Abstract: The platform economy is the most direct use of new technologies in the fourth industrial revolution, and it is an important driver of innovation and economic growth. Nevertheless, platform economy could also bring a slew of issues. It is necessary to improve the governance of platform economy, particularly in terms of policy coordination at four fronts: governance and innovation, development and security, various regulatory authorities, and regulation and anti-monopoly actions. The platform economy's distinct characteristics may necessitate a different governance mechanism than the traditional framework.
In the recent year or two, there have been significant changes in the regulatory policies targeting the platform economy. Since the beginning of 2021, regulatory focus has shifted to curbing monopoly and disorderly capital expansion, producing significant ups and downs in related industries. As illustrated by social media, the platform sector has undergone seismic shifts. However, in light of recent policy changes, there appears to be some shift in regulatory attitude as well. I'd like to make three observations in this regard.
Ⅰ. THE ROLE OF THE PLATFORM ECONOMY IN INNOVATION AND ECONOMIC GROWTH
It is said that the global platform economy is a three-way split between the United States, China, and the rest of the world. In reality, China and the US have the major market share; the global platform economy is actually dominated by the largest developed economy—the US—and the largest developing economy—China. It is a remarkable achievement for China, as a developing country, to be in second place in the world platform economy.
More importantly, the platform economy is the most direct application of digital technology, network technology, and artificial intelligence in the economy during the fourth industrial revolution. Each round of industrial revolution, as we all know, gives birth to new technologies, which often usher in new industries. Although China was unable to capitalize on the opportunities presented by the first three industrial revolutions, a significant number of major platforms in the country have kept up during the fourth revolution, fostering continual innovation in technologies and business models. Despite the fact that not all of these platforms have cutting-edge technology, China has been at the forefront of new business development and industry formation, which is extraordinary progress.
China’s economic growth will have to rely on innovation as it enters a new development phase, and the platform economy is exactly the most innovative part of the Chinese economy. In retrospect, most Chinese platform companies started from scratch and are private-owned.
The platform economy is also the finest example of the "Chinese Dream". It is astounding how ambitious, capable young people could turn their ideas into world-class platform firms with the help of capital. We often emphasize that China’s economic growth dynamics should shift from a traditional factor-driven model to one that is driven by innovation. In this regard, we should actively encourage the development of the platform economy.
In addition, platform economy is important to China’s economic growth. CF40’s research project of “Valuation and Measurement of Data Assets amid the Big Data Boom” has studied this issue and revealed the significant contribution of digital economy to China’s growth: when adopting the concept of digital economy in the narrow sense instead of the concept of platform economy, value added of digital economy contributed to as much as 75% of China’s GDP growth since the global financial crisis. In other words, the Chinese economy could take a hit if its digital economy or platform economy is crippled.
Thus, platform economy’s role in boosting innovation and economic growth should never be overlooked. The good news is that policymakers have recently signaled a conclusion to the crackdown on platform economy, and the focus of policy will turn to boosting its sound development. That’s a very positive change.
But at the same time, policymakers need to introduce concrete measures to shore up confidence in the platform economy. Since the start of last year, with shrinking capitalization, many of the platforms have been downsizing, which have undermined the morale of platform employees. Many founders of the platforms have chosen to retire. Such depression, if it continues, will weaken the platform economy’s momentum and put the global competitiveness of Chinese platforms at risks. Latest data suggest that India has overtaken China in terms of the number of new quasi-unicorns, while some of the European unicorns have also delivered impressive performance.
In summary, the importance of platform economy to innovation and growth is self-evident, and we look forward to more concrete morale-boosting policy actions.
II. PLATFORM GOVERNANCE NEEDS POLICY COORDINATION AT FOUR FRONTS
Over the past year, policymakers have stepped up platform governance with a focus on fighting monopoly, which is appropriate considering that digital economy itself embodies the characteristics of digital technologies.
Digital technology and the economies of scale and scope, the network effect, the multilateral market and big data analysis as a result of its development bring changes to economic and financial development that I summarize as “three increases and three decreases”. Three increases are the increases in scale, efficiency and user experience, while three decreases are the decreases in costs, risks and contacts.
Digital technology, while boosting efficiency, also promotes inclusiveness of services, and it can improve economic and financial activities in various aspects. At the same time, though, it also brings many potential challenges. For example, the economies of scale or scope could result in a “winner-takes-all” scenario or monopolies; big data analysis could breed discriminatory pricing, while large platforms are likely to engage in anti-competition conducts. All have happened in the past. It’s thus critical to put platform development under appropriate regulation.
