Contents

Introduction. 1

Lower Dominance Threshold Misunderstand Digital Markets 2

Kenya Should Avoid De Facto Ex-Ante Digital Regulation. 3

The “Superior Bargaining Position” Provision Will Chill Procompetitive Behavior 4

Recommendations 6

Conclusion. 6

Endnotes 6

Introduction

On May 28, 2024, the Competition Authority of Kenya (CAK) issued a draft Competition (Amendment) Bill for public comment. The central purpose of the bill is to modify Kenyan competition law to enable the CAK to more adequately address concerns about antitrust enforcement in the digital economy.^[1] The amendments follow a review of Kenya’s existing competition law, analysis of its enforcement experience, and consideration of international best practices.

The Information Technology and Innovation Foundation (ITIF) appreciates the opportunity to comment on the bill. ITIF is a nonprofit, nonpartisan research and educational institute that has been recognized repeatedly as the world’s leading think tank for science and technology policy. ITIF’s comment proceeds in four parts:

1. In digital markets, market power is often transient and a key driver of innovation. As such, the bill’s proposal to lower the threshold for showing dominance in digital markets is misplaced, especially given that the Competition Act already uses the relatively low European threshold to trigger unilateral conduct obligations, as opposed to the higher threshold for “monopoly power” used in the United States.
2. Kenya should avoid implementing de facto ex-ante regulation while its digital markets are at a nascent and growing stage. Specifically, the monitoring, reporting, and codes of conduct practice provisions suggest that they may effectively give the CAK power to regulate its digital markets rather than relying on ex-post law enforcement. This will chill the innovation Kenya needs to grow its economy.
3. The bill’s special concern for firms with a “superior bargaining position” is unnecessary. The prohibitions generally encompass exploitative practices rather than the exclusionary conduct that should be the focus of unilateral conduct enforcement to protect the competitive process. Moreover, a number of the prohibitions are vague and will likely result in an overbroad interpretation that chills procompetitive and standard business conduct.
4. Accordingly, ITIF recommends that the CAK step back from the proposed amendment and continue to allow competition and innovation to flourish to help grow its economy.

Lower Dominance Threshold Misunderstand Digital Markets

Clause 3 of the bill contemplates amending the Competition Act by lowering the dominance threshold to include firms with market shares below 40 percent in digital markets. This is problematic. First, as a general matter, 40 percent is already well below the monopoly power threshold used to trigger unilateral conduct obligations in the United States, where “[c]ourts generally require a 65% market share to establish a prima facie case of [monopoly] power.”^[2] Moreover, even in the European Union, which applies a lower “dominance” or market power test, “[i]f a company has a market share of less than 40%, it is unlikely to be dominant.”^[3]

Second, there is no need to craft a special rule for digital markets. Rather, antitrust enforcement should remain a generally applicable tool that applies coherent legal principles regardless of the market in question, even if the application of those principles can produce different results across markets. As U.S. courts have explained, there is no good basis for treating digital markets differently from regular markets: while certain factors may seem to make enforcement more necessary, other factors may actually counsel in favor of reducing antitrust enforcement and which may ultimately “offset one another.”^[4]

Specifically, in digital markets, competition often takes the form of Schumpeterian “gales of creative destruction.”^[5] In this sense of competition, firms compete 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 dazzles consumers.^[6] As such, in these dynamic markets, market power is very often a feature, not a bug, of competition: size, scale, and scope create the appropriability incentives that allow firms to make the necessary investments in a dynamic competition that makes digital markets work.

Accordingly, in these markets dominance is often fleeting and most likely only sustainable in cases of very high market shares protected by strong barriers to entry. For example, in the landmark U.S. v. Microsoft case, Microsoft was found to have a market share in excess of 95 percent—in effect, the only firm in the market.^[7] Moreover, Microsoft’s dominant share was protected by an “applications barrier to entry,” which took the form of network effects whereby, first, “consumers prefer operating systems for which a large number of applications have already been written,” and second, “most developers prefer to write for operating systems that already have a substantial consumer base.”^[8]

Outside of this extreme case, firms with a first mover advantage in digital markets often fail to sustain their power: for example, in search, Yahoo! was displaced by Google; in social media, the first mover MySpace ultimately was eclipsed by Facebook; eBay, which had the lead in E-commerce, lost out to Amazon—and so on. Today, amidst new technological changes driven by artificial intelligence, even the incumbent high-tech giants are finding themselves behind not just in chips—where Nvidia has reinvented itself and become the clear leader—but in the critical foundational model space to new upstarts like OpenAI, who in turn is facing pressure from other young players like Mistral, Anthropic, and many more.

