Abstract: Platform economy has witnessed rapid development in recent years and grown as a fundamental part in China’s economy. To address the problems associated with platform economy, China decided to step up regulation in 2021. The authors look into the impact of strong regulation on the development of platform companies and attempt to provide policy suggestions on how to improve the governance of platform economy.
I. PLATFORM ECONOMY IS AN EMERGING ECONOMIC SECTOR
Platform economy refers to a new economic model that relies on cloud, network and terminal among other network infrastructure and uses digital technologies such as artificial intelligence, big data, and blockchain to match transactions, transmit information, and manage processes. Platform enterprises are not new things, but the application of digital technology enables digital platforms to break through the limitations of traditional platforms in terms of scale, speed, and connotation, and gain unprecedented influence.
So far, most of the successful platform companies have concentrated in the consumption sector, and they are of two types: transaction-facilitating and content-transmitting. Transaction-facilitating platforms aim to transmit transaction information and facilitate the completion of transactions, and can further be subdivided into platforms such as e-commerce, payment, online car-hailing and food delivery. Content transmission platforms transmit information of news, opinions, communications, entertainment, finance, science, etc. Platforms of this kind include social platforms and short video platforms, and so on. In the future, as 5G and other communication technologies drive the implementation of the high-throughput and low-latency Internet of Everything, industrial Internet may become a new hot spot, and may give birth to a new type of digital platforms.
China’s platform economy is not only a product of the advancement of digital technology, but also the fruit of market-oriented reforms. All the top platforms are private enterprises who have created one legend after another. In terms of the number of leading companies or market size, China’s platform economy currently ranks only second to that of the United States. For a developing country, this is a remarkable achievement. However, most of China’s leading platform companies do not have technological advantages compared with their international counterparts, and what they do mainly is to learn and apply international cutting-edge digital technologies. Even so, it is worth pointing out that during the first three industrial revolutions, China lagged behind the world in terms of technology application, but this time, during the fourth industrial revolution, China’s platform enterprises have been catching up with the international economic and technological frontier.
The rapid development of China’s platform economy has benefited from the following important factors in addition to digital technology breakthroughs and market-oriented reforms:
? The first is sound digital infrastructure. The penetration rate of Internet and smartphone in China is relatively high, which provides a technical foundation for digital platforms to connect a large number of users anytime and anywhere.
? The second is the huge population. With a large market size, it is relatively easy to promote new models of digital platforms, and also easier for digital platforms to achieve economies of scale.
? The third is insufficient protection of personal rights and interests. The downside is prevalent private data collection and personal privacy violation, but it has indeed spawned many new economic models based on big data analysis and digital technology innovation.
? The fourth is the relative isolation from the international market. In this way, domestic platform companies are protected from international competition and have gained valuable time for growth.
However, the third factor has changed and the fourth will inevitably change in the future. Therefore, how to encourage innovation of platform enterprises and ensure growth of the platform economy is an urgent task faced by enterprises and the government.
Platform enterprises have brought earth-shaking changes to the Chinese economy.
On the one hand, platform companies have facilitated innovation, promoted growth, improved efficiency, and increased employment. They have not only used the long tail effect to cover a large number of users, but also applied big data to achieve precise marketing and improve transaction efficiency. Today, digital platforms have become an integral part of our everyday lives. They have greatly lowered the barrier for online innovation, entrepreneurship and employment, and significantly promoted productivity and economic growth.
On the other hand, the platform economy has been accused of unfair competitions and behaviors that harm the interests of consumers. For example, some platforms use their huge market power to crowd out competitors; some illegally obtain personal information and use algorithms to impose discriminatory pricing on consumers; more seriously, some platforms violate market and social orders through disorderly expansion of capital.
It is against this background that China started to implement strong regulation on its platform economy in 2021. The Politburo meeting of the CPC Central Committee and the Central Economic Work Conference held in December 2020 both proposed to "strengthen anti-monopoly and prevent the disorderly expansion of capital", and issued a mobilizing order for "strong regulation". In 2021, various government departments have issued a series of laws and policies to promote data protection, combat monopoly and unfair competition, and protect labor rights and interests. President Xi Jinping called for equal attention to be paid to development and regulation. It can be seen that the purpose of strong regulation is to nudge platform companies to develop their advantages, overcome shortcomings, and thereby promote stronger and better development of platform economy.
Improving the governance system is a fundamental prerequisite for the orderly development of the platform economy. There is not yet a mature regulatory framework in place for this emerging sector. Therefore, in addition to correcting inappropriate practices, the goal of strong regulation should also be to fill regulatory voids.
