GAFA and Competition Policy: Japan's Uniqueness in Public-Private Joint Regulation

OHASHI Hiroshi
Program director / Faculty Fellow, RIETI

For the first time in half a century, antitrust law is undergoing a major shakeup. The epicenter is in the United States.

In July 2021, U.S. President Joe Biden signed an executive order to encourage market competition in the U.S. economy. There has been a growing concern that the oligopoly by a few large corporations in a wide range of fields such as information and communications, agriculture, and prescription drugs is harming consumer interests and the economic vitality. In response to the growing market dominance by Big Tech companies (represented by GAFA; Google, Apple, Facebook, in the U.S., he called for the need to strengthen the enforcement of aggressive competition policies.

In June, Lina Khan, supported by the left wing of the Democratic Party, was appointed as the chairperson of the Federal Trade Commission (FTC). In a paper she wrote while still in law school, she criticized Amazon's business model as anti-competitive, which imposes excessive burdens on small businesses, and drew attention by criticizing the "Chicago School" view that emphasizes consumer interests in antitrust enforcement.

As the focus of economic activities is shifting toward digitalization, the failure to prevent the rise of Big Tech companies, which is one of the causes of the current oligopoly, may be due to problems in the application of antitrust laws. Against the backdrop of this awareness, the momentum for reviewing antitrust laws is spreading to European and other countries.

In this article, the situation surrounding the Antimonopoly Act and its implications for the Japan's competition policy will be discussed.

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It was the Obama administration that has first sounded the alarm against the oligopoly in the U.S. economy, suggesting that the decline in the economic vitality evident from several macroeconomic indicators (such as declining labor share, private investment, and productivity) was caused by the increase in the market dominance. Furthermore, the International Monetary Fund (IMF) has pointed out in April 2019 that there has been an increase in the market dominance worldwide. In particular, the dominance by large corporations has been remarkable, and there has been a growing tendency to blame this on the rise of giant IT companies such as GAFA.

Comparing to the time when the U.S. antitrust laws were initially passed, some support the idea that all such giant corporations should be eliminated as they represent a crisis for democracy.

Until now, U.S. competition policy has been largely dominated by the supporters of the Chicago School's view that a free market without policy intervention will deter market dominance and encourage innovation, resulting in a restrained enforcement of competition policy for digital markets.

However, since 2019, many competition authorities, including Japan's, have published investigative reports, and discussion on new competition policies for the digital age has become more active. In addition, in 2019, the FTC established a new department with expertise in digital technology, and in 2021, the British competition authority established a new department to oversee digital markets.

The Judiciary Committee of the U.S. House of Representatives released its report in October 2020 after a 16-month investigation, based on hearings attended by all GAFA CEOs, with Ms. Khan assisting in the writing of the report.

In particular, the following three issues were raised. The first relates to concerns that GAFA's hundreds of annual acquisitions of startups were hindering competition and stifling future innovation. For example, Facebook's acquisitions of Instagram and WhatsApp were initially approved, but it was later revealed that their acquisitions were undertaken mainly for the purpose of eliminating competition. In the U.S., the FTC has filed a lawsuit to unwind the acquisitions.

The second issue is the copying of other companies' products. It has been pointed out that platformers such as Amazon have been manufacturing copies of the best-selling products traded on their platforms to sell them as their own products at lower prices than those of other companies' that operate on their platforms. This point was also highlighted in a fact-finding survey by the Japan Fair Trade Commission (JFTC).

The third issue is self-favoritism, which refers to the act of platform companies not treating other companies' content on an equal footing as their own content or forcing users to use their own applications. It is known that Epic Games, the operator of the popular game Fortnite, filed a lawsuit against Apple, as it was forced to use Apple's app store which charges 30% revenue share.

In the U.S., since the beginning of 2021, a series of legislative proposals have been submitted that would require strict legal measures to curb the market dominance of Big Tech companies. These include the prohibition of elimination-buyouts and self-favoritism, restrictions on the activities of platform companies operating in multiple businesses, the promotion of data portability enabling users to freely remove their data from any platform, and increases in acquisition application fees.

On the other hand, GAFA's lobbying activities are well entrenched in the U.S., and few people expect the bill proposed by lawmakers to be enacted as it is. With the U.S. Supreme Court becoming more conservative under the former Trump administration, there is high confidence that the legal interpretation of competition policy for giant IT companies will not change significantly. Nevertheless, political moves related to antitrust laws appear to be impacting stock prices (see figure). We will have to keep a close eye on developments in the U.S. Congress.

Figure. GAFA Stock Prices and U.S. Competition Policy

Japan, on the other hand, has been considering the issue based on its unique circumstances, such as the large number of small and medium-sized companies that provide goods and services to app stores and online malls. In 2016, if not earlier, it was recognized that the unfair and opaque business relationship with GAFA was a major competition policy issue, and at the end of 2018, Japan became the first country in the world to establish basic principles for the development of rules for platform companies. Since then, competition policy in dealing with Big Tech companies has been a policy discussion topic.

Strict ex ante regulations can stifle innovation and encourage regulatory subterfuge. On the other hand, it was pointed out that the current ex-post regulations take too much time for law enforcement and do not prevent anti-competitive behavior. In light of this, in May 2020, the Digital Platform Trade Transparency Act was enacted, a rare example in the world as it is a public-private joint regulation, in which major platform companies and the government jointly develop the trading environment.

The law will require major platform companies to disclose information such as terms and conditions of transactions and to give prior notice of any changes, as well as to voluntarily establish procedures and systems based on guidelines required by the government. The aim is to improve the predictability for companies trading with major platform companies and to promote competition through good trading practices by having the government engage in dialogue with major platform companies.

However, there is a possibility that public-private co-regulation could lead to a "regulatory trap" for the government, as the content of the regulations could be shaped by the platform companies to their advantage. To ensure that major platform companies take the joint regulatory framework seriously, there must be an understanding that inappropriate conduct will be met with the strictest enforcement of the law.

The challenge for Japan lies in the fact that the JFTC has limited experience in law enforcement in the digital sector: it terminated its review of the Apple case in September 2021 and the Amazon case in 2017 on the grounds that the companies had offered to take voluntary measures, and no legal enforcement action was taken.

The "U.S.-European model" confronts Big Tech companies by strengthening ex ante regulations in addition to strict ex post sanctions. The "Japanese model" promotes transparency and fairness through good business practices in a voluntary but effective manner through dialogue rather than through intimidation. It remains to be seen which model will become the global standard.

>> Original text in Japanese

* Translated by RIETI.

October 25, 2021 Nihon Keizai Shimbun

November 19, 2021