The European Union (EU) is manifesting the dreams of U.S. policymakers who want granular control over online platforms and commerce. The EU drew longing gazes from would-be central planners when it adopted the General Data Protection Regulation (GDPR) – a comprehensive and burdensome data-privacy regime – in 2016. In 2022, Europe dove still deeper into digital technocracy, codifying the Digital Markets Act (DMA) and the Digital Services Act (DSA).
These sister laws seek to enforce EU regulators’ conception of safer, fairer online speech and competition. However, the road to stagnation is paved with good intentions and bad economics. These statutes will fail utterly to realize their proponents’ lofty hopes. Instead, they will ban pro-consumer business practices, degrade user privacy, and crush the market’s natural competitive forces.
The DMA went into effect earlier this year. American leaders should monitor its shortcomings to avoid replicating them here. Already, many of the DMA’s policies have found support in Congress, in such proposals as the American Innovation and Choice Online (AICO) Act, legislation which died last Congress but is poised to be reintroduced soon. While the DMA contains myriad ill-conceived regulations, a few high-level failings stand out.
The law creates a sweeping, unbending list of obligations and prohibitions that governs ten categories of economically significant “gatekeeper” platforms. Examples include operating systems, search engines, web browsers, social-media platforms, and more. However, many newly forbidden business practices have generally pro-competitive or pro-consumer effects.
“The prohibited practices are presumed to harm competition irrespective of efficiency considerations raised by the [business], such as improving consumer welfare or product improvement by technological innovation,” the Information Technology & Innovation Fund’s Aurelien Portuese explains. Any market hobbled by such inflexibility will invariably produce fewer innovative products and business strategies. This will further smother Europe’s already lagging tech sector.
The DMA-proscribed practice of “self-preferencing,” whereby a search engine or online marketplace prominently features its own products. For example, Google Search “preferences” Google Maps over other mapping services. Another instance is Amazon’s search results, which promote the marketplace’s in-house product lines, such as Amazon Basics. In both cases, consumers benefit. Google Maps’ prominent search positioning spares users the time that would be required to wade past through a list of mapping services simply to find directions. Likewise, Amazon’s self-preferencing highlights affordable products with a familiar brand they can rely on. If consumers don’t want either of those, they can continue scrolling as normal.
Moreover, despite the agitation of pro-DMA technocrats, self-preferencing often benefits large platforms’ small competitors. “Platforms that preference their own products frequently end up increasing the total market’s value by growing the share of users of a particular product,” writes Dirk Auer, director of competition policy at the International Center for Law & Economics. “Those that preference inferior products end up hurting their attractiveness to users of their ‘core’ product, exposing themselves to competition from rivals.”
The DMA further fails to account for the nuances of market share. A dominant incumbent in one market may be a disrupter in another. Apple is the premier programmer and manufacturer of mobile phones, but is just another competitor in the streaming market. Nonetheless, “the DMA will regulate Apple Music (which has 15 percent market share) while exempting Spotify (31 percent market share),” Portuese notes. This is transparent protectionism for the European-owned Spotify against American competition. This is contrary to DMA proponents’ claims of safeguarding market competition.
Such shortsightedness stretches across many industries. “In the travel industry, the DMA will impose restrictions on Google Flights while exempting such incumbents as Expedia,” Portuese continues. “Within the social media industry, the DMA will regulate Facebook while exempting Twitter.”
Looking back, the GDPR’s regulatory heavy-handedness reduced app availability, measured on the Google Play app store, by a third. It also slowed the rate at which new apps appeared by nearly half. Looking forward, the Center for Strategic and International Studies (CSIS) estimates regulatory costs associated with the DMA and DSA could reach $70 billion for European companies alone (about 0.3 percent of EU GDP). Further, American firms could, conservatively, see an invoice of $50 billion, CSIS says. These laws are not a formula for innovative dynamism and consumer choice. And, like any new tax or regulation on business, these costs will ultimately be borne by consumers.
Europe’s tech posture is that of an overbearing parent. Regulators wish to cajole and micromanage industry, demanding adherence to a myopic, idiosyncratic conception of how markets should work. Meanwhile, in the relative free markets of America, firms like Apple, Google, Amazon, and Facebook have lapped their continental competition. To conserve this exceptionalism, American policy makers must conserve the policies that allowed Silicon Valley to flourish and eschew the sort found in the DMA, DSA, and GDPR.
