Jean Tirole Explores the Future of Platform Regulation

Professor Jean Tirole, Toulouse School of Economics, explained how traditional regulation and antitrust rules are ineffective in addressing the unique issues arising from the growth of digital platforms. In his keynote address at the National Bureau of Economic Research’s (NBER) spring conference on Megafirms and the Post-COVID Economy, Professor Tirole discussed how the European Union’s Digital Markets Act (DMA), which became law in 2022, will establish rules aligned with two key concerns: the contestability of platform markets and equity for consumers and platform business users.

Below is an overview of Professor Tirole’s keynote address, “The Future of Platform Regulation” at NBER’s conference, “Megafirms and the Post-COVID Economy.” Recorded April 22, 2022.

Summary

Traditional regulation and antitrust rules are ineffective in addressing issues arising from the growth of dominant platforms. Economists could help design better rules to ensure that platform markets are competitive.

Main Points

• Platforms often resemble regulated public utility networks, and blur the lines between regulation and antitrust; platforms challenge both traditional regulation and antitrust.
  • Antitrust enforcement moves too slowly, and enforcers lack data on the world-wide activities of global firms.
  • Old-fashioned regulation is ineffective when the industrial landscape changes quickly.
  • Regulators cannot judge whether a firm's rate of return is fair, as they do not know the firm's probability of success.
• Contrary to the arguments of the Chicago School, platforms may have incentives to treat complementary services badly.
  • Platforms offering a rich array of complementary services might be able to charge more for those services, but this is not true if the price of core services is regulated.
  • Platforms might “kill” apps or use preemptive mergers to stop a complementary service from becoming a competitor.
• The European Union’s Digital Markets Act (DMA), which became law in 2022, is primarily concerned with two issues:
  • The contestability of platform markets, which allows entry of more efficient competitors.
  • Equity, that is, whether consumers and platform business users get a fair share of the value they contribute to the platform.
• To ensure that platform markets are contestable, DMA enforcers will establish rules beyond prohibitions on tying, such as the following:
  • Platforms will be required to allow users to engage in multihoming; for example, users should be able to use both Uber and Lyft.
  • To prevent access to data from becoming a barrier to entry for new firms, platforms may be barred from combining data from different services; for example, Facebook might not be allowed to combine data with WhatsApp.
• Challenges economists face in designing regulation for platforms include the difficulty of designing better rules for two-sided markets; Most Favored Nation (MFN) clauses and merchant surcharges are little understood.
• When a dominant platform buys an emerging firm, enforcers struggle to prove that the merger is anticompetitive; the burden of proof should be reversed for dominant platforms.
• Economists could identify rules that may reduce the likelihood that agreements between firms are anticompetitive, especially in contexts such as patent pools and standard setting.
• Economists could improve understanding of the links between data access, privacy, and competition.
  • Europe’s Artificial Intelligence Act forbids actions that circumvent users’ free will, but the meaning of this rule is uncertain.
  • If regulators require firms like Google, Apple, and Uber to share data with rivals, the data owners could be paid on fair, reasonable, and non-discriminatory terms (FRAND).

Conclusion

Traditional public utility regulation and antitrust may be ineffective in addressing concerns with large digital platforms. Contrary to the arguments of the Chicago School, a platform might have incentives to treat users badly, particularly if the platform seeks to stop a complementary service from evolving into a competitor. Europe’s Digital Markets Act focusses on the contestability of platform markets and on equity, ensuring that users share in the gains they contribute to the platform’s success. Economists face challenges in helping to design new rules for digital platforms, as platform features such as merchant surcharges are little understood. Policymakers should consider requiring dominant firms to prove that a proposed merger with an emerging firm is efficient.

Keynote Address by Professor Jean Tirole, “The Future of Platform Regulation” at NBER’s conference, “Megafirms and the Post-COVID Economy.” Recorded April 22, 2022.

Jean Tirole is Honorary Chairman of the Jean-Jacques Laffont - Toulouse School of Economics Foundation and Scientific Director of TSE-Partnership. He is also affiliated with MIT, where he holds a visiting position and the Institut de France. Professor Tirole’s research covers industrial organization, regulation, finance, macroeconomics and banking, and psychology-based economics.

In 2014, Professor Tirole was awarded the Nobel Memorial Prize in Economic Science for his analysis of market power and regulation. Also in 2014, he was awarded the Erwin Plein Nemmers Prize in Economics and in 2013 he was given the Stephen A. Ross Prize in Financial Economics.