The Competition Commission’s recently released discussion paper on the digital economy in South Africa highlights issues around why it thinks this sector must be regulated.

The “Competition in the Digital Economy” paper says that if the country does not set up a regulatory framework, it could soon find itself trying to govern companies that have quickly amassed a lot of power.

The paper notes that this is likely, as digital markets are prone to extreme “winner takes all” outcomes that has seen companies such as Google, Facebook and Alibaba dominate their respective local markets and around the globe. It warns that this kind of power could be detrimental to South African businesses.

“This frequently plays out on a global interconnected and virtual stage, resulting in tech giants dominating entire areas of global commerce, such as social media, search, digital advertising, mobile operating systems and e-hailing. Digital markets, therefore, threaten a new era of global concentration and the marginalisation of developing-country businesses unless purposefully regulated.”

The commission acknowledges that it has little sway over what happens in other jurisdictions, but says that discussing what happens in the local digital market is important because it could prevent market power abuse in sectors that are still emerging.

Concentration of power

It fears, for instance, that if it allows the merger of two seemingly unrelated companies, it would unintentionally concentrate power in a market by approving so-called ‘killer acquisitions’. This is where start-ups or emerging competitors are bought with the express purpose of closing them down.

Aside from primitively killing a rival, there is also the danger that an acquisition could end up entrenching dominance by expanding into related markets.

“For instance, such strategic behaviour in merger activity has played an important role in entrenching Google’s position in search and search advertising, with acquisitions of companies such as YouTube and DoubleClick. Facebook’s acquisition of WhatsApp and Instagram could be viewed in the same light.”

Digital services tend to lead to power concentration in markets like search, the commission argues

The commission warns that another danger in allowing some acquisitions is the combination of datasets. This is where the merging companies seemingly don’t have overlapping datasets, but the resulting merger gives them “an advantage over competitors to improve on products in a way that cannot be matched”.

The merged dataset concern was one of the reasons the CompCom recommended that the Competition Tribunal not approve the Naspers’ takeover of WeBuyCars. It reasoned that as Naspers controls e-classifieds OLX and Autotrader, an online vehicle listing site would have had considerable market power.

“The commission determined that the combination of these datasets would provide WeBuyCars with an unmatchable competitive advantage over rivals in the guaranteed purchase used car marketplace.”

So far, vetoing proposed mergers like the Naspers/WeBuyCars have been the exception and not the rule — until 2019, the CompCom had investigated 87 mergers in the digital markets space, prohibiting none.

Even so, the commission insists that digital markets need to be better understood by regulators, because participants are able to organise themselves in novel ways that are detrimental to competitors and customers.

It gives the example of the US airline industry, where airline companies sent fare information daily to the Airline Tariff Publishing Company (ATPCO), a central clearinghouse. ATPCO shares all the data received in real time with travel agents, computer reservations systems, consumers and even the airline companies themselves.

Abused

ATPCO publishes information about prices, travel dates, origin and destination airports, ticket restrictions, as well as first and last ticket dates, which indicate the time range when the tickets at a particular fare were for sale.

According to the US justice department, this information was abused by airliners as they were using first ticket dates to announce tariff increases many weeks in advance. “If the announcements were matched by the rivals when the first ticket date arrived, all companies would simultaneously raise the tariff.”

The justice department said the fast data exchange mechanism used to monitor tariffs and react rapidly to price changes, “enabled companies to collude without explicitly communicating.” The US airlines showed that they were able to use computer algorithms to spot pricing patterns and collude in ways that are complex and difficult to detect.

The Competition Commission says given the complexity of digital markets, regulators like itself need to be better resourced to be able to detect, investigate and prosecute these kinds of cartels. This is why it needs the requisite tools, skills and jurisdiction to do so. In order to achieve these outcomes, the commission intends to:

Develop appropriate tools for detecting digital cartels and assessing the effects of agreements among competitors;
Pilot a tender bid-rigging detection programme;
Build and staff a cartel forensic lab; and
Develop guidelines for establishing the commission’s jurisdiction in cases of digital collusion that have an effect in South Africa.

The commission admits when it comes to properly regulating digital markets, it’s still finding its feet, but says that if it’s not proactive when it comes to the enforcement of competition law, there is the danger of a concentration of power in digital markets.

This strategy is premised on the belief that digital markets have tendencies to tip towards a “winner takes all” environment, where one or a few firms dominate. It fears that reversing this position once “the markets have tipped”, as well as regulating the behaviour of dominant firms would be very difficult.