Synopsis: Regulating the Digital Network Industry
Jasper van den Boom
Introduction
The regulation of digital markets is taking off globally. The European Union and United Kingdom have been frontrunners in introducing ex ante regulation for digital platforms. Many jurisdictions are now following, including major economies in Asia, Oceania, and South America. Each of these jurisdictions follows their own approach, some inspired by one preceding form of regulation, while others introduce something that is wholly their own. The true first-mover in the area of regulating digital markets was Germany, which introduced an amendment to their competition law specifically to better regulate digital ecosystems. Despite offering a blueprint, and the increasing attention to the operation of digital ecosystems in EU competition law, there has been little focus on how ex ante regulation can shape competition within and between digital ecosystems.
In my new book ‘Regulating the Digital Network Industry’ (Cambridge University Press), I propose a regulatory framework called ‘progressive ecosystem regulation’. Progressive ecosystem regulation looks beyond the market- or platform paradigm, and explores how the presence of digital ecosystems shapes competition across markets that are all connected in a digital network industry. In this view, digital ecosystems are not just collections of products and actors that co-generate value. Instead, the digital ecosystems operated by Big Tech firms allows them to carve out a segment of the digital network industry where they can act as the de facto regulator, setting terms for competition, use, and entry for their parts of the network. This broad view on the power of digital firms inspires a wholly different approach to regulating, where the focus is not on monopoly within a market, but rather on the ability of large firms to pre-empt entry and prevent disruption of the status quo.
This change in paradigm significantly affects our notions surrounding effective competition: it is argued that it can be efficient for emerging ecosystem operators to establish a monopoly in a platform market, if it positions them to compete with incumbent ecosystem operators. At the same time, it provides a justification for far-reaching regulatory burdens that apply throughout incumbent ecosystems, even for markets where their position is still small. At its foundation, it shifts away from the idea that we should look at markets and move towards a notion of how the presence of different entrants, mature ecosystems, and incumbent ecosystems impact the competitiveness of not just their occupied markets but the digital network industry as a whole. Interventions are focused not on reducing market power, but rather on opening up bottlenecks, removing perverse incentives to behave anti-competitively, and making resources available so that a next generation of disruptors can enter and flourish in new or existing digital markets.
The book justifies the proposal through an in-depth exploration into digital ecosystems and the competitive dynamics of the digital network industry. The book consists of three parts: (1) the competitors; (2) the competition, and (3) the regulation. These parts together form a narrative that help us to understand what digital ecosystems are, why they are so prevalent in digital markets, their efficiencies, how the presence of digital ecosystems changes the role of monopoly within a market, and how to ensure that the digital network industry as a whole stays competitive and innovative by introducing regulation that is specifically aimed at creating an environment where disruptive innovation is both facilitated and encouraged. The book is a valuable resource for academics and policymakers that work in EU competition law and the regulation of technology, and creates a bridge between law, economics, and management studies to tackle the problem of the pervasive power of Big Tech.
The competitor: what exactly are digital ecosystems and how do they generate value?
In the first part, the competitor, the book relies heavily on insights from economic literature to define digital ecosystems and to explain why they are prevalent and likely unavoidable. It looks into the key components that cause concentration in platform markets and why the logical next step is evolution into digital ecosystems. These components are economies of scale, driven by data and supply-side efficiencies that arise with increases in demand. As digital platforms are intermediaries, network externalities shape the demand-curve: demand increases demand. What sets digital markets apart however, is that data-driven network externalities also create supply-side efficiencies: more interactions with a digital platform means more data, which in turn means more resources to improve quality, engage in personalization, and to improve competitive strategies on the basis of an informational advantage.
While platform markets tend to concentrate, establishing a monopoly in a digital platform market is rarely enough for digital firms. The required sunk and fixed costs for entry are low in emerging platform markets, especially when compared to entering infrastructure markets in non-digital network industries. However, the required entry costs grow as the position of the platform operator becomes more entrenched: once the platform operator has incumbency and is ahead in terms of users on different sides of the market, data, and financial means, it becomes harder to contest these monopolies. Entrenchment however does not only happen by solidifying the firm’s position within the platform market, but also by anchoring it within a digital ecosystem consisting of various products and services. By engaging in on-platform and cross-platform expansion, the digital firm can leverage users and resources from one market to another, making their core platforms harder to contest. At the same time, economies of scope derived from data and the modularity of digital goods also facilitates entry into new markets. While returns to scale from data are diminishing at some point within the platform market, a deep trove of data can help to identify entry opportunities in downstream or adjacent markets. Through strategic expansion, the digital firm that is incumbent in one platform market can offer goods and services in adjacent markets more efficiently – and lower prices and higher quality – than it could without an established position in the conquered market. This means that in the short-run, incumbency and expansion can be cost-efficient and offer consumer benefits. In the long-run however, ecosystems continue to grow at the cost of entry not only in the monopolized market, but also with risks to creating entry barriers in downstream and adjacent markets. Thereby, in the long-run, ecosystems that grow to large become likely to harm competition. The first part of the book concludes however that the cure may be in the poison: while it is hard for single-focus firms to compete with digital ecosystems that entrench their position by acting defensively, the presence of emerging digital ecosystems can also help to overthrow established monopolies if leveraged into competition with the incumbent offensively.
