Ctrl+Alt+Regulate: The DMA’s Misguided Reboot of Competition

The European Union’s Digital Markets Act (DMA) represents a misguided attempt to regulate digital marketplaces, resurrecting the outdated and deeply flawed Structure-Conduct-Performance (SCP) paradigm. This essay argues that the DMA’s structural approach is not merely ill-suited to the dynamic nature of digital markets, but actively harmful, threatening to stifle innovation, impede market progress, and ultimately harm the very consumers it purports to protect.

The SCP paradigm, which forms the bedrock of the DMA, is a relic of mid-20th century industrial economics, woefully inadequate for understanding modern digital ecosystems. This framework naively posits that market structure determines firm conduct which, in turn, affects market performance. In clinging to this outdated model, EU regulators demonstrate a profound misunderstanding of the digital economy’s dynamics.

The DMA’s core methodology betrays its deep-seated reliance on the SCP paradigm, particularly in its obsession with market structure. This is evident in its criteria for designating “gatekeepers,” which are primarily based on quantitative structural metrics such as annual turnover, market capitalization, and user base size. By focusing on these static structural elements, the DMA fundamentally misunderstands the nature of competition in digital markets. It erroneously assumes that market structure is the primary determinant of competitive behavior and market outcomes, ignoring the dynamic processes that truly drive digital innovation and competition.

This structural fixation leads to a regulatory approach that is both reductive and potentially harmful. By targeting firms based on their size and market position rather than their actual conduct or the outcomes they produce, the DMA risks penalizing success and efficiency. It creates a perverse incentive structure where firms may deliberately limit their growth or innovation to avoid regulatory scrutiny. Moreover, this approach fails to account for the rapid and often unpredictable changes in digital markets, where today’s dominant player can quickly become tomorrow’s obsolete platform. The DMA’s rigid structural thresholds and ex-ante regulations are thus likely to be perpetually misaligned with market realities, potentially hampering the very competitive dynamics they aim to protect.

Digital markets are characterized by rapid innovation, fluid boundaries, and constant disruption. The DMA’s focus on structural elements—such as designating “gatekeepers” based on arbitrary quantitative thresholds—is akin to using a sundial to measure nanoseconds. It’s not just inaccurate; it’s absurd. It is truly important to understand competition as it is. As Hayek said: ”I wish now to consider competition systematically as a procedure for discovering facts which, if the procedure did not exist, would remain unknown or at least would not be used.” Not as any kind of static position or structure.

The DMA represents a monument to regulatory overreach, built on the shaky foundations of the SCP paradigm. Its consequences are likely to be severe and far-reaching:

1. Innovation Strangulation: By imposing draconian rules on large platforms, the DMA will inevitably choke innovation. Resources that could fuel next-generation technologies will instead be squandered on regulatory compliance.
2. Regulatory Quicksand: The DMA’s broad and prescriptive nature creates a quagmire of uncertainty for businesses. In this environment, cautious stagnation becomes a safer strategy than bold innovation.
3. Misalignment with Reality: The criteria used to designate gatekeepers are crude instruments that fail to capture the nuanced competitive dynamics of digital markets. This misalignment threatens to distort market incentives and competition.
4. Consumer Disempowerment: In their paternalistic zeal, EU regulators have overlooked the power of consumer choice in shaping digital markets. The DMA implicitly assumes consumers are helpless pawns rather than active market participants.

The DMA’s structural approach betrays a hubris among EU regulators—a belief that they can effectively micromanage the complex, rapidly evolving digital ecosystem. This is a dangerous delusion. Regulatory bodies lack the agility, expertise, and foresight to oversee such dynamic environments effectively.

The implementation of the DMA is likely to be a bureaucratic nightmare, with regulators perpetually lagging behind market realities. It’s as if the EU has decided to regulate the internet using a committee of telegraph operators.

The flaws of the DMA’s structural approach become even more apparent when viewed through the lens of Austrian economics. The Austrian school offers a radically different perspective on markets and competition that fundamentally challenges the SCP paradigm underlying the DMA. While the SCP model views market structure as the primary determinant of firm behavior and market outcomes, Austrian economists see the market as spontaneous order arising naturally from individual actions without central control. This perspective suggests that attempts to regulate markets through antitrust laws, such as the DMA, profoundly misunderstand the organic and self-regulating nature of economic systems, potentially disrupting beneficial market processes rather than enhancing them. As Murray Rothbard has pointed out in Man, Economy, and State: 

antitrust laws and prosecutions, while seemingly designed to combat monopoly and promote competition, actually do the reverse, for they coercively penalize and repress efficient forms of market structure and activity.

Central to the Austrian critique is the concept of competition as a dynamic discovery procedure rather than a static state of affairs or perfect competition as implied by the SCP paradigm. This process allows market participants to uncover new information, innovate, and improve continuously, which is essential for the healthy functioning of markets. By focusing on preserving certain market structures or limiting the size of firms, the DMA’s interventions may inadvertently stifle this discovery process, harming innovation, and consumer welfare. Moreover, the Austrian emphasis on the subjective nature of prices stands in stark contrast to the objective metrics used in the DMA’s structural analysis. This subjectivity of value suggests that the quantitative thresholds and structural indicators employed by the DMA may fail to capture the true complexities and dynamics of digital markets, leading to misguided interventions that do more harm than good. As Ludwig von Mises has pointed out in Human Action: “The market is not a place, a thing, or a collective entity.… The forces determining the-continually changing-state of the market are the value judgments of individuals and their actions as directed by these value judgments.”

The Digital Markets Act represents a dangerous revival of the SCP paradigm’s fundamental flaws. It is a misguided attempt to force the dynamic, innovative world of digital markets into a static, outdated regulatory framework. The DMA threatens to substitute the wisdom of markets with the hubris of regulators, potentially stifling the very innovation and competition it claims to promote.

What’s needed is not a fine-tuning of this flawed approach, but a complete paradigm shift—a regulatory CTRL+ALT+DELETE. Policymakers must reboot their understanding of digital markets, abandoning the comfortable but misleading simplicity of the SCP paradigm. They must embrace the complex, uncertain, and dynamic nature of digital competition.

The future of the digital economy is too important to be left to the mercy of misguided regulations based on obsolete economic theories. It’s time for a fundamental reset in our approach to digital market regulation. Otherwise, the EU risks turning its digital economy into a regulatory wasteland, where innovation withers and consumers ultimately suffer the consequences of allegedly well-intentioned but profoundly misguided interventions.

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