Too Little, Too Late? How Policymakers and Regulators Respond to the Business Model Innovations of Digital Firms

Digitally enabled firms such as Alphabet, Amazon, and Meta achieved rapid growth in part through business model innovations that challenged the existing norms and regulations of the markets they entered. Research has explored aspects of their norm-breaking behavior—for example, getting users to behave differently, or offering free services to forestall competitors. I focus on their tactics for getting through or around regulatory infrastructure designed to protect consumers and other stakeholders. Specifically, I examine the relationship between large digital firms and three sets of institutional structures—competition policy, employment law, and individual property rights. I identify three tactics firms have used to overcome potential resistance: some have finessed regulations by identifying gaps and inconsistencies they could take advantage of, some have sidestepped regulations by arguing that those regulations do not apply to their situation, and others have nullified those rules by denying their existence altogether. I discuss regulatory responses to these tactics, from providing a free pass on one extreme, to doubling down on existing rules on the other extreme, and negotiating a new set of rules in the middle. I conclude with thoughts on the role of institutional innovation in fostering economic development in the context of digital innovation.