CAT 2022 Slot 2 VARC: Free to Use, Costly to Leave

Antitrust law, as developed through most of the twentieth century, was built to catch a fairly specific kind of harm: a dominant firm using its market power to raise prices above the competitive level. Digital platforms have exposed how narrow that lens has become. Many of the largest platforms offer their core consumer-facing service — a search engine, a social network, a marketplace app — for free, so the textbook question of whether prices have risen above a competitive benchmark simply does not apply in the way it did to a railroad or a steel monopoly. A regulator trained to look for price gouging can conclude, technically correctly, that a platform charging users nothing has not raised prices at all, while missing the ways the platform extracts value elsewhere.

The extraction, critics argue, happens on the other side of the platform, in markets consumers do not directly see: advertisers who must bid ever more to reach an audience the platform controls, third-party sellers who must pay escalating fees or promotional charges to remain visible in a marketplace's search results, and app developers who must accept a fixed percentage of revenue to reach the users of an operating system. None of these costs shows up as a price increase to the ordinary consumer, yet all of them are eventually passed through, diffused across an entire economy in the form of higher advertised prices, thinner margins for independent sellers, and a narrower range of apps that can survive the platform's toll.

A further complication is that platforms frequently compete in two-sided or multi-sided markets, where the presence of many users on one side is precisely what makes the platform valuable to advertisers or sellers on the other. This creates powerful network effects: a new search engine or social network, however good its underlying technology, struggles to attract users because there is little content or activity there yet, and struggles to attract content and activity because there are not yet enough users. Incumbents can therefore entrench their position not by being better in every respect but simply by having arrived first and grown large enough that switching costs — the loss of a social graph, a purchase history, an advertising track record — deter both users and business partners from moving to a rival, even one offering a superior product.

Proposed remedies split along familiar lines. Structural separation — forcing a platform to divest a marketplace from the retail business that competes within it, for instance — aims at the conflict of interest directly but is difficult to design without breaking genuine efficiencies that come from operating the pieces together. Interoperability mandates, which would require a dominant platform to let rivals plug into its network, try to neutralise the network-effect advantage without dismantling the firm, but raise thorny technical and security questions about how much access a rival should get. What most serious proposals share is a rejection of the old assumption that an absence of price gouging is sufficient evidence of healthy competition; the argument, increasingly accepted even among regulators who once treated network effects as simply the reward for building a superior service, is that dominance sustained mainly by switching costs and data advantages needs to be examined on its own terms, price effects or not.