Regulation of Digital Markets with Competition Soft Law—A Law and Economics Perspective

Abstract

Most legal regimes adopt a hybrid model of competition law that combines both hard law and soft law. Although EU competition law features more soft law than hard law instruments, existing literature has rarely explored why the European Commission often employs competition soft law, nor is there much empirical research examining the efficiency of soft law in addressing competition concerns in digital markets. The law and economics literature suggests that using competition soft law rather than hard law has theoretical advantages, specifically in terms of lower costs, increased flexibility, and better information. Hence, soft law can address certain disadvantages of hard law in governing digital markets, whereas hard law is often considered inflexible and costly (in terms of time and money) to formulate. To evaluate the validity of these economic predictions, this paper conducts an empirical analysis to test whether the formulation of soft law incurs lower costs and enhances the flexibility of regulation. It further assesses the information provided by soft law, taking into account that more precise information can reduce error and transaction costs associated with digital regulation. Our observations suggest that competition soft law can contribute to fostering (dynamic) efficiency in the governance of digital markets.

I. INTRODUCTION

Digitalisation has fundamentally changed the informational basis of our economy and has altered the dynamics of markets and competition.¹ Much of the ongoing discourse concerning digitalisation revolves around the swiftness of legal intervention, with a growing consensus that at least parts of competition law must be adjusted in response to digitalisation.² From an economic perspective, regulatory efficiency is pertinent in digital markets, to ensure that innovation keeps on serving consumers and firms,³ while also ensuring sufficient and timely intervention. In that respect, it is worth noting that hard law often garners criticism for its inherent inflexibility, attributed to its limited capacity to be frequently revised or supplemented, essential for upholding legal certainty.⁴ In consideration of this criticism, the necessity for a flexible and lower-cost regulatory instrument, such as soft law, becomes evident, aimed at bridging the ensuing gap and enhancing the efficiency of regulation.⁵

From an economic perspective, legal rules are important tools to cure market failures.⁶ However, economists have often stressed that law should not necessarily be limited to formal state law. It is for that reason that economists have paid a lot of attention to alternatives for formal state law, arguing that, for example, informal laws, traditional laws, self-regulation, and trade practices can, under certain circumstances, also serve the goal of remedying market failures.⁷

Soft law instruments are part of a reality that is difficult to ignore nowadays, as hybrid modes of regulation that combine soft and hard law instruments are put in place in many sectors,⁸ including competition.⁹ An often quoted academic definition of soft law is by Snyder, who defines soft law as ‘rules of conduct which, in principle, have no legally binding force but which nevertheless may have practical and also legal effects’.¹⁰ However, this definition is quite broad. In this paper, we mainly focus on the type of soft law instruments issued by competition authorities, such as guidelines and notices.

Competition law has been designed to react to ever-changing market settings, which is needed in the new digital world. Most legal regimes adopt a conscious hybrid system consisting of both hard and soft law. For example, competition is an area of traditionally hybrid regulation in the EU.¹¹ Since 2004, soft law issued by the Commission has played a very important role in policy developments, namely the decentralization of the enforcement of the EU competition rules,¹² which increased the need for adopting more soft law instruments to provide guidance to undertakings and their legal advisors, national competition authorities, and national courts.¹³ Although some scholars have argued that soft law has been used strategically by competition authorities in order to prompt efficiency gains in competition regulation and enforcement,¹⁴ the existing literature generally takes a legal rather than an economic perspective. In addition, although a rich literature now exists on the competition regulatory framework in digital markets, only few scholars focus on the use of competition soft law to address the challenges caused by digitalisation. In the same vein, research applying a law and economics analysis to soft law is rare. Furthermore, the number of new regulations governing digital markets has been increasing steadily in recent years, and several of those regulations empower the Commission to adopt soft law instruments (particularly guidelines) to facilitate the enforcement of certain hard law provisions. One obvious example of this trend is the Digital Markets Act (DMA).¹⁵ This further emphasizes the significance and timeliness of examining how soft law enhances regulatory efficiency within digital markets.

What can we expect from competition soft law in governing digital markets? From an economic perspective, the answer would be lower costs, higher flexibility, and better information.¹⁶ The ensuing flexibility in particular is assumed to be a strength of competition soft law. This is attributed to its relatively simple procedures and precise provisions, allowing it to address the emergent phenomena of the digital era and quickly rising positions of market power. However, potential costs of competition soft law might result from rent-seeking behaviour engaged in by private-interest groups (like lobby groups representing industry), as well as from weak enforcement. This leads to a trade-off between flexibility and the ‘quality’ of the rules in terms of addressing market failures.¹⁷

This paper aims to explore whether competition soft law can enhance the efficiency of regulation in digital markets, by assessing its benefits and costs. The efficiency of regulation can be achieved when the costs of reaching a regulatory target are minimized.¹⁸ For the purpose of this paper, regulatory efficiency includes both procedural and substantive perspectives, which are grounded in cost–benefit analysis.¹⁹ Specifically, this paper explores whether soft law can facilitate rapid intervention and can address market failure in digital markets. However, we do not intend to provide a full-fledged comparison of competition hard law with soft law, as we acknowledge that a combination of both legal instruments is often more effective.²⁰ Instead, in this paper, our central research question is whether and how competition soft law can enhance efficiency in digital markets. It is important to clarify that our scope here does not encompass the investigation into why certain digital activities fall within the ambit of regulation while others do not.

The paper consists of six parts. After this introduction, the subsequent Section II provides an overview of the costs and benefits of soft law from an economic (that is, efficiency) perspective. Section III introduces the competition legal system and procedures in the EU, to provide a legal basis for the application of economic analysis in the field of competition law. Sections IV and V explain the procedures for the adoption of competition soft law and the substantive content of soft law. In Section IV, we analyse data collected from the website of the European Commission (particularly DG Competition) related to the procedures behind the drafting of competition hard and soft law instruments, to assess the efficiency of competition soft law in the procedures of formulation, particularly in the steps of public consultation and impact assessment. Then, it zooms into the competition rules in digital markets to explore the efficiency of the respective rule-making processes. Section V introduces the substantive contents of competition hard and soft law instruments and explains how competition authorities provide better (that is, more detailed) information related to digital market governance through soft law instruments. In Section VI, we provide our conclusions.

