This Report, which can be found here, follows a review ordered by the UK’s Treasury to make recommendations on changes to competition and pro-competition policy to help unlock the opportunities of the digital economy. The report’s recommendations build on a number of propositions, namely that: the digital economy is creating substantial benefits; that a number of digital markets are prone to tipping and being ‘winner-takes-all’; market concentration in these markets both creates benefits and incurs costs; but government policy and regulation have limitations.

In the light of this, the report found that the standard tools of competition policy, evaluating whether mergers can proceed and whether antitrust action is warranted to remedy abuses by companies, could play a role in helping to promote competition and the associated better outcomes for consumers and innovation. To do so, competition policy will need to be updated to address the novel challenges posed by the digital economy. Some of these updates can happen within current powers, but legal changes are important to ensure that this job can be done effectively. The biggest gains, however, will come from going beyond these tools to focus on policies that actively promote competition, foster entry by new competitors, and benefit consumers. The most significant suggestion in this regard is the creation of a digital markets unit with the remit to prepare a code of conduct for the most significant digital platforms, and adopt measures to promote data mobility and systems with open standards, and promote expanding data openness.

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Chapter I focuses on the benefits and challenges in digital markets.

The digital revolution is a powerful driver of growth for the UK and global economy. Innovative businesses in competitive markets drive this success, delivering the combination of private and public benefits that have characterised the modern market economy. Digital companies invest large sums in research and development. Online platforms can be strong drivers of innovation, and the services they provide to consumers are frequently free at the point of use. Several digital markets, despite the major differences in the types of goods or services they offer, have a number of common and distinctive features that pose unique challenges for competition and pro-competition policy. Many are dominated globally by one or two of five large digital companies. Services provided by online platforms are frequently provided to the consumer at no monetary cost. Online services that have no monetary price are funded through commissions paid by business users of platforms, or through advertising. Where commissions are paid, these may ultimately be passed through to consumers in the prices they pay for goods and services. For services funded through advertising, consumers will pay through provision of their data.

The persistent concentration amongst a small number of firms in digital platform markets is a result of several economic features of these markets, as well as in some cases behaviour of the incumbents. The challenges to effective competition in digital markets do not come about solely because of platforms’ anti-competitive behaviour and acquisition strategies. Their network-based and data-driven platform business models also tend to tip markets towards a single winner. Digital markets have features that can increase competition relative to traditional markets. These include the ability for consumers to use multiple platforms simultaneously, the removal of some barriers to switching, and the ability to use digital tools to compare prices and features. Digital markets also have features that heighten concentration, including economies of scale and scope, a data advantage for incumbents, network effects, limitations to switching and multi-homing including behavioural factors, and access to finance and intangible capital. The relative importance of these factors varies from market to market but in many digital markets, the forces for concentration appear to have a strong cumulative effect and thus predominate. The barriers to entry that exist in established digital platform markets mean that they cannot generally be considered freely contestable, and as such the largest incumbents’ positions are not imminently under threat. There are a number of a priori economic reasons to believe that this market power could be persistent under the current policy regime. The more rapid turnover in the earlier days of the consumer expansion of the internet has given way to a greater degree of stability and continued consolidation in market shares in the major activities.

This means that digital platforms can exert significant market power over their users, meaning they are not required to deliver the same level of positive outcomes as they would if facing normal competitive market conditions. The welfare effects of this are not entirely clear. As economies of scale reduce costs for larger firms, and network effects raise the benefits of single platforms being used, then a concentrated market may be an efficient outcome. However, this is only satisfactory if consumers receive a sufficient share of the benefits of these efficiencies. When a single platform faces limited competition for the market and many fragmented users with limited bargaining power, this is unlikely to be the case over the long term. Absent an effective competitive constraint on the market, economic theory suggests that optimal decisions by a dominant platform will not consistently deliver optimal outcomes for consumers. This can affect consumers directly, through variation of prices and quality of services provided by platforms to consumers. Alternatively, it might result in indirect consumer impacts, as the effects of unfair terms and unfair access for business users of platforms filter through to consumers in the prices, quality, and range of services they receive from those businesses.

Chapter II focuses on how to build consumer choice and competition into digital services.

To make competition effective requires policy that changes that dynamic and creates space for businesses to start, compete and grow alongside and around the big platforms. This can be achieved through a pro-competition approach that sets rules and standards to change how a digital market works and creates new opportunities for competition, innovation and consumer choice. To deliver this, the report calls for a new digital markets unit with capabilities and resourcing to deliver greater competition, backed by new powers to set and enforce competition-enhancing rules.  In order to successfully pursue these roles and boost competition, market-driven innovation and consumer choice in complex and evolving markets, the unit will need significant resourcing, leadership, and technical, economic and behavioural expertise.

The report describes three functions for the digital markets unit that will deliver more effective competition. Firstly, agreeing and setting out upfront a code of conduct to complement antitrust enforcement with a clearer and more easily applied set of standards that define the boundaries of anti-competitive conduct in digital markets. Secondly, to use tools such as fomenting the adoption of open standards and to adopt standards to allow data portability to give consumers greater effective choice over their digital services, allowing new opportunities for competition where there are currently closed systems. There these solutions are not voluntarily agreed, deciding whether and how to require data mobility or open standards in a digital market will take engagement, expert skills, and careful analysis by the unit to decide when they will be proportionate and effective. Thirdly, the digital markets unit should be able to open up some of the data held by digital businesses and provide access to them on reasonable terms.

