Contents

Introduction. 1

Response to Question 29. 2

Considering the market failures identified for digital markets, which of these failures do you consider most prominent? 2

Response to Question 41. 3

What prevents or hinders the entry of new companies into digital markets? Cite examples and sources of information? 3

Response to Question 45. 4

What would need to be changed in the current legislation or regulation in Brazil to improve competitiveness in digital markets? 4

Recommendations 5

Conclusion. 5

Endnotes 5

Introduction

The Information Technology and Innovation Foundation (ITIF), the world’s top-ranked science and technology policy think tank, appreciates the opportunity to respond to Anatel’s 26/2023 consultation and specifically to discuss questions related to promoting innovation and competition in the digital markets.[1] This comment follows ITIF’s remarks submitted to the Brazilian Government’s consultation about the bill on November 20, 2023 and the Ministry of Finance’s consultation on May 2, 2024.[2]

The consultation has special significance in light of Bill 2768/2022 (bill), introduced to the Brazilian Federal Congress on October 11, 2022, by João Maia (MP, Partido Liberal), proposing the regulation of Brazil’s digital markets in a way similar to the European Union’s (EU) Digital Markets Act (DMA).[3],[4] The bill seeks to amend two key pieces of legislation: the General Telecommunications Law (Law No. 9472/1997) and the Brazilian Civil Framework of the Internet (Law No. 12,965/2014).[5] Among other things, the bill expands the regulatory authority of the National Telecommunications Agency (Anatel) to encompass digital platforms while introducing principles beyond Anatel’s current purview, such as open competition, consumer protection, and reducing social and regional inequalities.[6]

In response to Anatel’s public consultation, ITIF’s comments proceed in three parts that address the following questions: 29, 41, 45. In sum, regulation in the digital sector should only be necessary to remedy market failure that cannot be addressed by the current legal framework, which simply is not true. Moreover, even if regulation was justified to address market failure, regulation should put forward clear policy-oriented goals that complement the broader legal and regulatory ecosystem. Finally, introducing a heavy-handed hodgepodge regulation will only lead to regulatory fragmentation and chilling innovation.

Response to Question 29

Considering the market failures identified for digital markets, which of these failures do you consider most prominent?

The Brazilian economy has been marked by a period of substantial growth and is poised for a digital transformation. With a population of almost 220 million citizens, Brazil is the largest country in South America (and the fifth-largest fintech market in the world).[7] Recent trends indicate a commitment to digital innovation, as evidenced by the National Internet of Things Plan and the Brazilian Digital Transformation Strategy (E-Digital).[8] The emerging digital market, with its potential to fuel productivity growth, has become a focal point in leveraging Brazil’s economic resilience.

Anatel’s consultation describes how several market failures can lead to a lack of competition in digital markets, which could be cured by implementing regulations—similar to what Brazil has done in its telecommunications industry.[9] But there is a lack of strong evidence suggesting market failure exists within the Brazilian digital ecosystem. On the contrary, Brazil’s digital landscape presents a unique opportunity: it is nascent and well-positioned to become a vibrant and dynamic arena where firms are incentivized to compete through creative destruction. Indeed, the nascent nature of Brazilian digital markets belies the existence of evident market failure but rather underscores the argument against immediate and extensive regulation

Secondly, while large platforms are often considered environments characterized by a high degree of market power, any assessment of market power requires accurately defining markets, which is best understood in terms of “eyeballs” or “attention markets.”[10] A Rio resident who is using X is not using YouTube, LinkedIn, Facebook, or TikTok. In other words, even though digital platforms serve particular niches, they compete fiercely for consumer attention.[11] Moreover, there is intense competition on the ad side of many digital market, with Brazilian advertisers having a wide array of choices for getting their messages to consumers.[12]

Even where market power exists, that does not by itself indicate that there is market failure. Since the groundbreaking work of Joseph Schumpeter in the 1940s, it has long been understood that competition is not merely, as neoclassical economics holds, an equilibrium where price equals marginal cost. Nor is it simply, as Adam Smith imagined, a rivalry between many sellers in a market. Rather, as Schumpeter explained, innovation or dynamic competition occurs through “gales of creative destruction” whereby one firm competes for the market by creating a new product, only to be challenged by additional “leapfrog competition” that supplants the formerly dominant firm with a still newer product that not just dazzles consumers but allows for the firm to recoup the costs of its innovation.[13]

Anatel’s consultation points out that new companies struggle to compete because they cannot offer the same network effect from the start. However, the idea that market power and network effects alone suffice to show market failure is incorrect. First, many digital markets are characterized by consumers engaging in multi-homing, whereby they regularly use multiple competing platforms—increasing competition in the market.[14] Additionally, many leading technology platforms were not the first movers in their markets, which evinces the limited power of network effects to entrench one firm: Amazon overtook eBay, Google leapfrogged Yahoo!, and Meta disrupted MySpace.

Response to Question 41

What prevents or hinders the entry of new companies into digital markets? Cite examples and sources of information?

