Regulation can improve the competitive environment and give consumers a better deal, but the EU’s proposal to enforce “neutrality” on internet platforms does the opposite, argues Diego Zuluaga.
Diego Zuluaga is a researcher at the Institut économique Molinari (France), the Institute of Economic Affairs (UK) and Epicenter (Brussels).
Every period of economic transformation in modern history has been underpinned by dramatic improvements in communication. The second half of the 19th century, which saw a doubling of income per capita across Western Europe and North America, was marked by the spread of railways and the invention of the telegraph.
When a telegraph cable was laid across the Atlantic Ocean, it shortened the time it took to communicate information between the Old and New Worlds from ten days to a matter of hours and, soon afterwards, minutes.
The importance of communication is explained by two economic factors which are sometimes neglected by economists: imperfect information and transaction costs. In order to make decisions about work, investment and consumption, people require adequate information about the options available to them and the relative costs and benefits of each. If the costs of obtaining information or coming into contact with other people are high, fewer transactions will take place.
There is thus great value in innovations which reduce transaction costs, and when successful solutions are developed, the prospects for economic development improve dramatically. This is as true for the Internet in the 21st century as it was for trains in the 19th.
PCs and smartphones have spread and broadband speeds have increased beyond most people’s expectations. As of 2015, 70% of mobile subscriptions in the EU were smartphone subscriptions and 80% of households had a broadband connection. Europe is today a connected continent.
The possibilities opened up by the spread of the Internet are myriad and touch every aspect of our lives. People now conduct a large part of their social lives online. The web offers a range of cultural and entertainment choices – news, music, videos, films – which not even the Library of Alexandria could have equalled in its time.
Individuals can purchase and rent goods and services online with a trust and transparency similar to that available in their local shop. Increasingly, the Internet-based sharing economy is also helping people make better use of their assets, increasing incomes and reducing waste.
Discussions of the digital economy in the EU tend however to present it more as a threat to living standards than an opportunity for greater prosperity. It is believed that extensive regulation can offer the right answer to these new developments, with a particular focus on large platforms such as Google and Amazon.
The argument is that, because of their large market share, these players are in a position to affect competition and prevent individuals and businesses from being active on the Internet. The European Commission, in the two cases it is currently pursuing against Google with regard to its search engine and its mobile software Android, has expressed these concerns.
It is right for policymakers to study online platforms, as they are a relatively recent phenomenon which underpins much innovation on the Internet. In short, platforms bring together distinct types of users with different objectives in such a way that transactions on both sides are made easier.
Offline, newspapers are a platform: they bring together advertisers and news readers. Online, Google – which connects advertisers and those browsing for content, among others – also operates as a platform.
However, those advocating regulation have failed to answer some crucial questions. Firstly, is it true that platforms are preventing some users from effectively taking part in exchange? The massive growth of websites, blogs and specialist search engines catering to a variety of consumer needs suggests otherwise.
Proponents of regulation argue that Google “manipulates” its ranking and is therefore not neutral when listing results on its search engine. But such “search neutrality” is an impossibility. Indeed, competition between Google and other search engines such as Yahoo! and Baidu comes precisely from the different ways in which they respond to customer queries.
Secondly, how will regulation improve the competitive environment? Proposals to enforce “neutrality” on large platforms will lead to greater standardisation, not greater variety, online. Similarly, efforts by the European Commission to change the ways in which Android interacts with mobile-phone manufacturers and app developers may well lead Google to pursue a closed model where it makes the phones, controls the apps and develops the software all by itself. This is the model pursued by Apple, which is more profitable but has restricted Apple’s market share in mobile software.
While innovation reduces transaction costs, regulation tends to increase them by mandating certain behaviours and restricting the scope for change. This does not mean that regulation is always and everywhere undesirable.
It does mean, however, that regulation must be undertaken only in those instances where it is reasonably assured that intervention will improve on the existing situation. That is simply not the case on the Internet today.