Indeed, comparing the competition regime adopted by the United States, with its high monopolization threshold, and Europe, and its lower dominance threshold, is part of a larger story about the benefits of Schumpeterian competition by large firms: ten most valuable companies in the world, eight are in high-tech industries and seven of these are American. This lack of any European digital leaders has a lesson behind it: policies that punish dominant firms can come at the expense not only of innovation, but strategic interests associated with building up a strong domestic technology industry.

Kenya Should Avoid De Facto Ex-Ante Digital Regulation

The bill’s addition of a new regime policing “abuse of superior bargaining position” contains several troubling features that resemble not just a modification of Kenya’s existing ex-post competition law regime, but the introduction of a new ex-ante regulatory framework for digital markets. For example, Clause 9(3) of the bill explains that “[w]here the Authority determines that a sector or an undertaking is experiencing or is likely to experience incidences of abuse of superior bargaining position, the Authority may” take several actions including “monitor the activities of the sector or undertaking,” “impose reporting prudential requirements and regulations to ensure compliance,” and “develop a code of practice.”^[9]

As a general matter, ex-ante regulation should be a response to market failure. But Kenya’s digital ecosystem is poised to rapidly develop and become a “Silicon Savannah.”^[10] In April 2022, Kenya’s Ministry of Information, Communications and Digital Economy (MICDE) released the Kenya Digital Master Plan (DMP) 2022-2032, the country’s new blueprint for implementing digital transformation.^[11] As the Plan explains, in view of “the transformative nature of the fourth industrial revolution technologies,” Kenya is working to “position itself to exploit these technologies.”^[12] Indeed, Kenya has a strong digital infrastructure and is already one of the most connected countries on the Eastern Coast of Africa.^[13]

As Kenya’s digital markets are at a nascent and growing stage, they do not resemble any kind of market failure. On the contrary, several of its digital sectors are already beginning to thrive. For example, Kenya’s e-commerce sector is booming, with a large portion of businesses (39 percent) now engaged in e-commerce.^[14] This e-commerce growth has been powered by mobile money platforms, which manage 70 percent of all e-commerce payments, like M-PESA.^[15] This dynamism has resulted in Kenya becoming one of the world’s biggest mobile money markets.^[16]

Furthermore, even if there were some appreciable digital market failures, regulation only makes sense if existing law enforcement mechanisms are somehow insufficient to competition concerns. But, unlike many other jurisdictions implementing digital regulation, Kenya has not even attempted to broadly use its existing antitrust powers to police unilateral behavior by large technology firms. As a result, there is no basis for thinking that Kenya’s existing antitrust laws are incapable of addressing harms in digital markets in a way that could justify ex-ante regulation.

Indeed, to be justified ex-ante regulation should not only be needed in light of the limitations of existing ex-post enforcement tools but improve the status quo. And yet, regulation itself brings with it a host of harms that can be particularly acute in fast-moving digital markets. First, regulation can create barriers to entry that stifle the ability of small and dynamic firms to compete with existing incumbents, who may thus benefit from the regulation by having their own market power become more entrenched. In other words, regulation can come at the expense of the very competition and entry it can be intended to foster.

Second, ex-ante regulation can lead to poor market outcomes relative to non-regulation, and again in particular when it comes to digital markets. Specifically, while an ex-ante approach can reduce administrative costs associated with ex-post enforcement and allow anticompetitive conduct to be addressed more quickly, it can also result in increased error costs, and most notably in the form of false positives, or the chilling of innovative and pro-competitive conduct. Especially in constantly changing dynamic markets, regulators often lack the requisite precision to determine ex-ante what rules will best promote competitive outcomes. 

Third, ex-ante regulation can also result in myriad other issues like vagueness and regulatory capture, where regulation is co-opted to benefit particular private interests over others rather than improve general market welfare and consumers. For example, during its own period of regulation across many key industries and heavy-handed antitrust enforcement, the United States encountered numerous problems. For example, non-discrimination laws like the Robinson Patman Act resulted in several “practical problems dealing with a vague, complex, and burdensome law,” including higher prices for consumers.^[17]

Fourth, such regulation could harm Kenya’s global reputation as a tech-friendly country, limiting foreign tech investment. Foreign investment is crucial for Kenya’s tech sector to flourish, bringing capital, expertise, and access to cutting-edge technologies. Stifling this investment through regulation – especially when perceived as targeting certain countries’ technology companies – could lead to missed opportunities for job creation, economic growth, and Kenya’s overall competitiveness in the global tech landscape.

The “Superior Bargaining Position” Provision Will Chill Procompetitive Behavior

The bill’s definition of “superior bargaining position” implicates two distinct concepts. First “bargaining power” reflects a type of “buyer power” that lowers input prices but falls short of monopsony power, where input prices also fall.^[18] As the Report explains, “the exercise of monopsony power results in prices being depressed below competitive levels, whereas the exercise of bargaining power might countervail seller market power and push prices to competitive levels.”^[19] For this reason, whereas conduct that creates or protects monopsony power can be harmful to consumers, the existence of bargaining power is generally not in and of itself a proper basis for competitive concern.

