MAINTAINING COMPETITIVE CONDITIONS IN THE ERA OF DIGITALISATION │ 1 Maintaining competitive conditions in the era of digitalisation OECD report to G-20 Finance Ministers and Central Bank Governors, July 2018 This note reviews the main changes in the competitive landscape that the digital economy may bring about. In light of these changes, ensuring that competition policies and regulations remain well adapted for both online and offline business models is key to boost innovation, technology diffusion and productivity in the digital era. Regulations creating barriers to entry or inadvertently providing an advantage to either traditional or new business models are in most urgent need for review. Priority sectors for regulatory review may differ between countries, but usually include transport and logistics, accommodation, finance, health and platforms. A set of potential principles is suggested to guide policymakers in conducting reviews of existing regulations and help regulation keep pace with rapid digitalisation. 1. The digital transformation and the competitive environment 1.1. Digital business models may raise competition concerns 1. The digital transformation is changing business models, methods of production and distribution, and the way firms compete. Digital technologies have reduced the cost of entering some markets, even across borders, for instance as platforms allow small firms to sell online seamlessly to foreign customers and become “micro-multinationals”. Digitalisation has also reduced the costs of scaling up production, advertising and distribution for new entrants. For instance, the availability of cloud computing services provides smaller and newer firms with a flexible access to considerable computing power without investing in physical infrastructure. More broadly, core digital products are replicable at close to zero marginal cost. This can allow innovative start-ups to grow and gain market share rapidly once they bring a product to market, often with few employees, few tangible assets and limited geographic footprint (OECD, 2018 [1] ). 2. Through these channels, the digital transformation offers potential to stimulate competition and yield substantial consumer benefits. Furthermore, platform-based business models (Airbnb, Uber, Amazon, eBay, etc.) have also raised competition in some traditional markets, such as accommodation, transportation or retail services where online and offline business models compete.
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MAINTAINING COMPETITIVE CONDITIONS IN THE ERA OF DIGITALISATION │ 1
Maintaining competitive conditions in the era of
digitalisation
OECD report to G-20 Finance Ministers and Central Bank Governors, July 2018
This note reviews the main changes in the competitive landscape that the digital economy
may bring about. In light of these changes, ensuring that competition policies and
regulations remain well adapted for both online and offline business models is key to
boost innovation, technology diffusion and productivity in the digital era. Regulations
creating barriers to entry or inadvertently providing an advantage to either traditional or
new business models are in most urgent need for review. Priority sectors for regulatory
review may differ between countries, but usually include transport and logistics,
accommodation, finance, health and platforms. A set of potential principles is suggested
to guide policymakers in conducting reviews of existing regulations and help regulation
keep pace with rapid digitalisation.
1. The digital transformation and the competitive environment
1.1. Digital business models may raise competition concerns
1. The digital transformation is changing business models, methods of production
and distribution, and the way firms compete. Digital technologies have reduced the cost
of entering some markets, even across borders, for instance as platforms allow small
firms to sell online seamlessly to foreign customers and become “micro-multinationals”.
Digitalisation has also reduced the costs of scaling up production, advertising and
distribution for new entrants. For instance, the availability of cloud computing services
provides smaller and newer firms with a flexible access to considerable computing power
without investing in physical infrastructure. More broadly, core digital products are
replicable at close to zero marginal cost. This can allow innovative start-ups to grow and
gain market share rapidly once they bring a product to market, often with few employees,
few tangible assets and limited geographic footprint (OECD, 2018[1]).
2. Through these channels, the digital transformation offers potential to stimulate
competition and yield substantial consumer benefits. Furthermore, platform-based
business models (Airbnb, Uber, Amazon, eBay, etc.) have also raised competition in
some traditional markets, such as accommodation, transportation or retail services where
online and offline business models compete.
2 │ MAINTAINING COMPETITIVE CONDITIONS IN THE ERA OF DIGITALISATION
3. However, some characteristics of the digital economy also create massive
economies of scale and scope that may present challenges to maintain competitive
conditions: first, the fact that digital production typically features significant upfront costs
to develop products and near-zero marginal costs; second, the importance of intangible
assets (intellectual property, algorithms, software, data) to compete effectively (OECD,
2018[2]). In particular, in an increasingly data-driven economy, platforms benefit from
economies of scale and scope in collecting data; precisely as data has become a more
valuable asset and as access to large amounts of data feeds into improvements in analytics
and machine learning, which further help firms improve the quality of their services and
target potential new users (OECD, 2016[3]).1 However, a thriving market for data between
firms also exists, which may contribute to alleviate the asymmetries in data collection
between smaller and larger players. Platform businesses also exhibit strong network
effects, which further reinforce the benefits of scale, potentially creating difficulties for
new entrants to break into a range of markets where they need to compete with large
established firms.
4. While temporary market power earned through new or higher quality products is
well warranted to incentivise innovation, scale, network and cross-platform effects could
create dynamic inefficiencies by perpetuating it, leading to new sources of concentration.
This could limit the productivity benefits from new technologies by creating obstacles to
the entry and innovation of new players, as well as slowing down the diffusion of
innovations to potential competitors.
5. Assessing the strength of the competitive environment and its evolution requires
looking at a range of different outcomes. A first, although necessarily imperfect, indicator
is the evolution of mark-ups – the ratio of the price charged by a firm per unit of product
and its marginal cost. Evidence points to a significant rise in mark-ups since the early
2000s in the United States and other economies (Calligaris, Criscuolo and Marcolin,
2018[4]; De Loecker and Eeckhout, 2017[5]; Andrews, Gal and Witheridge, 2018[6]). The
increase has been driven by those firms that enjoy the highest levels of mark-ups: since
2001, mark-ups rose by about 20% for the top decile of the distribution, whereas the trend
has been flat for the bottom half of the distribution.
