The European Union Needs to Find the Right Mix for Regulating Online Platforms

Looking to sell your house? Or a new recipe for dinner tonight? There’s an online platform for that.

Everyday millions of consumers and businesses turn to online platforms to make life easier. They peel away barriers to the online marketplace for businesses of all sizes and across all sectors. Digital platforms have revolutionized our ability to work, socialize, and create value by breaking down language and geographic barriers. The total market value of platforms is an estimated $4.3 trillion with welfare effects that are generated by lower transaction costs and more efficient allocation of resources.

Three years ago, as part of its Digital Single Market initiative, the European Commission started determining if regulation was necessary to ensure the market is fair and transparent for business using online platforms and search engines. After some indecisiveness on the need for and scope of a regulation, the process has resulted in a new proposal that would put in place transparency requirements, mandatory procedures to address complaints, and a collective redress mechanism for business users.

Just within these three years, the global marketplace has seen a significant rise in the diversity of online platforms, search engines, and their users. Existing platforms have helped business develop and scale much more quickly than they would have been able to if they’d had to build their own data centers or create their own mapping infrastructure. Small businesses in particular benefit from the widening of their consumer base through the use of platforms.

Transparency within these business-to-business relationships is important but should not be overly prescriptive. For example, the proposed regulation allows each platform to develop its own code of conduct, which is necessary considering the regulation covers several different types of platforms with a variety of users. This approach to transparency ensures platforms have the ability to protect their “secret sauce,” the algorithms which helps make these online tools work.

Given the diversity of platforms, a one-size-fits-all approach to regulating could result in higher costs and impediments to innovation. Further, online platforms and search engines are already subject to existing regulations based on the type of good or service provided. As the proposed regulation moves onto the European Parliament and Council, it is important that the result is the right mix of ingredients that will provide business users with transparency and confidence without raising the costs overregulating a market with low barriers to entry.