Moreover, the Competition Act already contains a general provision for condemning “any conduct that mounts to abuse of buyer power” making the addition of a new section detailing more specific abuses of buyer power unnecessary. Indeed, rather than specific statutory rules, U.S. law has long had a preference for competition law standards developed over time by courts which allows the law to “evolve[] to meet the dynamics of present economic conditions.”^[20] Through legal evolution, rather than periodic changes by legislative bodies, antitrust is able to develop consistent with the rule of law, rather than political whims.

Additionally, and consistent with the bill’s use of the term “counterparties” rather than “sellers,” bargaining power can also be understood as a form of power on the sell side that may fall short of traditional market power but still be thought to have the ability to harm competition, such as by deciding not to engage in a transaction in a way that is harmful to a counterparty.^[21] But here again, this type of bargaining power should not raise concerns if it does not reach the level of sell side dominance or market power, and especially so in digital markets. Indeed, neither the EU nor U.S. competition regimes contemplate condemning unilateral conduct unless there is some indicia of dominance or monopoly power.

The specific prohibitions for firms that have a superior bargaining position are also problematic in themselves. First, many of the offenses are vague and overbroad, which defeats the very purpose of having specific rules relative to general standards interpreted and applied by courts. For example, the bill lists the “transfer of costs to a counterparty” and the “demands for preferential terms unfavorable to the counterparty” as illegal behavior, which in practice could encompass a huge amount of standard commercial activity, including basic good faith bargaining where parties seek to get the best deal they can and minimize the costs associated with the transaction.

Second, the bill condemns several types of behavior, such as the delay in payment to suppliers, breach of contract without notification, or abusive prices, which do not constitute the sort of exclusionary behavior that harms competition and U.S. antitrust law is designed to condemn. However, this more European-style but far broader prohibition of exploitative behavior like exploitative pricing raises serious legal and economic issues associated with chilling procompetitive behavior or “false positives.” For example, high pricing is often necessary to recoup fixed costs and make investments in new technologies. This is especially true in dynamic industries, where it is “obvious that the ability of competition authorities and courts (or indeed any economist) to distinguish between efficient (fair) and inefficient (unfair) prices in practice is very low.”^[22]

Finally, even where the bill does identify conduct that could be associated with exclusionary conduct, such as “the unilateral termination or threats of termination of a commercial relationship without notice or on an unreasonably short notice period, and without a justificable reason,” the language of the bill suggests that problematic legal standards will be applied. For example, under U.S. law refusals to deal are only unlawful if there is some prior “course of dealing” between the counterparties, which serves as a way to ensure that only refusals “prompted not by competitive zeal but by anticompetitive malice” are condemned so as to not lessen firms incentives to innovate.^[23]

Recommendations

ITIF recommends that the CAK strongly consider staying the course and look to work within its current competition law regime as its digital markets continue to grow.

1. Don’t treat digital markets as special: Lowering dominance thresholds not only makes the mistake of assuming that market power is more likely to be a concern in digital markets but overlooks that in reality, fast-moving digital markets are more likely to correct in part through the Schumpeterian scale driven competition that drives innovation and benefits consumers.

2. Avoid ex-ante digital regulation: Even if Kenya wishes to proceed with some reforms to its existing ex-post law enforcement framework, it should avoid imposing any kind of de jure or de facto ex-ante regulation. But unfortunately, Clause 9(3) suggests that the CAK will obtain what appear to be de facto regulatory powers, which are not only wholly unnecessary given the nascent stage of Kenya’s digital markets, but also will likely do far more harm than good when it comes to fostering the innovation and economic growth Kenya needs. 

3. Reconsider the prohibitions associated with a “superior bargaining position”: Firms with a “superior bargaining position,” as distinct from the market or monopsony power, are unlikely to be able to harm competition and consumers. Moreover, the prohibitions appear to focus on targeting merely exploitative behavior, rather than exclusionary conduct that harms the competitive process, as well as risk chilling pro-competitive or otherwise a broad swath of standard business practices.

Conclusion

As the government has already recognized, “[a] digital economy offers Kenya a leapfrogging opportunity on economic development” which can help “Kenya emerge from a low middle-income economy to an emerging markets/advanced economy.”^[24] Unfortunately, the proposed changes to Kenya’s competition regime will hinder, not help, Kenya’s digital economy proposer. Rather than impose substantial changes to its current competition regime based on the false premise that digital markets require special treatment, Kenya should prioritize using its existing law enforcement tools to police its growing digital markets. And instead of ex-ante regulation that will likely produce far more harm than benefits, Kenya should prioritize the model of market driven innovation that enabled the explosion of the digital economy in the United States.

Thank you for your consideration.

Endnotes