II. COSTS AND BENEFITS OF SOFT LAW

The existing literature has identified various advantages and disadvantages of hard law,²¹ which this paper does not aim to examine in full detail. Instead, we propose the hypothesis that the inherent costs associated with employing hard law for regulating digital markets could potentially be mitigated through the benefits offered by soft law, that is, a ‘smart mix’ of soft and hard law may often be efficient. Accordingly, this section attempts to provide an overview of the literature elucidating hard law, with a particular focus on the costs and benefits associated with soft law instruments.

A. Literature on Hard Law

As indicated above, soft law can add to a smart regulatory mix by addressing some of the weaknesses of hard law. According to the literature, one of these weaknesses of hard law approaches is that they are relatively inflexible.²² The establishment of hard law must comply with statutory procedures whose structures are generally rigid.²³ Hard law cannot be revised or supplemented frequently due to the need for legal certainty.²⁴ Therefore, the administrative costs of the formulation and revision of hard law are relatively high. Although hard law may have the potential to reduce the post-agreement costs of managing and enforcing commitments, the adoption of hard law entails significant contracting costs.²⁵ Legalization reflects a series of trade-offs.²⁶ More specifically, any agreement in hard law entails some negotiating costs—coming together, learning about the issue, bargaining, and so forth—especially when issues are unfamiliar or complex. However, these costs are greater for legalized agreements (acts). Stakeholders normally exercise special care in negotiating and drafting legal agreements because the costs of violation are higher. Legal specialists must be consulted; bureaucratic reviews are often lengthy. Approval and ratification processes, typically involving legislative authorization, are complex.²⁷

Apart from the procedures, hard law presupposes a fixed condition based on previous knowledge (or experience) while situations of uncertainty may demand constant experimentation and adjustment.²⁸ The formal and complex procedures of hard law make it slow to cope with uncertainties and contingencies. However, uncertainty is what we face in digital markets. Competition law has to be designed to react to ever-changing markets.

B. Benefits of Soft Law

1. Flexibility and Simplicity

Soft law obeys a logic of ‘flexible governance’,²⁹ with its relatively simple procedures of formulation and modification. It does not need to be drafted in such a careful manner as hard law,³⁰ enabling it to meet a need for faster regulation.³¹ In light of the relatively simple procedures of drafting and issuing, the extensive use of soft law can be seen as a reaction to the need for a more flexible regulatory system.³² For example, during the Covid-19 period, soft law instruments were adopted on a contingency basis to provide a fast regulatory response to attenuate the effects of the lockdowns or to manage the spread of the virus.³³

Additionally, the greater flexibility of soft law allows for renegotiation or modification as circumstances evolve over time.³⁴ Soft law is well equipped to cope with new problems by providing the flexibility necessary to allow for the possibility of required reform that can accommodate diverse legal systems.³⁵ Due to the less formal adoption process, it is likely to be less expensive than traditional legislation, as analysed in the following.³⁶

2. Lower Administrative Costs

Soft law can sometimes accomplish what hard law accomplishes but at a lower cost.³⁷ Generally, the administrative and compliance costs of soft law are lower than hard law.

Both instruments—soft and hard law—involve costs at two stages: at the law making and the adjudication stage.³⁸ During the law-making process, the negotiation or ‘contracting’ cost of soft law is lower than hard law, especially when the issues are unfamiliar or complex.³⁹ Compared with hard law, soft law can reduce the levels of obligation of stakeholders due to the weaker enforcement, making cooperative agreements possible.⁴⁰ It has been underlined that the simplified adoption procedures for soft law are highly valued characteristics in regulating sensitive sectors in which agreements are hard to reach.⁴¹ However, at the adjudication stage, the costs of soft law may be higher than those of hard law, as will be explained in the next subsection.

C. Costs of Soft Law

Scholars also see potential disadvantages of soft law. In general, soft law has vague legal consequences. It, in principle, has no legally binding force and is not enforced by state coercive power.⁴² As a result, the enforcement of soft law might be difficult. Despite the fact that soft law may have legal and practical effects and encourage consistency as well as disseminate information,⁴³ it mainly relies on social coercion or self-disciplinary mechanisms.⁴⁴ For instance, Trubek et al. argue that shaming is one of the ways for EU soft law to affect and change behaviour. Member States seek to comply with guidelines to avoid negative criticism in peer reviews and Council recommendations.⁴⁵ However, hard law takes advantage of its legally binding force in enforcement with coercive power, forcing actors to consider the threat of sanctions.⁴⁶ The legal consequences of hard law are certain and clear, which makes it easier for private actors to predict the effects of their behaviour.

Additionally, it has been argued that soft law lacks democratic legitimacy because the legislators and public participants are not involved in its production. While legal scholars point to the importance of legitimacy in the drafting of EU soft law, from an economic perspective the analysis of stakeholder involvement in law production fits in with the private interest (or: public choice) analysis of interest group behaviour.⁴⁷ The likelihood of private interests prevailing over the public interest and the risk of rent-seeking behaviour are potential disadvantages of soft law.

III. HARD AND SOFT LAW IN EU COMPETITION LAW

Before addressing the question of whether competition soft law instruments can enhance the efficiency of regulation, we need to introduce the hybrid legal framework and the procedures for the formulation of competition law.

A. A Hybrid Model of Competition Law and Policy

The Treaties provide a legal system for the governance of competition within the EU, crafted from Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU).⁴⁸ Further important components of the competition legal framework are contained in several secondary legislative acts and soft law instruments. Zheng’s research identifies 13 hard law and 20 soft law instruments within EU competition law, highlighting 2 hard law instruments and 3 soft law instruments that are particularly relevant to digital markets.⁴⁹

With respect to digital markets, two legal acts require special attention in this paper: the Regulation on Promoting Fairness and Transparency for Business Users of Online Intermediation Services (P2B Regulation)⁵⁰ and the Digital Markets Act (DMA)⁵¹.

