From Territorial to Functional Sovereignty: Competition in the Digital Age

This OECD Forum 2019 background note was used to prepare speakers on the panel From Territorial to Functional Sovereignty: Competition in the Digital Age, which took place at the OECD headquarters from 14:30-15:45 on Tuesday, 21 May. 
From Territorial to Functional Sovereignty: Competition in the Digital Age

Serving as infrastructures that intermediate between different groups, digital platforms are not a new business model, but rather an old one that has been rejuvenated by the sheer scale and scope of the participants in the digital economy.  Yet, the characteristics of platforms that have enabled them to rise also carry the seeds of significant monopolistic or oligopolistic risks. This trend holds far-ranging implications in terms of the accumulation of durable market power, if not for the exercise of political power itself.

Digital platforms can achieve “scale without mass”, that is, provide their services to new users at virtually no cost. Furthermore, they exhibit strong network effects and “winner-take-most” market dynamics. In other words, size begets size: the greater the number of people using a platform, the greater the value in using it. These features not only allow platforms to grow at a formidable pace, they also present significant barriers to entry for newcomers. If there are significant switching costs for consumers, for example in the form of content transfer, new entrants will find it difficult to attain critical mass. Of course, digital giants are keen to argue that markets remain contestable, with reference to digital platforms that were once dominant but were overtaken by new entrants. Yet, the accumulation of market power in their hands may well have become a significant hurdle for the rise of potential competitors, with acquisition by a dominant player often representing the final stage for successful SMEs.

The potential for a handful of giants to acquire dominant positions in an increasingly large share of our economies can carry risks for consumers as well. Without competitive pressure, firms will charge higher prices to consumers. And whilst the bill may present itself in new forms, what was true for traditional markets has not lost its relevance in our digital world. In what some pundits have labelled  the age of “surveillance capitalism”, digital marketplaces are free to consumers, but platforms use available technologies to monetise the information conveyed by users. As a result, consumers can end up paying a hefty price for “free” services – a price that cannot be easily understood at the time of the exchange, and which might rise even further, as platforms venture ever deeper into our lives.

The capacity of platforms to act as powerful gateways to digital services may not only enable them to extend their dominance to other markets; it could also allow them to displace a wide array of governmental roles over time. From room letting and transportation to the provision of informational infrastructure, citizens are increasingly becoming subject to corporate – rather than public – rule and arbitrage. Through such roles, platforms come to be much more than dominant firms. Rather, they rule over digital infrastructures that market participants can hardly afford to pass by. By settling disputes between buyers and sellers, they even serve as courts. And through opaque decision-making on matters such as algorithms, gatekeepers such as search engines and social networks shape the realities of billions by governing over information flows. If code is law, its makers are powerful sovereigns in their respective kingdoms. 

In the face of this apparent shift from territorial to functional sovereignty, both companies and governments must take responsibility to ensure that citizens are protected and reap the benefits of digitalisation. Thankfully, regulators are not empty-handed when faced with anticompetitive conduct or competition problems in markets. If they are to curb monopolistic risks, it will however prove essential for them to embrace international co-operation as platforms ignore national borders. Fostering data portability and users’ control over their private information could also prove decisive in encouraging digital competition to flourish. Greater synergies between data watchdogs and competition authorities may thus be required. At the same time, sound policy responses will need to avoid stifling innovation. After all, platforms do provide tremendous benefits to citizens and societies in the form of better and cheaper products and services. Beyond disputes about whether they should be broken up or not, it therefore should not come as a surprise if a number of pundits are calling on states to learn from them by embracing government…“as a platform”! 

Across the globe, economies, societies, governments, and perhaps sovereignty itself, are going digital. For the OECD, helping shape this digital transformation in a way that benefits both growth and well-being is a core priority. For all their benefits, there are, however, mounting concerns that digital technologies may breed undue corporate control over our private, commercial and political lives. With political power itself in the balance, there is no time to waste.  

OECD Forum 2019: World in EMotion

Banner image: Mitchell Johnson on Unsplash

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