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Greater EU Competition Enforcement needed in the Digital Era

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

15-04-2019

As we have recently reported, a number of competition authorities and governments are in the process of assessing whether their competition enforcement tools are fit for the digital economy. In the UK, on 13 March 2019 a specially commissioned panel published a report called “Unlocking Digital Competition” which sets out a number of recommendations to change the UK’s Competition framework in order to face the economic challenges posed by digital markets (our briefing is available here).

On 4 April 2019, the European Commission (the “Commission”) published a report titled “Competition policy for the digital era” (the “Report”), which was prepared by three special advisors appointed by EU Competition Commissioner Margrethe Vestager. The Report explores how EU Competition policy must evolve to promote pro-consumer practices in the digital age.

The Report highlights the challenges created by digitisation. The online world has become such an integral part of our daily lives and yet has brought many new issues, one of which is the concentration of power by a few very large digital firms. This issue has been the focus of the Commission in an increasing number of cases, such as Microsoft (2004), Google Shopping (2017) and Google Android (2018). These cases have contributed to an increased understanding of the digital markets and have raised awareness of the need to adjust the analytical methodologies and theories of harm applicable to the digital context.

Is the current EU competition framework fit for purpose?

The Report argues that digital markets require greater competition policy enforcement, as dominant digital players tend to have a strong competitive advantage. It states that there are clear issues caused by dominant companies who have strong incentives to engage in anti-competitive behaviour and that EU competition law concepts need to be updated as a result.

The Report highlights three main issues which it argues are of most concern in the digital economy:

1) Extreme returns to scale: the cost of production of digital services is not at all proportional to the number of customers served and this creates a significant competitive advantage.

2) Network externalities: the convenience of using a technology or a service increases with the number of users that adopt it. Consequently, it is not enough for a new entrant to offer better quality and/or a lower price, but it also has to convince users to coordinate their migration to its own services.

3) The role of data: the evolution of technology has made it possible for companies to collect, store and use large amounts of data. Therefore, the ability to use data to develop new, innovative services and products is a further barrier to competition.

What are the main concerns highlighted by the Report?

Consumer welfare standard

The Report considers the goals and methodologies of EU competition law in the digital era, discussing possible modifications to the established legal tests. Regarding the consumer welfare standard, it notes that where consumer harm cannot be precisely measured, strategies employed by dominant companies aimed at reducing the competitive pressure should be forbidden in the absence of clearly documented consumer welfare gains. The Report also mentions the possibility of amending how market power is measured in order to take into consideration data which a dominant player may have exclusive access to.

Online platforms

The Report looks at some of the anti-competitive practices of dominant platforms, such as price fixing requirements that goods cannot be sold through other channels at lower prices. On the other hand, the Report considers that platforms should play a regulatory role in determining the rules of interaction between users and have a responsibility to ensure that competition on the platforms is fair, unbiased and pro-users.

Big Data

Data is also discussed in the remit of access to personal data and data sharing. The Report recommends that further guidance should be provided on the conditions in which it is pro-competitive for companies to share or pool data.

Mergers

The Report highlights the issues presented by acquisitions of small start-ups with a quickly growing user base and significant competitive potential by dominant companies (the so called “killer acquisitions”). The Report discusses whether the current EU merger control regime needs to be adjusted as a result.

Often, acquisitions of start-ups do not meet the Commission’s jurisdictional thresholds because they take place when the start-ups do not yet generate sufficient turnover. Nevertheless, the Report advises against any changes to the EU merger thresholds to capture “killer acquisitions”, arguing it is too early for such a legislative update at the moment.

The Report also discusses the need to revisit the substantive theories of harm to properly assess this type of cases. In particular, a new theory of harm may be needed to capture the potential adverse effects on competition of mergers in the digital field. The Report states that, in the future, the competitive assessment must include an analysis of the strategic relevance of such mergers in protecting the broader digital ecosystem from competitive threats. Where network effects and strong economies of scale lead to further concentration, Competition law must be careful to ensure that dominant players remain exposed to competitive challenges.

What proposals have been put forward?

The Report outlines a number of proposals, the main ones being:

• A possible regulatory regime in the longer run as competition law enforcement may be overburdened to deal with the oversight of dominant digital companies. This could include regulatory agencies developing internal technological capabilities.

• Requiring dominant players to exchange data with other parties.

• The need to revisit the substantive theories of harm to properly assess acquisitions of start-ups with a low turnover but a high future potential. It is suggested that the best way to handle these cases is to update the existing conglomerate theories of harm and specify when such novel theories of harm would apply.

• Monitoring whether changes to the EU jurisdictional thresholds are needed in light of the acquisitions of start-ups.

• Changing the standard and burden of proof in competition enforcement so that dominant companies bear the burden of showing that the adverse effects on competition are offset by pro-competitive efficiencies.

• Requiring competition agencies to provide more guidance relating to the digital economy. For instance, guidance may be needed on the definition of dominance on the digital market, and the duties of dominant platforms’ in terms of their behaviour on the market.

• Recommending guidelines on data sharing, data pooling, data access and interoperability requirements to create more legal certainty for companies.

Our comment

The Report clearly demonstrates the Commission’s increasing activism in scrutinising the digital market and explicitly supports even stricter competition enforcement in that area. The Commission is the number one regulator in the world in terms of number of investigations in this field and also in terms of imposing record fines totalising EUR 11 billion since 2015.

National competition authorities in Europe together with their counterparts in North America and Asia are also increasingly more active in the digital economy and are considering how to enhance their respective competition regimes to adequately regulate the behaviour of digital market players. All of this is happening in times when competition investigations are on the surge. In 2018, a total of 18 cases concerning the digital economy were closed worldwide, and there are currently 19 ongoing investigations against the top four US tech companies.

Therefore, we recommend that companies active on the digital market should engage with domestic and international competition regulators, such as the European Commission and the US Federal Trade Commission, who are actively trying to address competition law challenges in the digital world. The outcomes from their consultations have the potential to significantly increase the regulatory burden on digital companies and also affect their business models. Mergers and “killer acquisitions” seem to be of a particular concern for regulators, together with overseeing the dominant behaviour of tech giants.


1. Jacques Crémer, Yves-Alexandre de Montjoye and Heike Schweitzer.

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