The P2B Regulation was published on 11 July 2019 to promote fairness and transparency for business users of online intermediation services. According to the Commission, the P2B Regulation is the first-ever set of rules for creating a fair, transparent, and predictable business environment for smaller businesses and traders on online platforms.⁵² It applies to providers of ‘online search engines’ and ‘online intermediation services’ that enable businesses to sell goods or services to consumers located in the EU, regardless of where that business is based.⁵³

The DMA was proposed by the Commission to the Parliament and the Council at the end of 2020, and became applicable on 2 May 2023.⁵⁴ According to the Commission, the DMA introduces rules for platforms that act as ‘gatekeepers’ in the digital sector, which aims at preventing gatekeepers from imposing unfair conditions on businesses and end users and at ensuring the openness of important digital services.⁵⁵ Additionally, the DMA also empowered the Commission to designate ‘core platform services’ providers involved with, for example, search, social networking, video-sharing, online intermediation, cloud computing, and online advertising as ‘gatekeepers’,⁵⁶ and to adjust this ‘code of conduct’ if needed, based on market investigations.⁵⁷

In addition to the provisions laid down in the Treaties and in secondary legislation, the EU institutions have issued a vast amount of soft law instruments over the years.⁵⁸ Indeed, the Commission has already published or revised three soft law instruments in relation to digital markets. First, after the P2B Regulation was published in the Official Journal of the European Union in 2019,⁵⁹ the Commission issued the Guidelines on Ranking Transparency Pursuant to Regulation (EU) 2019/1150 of the European Parliament and of the Council⁶⁰ (Ranking Transparency Guidelines) to facilitate compliance with the P2B Regulation, and to assist providers in applying the requirements and help optimize the manner in which the main parameters determining ranking are identified and presented to business users and corporate website users.

Second, DG Competition revised the Guidelines on Vertical Restraints to fit the new developments in relation to vertical agreements, including the digitalisation and a resilient internal market.⁶¹ According to Executive Vice-President Margrethe Vestager: ‘the new rules will provide companies with up-to-date guidance that is fit for an even more digitalised decade ahead’.⁶² Lastly, the Commission published the revision of the Notice on the definition of the relevant market for the purpose of Union competition law (Notice on the Definition of the Relevant Market) on 8 February 2024.⁶³ The revised instrument aims to fit for the new market realities and significant societal and technological changes, especially digitalisation, as well as developments in the Commission’s competition law enforcement practice and in the EU courts’ case law.⁶⁴ Likewise, in September 2024, the Commission published the Draft Guidelines on the Application of Article 102 TFEU to Abusive Exclusionary Conduct by Dominant Undertakings, intended to replace the Guidance Paper published in 2009, and launched a public consultation to collect further input.⁶⁵ The final version is scheduled for adoption in the fourth quarter of 2025.⁶⁶

B. Procedures for the Formulation: Legislative Procedures and Better Regulation

The procedures of formulating hard law are prescribed in Article 294 TFEU as the ordinary legislative procedure, which requires the Commission to submit each proposal to the Parliament and the Council. Then, the Parliament and the Council shall adopt their positions at three readings and communicate them to the Commission. The emphasis throughout the procedure is on compromise and dialogue to facilitate the successful passage of the legislative act.⁶⁷ Furthermore, in the area of competition law, Article 103 TFEU provides that the Council must, after receiving a proposal from the Commission and consulting the Parliament, lay down the appropriate legislation to give effect to the principles set out in Articles 101 and 102 TFEU.⁶⁸ The Council has adopted several pieces of legislation that are paramount in EU competition law,⁶⁹ for example, the European Union Merger Regulation.⁷⁰

In 2015, the Commission published the Better Regulation Package, originally presented as a tool ‘to make Community decisions more effective in order to win back the support and confidence of European citizens’.⁷¹ According to the Better Regulation Guidelines,⁷² there are six steps for the Commission to make policy: (1) forward planning and political validation, (2) stakeholder consultation, (3) evaluation and fitness checks, (4) impact assessment, (5) quality control, and (6) compliance support and implementation. At the same time, the document requires that the minimum timeframe for stakeholder consultation is 12 weeks.

Additionally, the introduction of the Better Regulation Guidelines indicates that the pursuit of better regulation entails creating legislation that achieves its objectives while being targeted, effective, easy to comply with, and with the least burden possible.⁷³ The Better Regulation Guidelines can also apply to the day-to-day practices of Commission officials preparing new initiatives and proposals, or manning existing policies and legislation.⁷⁴ The Commission stresses that these guidelines should be read and applied by all Commission officials involved in regulatory activities and managers responsible for quality control and for the allocation of resources.⁷⁵ On the basis of these explanations, the formulation of hard law should adhere to the steps and requirements outlined in Treaties and supplemented by the Better Regulation Guidelines. However, it appears that the Commission does not explicitly commit to adhering to the six steps described by the Better Regulation Guidelines when formulating soft law. With this in mind, the subsequent section will analyse the findings of the empirical study to investigate the procedures employed by the Commission in the formulation of hard and soft law instruments.

Overall, the existing competition legal framework embodies a hybrid nature, integrating both hard and soft law instruments. In the context of digital markets, competition hard law instruments, such as the P2B Regulation and the DMA, alongside soft law instruments, such as the Ranking Transparency Guidelines, have been adopted. Building upon this foundation, the following sections attempt to explore the potential for using competition soft law to enhance regulatory efficiency, particularly in digital markets.

IV. AN EMPIRICAL ANALYSIS OF PROCEDURES FOR THE FORMULATION OF COMPETITON SOFT LAW

Regulation produces a range of costs for the community, encompassing expenses associated with formulating regulations, establishing standards, passing the statutes, and subsequent enforcement.⁷⁶ The objective of this section is to analyse the benefits and costs of competition soft law within the context of the procedures for the formulation. To achieve this objective, Subsection A will empirically explore how competition hard and soft law instruments are formulated by European institutions. Given the limited number of legal instruments in the digital sector,⁷⁷ this analysis will include a broader range of competition laws. Specifically, we will use a simple quantitative approach to examine two of the six steps outlined in the Better Regulation Guidelines: public consultation and impact assessment, as they are the most relevant to the information officially published by the Commission on its website.⁷⁸ Subsequently, in Subsection B we will examine the formulation procedure of two examples—a hard and soft law instrument—specifically related to digital markets, to confirm the observations explored from Subsection A. Lastly, Subsection C will narrow the focus to the specific scenarios of formulating new competition policies in regulating digital markets. It will assess the costs and benefits inherent in the formulation procedures of competition soft law instruments, building on the empirical findings from Subsections A and B.

