Ecosystems in Competition Law: A U.S. Perspective

The Network Law Review is pleased to present you with a special issue curated by the Dynamic Competition Initiative (“DCI”). Co-sponsored by UC Berkeley and the EUI, the DCI seeks to develop and advance innovation-based dynamic competition theories, tools, and policy processes adapted to the nature and pace of innovation in the 21st century. This special issue brings together contributions from speakers and panelists who participated in DCI’s second annual conference in October 2024. This article is authored by Christopher S. Yoo, Imasogie Professor in Law and Technology at Penn University; Professor of Communication; Professor of Computer and Information Science; Founding Director, Center for Technology, Innovation & Competition.

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The aptly titled panel on “Competition Policy towards Ecosystems: The Need for Clear Theories of Harm and Efficiencies” at the 2nd Annual DCI Conference held at the European University Institute on October 21–22, 2024, provided a timely opportunity to assess the impact of ecosystem-based theories of antitrust liability on U.S. law and legal scholarship.

1. The Reception of the Ecosystem Concept in U.S. Law and Legal Scholarship

To date, ecosystem-based theories of antirust liability have had only a modest impact in the U.S. Enforcement officials during the Biden Administration referred to the concept in a fairly informal manner. For example, the complaint filed in the U.S. Department of Justice’s complaint against Apple mentioned the concept several times without defining it.[1] In terms of the courts, the liability decision issued by the U.S. District Court for District of Columbia referred to ecosystems in a nontechnical manner, consisting primarily of quotations from testimony.[2] American scholars have begun to show some interest in ecosystems as a concept but at a lower level than European scholars.[3]

2. The Need for Clear Theories of Market Definition

The reception of ecosystems into U.S. law is no doubt being impeded by the lack of a clear articulation of how the concept differs from existing principles of antitrust law. For example, 2024 the EU Guidelines on Market Definition indicate that ecosystems can “be thought of as consisting of a primary core product and several secondary (digital) products whose consumption is connected to the core product, for instance, by technological links or interoperability” and are analyzed in a manner similar to after markets or bundles.[4] The next sentence reserves the possibility that “not all (digital) ecosystems fit an after-market or bundle market approach” and indicates that “the Commission takes into account, where relevant, factors such as network effects, switching costs (including factors capable of leading to customer lock-in) and (single- or multi-) homing decisions for the purpose of defining the relevant product market(s).”[5]

Unfortunately, the Guidelines language provide little guidance as to how ecosystems differ from conventional principles governing after markets and bundles. The list of factors does not offer any explanation of how they should be applied or how to resolve any conflicts or ambiguities that may arise among them.

This is particularly problematic because the factors listed in the Guidelines have ambiguous implications for competition law. Consider the factor focusing on network effects. The mere invocation of this consideration says little about how it should be applied to particular business models. The idea that network effects would yield the same advantages in markets as varied as e-commerce, search, social media, and online advertising blinks reality.[6]

Equally importantly, a close reading of the economic literature reveals that network effects can theoretically lead to excess momentum as well as excess friction, which undercuts any simple inferences that network effects inevitably lead to winner-take-all markets that give advantages to the first mover. Moreover, network effects are also subject to diminishing marginal returns, rapid market growth, product differentiation, and a variety of private ordering devices that can offset the impact of network effects and can even permit multiple firms to exist in equilibrium. Moreover, multi-homing can eliminate winner-take-all dynamics altogether.[7] Moreover, as Frédéric Jenny has pointed out, the longstanding prevalence of fast-follower strategies, in which competitors wait until the first mover has undertaken the risk and expense of validating a new business model, can offset first-mover advantages.[8] The lack of further explanation of how to incorporate these factors is problematic, because it is only to the extent that ecosystems extend beyond after-markets or bundles that the concept provides any analytical value.

The European courts and academics have also defined ecosystems in terms of firms that offer complementary products.[9]As was the case with the EU Guidelines on Market Definition, it remains unclear what a concept of ecosystems defined in terms of complementary products adds to the principles governing vertically integration. This is particularly problematic in light of the empirical literature showing that vertical integration tends to be neutral or beneficial to consumers or, at worst, mixed.[10]

Absent a clearer articulation of what differentiates ecosystems from areas already addressed by existing antitrust law. Without a more specific definition, the concept risks inviting lumping all large digital companies together without analyzing the key differences in how various factors play in their business models. Doing so risks causing ecosystems to devolve into a classic Areeda-style epithet.[11]

