Value Preserving Platform Regulation: Network effects, platform value and regulatory remedies.

Abstract

The digitization of the economy is transforming not just the internal firms’ operational processes but entire sectors by redefining how firms create and deliver value. This is achieved through new ways of organizing firms’ value chains and interfirm relationships, which now increasingly occur not in isolation but in digital ecosystems and digital marketplaces. Digital platforms represent the engine of this transformation: they enable new structures of economic relationships, facilitate and manage interactions among multiple groups of users, and create new roles and innovation opportunities by empowering value-adding contributions by external firms and users. While this market orchestration power has produced large benefits for consumers and the economy at large, those benefits may hide risks associated with market power concentration. This report explores these implications by revisiting first the role of network size for network effects, then discusses when data can lead to network effects dynamics and create entry barriers or when they might stimulate greater innovation and competition. It concludes with a brief account of the challenges and issues with the writing of effective competition law.