Digital platforms are increasingly shaping the economy. What characterizes this development?
The rise of the platform economy is a profound structural change in electronic markets. In the early stages of the World Wide Web, a popular slogan was "Cut out the middleman!" It was expected that providers would connect with a global clientele without intermediaries. However, looking at electronic markets today, the opposite has happened: digital intermediaries that provide access to the client are among the most important and dominant players.
How does this happen?
First of all, platforms are very attractive in many ways - for both customers and suppliers. Think of a small, owner-managed hotel. Through booking platforms, it can reach customers worldwide; many more than through its own website. In addition, platforms often provide other services, such as payment processing, ratings or shipping in the case of e-commerce. For small and medium-sized enterprises in particular, they open up access to markets, which they could rarely achieve on their own.
These benefits come at a price: dependencies arise. For example, if a medium-sized company generates a large part of its revenue on a specific platform. Platforms often present themselves as marketplaces, as a neutral infrastructure on which providers and customers can meet. But the game of supply and demand is not that free. The platform operators use their algorithms to control which recommendations or rankings are displayed to the customers.
At the minimum, there is a risk that the results will be distorted by the platform's own interests. As platforms move between suppliers and customers, vendors also lose their direct user interface.
Can you give an example?
When you book a hotel through a booking platform, the communication is routed through the platform, and often the payment. Sometimes the hotel no longer has direct contact details of the customer. The platform controls access to the customer and becomes the gatekeeper.
What are the consequences?
The customer loyalty fades. For example, many customers who have purchased a product through Amazon from a third-party retailer would likely say that they bought it "from Amazon". In fact, platforms also help customers find their way around a multitude of offers - they reduce search costs. From the point of view of the vendor or retailer, however, this means that they are downgraded to the supplier of the platform.
Do you believe this is a cross-industry trend?
The development is well advanced in online trading or booking platforms. I think that platform economics is penetrating many industries, partly because it allows for success with relatively little investment. For example, you do not have to set up a branch network, but just a platform.
That alone is costly enough. But you can achieve network effects: the more customers there are, the more attractive the platform becomes for the providers. The more providers are there, the more attractive it becomes for the customers. Similar developments can be found in mobility services, soon perhaps in education or health. Even banks are worried that one day they will only be suppliers of platforms for financial services.
Are new rules needed for platforms?
I believe there is a need for action. But the issue is identifying which instruments are appropriate, how and where they can best be put to use. Evidence-based policies may require further economic research.
So far, antitrust law has been at the center of the legal policy debate. Important steps have already been taken to adapt competition law to the changed conditions in digital markets. In order to assessing market power, for example, data power and access to competitive data can now be taken into account.
Antitrust law is a strong instrument, but only regulates selectively and retrospectively. Also, the procedures are often very tedious. More recently, there is a growing demand for clear rules for platforms that are independent of market power.
Don’t such rules exist yet?
In Europe, an important first step has just been taken: in June 2019, the so-called Platform-to-Business Regulation was adopted. It concerns the relationship between platforms and commercial users.
In the future, for example, platforms must announce changes to their terms and conditions in good time. Account blocking must be justified. For rankings, the most important criteria should be stated clearly and comprehensibly. If platforms treat providers differently, they must disclose that. However, what the regulation does not regulate is the question of access to data.
...This is in reference to the idea that platforms should also make certain data accessible to others, such as machine learning applications.
My impression is that this debate is still not very nuanced. Initially, the idea sounds fair and just: Data-rich companies should grant data-poor companies access. I think there should be more differentiation here: what kind of data is involved? For what purpose should they be used? Platforms generate vast amounts of data: transactions, addresses, payments, ratings, and more.
An example: A hotel would like to refer customers who have stayed there once before to a special offer. However, it cannot address its customers directly because the e-mail addresses are only on the platform. In this situation, the customer’s data protection interests contradict access to data for the hotel. These interests must be balanced.
In aggregated form, the data generated on platforms also indicates wider trends. For example, a booking platform could evaluate which cities are becoming increasingly popular with travellers, and use the data as a source for new business models. Some data is generated only because the platform has invested heavily in the digital infrastructure. In these cases, the platform’s investment interests contradict access to the data for other parties. Other data is generated more as a by-product, and I think it’s more appropriate to focus on the need to pass data on in these areas.
How would this type of access to data work in practice?
That, too, depends on what the data should be used for. For financial services, such a right is already in effect. The new EU Payment Services Directive requires banks to set up a software interface to give third-party providers access to account information when customers want it. If you have multiple accounts, you can, for example, use an account balance app and view the account transactions.
We could consider whether such a model should be implemented in other areas. For example, there are different rating systems on different platforms. Retailers, of course, want to see at a glance how evaluations develop and learn early when a problem arises. This could be helped by an aggregator app that brings together reviews from different platforms. But this requires real-time access to the data of the individual platforms. Whether this is possible or not depends on the - often very restrictive - conditions of use of the platforms.
Or consider a hotel that wants to leave a certain booking platform and go to a competitor: it might have two hundred good ratings, but has to start from zero on the new platform if it can’t take the ratings with it – so it loses its reputation capital. This raises the question of whether the portability of reputational data should be guaranteed for companies. The Competition Law 4.0 Commission appointed by the Federal Ministry of Economics has recently made some good suggestions as to how this type of problem could be resolved. For an evidence-based policy, however, further economic research may be needed to find appropriate solutions.
How do you believe interaction between platforms and companies should work?
The EU Platform Regulation I mentioned has been given the somewhat unwieldy title: “Promoting fairness and transparency for business users of online intermediation services”. These are great terms, but they are about transparency and fairness - broken down into many individual solutions.
Above all, the platform regulation focuses on transparency, i.e. clear conditions under which providers operate on a platform. The participants then know what they are getting involved with, who can change the rules and when, or what the platform can do with the data from transactions.
However, it is questionable whether transparency alone is sufficient to ensure a fair competitive environment. In some areas, material fairness rules may also be needed, such as when platforms may or may not prefer their own products.
It is also important that we are dealing with platforms that are frequently active worldwide. So solutions must be found at least at European level, and perhaps beyond, for example in the OECD .