The competition: how does competition within and between ecosystems take place?
The second part of the book dives deeper into the dynamics of ecosystem competition. It first looks into where competition in digital ecosystems occurs, using the distinction between inter-ecosystem competition (between digital ecosystem operators horizontally across markets), intra-ecosystem competition (competition that happens between actors that offer their goods and services on the platforms that are part of the ecosystem), and vertical ecosystem competition (between the ecosystem operator and the actors that co-generate value within its ecosystem such as software developers and sellers). The book explains how these forms of competition influence one another. In the early stages of establishing one’s position in a platform market, the ecosystem operator needs strong intra-ecosystem competition. More competition between sellers and software developers makes the platform more attractive to users, and the more attractive it becomes to users the more attractive it is to buyers and sellers. Digital firms that try to capture a platform markets use abundance strategies: they give away products for free, handsomely reward complementors, and offer low prices and high quality to users. By engaging in loss-leading strategies early, they can establish their position to compete in the long-term. This is the first stage of ecosystem competition: emergence. To become an ecosystem operator the digital firm must first capture a platform, and to capture a platform it needs to create a strong multi-actor ecosystem that brings value to its platform.
As the platform operator becomes more established it can grow its multi-product ecosystem. The platform operator is likely to identify downstream opportunities by looking at successful complementors, and opportunities in adjacent markets by looking at the behavior of its end-users. As the platform operator expands into new markets, it is able to leverage its resources across markets to strengthen its position in not only new markets but also its established markets. As the platform operator becomes an ecosystem operator, it becomes better positioned to compete, not only with other ecosystems, but also with the actors that are active on its platforms. There is ambivalence in this period: on the one hand, entry into new markets – and especially challenges to incumbent ecosystems – create new products and efficiencies for end-users and may create more opportunities to reward complementors. On the other hand, as the position of the ecosystem operator grows, they may challenge their successful downstream complementors to gain more control over their ecosystem. This is the second stage of ecosystem competition: expansion. This is a natural part of digital competition: a digital firm that offers only one platform is vulnerable to challenges from the incumbent ecosystem operators, so it has incentives to strengthen its competitive position. This is not inherently anti-competitive and can create long-term benefits to competition, but may also cause complementors to gain less rewards in the short-run.
The second stage logically flows into the third: maturity. An ecosystem that expands matures. The abundant rewards that are offered in the early stages of platform competition cannot continue indefinitely: nobody invests in a firm that operates only a loss-leading platform with no profit-generating strategy in sight. The ecosystem operator becomes less dependent on its multi-actor ecosystem and its bargaining position becomes stronger. It starts to offer worse terms for business users, and is able to replace them with downstream integration if necessary. The threat of being ousted from the platform becomes sufficient for business users to fall in line, at least if there is a lack of inter-ecosystem competition and viable alternatives. If business users can take their business elsewhere, they can push back. If they are wholly dependent on the platform for their income, they cannot. Maturity thus shapes both the image and utility of the ecosystem as a whole and the relationship between ecosystem operator and the actors that are active on its platform. However, these changes do not occur in a vacuum: when there is less inter-ecosystem competition, ecosystem operators are able to mature faster and act more aggressively towards their business users. When inter-ecosystem competition is strong, the relationship between the ecosystem operator and its complementors remains more equal.
This sets ecosystem competition apart and requires a look at the entire digital network industry. It is not as simple as capturing a market and establishing monopoly: the power of one ecosystem operator depends heavily on the number of active ecosystem operators of a relatively equal size (i.e. with the ability to create competitive constraints), as well as the threat of disruptive entry either by their own business users or outside firms. When there are a few, very large, mature ecosystem operators, this creates stage four ecosystem competition: incumbency. The small number of ecosystem operators will soon realize that it is more efficient to create a competitive equilibrium where they focus on suppressing potential disruption, rather than on competing intensely with one another. The large ecosystem operators start following each others cues: all of them enter into emerging markets until a winner emerges, once that winner emerges in that market the others retreat, and this happens again in other potentially disruptive markets. By leveraging their resources and incumbency advantages into potentially disruptive markets, they prevent actual disruptive entrants from gaining a foothold. As long as the new market is captured by one of the large tech firms, the equilibrium remains and uncertainty is reduced. This allows them to enjoy a type of quiet life as enjoyed by monopolists: even though they face challenges, they never face existential threats. Once the situation of incumbency has captured the digital network industry, it becomes difficult – if not impossible – to restore competitiveness and contestability without regulation.
These conceptual stages of ecosystem competition help regulators and stakeholders to understand the difference between good ecosystem competition and bad ecosystem competition. Good ecosystem competition happens when new firms emerge and disrupt the status quo, grow their ecosystems and eventually expand into mature ecosystems. The more of these ecosystems are present in the digital network industry, the less ecosystem power any one firm holds. Bad ecosystem competition happens when there is intense competition between only the same four or five ecosystem operators every time a new potentially disruptive market emerges. This type of competition produces suboptimal results in the short-run, as there is never a stage of abundant rewards and new disruptive products, and creates structural competition issues in the long-run as disruptive firms cannot enter. Regulation is necessary to rekindle competitiveness and contestability so that innovation can bloom, and without it users are doomed to gain access only to products that exist to reinforce the incumbency of existing Big Tech firms.
