early, they can establish their position to compete in the long-term. This is the first stage of ecosystem competition: emergence. To become an ecosystem operator the digital firm must first capture a platform, and to capture a platform it needs to create a strong multi-actor ecosystem that brings value to its platform.
As the platform operator becomes more established, it can grow its multi-product ecosystem. The platform operator is likely to identify downstream opportunities by looking at successful complementors. It is also likely to search for opportunities in adjacent markets by looking at the behaviors of its end users. As the platform operator expands into new markets, it is able to leverage its resources across markets to strengthen its position in not only new markets but also its established markets. As the platform operator becomes an ecosystem operator, it becomes better positioned to compete, not only with other ecosystems, but also with the actors that are active on its platforms.
There is ambivalence in this period: on the one hand, entry into new markets—and especially challenges to incumbent ecosystems—create new products and efficiencies for end users and may create more opportunities to reward complementors. On the other hand, as the position of the ecosystem operator grows, they may challenge their successful downstream complementors to gain more control over their ecosystem. This is the second stage of ecosystem competition: expansion. This is a natural part of digital competition: a digital firm that offers only one platform is vulnerable to challenges from the incumbent ecosystem operators, so it has incentives to strengthen its competitive position. This is not inherently anticompetitive and can create long-term benefits to competition, but may also cause complementors to gain fewer rewards in the short run.
The second stage logically flows into the third: maturity. An ecosystem that expands can mature. The abundant rewards that are offered in the early stages of platform competition cannot continue indefinitely: nobody invests in a firm that operates at a loss. The ecosystem operator becomes less dependent on its multi-actor ecosystem and its bargaining position becomes stronger. It starts to offer worse terms for business users and is able to replace them with downstream integration if necessary. The threat of being ousted from the platform becomes sufficient for business users to fall in line, at least if there is a lack of inter-ecosystem competition and viable alternatives. If business users can take their business elsewhere, they can push back. If they are wholly dependent on the platform for their income, they cannot. Maturity thus shapes both the image and utility of the ecosystem as a whole and the relationship between an ecosystem operator and the actors that are active on its platform. However, these changes do not occur in a vacuum. When there is less inter-ecosystem competition, ecosystem operators are able to mature faster and act more aggressively towards their business users. When inter-ecosystem competition is strong, the relationship between the ecosystem operator and its complementors remains more equal.
This is why ecosystem competition requires a look at the entire digital network industry. It is not as simple as capturing a market and establishing monopoly: the power of one ecosystem operator depends heavily on the number of active ecosystem operators of a relatively equal size (i.e. with the ability to create competitive constraints), as well as the threat of disruptive entry either by their own business users or outside firms.
When there are a few, very large, mature ecosystem operators, this creates stage four ecosystem competition: incumbency. The small number of ecosystem operators will soon realize that it is more efficient to create a competitive equilibrium where they focus on suppressing potential disruption rather than on competing intensely with one another. By leveraging their resources and incumbency advantages into potentially disruptive markets, ecosystem incumbents prevent disruptive entrants from gaining a foothold. As long as the large tech firms capture new market, the equilibrium remains. This allows them to enjoy the type of quiet life enjoyed by monopolists: even though they face challenges, they never face existential threats. Once the situation of incumbency has captured the digital network industry, it becomes difficult—if not impossible—to restore competitiveness and contestability without regulation.
These conceptual stages of ecosystem competition help regulators and stakeholders to understand the difference between goodecosystem competition and badecosystem competition. Good ecosystem competition happens when new firms emerge and disrupt the status quo, grow their ecosystems, and eventually expand into mature ecosystems. The more of these ecosystems are present in the digital network industry, the less ecosystem power any one firm holds.
Bad ecosystem competition happens when there is intense competition between only the same four or five ecosystem operators every time a new potentially disruptive market emerges. Regulation is necessary to rekindle competitiveness and contestability so that innovation can bloom, and without it users are doomed to gain access only to products that exist to reinforce the incumbency of existing Big Tech firms.
The Regulation: how to create an environment where competition and innovation flourish?
Regulating competition between ecosystems and opening up the digital network industry for competition requires a rethink of economic regulation for digital markets. In the third part, the book develops a proposal for progressive ecosystem regulation that develops a new view on restoring digital competition: regulation must serve to break down the largest ecosystems in size while promoting the growth of entrants in the digital network, intensifying competition between more ecosystems of a relatively equal size.
The strategy to enhance competition is two-pronged. The first is to stop incumbent ecosystem firms from pre-empting disruption by taking away their ability to foreclose, threaten, or acquire promising disruptors. Netscape, Instagram, Slack, WhatsApp, and Oculus, are all examples of disruptors that incumbents viewed as threatening and subsequently foreclosed through leveraging or acquisition. The second is to make resources available to entrants and growing ecosystem operators depending on their needs. Entrants need free access to facilities and data of Big Tech without constraints. Regulation should be more selective for larger ecosystems.
