New factors for antitrust analysis in digital markets

The new Section 18 (3a) of the recently amended German antitrust law will extend the analytical framework for assessing market power in digital markets to include new factors, especially those brought by technology. Whether this new “toolbox” will shift the benchmark for measuring market power in digital markets on a sustained basis remains to be seen.

Digitalisation is changing economic processes, and these changes represent a challenge for antitrust law. Antitrust problems in digital markets are often heightened by the acceleration of competitive effects, markets “tip” into monopolies more quickly, and standardisation and innovation processes take place at a much faster speed. One example is how the way we consume music in the analogue world hardly changed since the CD-ROM was introduced 35 years ago. In the digital world, we are already witnessing the success (and recession) of the fifth or sixth business model in the course of 10 years.

The 9th Amendment of the Act Against Restraints of Competition (“ARC”) is intended to prepare German antitrust law for the challenges associated with digitalisation. The additional provisions in Section 18 (3a) of the ARC deal with measuring market power in digital markets and will have an effect not only on market dominance proceedings but also on material aspects connected with merger control. But where is the problem?

German and European antitrust law are both based on the concept of market power. The law is only supposed to intervene where market power exits and where this market power may lead to disadvantages for competitors. Market power is measured on the basis of market structure: the relevant markets are first identified, then the market position of suppliers and consumers on these markets is determined. This essentially takes place by calculating market shares and accounting for other factors such as financial power and access to procurement and sales markets (referred to as “plus” factors). It has now become apparent that certain technology-related aspects of digital markets did not feature in these criteria:

• Digital markets, especially multi-sided markets (known as “platforms”), are characterised by network effects. Network effects are not just a phenomenon in the digital world – they are simply much more pronounced there (one of the classic articles on this topic is by economics professors Michael Katz and Carl Shapiro from Berkeley, “Systems Competition and Network Effects”, published in 1994, available here). Economists describe the network effect phenomenon as being that the utility a consumer derives from a product changes depending on the number of consumers of the same product or a product otherwise linked to it. Classic examples include the telephone or fax. A more up-to-date example is provided by the digital world: social networks such as Facebook become more attractive as more users join the network. From a certain critical mass, the phenomenon “tips” into a form of standardisation. “The social network” becomes tantamount to Facebook. This process, which can also be observed in multi-sided markets such as property search platforms or hotel websites, is referred to as tipping.


• User behaviour on digital markets is changing. One example is the way people consume journalism. In the analogue world, many people are willing to spend money on a newspaper, whereas in the digital world news is consumed for free. Apart from this, many users use several products at the same time. One example of this that is worth reading is the decision by the Federal Cartel Office in merger proceedings relating to dating platforms (decision of 22 October 2015 – B6-57/15, only German, available here): 72% of the users questioned used several dating platforms at the same time. The reason is that it increases their chances of finding a suitable partner. This user behaviour, which is very pronounced in online markets and depends on the degree of differentiation of the offers and switching costs, is referred to as multi-homing.


• The cost structures of providers in digital markets are very different from those in analogue markets. For an online travel agent it essentially does not make any difference whether ten, a hundred or a thousand people access their offers at the same time. Economists speak of low marginal costs for each additional user. The remaining fixed costs are spread out across the number of users. The higher the number of users, the lower the costs per user. This reinforces the trend towards size and means that the largest suppliers have the lowest costs per user. Those effects are often called economies of scale.


• In the digital world innovation cycles are much shorter. The example of music consumption illustrates this very clearly. Nowhere is the Schumpeterian principle of creative destruction brought to bear as strongly as here. Even the U.S. Court of Appeals of the District of Columbia captured one of Microsoft’s central arguments during the famous Microsoft I antitrust proceeding in 2001, which was about “breaking up Microsoft”, as follows: “Once a product or standard achieves wide acceptance, it becomes more or less entrenched […]. In technologically dynamic markets, however, such entrenchment may be temporary, because innovation may alter the field altogether”. Thus Microsoft argued against an intervention by antitrust law by predicting its own demise.


• Collecting, evaluating and using personal data forms the basis of a wide range of business models in the digital world. This leads not only to data protection issues, but also to challenges under antitrust law. Data that is exclusively collected or evaluated can bring market power. Collecting data can also become relevant under antitrust law. In 2016, the Federal Cartel Office launched proceedings against Facebook. The accusation was that as a dominant undertaking (on the market for social networks) Facebook was abusing its position by violating data protection rules. The follow-up questions arising from this overlap between data protection law and antitrust law are manifold.

Section 18 (3a) ARC now lists the five factors above which should be taken into account “in particular in multi-sided markets and networks”. This broadens the toolbox available to the antitrust authorities and could be a step in the direction of a new concept of market power for the digital world. Although the significance of market structure analysis in digital markets will not disappear completely, it will be relativised by the new law. On the other hand, it was also possible to examine many of the aspects referred to under the old law. Only time will tell whether the new “checklist” (which, however, is not meant to be exhaustive) will shift the benchmark when analysing market power.