Interoperability as a competition remedy for digital networks

Authors:

Michael Kades, Washington Center for Equitable Growth
Fiona Scott Morton, Yale University

Abstract:

Addressing entry barriers created by network effects is critical to remedying a monopolization violation in a social network market (e.g. Facebook). For a social network, interoperability is likely a necessary, but not necessarily a sufficient, condition for an effective remedy. Mandatory interoperability based on robust and effective rules could overcome the network effects that protect the incumbent from entry, maximizing the potential for new entrants to enter at minimal cost, compete in the market, and take share from the incumbent. This remedy could be ordered in addition to other relief such as a divestiture, and indeed could be complementary to it, or stand on its own. In today’s internet-based network markets, interoperability carries no incremental costs such as dedicated wires and machines that were true of the telecom interoperability of past decades. Its main cost is the establishment of an open standard to exchange commonly used functionalities (e.g. text, images) of social networks.

Developing an effective interoperability scheme from scratch will be challenging in the context of adjudication. Remedy details will be technical, but important, and time will be short. Moreover, interoperability affects multiple parties, not simply the litigants, which the court will want to consider. The adversarial process is poorly suited to addressing these tasks. A Federal Trade Commission rulemaking can address these limitations and improve the remedy process. By developing a default order on interoperability, a rulemaking could provide the foundation for a remedy in monopolization cases involving strong network effects. 

This working paper describes the general competitive concerns that arise in digital platform markets with strong network effects, explains how requiring interoperability can remedy illegal monopolization by creating the potential for disruptive competition to arise and thrive, addresses how to make an interoperability requirement effective, discusses the problems or dangers of relying solely on adjudication for developing remedies for complex monopolization violations, and explores how rulemaking could ameliorate this challenges., including a proposed draft rule.