Competition Law and Governance of Synthetic Realities and Competition Law

1. Introduction

Synthetic realities refer broadly to digitally constructed or computationally mediated environments in which users interact with virtual objects, avatars, services, markets, and other participants. The concept includes virtual reality (VR), augmented reality (AR), mixed reality (MR), metaverse environments, AI-generated virtual spaces, digital twins, persistent virtual worlds, synthetic media environments, and interoperable virtual economies.

From a competition-law perspective, synthetic realities create a distinctive combination of problems because control may exist simultaneously at several layers:

Hardware layer – VR/AR headsets, glasses, controllers and sensors.

Operating-system/platform layer – software environments controlling access to applications.

App-store layer – distribution and payment systems.

Content layer – games, entertainment, education, fitness and commercial applications.

Identity layer – avatars, digital identities and authentication.

Data layer – biometric, behavioural, location and interaction data.

Interoperability layer – APIs, standards and cross-platform compatibility.

Virtual-asset layer – digital goods, currencies, NFTs and virtual property.

Advertising layer – immersive advertising and behavioural targeting.

AI layer – AI-generated environments, agents and personalised synthetic experiences.

Competition law therefore has to examine not merely whether a particular virtual product is dominant, but whether control over one layer enables a firm to leverage market power into neighbouring synthetic-reality markets.

The FTC's Meta/Within proceeding is particularly significant because it directly concerned VR: the FTC alleged that Meta's proposed acquisition of Within could eliminate competition and innovation in VR fitness applications. (Federal Trade Commission)

2. Meaning of Governance of Synthetic Realities

Governance of synthetic realities concerns the rules determining:

who may enter a virtual ecosystem;

which applications can operate within it;

what technical standards must be followed;

who controls user identity;

how virtual goods are exchanged;

which payment systems can be used;

how algorithms rank or recommend content;

how data are collected and combined;

whether competing environments can interoperate;

whether users can move assets between platforms; and

whether developers can access APIs and essential technical functionality.

The competition-law concern arises when governance power becomes economic power.

A platform may describe a restriction as a technical safety or quality-control measure. Competition law must nevertheless examine whether that restriction is genuinely necessary or instead protects the platform from competitive pressure.

3. Why Synthetic Realities Present Special Competition Problems

A. Network effects

Synthetic-reality ecosystems are strongly dependent upon network effects.

A virtual world becomes more attractive when it has:

more users;

more developers;

more applications;

more virtual goods;

more creators;

more compatible devices; and

more social connections.

This creates a positive feedback loop:

Users → Developers → Applications → More users → More data → Better services → More users

Once a platform reaches substantial scale, new entrants may face significant barriers.

B. Ecosystem concentration

A synthetic-reality company may simultaneously control:

Hardware → Operating system → App store → Payments → Identity → Data → Advertising → Content

This is considerably more significant than dominance in a single conventional product market.

A company controlling the headset and app store, for example, may possess the ability to influence which competing virtual-reality applications reach consumers.

The FTC's Meta/Within case illustrates precisely this concern: the FTC described Meta as operating at several levels of the VR sector, including hardware, an app store and VR applications, while challenging its proposed acquisition of Within. (Federal Trade Commission)

4. Relevant Competition-Law Theories

A. Abuse of dominance

A dominant synthetic-reality platform could potentially abuse its position through:

exclusionary access rules;

discriminatory API access;

self-preferencing;

tying;

refusal to interoperate;

discriminatory app-store treatment;

excessive platform commissions;

discriminatory ranking;

foreclosure of competing virtual worlds; or

restrictions on alternative payment systems.

In India, these issues would primarily arise under Section 4 of the Competition Act, 2002, subject to market definition and evidence of dominance.

5. Market Definition in Synthetic Realities

Traditional product-market definition can become difficult.

For example, should the relevant market be:

VR fitness applications?

all fitness applications?

dedicated VR fitness applications?

immersive fitness experiences?

virtual-reality entertainment?

all digital entertainment?

a particular virtual-world ecosystem?

The answer depends upon substitutability, consumer behaviour, technology and competitive constraints.

The Meta/Within litigation is especially useful because the FTC articulated both a narrower market for dedicated VR fitness applications and a broader VR-fitness market. (Federal Trade Commission)

Synthetic-reality markets therefore require attention to:

1. Functional substitutability

Can a conventional application perform the same function?

2. Technological substitutability

Can users move between VR, AR and conventional digital products?

3. Ecosystem substitutability

Can users realistically switch to another virtual environment?

4. Multi-homing

Can users simultaneously participate in several synthetic ecosystems?

