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The Brazil Antitrust Agency’s new study on digital markets

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Guilherme Favaro Corvo Ribas
TozziniFreire, São Paulo
gribas@tozzinifreire.com.br

Natan Maximiano Munhoz
TozziniFreire, São Paulo
nmunhoz@tozzinifreire.com.br

 

In August 2020, the Department of Economic Studies (DEE) of the Administrative Council for Economic Defence (CADE), the Brazilian Competition Authority, launched the results of a new and interesting study.[1] It analyses issues involving competition dynamics in the so-called digital markets, confirming the necessary attention given by Brazil’s watchdog on this matter. The study was based on various reports and papers produced by other antitrust authorities and international research centres on the subject and does not necessarily reflect CADE’s view and positioning on the issues discussed. The study particularly analysed 21 reports and papers, including those from Australia, Canada, the European Commission, France, Germany, India, Japan, Mexico, the Netherlands, Portugal, the United Kingdom, and the United States. Its aim was to compile the most relevant discussions and international trends to improve CADE’s policies and to ensure the technical and scientific enhancement of the public enforcement in the field of antitrust. This article will briefly outline this new CADE study and summarise the main topics it presents.

At the outset, CADE’s study presented an overview of the structure usually observed in digital markets, as they commonly share similar characteristics. These include: significant network effects (direct and indirect); network externalities; economies of scale and scope; low marginal costs; and a tendency to ‘tipping’ effects. From an antitrust standpoint, the study highlighted: the challenges of an accurate definition of relevant markets, also given the two-sided or multi-sided characteristics of these markets; the possible relevance of data accumulation (Big Data) for the maintenance of market power and competitive advantage; the challenges of the analysis in markets with zero or negative prices; and the importance of the user’s behavioural economics to understand better such digital competition dynamics.

CADE’s study indicated that international reports and papers generically cite the many benefits created by the evolution of the digital markets, including: greater and improved connectivity; decreases in transaction costs; the possibility of reduced prices; innovation in products/services and business models; greater customisation of products and services to benefit users; the possibility of increased productivity via better use of scarce resources; and, countless possibilities brought by artificial intelligence. Studies also indicate the relevance of digital markets to the economy in general. For instance, in the UK, in recent years digital markets have grown 2.6 times faster than the economy as a whole, generating five times more jobs, and accounting for 16 per cent of the country’s production and 25 per cent of its exports.

One of the most interesting parts of CADE’s study is the compilation of the potential antitrust concerns in the digital markets constantly discussed in several reports and papers, and the possible new ways of analysis, especially in environments with undoubtedly dominant platforms. In such cases, market power is known as Strategic Market Status. Even in markets with apparent zero price, there may be impacts on the prices observed by end-consumers, depending on the negotiating power of these platforms regarding their advertisers (ie, the Strategic Market Status may force asymmetrical negotiations for the digital advertising, which may lead the advertisers to pass on such possible cost increases into the price of their advertised products/services). Numerous international reports and papers have also taken into account the risks of abusive contractual terms for accessing the platform, removal of actual or potential competitors (either through acquisitions or exclusions) and decreases in quality and innovation levels in environments with Strategic Market Status, as well as a lack of competition.

Based on the simplified assessment of potential consumer harm presented by the UK’s Competition and Markets Authority (CMA), CADE’s study underlined the concern about negative effects on consumer welfare when large online platforms face limited competition. This includes possible direct harms in terms of reduced innovation, restricted choices, lower quality levels and limited control over users’ data. Additionally, there are possible indirect harms passed on to consumers. These might include, for example: higher prices for goods and services across the economy (through advertisers); a potential decline in the quality and range of important and diverse content, such as new articles (through publishers); and missing out on opportunities for new products and services in emerging markets (through other related markets). CADE’s study also presented further considerations on potential antitrust concerns with specific digital markets, such as price comparison platforms, app stores (marketplaces) and markets based on online advertising (ie, general search and social networks).

Some possible solutions of how to deal with such potential antitrust concerns over digital markets, based on international experience, would include: the maintenance and enhancement of the consumer welfare standard as an important focus of analysis; non-discriminatory and fair treatment obligations; and, topics involving portability and interoperability. Two possible tools worth mentioning are the reversal of evidential and intervention standards based on potential competition (in this way, it would be up to dominant platforms with indisputable Strategic Market Status to prove the efficiencies of certain conducts and policies under investigation); and the creation of a new regulatory body with specific powers to monitor the commercial dynamics and competition levels in the digital markets, and, particularly, intervene with necessary expertise and agility.

Based on the overall discussions of the study, CADE finally presented some areas which need to be better evaluated and that may form the object of further studies. Such areas are:

  • A better understanding of the positive and negative aspects of a specific regulatory regime and better definition of the scope of action of this possible new regulatory body.
  • Practical guidance on how to structure this new regulatory body, especially considering the specifics of each jurisdiction and the characteristic of global platforms in digital markets.
  • Impacts on the consumer welfare given a possible increase in price discrimination capacity. On one hand, price discrimination increases supply and decreases deadweight loss. On the other, this practice transfers all surplus from consumers to firms.
  • How to identify and characterise ‘predatory strategies’. Several international studies and papers indicate the challenges in using current criteria in determining predatory prices by dominant companies. Although such studies advocate greater flexibility of the recoupment criteria to facilitate the analysis of predatory strategies in digital markets, they lack a better explanation on what would update or replace the current review standard.
  • Methodology for the analysis of potential competition, a reversal of evidential and intervention standards. The international studies and papers consistently present the need to balance traditional antitrust analysis to incorporate potential competition risks. Nevertheless, there are still few directives on how antitrust agencies could achieve this in specific cases.
  • The role of high investments in innovation. Although the international studies and papers consistently describe how problems in digital markets can negatively effect innovation, they do not directly address the high degrees of investment in innovation made by dominant platforms. It is necessary to understand better how the dynamics of innovation and investments in specific markets can be affected by the proposed changes.

In conclusion, CADE’s study considered that the competitive dynamics in the digital markets is certainly an area of public policy that is also constantly changing with the modern economy. It is therefore safe to say that Brazil’s authorities will pay close attention to the idiosyncrasies of the digital markets and the changes in competitive dynamics to ensure fair and free development of the national digital economy.

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