Is it time to regulate the market power of digital platforms in Mexico?

Alejandra Palacios P. Afiliada Senior de la Escuela de Gobierno de la Universidad del Sur de California (USC Price School). De septiembre de 2013 a septiembre de 2021 fue Presidenta de la autoridad de competencia en México (Comisión Federal de Competencia Económica, COFECE). External Advisor de Cuatrecasas.

The view in the European Union, the UK, Germany, Japan, Australia, Brazil, as well as a group of scholars and politicians in the US, is that some sort of regulation – industry specific / ex-ante regulations– is necessary to complement the antitrust system, to better watch over the market power of big techs and their corresponding harm to consumers and competition. Antitrust regulation is traditionally considered a regulatory tool to treat anticompetitive business practices, that is unless market power itself is specific to an industry’s structure and unique characteristics. In such a case sectoral regulation is needed.

The digital market power regulation experiment has started. Should Mexico also go this way?

«Of keen interest in the Mexican case is that more than 10 years ago the country recognized that in order to be effective against certain “big companies”, its antitrust toolkit needed to include the two core features of today’s DMA, i.e., targeted regulation in a specific industry, and only for those businesses with a large amount of market power (…) Consequently, in 2015 the largest telecom (America Movil) and broadcasting (Grupo Televisa) groups in Mexico were designated as dominant, and a series of obligations related to interconnectivity, the unbundling of services, infrastructure sharing, and other similar procompetitive measures contemplated in the DMA were imposed on these companies«.

This is not an easy policy discussion because for several reasons; among others:

• The harms most often mentioned by the press and politicians like loss of privacy, disinformation and misinformation from social media, the detrimental effects of social media on children and teenagers, and an advertising-supported business model that incentivizes maximum user engagement, are indirectly related to competition. Thus, some argue, the regulatory tools best suited to addressing these harms are regulations to protect privacy and hold platforms accountable for the content they handle.
• Big techs monetize their services in different ways, which also means they have different incentives driving how they engage with rivals and customers. Thus, the potential anticompetitive conduct could differ from one platform to another. As such, some argue, the actual case-by-case antitrust approach versus a general rule for “preponderant” digital businesses serves well.
• If market power digital regulation goes too far, thus condemning both good activities as well as bad, then the side effects of the proposed regulatory provisions themselves cause more harm than benefits. The European Digital Market Act (DMA), of course, could have unintended consequences.
• Regarding antitrust enforcement against big tech, you need a scorecard to keep track of the pending antitrust suits and investigations worldwide, Mexico included. Some argue that we should wait for major antitrust enforcement actions pending in the US and the real effects of the European regulatory experiences to play out before moving forward with regulation plans in Mexico.

On the other hand, there also seems to be a consensus on:

• Much of the dominance of today’s tech firms is, in part, a consequence of the intrinsic economic characteristics of digital markets (network effects, economies of scale, expansive ecosystems that collect and mix massive amounts of data, vertical integrations, switching costs and consumer inertia). Other markets prone to concentration due to the relevance of network effect and economies of scope and scale —like telecommunications, transport, and energy—are subject to sectoral regulation, even if each present their own specificities.
• Big tech market power is also partly driven by strategic anticompetitive conduct. The combination of the market characteristics abovementioned and their behavior makes it very difficult for potential contenders to enter the market and compete against the big techs.
• By being —the digital platforms— intermediaries between those who offer and those who consume a good or service, potential harm goes beyond monetary price and exists in the terms and conditions imposed on those who use the platform to sell their products (commissions in app stores, high prices for advertising, high prices for using logistics systems, among others). On the consumer side, there is a degradation of the user experience with exposure to advertising, excessive personal data collection and online tracking — to the detriment of consumer autonomy and privacy.
• Big tech companies have the technology to adopt certain codes of conduct in some markets and not in others, so procompetitive regulation in one country does not automatically translate to modifying an anticompetitive conduct in another. A big tech company could consider aligning its business models worldwide with the DMA stricter standards. However, it would be naïve for Mexican regulators to think it will mechanically happen in our country.

