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UK Competition law – Is it fit for the digital economy?

  • United Kingdom
  • Competition, EU and Trade
  • Technology, Media and Telecoms

26-03-2019

With the rapid growth of the digital economy, a number of competition authorities, as well as governments1 are in the process of assessing whether their competition enforcement tools are fit for the digital economy. In the UK, the Government commissioned a panel of experts2 (“Panel”) to report on the state of competition in the digital economy. On 13 March 2019, they published their final report titled “Unlocking Digital Competition” (“Report”) setting out the Panel’s conclusions and its recommendations to change the UK’s competition framework to enable it to face the economic challenges posed by digital markets. This included updating the UK competition rules governing merger and antitrust enforcement, as well as proposing a bold set of pro-competition measures to open up digital markets.

This briefing considers the Panel’s conclusions, the Competition and Markets Authority’s (“CMA”) response to the Panel’s recommendations and the possible outcomes from the Report.

What are the benefits of the digital economy in the UK?

The Panel found that the digital economy has created substantial benefits for consumers by creating new categories of products and services. Many of these are of high quality with low or even zero monetary price. Furthermore, the digital economy has lowered the start-up costs for businesses, for example, through cloud computing, access to platforms and digital comparison tools. Pursuant to the industry body, Tech Nation, the digital technology sector contributed nearly £184 billion value added to the UK economy in 2017, and is expanding 2.6 times faster than the rest of the UK economy.

What are the disadvantages?

The Panel found that in many cases digital markets are subject to “tipping” when a market player reaches a certain scale resulting in the winner taking most of the market. Concentration or dominance in digital markets can raise significant competition concerns. It can increase effective prices for consumers, reduce choice or impact quality. This can be the case even when consumers to not pay anything for the service (so-called “zero-price markets”). In such cases, more competition in the market may have resulted in consumers having to give up less in terms of privacy or may even have been paid for their data. Furthermore, it is often harder for new companies to enter or scale up in a concentrated market, and it can impede innovation.

What is the most significant finding in the Report?

The key conclusion in the Report is that the current UK competition law framework is insufficient to respond to challenges in the digital market. The Panel found that policy change and enforcement can be “slow and unpredictable, which is even more costly than normal in rapidly evolving technology markets”. The main reason for this is because regulators are at an “enormous informational disadvantage” compared with technology companies. The Report states that to fit the emerging digital market, the UK competition rules must be updated. The Panel, however, considers that new tools are needed rather than a completely new approach.

The Panel’s recommendations still promote policy based on a balance of economic evidence and models with consumer welfare as the motivating perspective. The Panel, however, is of the view that solely using merger and antitrust enforcement going forward can create both delays and uncertainty, that can hinder any player in the market. Instead the Panel recommends that the UK should take a forward-looking approach that creates and enforces a clear set of rules to limit anti-competitive actions by the major digital platforms whilst also reducing structural barriers that currently hinder effective competition.

The Panel’s Recommendations

The Report sets out the following sixth strategic recommendations.

1. The establishment of a new digital markets unit with expertise in technology, economics and behavioural science, which will support greater competition and consumer choice in digital markets backed by new legal powers. The new unit would have three functions:

a. to develop a code of competitive conduct for companies deemed to have “strategic market status”

b. to enable greater personal data mobility and systems with open standards so that people can switch between platforms more easily

c. to advance data openness where access to non-personal or anonymised data will tackle the key barrier to entry in a digital market, whilst protecting privacy

2. Changes to merger control policy so that it is more forward-looking and takes better account of technological developments. The Panel considers that:

a. the CMA should further prioritise the scrutiny of mergers in digital markets and closely consider harm to innovation and impacts on potential competition in its case selection and assessment;

b. digital companies that have been designated with a strategic market status should be required to make the CMA aware of all of its intended acquisitions;

c. the CMA's Merger Assessment Guidelines should be updated to reflect the features and dynamics of modern digital markets, to improve effectiveness and address under-enforcement in the sector, and

d. legislative changes are needed to enable the CMA to use a “balance of harms” approach so that the CMA can better stop digital mergers that are likely to damage future competition, innovation and consumer choice.

3. Changes to competition enforcement to improve its speed and effectiveness including:

a. changes to enable greater use of interim measures to prevent damage to competition whilst a case is ongoing, and

b. adjusting appeal standards to balance protecting parties' interests with the need for the competition authority to have usable tools and an appropriate margin of judgment.

4. The Government, the CMA and the Centre for Data Ethics and Innovation should continue to monitor how the use of machine learning algorithms and artificial intelligence evolves to ensure that they do not lead to anti-competitive activity or consumer detriment, in particular to vulnerable consumers.