The regulatory design that is proposed is as follows: ecosystem operators are entered into one of three pools: heavily regulated, lightly regulated, or entrant. Firms that are in stages one and two of ecosystem competition (emergence and expansion) are automatically in the entrant pool. These firms do not face any regulatory burdens but are instead granted access to resources held by lightly or heavily regulated ecosystem operators, and granted protection in terms of competition. Entrants should be able to request, free of charge, access to data, facilities, and other resources held by larger ecosystem operators to develop and capture new platform markets. This can entail, for instance, that entrants can mix and match curated content based on social media posts, vertical search offerings, or video content at favorable rates or conditions. These conditions depend on which ecosystem operator they are dealing with and if they are entered into the lightly or heavily regulated pool.
The lightly regulated pool is for mature (stage three) ecosystem operators, and imposes tailored burdens on these operators to ensure that they do not “pull up the ladder beneath them” in terms of ecosystem competition. Meaning, ecosystem operators in the lightly regulated pool may be subjected to access duties or prohibitions, but only those that help entrants. Lightly regulated entities do not have any obligations towards heavily regulated firms but instead enjoy access rights and protections from incumbents themselves. They are also free to compete with one another without additional burdens. The same goes for the entrant and heavily regulated pool: competition between relatively equal-sized ecosystems should be unrestrained, except for the possibility to enforce ex post competition law.
The heavily regulated pool consists of stage four incumbent ecosystem operators. They are subjected to extremely heavy regulatory burdens for how they must aid entrants. These can include granting entrants free access to data, facilities, or resources without any additional conditions or constraints. These can also include less-extensive duties towards lightly regulated entities such as honoring fair, reasonable, and non-discriminatory (FRAND) requests for access to the same. It should be clear from the outset that larger ecosystem operators cannot simply refuse access, their power to govern their own ecosystem comes with the responsibility of equal treatment and the need to motivate decisions. Refusing access to their platforms or the data that they must share can happen on justified grounds such as security or public safety, but not to force disruptive entrants into adopting the business model desired by the incumbent. If Google as a heavily regulated entity wants to include AI overviews, they must allow competitors to offer their overviews in the exact same position under regulated terms and give users a fair choice for defaults. Similarly, Microsoft cannot integrate its own services into its productivity software without giving competitors like Slack, Zoom, or Anthropic an opportunity for integration as well.
The burdens of committing to such interoperability and access for all services offered by a heavily regulated entity are huge. However, this is by design. The purpose of the heavily regulated pool is specifically to make it less attractive to focus on maintaining one’s incumbency than it is to compete on the merits. Ecosystem operators in the heavily regulated pool are aware that if they forgo their position in parts of their ecosystems—be it through divestments or by making room for heavier competition in their markets—they can be moved from the heavily regulated pool into the lightly regulated pool. This would not only reduce their burdens towards entrants but also allow them to compete freely with other firms in the lightly regulated pool.
The regulatory system is completely different from anything that is happening globally at this moment. The purpose is not to introduce competition on certain core platform services, like the EU’s Digital Markets Act,) or to reduce the strategic position of a certain activity, like the U.K.’s Digital Markets, Competition, and Consumers Act 2024, but rather to create an environment where firms of all sizes are encouraged to compete intensely and on the merits with ecosystem operators of an equal size while leveling the playing field between those that are unequal.
Progressive ecosystem regulation gives a “way out” to the large incumbent firms, rewarding them for the divestment of their position. The underlying hypothesis being that if there are enough ecosystems of an equal size without a small group of “winners,” competition will continue to intensify. The regulatory framework intends for the heavily regulated pool to phase out eventually, so that regulators can intervene where necessary to keep entry into the digital network industry open and to allow for disruptive innovation. It is not about a list of do’s and don’ts but about a recalibration of competition and better division of the digital network industry across various digital ecosystems. It balances trust in the ability of competition to produce the best outcomes and gives a hand to the digital network industry for competition to restore itself.
Conclusion
The book offers a blueprint for a new type of regulation that approaches competition in the digital economy holistically by looking at competition throughout the digital network industry instead of adopting a fragmented view. Early experiences with the DMA have already shown that large ecosystem operators still have incentives and the ability to maintain the incumbency of their ecosystem. These firms leverage their capabilities, resources, and legal recourse to slow down compliance or shift away from one business model to another. The process of introducing contestability in digital markets by these means takes years for markets where competition already exists, and does not stop incumbent ecosystem operators from leveraging their position into new markets such as artificial intelligence. To really open up digital markets in a way that produces systematic and continued competition, innovation, and rewards for users, a shift towards regulating with a focus on ecosystem competition may be direly needed in the fight to curtail the ever-growing economic and political power of Big Tech.
Author Disclosure: The author reports no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
Subscribe here for ProMarket’s weekly newsletter, Special Interest, to stay up to date on ProMarket’s coverage of the political economy and other content from the Stigler Center.
