Old paradigms that would like to govern modern day competition
Paper by Francesco Grillo and Claudia De Sessa expanding Francesco's column published on the Italian newspapers Il Messaggero e Il Gazzettino del Nord Est
Scan of the paper edition
“ The opening up of new markets and the organizational development illustrate the same process of industrial mutation that incessantly revolutionizes the economic structure from within. This process of Creative Destruction is the essential fact about the modern economic system”
Joseph Schumpeter, one of the great intellectuals of last century, provides us with one of the best definitions of “competition”. The same competition that European and Italian authorities need to defend because it is essential for the competitiveness of European economy and to increase the interest of consumers. More recently, those same authorities have declared that the greatest menace to competition comes from those global e-platforms that are literally changing the world. Just last week, the authority in charge of competition and markets in Italy (AGCOM) condemned Amazon to a fine of over one billion euros, the highest ever inflicted by a European national judiciary. We may argue, however, that they have chosen the wrong target. Further reducing innovation in a Country that absolutely needs it, to renounce the challenge of reasoning on how to govern this transformation that requires new intellectual tools.
The internet revolution is one of the greatest industrial revolutions of history. It is possible that we are even experiencing a biological mutation, as the way in which we collect, elaborate and transmit data is changing1. Amazon, founded in 1997 by Jeffrey Preston Bezos who after working in finance first understood the commercial potential of the internet, has been one of the great disrupters, revolutionizing the entire structure of multiple industrial sectors, retailoring it to bring forward a customer-centric strategy. Sure, every technological revolution comes with deep changes, great resistance and the need to reorganize theories about economic systems.
However, a fundamental question remains: what can the EU - and Italy - do in order to get back in this game made of radical innovations that we have, up to this point, only passively consumed?
The sanctioning – especially at the national level - route looks more like a sum of reactions that do not amount to a strategy.
Uncertainness increases and we risk on throwing the baby – the value that innovation creates for industries and consumers - out with the bathwater – meaning the implications of the inevitable dominant positions that tend to emerge in these situations. The Italian authority ruling focuses on a specific aspect, the use of Amazon logistics as a sine qua non condition to obtain a good ranking on the Amazon website. The paradoxical conclusion they reached, however, is that the platform is imposing prices, limiting market outlets and finally “impeding technological progress, to the damage of consumers (as per “abuse of dominant position” and “norms for the protection for the market” definitions). This overturns the reality of the net impact of e-platforms that reorient the production and distribution chain towards a system based on consumer choices. We can argue that judicial rulings need to be respected. However, the real issue is another: we are pretending to govern a profoundly changed world with outdated laws (the AGCM one dates back from 1990) that were conceived when none of those who are reading this article had even sent their first e-mail. The issue is that we are leaving to a judge – however talented and professional – the task of evaluating the positive and negative effects of these great transformations.The task should belong to politics.
Constructing a European normative framework is already a better decision.
In this sense, the European Commission initiative to create a legislation for the protection of people and industries’ data (GDPR) is a good initiative, although the regulation needs to create protection tools that are more understood and used by the individuals and companies they aim at protecting. Regulating web content (DSA) is also a good choice, although we need to strengthen the concept that Twitter cannot be the ultimate judge on the quality of news.
Another sensible principle is making sure that internet giants keep being challenged by new enterprises.
However, the Commission proposal for a directive on digital markets (DMA) seems to employ only one taxonomy to regulate very different platforms. Platforms vary in terms of market, impact on employment and, as the graphic shows, even profit. Imposing sanctions on profits can thus have distortive effects, penalizing those who operate in low profit margin sectors (like Amazon) and employs more people, compared to those who have a particularly strong digital component (like Facebook/Meta). It also seems to ignore that a digital platform is, in the end, only an organizational model that all kinds of companies are adopting. This can lead to the mistake of treating in the same manner different problems and opportunities.
Today, only one European company (SAP) is among the first 43 that are worth more than 100 billion and that are less than 50 years old. Among those who reach more than 300 billion users, only one is in Europe (Spotify). Draghi himself admitted that our Country does not have even one “unicorn” (a “start-up” whose value is over one billion dollars) while in Estonia – which by comparison has even less inhabitants than Milan – there are more than seven. How can we be competitive, if we keep chasing after others? Without pretending to tame them with sanctions and by including everyone in a constructive dialogue that benefits everyone? Learning uncomfortable lessons and inventing new models? This is the decisive match, but in order to win it we need to change the ways and the players of the game. Lawyers, magistrates, constitutional law experts are all useful, btu they’re not enough if we want to start building a future where, together with the toes we’re dipping in, we’re also bringing the head that we left in another century.
Governing something so fluid like the internet and e-platforms is, of course, no easy task. First of all, there’s a need to create laws catered not only to the current situation, but to the potential innovations of platforms, in other words, regulating the game, not the players. In this sense, law makers need to be as inventive as CEOs, but most importantly, they need to first deeply understand digital platforms and their impact on the real economy.
Understanding platforms means analyzing how they collect information, how they use them and upon what logic. Google for example works by keywords and aims at redirecting users away from its platform. Facebook has like fundamental unit the individual, with its likes and dislikes, and aims at keeping the user on the platform as much as possible. Amazon on the other hand is concerned with buying habits and thus aims at a high conversion rate. These three different natured platforms thus do not find their competitive advantage or create their strategies in the same way.
The impact of global e-platforms on the real economy also needs to be evaluated. Indeed, platforms have provided for SMEs a way to remain competitive during the Covid crisis, for example, but they have also expanded their markets, giving them a way to access an ever more globalized economy in the same way big distribution chains could afford to. This opening of the market has then also fostered innovation in big distribution chains, sometimes even providing a tool for them to be more sustainable in a context of the current consumerism culture. Lastly, the digital revolution has allowed customers to enjoy both parts of the shopping experience, in a strategy called “omnichanneling” that does not exclude but rather creates a complementarity between online and offline world.
These are just some of the differences, but only if we start understanding global platforms we will finally be able to govern them.
[1] VISION project “THE PANDEMIC AS THE BIG DATA FAILURE AND THE INTERNET OF BEINGS AS NEXT FRONTIER” is dedicated to this topic (available at this link). “INTERNET OF BEINGS” is for VISION, the third development phase of the internet. The first one was when the web linked every digital object, the second one is the one progressively connecting physical objects and that is chanding manufacturing itself.
