Entitlement problems in digital markets and how antitrust shapes the appropriation of network externalities

Abstract

The engine of value creation in the digital economy is network externalities, i.e. the phenomenon by which the value to a new user from adopting a good or service increases in the number of users who already adopted it. But network externalities are not manna from heaven. They are ‘sponsored’ by firms who make demand expanding investments. In areas with imperfect property institutions like the digital economy, a key business decision for profit maximizing firms consists in devising value capture strategies to appropriate their investments. This paper identifies three recurrent types of appropriation disputes in digital markets: Access to software platforms, limitations to the exploitation of raw data and claims over digital content. At the heart of each dispute lies the controversial exercise of an entitlement over a digital asset that is embedded in a context of or exhibits itself network externalities. The appropriation of this asset and its integration into the firm’s ecosystem could make the firm benefit from network efficiencies. Controlling the digital asset in question becomes a proxy. Appropriation strategies by proxy can have pro- and anti-competitive effects. This is why each dispute can not only be understood as a problem of appropriability, but also as a problem of potential harm to competition. And indeed, competition enforcers have brought forward various cases with underlying appropriation disputes. This paper tracks the influence of three of them on the appropriability of assets in the digital economy, and on digital firms’ strategies to capture the value of network externalities.