A. A Simple Quantitative Analysis of Public Consultation and Impact Assessment

Based on the requirements and steps provided by the Better Regulation Guidelines and the Treaty, we carried out searches for information on specific competition hard and soft law instruments on the website of DG Competition.⁷⁹ We found that most information on public consultations and impact assessments has been officially published by the authority and can be easily collected; however, information about other steps of the procedure, such as the fitness check and the compliance support and implementation, is not (or not easily) available. More specifically, the ‘Have Your Say’ web portal on the website of DG Competition⁸⁰ shows information related to public consultations in the field of competition and state-aid measures. Our searches revealed that DG Competition has initiated public consultations of competition law in 98 instances since 2015. Among those consultations, 57 instances are related to state-aid rules, and 8 consultations are related to concrete cases. Both categories are excluded from the scope of this research, which focuses on competition law under Articles 101 to 106 TFEU.⁸¹ We will further examine the remainder of the 33 consultations reflected in Figure 1 below.

Our simple quantitative analysis below is grounded in data and documents officially sourced from the European Commission’s website, focusing specifically on two procedural aspects: stakeholder consultation and impact assessment. Based on the data and documents we have collected, we will assess and compare the costs and benefits of hard and soft law instruments in these two procedures. Meanwhile, we will examine whether the formulation procedure of soft law reflects the requirements under the Better Regulation Guidelines.

1. Public Consultation

Stakeholder consultation is considered an essential element of policy preparation and review.⁸² The information on stakeholder consultations published by the Commission includes a clear indication of the consultation and its objectives, the identified relevant stakeholders, and the consultation methods and tools, as well as timeframes for consultation and feedback.⁸³ Among these factors, we observe that the number of consultations and their duration can reflect the possible costs of the law-formulation phase.

We collected data on these two factors from the 33 public consultations (together with targeted consultation) related to antitrust and merger policies. On the basis of these 33 public consultations, we classified the relevant instruments involved into three categories, as presented in Figure 2: Category 1 comprises consultations exclusively for competition soft law instruments; Category 2 includes simultaneous consultations for both competition hard and soft law; and Category 3 consists of consultations exclusively for competition hard law instruments. It was also noted that there can be several consultations opened by the Commission in relation to a single piece of hard or soft law.

Interestingly, Category 2 shows four examples in which the Commission opened a public consultation for a hard law instrument accompanying a soft law instrument at the same time, such as the Guidelines on Vertical Restraints and the Regulation on Vertical Block Exemption. This category shows more similarities to Category 3 related to the consultation of hard law instruments, as these initiatives were consulted multiple times over 12 weeks. We have thus added the figures from Category 2 to Category 3.

Building on the data and information, we came to the following two findings.

First, although the Commission held consultations for both competition hard and soft law instruments, the figures show that most competition hard law instruments involve a higher number of public consultations than soft law instruments. We found that six out of eight soft law instruments involved only one public consultation before they were officially published by the Commission (presented in Figure 3). For most competition hard law instruments, the Commission opened a public consultation twice (or more), except for the DMA, which involved only one public consultation by the Commission (presented in Figure 4).

Second, although the Better Regulation Guidelines require a minimum of 12 weeks of stakeholder consultation, the consultation periods of some soft law instruments are shorter. A good example is that the Commission initiated an 8-week consultation for the Ranking Transparency Guidelines. The figure also shows that the time period of consultation for each competition hard law instrument did satisfy the requirement of the minimum time period. In addition, the average time period for consultations on competition soft law is 15 weeks, which is shorter than that for hard law, which has an average of 20 weeks. The shorter consultation period is not a real surprise because, strictly speaking, the Commission does not limit itself to adhering to the Better Regulation Guidelines when formulating soft law.

It should be noted here that there are some debates among legal scholars concerning the consultations published by the Commission on soft law.⁸⁴ For example, scholars have argued that these consultations for soft law appear to be happenstance and untransparent: soft law instruments are often adopted omitting public consultations, raising questions about their legitimacy, whereas the consultation processes exhibit shortcomings in relation to the transparency. Nevertheless, our research presents quantitative evidence indicating that the Commission has opened public consultations for all soft law instruments examined in this paper and has adopted a more flexible approach in its consultation processes for competition soft law.

The aforementioned findings, derived from a simple quantitative analysis, appear to suggest that the process of stakeholder consultations for competition soft law instruments exhibits greater flexibility and simplicity when compared with that of hard law, both in terms of frequency and duration. In most instances of soft law adoption, the Commission only needs to allocate resources, such as budgets and experts, for consultations of soft law instruments once. From an economic perspective, a reduced number of consultations could yield diminished administrative costs and shortened timeframes. However, this should not be misconstrued as implying that the Commission can merely undertake consultation once for each soft law instrument. Certain competition soft law instruments characterized by complicated rules may necessitate multiple rounds of stakeholder engagement for advisory input. For example, to revise the Notice on the Definition of the Relevant Market, the Commission conducted three separate rounds of public consultation as of January 2023. Notably, the final version of this document was eventually issued by the Commission in February 2024 in light of the complexities of digital markets.

The (often) shorter duration of consultations can potentially serve as an indication of how quickly soft law is formulated. A good example emerges in the context of the revision of the Information Guidance Notice, wherein the consultation period spanned merely 4 weeks.⁸⁵

2. Impact Assessment

Impact assessments are about gathering and analysing evidence (including evaluation results) to support policymaking.⁸⁶ According to the Better Regulation Guidelines, the lead DG(s) should allow sufficient time to collect and analyse all the relevant evidence (including data, scientific advice, other expert views, etc.) and present the outcome of the impact assessment process in a report. Then, the Regulatory Security Board (RSB) should review the quality of the report and issue opinions on the draft. The impact assessment report should also be published on the Register of Commission Documents and the ‘Have Your Say’ web portal and transmitted to the legislator.⁸⁷ Although there is no time limit for an impact assessment, carrying out such an assessment requires sufficient time and resources.

As indicated above, we collected the relevant impact assessment reports published on the ‘Have Your Say’ web portal and summarised the information in Figure 5.