Even where there is market failure, regulation should provide benefits that outweigh any harms that will also result, as well as be necessary relative to existing competition law frameworks. But neither of these conditions is likely to be met. Indeed, overly complex, intrusive, or broad regulatory regimes will likely chill the entry of new, innovative firms, and the competitive forces within the market, unimpeded by regulation, are often the best mechanisms to address any market imbalances.[15] This can occur through regulation by placing costs on market entrants that ultimately benefit established incumbents, and it is especially harmful in dynamic markets where market power is transient.

Moreover, CADE has a demonstrably effective track record in addressing competition concerns within the Brazilian digital market. A review of its activities reveals that CADE has reviewed a total of 233 transactions involving “digital platforms,” with the majority analyzed under its fast-track procedure, suggesting minimal competition concerns in most cases.[16] CADE has also initiated 23 investigations of digital aspects of various markets since 2011.[17] These investigations involved analyzing economic conditions, competitive dynamics, and specific business models on a case-by-case basis. While remedial actions were implemented in a limited number of situations, most investigations were closed after thoroughly examining facts and economic evidence.[18] Furthermore, CADE’s commitment to understanding the digital market landscape is evident through numerous initiatives, including the publication of various studies and detailed reports. As such, there appears to be no current indication that CADE lacks the tools or regulations necessary to address competition concerns within the Brazilian digital market effectively.

Response to Question 45

What would need to be changed in the current legislation or regulation in Brazil to improve competitiveness in digital markets?

Articles 4 and 5 of the bill respectively delineate six broad principles along with five objectives that will surely create confusion. For example, the objectives encompass economic development, fair competition, access to information, knowledge, and culture, promotion of innovation, the massification of new technologies and access models, encouragement of interoperability through open technological standards, and the incentivization of mechanisms for data portability. This is a hodgepodge of incomparable if not also incommensurable goals, some of which can be addressed by other legislative products and not by antitrust. The same is true with the enumerated principles such as freedom of initiative, free competition, consumer protection, reduction of regional and social inequalities, repression of abuse of economic power, and expansion of social participation in public interest matters.

As such, the bill provides a framework that is too all-encompassing to provide sufficient guidance about its application. Specifically, these far-reaching statements of principles and objectives are highly abstract and undefined, making it challenging to identify concrete regulatory priorities focused on preserving competition and those aiming at broader societal and economic goals. Moreover, incorporating these broader purposes into Brazilian competition policy represents a significant departure from the historically well-developed policy recommendations of economics-based competition and regulatory policy that have helped drive innovation and growth in America.[19]

This lack of clarity and the uncertainty that will result is likely to be exacerbated by increased regulatory confusion.[20] Indeed, the bill’s subject matter affects at least three agencies: Anatel, the CADE, and the Brazilian Data Protection Agency (ANPD). This regulatory triad plays distinct roles in overseeing different facets of the digital landscape, and the bill’s focus on digital platforms with essential access does not eliminate this interdependence and overlap. By proposing that Anatel should administer the regulation instead of relying on the expertise of Brazil’s competition agency (CADE), the bill introduces a serious risk of regulatory fragmentation by concurrently empowering Anatel and CADE with full competition enforcement in digital markets, as well as raises concerns about the risk of over-enforcement in their respective actions.[21]

The dangers of regulatory fragmentation are evident from the European experience with the DMA.[22] In fact, while the DMA was introduced as an attempt to limit regulatory fragmentation by establishing EU-wide regulations, the legislation fell short of this goal, as it permitted additional national regulatory initiatives and did not remove existing national regulatory barriers. This lack of harmonization raised concerns about decentralized and disparate enforcement practices within the EU. For example, while the DMA allowed Member States to set new rules on gatekeepers, this flexibility contributed to potential inconsistencies and contradictions between the DMA and national rules. Such overlap is likely to hinder the harmonization of digital regulations within the EU, resulting in confusion rather than a unified approach.

Recommendations

For these reasons, ITIF has significant concerns about the bill and offers the following recommendations: 

▪ Brazil’s digital markets are not failing: Brazil’s booming digital marketplace, brimming with innovation, suggests a measured approach to regulation. As Brazil contemplates its digital future, carefully considering the inherent resilience of competitive dynamics is paramount to ensuring that regulatory measures align with the genuine economic needs and requirements of the burgeoning digital market.

▪ Regulation can do more harm than goods: Without evident problems, heavy-handed regulations could hinder the very innovation driving the country’s economic strength and digital transformation—including by creating barriers to entry for smaller firms that chills the very competition Brazil hopes the regulation will bring.

▪ Minimize regulatory uncertainty and inter-agency conflict: In addition to its broad and conflict set of goals and principles, the bill’s delegation of anti-competitive conduct monitoring and prosecution to Anatel raises questions regarding the potential for a disjointed regulatory framework, conflicting enforcement actions between agencies, and regulatory fragmentation.

Conclusion

Anatel’s comments raised some very specific and important questions related to competition policy and institutional competencies in digital markets. But a comprehensive assessment of the proposed legislation’s practical ramifications remains outstanding. Consequently, as Brazil crafts its own DMA, it is prudent for the policymakers to be acutely aware of its potential shortcomings and question any unsubstantiated advantages associated with such wide-ranging economic regulation within its still very nascent digital market landscape.

Thank you for your consideration.

Endnotes