5. Switching costs

Can avatars, digital goods, social connections and reputation be transferred?

6. Case Law

Case 1: FTC v. Meta Platforms, Inc. / Meta–Within

This is the most directly relevant competition case concerning synthetic realities.

Meta proposed acquiring Within Unlimited, developer of the VR fitness application Supernatural. The FTC sought to block the transaction, alleging that the acquisition could eliminate competition in VR fitness applications and reduce innovation.

The FTC's theory included the proposition that Meta was itself a potential entrant into the relevant market and that acquisition of an established competitor could eliminate future competitive rivalry. (Federal Trade Commission)

The FTC also alleged that Beat Saber, owned by Meta, and Supernatural competed in VR fitness and that competition between them had encouraged product improvements and affected pricing considerations. (Federal Trade Commission)

The administrative proceeding was ultimately dismissed/withdrawn in February 2023. (Federal Trade Commission)

Competition-law significance

The case demonstrates:

importance of nascent-market competition;

scrutiny of acquisitions by ecosystem operators;

potential importance of potential competition;

innovation as a competitive parameter;

importance of controlling multiple levels of a digital ecosystem.

Synthetic-reality lesson

A dominant hardware/platform operator cannot necessarily treat emerging VR applications as unrelated markets merely because they are technologically new.

7. Case 2: United States v. Microsoft Corp.

The Microsoft litigation is a foundational case for understanding how control over a technological platform can be used to restrict emerging competitive technologies.

The central issue concerned Microsoft's control over the Windows operating-system platform and its conduct toward competing technologies, particularly Netscape and Java.

Competition-law significance

The case established important principles concerning:

platform leverage;

exclusionary conduct;

technological tying;

interoperability;

control over distribution channels;

strategic restriction of emerging competitors.

Application to synthetic realities

A similar structure could arise where a VR/AR operating system controls access to:

virtual-world applications;

AI agents;

virtual marketplaces;

competing identity systems; or

cross-platform environments.

If platform control is used to prevent competing synthetic-reality technologies from gaining distribution, the Microsoft framework becomes highly relevant.

8. Case 3: Epic Games, Inc. v. Apple Inc.

The Epic Games litigation concerned Apple's control over the iOS ecosystem, including app distribution and payment mechanisms.

Epic challenged Apple's restrictions concerning alternative app stores and payment systems. The case therefore illustrates the competition-law significance of closed technological ecosystems. The U.S. government later participated as amicus in the appellate proceedings. (Department of Justice)

Competition-law significance

The case raises questions involving:

app-store monopolisation theories;

alternative distribution;

anti-steering;

payment-system restrictions;

ecosystem access;

platform governance.

Application to synthetic realities

Imagine a virtual-reality platform requiring every developer to:

distribute exclusively through its store;

use its payment system;

pay a mandatory commission;

accept its ranking rules; and

refrain from directing consumers toward competing virtual environments.

The Epic–Apple litigation provides an important analytical framework for examining those restrictions.

9. Case 4: Epic Games, Inc. v. Google LLC

The Epic–Google litigation similarly concerns the governance of digital distribution ecosystems.

The U.S. Department of Justice records the case as an antitrust proceeding involving Epic Games and Google. (Department of Justice)

Competition-law significance

The dispute illustrates how competition questions can arise when a platform controls:

application distribution;

payments;

developer access;

contractual restrictions; and

alternative distribution mechanisms.

Application to synthetic realities

A synthetic-reality platform could become a gatekeeper for virtual commerce.

For example, if an operator controls the dominant virtual-reality store, it could potentially influence:

which virtual goods can be sold;

which currencies are permitted;

which competing marketplaces can operate;

whether developers can use alternative payment systems.

Thus, app-store competition principles can migrate directly into VR/AR ecosystems.

10. Case 5: FTC v. Facebook, Inc. / Meta Platforms

The FTC's Facebook/Meta litigation concerns alleged maintenance of monopoly power in personal social networking through acquisitions and other conduct. The FTC alleges, among other things, that Facebook's acquisitions of Instagram and WhatsApp and conditions imposed on developers formed part of an overall strategy to maintain monopoly power. (Federal Trade Commission)

Competition-law significance

The case demonstrates the importance of:

acquisitions of emerging competitors;

network effects;

data advantages;

ecosystem expansion;

potential competition;

entry barriers.

Synthetic-reality relevance

Synthetic realities may produce similar acquisition strategies.

A major platform could acquire:

a promising virtual-world developer;

a virtual identity provider;

an AI-avatar company;

a virtual marketplace;

a spatial-computing application; or

an interoperability technology.