Interestingly, in Europe, where we have seen this push towards digital regulation, it is the antitrust authorities themselves who have been asking for more tools to tame market power. This is in response to their frustration over an inability to achieve more on-the-ground, even as they have issued several fines and rulings against some of the biggest digital platforms. As antitrust alone has not been effective, they have asked for new tools, including a mix of nondiscrimination rules, access rules and business line restriction through targeted regulation, applied only to specific platforms, and only to competition issues identified through previous antitrust enforcement efforts.

Of keen interest in the Mexican case is that more than 10 years ago the country recognized that in order to be effective against certain “big companies”, its antitrust toolkit needed to include the two core features of today’s DMA, i.e., targeted regulation in a specific industry, and only for those businesses with a large amount of market power. In 2014, Mexico passed a new Telecommunications and Broadcasting Law with the goal of increasing competition in those two sectors. Provisions included dominant carrier regulation which in practice gave the Mexican telecom regulator the ability to impose specific procompetitive measures on any operator found to be “preponderant” (with a market share of more than 50 percent in terms of subscribers, audience and/or traffic on its networks) in each of the telecommunications and broadcasting sectors. Consequently, in 2015 the largest telecom (America Movil) and broadcasting (Grupo Televisa) groups in Mexico were designated as dominant, and a series of obligations related to interconnectivity, the unbundling of services, infrastructure sharing, and other similar procompetitive measures contemplated in the DMA were imposed on these companies.  At that moment, the most vocal party of all on the need to tame the power of these two giants was the Mexican antitrust agency, hand in hand with the telecom regulator.

Two and a half years ago, before leaving my position as Chair of the Mexican antitrust agency (COFECE), my fellow commissioners and I discussed whether it was the moment to launch an advocacy document pointing out the risks of the big techs in the Mexican economy, including a high level / first draft proposal on how to regulate their market power. The idea was to open this discussion to the public. At that time, although COFECE understood full well that digital platforms reach tipping points that were difficult to step back from, it was the tech giants themselves operating in Mexico that were becoming robust sources of competitive pressure for traditional incumbents with entrenched market power. For example, Google and Facebook in the advertising sector which had traditionally been dominated by two broadcasting companies, and Amazon and Mercado Libre in the retail sector, where incumbents like Walmart had important levels of market concentration. Additionally, the Board recommended that we wait and see the development of the regulatory efforts taken elsewhere before starting the Mexican discussion. This was under the logic that regulation in countries with larger economies would show the way forward, and possibly even positively impact Mexico if big techs adopted and implemented the codes of conduct mandated in Europe in other jurisdictions, such as ours.

A final consideration then, which I did not agree with, is that the Mexican Competition Act includes a quasi-regulatory procedure (known as Article 94 market investigations) that can serve well in addressing the competition challenges that the digital era has brought to competition authorities. This procedure gives COFECE – upon identifying a competition problem – the power to impose a wide range of remedies (including behavioral and structural) to favor the entry of new competitors.

My perception is that said procedure is not fit for this purpose for two reasons: First, remedies can be mandated after an exhaustive case-by-case investigation, each of them taking many years (3 years or more in the Mexican experience). In this same line of thought, the UK competition authority, that has a market review procedure very much like the Mexican one, still considers that the market power in digital markets needs to be addressed with new powers, which are being discussed under the Digital Markets, Competition and Consumers Bill (the DMCC bill) in Parliament. Secondly, when this provision was enacted in the 2014 Mexican Competition Act, it was largely criticized by various actors of the competition community. They considered it an unnecessary mechanism because the law already contemplates abuse of dominance enforcement powers and because the Commission was not a regulator. As such, ten years of experience has taught us that as redacted this procedure it is essentially toothless.

So, I ask again: Is it time to open the discussion now?

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