3. The Risks of Basing Liability on Firm Success

In addition to being an ecosystem, Jacobides and Lianos require that the ecosystem occupy a “central position,” determined by its control of resources, ability to set of rules, exercise bargaining power, and control services essential to third parties. The ecosystem must also be of “paramount importance,” which arises when the ecosystem substantially affects the economic activities of third parties. This in turn depends on the ecosystem’s economic power and revenue share, access to substantial resources (including a large number of business users), and significance regarding access to procurement and sales markets.[12]

Defining harm in terms of economic significance suffers from significant endogeneity problems. Achievement of a central or important position can be the result of either successful competition on the merits or anticompetitive activity. Using those outcomes as a basis for liability risks treating causes as effects.

4. Impact on Incentives to Invest and Innovate

Even more importantly, the endogeneity of firm size underscores the risk that imposing liability on firms that compete on the merits too well may deter innovation. Success in the marketplace is often the result of procompetitive activity, such as improvements in products or production processes. A simple decision-tree analysis reveals that making success from competition on the merits the basis for liability reduces the expected value of any such innovation, which inevitably reduces it. Indeed, the ambiguity of firm size is one of the primary reasons why antitrust law abandoned the structure-conduct-performance paradigm a half-century ago and has rejected subsequent calls to embrace no-fault monopoly and has instead until now retained the requirement of showing some form of exclusionary conduct.[13]

Anecdotal evidence suggests that some platforms have achieved their market positions by being more innovative. Consider Google’s Android mobile operating system. The fact that it is based on Linux leaves all would-be competitors free to develop their own alternatives based on the original source code. Indeed, this is precisely what Amazon did with Fire OS. Interestingly, discomfort with being reliant on Android has led device manufacturers to try to develop their own alternatives. Samsung’s effort, known as Tizen, was intended to compete with Android but has since given up, reconceiving itself as an operating system for smart TVs and smartwatches. Huawei has finally launched its mobile operating system, known as Harmony, after more than a decade of development and several false starts. The challenges that such sophisticated technology companies faced and the time it took to try to replicate what Google has accomplished raises the possibility that Android’s market position is the result of the investments it has made into the platform and its ability to solve difficult technical problems. If so, Android represents the type of innovation that benefits consumers and that competition law is supposed to encourage. Penalizing them for succeeding where others have tried and failed only dampens incentives to innovate.

Furthermore, the literature on the essential facilities doctrine and analogous regulatory measures show how granting complementors access to existing facilities can be counterproductive. When entry by competitive facilities is feasible, complementors unhappy with their dependence on the incumbent are natural strategic partners to support entry by a new alternative, which would be the best outcome from the standpoint of competition law. Indeed, investing in infrastructure represents an important dimension of competition on the merits.[14] Granting complementors access to the existing facility relieves them from having to support such efforts, which in turn reinforces the status quo. Such a regulatory strategy might make sense if entry were infeasible, in which case fostering entry into the primary market would serve no purpose and promoting competition in secondary markets becomes a potentially appropriate alternative objective. But such an approach could serve to prolong the incumbent’s market position when entry is viable.[15]

This dynamic is exacerbated by the fact that providing open access to the platform redirects value away from the platform and toward complementors. This reduces investment still further.[16] Indeed, the tendency of platform creators to create positive externalities for complementary services led Timothy Bresnahan and Marc Trajtenberg’s seminal article on general purpose technologies to propose permitting platforms to vertically integrate into complementary services to enable them to internalize more of the benefits created by their activities.[17] Relatedly, David Teece’s landmark article on Profiting from Innovation has emphasized the importance of entering into vertical agreements with providers of complementary inputs before undertaking any irreversible investments.[18]

5. Conclusion

In sum, substantial barriers exist that must be overcome before ecosystem-based approaches are likely to be incorporated into U.S. antitrust law. These include a clearer explanation of how it differs from existing law on after markets, bundling, and vertical integration and how to reconcile the ambiguities surrounding the economic factors used to define what constitutes an ecosystem. Moreover, ecosystem proponents must come to grips with the reasons that competition law has turned away from basing liability based exclusively on firm size. Specifically, they must explain why the concerns about suppressing innovation and investment that led competition law to reject such approaches are no longer compelling. The growing recognition on both sides of the Atlantic of the negative impact that overly intrusive regulation can have on innovation[19] makes answering such questions an essential precondition to any serious consideration of ecosystem-based approaches.

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Citation: Christopher S. Yoo, Ecosystems in Competition Law: A U.S. Perspective, Network Law Review, Spring 2025.

