Why Internet Platforms Don’t Need Special Regulation

October 19, 2015
Regulators already have the ability to address clear cases of anticompetitive or anticonsumer behavior. Beyond that, the legitimate concerns of government are limited.

The Internet has had a major, beneficial impact on economic growth and everyday life, and an important source of these benefits has been the rise of multisided Internet platforms such as eBay, Uber, TaskRabbit, and Airbnb. The role and influence of these platforms has led to calls for greater regulation, especially in Europe. But many of these calls overlook how platforms work, the significant value they create, and the constraints they face. Because platforms remain subject to normal competitive forces, their structure alone should not give regulators untoward concern. Regulators already have the ability to address clear cases of anticompetitive or anticonsumer behavior. Beyond that, the legitimate concerns of government are limited.

The main value of an Internet platform is in providing a common place for other market participants to find each other and easily conduct transactions. These companies create value in several ways: 1) improving resource use; 2) increasing competition; 3) reducing transaction costs; 4) reducing asymmetric information between buyers and sellers; and 5) bringing new buyers and sellers into the market. The danger is that, because these often enormous benefits are hard to quantify, policymakers will discount them and only look at the perceived market power of the platform.

This explains why the rapid growth of some platform companies has triggered a number of calls for greater regulation. The motivations behind these outcries vary, but they include fears of market power, exploitation of workers, concerns about data security and privacy, opposition from incumbent suppliers, and general concerns about lagging national or regional competitiveness in the digital economy. By and large, these calls for new regulatory action are misplaced, however. While Internet platforms are just as capable of anticompetitive behavior and bad business practices as any other company, the traditional powers available to injured parties and government regulators are sufficient to address virtually all actual (as opposed to hypothetical) harms. There is therefore little need at this point for new laws or regulatory actions aimed solely at platforms.

It is true that economies of scale and network effects favor large firms and may limit the number of competitors that a platform faces. But this need not harm users and in many cases, by making it easier to find other users, dramatically increases value for users. There are also countervailing pressures that limit growth. One is the presence of multi-homing (where users participate in other competing platforms) and product differentiation, both of which reduce the importance of economies of scale. In addition, technological changes in network architecture reduce startup costs and boost both entry and exit by allowing assets to be used for a variety of purposes. Finally, the demand for continued innovation will erode any temporary market power and force companies to constantly invest in new features. Examples of powerful platforms that lost their dominance due to a lack of innovation include AltaVista, MySpace, and Friendster. 

Antitrust regulators still need to be watchful, but they cannot merely assume that a platform is behaving in an illegal manner and harming consumers just because it is doing something that they don’t like or understand. Instead, regulators need to make detailed, case-by-case determinations about whether total social welfare has been harmed. Standard antitrust orientations and tools may be of limited use. 

Given the value created and the existing market constraints, there are few reasons to fear that Internet platforms pose a unique challenge to markets and competition. Moreover, regulators already have sufficient legal powers to act against the most likely problems. The question is whether they will instead divert their attention to unlikely ones, and in the process risk reducing Internet platform innovation.