Figures 5 and 6 show that only one of eight competition soft law instruments has been provided with an impact assessment report by DG Competition: the Guidelines on Collective Agreements of Self-employed People.⁸⁸ For the other seven soft law instruments, DG Competition merely published the draft version without any further reference. For example, DG Competition published the draft of the Guidelines for National Courts on how to estimate the share of overcharge that was passed on to the indirect purchaser when initiating a public consultation.⁸⁹

On the contrary, DG Competition published impact assessment documents and/or the Evaluation Report in most cases of competition hard law instruments to explain the assessment of the environmental, social, and economic impacts of the policy options (presented in Figure 7). These documents concerning the impact assessment also state the efficiency and economic value of hard law instruments. For example, DG Competition published the Impact Assessment Report for the DMA proposal, which was reviewed by the RSB twice, first with a negative opinion,⁹⁰ and later with a positive opinion, but with reservations.⁹¹

Comparably, the rare reports of impact assessments for competition soft law investigated above empirically indicate that performing an impact assessment is not (considered) mandatory for the formulation of competition soft law. On this basis, we may assume that the absence of procedures for an impact assessment can speed up the formulation of competition soft law and enhance the flexibility and quickness to repair market failures.

B. Zooming into Competition Policies in the Digital Sector

The previous section provided insights into data on public consultations and impact assessments in relation to particular hard and soft law instruments. Given that DG Competition’s website primarily provides data on these two procedures, this subsection focuses on the formulation process of one hard and one soft law instrument. The aim is to present a full picture of the procedures and timeframes involved in the drafting and issuing of the two regulatory tools. The drafting processes of the DMA and the Ranking Transparency Guidelines will be explored in detail, serving as examples of competition hard and soft law, respectively.

1. An Empirical Study of the Procedure for Drafting the DMA

The procedures for issuing the DMA were fully consistent with the Better Regulation Guidelines and the ordinary legislative procedures. Although the DMA was submitted to the European Parliament and the Council on 15 December 2020, the Commission had prepared the DMA proposal ahead of that date. To illustrate this point, the Commission proposed its initiative regarding an ex ante regulatory instrument directed at very large online platforms acting as gatekeepers in June 2020.⁹² This proposal was regarded as an attempt to make competition policy fit for the modern economy, referring to digital markets and the global scale in particular.⁹³ Meanwhile, in the Inception Impact Assessment, the Commission mentioned its plan of proposing the legislative instrument for a new competition tool in the fourth quarter of 2020.⁹⁴

Subsequently, the Commission opened a public consultation for the DMA from 2 June 2020 to 8 September 2020. The Summary Report of the consultation shows that the Commission held 14 weeks of public consultations on the main challenges arising around the provisions of digital services, and online platforms in particular. The consultation was launched in preparation for the proposals of the DMA, as well as to explore emerging challenges in other areas related to online platforms and digital services.

As the next step of the Commission’s internal revision, we observed that the RSB published its Opinion for quality control on 8 October 2020. In that document, the RSB came to a negative conclusion on 4 November 2020, which meant that DG Competition had to revise its proposal and submit the revision to the RSB for a second quality control.⁹⁵ After the revision of the draft, the DG Competition resubmitted the proposals to the RSB on 6 December 2020. The RSB eventually provided a ‘positive with reservations’ conclusion on 10 December 2020.⁹⁶ The Commission thus continued its external procedure by proposing the DMA to the Parliament and the Council on 15 December 2020.

The Parliament published information on the legislative progress related to the DMA on its website.⁹⁷ According to the website of the Parliament, a political agreement on the DMA was achieved on 25 March 2022. The Parliament made a decision for the DMA after the first reading on 5 July 2022. Subsequently, the DMA was adopted by the Council after the Parliament’s first reading on 18 July 2022. On 14 September 2022, the final act was signed by the Parliament and the Council.⁹⁸ The DMA entered into force on 1 November 2022.

Based on the explanation above, we consider that the Commission, more particularly DG Competition, explicitly adopted certain procedures required by the Better Regulation Guidelines, such as stakeholder consultation, impact assessment, and quality control (presented in Figure 8). However, it is hard to find evidence of the Commission’s compliance with the other three procedures required by the Better Regulation Guidelines, including the evaluation and fitness check, compliance support, and implementation.

The drafting and official publication of the DMA lasted almost 3 years. During these three years, the Commission spent a year drafting and preparing a proposal, while the Parliament and the Council spent at least 2 years reading and voting for the official publication of the DMA, which included the compromise and dialogue to facilitate democracy. Although the DMA was drafted by the Commission, the proposal was reviewed and amended by the Parliament and the Council through multiple negotiations. More specifically, it took a year and a half to achieve a political consensus and sign the legislative act. One may also note that the stakeholder conferences organised by the legislator are a costly process. However, these legislative procedures are not necessary for the formulation of soft law, which will be analysed in the subsequent subsection.

However, the process of formulation and publication of the DMA has been considered quite fast compared with other legislative acts.⁹⁹ According to the Parliament, between 2014 and 2019, the average length of procedure for acts adopted at first reading was just <18 months; the figure rose to ~20 months for those that were negotiated. Acts adopted at the early second reading took 39 months on average; those adopted at the second reading took 40 months.¹⁰⁰

We conclude that the process regarding drafting and proposing the DMA was broadly in line with the requirements set forth by the Better Regulations Guidelines. The legislative processes adopted by the Parliament and the Council promoted democratic engagement through stakeholder involvement, yet they also prolonged the timeframe for the DMA to be enacted and become effective. In essence, the formulation and publication of the DMA were relatively complicated and time-consuming, although, compared with other hard law instruments, it was expedited.

2. An Empirical Study of the Procedure of Drafting Soft Law

Contrary to the DMA, the timeline for the procedures of competition soft law remains unclear. We use the Ranking Transparency Guidelines as an example to explain the vague process of soft law making.

The Ranking Transparency Guidelines were published by the Commission on 8 December 2020. These guidelines aim to address the main requirements for online platforms identified in the P2B Regulation, from the need to identify key algorithmic parameters behind ranking to their communication with businesses. However, the website of the Commission provides only limited information related to the procedures for the formulation of the Ranking Transparency Guidelines compared with the relevant information of the DMA and the P2B Regulation. We only know that, after publishing the P2B Regulation on 20 June 2019, the Commission organised two workshops at the end of 2019 to gather the input of stakeholders.¹⁰¹ Furthermore, the Commission initiated a targeted online survey for comments from 7 November 2019 to 31 December 2019. Apart from these two steps, however, no further information about the formulation of these guidelines has been published by the Commission (presented in Figure 9).