Competition authorities may therefore need to examine whether the target is merely a small company today or a potential competitive constraint tomorrow.

11. Case 6: United States v. Google LLC — Search and Digital Advertising Cases

Google's major antitrust proceedings provide another useful analogy.

The underlying competition concerns include control over important digital infrastructure, distribution channels, data and intermediation.

Synthetic-reality relevance

A future synthetic-reality ecosystem could contain multiple intermediary layers:

User → Virtual environment → Search/discovery → Advertisement → Virtual transaction → Payment

If one undertaking controls several of those layers, competition concerns may arise from:

self-preferencing;

exclusionary contracts;

preferential access;

discriminatory rankings;

tying;

leveraging;

foreclosure.

The lesson is that competition law can examine the infrastructure surrounding a digital product rather than merely the product itself.

12. Case 7: European Commission — Google Android

The Google Android decision provides an important European competition-law framework for analysing ecosystems.

The central concerns included restrictions involving Android distribution and Google's relationship with competing services.

Synthetic-reality relevance

A future VR operating system could similarly require manufacturers or developers to adopt particular services.

Potential examples include:

mandatory virtual search;

mandatory virtual assistant;

compulsory advertising technology;

restrictions on competing app stores;

restrictions on alternative payment services.

Such conduct may raise issues under Article 102 TFEU where dominance and exclusionary effects are established.

13. Case 8: Microsoft v Commission

The European Union's Microsoft jurisprudence is particularly relevant to interoperability.

The case involved Microsoft's refusal to provide sufficient interoperability information to competing work-group server operating systems and other conduct concerning its dominant Windows platform.

Synthetic-reality relevance

Interoperability may become one of the central competition issues in synthetic realities.

Consider:

Virtual World A → Avatar → Virtual World B

If the dominant platform prevents users from carrying:

avatars;

digital identities;

virtual goods;

reputation;

social connections;

AI agents;

into competing environments, switching costs may become extremely high.

A refusal to provide necessary interoperability could therefore become a significant competition-law issue, depending on the applicable legal test.

14. Self-Preferencing in Synthetic Realities

A synthetic-reality platform may operate both as:

Infrastructure provider + competitor

For example:

VR Store operator
↓
Own fitness application
↓
Competing fitness applications

The platform could theoretically manipulate:

search ranking;

recommendation algorithms;

visibility;

virtual shelf space;

default installation;

avatar placement;

advertising prices.

This creates a classic vertical integration and self-preferencing problem.

The competition authority would need to distinguish legitimate quality-control or safety measures from conduct that unnecessarily disadvantages competing applications.

15. Data as a Competitive Advantage

Synthetic realities can generate unusually rich data.

Examples include:

eye movements;

hand movements;

voice;

facial expressions;

body movements;

spatial location;

social interactions;

purchasing behaviour;

attention;

biometric information.

Such data may create competitive advantages through:

Data → Better algorithms → Better experience → More users → More data

This produces a feedback loop resembling traditional digital-platform network effects.

Competition law may therefore need to examine whether exclusive control over data:

prevents entry;

creates switching costs;

facilitates targeted advertising;

strengthens ecosystem dominance; or

enables discriminatory treatment of rivals.

16. Interoperability and Data Portability

Interoperability could become the central competition principle for synthetic realities.

A competitive synthetic-reality environment may require:

Technical interoperability

Different platforms can communicate.

Identity interoperability

A user can maintain a portable digital identity.

Asset interoperability

Virtual goods can move between platforms where technically and legally feasible.

Social interoperability

Users can maintain relationships across environments.

Data portability

Users can transfer relevant data to competing services.

Without interoperability, platforms may develop into isolated "walled worlds."

17. Virtual Goods and Market Power

Synthetic realities create new forms of commerce.

Examples include:

virtual clothing;

digital buildings;

virtual land;

game assets;

avatar accessories;

virtual tickets;

digital currencies;

AI-generated objects.

A platform controlling the marketplace may impose:

high transaction fees;

exclusivity requirements;

mandatory payment systems;

restrictions on secondary markets.

This can create a competition problem similar to conventional platform intermediation, although market definition and consumer substitutability would need careful analysis.

18. Algorithmic Governance

Synthetic realities are likely to rely heavily on algorithms.

Algorithms may determine:

which virtual environments users see;

which advertisements appear;

which virtual goods are promoted;

which creators receive visibility;

how prices change;

which avatars are recommended;

which applications are ranked.

Consequently, algorithmic governance can become a mechanism of market power.

Potential competition concerns include:

Algorithmic self-preferencing

The platform promotes its own virtual products.

Algorithmic discrimination

Competing applications receive inferior rankings.