The enhanced regulation measures have played a positive role in the healthy development of the platform economy, but not without negative effects. There has been a drop in the number of employees of many leading platforms and their sense of professional pride. The previous working schedule of "996" has disappeared. A heightened level of uncertainty among investors about the current policy direction has directly led to reduced investment in the sector. A number of platform founders have chosen to retire early. The international status of China’s platform economy has also declined.
A short-term weakening of platform economy following regulation tightening may be normal, but it is necessary to avoid continuous decline due to the misunderstanding and improper implementation of regulatory policy, which goes against the original intention of promoting the sector’s robust development.
This paper attempts to make a preliminary assessment of regulation tightening in recent years along with analyzing the impact of China’s platform economy, and then puts forward some policy suggestions for improving the governance of the platform economy.
II. ECONOMIC CONTRIBUTION OF DIGITAL PLATFORMS
“Platform”, as discussed here, mainly refers to digital platforms that utilize technologies such as the Internet, big data, AI, mobile terminals, and cloud computing. There is no significant difference between digital platforms and traditional platforms in terms of basic functions. But the application of digital technologies reinforces or even fundamentally changes the features of traditional platform operation. Platforms often have network effects. With more users, platforms can create greater value. Meanwhile, platforms also have the effect of bilateral market whereby more buyers (or sellers) will increase the platforms’ value to the sellers (or buyers). These effects exist in all platforms but are more prominent in digital platforms. In addition, the revenue from advertising business based on an enormous user base and big data could account for a considerable share of the digital platform’s total revenue. Thus they could even subsidize consumers, which is rarely seen in traditional platforms.
To summarize, digital technologies bring six major changes to the operational features of platforms, i.e., larger scale, higher efficiency, improved user experience, lower costs, better risk control, and less contact. These features have significantly improved economic activities. For example, things that require people to go back and forth, like shopping, buying air tickets, booking hotels, having meetings, teaching, and watching movies, now can be done through mobile terminals. These new businesses not only save time and cover a large number of customers that cannot be reached in the past, but also improve operational efficiency. Many things that were hard to do offline now can be achieved online. The barrier to entry into online business is much lower, which dramatically reduces the hurdles for innovation and entrepreneurship. Online businesses also provide a lot of opportunities of flexible employment for many less-educated and lower-skilled workers. Some platforms can directly connect companies and consumers by target potential customers with product offers or even customizing products based on consumer preference.
At the macro level, the platform economy has become the most important contributor to China’s gross national product (GDP) and total factor productivity (TFP) growth. Between 2001 and 2018, the roughly defined “digital economy sector” contributed three-quarters (74.4%) of GDP growth. In the same period, despite continuously declining TFP growth in China, the digital economy sector sustained a positive TFP growth, playing a critical role in stabilizing the economy.
A noteworthy change in the past two decades is the replacement of labor with capital as the biggest source of economic growth. However, while labor reallocation contributes positively to TFP growth, capital allocation contributes negatively, which implies that resource allocation is efficient in the labor market, but much less so in the capital market. With capital playing an increasingly important role in China’s economic growth, there is an urgent need to deepen financial reforms to improve the efficiency in sectors such as the platform economy.
Inclusive finance is an important case of digital platform innovation. Developing inclusive finance is a global challenge because it is hard to acquire customers and control risks. Digital platforms can reach enormous users through the long-tail effect and provide them with financial and non-financial services including mobile payment; meanwhile, users’ digital footprints are collected to form big data that can support financial decisions, which provide feasible solutions to some financial services that were difficult to realize in the past.
Nowadays, platform users, wherever they are, can enjoy good financial services as long as they have smartphones with mobile signals. According to the Digital Financial Inclusion Index of Peking University, between 2011 and 2020, the gap between China’s inland areas and coastal areas in the development of digital inclusive finance is narrowing. Currently, China’s most successful digital inclusive financial services, like mobile payment, big tech credit, and online investment, are leading the world. The breakthrough in the development of China’s inclusive finance during the 13th five-year plan period is mainly due to the contribution of digital platforms.
The platform economy also has made a huge impact on economic and financial stability. Though the overall impact needs further analysis, two cases are provided as follows:
First, before 2013, China’s producer price index (PPI) and consumer price index (CPI) both fluctuated a lot. But since 2013, while PPI has remained volatile, CPI has become more stable. At the same time, the standard deviation of inter-provincial PPI and CPI has continued to decline. One possible explanation for the significantly increased stability of CPI over the past decade is the rapid development of e-commerce and logistics which makes markets across regions highly integrated and more able to absorb shocks.
