New Report Questioning Political Logic and Economic Assessment Behind EU DMA Proposal

Last week, the US government distributed an eight-point policy paper calling on the EU to reconsider its proposed Digital Market Act (DMA). The message was clear:

“We think it is important that regulatory efforts on either side of the Atlantic do not create unintended adverse consequences, such as inadvertent cybersecurity risks or harms to technological innovation,” the paper states. “We have also been clear that we oppose efforts specifically designed to target only U.S. companies where similarly situated non-U.S. companies would not be covered.”

A new report by the Lithuanian Free Market Institute (LFMI) and supported by Germany’s Friedrich Naumann Foundation (FNF), confirms these views – with a long list of reasonable arguments questioning the political logic and economic impact assessment behind the DMA proposal.

Here are major findings:

The DMA proposal fails to keep with principles of good regulatory design. The OECD’s “Recommendation of the Council on Regulatory Policy and Governance” from 2012 highlights that the challenges faced by governments today and in the foreseeable future require systematic principle-based policies and careful impact assessment: “[i]n designing regulation governments need to be aware of the incidence of regulatory costs on businesses and citizens and of disproportionate impacts on small to medium-sized enterprises and micro businesses”.

Concepts and requirements of the proposed regulations are vague and do not provide the expected degree of legal certainty. The vagueness and ambiguity of the proposed rules are caused by poorly defined concepts and the unrestricted scope and powers of the European Commission.

Several definitions lack the clarity to qualify as solid legal concepts:

• Gatekeeper – It is not defined explicitly what exactly gatekeepers keep and what criteria define them.
• Fair competition – “Fairness” is not an economic and stand-alone legal term. It only has meaning when contextualized and it depends on interpretation.
• Market – It is not clear how exactly this legal act defines the market, what scope of activity will be regarded as the market for the purpose of evaluating a lack of competition or its abundance.

Many terms that are related to gatekeepers are context sensitive and critically depend on the time when an evaluation is conducted by the European Commission. Terms like “significant impact on the internal market”, “important gateway” and “entrenched and durable position” are open to interpretation.

The combination of vague concepts for gatekeeper designation together with unlimited powers of the regulator will likely lead to years of additional lawsuits in the EU just for the designation of gatekeepers.

The proposed DMA reverses the burden of the proof by stating that the gatekeepers should be always held guilty of unfair practices and therefore subject to behavioural constraints or obligations unless they show their conducts are “fair”.

By applying the ex-ante approach to competition instead of classical ex-post enforcement, the proposed DMA is based on a presumption of guilt. The absence of the presumption of innocence eliminates the legislative process from the rule of law tradition.

The meaning of competition and contestability remains ambiguous when objectives and obligations are fully detached from appropriate market analysis or case-by-case investigations.

Private “platforms” are treated as public goods even though there is no rationale or ground whatsoever for such bold treatment. In the case of public utilities, regulation evolved over a very long period of time with numerous unintended consequences and regulatory revisions to mitigate undesired socio-economic effects. By contrast, digital services with undertakings subject to monopoly regulation in other fields did not evolve over a long period of time, they were not inherited from tribes, earlier generations, or the government. They evolved because they were and still are highly competitive compared to alternative offers, and chosen by consumers.

Proponents of the DMA proposal call for artificially (“armchair”) constructed competition in Europe’s digital markets but fail to recognise real-world developments, i.e., the evolutionary nature of business development and competition, and how consumers value reliable new and reliable products and services offers.

The proposed DMA, if implemented, will clearly impact the services offered by today’s mostly used providers. As the proposed DMA will cause companies to change or remove offers from the European market, the interests of the users, who value high quality service continuity, will be damaged.

The European Commission reports that start-ups, research institutes and trade associations, point out the positive impact of platforms on start-ups and SMEs. Accordingly, “consumer harm” created by the implementation of the proposed DMA would to a large extent be imposed on businesses, first of all for all SMEs, whose business models critically rely on services provided by so-called “gatekeepers”.

The proposed fines are extremely high and cannot be considered proportionate measures when non-compliance with ex-ante rules rather than abusive actions or de facto harm are punished.

The proponents of the DMA see a digital market as an exception from the rest of the economy and demand specific rules, principles and institutions. The former is not true, the latter is not feasible without harming the market in general and the development of the technology sector in particular.

The proponents of the DMA fail to state why “new winners”, who are supposed to emerge after the rules of the game have been changed, will bring only positive effects and will not have any negative effects on consumers, innovation, and market potential.

If the goal of the DMA is to invigorate the digital sector in the EU, attention should be drawn towards enhancing conditions for firms to take risks and to invest in the EU, not other markets. This involves protection of property rights, transparent and minimum regulation, preventing the Member States from building regulatory barriers to the European Single Market (as they are prevented in the non-digital sector), employment flexibility, and other favourable business environment measures.

---

The full report can be accessed here.