By Milla Pollak
The Digital Markets Act (DMA) became enforceable on the 7th March 2024, marking a turn towards stricter regulation of dominant tech companies. This groundbreaking legislation entails a comprehensive series of anti-trust regulations with the goal of limiting the world’s biggest corporations from achieving and maintaining monopoly power within the European Union (EU). The DMA identifies the necessary criteria for an organization to be considered a “gatekeeper”, including Alphabet, Apple, Amazon, Meta, Microsoft and ByteDance in the category. They are considered ‘core platform services’ and singled out for their impressive market dominance, international reach and durability. The Digital Markets Act requires these companies to offer more choices to their consumers, in an attempt to prevent them from abusing their market power. It aims to establish a more competitive and dynamic environment, where consumers enjoy more freedom and data privacy. The six companies mentioned above have an immense economic impact, so what will the consequences of these restrictions be? Will the Act succeed at encouraging competition and lower prices, or will it be ineffective or even have contradictory results?
The Digital Markets Act was passed in 2022, ushing in an unprecedented era of digital controls. This Act is amongst the first of its kind, as it represents a shift from an ex-post regime to an ex-ante one that focuses on preventative measures. The DMA entails a set of regulations such as quantitative thresholds, obligations and prohibitions. These directives apply only to the select few largest companies, a status reviewed every three years. The DMA stipulates infringements are to be punished by imposing up to a 10% fine on the total annual global turnover of the company. This figure can increase to up to 20% for repeated instances of noncompliance. In extreme cases, the EU may even enforce behavioural and structural changes, such as limiting the operational scope of the unruly company. The Digital Markets Act represents a very new approach and therefore has yet to prove itself in empirical cases, however one example of a recent investigation is Apple’s App Store. Apple stands accused of not complying with the DMA by failing to inform its users of free alternatives to its App Store. Bloomberg reports that the EU’s decision is still being finalised, but states that Apple is likely to face a serious fine.
If effective, the DMA could reduce the overwhelming market dominance of companies such as Apple and Alphabet, which is Google’s parent corporation. It has the potential to reduce barriers of entry to the field and thereby increase potential and actual competition. More specifically, the Act mandates that gatekeepers must allow third-party app stores or some other alternative ways to download apps. Additionally, the firms in question are prohibited from refusing their users access to the data collected about them across platforms. Gatekeepers must also provide accurate rankings of their and competitors’ products. Lastly, they cannot reduce the scope or function of competitors’ services in an effort to restrict consumer choice. These rules all aim to benefit the consumer by limiting the adverse effects of monopolistic markets. A competitive and dynamic market is generally agreed to positively impact consumers, since it lowers prices, increases choices, and improves the quality of the goods and services provided. By limiting monopoly powers, the Act couldfoster an innovative environment in which small companies play a significant role. Notably, all the companies included in the ‘gatekeeper’ category are American, with the exception of ByteDance, which is based in China. By limiting this market dominance from foreign firms, the Act could have the added benefit of allowing European firms to enter and ideally thrive in the industry. This diversification couldthus redistribute market shares, resulting in a fairer business environment. Consumers would be able to switch providers if they wish and would be able to do so at more competitive prices. The DMA also strives to boost data privacy by allowing users to choose the degree to which their personal data is to be redistributed and shared across platforms. By taking the first step in transnational digital markets regulation, the EU has set the tone for times to come. It hasestablished a legal precedent, one that other countries are likely to observe closely, if not follow. Indeed, some countries have started developing such regulation as well, solidifying the growing consensus that competition in the tech industry is not only necessary but lacking. In sum, the Digital Markets Act aims to protect consumers interests by establishing legislation in a so far largely uncontrolled market.
Sceptics have however pointed out that the DMA may result in unintended negative economic consequences, for example by limiting these companies from making full use of their economies of scale. This may introduce inefficiencies into the market, leading to lower profits and lower incentives to innovate. Additionally, the DMA is costly to implement, both for the EU itself and for the gatekeepers. This could impact profit margins and valuations, which could be problematic even for consumers considering that these companies are amongst the most commonly owned stocks across the globe. Those who have invested in these companies might find their shares devalued. Notably, the Digital Markets Act could prove to be largely inconsequential and ineffective if companies succeed at circumventing regulations by encouraging consumers to stick with the status quo by introducing payments or limitations in other areas. For example, Apple might impose conditions or new fees for those who want to take advantage of alternatives to the Apple App Store. Additionally, the DMA requires select firms to ask users to make more decisions concerning for example which browsers they want to use and how their data is distributed. The user response in these cases is critical to understanding the longer-term effectiveness. Greater availability of choices does not necessarily mean that consumers will take advantage of these choices, due to consumer patterns of habit. Other possible reasons for this outcome could be that many users might not understand what they are being asked, or experience choice fatigue. More variety might also fail to diversify competition if people turn towards the most well-known and widely used options. For example, Apple will be required to offer a selection of browsers, which will likely encourage more people to use Google Chrome instead of Apple’s default browser Safari. Thus, depending on people’s choices, these laws may have a weaker effect on competition than intended, or even the opposite effect. Intra-company investment could become less profitable as a result of restrictions limiting self-preferencing, thereby reducing innovation and R&D within the company. Lastly, Google, Apple and Meta have delayed the introduction of their AI technology into the European market because of regulatory hurdles. Trends like these could prevent the EU from quickly and effectively introducing new technologies, thereby limiting its international competitiveness.
Ultimately, the question of whether these restrictions willhave a positive or negative net effect depends on which stakeholders are being considered. From the perspective of those high up in these big tech companies, the Digital Markets Act represents a significant limitation to the scope of operation and profitability potential of their company. From a consumer perspective, however, this unprecedented legislation is likely to represent a significant step towards the protection of data privacy, as well as a limiting of the negative consequences that arise when a firm has monopolistic power. From this analysis it could be deducted that the DMA will likely have an ambiguous effect on competition, improving it in some respects whilst hindering it in others. Consumers and their behavioural patterns will play a significant part in deciding who benefits and loses from this new legislation. If consumers engage with the wider variety of options available, the chances are high that the result will indeed be beneficial for users in the form of higher competition and a more dynamic market environment. This in turn could ideally lower prices and improve the quality of the services provided. The true impact of the Digital Markets Act will only become apparent with time, as the EU handles more infractions and enforces the mandates associated with this Act. If successful, the DMA might prompt a shift of the balance of power back toward the consumer, instead of concentrated in the hands of the handful leaders of these multinational corporations.
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The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.