5. The CMA should conduct a market study into the digital advertising market.3

6. The Government should engage internationally on these recommendations, encouraging closer cross-border co-operation between competition authorities in sharing best practice and developing a common approach to issues across international digital markets.

Reaction to the Panel’s Recommendations

On 21 March 2019, Andrea Coscelli, the Chief Executive of the CMA, set out the CMA’s response to the Panel’s Recommendation in a letter to the Government. The CMA welcomed the Report and most of the Panel’s recommendations. It agrees that a digital markets unit would be beneficial, as the CMA recognises that enforcement action is insufficient to address the wider concerns in digital markets. In terms of ex-ante regulation, the CMA considers that this should complement rather than replace existing approaches. It suggests using the CMA’s market regime to gather evidence to establish the scale of the issues identified in the Report and to use this to develop clear recommendations for the new regulatory functions. Furthermore, the CMA considers that it could have a role in taking on these functions.

The CMA acknowledges that there are challenges in considering mergers in digital markets. Unlike the Panel, however, the CMA does not consider that fundamental changes to the existing legislative regime are required at present. It believes that the current legislative regime is “fit for purpose” and has proven itself so even in fast-moving and dynamic digital markets. The CMA is of the view that there would be practical challenges in applying a “balance of harms” test such as the ability to apply the test in a transparent and robust way. Furthermore, the CMA considers that the test would result in a fundamental shift in merger policy.

The Panel’s recommendations relating to the CMA’s enforcement tools mostly align with the CMA’s proposals in Lord Andrew Tyrie, the Chair of the CMA’s letter to the Secretary of State in February4. The CMA, however, has concerns regarding the introduction of more independent CMA decision-making structures for antitrust enforcement cases if appeal standards are changed. It considers that more internal checks-and-balances could become cumbersome and potentially impede the “agile and swift tackling” of anti-competitive practices.

The CMA agrees with the Panel’s recommendation to monitor the use of algorithms. It has already invested heavily in this area with the formation of a new Data, Technology and Analytics unit whose role is to understand how firms use data, what their machine learning and artificial intelligence algorithms are doing, and the consequences of those algorithms. Lord Tyrie’s letter sets out a number of proposals to enhance the CMA’s information gathering powers, which it considers are particularly relevant in fast-moving digital markets.

Following the Panel’s Recommendations, the UK Chancellor Philip Hammond wrote to the CMA asking it to conduct a market study into the digital advertising sector. The CMA’s ability to launch such a study is qualified on the budgetary restraints that the CMA will most likely face after Brexit.

Competition authorities across the globe are facing challenges with maintaining competitive conditions in the digital economy. The international Organisation for Economic Co-operation and Development has published a number of reports in this area5. Furthermore, topics such as merger review in the digital economy, digital cartels and algorithms are included in the International Competition Network’s strategic plan. The CMA intends to continue to play a leading role at an international level, as it recognises the benefits of acting at an international level in this area.

Comment

At a recent conference, Lord Tyrie stated that the digital economy is currently amplifying an erosion of the public’s trust in competition which causes legitimacy issues for antitrust policy. In his view, competition policy needs to be “rebooted” to make it quicker, more effective and more relevant to the public. The Panel’s Recommendations, as well as the proposals set out in Lord Tyrie’s letter, intend to enhance the CMA’s powers to make them fit for purpose for the digital economy.

Companies active in digital markets should engage with the Government and the CMA, as well as with international regulators such as the European Commission and the US Federal Trade Commission, who are also actively considering how to address competition law challenges in the digital economy. The outcomes from their consultations have the potential to significantly increase the regulatory burden on companies active in the digital economy and they could also affect their business models.


1 - Competition enforcement and regulation in the digital economy are a clear focus for the UK Government. The House of Lords Select Committee on Communications published its report on Regulating in a Digital World in March 2019 and on UK Advertising in a Digital Age in April 2019. Both of these reports considered the effect of the digital economy on competition.

2 - The Panel consisted of Professor Jason Furman, Professor Diane Coyle CBE, Professor Amelia Fletcher OBE, Professor Derek McAuley and Professor Philip Marsden.

3 - The House of Lords Select Committee on Communications included the same recommendation in its report on UK Advertising in a Digital Age in April 2019.

4 - Please see our client briefing on the proposals set out in Lord Tyrie’s letter here.

5 - For example, Rethinking Antitrust Tools for Multi-Sided Platforms and Maintaining Competitive Conditions in the Era of Digitalisation.

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