Second, big tech credit uses big data to replace collateral as the main means to manage credit risk, which might weaken the asset price channel generated by the collateral-based “financial accelerator”. In the mortgage scenario, the pro-cyclical mechanism between asset prices and credit supply may exacerbate financial instability. Once data replaces collateral, the pro-cyclical mechanism will be weakened, thereby strengthening the stability of the financial system.
III. “ECONOMY OF SCALE” OF PLATFORMS DOES NOT MEAN MONOPOLY
Given the basic features of digital technologies, the development of the platform economy also poses many new governance challenges.
First, the feature of economies of scale in digital platforms can help improve efficiency but can also create monopoly.
Economies of scale mean higher production and lower costs. Therefore, large companies tend to have higher production efficiency and competitiveness. The feature is usually more prominent in digital platforms. The long-tail effect suggests that once the platform is established, the marginal cost of scaling up its services is near zero. As a result, the economies of scale of digital platforms make their services more inclusive than ever, but meanwhile tend to create a winner-takes-all situation. However, in the field of the platform economy, is large scale equal to monopoly? Still, this issue merits close scrutiny. Overall, the governance of platform economy does face a great challenge in terms of how to prevent digital platforms from leveraging their market power to monopolize the market, which will disrupt market order and hurt consumer interests.
Second, there may be a conflict of interest between the company’s operational goal for its digital platform and the platform’s regulatory function.
In a traditional economy, enterprises, the market, and the government each play the separate role of operation, transaction, and regulation. But platform companies have blurred the boundaries. They are business entities, trading venues, and also serve a regulatory role to some extent. As a regulator, a platform needs to uphold the principle of fairness and impartiality. Yet as an enterprise, it has to pursue profits and gain returns for investors, which could lead to “self-preferential” treatments. For example, some search engines rank search results based on advertising revenue, and some e-commerce platforms open their own online stores to sell best-selling products. These practices are unfair and detrimental to consumer interests.
Despite the contributions of digital platforms to social government, such as e-gov and city brain, they could potentially intervene in politics, which is highly unlikely in China but worth considering: How should the work be divided between the government and the platforms? How could the two work together? How much responsibility should platforms assume when it comes to handling platform disputes, and in what way should the government get involved?
Third, digital platforms are the product of innovation, but they could also inhibit new innovation.
China’s platform companies don’t have the technological edge if put on a global arena, but almost all of them started from scratch, being successes in themselves, not to mention their various support for small and micro-sized businesses on their platforms, just like incubators. However, data suggest that digital productivity is declining, with an annual contribution to TFP dropping from 2.5 percentage points in 2001-2007 to 1.3 in 2007-2012 and 0.7113 in 2012-2018, accounting for 23%, 16%, and 13% of GDP growth rates respectively.
What is causing the slowdown? Is it that Chinese platform companies are approaching the international technology frontier through continued efforts? Or is it because the top platforms, with abundant cash flow, are eliminating potential competitors by large-scale killer acquisitions? Whatever the reason, there is a pressing need to maintain robust innovation in the platform economy sector.
Fourth, while providing “gig jobs”, platform companies could also harm workers.
Platform companies offer a wide range of job opportunities, including translation, consulting, programming, and e-commerce livestreaming, as well as online car-hailing, food delivery, maintenance, and designated driving. These positions are plentiful and highly inclusive, many of which have low entry requirements and flexible working hours, serving as a valuable supplement to conventional employment. The total number of delivery employees in the country is estimated to be around 7 million, with certain leading platforms providing tens of millions of jobs directly and indirectly.
This new labor market, however, has created certain issues. Many of the traditional offline jobs bear the brunt and re-employment is costly. Then there is the unfriendly working environment of some "gig workers", particularly in the food delivery industry, where "algorithms" have made work increasingly demanding. Finally, gig workers are vulnerable in the event of an accident due to the lack of a social security system that accommodates the gig economy.
Fifth, big data analytics can reduce information asymmetry on platforms, but it becomes opaquer to other platform users.
Data is the "oil" of the digital economy. The central government's proposal to use data as a factor of production is a theoretical innovation in response to the economic trend. The efficacy of big data analysis has been fully demonstrated in the platform economy, assisting platforms to improve operational efficiency, change business models and enhance personalized services. However, there are many problems with the use of data on platforms. Personal information is collected in an irregular or even unlawful manner on some platforms; algorithmic discrimination and algorithmic black box are also frequent. Platforms frequently charge various costs for the same product or service to different users, at different times and in different places, but most platform users lack the skills to determine if such dynamic pricing is appropriate, and there are no third-party organizations that can do so.