Algorithmic exclusion

A competitor's product becomes effectively invisible.

Algorithmic coordination

Multiple market participants use common algorithms that facilitate coordination.

Personalised foreclosure

Different users receive different competitive offers depending upon behavioural data.

19. Competition and AI-Generated Synthetic Worlds

AI makes synthetic realities substantially more complex.

A future virtual environment could automatically generate:

buildings;

characters;

products;

advertising;

music;

games;

services;

marketplaces;

negotiations.

The platform controlling the underlying generative model could consequently become a critical input supplier.

This creates potential competition issues concerning:

access to foundation models;

compute;

training data;

model interfaces;

APIs;

proprietary datasets;

AI agents;

virtual-world generation tools.

The competition question becomes:

Can a firm controlling the intelligence layer also control the synthetic environment in which competing firms must operate?

20. Merger Control

Merger control may become particularly important.

A large synthetic-reality platform could acquire:

VR developers;

AR developers;

AI-avatar companies;

virtual marketplaces;

spatial-computing companies;

identity providers;

interoperability providers;

virtual advertising firms.

Authorities should examine not merely current turnover but, where legally appropriate, factors such as:

innovation potential;

future competitive significance;

network effects;

data assets;

ecosystem position;

nascent competition;

potential entry.

The Meta/Within litigation illustrates the importance of considering competition in a developing technological market rather than treating the target simply according to its present scale. (Federal Trade Commission)

21. Tying and Bundling

Synthetic realities create substantial opportunities for tying.

For example:

VR headset
+
Operating system
+
App store
+
Payment system
+
Identity system
+
AI assistant

could become a single ecosystem.

A dominant undertaking might condition access to one component upon adoption of another.

Competition analysis would consider:

whether the undertaking is dominant;

whether there are separate products or services;

whether there is coercion or effective conditioning;

whether foreclosure occurs; and

whether legitimate efficiencies justify the arrangement.

22. Exclusive Dealing

Synthetic-reality platforms may negotiate exclusive arrangements with:

game developers;

entertainment studios;

advertisers;

retailers;

payment providers;

AI companies;

headset manufacturers.

Exclusivity can produce efficiencies, such as investment incentives, but may also foreclose rivals when a dominant platform controls an important distribution channel.

23. Network Effects and Winner-Take-Most Markets

Synthetic realities could exhibit strong:

direct network effects;

indirect network effects;

economies of scale;

economies of scope;

data feedback loops.

Consequently:

More users → more developers → more content → more users

can produce rapid concentration.

This does not automatically mean that concentration violates competition law. Concentration becomes legally relevant when combined with prohibited conduct, anticompetitive mergers, or other conditions recognised under the applicable competition regime.

24. Digital Markets Act and Synthetic Reality Governance

European digital-market regulation also demonstrates how competition governance is moving beyond traditional ex-post antitrust.

For example, the European Commission has applied the Digital Markets Act to issues concerning app-store steering and platform data choices. In April 2025, the Commission announced findings against Apple and Meta concerning specified DMA obligations. (Digital Strategy Europe)

This regulatory model is significant for synthetic realities because future gatekeepers may possess the ability to determine:

access conditions;

interoperability;

app distribution;

payment mechanisms;

data use;

business-user access.

Synthetic-reality governance may therefore involve both conventional antitrust and ex-ante digital regulation.

25. Indian Competition-Law Perspective

Under the Competition Act, 2002, synthetic-reality ecosystems could potentially generate issues under:

Section 3

Anti-competitive agreements, including:

cartelisation;

vertical restraints;

exclusive distribution;

tying;

refusal to deal;

resale restrictions.

Section 4

Abuse of dominant position, including:

unfair conditions;

discriminatory conditions;

denial of market access;

leveraging dominance;

tying;

exclusionary conduct.

Sections 5 and 6

Combinations involving major technology companies and synthetic-reality businesses.

Section 19

Investigation into alleged contraventions and relevant factors for determining markets and dominance.

The CCI would potentially need to consider ecosystem effects, rather than examining every VR or AR service in complete isolation.

26. Possible Relevant Markets in India

Depending on facts, potential markets might include:

VR headset markets;

AR hardware;

VR operating systems;

VR application distribution;

VR gaming;

VR fitness;

virtual advertising;

virtual marketplaces;

digital identity;

immersive education;

metaverse services;

virtual payment services.

However, market definition must remain fact-specific rather than assuming that "the metaverse" itself constitutes one market.

27. Consumer Welfare Issues

Synthetic realities raise novel consumer concerns because users may be simultaneously:

consumers;

creators;

sellers;

advertisers;

data suppliers;

developers.