The regulation: how to create an environment where competition and innovation flourish?
Regulating competition between ecosystems and opening up the digital network industry for competition requires a rethink of economic regulation for digital markets. In the third part, the book develops a proposal for progressive ecosystem regulation that draws lessons from existing instances of digital regulation (specifically in the EU, UK, and Germany) and from the regulation of non-digital network industries. Rather than focusing on the similarities between non-digital and digital network industries and digital regulation aimed at governing platforms, it looks into what we need to do differently. Progressive ecosystem regulation has two clear objectives. First, to stop incumbent ecosystem firms from pre-empting disruption by reducing their power to leverage, steer users, and force entrants to sustain their business models by exerting their power. Second, to open up access to resources so that entrants gain real opportunities to compete with incumbent firms in not just one market but in every way that a creative entrepreneur can imagine. At the same time, the regulatory framework wants to prevent undue burdens on ecosystem operators whose activities do benefit users or competition in the short- or long-term.
The regulatory design that is proposed is as follows: ecosystem operators are entered into one of three pools – heavily regulated, lightly regulated, or entrant. Firms that are in stage 1 and 2 of ecosystem competition are automatically in the entrant pool. These firms do not face any regulatory burdens but are instead granted access to resources held by lightly or heavily regulated ecosystem operators, and granted protection in terms of competition. Entrants should be able to request – free of charge – access to data, facilities, and other resources held by larger ecosystem operators to develop and capture new platform markets. This can entail – for instance – that entrants can mix-and-match curated content based on social media posts, vertical search offerings, or video-content at favorable rates or conditions. These conditions depends on which ecosystem operator they are dealing with and if they are entered into the lightly or heavily regulated pool.
The lightly regulated pool is for mature (stage 3) ecosystem operators, and imposes tailored burdens on these operators to ensure that they do not ‘pull up the ladder behind them’ in terms of ecosystem competition. Meaning, ecosystem operators in the lightly regulated pool may be subjected to access duties or prohibitions, but these only apply towards entrants. Lightly regulated entities do not have any obligations towards heavily regulated firms but instead enjoy access rights and protections from incumbents themselves. They are also free to compete with one another without additional burdens. The same goes for the entrant and heavily regulated pool: competition between relatively equal-sized ecosystems should be unrestrained, except for the possibility to enforce ex post competition law.
The heavily regulated pool consists of incumbent ecosystem operators, they are subjected to extremely heavy regulatory burdens that apply towards entrants – including granting free access to data, facilities, or resources without any additional conditions or constraints – and less extensive duties towards lightly regulated entities such as honoring FRAND requests for access. The purpose of the heavily regulated pool is specifically to make it less attractive to focus on maintaining one’s incumbency than it is to compete on the merits. Ecosystem operators in the heavily regulated pool are aware that if they forego their position in parts of their ecosystems – be it through divestments or by losing them in the competitive process – they can be entered form the heavily regulated pool into the lightly regulated pool. This would not only reduce their burdens towards entrants, but also allow them to compete freely with other firms in the lightly regulated pool.
The regulatory system is completely different from anything that is happening globally at this moment. The purpose is not to introduce competition on certain core platform services (DMA) or to reduce the strategic position of a certain activity (DMCCA), but rather to create an environment where firms of all sizes are encouraged to compete intensely and on the merits with ecosystem operators of an equal size while leveling the playing field between those that are unequal. Progressive ecosystem regulation gives a ‘way out’ to the large incumbent firms, rewarding them for the divestment of their position. The underlying hypothesis being that if there are enough ecosystems of an equal size without a small group of ‘winners’, competition will continue to intensify. The regulatory framework intends for the heavily regulated pool to be phased out eventually, so that regulators can intervene where necessary to keep entry into the digital network industry open and to allow for disruptive innovation. It is not about a list of do’s and don’t but about a recalibration of competition and better division of the digital network industry across various digital ecosystems: it balances trust in the ability of competition to produce the best outcomes, and giving a hand to the digital network industry for competition to restore itself.
Conclusion
The book offers a blueprint for a new type of regulation that approaches competition in the digital economy holistically by looking at competition throughout the digital network industry instead of adopting a fragmented view. Early experiences with the Digital Markets Act have already shown that large ecosystem operators still have incentives and the ability to maintain the incumbency of their ecosystem. These firms leverage their capabilities, resources, and legal recourse to slow down compliance or shift away from one business model to another. The process of introducing contestability in digital markets by these means takes years for markets where competition already exists, and does not stop incumbent ecosystem operators from leveraging their position into new markets such as Artificial Intelligence. To really open up digital markets in a way that produces systematic and continued competition, innovation, and rewards for users, a shift towards ecosystem competition may be direly needed.
The book can be pre-ordered here, and is available in December 2025.
