US, EU Policymakers: Don’t Single Out Internet Platforms for Special Regulation, Says ITIF

WASHINGTON—The Information Technology and Innovation Foundation (ITIF), one of the world’s top science and technology think tanks, today released a new report outlining why Internet marketplace platforms—which include companies such as Airbnb and eBay—do not need their own, special regulations to address potential competition, privacy, or employment concerns. In light of growing U.S. and European interest in creating new rules specifically for Internet platforms, ITIF argues that regulators already have the authority to address these and other possible harms. The fact that these markets are Internet-based is not cause for them to be regulated separately.

“Online marketplaces are bringing immense value to society by connecting buyers to sellers more seamlessly than ever. But the idea of a two-sided marketplace is nothing new,” said Joseph V. Kennedy, a senior fellow at ITIF and author of the report. “Where we once had town-square bazaars and village matchmakers we now have Internet platforms like Etsy and Tinder. These kinds of online marketplaces are growing quickly because the Internet reduces costs, scales easily, and is available anywhere, any time. It is important for policymakers to recognize that some Internet platforms have significant market share only because by doing so they maximize value for consumers. Moreover, most nations have long wrestled with all sorts of commercial exchanges between buyers, sellers, and market makers, so the regulatory structure is already in place to deal with potential harms. There is simply no need for special regulations that could hamper new, value-creating innovation.”

The report, “Why Internet Platforms Don’t Need Special Regulation,” identifies four commonly cited areas of concern for Internet marketplace platforms and rebuts the contention that they call for special regulation. The most important of these fallacies is that Internet platforms have become too powerful and are precluding competition in the marketplace.

The report explains that the very qualities that make Internet platforms different from other types of businesses also mitigate against market abuses. For example, because of network effects, Internet platforms deliver more value to society as they get larger, not less. They also must balance demand on two or more sides of the market, and they face a continual threat of technological displacement from “Schumpeterian competition.” These dynamics make it harder for them to successfully exercise market power the way big players can in more traditional industries. Practices such as pricing below marginal cost or tying agreements, which normally signal an abuse of market power, can actually create social benefits in the case of platforms. As a result, the report concludes that in evaluating antitrust concerns, regulators must not only understand the unique economic nature of platforms, they must also carefully analyze any particular platform that is under scrutiny because each is different.

“Are we better off with three different ‘Facebooks’ or ‘Twitters’ or just one? Clearly in these cases one large network is better than three smaller ones,” said Dr. Robert D. Atkinson, founder and president of ITIF. “When looking at antitrust issues, market share has traditionally been the most important indicator of abuse. But for Internet platforms, we can no longer use this old lens. Larger market share is usually a reflection of superior total economic and consumer value for networks.”

ITIF goes on to argue that the next potential concern—that Internet platforms are a threat to privacy—is misguided because the privacy risk is no less or greater with platforms than with other digital firms, and as such, there is no need for special privacy policies applying just to platforms.

With regard to the potential concern that platforms threaten jobs, ITIF reminds policymakers that the principal goal of economic policy should be spurring productivity growth. To the extent that platforms can enable higher productivity, they should be welcomed, not shunned.

The report also points to a fourth potential concern—that platforms are a threat to incumbent industries—but dismisses it as misplaced fear. The report argues that by definition, platforms that enable others to take market share from incumbents are pro-consumer and pro-growth.

“Just as Luddites rioted against the loom replacing textile workers, so too will taxi drivers, hospitals, and lawyers push back against Uber, Heal, and UpCounsel,” said Atkinson. “But there is no reason to expect that the tremendous value these platforms create should go to incumbent providers. In fact, the greatest beneficiaries are the least affluent consumers and small businesses, because they are now able to participate in markets where the price of entry used to be too high.”

Kennedy concluded: “Policymakers should not be regulating out of fear that Internet platform companies have become too big. While Internet platforms are just as capable of bad business practices as any other company, the system already exists to protect consumers and other users against any potential abuse.”

Read the report.