bidt-project RESREG: unintended consequences of regulating digital markets

How effective is interoperability between messenger services? Does it really foster competition and innovation? These are some of the questions being examined by a team from the University of Passau, led by Professor Jan Krämer, Chair of Information Systems, as part of a new bidt project.

The Digital Markets Act (DMA) imposes specific rules of conduct on digital gatekeepers with significant market power, such as Meta, Google and Apple, in order to promote competition and innovation in digital markets. For example, large messenger services will be required to be interoperable in future, i.e., to allow communication with smaller services. This requirement affects the Meta corporation, which will have to create an interface for its messenger service, WhatsApp, and Facebook Messenger to allow users of smaller services to participate in group chats. 

But how effective is this regulation? And what principles are needed to deal efficiently with current cases in digital markets, while at the same time regulating wisely over the long term? An interdisciplinary team of researchers is studying these questions as part of a new project by the Bavarian Research Institute for Digital Transformation (bidt) at the Bavarian Academy of Sciences and Humanities, coordinated by Professor Tobias Kretschmer of the Ludwig Maximilian University in Munich. Researchers from the University of Passau, led by Professor Jan Krämer, Chair of Information Systems, are also involved in the project titled “Resilient Regulation for Digital Markets (RESREG)”, which combines legal, strategic and information technology perspectives. The project will start on 1 April 2024 and run for three years. It is one of four interdisciplinary research projects selected from 39 applications in a two-stage selection and evaluation process. 

Interoperability could have negative consequences

“The DMA tries to avoid lengthy competitive procedures by prescribing very specific do’s and don’ts for digital gatekeepers”, says Professor Krämer. “However, these specific requirements come at a price, as they raise the question of whether the regulation is resilient to the rapidly advancing technological progress in digital markets and what long-term effects this may have.”

In the project, the team is focusing on interoperability between messengers. The DMA assumes that this reduces network effects, lowers barriers to market entry and is initially good for competition. However, in a study by the Brussels-based think tank “Centre on Regulation in Europe (CERRE)”, Professor Krämer and other researchers conclude that this may not be the case. One reason is the concept of multi-homing, which allows users to install multiple messengers on their phones. Interoperability would mean that users would no longer install a smaller messenger service because they already have access to it through the larger provider. “This means that a smaller competitor loses direct access to customers, which could have a long-term negative impact on competitiveness”, says Professor Krämer.

His team is also examining how interoperability affects innovation. Would a smaller competitor still have an incentive to innovate if it relies on access to the users of a larger platform? What are the dynamics at play? How can technical standards be developed that are both resilient and foster innovation and competition? To investigate these questions, researchers use methods from game theory and laboratory experiments.

Research on the digital platform economy

Professor Krämer’s team can draw on existing expertise at the University of Passau. As holder of the Chair of Information Systems with a focus on Internet and Telecommunications Business, he has been researching both old and new monopolies for years. As Academic Co-Director of the Brussels-based think tank CERRE, he advises European policymakers on the regulation of internet giants. He is also the Information Systems Spokesperson for the DFG Research Training Group 2720 “Digital Platform Ecosystems (DPE)”, which is addressing the consequences of digital platform ecosystems for regulatory developments.

Further information:

• Project description of the Bavarian Research Institute for Digital Transformation (bidt) 
• CERRE study on horizontal and vertical interoperability (PDF)
• DFG Research Training Group 2720 “Digital Platform Ecosystems (DPE)” at the University of Passau