Management of the platform is not the sole responsibility of the government

Render to Caesar what is Caesar’s, and to God what is God’s. Here are my thoughts on the key governance role that platform companies play in China’s economic development.

God, represented by the public government or government authorities, is expected to use power to regulate platform companies, sellers, consumers and other participants through public laws and laws. Caesar, on the other hand, refers to platform companies that should themselves take over a certain level of management of the platform economy and ecosystem.

Before 2022, China’s platform economy has undergone a period of rigorous management and repair. From 2022, it switched to standardized regulations. In January 2022, the National Development and Reform Commission published guidelines to promote the unified, healthy and sustainable development of the platform economy. In December 2022, the Central Economic Labor Conference stated that the country will support platform companies to lead development, create jobs and compete internationally.

All these efforts set the tone and opened a new chapter in the development of the platform economy in the country. However, it is important to note that the country continues to emphasize the “standardized, healthy and sustainable development” of the platform economy.

From an international perspective, the United States has passed several regulations specifically targeting certain platforms with large user bases. The European Union has introduced a Digital Markets Act and stated that large platforms act as digital gatekeepers.

The reason why various countries are emphasizing large platforms is that these platforms can no longer be assessed solely from a regulatory perspective once antitrust laws come into force. Instead, they are required to assume specific management responsibilities in advance.

This change also marked an evolution in platform governance, moving from the initial concept of “safe harbor and red flag”, which defined limited liability for platforms, to a focus on the “primary responsibility” of platforms.

Currently, regulation can be divided into three stages: initial regulation, which focuses primarily on qualifications and licensing; middle regulation (or in-process regulation), which mainly concerns behavior; and post-regulation, which is primarily concerned with liability and remedies.

In the context of this evolving role, we recognize that the management of the platform is not the responsibility of a single entity and cannot rely solely on public regulatory measures taken by the government.

Government regulation often lags behind, although there are cases where proactive regulation, such as the issuance of business licenses and permits, is necessary. Therefore, while the government has strengths in both proactive and reactive regulation, platform companies have some regulatory advantages in indirect regulation.

Platform regulation, as a form of private management, is relatively flexible, while government regulation relies on public authority and entails higher public administration costs.

As such, there are two regulatory entities operating on platforms: government regulators, such as China’s industrial and commercial authorities, and the platform companies themselves.

In summary, government regulation and platform regulation work together to create a common regulatory framework for the platform economy in the country.

Effective regulation

In the case of these two regulatory entities, I believe that the regulation of the platform economy should make greater use of the private regulatory role of platform companies, as they are more flexible and are regulated during the process itself.

If regulations are effective, the government may relax its proactive public regulations, such as licensing regulations. In China, many regulations are based on licensing laws, where inappropriate behavior can result in license revocation. However, given that when faced with post-event penalties, platform companies rely on private funds to obtain private remedies, public penalties may also be mitigated unless they entail particularly serious consequences.

Therefore, compared to the specialized and stringent government regulations of previous years, providing strong theoretical support for standardized regulations can better recognize the role of private regulation by platform companies. When this role is used effectively, the government can reduce the intensity of its regulation.

The government currently has strong regulatory capacity both pre- and post-regulation, while platform companies, with their capabilities, digital advantages and flexibility of private regulatory methods, are better suited to play a regulatory role in the middle stage of regulation.

In my opinion, the regulation of platforms should also be open to more social actors to create a truly collaborative system that includes the media, industry associations and capital markets.

Overall, these forces are relatively weak in China today. Before the introduction of strict regulations on online platforms, public opinion was almost unanimously positive towards these platforms. After the introduction of management measures, public opinion collectively became negative, even to the point of personal attacks on some very prominent entrepreneurs.

The capital market has two very effective mechanisms: short selling and class action lawsuits, but these are not yet well established in China. Therefore, the road to greater participation of social actors remains a long process.

Building ecosystems

In addition to the above, here are some more thoughts. As the platform economy shifts from the consumer Internet to the industrial Internet and from digital platforms to digital ecosystems, how should we collectively manage digital ecosystems, especially innovation ones?

First, in the case of a digital ecosystem, it is important to offer member companies services with commercial value, including openness and greater business opportunities for these companies. Additionally, some governance tools are necessary, such as digital policies and standards in the ecosystem. Standards are crucial in building a digital ecosystem.

For example, the British chip company ARM has used the open ecosystem to establish a series of mature standards and helped its ecosystem partner companies to develop. This has led to the successful creation of an excellent digital ecosystem in the semiconductor sector, especially in mobile chips.

Second, should platform companies participate in the broader governance of the digital economy and society?

In some prepaid industries, such as early childhood education, health clubs, beauty salons and hairdressing, companies strongly encourage consumers to purchase membership cards and prepay for services. These companies are very active in promoting user payments.

However, when the number of users reaches a certain level, some companies decide to run away. It has become quite common in cities such as Hangzhou, Shanghai and Beijing, posing a serious challenge to local governance. Although these cities have implemented management measures for the prepayment industry, the actual results have been less than ideal.

In fact, we can leverage the platforms’ internal payment mechanisms to solve this problem. For example, platforms such as Ant Financial and JD have introduced payment methods such as pay-by-use.

The author is a tenured professor at Tsinghua University and deputy director of the Institute of Economics at the university. This article is a translation of his article first published on the official WeChat account of the Chinese think tank China Macroeconomy Forum.

The views do not necessarily reflect those of China Daily.