Illusions of Dominance: Revisiting the Market Power Assumption in Platform Ecosystems

Legislators and regulators in the United States, European Union, People’s Republic of China, United Kingdom, and other jurisdictions have adopted or advocated historically significant changes to antitrust and competition law as applied in the digital economy. Much of the business and general press, which play an influential role in impacting public sentiment, has welcomed these steps. These changes would place (and, in the case of China and the EU, have already placed) much of the digital economy under a regime of preemptive rules, effectively substituting the conventional regime of ex post fact-intensive, case-by-case adjudication with a regulatory regime comprising a wide array of ex ante antitrust violations, often without requiring evidence of competitive harm. This effectively places substantial portions of the digital economy—including the platforms that often act as the coordinating hub of digital technology and content ecosystems—under a standing regime of regulatory investigation, enforcement, or waiver.

These dramatic interventions rest on the assertion—what I will call the “platform monopoly” thesis—that leading digital platforms typically enjoy market power and regularly exercise that power to harm competition. Following what has become conventional wisdom, digital-platform markets are purportedly “winner-take-all” environments prone to high levels of antitrust risk because incumbents are inherently shielded by network effects and switching costs that inhibit entry. Absent competitive discipline, incumbents are therefore free to increase prices or reduce quality at will (subject of course to consumer demand). If those assumptions are correct, then the digital economy represents a massive case of market failure that merits fast-track regulatory intervention unencumbered by the conventional safeguards supplied by case-specific factual examination. In a more extreme version of this line of thought, some regulators and scholars argue that digital-platform markets are akin to natural monopolies that should be regulated as public utilities—in effect, largely placed outside the realm of the market altogether.

Given the significant implications of these actual and proposed interventions in digital markets, which comprise large portions of the global economy, it is imperative to assess rigorously the theoretical and factual basis for the market-power assumption in platform environments. I do so in two steps.

In Part I, I draw on the existing antitrust and economics literature to identify the conditions under which a leading digital platform would plausibly be in a position to exercise pricing power. Contrary to the increasingly common tendency among regulators, legislators, and some scholars to reflexively attribute market power to leading digital platforms, the economics literature identifies specific circumstances in which a platform is likely to exercise market power for an appreciable period of time. Moreover, even when market power can be attributed to a particular platform, a net-welfare analysis requires balancing any adverse competitive effects arising from the platform’s exercise of market power against the transaction-cost savings and other efficiencies arising from the platform’s economies of scale and scope. I also review evidence concerning market power in the mobile communications and social-networking sectors. That evidence suggests that dominant platforms often face competitive threats and can rapidly lose market leadership to innovative entrants.

In the aggregate, theoretical and empirical considerations disfavor the view that a leading platform inherently enjoys durable market power, although it may enjoy high market share for certain periods of time. To be clear, this does not exclude the possibility that, in particular cases, a platform can secure market power, and it is therefore necessary to inquire whether any apparently dominant platform exercises market power and is using anticompetitive means to maintain it. In other cases, it may be appropriate to inquire whether a platform is employing anticompetitive practices in an attempt to secure market power and has a sufficient likelihood of achieving that outcome.

In Parts II and III, I present case studies of the food-delivery and cloud-computing markets. Reflecting the importance of market-specific analysis to assess competitive conditions in platform environments, each case study examines in detail the extent to which each of these markets conforms to the expectations of the platform-monopoly thesis. Following that thesis, some policymakers and commentators have characterized leading firms in both markets as platform monopolies that require preemptive intervention. This has resulted in caps imposed by certain U.S. cities on commissions paid by restaurants to delivery platforms, challenges by EU and UK competition regulators to acquisitions in the food-delivery market, and ongoing investigations by U.S., EU, and UK competition regulators in the cloud-computing market. In both cases, I identify characteristics that challenge the widespread attribution of pricing power to leading platforms in these markets.

In food delivery, any market-power assertion is challenged by two inconvenient facts, which are presented in the case studies below: consumers and vendors can easily switch among providers, and every major platform remains unprofitable since the market’s inception almost two decades ago. In cloud computing, standard assertions that leading providers exert market power due to user lock-in are difficult to reconcile with the facts that users widely adopt multiple cloud services and much of the potential user population has not yet adopted (or fully adopted) cloud services, leaving much of the market open to competition. Contrary to these common assertions, neither market persuasively conforms to the limited circumstances in which an incumbent platform could increase pricing or degrade quality relative to competitive levels without a rival imposing a penalty.

Like any case-study analysis, these findings may reflect to some extent economic and technological characteristics that are peculiar to these specific markets. However, both markets are likely to deliver insights that apply to platform environments more generally, subject to appropriate accommodation for industry-specific characteristics. For example, the food-delivery market exhibits a multisided structure (specifically, a complex three-sided structure involving users, vendors, and couriers) that is a definitional element of any platform environment. The cloud-computing market, on the other hand, carries potentially broad implications for the digital economy insofar as it supplies the data-storage and transmission infrastructure for a wide range of digitally enabled business and consumer markets. Subject to these considerations, this article’s case studies cast doubt on the widely adopted assumption, as reflected in a substantial portion of regulatory and academic commentary, that platform markets are inherently prone to entrenched winner-take-all outcomes that necessitate preemptive intervention by regulatory authorities.

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