References:

• [1] United States v. Apple Inc., No. 2:24-cv-04055, at 3, 6, 17, 27, 35, 43 (D.N.J. filed Mar. 21, 2024).
• [2] United States v. Google LLC, 747 F. Supp. 3d 1, 63, 98, 106, 145, 159, 174, 176 (D.D.C. 2024).
• [3] See, e.g., Daniel A. Crane, Defining Relevant Markets in Digital Ecosystems, 7 J.L. & Innovation 10 (2024).
• [4] Commission Notice on the Definition of the Relevant Market for the Purposes of Union Competition Law, (C/2024/1645), 2024 O.J. 1, 32 ¶ 104.
• [5] Id.
• [6] Christopher S. Yoo, Network Effects in Action, in GAI Report on the Digital Economy 159, 165 (Douglas H. Ginsburg & Joshua D. Wright eds., 2020).
• [7] Id. at 161–67, 173–74, 180–85, 188–91.
• [8] Frederic Jenny, Competition Law and Digital Ecosystems: Learning to Walk Before We Run, 30 Indus. & Corp. Change 1143, 1148 (2021).
• [9] See, e.g., Case T-604/18, Google & Alphabet v. Comm’n (Google Android), ECLI:EU:T:2022:541, ¶ 116 (Sept. 14, 2022); Michael G. Jacobides & Ioannis Lianos, Ecosystems and Competition Law in Theory and Practice, 30 Indus. & Corp. Change 1199, 1220 (2021); Jenny, supranote 10, at 1146–47.
• [10] See Francine Lafontaine & Margaret Slade, Vertical Integration and Firm Boundaries: The Evidence, 45 J. Econ. Lit. 629, 680 (2007) (surveying the empirical literature on vertical integration, finding “clear evidence that restrictions on vertical integration that are imposed . . . on owners of retail networks are usually detrimental to consumers” and that “under most circumstances, profit-maximizing vertical-integration decisions are efficient, not just from firms’ but also from the consumers’ points of view,” and calling on “government agencies to reconsider the validity of . . . restrictions” on vertical integration); Francine Lafontaine & Margaret Slade, Presumptions in Vertical Mergers: The Role of Evidence, 59 Rev. Indus. Org. 255, 268 (2021) (surveying retrospective studies of vertical mergers and finding that four had a positive effective on consumer welfare and six were neutral or ambiguous); Marissa Beck & Fiona Scott-Morton, Evaluating the Evidence on Vertical Mergers, 59 Rev. Indus. Org. 273, 274, 298 (2021) (surveying twenty-nine empirical studies on vertical integration and finding fourteen with evidence of consumer harm and fourteen with evidence of consumer benefit).
• [11] Phillip Areeda, Essential Facilities: An Epithet in Need of Limiting Principles, 58 Antitrust L.J. 841 (1989).
• [12] Jacobides & Lianos, supra note 11, at 1220–21.
• [13] Ex Ante Antitrust Regulation of Digital Platforms: Lessons from History (Christopher S. Yoo & Giovanna Massarotto eds., Cambridge University Press, forthcoming 2025).
• [14] Verizon Commc’ns, Inc. v. Law Offices of Curtis V. Trinko, 540 U.S. 398, 407–08 (2004); Case C-233/23, Alphabet Inc. and Others v Autorità Garante della Concorrenza e del Mercato (AGCM), ECLI:EU:C:2025:110, ¶¶ 42–43 (Feb. 25, 2025).
• [15] Christopher S. Yoo, Vertical Integration and Media Regulation in the New Economy, 19 Yale J. on Regul. 171, 246–47 (2002).
• [16] Christopher S. Yoo, Modularity Theory and Internet Regulation, 2016 Ill. L. Rev. 1, 24.
• [17] Timothy F. Bresnahan & M. Trajtenberg, General Purpose Technologies: “Engines of Growth”?, 65 J. Econometrics 83, 94–96, 99 (1995).
• [18] David J. Teece, Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy, 15 Rsch. Pol’y 285, 285, 288, 290–95, 302 (1986).
• [19] See, e.g., Unleashing Prosperity Through Deregulation, Exec. Order No. 14,192, 90 Fed. Reg. 9065 (Jan. 31, 2025); Mario Draghi, The Future of European Competitiveness, Part A | A Competitiveness Strategy for Europe (2024), available athttps://commission.europa.eu/document/download/97e481fd-2dc3-412d-be4c-f152a8232961_en.