Interoperability in Digital Markets

Mandated interoperability has been used as a regulatory instrument in network industries. It is currently being discussed as a tool to ensure contestability and fairness in digital markets. The European Commission’s proposal for the Digital Markets Act foresees select vertical interoperability obligations for gatekeepers on ancillary services, app stores and side-loading of apps. The European Parliament’s amendments include horizontal interoperability obligations for messenger services and social networks.

Would those interoperability obligations really stimulate contestability in digital markets – or could some of them be harmful to competition and innovation?

To contribute to the debate, CERRE releases its latest report ‘Interoperability in Digital Markets‘, authored by leading academics Marc Bourreau, Jan Krämer and Miriam Buiten. This important work examines whether vertical and horizontal interoperability obligations are desirable policy objectives in the context of dominant online platforms, considering their impact on competition and innovation in the markets affected.

Recommendations

The authors draw three main conclusions from their study:

Firstly, policymakers must be very precise when defining interoperability and they need to differentiate between notions of horizontal and vertical interoperability. Horizontal (i.e., interoperability between substitutable services) and vertical interoperability (i.e., interoperability between complementary services) are structurally very different and so is their economic assessment. They should thus not be confused in the policy debate.

Secondly, mandated horizontal interoperability is not advisable to ensure digital markets contestability. In practice, horizontal interoperability will never be perfect and can only achieve limited interoperability between a set of common features. Thus, network effects for the dominant platform remain, while at the same time interoperability reduces the incentives of consumers to multi-home. This means that horizontal interoperability can be anti-competitive in digital markets and has the potential to enshrine the dominance of digital incumbents.

Finally, vertical interoperability may be a powerful instrument for regulating digital bottlenecks under specific conditions ensuring that its positive effects outweigh its negative effects. Mandated vertical integration should only be considered in the case the digital gatekeeper is vertically integrated and if there is evidence that vertical integration leads to discrimination or foreclosure of complementors that would not have occurred in the absence of vertical integration. Moreover, vertical interoperability should not be equated with “open access” and should involve a licensing regime and a pricing regime for third parties seeking access.

Join us on Monday 21 March at 15:30 CET for an open discussion on vertical and horizontal interoperability obligations in the Digital Markets Act, followed by a panel discussion with representatives from regulatory bodies, civil society and online platforms.