Based on the limited information presented above, we deduce that the time involved in the formulation and publication of the Ranking Transparency Guidelines was about a year and a half. Meanwhile, as the official information published by the Commission merely mentions stakeholder consultations, such as workshops and online surveys, we conclude that, contrary to the procedures for the formulation of the DMA, there is no mandatory requirement for the procedures of impact assessment and quality control. More importantly, the publication of competition soft law does not need the approval of the Parliament and the Council, which significantly saves both time and costs.

C. Assessment of Efficiency on the Basis of Empirical Findings

The empirical research conducted earlier reveals a pronounced disparity between the procedures for the formulation and publication of competition soft law in comparison to its hard law counterpart. A comprehensive examination in Subsections A and B highlights the simplicity and flexibility characterizing the processes of competition soft law, particularly compared with the complexities inherent in the formulation and publication of hard law. On the one hand, the simple quantitative analysis of procedures for stakeholder consultations emphasizes that competition soft law is flexible and time saving indeed, as it reduces administrative costs and enhances flexibility in regulating digital markets. On the other hand, the dataset concerning impact assessment procedures indicates that the Commission does not limit itself to assessing the impacts of competition soft law. Both procedures may speed up the process of the formulation and publication. The two observations are substantiated by a specific case study, namely the DMA and the Ranking Transparency Guidelines, which consistently highlight the comparably lower costs and simplified procedures associated with competition soft law in contrast to that of hard law.

On the basis of market failures present in digital markets as discussed above, the conclusion can be drawn that the flexibility and lower costs of competition soft law present a cost-effective framework for the dynamic regulation and prompt intervention that is required in markets characterised by rapid technological innovation. The benefits of soft law can thus enhance regulatory efficiency, from a procedural perspective, of the entire competition legal framework in digital markets.

Note that the simple procedures for competition soft law may carry disadvantages and cause potential costs in general. For example, economists may consider the existence of a trade-off between costs and flexibility on the one hand and the ‘quality’ of the rules in terms of addressing market failures on the other, as the latter often requires the involvement of different interest groups in its formation.¹⁰² Nonetheless, the potential costs of quality indicated by economists can be (partially) justified through our empirical study.¹⁰³ Public consultations initiated by the Commission frequently involve multiple private interest groups. A good example is the process of the Ranking Transparency Guidelines, which included two workshops that brought stakeholders representing online search engines, app developers and stores, as well as social media together;¹⁰⁴ and a targeted online survey opened to all citizens and organisations. A comparison with stakeholder consultations initiated for competition hard law, exemplified by the DMA, suggests that Member States may not pay equal efforts to the consultations of soft law. A normative explanation for this difference would be that competition soft law has a non-legally binding force for Member States, which may reduce the incentives for Member States to participate in the consultation process. However, the Commission can also cooperate with all Member States through the European Competition Network, thus assimilating extensive feedback from national competition authorities.¹⁰⁵ Consequently, we conclude that, at least in the instances reviewed in this research, the quality of competition soft law seems not to have been compromised in exchange for its flexible and simple consultations, as the involvement of multiple private interest groups ensures a competitive balance within the consultation process. A closer examination of the consultation methodologies of competition soft law reveals that the involvement of public consultations through online questionnaires or surveys is comparably cheap by optimizing both time and resources.

In addition, there are concerns that powerful interest groups might capture the formulation process of soft law, similar to their involvement in the development of hard law.¹⁰⁶ The dangers of private interests prevailing are especially serious when there is no countervailing power against lobbying by gatekeepers. This risk is especially pronounced in instances of pure self-regulation, where only industry determines the contents of the regulation. However, we assume that competition soft law is less likely to be influenced or distorted by powerful interest groups, such as gatekeepers, as the assessment presented in this paper is grounded in the specific context of digital markets.¹⁰⁷ To illustrate, the diverse stakeholder engagement in consultations, as discussed earlier, can mitigate the risk of rent-seeking behaviour and enrich the effectiveness of competition soft law, fostering a reflection of public interests encompassing consumer welfare and contestable markets. Simultaneously, the existence of very high barriers to entry or exit,¹⁰⁸ along with the potential for far-reaching decreases in choice for both business users and end users in digital markets,¹⁰⁹ compels the Commission to weigh potential consequences meticulously and strike a balance between regulation and allowing market forces to operate effectively. Meanwhile, public choice theory also suggests that the commissioners and politicians may also intend to use the competition soft law as a policy outcome to show the strict attitude against gatekeepers, and thus gain prestige and reputation from citizens. This strict attitude is further evidenced by the Commission’s actions in imposing fines against several gatekeepers.¹¹⁰

Note again that the absence of democratic institutions such as the Parliament and Council in the formulation of law may be considered by some as being at the expense of ‘democratic legitimacy’, even when other stakeholders are involved in the law-making process. Although we acknowledge the potential importance of these concerns, this (normative) discussion on the value of democratic institutions goes beyond the scope of this paper.

Overall, the benefits of soft law regarding its flexible and fast response to market failures are considered significant for regulating the dynamic nature and fast development of digital markets (in comparison with most traditional markets), which would enhance the regulatory efficiency of the entire competition legal framework, taking its mitigated costs into account.

V. AN ECONOMIC ANALYSIS OF SUBSTANTIVE CONTENTS OF SOFT LAW: BETTER INFORMATION

So far, we have analysed whether competition soft law can enhance the efficiency of regulation by examining the procedures for the formulation and publication of law. This section pivots its attention towards the contents of competition soft law instruments in regulating digital markets. The overarching objective is to assess the efficiency of competition soft law in addressing market failures in digital markets.