6. There are several possible explanations for the observed increase in mark-ups as
digitalisation has progressed. One such explanation would be that the competition faced
by top firms in digitalised sectors may have declined, domestically or globally, and
barriers to entry may have been rising. Other, more benign drivers may include
technological factors (high fixed costs and low marginal costs in the digital economy),
higher product and quality differentiation enabled by digital technologies, or continued
product or process innovation repeatedly extending the temporary market power of top
firms and improving their productivity. Taking into account a broader range of indicators,
including profits, returns on investment, concentration ratios and firm entry and exit rates,
can help disentangle these possible explanations and assess the extent to which rising
mark-ups in the digital economy raise competitive concerns. These measures by and large
indicate that market power appears to be increasing. The available evidence points to a
moderate rise in broad measures of concentration in the US and Japan, with a more mixed
picture in Europe; and a strong trend towards increased profits not only in the technology
1 The widespread use of pricing algorithms has also raised concerns of possible anti-competitive
behaviour as algorithms can make tacit collusion easier to achieve and sustain without any formal
agreement or human interaction (OECD, 2017[11]). There are however few known cases so far.
MAINTAINING COMPETITIVE CONDITIONS IN THE ERA OF DIGITALISATION │ 3
sector but also in financial services, healthcare and a range of other services (OECD,
2018[7]).
7. The fact that mark-ups are higher and have risen faster in sectors more exposed to
digitalisation (Figure 1) further suggests that the digital transformation may have played a
role in these developments. Moreover, business dynamism as captured by firm entry rates
has also been declining at a faster pace in digitally intensive sectors than in the rest of the
economy (Figure 2).
Figure 1. Average percentage differences in mark-ups between firms in sectors of different
digital intensity
Note: Digital intensive sectors (resp. less digital intensive sectors) rank above (resp. below) the median sector
by digital intensity, as calculated jointly over all indicators of digitalisation in Calvino et al. (2018[8])
including tangible and intangible ICT investment, use of ICT goods and services, online sales, etc. Top digital
intensive sectors are in those in the top 25% of digital intensity. This graph fixes the ranking of sectors to the
initial period (2001-03). The estimates are from a pooled regression explaining firm log-mark-ups in the
period, on the basis of the company’s size, country-year of operation, and the sector’s digital intensity.
Source: OECD (2018[2]).
Figure 2. Change in entry rates by sector digital intensity
Within-sector trends, relative to 2001
Note: Country coverage: Belgium, Brazil, Costa Rica, Finland, Hungary, Italy, Netherlands, Norway,
Portugal, Spain, Sweden and Turkey. Sector coverage: Manufacturing and non-financial market services.
Source: OECD DynEmp3 database, May 2018.
4 │ MAINTAINING COMPETITIVE CONDITIONS IN THE ERA OF DIGITALISATION
1.2. Improving and reviewing pro-competition policies
8. Policies and regulations that maintain competitive conditions help sustain a
healthy business environment and bring benefits to consumers. Adequate competition
keeps rents low in product markets, with competitive pricing in turn supporting
households’ purchasing power. Furthermore, a competitive environment fosters stronger
innovation and growth by ensuring that new entrants with superior products or more
efficient processes can enter, grow and gain market share over incumbents; while
inefficient firms ultimately exit the market, freeing up capital and talent for new firms to
grow. Through these channels, competition feeds into higher productivity and wages.
9. The rapid digitalisation of the economy makes the need to keep regulations up to
speed with changes in business models more urgent than ever (see Box 1 on tools to
identify and review regulations that may create restrictions). In the EU, for example, the
number of consumers who made a purchase online in the last 3 months doubled in less
than a decade.2 Enterprises sales through electronic networks increased from 11% of their
total turnover to 18% from 2007 to 2017.3
10. As digitalisation transforms the nature of production, ensuring that an adequate
regulatory environment prevails, promoting entry and competition, matters not only in
digital sectors but also for the wider economy to reap the full benefits of new
technologies. Policies in many countries often implicitly or explicitly favour incumbents,
and do not always enable the experimentation with new ideas, technologies and business
models that underpins the success of innovative firms. It is notable that the rise in mark-
ups has been more pronounced in services (Andrews, Gal and Witheridge, 2018[6]), which
also tend to be subject to a heavier regulatory burden on entry and operations than
manufacturing industries. Administrative burdens on start-ups or barriers to entry in
services are associated with a lower adoption of technologies such as cloud computing,
slowing down the productivity gains from technology diffusion to the vast majority of
non-frontier firms (Andrews, Nicoletti and Timiliotis, 2018[9]) and thus holding back
income and wage gains throughout economies.
11. Adequate regulation to promote competition, entrepreneurship and technology
diffusion can help foster more inclusive growth by strengthening the productivity gains
from new technologies and ensuring workers widely share in these gains. Evidence points
to a link between widening productivity dispersion between firms and widening wage
dispersion between workers in a given sector, as more productive firms tend to pay better
wages to their employees (Berlingieri, Blanchenay and Criscuolo, 2017[10]). Digitalisation
appears to reinforce this link, resulting in even more exacerbated wage inequality within
sectors more reliant on ICT technology. Competitive conditions conducive to more
widespread technology and productivity diffusion could thus contribute to narrowing
wage gaps and promoting more equity across workers.
12. Rapid digitalisation also raises the question of whether existing regulatory
approaches and tools remain appropriate, or whether new sectors and activities would
require regulators to rethink competition policy and explore new approaches. Regulators
2 See Eurostat http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=isoc_ec_ibuy&lang=en
3 See Eurostat http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode
=tin00110&plugin=1 and more generally, the European Commission Final report on the e-