A good governance structure is a basic prerequisite for data as a factor of production, but given the unique nature of data, it is evident that the norms of traditional factors such as land and capital in terms of entitlements, transactions, and pricing cannot simply be applied to data.
IV. "STRONG REGULATION" ISN'T MEANT TO DOOM THE PLATFORMS.
Heightened regulatory scrutiny on China's platform economy that started in 2021 now faces at least two obstacles.
On the one hand, there is a huge regulatory vacuum in the face of the novelty of the platform economy. The goal of tightening regulation is to create a comprehensive system for governing platforms, but a multi-departmental approach may easily lead to campaign-style governance, which could deal a crushing blow to the platform economy.
On the other hand, the platform economy has many characteristics that are different from the traditional economy. These features can bring benefits but also problems. The purpose of strong regulation is to keep the benefits while addressing the issues. If the governance policy simply follows the traditional economic thinking, it is likely to "throw the baby out with the bathwater", which is detrimental to the development of the platform economy.
Governance policy of the platform economy can be divided into economic regulation and anti-monopoly enforcement, but the two are frequently muddled in practice. The former aims to maintain whereas the latter aims to restore the normal operation of the efficient markets. There is an urgent need for policy innovation in both areas.
The United States has been leading the way in antitrust legislation since the Sherman Act was enacted in 1890, which clearly states that conspiracy is illegal and any attempt to dominate the market is a crime. In 1914, the Clayton Act and the Federal Trade Commission Act were passed, which, along with the Sherman Act, form the foundation of US antitrust law. For a long time, consumer welfare was a key criterion for determining whether a monopoly exists, and price was used as a key indicator of consumer welfare.
This approach renders the current antitrust investigation impotent in combating the tech giants’ monopoly, because, rather than raising prices, many platforms lower prices or even provide free services, but this does not mean that consumers are being "subsidized" or that the platforms are not monopolistic. In recent years, this has given rise to the "New Brandeis Doctrine", whose central proposition is that "big is the problem". Some internet platforms not only feature conflicts of interest between "players and referees", but they also control markets through "predatory pricing", "vertical integration" and other tactics.
It is not fair to claim that big is an issue in the platform economy, as economies of scale are one of its inherent features. If being big means it should be cracked down, there will be no progress for the platform economy at all. Some Chinese platform companies are big but face tough competition in industries like e-commerce, online car-hailing, and food delivery. Over the past decade, the market share of e-commerce has changed significantly, indicating that platforms that previously held a large share do not have a monopoly. The key is "contestability", i.e., the entry threshold for potential competitors, which includes licenses and other sunk costs like users and data.
Platforms cannot monopolize the market despite their large shares as long as the barrier to entry is low enough. For example, the share of China’s largest e-commerce platform in the national market reduced from 92% in 2012 to 42% in 2020, indicating that it wasn’t powerful enough to acquire monopoly back in 2012, and its lost shares have been taken mostly by social media and short video platforms. This shows the “economies of scope” of digital platforms: the total cost incurred when producing various types of products altogether is lower than the sum of costs when each of the products is provided separately. This could enable a proper balance in the platform economy between full competition and economies of scale. Social media platforms can easily cross over to the field of e-commerce, taking advantage of their accumulation of users and data; as a result, no e-commerce platforms, not even those with overwhelming market shares, can enjoy monopoly or the benefits it brings.
In fact, many of the platforms in China are engaged in cross-sector business. In view of this, anti-monopoly is not the most pressing task at the moment; nor should it focus on imposing penalties on or breaking up large platforms. Instead, the key should be to make the market a “more contestable” place, that is, to lower the barrier to entry for potential competitors.
Relatively speaking, platform regulation is quite an arduous task, especially because of the need for building a complete regulatory system from the ground up. At present, overlapping duties among different government departments and the tendency towards campaign-style enforcement have created a more, rather than less, uncertain policy environment. For a very long time in the past, few regulatory departments took actions to manage platforms’ behaviors; but after the shift in policy tone to strong regulation, departments of all kinds seemed to have engaged themselves in a “race” where they flooded the market with a fast and furious succession of laws, measures and rules. Many of the normal practices, all of a sudden, became “major problems”, with many platforms subject to “retrospective” penalties. As a result, the platform economy has grown highly volatile.
Specifically, strong regulation has two major weaknesses: first, despite the large number of laws and rules introduced, a consistent policy framework remains absent; second, we don’t have an effective policy coordination mechanism that can align the activities of various departments and balance between long-term goals and short-term effects. Platform economy governance should aim at building a complete set of regulatory rules and measures, in order to routinize governance endeavors that were once scattered and violent.
