Disruptive technologies and competition: a Portuguese perspective

Author: Maria João Melícias - Board Member, AdC (Portuguese Competition Authority)

Speech delivered at W@Competition Conference 2.0: Is Disruptive Competition Disrupting Competition Enforcement? Brussels, February 28, 2018

Our lives are being disrupted by change. This is not a unique feature of our time, rest assured. Disruption itself is not a new concept. But there is, in effect, a distinguishing trait of innovation nowadays – which is its infuriating pace. This speed is triggered by the unprecedented availability and flow of information, data and knowledge.

Disruption can take many faces, many forms: it is not only about new business models, new competitors, new products; it is also about new social realities, new cultures and new people. One of the major challenges of our time consists precisely in deciding how one should address these cultural changes. You can choose to fear the unknown, aversion to change or take the path of scepticism and denial. I am afraid nothing will remain the same.

You may wonder but what the heck does this have to do with competition policy? Well everything. So it happens that to a large extent competition policy is at the heart of this cultural transformation. Competition can make a difference. The Portuguese Competition Authority’s (AdC) experience and approach in each one of the four main pillars of competition policy can help illustrate this.

Collusion

Should we fear the algorithm? It seems that algorithms can predict almost every aspect of daily life and with the help of Artificial Intelligence they are increasingly self-learning.

The AdC’s priorities paper for 2018 highlights that we will remain vigilant when it comes to algorithmic pricing. Companies cannot escape liability by hiding behind the argument that “my computer did it”.

But we are also taking the path of humility here, by seeking to fully grasp what these softwares are capable of. Whether or not we will need to stretch the boundaries of antitrust to cover certain forms of algorithm-led collusion remains to be seen, but I would rather highlight how we are also taking advantage of “Big Data” and algorithmic methods to actually fight anticompetitive behaviour.

E-procurement is a good example. In Portugal, every bid for a government contract needs to be submitted via online platforms. This has given rise to huge amounts of data. The AdC has direct access to this huge database, enabling us to run targeted screens and apply algorithmic methods, in order to help cartel detection. Therefore, “Big data” and algorithms can also be an opportunity for competition enforcement.

Merger control

In the digital economy, a company’s database can actually be more valuable and attractive than its turnover. However, the turnover of some data driven start-ups may not be high enough to be caught by merger notification thresholds. Nonetheless, we have been able to deal with this concern, without the need to fix our thresholds, because Portugal’s notification thresholds since 2012 combine both turnover and market shares.

For example, we recently examined an interesting transaction between the two biggest online platforms for non-professional classified ads in Portugal, which was only caught because it would lead to the reinforcement of a market share in excess of 50%, even though the target’s turnover was marginal.

In this context, we dealt with a number of original issues inter alia: (i) the multisided nature of these platforms; (ii) the fact that the notifying party was already integrating data from other platforms, thus reinforcing network effects and rendering change very costly; moreover, (iii) the parties’ market power was assessed on the basis of traffic, notably, page visits and page views.

Ultimately, the transaction was dropped just before we moved to phase II.

The digital landscape is also creating a merger trend towards convergence and vertical integration in the media industry and telecommunications, the enablers of the digital economy. Over-the-Top TV services, like Netflix, have transformed the ways how consumers access and watch audiovisual content. Media executives have understood that they need to scale up both in terms of distribution and content. In turn, telecom operators are dreading the fact that they may become irrelevant, like mere commodities.

State restraints

It is not only firms that can harm competition. Governments can do that quite effectively as well, even if involuntarily.

After issuing several recommendations throughout 2016 and 2017 on the legal framework for transport services, in particular taxi services, the AdC is now paying particular attention to Fintech, as the financial regulatory landscape across Europe in undergoing profound changes. We want to ensure that national regulation in this respect does not stifle innovation and efficiency, so that markets remain open to new entrants. Therefore, we are looking closer at certain financial markets, like payment services, crowdfunding, crowdlending, and automated financial advice to make sure that existing regulation neither becomes a disproportionate barrier to entry nor it is used by incumbents to strategically foreclose the market or stall market developments.

Dominance and competition policy

Companies act globally expecting regulation to be of course, if not uniform, at least coherent across jurisdictions, even more so in the context of the digital economy. For a long time, and particularly when it comes to the assessment of unilateral conduct there has been a transatlantic divide and convergence proved to be difficult.

In my opinion, the digital economy seems to be bridging the gap between both worlds.

In the US, antitrust has usually been regarded as a “consumer welfare prescription”, meaning that red flags would never be raised, unless palpable consumer harm could be shown in the form of higher prices or reduced output. And in the digital economy this is hard to establish, since innovative services are often provided supposedly for free. This relaxed approached has been based on the assumption, perhaps a correct one in the US context, that markets usually remain open and contestable and that at any moment a new technology could disrupt the status quo, through a process of “creative destruction”.

However, this approach, besides causing antitrust to become almost politically irrelevant, has arguably also led to high concentration levels in many industries in the US and more importantly to the creation of tech giants that only keep on growing because of network effects. Barriers to entry are getting higher. The digital economy has thus resulted in markets perhaps not being as contestable as they were thought to be.

Market power here is based on access to oceans of data, including valuable information on consumers’ preferences and personal habits. Data is currently regarded as the most valuable resource on the planet and as the currency that we give away to have access to certain web services. This market power has been often gained not only through “superior skill, foresight and industry” but also by systematically taking over rivals and innovations, before they reached the market.

And this is where we start bridging the gap. For example, the Department of Justice has challenged vertical mergers – something that would seem unlikely in the recent past, or The Economist magazine has called for more intervention and for the need to regulate the net and “tame the titans”. It seems that even in the US, there is a sense that people might not be in full control of their economic destiny, so that freedom of opportunity and the entrepreneurial spirit might be under threat.

Don’t get me wrong: size is not a bad thing. Scale brings efficiencies. The knowledge-based society created products and services that have made the world a better place. It has enhanced humankind. Furthermore, it seems that other industries, such as banking, healthcare and pharma are also getting uneasy on account of Big Tech. And I confess: I tend to like it when I see companies getting nervous.

But let’s face it: innovative companies do not produce innovation and foster consumer welfare out of the kindness of their hearts. Companies, even those that are truly immersed in a corporate culture of social responsibility and compliance, hate to compete. They hate their rivals and “dream of monopoly”. Even greed is good, the urge to profit is good – so long as it is disciplined through the competitive process.

Regardless of the specific remedy one may envisage to solve competition concerns triggered by the digital economy where they exist, our underlying policy approach in Europe has always been about the need to preserve incentives for companies to do the right thing – compete – by making sure that markets remain open and contestable, so that citizens remain in control of their fates, of their choices and of their data. So that we do not lose confidence in the social contract.

This is a very basic old insight that goes back to Adam Smith really, but which I find it also holds true in the digital environment: it is rivalry, coupled with vigorous competition enforcement, that provides the right incentives for innovation, whereas with scarce or no competition, society will most likely suffer. And, at least in Europe, we will not allow that to happen.

#Algorithms #BigData #Innovation #Digitalmarkets #Enforcement

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