A. Lower Transaction Costs for Users

According to the economic literature, transaction costs include search and information costs, negotiation costs, and the costs of implementing and enforcing the resulting agreements.¹¹¹ Already in 1984, the economist Steven Shavell provided an analysis of information differences between private parties and governments.¹¹² He argued that private parties generally have better information about certain risks (like the risk of an accident that causes damage to third parties) and how to deal with them than a regulatory body. This ‘assumption of information’ will, however, be reversed if it becomes clear that some risks are not readily appreciated by the parties involved or when risks are very complex and (publicly funded) research is needed to generate such information. Applying his argument to our case, regulated firms have superior knowledge about their environment: their technology, the cost of their inputs, and the demand for their products and services. These firms may also possess much better information concerning technological developments in digital markets than regulatory bodies, for example, the Commission. However, several of the market studies and investigations conducted by competition authorities and publications by scholars have centred on the lack of information and pushed firms for greater dissemination of information to address a lack of transparency.¹¹³ Big tech firms do not (always) have incentives to disclose or share information with users and competitors, which may lead to market failures. The data-related information asymmetries may be caused by that dominant data holders may be reluctant to grant access to data where these data may contribute to the entrenchment of their monopoly position on the primary market or allows them to enjoy competitive advantages when expanding into neighbouring markets. Furthermore, information asymmetries between suppliers and their customers and bounded rationality may lead customers to accept ‘data-closed’ environments even where this may lead to a durable and costly ‘lock-in’.¹¹⁴ Growing economic literature suggests that, under certain circumstances, firms, particularly gatekeepers, could have incentives to actively obfuscate, either by complicating their tariffs, thus hiding important information, or by providing the wrong type of information.¹¹⁵ In that particular instance, information costs for the public will be high.¹¹⁶ Thus, information asymmetry can lead to increased transaction costs in digital markets.

From a public interest perspective, the absence of ‘perfect’ information cannot itself justify intervention. However, unregulated digital markets cannot generate ‘optimal’ information in relation to decision-making.¹¹⁷ Consumers are assumed to have the information necessary to make utility-maximizing choices.¹¹⁸ Thus, better information about consumer behaviour can allow firms to understand market trends and hence better plan how to match supply with demand.¹¹⁹ At the same time, the dissemination of information and better tools to allow users to use the information may improve consumer welfare. According to Posner, regulatory agencies are specialized and have flexible means of obtaining information.¹²⁰ Furthermore, it is said that markets alone do not provide appropriate incentives for information disclosure, and there is, in principle, a role for government.¹²¹

Furthermore, compared with private groups (gatekeepers in our case), regulatory bodies may provide more neutral and fair information. Consequently, both hard and soft law instruments can address the challenges and reduce transaction costs. In this regard, soft law issued by the competition authority seems a useful regulatory tool to provide information at lower transaction costs. Then, the question arises of whether competition soft law instruments issued by the Commission can provide information efficiently for users and potential competitors. This question will be explored in more detail in the following sections.

B. Lower Information Costs for Formulation

As a relatively small and thinly staffed organisation, the Commission has only a fraction of financial and human resources available compared with national governments, but its position at the centre of the wide-ranging network including national governments, subnational governments, and interest groups, gives it a unique information base for independent influence on policymaking.¹²² Competition law and policy in the context of the EU fulfils an important function of facilitating and defending the single market. The Commission acts as guardian of the single market.¹²³ It has a central role in EU competition law and policy and is responsible for fact-finding, taking action against infringements of Articles 101 and 102, imposing financial penalties, adopting block exemption regulations, conducting sectoral inquiries, investigating mergers, and developing policy and legislative initiatives.¹²⁴ To be able to play its policy-initiation role, the Commission needs access to information. For example, it has superior in-house knowledge and formidable expertise in competition law and economy. The Commission also relies upon Member States’ submissions and its extensive advisory system of public and private actors and paid consultants.¹²⁵

Furthermore, DG Competition is the Directorate of the Commission specifically responsible for competition policy.¹²⁶ DG Competition has commissioned several professional reports, such as Ex Post Economic Evaluation of Competition Policy: The EU Experience,¹²⁷ which evaluates whether the outcomes of Commission decisions matched what was hoped for.¹²⁸

In light of this circumstance, first, the Commission, with its specialized staff members and experts, can provide information at lower costs vis-à-vis the Parliament and the Council. That is, the Commission has more experts in relation to the digital economy and competition law. A good example is that DG Competition has commissioned reports, such as Competition Policy for the Digital Era, which discusses how competition law and policy might evolve in the digital age. Another example is that the Commission has created a high-level group to provide advice and expertise in the implementation of the DMA.¹²⁹ Although this may also prompt a discussion on the expense of ‘democratic legitimacy’ in the use of soft law, such a normative debate falls beyond the scope of this paper.¹³⁰

At the same time, the Commission has been particularly active (in recent years) in the enforcement of Articles 101 and 102 within the EU, which provides itself with rich experiences in practice. In recent years, the Commission adopted several decisions against big tech firms. For example, the Commission made three decisions concerning Google’s abusive practices between June 2017 and March 2019, which accounted for record-breaking fines of 8.25 billion Euros.¹³¹Additionally, Article 47 of the DMA also indicates that the Commission has abundant experience in facilitating the effective implementation and enforcement by adopting guidelines. This provision explains that ‘It should be possible for such guidance to be based in particular on the experience that the Commission obtains through the monitoring of compliance with this Regulation’.¹³²

Although the Parliament and the Council also have experts and knowledge related to the digital economy and regulations,¹³³ the previous experiences and professional experts of the Commission can reduce its information costs in the formulation of substantive contents of competition soft law.

C. Detailed Information

Because (most) substantive legal rules may not be clear-cut,¹³⁴ information-gathering and information-processing procedures must be conducted to provide a more detailed explanation. In principle, one of the purposes of competition soft law is to complement the vague provisions of hard law. The ‘precision’ refers to the information content of the law rather than to the number of provisions included in a given law.¹³⁵

Articles 101 and 102 TFEU, like most competition provisions in other jurisdictions, are drafted broadly and are based on general norms.¹³⁶ Thus, the Commission may issue competition soft law to provide precise rules to supplement vague provisions of hard law. For example, the P2B Regulation asks online intermediation services, such as e-commerce marketplaces, app stores, and online travel agents, to set out in their terms and conditions the main parameters determining rank and the reasons for their relative importance. Recital 28 of the P2B Regulation also provides that the Commission has to develop guidelines to assist providers of online intermediation services and providers of online search engines in applying the ranking transparency requirements laid down by this hard law instrument.¹³⁷ According to the P2B Regulation, this effort should help to optimize the manner in which the main parameters determining rank are identified and presented to business users and corporate website users.¹³⁸

Subsequently, the Commission published the Ranking Transparency Guidelines that address the main requirements for online platforms identified in the P2B Regulation, from the need to identify key algorithmic parameters behind ranking to their communication with businesses. According to the Commission, the Ranking Transparency Guidelines will help online platforms to make the right information available to businesses, so that they, in turn, can consider how best to increase and manage their online visibility, ultimately enabling consumers to receive the highest quality goods and services.¹³⁹ Additionally, the Commission also stresses that the document will provide valuable support for the adequate and effective enforcement of the transparency required to ensure that online platforms are acting fairly in their ranking practices.¹⁴⁰ As such, these detailed guidelines, complementing the enforcement of the P2B Regulation, can contribute to addressing market failures that result from the market power caused by online intermediation providers.

