Digital Economy Rules Update

Author: Faizal Bin Yahya, NUS

The digitization of businesses has accelerated during the COVID-19 pandemic. Digitization provides e-commerce platforms with a constant market presence and eternal trading hours. E-commerce is expected to grow by 8.1% between 2020 and 2025 in the Asia-Pacific region, faster than in the United States and Europe. Digital sales in the Asia-Pacific region totaled nearly US$3 trillion in 2021.

The McKinsey Global Institute reported in 2016 that the world’s largest companies are building digital platforms to manage their suppliers and connect with customers. Public internet platforms such as social media, digital media and e-commerce websites have also emerged. Major Internet platforms have since exploited these trends and monopolized their sectors by generating applications that combine user interface, software and personal data controlled by their own cloud servers.

The use of automation and algorithms radically reduces the marginal costs of adding new interactions, allowing the largest platforms to support hundreds of millions of global users. Thanks to network effects, the platforms offer attractive prices and products which, in turn, stimulate their commercial expansion. The impact this has on competition has been raised by various jurisdictions, such as the Australian Competition and Consumer Commission’s 2019 Digital Platforms Inquiry and the Stigler Committee Report on State Digital Platforms United in 2019.

Big tech companies can use the data they collect about businesses, tastes, and consumer preferences to gain an unfair advantage over competitors and new market entrants. Tech companies have developed targeted advertising models that use opaque algorithmic systems to create detailed user profiles. Detailed user profiles are linked to the companies’ social media platforms. The addictive design of social media platforms keeps users engaged, providing companies with even more data, further refining the platform’s algorithm.

Regulators are increasingly concerned about the use of business and consumer information collected by big tech companies like Amazon and Google. To prevent predatory behavior, platforms could be self-regulated, externally regulated or co-managed.

To determine the optimal regulatory framework, regulators should examine stakeholder involvement in the regulation of big tech companies while learning how companies access, share and use data. This could include developing data exchange standards, refining processes for business interaction and collaboration, and improving data service level agreements.

Regulators could also consider limiting how big tech companies make their data a proprietary good for which users and other companies must pay excessive access costs. Increasing data interoperability – when data can be exchanged between different systems and organizations – is a promising antitrust solution.

Companies could be required to hand over personal data to competitors without users losing the services they had accrued on a platform. The resulting portability and interoperability of personal data between platforms would allow users to test, share and store their data in new, more innovative digital services.

Regulators could force companies to allow new entrants access to their company’s data, ensuring fairer competition. China aims to create a joint venture with Chinese tech giants to oversee data collection, break up platform monopolies and curb anti-competitive behavior. But it may infringe the privacy of users.

The reactive approach to data governance must become proactive. Proactive data governance could explore alternative data governance strategies, including common crowd data, collective bargaining over personal data rights, data pooling across organizations, and data coercion, which involves to formally request data from digital platform service providers. Singapore has attempted to balance the need for data governance and technological innovation by enacting personal data protection laws. But over-regulation of tech companies and digital platforms could limit technological innovation, making the digital economy unsustainable in the long run.

In 2019, the Australian government considered introducing tougher penalties for misuse of data under the Privacy Act (which would complement the Australian Consumer Act) to create a Code of Binding online privacy. A new unit of the Australian Competition and Consumer Commission has been created to report on competition on digital platforms and consumer protection. Canberra has worked with digital platforms and media to develop a voluntary code addressing imbalances between the two sides.

The European Commission’s Digital Markets Act 2022 attempts to regulate the ability of big digital companies to use their “gatekeeper” powers to restrict or condition access to their market. The 2022 Digital Services Agreement prohibits the use of “dark models” – online interfaces designed to manipulate user choices – unless permitted by the Unfair Commercial Practices Directive.

The agreement allows the European Commission and member states of the European Union to access the algorithms of major online platforms to monitor legal compliance. Platforms that use profiling algorithms in their advertising must describe the recommendation system defined in their terms and conditions. Users should be able to change the parameters used in recommender systems, including the ability to select parameters without profiling.

The expansion of the digital economy is likely to redefine what is considered a “market”. In light of this, some European experts recommend that antitrust enforcement be updated for use in the digital economy. Regulation and innovation seem to be at opposite ends of the data usage spectrum, since regulations that impede data usage are often seen as a tax on data-intensive industries.

But far from impeding progress, merger and antitrust enforcement is necessary to improve the digital economy. Regulators must ultimately calibrate their “gatekeeper” interventions to fit the conditions of different economies. A personalized and proactive approach will prevent predatory and anti-competitive behavior without deterring digital innovation.

Dr. Faizal Bin Yahya is a Senior Research Fellow in the Department of Governance and Economics, Institute of Policy Studies, National University of Singapore.

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