NERA Study Estimates Cost of Online Platform and Marketplace Regulation

The Situation

Online platforms and marketplaces provide consumers direct and instantaneous access to an extensive array of global goods, services, and content. Conversely, they enable producers to reach consumers largely untethered by size and geographic reach. The popularity of online platforms and marketplaces, including those operated by Google, Apple, Facebook, Amazon, and Microsoft, attests to the societal benefits these services offer to consumers and producers alike.

Some US lawmakers and competition authorities consider the growth of these platforms a threat to competition. They claim that online platforms monopolize various segments of the digital economy, including online search, online commerce, social media, mobile app stores, web browsers, and digital advertising. To remedy this alleged competition problem, some lawmakers in the US House of Representatives and the US Senate introduced several bills that would subject certain of these platforms and marketplaces to common carrier, structural separation, and line of business restrictions. Although these bills differ in several important aspects, they all seek to regulate online platforms and marketplaces that meet a certain threshold.

NERA's Role

The proposed bills are largely silent as to the economic repercussions that would ensue if the bills are adopted. Moreover, there is a void in the public debate as to how the proposed regulation would affect consumers and small-to-medium businesses, including startup companies. This is the first of two studies that examine the economic ramifications of the proposed bills. This first study examines the reach of the proposed regulation, the economic impact, and the ultimate effects on consumers and small-to-medium businesses. Our conceptual assessment results in the following overarching findings.

The Result

First, the proposed bills create significant regulatory risks not only to the primary targets of the bills— Google, Apple, Facebook, Amazon, and Microsoft—but also to no less than 13 additional US companies. The risks emanate from an overly broad definition of an online platform, the extensive regulatory framework that applies to covered platforms, the broad discretions that are granted to competition authorities tasked to determine compliance, and the extensive financial penalties that apply for noncompliance.

Second, the size thresholds likely would force covered platforms to break into independent units that individually fall below the size threshold or to divest prior acquisitions until the core company falls below the size threshold. The structural separations and divestitures would either be compelled by the competition authorities or would be voluntarily undertaken by the online platforms lest they face huge fines and the risk of structural separation in the future anyway. These structural separations are the opposite of mergers. Whereas mergers often create cost synergies that benefit consumers, the forced reductions in scale would create cost inefficiencies for the five firms targeted by the proposed bills. Our preliminary analysis demonstrates that the immediate effect of the common carrier, structural separation, and line of business restrictions on these five companies would be approximately $300 billion. These cost increases would ultimately be passed through and borne by the consumers and business users of the platforms.

Third, the proposed bills would jeopardize US technological development as a prohibition on acquisitions would eliminate a target audience of many US startups, thereby reducing market demand to acquire US startups. With reduced investment in startup firms, fewer startup technology firms would be established and the ones that are established would be diminished competitors in the United States and on the global stage.

Fourth, the proposed bills would jeopardize US international competitiveness by applying US-specific size thresholds that would cover US-based online platforms and marketplaces long before they cover foreign competitors with similar global sizes. The application of the extensive and costly regulatory framework and compliance requirements to US firms, with structural separation as the most likely consequence, risks leaving US online platforms and marketplaces as diminished competitors on the global stage.