A small seller exemption is vital – small platforms face much higher enforcement costs

First, the size of the platform may affect intermediaries’ costs of detection, monitoring and removal because of possible economies of scale in precautionary measures. Economies of scale may be more relevant in relation to active monitoring than to passive monitoring. As regards passive monitoring, large intermediaries, with more activity or transactions on their platform, likely deal with more instances of illegal material than small intermediaries do. As a result, they are likely to receive more requests to remove content or offers than small platforms. They may have few means to economise on handling these notifications. However, as regards active monitoring, larger intermediaries may be able to benefit from economies of scale. Because of their large scale, it may pay off for large intermediaries to invest in developing or acquiring software tools to identify and filter out illegal content. Large intermediaries can spread the high fixed costs of such software tools over all instances of illegal material, and cover it with their higher revenues. Also, the precision of warnings generated by software tools may increase with the volume of transactions. Investments in advanced software tools might not pay off for smaller platforms, forcing them to do more detection and monitoring work manually, at higher average costs and less precision per instance of illegal material.

Economies of scale are a relevant consideration in deciding on liability rules for intermediaries, also because of the effects on competition these rules may have. The duty of care imposed by a liability rule results in higher costs of doing business for intermediaries. As a possible downside, this may discourage socially beneficial business activity of intermediaries as it increases the cost of operation; see the discussion in Section 3.2.5. below. If the costs to comply with the duty of care are significantly higher for small intermediaries than for large ones, the liability rule may make doing business too costly for small intermediaries. Large incumbents obtain an advantage as compared to small competitors, potential entrants may be discouraged from entering the market and small intermediaries may exit the market. Thus, there may be a trade-off between static efficiency of liability rules and dynamic considerations that include entry and exit of intermediaries in response to changes of the liability regime. In order to prevent a detrimental effect of liability rules to competition, it may be necessary to determine a threshold for some monitoring obligations. Particularly with respect to active monitoring, where scale economies may be more relevant, small platforms might need to be relieved from some obligations. Static efficiency considerations should prevail if the cost inflicted upon all market participants is considered low, while the expected benefit generated by the liability rule is high. In such cases, it may be preferable to apply a liability rule across the board.