More evidence of the level of detail of the information is provided by the substantive contents of the Ranking Transparency Guidelines. Paragraph 1 of that instrument states that the purpose is to facilitate the compliance of providers of online intermediation services and providers of online search engines with, and the enforcement of, the requirements provided in Article 5 of the P2B Regulation. At the same time, the document also aims to assist providers in applying the requirements and optimizing the manner in which the main parameters determining rank are identified and presented to business users and corporate website users.¹⁴¹ The entire document comprises 10 sections with 135 paragraphs to explain the detailed requirements and the main parameters of ranking transparency.¹⁴² Therefore, we may conclude that the content of the Ranking Transparency Guidelines is more specific than the content of the P2B Regulation.¹⁴³

There can be exceptions to the explanation provided above regarding the more precise rules of competition soft law.¹⁴⁴ Soft law instruments in the field of competition law are sometimes unclear.¹⁴⁵ A prominent example is found in the Commission’s Article 102 TFEU Enforcement Priorities Guidance (Guidance Paper),¹⁴⁶ which has been criticised due to its imprecise rules. However, we only partially agree with that comment. We agree that the substantive content of the Guidance Paper on some points may need further explanation. However, compared with the legal uncertainty that may be caused by non-legislative acts in addressing the issue of effective enforcement of competition law with limited resources, the Guidance Paper is considered an explanatory measure to promote legal certainty and bridge the regulatory gap. Hence, the value of competition soft law in increasing transparency and predictability may be noted. From an economic perspective, competition soft law can provide detailed and precise information.

Note that judges might lack the necessary information to find out whether, in a particular case, a competitor is a gatekeeper and circumvents its obligations merely based on the DMA. The more precise rules given by soft law instruments could provide information to the judges who have to evaluate the behaviour of the undertaking in concrete cases. Thus, competition soft law is important to steer decision-making and to facilitate the enforcement of hard law. In the same vein, the detailed information offered by competition soft law instruments can provide better guidance for private sectors to evaluate their own behaviour ex ante. For example, the DMA indicates that the guidelines developed by the Commission can assist gatekeepers to implement the obligations under that hard law instrument.¹⁴⁷ However, the guiding role played by these competition soft law instruments does not mean that they are binding on judges and undertakings.¹⁴⁸

However, it should be noted that, in general, the more detailed a rule is, the more often it will have to be changed.¹⁴⁹ This creates additional costs, such as the costs of producing new rules and costs arising from the fact that frequent changes in the law are a source of uncertainty.¹⁵⁰ With respect to competition soft law, taking into account the simple and flexible formulation procedure discussed above, the costs of such revisions seem to be much lower compared with those of amending competition hard law.

D. Assessment of Efficiency

So far, the law and economics research has indicated that competition soft law at least holds the potential to furnish precise information at a reduced cost, thereby mitigating transaction costs for users and potential competitors within digital markets. In the same vein, the often-cited costs of soft law, that is, high error costs and high enforcement costs (because of non-legally binding force), can be decreased due to its benefit of affording better information.

According to Ogus, specific regulatory rules can significantly reduce both information costs and the risk of error.¹⁵¹ It is worth noting that error costs can arise from imperfect legal information, which, in certain contexts, is significantly higher than the error costs attributed to imperfect price information. Thus, as discussed above, competition soft law serves as a source of precise information that complements the specific provisions of competition hard law and bridges regulatory gaps. In other words, competition soft law can provide more precise information. This benefit can potentially contribute to the reduction of error costs associated with competition hard law. In such instances, the overall efficiency of the competition legal framework, including both hard and soft law, would be increased.

Although legal scholars often point to the vagueness of legal consequences of competition soft law, particularly its lack of a deterrent effect against the illegal practices of gatekeepers, we propose that the precise information provided by competition soft law can, in fact, bolster the deterrence potential of the entire competition legal system. That is, the detailed information and requirements indicated by competition soft law can steer both competition enforcement institutions and private sectors, for example, gatekeepers, to correct, understand, and perform better in practice. That explanation may also confirm the legal effects of soft law argued by legal scholars. In light of this, the market failures caused by market power can be addressed based on the rules and information provided by competition soft law instruments.

VI. CONCLUSIONS

The basic consensus in the economic literature is that both competition hard and soft law are significant regulatory tools to correct market failure. Consequently, the evidence presented in this paper does not suggest that soft law is better than hard law or the opposite. Instead, a hybrid structure with both hard and soft law is required in most legal regimes.

Under this premise, the experience of the EU in employing competition soft law to govern digital markets suggests that, from an economic standpoint, competition soft law offers particular benefits, notably in terms of lower costs, better information, and increased flexibility.

By empirically examining the procedures for the formulation and publication of competition soft law, this paper highlights its benefits in providing flexible and fast responses to market failures. These benefits are particularly significant when taking into account the dynamic nature and fast development of digital markets (in comparison with most traditional markets). Consequently, competition soft law can enhance the regulatory efficiency of the overall competition legal framework for digital markets, whereas the associated costs, such as the trade-off between flexibility and the ‘quality’ of the rules in terms of addressing market failures, can be justified or mitigated within the specific context of digital markets.

This paper suggests that the substantive content of competition soft law, functioning as a regulatory intervention similar to that of hard law, can provide precise information while reducing transaction and formulation costs. Whether soft law is adopted to complement hard law or to fill regulatory gaps, it provides detailed information to guide both judges and big tech undertakings, thereby contributing to addressing market failures caused by information asymmetries and market power in digital markets. Conversely, the associated costs caused by the application of soft law, such as error costs and high enforcement costs, can be decreased due to its benefit of affording better information.

Given the intricate regulatory milieu shaped by rapid technological advancements, a better understanding of the benefits and costs of competition soft law holds the potential to guide regulatory entities to find a balanced and optimized governance framework for digital markets, and facilitate private actors in complying with competition law even more efficiently and effectively. In economic terms, one may therefore (carefully) conclude that soft law indeed seems to increase the overall efficiency of competition policy, particularly within rapidly evolving markets.

Footnotes

Author notes