Equitable Interoperability: The ‘Super Tool’ of Digital Platform Governance

This Article is concerned with competition in digital platform markets
where network effects are strong. As is widely acknowledged, these markets
have an inherent tendency towards concentration, leaving consumers with little
competition in the market. We explain how interoperability regulation can help
stimulate competition in the market in a way that benefits consumers. There are
different types of regulations that involve different levels of regulatory control
of firms’ strategies and products. Interoperability is a form of regulation that is
less intrusive than many others and is particularly suited to digital business
models and fast changing digital technology. The report solicited by the
European Commission on “Competition Policy for the Digital Era” (the Vestager
Report) made this point in 2019,
1
and we build on it here. Policy tools in this area
include data portability and open standards, as well as interoperability. We will
distinguish among these tools below, but we note here that the focus of this
Article is on interoperability.2
Regulators can set prices and rates of return, require adoption of certain
technologies, mandate nondiscrimination, and more. Unless deregulated by the
state, the retail sale of electricity in the United States has the attributes of
“classic” regulation. Among other things, a regulator sets or limits the price of
electric power paid by consumers and approves or disapproves utilities’
investments in generation, transmission, and distribution facilities.3 But very
specific requirements for prices and product design like these require the
regulator to make choices that risk creating inefficiencies. In the digital platform
context, these concerns are heightened because of the rapid change of products
and prices over relatively short periods of time. We caution that heavy-handed
regulation risks resource misallocation and the loss, degradation, or delay of
products that consumers do or might enjoy. Regulation can, however, avoid these
costs while unlocking considerable consumer benefits.
A regulator aiming to reduce market power while increasing consumer
surplus therefore wants to use a tool that involves minimal regulation of the
product itself, while at the same time promoting as much efficient entry and
expansion as possible. Interoperability can achieve both goals. Interoperability
in digital platform markets lowers entry barriers by giving new market entrants
the ability to join the platform and compete; similarly, it gives existing competitors the ability to access the platform and grow. In a market with direct
network effects, in which users benefit from other users’ activity (e.g., owning a
telephone), this will take the form of interconnection between users—either
directly using the platform’s standard, or through the platform. In a market with
indirect network effects, in which broader use incentivizes platform and content
development (e.g., businesses opening in a popular mall, which further increases
the mall’s appeal), interoperability allows complementors—the business users
who provide services on one side of the platform that complement those of the
platform—to enter and compete for consumers using an accessible public
interface (API). The entry of complementors not only enhances the platform’s
value, but can, with time, create competition for the platform’s own services and
for other complementors.
“Equitable interoperability” means that an entrant can not only join the
platform, but join on qualitatively equal terms as others, without being
discriminated against by the dominant platform that might have its own
competing service.4 Equitable interoperability facilitates competition in
innovation and differentiation by digital services but entails oversight by a
regulator that determines when advances should become part of the regulated
interface. It effectively prohibits self-preferencing and discrimination against
firms that are not part of the dominant ecosystem.
A simple example is an entering internet service provider (ISP) wishing to
join the World Wide Web and its system of interconnection. Such a firm can
adopt open standards like TCP/IP and Network Access Points to offer the same
functionality as rival ISPs, and, importantly, connect its users to just as large a
network size.5 Similarly, the creation of the “Open Banking” regulation in the
United Kingdom established an interface that licensed financial technology
(fintech) companies could use, with customer permission, to connect to the bank
accounts of their customers.
6 The existence of the banks and their data attracted
fintech applications, all of which entered on a level playing field using the same
interface. Even the customers of a small bank can have full access, due to that
interface, to all participating fintech providers, strengthening competition between banks.7 By contrast, Google’s Android operating system (OS) offers
interoperability to entrants, but it does not do so equitably because Google
restricts access to various valuable apps and features in the interoperable version
of Android OS.8
The equitable interoperability concept is less restrictive for firms than many
other forms of regulation because it mandates only the ability to interface and
leaves companies with flexibility to design their products. Moreover, when the
interface is designed by industry itself, the regulator need not take on this role,
but can focus on exercising oversight to ensure the interface promotes
competition and is not captured by the dominant platform. For this reason, we
describe equitable interoperability as a light-touch regulatory governance
scheme. And although interoperability is light touch, it must still be mandated,
because a monopolist will typically not voluntarily adopt a policy that erodes its
monopoly profit. Indeed, settings where interoperability would reduce entry
barriers and promote competition in the market are exactly the instances where
incumbents will not want to adopt it.
At the same time, however, equitable interoperability need not lead to a
free-for-all in which all platforms must make all functions interoperable with all
comers, thereby depriving platforms of control over their own systems or
security. Rather, equitable interoperability—like all regulatory tools—should be
used with precision and restraint, and it should be mandated only with respect to
platform functions for which the regulator is convinced that interoperability will
further the goals of contestability and fairness. In a similar vein, not everyone
should be allowed to interoperate, especially those firms that cannot guarantee
data security and safety. To participate in the ecosystem created by the UK’s
Open Banking regulation described above, for example, fintech companies must
enroll onto a directory maintained by the Open Banking Implementation Entity
(OBIE), which maintains a “whitelist” of developers who have certified, among
other items, their satisfaction of security and home-state licensing requirements,
thus entitling them to participate and gain access to customer information;
customer permission alone is not enough.9 We note in the remainder of the
Article other specific examples in which the regulator should consider robust
licensing or registration requirements for firms that seek to interoperate with
regulated platforms.
This Article applies the idea of an equitable interoperability mandate to
several well-known competition bottlenecks in digital platforms. In each setting,
we provide a way to think about how competition problems might be lessened
with a suitable interoperability regime. We offer these ideas as a starting point
for a discussion about how to use the interoperability tool; there are many difficult governance, privacy, and technical issues to consider, and further
research on these details is needed. One of these issues is whether it is optimal
to include an interconnection (termination or access) fee in each situation.10 We
have purposefully studied platform settings where we can make analytical
progress without addressing this complex question. It is one where economic
analysis can make contributions going forward.
We have engaged in conversations with industry participants and technical
experts about the difficulty and cost of carrying out interoperability from a
technical perspective. The working hypothesis we use in this Article is that
governance issues are more of a challenge than technical issues. The economic
analysis proceeds under this assumption.
We also note a diversity of opinion among authors such that not all agree
each interoperability policy we discuss will be effective for each platform
competition problem presented here. And, of course, equitable interoperability
will not fix every competition problem. As with most tools, it will work better in
some settings than in others. In some cases, alternative or supplemental tools like
divestitures will be needed to achieve competition.11 In other cases,
interoperability and nondiscrimination may be an alternative to divestitures. And
importantly, successful deployment of equitable interoperability requirements in
important and complex markets will require a regulator with sectoral expertise
and enough staff to ensure the regulations increase competition and are fully
enforced.
Economic analysis, however, demonstrates that equitable interoperability is
a powerful tool with several uniquely valuable characteristics. Because of its
ability to create competition in the market, all authors believe a digital regulator
should add interoperability to its regulatory toolkit and use it where appropriate.
Although interoperability comes with potential risks, various regulatory designs,
including licensing and oversight, could help mitigate such issues. We discuss
some options below.