In addition, many of the “irregularities” of common concern, such as exclusive agreements or differential pricing, need more in-depth study taking into full account the characteristics of the platform economy. Most of the behaviors do not constitute monopolies; instead, they are more akin to fraud, such as when a platform charges certain users hefty illicit fees taking advantage of information asymmetry. Besides, “irregularities” need to be examined on a case-by-case basis. Take the “either-or” exclusive agreements for example: any attempt to squeeze out competitors taking advantage of one’s market position must be prohibited; but an exclusive agreement could be reasonable if the platform has invested heavily in the promotion and marketing of its products or services, which resembles the “exclusive agency” normally seen in the pharmaceutical sector. Similarly, whether differential pricing is acceptable depends on the supply-demand relationship and the level of costs; not all should be deemed discrimination. This entails rigorous economic analysis and proper procedures to judge the rationality of policies.
V. PLATFORM GOVERNANCE EFFORTS, PREVIOUSLY OVERWHELMING AND CAMPAIGN-LED, SHOULD BE ROUTINIZED
“Strong regulation” seeks to promote the sound development of platforms, not to destroy them. Policymakers should consider both long-term goals and short-term implications. Chinese platforms have carved a place for themselves in the world economy, and this hard-earned comparative advantage has to be cherished.
In the past decade, the productivity of China’s digital economy has been on a continuous downward ride. Objectively speaking, ever since China hardened tone on platform regulation, the gap between Chinese and American platforms has significantly widened, while platforms in Europe and other places around the world are also emerging and catching up. These new trends ring the alarm bell. China has rolled out necessary and timely measures to improve platform economy governance, but policy formulation and implementation could be better coordinated and more carefully managed to avoid overwhelming campaign-led moves and improper regulatory competition.
First, China should consider abandoning the concept of “strong regulation”. Particular attention should be paid to prevent it from being used as an excuse to batter private businesses, tech companies and global capital. Instead, platform economy governance should be routinized.
Second, China should build a complete legal and policy system for platform economy governance. It now has many data protection and anti-monopoly laws, but they are poorly coordinated. China should step up efforts to formulate a Digital Economy Law that covers all related areas and serves as the fundamental law in this field, in order to provide systematic legal basis for platform economy governance. The Law should specify the goals of platform economy governance, such as promoting full competition, boosting innovation and protecting consumer rights; it should also clearly define key concepts such as the “disorderly expansion of capital”, so as to avoid unwarranted, excessively generalized interpretation during implementation.
Third, improve coordination in platform economy governance. In the short run, clearly define the roles of relevant authorities and improve policy coordination; while in the long run, establishing a comprehensive government department dedicated to platform economy governance is a ponderable move.
Quite a few regulatory departments in China are involved in platform economy regulation at the moment: some of them are industry regulators such as the Ministry of Transport, the People’s Bank of China and the Ministry of Industry and Information Technology; the others are general regulators such as the State Administration for Market Regulation. They are in charge of not only the market order and antitrust law enforcement, but also formulating rules for data governance. In view of this, in the short run, China could consider building a coordination mechanism at the State Council level; in the long run, it could establish a comprehensive body for platform economy regulation in order to evaluate the behaviors and performance of platforms in an all-round manner.
It’s best to separate platform economy regulation and antitrust moves, while governance of platforms should be more routinized, responsive and accommodative. Platform economy governance should focus on maintaining market order, while antitrust law enforcement focuses more on restoring market efficiency. Both should attach great importance to “contestability”. For exclusive agreements, differential pricing and other such platform behaviors, regulators should first analyze whether they are reasonable rather than cracking down on them all. Finally, China should improve its labor right protection system to address the issues brought by the emerging platform economy, and organize platform associations as well as labor unions for part-time workers.
Finally, when it comes to data policies, policymakers need to think out of the box rather than mechanically repeat the governance mindsets for traditional factors of production, while promoting algorithm auditing. Given the noncompetitive and partially exclusive nature of data as a quasi-public good, the previous “right confirmation first, transaction later” methodology no longer applies. We suggest to establish a high-level committee for data governance to coordinate data policies. The committee’s roles shall include: providing guidance on the scope of data transactions, algorithm governance, personal information protection and data security; managing the application, approval, issuance, restriction and withdrawal of data licenses; promoting algorithm auditing; coordinating works on personal information protection and data security; and putting in place dispute settlement and coordination mechanisms. Meanwhile, algorithm auditing should focus on platform reporting of inputs/outputs and performance appraisal.
This article was published on Beijing Culture Review, April 2022. It is translated by CF40 and has not been reviewed by the authors. The views expressed herewith are the authors’ own and do not represent those of CF40 or other organizations.
