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Analysis of Competition Policies between U.S. and EU in the Era of Inter-Industry Convergence ICT economy, competition policy

Author Gusang Kang, Yungshin Jang, Taehyun Oh, and Jeewoon Rim Series 20-08 Language Korean Date 2020.12.30

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   This study aims to provide implications for policies on the part of Korea’s competition authority to prevent ICT firms from abusing their market power and carrying out anti-competitive M&As under the changing competitive environment in the era of inter-industry convergence. It may be difficult to conclude whether these firm behaviors harm market competition or consumer welfare under existing competition policies. In this regard, we focus on recent policies of the U.S. and EU competition authorities in terms of how they deal with anti-competitive behaviors in ICT sectors.
   Chapter 2 presents an overview of U.S. and EU competition policies, including policy characteristics and causes of policy differences between authorities in the two economies. Recently, the Department of Justice (DOJ) and Federal Trade Commission (FTC), two U.S. competition authorities, investigated behaviors of large digital platforms such as Google, Apple, Facebook, and Amazon on whether they abuse their market power to an extent that negatively affects competition, innovation, and consumer welfare. As for the EU, the European Commission (EC) has implemented competition policies and recently announced EU-level online platform regulations to effectively implement competition policies for the rapidly developing digital platform industry.
   In chapter 3, we examine various forms of U.S. and EU regulation, focusing on abuse of market power and reviews of M&As. Largely two types of market power abuse were examined: exploitative and exclusionary abuse. The U.S. and EU take different perspectives on exploitative abuse. While the EU explicitly prohibits exploitative abuse in the Treaty on the Functioning of the European Union (TFEU), the U.S. does not have any legal provisions on exploitative abuse. Moreover, the U.S. does not consider this a target of regulation, on the grounds that there is no way to confirm whether the market price is the outcome of severe competition or market power abuse. In the area of exclusionary abuse, we examine predatory pricing, conditional rebates, tying, and refusal to deal. In regard to predatory pricing, U.S. legal authorities require rigorous analysis of the economic impacts of firm behaviors, whereas the EU competition authority has aggressively regulated these behaviors. In the case of conditional rebates, while there are no cases do date of the U.S. Supreme Court ruling such behavior as illegal, EU legal authorities such as the European Court of Justice (ECJ) have been more likely to consider those behaviors illegal as they harm competition in the European Common Market. In regards to tying, U.S. legal authorities concluded that a Microsoft (MS) case was not illegal as technological tying might increase market efficiency and provide benefits to consumers, whereas the EU authority concluded illegality in the MS case as it could set an entry barrier against its competitors due to network effects. When it comes to refusal to deal, while the U.S. considers that the theory of essential facilities is not necessary to determine monopolistic firm behavior, the EU holds the opposite view. Finally, the difference between the U.S. and EU in regulations for conducting reviews of M&As was relatively small compared to cases of market power abuse.
   Chapter 4 relates the characteristics of the digital platform industry to the U.S. and EU competition policies. Specifically, section 1 examines how the regulation differences between the U.S. and EU arise as inter-industry convergence and active market integration further progress across industries and regions due to the development of the digital economy. First, it may be difficult to assess exploitative abuse for certain firm behaviors as the price of digital platform services is often 0, or even minus (-). Second, technological tying as the outcome of a combination of products or technologies should be analyzed considering the impacts of limiting market competition and harming consumer welfare. Third, much more attention has been paid to conglomerate M&As under the environment of the digital economy. Concerning this issue, while the EU accepts the theory of portfolio selection, which states a certain firm can transfer its market power to another market through M&As or product bundling, the U.S. does not.
   In section 2 of the chapter, we investigate representative cases of anti-competitive ICT firm behaviors in the U.S. and EU and compare legal and policy responses by their respective legal and competition authorities. For example, the U.S. DOJ argued that MS abused its market power by the tying of its Windows operating system (OS) and Internet Explorer (IE) web browser. The EU, however, closed the case after MS accepted corrective actions to guarantee freedom in choosing web browsers for computer manufacturers and consumers. When it comes to the acquisition of WhatsApp by Facebook, the U.S. and the EU both allowed the deal as the merged entity would not harm market competition.
   Section 3 analyzes the impacts of digital platform M&As on market competition. Specifically, we examine the acquisition of WhatsApp by Facebook, utilizing data on the characteristics of 15 mobile social network service (SNS) applications (apps) and estimation using a structural model combining generalized method of moments (GMM) with instrumental variable (IV) estimation as empirical methodology. According to the empirical results, app file size negatively affects SNS app demand, whereas the number of apps provided by an individual digital platform has a positive impact on consumer demand. Furthermore, we calculate the change of own- and cross-demand elasticity in response to changes in app characteristics. The results show a 1% increase in the number of apps provided by Facebook leads to an increase in the market share of firms in the Facebook group but a decrease in the market share of competitor apps. This indicates a tipping effect in the market for mobile SNS apps due to Facebook’s acquisition of WhatsApp. In addition, we compare the markups of 15 SNS apps before and after acquisition by using a simulation method. As a result, we find that apps in the Facebook group experienced more increase in markups following acquisition, relative to competitor apps. This implies that Facebook’s acquisition of WhatsApp harms competition in the market for mobile SNS apps.
   In conclusion, it may be difficult to determine whether firms’ abuse of market power and M&As are unlawful using the existing competition policies. Drawing upon this perspective, and the case studies and empirical results of our study, we derive the following policy implications. First, Korea’s competition authority should transition out of the current regulation paradigm and introduce new legal systems in cases where the dynamics of competition and innovation should be ensured. Second, if the authority cannot determine whether the anti-competitive impacts of a certain platform’s behavior are greater than pro-competitive impacts, it needs to use ex-post regulation instead of ex-ante regulation to promote innovation and increase efficiency. Third, the authority needs to increase personnel to respond to the increase in M&As of small- and medium-sized startups by large digital platforms. Fourth, the authority needs to find a regulation level optimal to establish an environment where competition and innovation can coexist, as innovation will drive growth under the digital economy. Finally, the authority has to apply flexible regulation measures to diverse M&A cases instead of unconditional non-approval of M&As, as small- and medium-sized startups often use M&As as their exit strategy.

 

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