Introduction
The phrase “flywheel effect” refers to a self-reinforcing phenomenon in a business environment where investment or development in a certain operating area produces benefits that compound and result in growth in other areas, thus generating a process that requires progressively less effort to maintain.1 The concept, borrowed from business strategy literature, has achieved popularity due to the fact that it was applied to Amazon’s model of growth where low prices, increased selection of goods and better customer experience were viewed as reinforcing elements of scale.2 In competition law literature, the term is used to refer to a structural reason for the perpetuation of market power that is based not on any one anti-competitive action, but rather on the compound effects of scale, data, and network effect.3
Origin and Conceptual Development
The idea of the flywheel has been coined by Jim Collins in Good to Great (2001). It is used in order to demonstrate that momentum is generated as the result of accumulation of strategic decisions and not as the consequence of one breakthrough event.4 Amazon founder Jeff Bezos used this idea within the corporate shareholder communication as the description of a virtuous circle that starts with lower prices generating more customers and then attracts third-party sellers, increasing variety of products and further improving customer experience.5 Scholars in economics and law have used the term “flywheel” in the context of antitrust analysis as the way to describe the development path of Amazon as an example of a self-reinforcing platform.6 The term should be distinguished from economies of scale (efficiencies that arise from higher levels of production) and network effects and tipping (gains that arise from mutual dependencies of users); flywheel describes a combination of these and other effects within a self-reinforcing cycle.
Relevance to Competition Law
Static analysis of competition law, based on market shares and observable effects on prices and outputs, does not suffice to account for flywheels because the harm here is found in the accumulative nature of advantages rather than any observable indicator.7 In this way, the issue has direct implications for entrenchment and barriers to entry because a flywheel of interlocking efficiencies, logistics capabilities, data collection, and brand loyalty can raise costs of competition even if each action taken by the dominant firm is, in itself, legitimate from a legal standpoint.8 This raises both a doctrinal and economic challenge because the consumer welfare paradigm, focused on observable price and output benefits, could find such behaviour pro-competitive, whereas contestability and innovation within the relevant market become more difficult over time.9 Regulatory responses such as the EU's Digital Markets Act reflect an attempt to address this tension through ex ante, structural obligations rather than retrospective, effects-based enforcement.10
Example:
A good example of the flywheel effect in competition law can be seen in Amazon’s digital ecosystem. The flywheel effect suggests that multiple small steps can lead to substantial improvement in a company’s performance. The example includes Amazon’s acquisitions, which on their own may not have been significant, but collectively bolstered Amazon’s dominance in numerous areas. For instance, acquiring Audible complemented Prime’s goods, Twitch’s acquisition impacted Prime’s appeal to gamers, and MGM Studio’s acquisition significantly diversified Prime Video’s content. Together with the acquisition of the e-commerce marketplace, logistics, and Prime membership, the listed acquisitions created a flywheel effect, impacting different areas of Amazon selling and buying. First, a more attractive variety of goods and services increased the customer base. Second, Amazon attracted more sellers by offering a larger audience than any other platform. Third, the variety was impacted by increased diversity and scale. Fourth, more customers and sellers meant more transactions and further scale, which in turn impacted Amazon’s commercial supremacy. Finally, Amazon’s commercial power attracted even more customers and sellers. While Amazon’s flywheel effect benefited customers and sellers, it also reduced competition, making it harder for other companies to compete. Flywheel effects are significant by impacting a company’s competitive position, creating barriers to entry and expansion, and facilitating a company’s market power accumulation and its expansion into new markets.
Conclusion
The Flywheel effect is one of the significant challenges to competition law. It emerges due to the reinforcing feedback loops created through a set of actions, which on an individual basis, contribute to the generation of market power around a monopolist, which competition law is not completely suited to regulate. Dominant positions can be established and reinforced through a combination of methods including the creation of barriers to entry, self-preferencing, data gathering, killer acquisitions, and other means, but they all represent a subset of a more extensive list of causes.
At the same time, competition laws in most jurisdictions do not adequately address these issues as the US focuses on Sherman Act-type remedies while the EU commissions the Digital Markets Act ex ante approach. The UK pursues a middle way, while India’s similar proposals have been vetoed by political factions. It is not possible to say if global consensus will be established, but there is a reasonable chance that hybrid laws will emerge at the national level and that the system of ex ante and ex post remedies will develop further to grapple with monopolization, including its systemic and architectural forms.