Having said that, some of the regulatory practices have been misplaced. As the Central Economic Work Conference at the end of 2021 pointed out, many of our past regulation moves have been shortsighted, fragmented or excessively violent, undermining the morale of the entire platform economy sector. To address these problems, I suggest we enhance policy coordination at the following four fronts.
First, coordinate governance and innovation. Innovation shouldn’t be strangled by governance, or industrial development would lose its foundation. That would bring up the issue of data governance. Governance is necessary, but at the same time, digital innovation must be given full play. Countries implement different governance frameworks, but they all face the same tradeoff: if regulation is too loose, it could indulge consumer right infringements; but if it is too tight or even “l(fā)ocks data up”, it would strangle possibilities for innovation. Policymakers need to strike a proper balance between innovation and governance.
Second, coordinate development and security. Some of the regulators who strongly support the platform economy have limited say over policies, because once the issue of security risks is brought up, regulators tend to err on the side of caution, and that’s what we call the “red light” problem. Red light is of course important, but green light is equally important to balancing development and security.
Third, coordinate the work of different regulatory departments. It could lead to disorder if regulation which has been absent over the past years on digital economy is tightened all of a sudden. The campaign-style regulation and regulatory competition we have seen over the past year were a result of overlapping duties among different government departments. Digital economy would find it very hard to move forward under pressure from multiple regulatory bodies with policies targeting the industry, the market, and other areas. Regulatory departments should work in tandem when implementing policies so as to boost the sound development of platforms, instead of choking them.
Fourth, distinguish regulation from antitrust moves. Many of the problems that need regulatory attention in the platform economy are not about monopoly. For example, when a customer is cheated by the fishmonger at a farmers’ market, it’s not about monopoly, but about fraud. The same applies to the platform economy, where regulation and antitrust moves are two different things. The purpose of regulation is to maintain the sound functioning of the market, while that of antitrust moves is to restore market mechanisms and protect market rules when there have been problems. In addition, antitrust moves tend to be aggressive and costly, and can produce long-lasting “hangover”; in comparison, regulation is carried out in a day-to-day and responsive manner in order to maintain market order, which should be the focus of platform economy regulation today. Undoubtedly, antitrust enforcement activities are necessary to resolve monopolies, but in most cases, regulation should be more routinized with a focus on setting clear rules and making sure that market participants follow them. For areas without existing rules, regulators need to innovate and make new ones. We have the concept of “regulatory sandboxes” in the field of digital finance, and that’s something worth trying with platform economy as well.
In one word, to enhance platform economy governance, we need to improve policy coordination in the above four areas in order to boost digital economy innovation while putting this dynamic sector under proper regulation to promote its sound development.
III. THE SAME OLD REGULATORY FRAMEWORK NO LONGER APPLIES TO PLATFORM ECONOMY GOVERNANCE
Platform economy is subject to many problems including monopoly, exclusive agreements, anti-competition and anti-market behaviors, discriminatory pricing, etc. But it also has many new features compared with traditional economies, and so our traditional regulatory frameworks may no longer apply to platform economy governance.
Take monopoly for example. Under the traditional concept, big companies with dominating market shares are monopolists, and so antitrust law enforcement only needs to look at the market share to identify monopoly. But this issue could be more complicated in the case of platform economy, because platforms with larger market shares are not necessarily monopolists: if the market is easily accessible to new competitors, a company that captures a dominant share of the market may not hold monopoly power. Thus, market share is one of the indicators when identifying monopoly, but not the only one.
This is the case with the e-commerce market. A certain e-commerce platform that had over 90% of the market share a decade ago only occupies less than half of the market 7 or 8 years later. Then should we deem the situation a decade ago as monopoly? The answer is undoubtedly yes under the traditional concepts, but no if we look at the actual situation because other competitors have not been barred from entering the market.
This is what we call the economies of scope. There is a concept of a “contestable market” in economics. Such market does not feature a high level of competition, but it is highly contestable, which means that any monopolistic act of a company could trigger the entry of new competitors with easy market access in various aspects such as licensing, data, platforms or customers. Economies of scale is an important feature of platform economy, which means that once a company has established a platform and accumulated customers and data, it can expand its cross-sector businesses. That’s why we cannot judge monopoly simply based on the market share; it requires in-depth economic analysis instead. The same applies to “either-or” exclusive agreements or discriminatory pricing. That’s why I believe that financial and market regulatory departments could benefit from the recruitment of more talents with economics background for better governance of the platform economy.
This article is edited based on the author’s speech at the CF40 seminar on “China’s Data Governance and Platform Economy”. The original Chinese version has been reviewed by the author. The translation made by CF40 has not been reviewed by the author.
