A Critical Look at the #DigitalSingleMarket strategy Part 3
The concept of market failure is an economic model concept on the performance of markets. It was mainly conducted by the economist Francis Bator in 1958, and is one of the pillars of the so-called neoclassic economic science. A functioning market is supposed to deliver optimal results for growth and innovation to all its participants. Failing markets fall short of this mark due to structural issues. Monopolies and cartels (or better: the abuse of market power) can be one type of a market failure in which the performance of markets leads to less innovation and less performance. Possible indications of market failure are: the economy produces fewer goods, creates less added value or the wrong products are being purchased than under optimal conditions. And this is exactly what we see at the moment in the digital economy. But what is more important: A market failure is also the necessary condition for the legislator to enter and regulate markets well. No market failure means there is no reason for government intervention.
Now when it comes to digital economy, we have not yet even considered the possibility of the digital markets actually failing momentarily. We see monopolies rising left and right, but we have little leverage to tackle these monopolies with our common anti-trust regulation. But markets might fail also because of other reasons than market power alone. According to Bator markets can fail because of information asymmetries (structural intransparencies that make customers unable to decide between good and bad products). A quick glance at the economy of privacy-enabling telecommunication products might also reveal that the transparency of telecommunication products and digital services might leave room for improvement.
When it comes to digital economy, we have not yet even considered the possibility of the digital markets actually failing momentarily.
Another common reason for market failures are external effects, which are not part of the market operation itself, like pollution. They might be part of an economic progress but have unintended side-effects on third parties. Such external effects could also easily be attributed to many digital platforms not only affecting privacy rights, but also personality rights or copyrights. In the case of Google for instance, you can find all four criteria of market failure met in the acting of just one company.
In the end, market failures will not only create imbalances in the level playing fields between market participants, but will also have adverse effects of the performance of markets as a whole.
We need to understand markets properly, before harmonizing them
The EU has recently decided that its main digital strategy is harmonization. But the decision-makers have not yet asked themselves if the markets are functioning in the first place, before they harmonize. We have willingly accepted the paradigm of the digital platforms that only little to no regulation will give us added value in the digital realm. By that we have simultaneously accepted a neo-liberal agenda that pulls out many stops for digital infrastructures, but has adverse effects on properly regulated businesses so far. The conflict of taxi drivers versus Uber is perhaps the most enlightening example where the disruption of the digital domain causes severe conflicts with existing markets. It is evident that professional taxi drivers and Uber’s driving clients need a level playing field, and have comparable qualifications for a fair competition, to reach the optimum innovation in the transportation market. But other markets have been infiltrated before and more markets are about to be infiltrated by digitization, like the automotive market, or the health and security sector.
If we see the digital process as a whole, and digital as the new infrastructure enabler for other businesses, we might want to make sure that functioning markets are not being disrupted by failing infrastructure markets. As the financial analyst Edward Chancellor already wrote back in 2012: “The internet has failed to live up to its hype. Furthermore the financial gains are unevenly distributed.”
So, a proper regulation of the digital market must put level playing fields between content, telcos, logistics on the one hand, and the digital infrastructure companies on the other hand. Digital will only create a proper added value for the entire economy, if it finds level playing fields for all players in the value added chain. In case of a failing markets, the market forces will not play out properly as they would in a functioning market. So, enabling those value added chains should be the true digital market plan. Harmonization of the European markets comes after. Don’t harmonize failing markets.
Return to Part 1
Return to Part 2
