How Internet Platform Intermediaries Operate

Abstract

This paper examines how Internet ventures operate as intermediaries serving both upstream sources of content and applications as well as downstream consumers. Alibaba, Baidu, Amazon, Facebook, Google, Netflix, Tencent and other Internet “unicorns” have exploited “winner take all” networking externalities quickly accruing billion-dollar valuations. Courts and regulatory agencies acknowledge the substantial market shares these ventures have acquired, but most refrain from imposing sanctions on grounds that consumers accrue ample and immediate benefits when platform operators use upstream revenues to subsidize downstream services. Consumers also gain when intermediaries eschew short term profits to acquire greater market share and “shelf space.” Governments may over-estimate the opportunities for consumers to migrate to alternatives but underestimate the harms to competition and consumers occurring on either, or both sides of an intermediary’s platform. The paper considers how governments can respond to the onset of price and quality of service discrimination within the Internet ecosystem. They can refrain from regulating access and tolerate market concentration as proper rewards to ventures offering desirable services. Alternatively, they can impose a variety of sanctions for competition policy violations, unfair trade practices, consumer harms and unreasonable access discrimination. Between these poles, courts or expert regulatory agencies can use a narrower focus providing remedies after considering the merits of complaints from aggrieved parties. The paper concludes that most governments have failed to revise and recalibrate tools that examine potential marketplace distortions and the potential for harm to competition and consumers. Regulatory agencies and courts have generated false positives, resulting in market intervention where no major problem exists, but also false negatives, where undetected major problems cause harm without remedy. The paper recommends a recalibration of market definition and analysis, including examination of both downstream and upstream impacts.