Natural Monopolies in Digital Platform Markets, Francesco DUCCI

Francesco Ducci

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There is much talk today about the different approaches to address the challenges of digital platforms. The book Natural Monopolies in Digital Platform Markets, by Dr. Francesco Ducci, is definitely an informative, timely and powerful contribution to the debate. In this book, Dr. Ducci seeks to investigate the digital platform industries from the viewpoint of natural monopoly and to draw upon guiding principles for policy responses to digital platforms’ market power. As opposed to a black and white distinction between ex post and ex ante interventions, he contends that “a more complementary role between competition policy enforcement and regulatory instruments” is urgently needed.

After an explicit introduction outlining the essentials, the book begins with a chapter explaining the applicability and the application of the natural monopoly framework in digital platform markets. Traditionally, a natural monopoly refers to a monopoly that occurs due to high fixed costs and large economies of scale. It exists when one firm can produce more efficiently than other firms can, which entails ex ante regulation of the natural monopoly’s behavior rather than “promoting competition, entry, and fragmentation.” When it comes to digital platforms, Dr. Ducci points out that, in addition to the network effects between different users, the technological developments result in various forms of economies of scale related to the access to data, the use of algorithmic matching and prediction technologies, which increases the level of market concentration and makes digital platforms “more prone to natural monopoly.” As a result, the natural monopoly paradigm seems more relevant to deal with the concerns raised by the market power of digital platforms.

Based on the framework developed in the previous chapter, Dr. Ducci studies the specificities of three selected scenarios: horizontal search, e-commerce marketplaces, and ride-hailing platforms. These cases show that the existence of forms of scale does not necessarily lead to natural monopolies, although technological features can increase the likelihood of natural monopolies. The heterogeneousness displayed in each case leads to different conclusions as to the characterization of natural monopolies. According to Dr. Ducci, the first example, horizontal search, is more likely to be recognized as a natural monopoly because of its high fixed costs, marginal costs close to zero, and the scale and scope effects of data. On the contrary, online commerce marketplaces are not naturally monopolistic for the reason that neither the network externalities between buyers and sellers nor the network of physical infrastructures for logistics and delivery are significant enough. The case of ride-hailing platforms is more ambiguous, which is not necessarily natural monopolies. Nevertheless, depending on the local conditions in a given geographical area, the market can be served more efficiently by a single operator.

These three case studies offer important lessons for policy approaches in digital industries. Dr. Ducci argues that “policies that address market power while accepting various degrees of efficient concentration” are more desirable. In the next chapter, he derives general policy principles for digital platforms by analyzing and comparing the advantages and shortcomings of alternative policy instruments, such as sector-specific regulation, franchise bidding, public ownership, and competition policy. Generally, ex ante approaches are the most pertinent to address the problem of natural monopoly, but the institutional implementation of regulation is far from perfect due to the costs of regulation, asymmetric information, etc. Whereas alternative approaches like franchise bidding can be considered as substitute resolutions, the ex post competition policy intervention still remains crucial. Instead of breaking up big tech titans, Dr. Ducci holds that the approach of “facilitating a form of Schumpeterian competition and cycles of monopoly displacement” is preferable given the structural features of the digital industries. What’s more, the competition law approach has its own virtues and limitations. Therefore, he emphasizes that competition policy enforcement and different forms of regulatory intervention should be employed as complements to each other in digital platform markets.

For those who want or need to understand the interplay between competition policy and regulation, this book will provide a valuable addition to their reference library. It is particularly timely in light of the recent actions in many jurisdictions with regard to digital platforms. This book should appeal to a broad range of individuals including legal scholars, lawyers, in-house counsel, advisors, and students.