A platform can therefore exercise market power over multiple sides of the ecosystem.

For example:

User → generates data
Developer → supplies application
Advertiser → buys attention
Platform → controls access

Competition law must account for these multi-sided relationships.

28. Innovation Competition

Innovation may be more important than current price competition.

A synthetic-reality platform may offer services at zero monetary price while competing through:

product quality;

immersive functionality;

privacy;

interoperability;

developer tools;

AI capability;

latency;

graphics;

ecosystem breadth.

Consequently, traditional price-centred analysis may be insufficient.

The Meta/Within proceeding is illustrative because the FTC expressly alleged that eliminating the proposed acquisition could preserve innovation and competitive rivalry in VR fitness. (Federal Trade Commission)

29. Competition Between Virtual Worlds

A particularly important future question is whether users should be able to move freely between virtual worlds.

Suppose:

World A has 500 million users.

It controls:

identity;

avatar;

digital wallet;

social graph;

virtual goods.

If users cannot easily migrate to World B, World A can potentially develop significant switching-cost advantages.

Competition law may therefore increasingly consider:

portability;

interoperability;

open standards;

API access;

technical compatibility.

30. Essential-Facility-Type Problems

Certain infrastructure could theoretically become indispensable for competing synthetic-reality providers.

Examples:

dominant identity infrastructure;

dominant VR operating system;

critical interoperability protocol;

dominant app store;

dominant virtual payment network.

A refusal to provide access would not automatically constitute unlawful conduct. The stringent legal requirements applicable to refusal-to-deal/essential-facility theories would remain relevant.

Nevertheless, synthetic realities could make these doctrines particularly important because technical infrastructure and commercial markets are becoming increasingly interconnected.

31. Competition Risks from Synthetic-Environment Standards

Standards can promote competition by enabling interoperability.

But standards can also become exclusionary if dominant firms use standard-setting processes to:

exclude rival technologies;

impose discriminatory licensing;

lock competitors into proprietary standards;

prevent interoperability.

Therefore, standard-setting organizations in immersive technology could become important competition-law subjects.

32. Governance Model for Competitive Synthetic Realities

A competition-sensitive governance framework could contain:

1. Open access

Reasonable access for developers and businesses.

2. Interoperability

Technical standards enabling cross-platform functionality.

3. Non-discrimination

Comparable treatment of the platform's own services and independent rivals, where applicable under the relevant legal regime.

4. Data portability

Users should have meaningful ability to transfer relevant data.

5. Transparent ranking

Clearer governance of recommendation and discovery systems.

6. Competitive neutrality

Platform owners should avoid using infrastructure control to unfairly disadvantage competing services.

7. Merger scrutiny

Greater attention to acquisitions of emerging competitive technologies.

8. Developer freedom

Restrictions on alternative distribution and payment mechanisms should be examined under applicable competition law.

33. Key Doctrinal Lessons from the Case Law

34. Major Future Competition Issues

The most important emerging questions include:

Who controls virtual identities?

Can avatars move between competing worlds?

Can virtual assets be transferred?

Can competing app stores operate on VR devices?

Can developers use alternative payment systems?

Can users export their data?

Can competing AI agents operate inside dominant virtual worlds?

Can dominant platforms favour their own virtual goods?

Can platforms acquire emerging virtual-world competitors?

Can algorithmic governance exclude competitors?

Can standards be manipulated to prevent interoperability?

Can virtual advertising become concentrated in one intermediary?

35. Conclusion

Competition law and the governance of synthetic realities are likely to converge around control of ecosystems rather than individual products.

The most important competition issue is not simply whether one company owns a successful VR application. It is whether an undertaking can control the infrastructure through which users, developers, data, applications, payments, identities and virtual assets interact.

The Meta/Within proceeding provides the clearest direct illustration: a competition authority examined a proposed acquisition in the VR fitness sector and focused on potential competition, innovation and the strategic position of a company already active across multiple levels of the VR ecosystem. (Federal Trade Commission)

The broader cases—Microsoft, Epic Games v Apple, Epic Games v Google, Facebook/Meta, Google Android and Microsoft EU—provide complementary doctrines concerning platform power, interoperability, app distribution, tying, acquisitions, network effects and ecosystem foreclosure.

Accordingly, future competition-law governance of synthetic realities is likely to revolve around five fundamental principles:

interoperability + non-discriminatory access + control of ecosystem leverage + scrutiny of nascent acquisitions + protection of innovation competition.

The central legal challenge will be to distinguish legitimate technical governance of complex virtual environments from the strategic use of governance power to exclude competitors and entrench market power.