Competition in the Digital Age
By: Padmashree Gehl Sampath
Tags: Innovation, Data, Competition, Policy, Africa

Should African countries be worried and why?

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New digital technologies, such as big data analytics, 3D printing, robotics and process automation (RPA), artificial intelligence (AI), internet of things (IoT) and blockchains, lend a new urgency to resolving how to use the internet. The internet today is not just about accessing information, it’s a landscape for innovation for the future. In many countries starting from the USA, but spreading as far as China, India and Brazil, businesses are using the internet to create new forms of products and services, and are continuously benefiting businesses by (a) lowering the cost of scaling up through cloud computing, (b) expanding the access to clients through new platforms, and (c) promoting business planning, feasibility and future innovation in a myriad of ways.

The internet is now synonymous with new markets, and new means of income, for those companies that can get there first. There is no surprise, as a result, that the impact of new digital technologies on small and big business creation for enhancing productivity and generating prosperity have occupied centre stage in most recent discussions on transforming Africa. An African Development Bank report on the topic estimates that artificial intelligence (AI) itself is expected to generate revenues up to 47 USD billion by 2020 (from the current USD 8 billion), and the wider adoption of cloud technologies is estimated to have already increased GDP by $120 billion.

How to prevent unfair winners?

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For Africa, the challenges of promoting digital markets are numerous. In traditional markets, concentration and the accompanying rise in market power have been associated with increased consumer prices to monopolistic behavior, reduce choice and low quality. The digital economy is relatively more complex, with platform-based business models, new modes of value extraction and creation, dependent (or secondary) markets, network effects and externalities, and economies of scale. Digital markets are much worse. The European Commission is already dealing with the effects of a heavily concentrated digital market, with a few platform companies commanding most rents, and accumulating data in ways that can competition and consumer welfare.

The combination of economies of scale and scope; network externalities whether on the side of the consumer or seller; the integration of products, services and hardware in digital markets all work together to create a ‘winner-takes-most’ dynamic, “where one firm (or a small number of firms) can gain a very large share of the market”. Although technological change or network gains that enable firms to offer more and better innovative products with substantial network benefits can drive such rents, the evidence on what kinds of competitive effects fosters the rise of ‘super star’ firms in the digital economy is scant and largely inconclusive.

The importance of rethinking competition policy

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An enabling policy framework is not just one that allows these technologies to be exploited but is rather one that sets the limit to their exploitation in the interests of competition and creation of a level playing field where local firms can also thrive and innovate. This means that African countries — much like countries elsewhere — need to begin thinking of comprehensive policymaking, including extending/ reconceptualizing competition policy from a number of perspectives. For one, the nature of change in the digital economy paves the way for hidden charges and effects that are not immediately visible and give much scope for extracting rents at the detriment of the common consumer. For example, in the digital economy, even when it appears that the consumers are not paying a higher price, they may be paying hidden charges in terms of foregone privacy. Thus, while governments in developing countries are focused on building innovation capabilities for the digital economy through positive and enabling policy frameworks, creating a level playing ground also calls for parallelly curbing the abuse of market power by incumbent companies. The abuse of such market power can make it impossible for new companies to enter and perform, even when other factors, such as capabilities, an enabling framework for innovation, and policy support are all provided for.

This rise in market power can undermine local entrants in many ways — not just because it can be misused by large firms to amass data, which is the engine of growth in digital markets, but because it can promote the kinds of behaviour that entirely undermine social cohesion, personal welfare, and overall economic development.

As policymakers in the USA, European Union, and most recently, United Kingdom, are taking steps to engage with these issues, African policymakers need to make their own informed choices on competition policy frameworks that can unleash competition in the digital economy for their region. For Africa, the imperative of creating level playing grounds in key digital markets is much larger than anywhere else and will require a nuanced treatment of competition issues in light of ground realities of local economies. There is a need to focus on the opportunities and challenges of the digital economy and how it can be addressed through a proactive policy framework to facilitate competition and consumer welfare while promoting the interests of the local economy.