Competition in the digital economy is increasingly a competition between ecosystems. Hardware and software are integrated, Internet of Things devices connect to online services and a few large tech companies offer a very broad range of services often highly integrated with one another. OECD’s Harry Hong sets the scene for the 2021 OECD Competition Open Day discussions on the topic.
What are digital ecosystems and what are their characteristics? *
The most successful digital companies in recent years have increasingly been building their business model around large ecosystems of complementary products and services centred around their core service. These digital ecosystems offer access to their consumers to a line of products and services with a technological linkage increasing the complementarity between them. For example, Google, in addition to its search engine, has a strong position in browsers, operating systems and video streaming. Also, Facebook, from its origins as a social network, has expanded into messaging, devices, gaming and retail.
There are several key characteristics of the digital economy that facilitate and encourage the development of digital ecosystems. As Marc Bourreau suggests, among others, large economies of scope and scale across markets, and network effects play important roles on the supply side, while consumption synergies due to technological linkages are crucial on the demand side. The complementarity of services on offer may be seen as advantageous by some customers, who then become locked in to that particular ecosystem. Also, by collecting, analysing and aggregating large amounts of data, digital ecosystems can generate significant benefits and a comparative advantage against competing firms that cannot access the data. Moreover, the value created from data and the information it incorporates is reinforced through the data feedback-loop, which is enabled through machine learning and AI technologies.
Competition in ecosystems may differ from competition between traditional firms
Digital ecosystems work by operating in many markets simultaneously, some related to their primary market, others not. As their markets often overlap, these big digital firms sometimes compete with one another in many areas as an ecosystem, but they may also face the competition of specialist firms.
Business models adopted by ecosystems are different from those of traditional firms, and thus competition between ecosystems may also differ from competition between traditional firms. Based on some examples of sectors such as middleware/operating systems, e-books/tablets and connected/automated vehicles, Daniel Crane argues digital ecosystems may exhibit intensive competition among firms that do not necessarily offer substitutable products or services, and hence fall outside of traditional substitutability notions.
Some ecosystems have succeeded while others failed. Nicolas Petit suggests, among others, that the dynamic capabilities of an ecosystem are critical to its survival and success. Dynamic capability is the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments.[i] In practice, dynamic capabilities cover three sets of activities: the sensing of unknown futures; the seizing of business opportunities, value and needs; and the management of change by reconfiguration. Dynamic capabilities provide us with a preliminary understanding of the determinants of competition between ecosystems, and what drives their success and failure.
Digital ecosystems’ potential benefits and concerns for competition
Digital ecosystems may benefit from economies of scope and scale. Integration of a wide range of products and services can deliver efficiency savings, potentially reducing prices. They can also potentially improve the consumer experience overall, by offering demand-side synergies which increase the ease with which a range of different services are accessed.
However, there may also be potential competition concerns regarding digital ecosystems. Digital ecosystems can leverage their market power in one of their products or services into adjacent markets, giving themselves an advantage over potential competitors and undermining competition in those markets. Digital ecosystems may also represent a barrier to entry for new competitors and play a gatekeeper role with great information advantage, which allows them to shield their most profitable services from competition.
What next for competition policy and enforcement of competition law?
Competition law enforcement should reflect the complex features of digital ecosystems. Amelia Fletcher suggests that competition concerns regarding digital ecosystems are arguably better addressed through ex ante digital regulation since it is far from obvious that standard antitrust intervention, with its threat of sanctions for breach, is the right way to handle the complexity of digital ecosystems. Furthermore, Daniel Crane (2019) argues “the important question is not whether the existing antitrust statutes could be made applicable to ecosystem competition (they could), but whether it would be advisable to do so, and if so, what kind of cases might be brought under an ecosystem competition theory.” [ii] Finally, Georgios Petropoulos proposes information-sharing mechanisms as the most effective regulatory intervention to redistribute value in a fair way among all market participants, through which data will confer value not only to market leaders but also to their competitors and other firms of the ecosystem to the benefit of consumers.
These and other issues will be explored on 24 February 2021 at the third OECD Competition Open Day further to an OECD hearing held in December 2020. Register here and join us for this discussion which will highlight how competition in the digital economy is increasingly a competition between ecosystems; how it may differ from competition between traditional firms; the reasons why some succeed and others fail; and the consequences for the enforcement of competition law.
[*] This post draws in parts on the papers by Marc Bourreau, Daniel Crane, Amelia Fletcher, Nicolas Petit and Georgios Petropoulos, prepared for the OECD Competition Committee Hearing on Competition Economics of Digital Ecosystems in December 2020: www.oecd.org/daf/competition/competition-economics-of-digital-ecosystems.htm.
[i] Teece, D.J., G. Pisano, and A. Shuen (1997), “Dynamic Capabilities and Strategic Management”, Strategic Management Journal, Vol 18, pp. 509-533.
[ii] Crane, D. A. (2019), “Ecosystem Competition and the Antitrust Laws”, Nebraska Law Review. Vol 98.
2021 OECD Competition Open Day Blog Series