Complete failure in the pursuit of perfect competition

EU lawmakers, who long lost the innovation game to the United States and China, claim to have found the reason behind the continent’s failure: big American technology. They claim that big tech companies are creating an unfair competitive environment in Europe, preventing small innovators from breaking into the market. To restore “level playing field”, the European Union signed the Digital Market Act (DMA), which, starting from May 2, 2023, will tightly regulate ten US (and one European) tech giants.

With only one European company (Siemens) ranking in the top 20 most innovative companies in the world, Europe must pull itself together. But directly attacking the most innovative companies is a rather strange way of promoting innovation.

The authors of DMA justify their plan based on the concept of a “gatekeeper”. Looking at the digital market, they see a wide range of benefits such as network effects, search engines, operating systems, and software application stores. In their view, digital platforms “emerged” as a fee-collecting dwarf, holding the key to the gates that separate users from the features of the digital economy. Policy makers assume that serving as an “important gateway” leads to unfair behavior, lack of “competition,” higher prices, lower quality, and less innovation. They conclude that reducing the “gatekeepers” allows consumers and business users to “reap the full benefits of the platform economy.”

Policymakers plan to reduce the gatekeepers through a variety of targeted rules and regulations. Apple, for example, would have to give third-party app developers access to the operating system and hardware (for example, the Apple Pay microchip) without security or quality clearance. The law would prevent Amazon from franchising companies that offer their products with “Fulfillment by Amazon,” thus expanding opportunities for sellers to use other delivery services. Google will have to share its search data with other search engines.

In other words, platforms will have to abandon many business decisions or even entire business models, under the threat of massive restrictions and penalties of up to 10 percent of annual revenue. At the same time, smaller contenders will get advantages on an organizational silver platter.

Creating more opportunities for small businesses, and thus enhancing competition in the marketplace, may seem like a benign thing. But DMA shows a massive misconception about which competition and innovation processes will produce opposite results in practice than those presented in theory.

Competition is not an end in itself. There is no goal to compete over. Any business aims to Excellence competitors by innovating and attracting more customers with superior products, services and solutions, particularly in a fast-moving sector such as digital technology. Winners receive a “permanent position” where they can reap the rewards of their efforts and creativity, while consumers enjoy the best possible service. How did Apple, Amazon or Google become so big and influential? By creating the technological portals through which millions of consumers and businesses, scattered and separated, can access and interact with each other. These companies have become “gatekeepers” because they have captured significant market share by creating exceptional value: the digital economy itself, which EU lawmakers assume is “out there” without those companies.

DMA ignores that without the efforts and ingenuity of big tech companies, there were no “gates” to keep. The digital platform economy has become and continues to be an engine of innovation in the 21st century Because Big tech companies have invented ways to connect the world.

Limited selection and overcharging? Google gives away most of its products for free. Its entire business model is to create and give away unique products, thus attracting billions of people, to earn advertising revenue.

Less quality and less innovation? People can’t wait to get their hands on the latest iPhone, iPad, Macbook, Apple Watch or AirPods because they are amazing and constantly evolving products.

In terms of competition, DMA assumes that large firms do not face pressure to improve their services and deliver the best possible product without the threat of numerous competitors keeping them at bay. In fact, however, Ability Competition is a related concern as is the existing one. No one, for example, could have predicted that Thomas Edison would end John D. Rockefeller’s dominance of the home lighting market with his bulb. Likewise, Nokia, which once controlled nearly fifty percent of the mobile phone market, was outperformed by both Apple and Samsung. Facebook’s “lockdown” on social media has not prevented TikTok from becoming a dominant platform among young people.

Even the most prominent and established industry giants must always be on the lookout for the existing one And the potential rivals who could dethrone them. Companies like Apple, Alphabet, Amazon, and Microsoft understand it, so they’re still the most innovative companies in the world (1st to 4th, respectively) rather than stagnant monopolies. That a few giant corporations currently dominate the digital industry does not prove, as EU lawmakers assume, that corporations occupy an unfair position.

Lawmakers systematically avoid providing evidence that big technology is impeding the innovative capabilities of Europe’s creators. Instead, they sidestep a negative attitude towards big business to promote a political agenda disguised as unlocking Europe’s innovative potential. But by taking the competitive advantage from successful companies and giving it to the experienced, DMA will remove the incentive to innovate from both. Today’s giants will pause because their innovation will be taken from them anyway, while smaller players will expect to ride free for those who keep developing.

Unfortunately, there is nothing new under the European sun. Matt Ridley argues that Europe has already stifled innovators in fields such as medical devices and gene-editing technologies with its massive protectionist regulatory apparatus. DMA is just another of Europe’s regulatory wounds. Unfortunately, this will also affect the ability of the Silicon Valley giants to continue making progress in the United States and around the world.

Robert Bakula

Robert Bakula

Robertas Pakula is a research associate at the American Institute for Economic Research.

He holds a Master’s degree in Philosophy, Politics and Economics from CEVRO Institute, Prague, Czech Republic, and a Bachelor’s degree from Vilnius Gediminas Technical University. He is a former AIER Visiting Research Fellow.

Get notifications of new articles from Robertas Bakula and AIER.

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *