California’s new regulations on big tech face criticism for flawed economic reasoning.

California has historically served as the driving force of the global digital economy, playing a pivotal role in fostering innovation and technological advancement. However, recent legislative proposals aimed at regulating major tech firms in ways reminiscent of European models raise concerns about potentially stifling the very creativity and competitive spirit that have characterized American technology giants like Google, Apple, Amazon, and Meta.

The latest initiative, spearheaded by Senator Scott Wiener of San Francisco, is known as the BASED Act. This legislation draws heavily from the European Union’s Digital Markets Act (DMA), specifically targeting the practice of “self-preferencing.” This term refers to the tendency of digital platforms such as Amazon’s marketplace and Google Maps to prioritize their own services or those of affiliated companies over those of competing third-party businesses. Under the proposed act, practices such as ranking, bundling, and even AI-driven recommendations could face legal scrutiny without a thorough examination of their impact on consumers.

Instead of enhancing fair competition, there are fears that such regulations could diminish the utility of digital services. Adjustments made to comply with regulatory demands may lead tech companies to focus more on satisfying bureaucratic requirements rather than catering to user preferences. This shift could inadvertently skew competitive dynamics in favor of certain enterprises, creating an environment that does not necessarily benefit consumers.

Self-preferencing is not a modern phenomenon restricted to digital platforms; it has long existed in traditional retail contexts. Supermarkets often allocate prime shelf space to their own store brands, allowing for increased competition and lower prices through the elimination of so-called “double marginalization.” Similarly, Amazon’s marketplace operates under similar economic principles. If Amazon were to promote inferior products over more competitive options, the risk of losing customers would be heightened. Notably, research indicates that Amazon engages in direct competition with third-party sellers for only a small percentage of its product offerings, suggesting that consumers often benefit from the diversity of choices available.

The potential consequences of implementing the BASED Act extend beyond perceived regulatory fairness. Limiting Amazon’s ability to prioritize its own products or to tie third-party sellers’ participation in programs like Prime to the use of its shipping services may adversely affect the overall value of those services. Restricting self-preferencing could hinder Amazon’s capacity to lower shipping or manufacturing costs, thereby impacting consumers through potentially higher prices and reduced service quality.

International experiences, particularly in Europe, provide cautionary tales. The DMA’s stipulations led to a decline in the functionality of services like Google’s search and flight booking tools, resulting in a decrease in user satisfaction. While the intent behind such regulations is to foster competition, the outcome often paradoxically hampers the very entities they aim to protect.

While it is vital to guard against potential anticompetitive behavior among large corporations, systemic changes to digital platform regulations should not come at the expense of consumer choice or convenience. Current antitrust laws already possess mechanisms to address egregious cases of self-preferencing without imposing sweeping regulations that may stifle innovation. As California policymakers consider the implications of such legislative measures, it is crucial to remain vigilant against enacting policies that could inadvertently hinder technological growth and the economic opportunities it creates for consumers and businesses alike.

Adopting a regulatory approach based on historical failures observed in Europe would be unwise, particularly during a time of rising cost-of-living concerns among Californians. The evolving landscape of digital business requires balanced regulations that prioritize consumer welfare without undermining the innovative capabilities of tech companies.