This chapter then outlines the potential institutional design of the digital markets unit. The role of the unit would have important links to functions and expert skills within the Competition and Markets Authority (CMA) and the telecoms regulator. The unit could be an independent body linking to both, or it could be a function of either institution. Its role also links to other potential functions currently under consideration to tackle separate but related issues such as harmful online content, the relationship between digital platforms and the news media, and open data in regulated utilities. Finally, the unit would need a strong relationship with the UK’s data privacy regulator. Whatever the institutional format, co-operation and consultation with business and other stakeholders will be essential. The unit will be most effective if its functions are designed and delivered through participation, balancing the interests of major platforms and newer and smaller tech companies to ultimately benefit the consumer, and translating this into codes and standards that can be understood and used.

At the same time, it is clear that a voluntary approach would be insufficient –businesses’ natural incentives do not line up with delivering these functions. Therefore, it will need new regulatory powers, beyond those currently in statute, to set solutions. Such regulatory interventions should be narrow in scope, to minimise the burden of compliance on smaller businesses and in markets where competition will work effectively without intervention. Intervention will also need to be timely, as new digital markets arise and existing ones tip to a winner or diversify with new entrants. A good approach to combine these elements would be to define and periodically assess which companies hold a position of enduring market power, and limit mandatory solutions to these entities.

Chapter III outlines how to implement a competition system optimised for a digital world.

This chapter makes a set of recommendations on how to make more effective use of existing competition powers, and what new ones are needed to address gaps. Some recommendations can be applied within the existing legal framework; but the Panel’s full recommendations, and the full associated benefits, require additional targeted legislation. The changes proposed are particularly relevant for issues seen in digital markets, but they are likely to be beneficial where similar challenges occur elsewhere, so they should be applied across the board.

A first set of recommendations concern mergers. The largest digital companies have made extensive use of mergers, as their market shares have grown. Over the last 10 years, the five largest firms have made over 400 acquisitions globally. None has been blocked and very few have had conditions attached to approval, in the UK or elsewhere, or even been scrutinised by competition authorities. A number of solutions are advanced. The CMA should take more frequent and firmer action to challenge mergers that could be detrimental to consumer welfare through reducing future levels of innovation and competition, supported by changes to legislation where necessary and an update of its merger guidelines. In part, the CMA can achieve this through giving a higher priority to merger decisions in digital markets. Furthermore, requiring digital companies that hold a strategic market status to make the CMA aware of their intended acquisitions will allow the CMA to determine in a timely manner which cases warrant more detailed scrutiny. Finally, the standard of review should be reformed. As it stands, a merger may be blocked if a substantial lessening of competition is more likely than not to result. Although in many situations this is a reasonable approach, it does not adequately allow the scale of any harm (or benefits) to be accounted for alongside their likelihood, as they would be in economically sound cost-benefit analysis. As such, the report recommends that a change should be made to legislation to allow the CMA to use a ’balance of harms’ approach which takes into account the scale as well as the likelihood of harm in merger cases involving potential competition and harm to innovation.

A second set of recommendations focus on anticompetitive conduct. The tools and frameworks within existing antitrust law are appropriate –and where they have limitations, a pro-competition approach will provide better solutions. The key weaknesses of antitrust in digital markets are instead that it has been used very infrequently and cases have moved too slowly. A way to address this may be to look back at past decisions to learn from experience to inform when and how abuse of dominance could be more effectively applied in future. It was recommended that the CMA should perform a retrospective evaluation of selected cases not brought and decisions not taken, where infringements were suspected or complaints received, to assess how markets have subsequently evolved and what impact this has had on consumer welfare. Furthermore, since in digital markets can move fast and tip to a winner before a final decision is reached, the CMA should adopt streamline procedures to impose interim measures. To ensure that action is effective, the standard of review of CMA decisions should move from a full merits review to something close to judicial review; to ensure that this does not lead to institutional overreach, the CMA’s structures for antitrust cases should enhance the role of the independent members of its decision-making panels.

A third set of recommendations focuses on the institutional capabilities necessary to support digital competition. A first pre-requisite for successful regulatory intervention is that the regulator has appropriate digital information. This means that the authorities responsible for enforcing competition and consumer law must have sufficient and proportionate information gathering powers to enable them to carry out their functions in the digital economy. Similarly, where possible the CMA should deploy consumer law powers to protect consumers in digital markets. This can support competition aims and should be continued, with consideration given if there are gaps in current power. There has also been significant analysis and debate around whether there is increased potential for collusion and personalisation where prices are set using algorithms. At present, it is hard to predict whether greater use of algorithms will lead to algorithmic collusion or personalised pricing in future, and there is no evidence that harmful personalised pricing is widespread. But these are areas with potential to move fast, where it will be important to stay alert to potential harms. It is thus recommended that the government, CMA and the Centre for Data Ethics and Innovation should continue to monitor how use of machine learning algorithms and artificial intelligence evolves to ensure it does not lead to anti-competitive activity or consumer detriment.

Chapter IV then describes an international agenda for promoting competition in the digital age.

By implementing the approach set out in this review, the UK can take a lead on solutions to issues that competition policy is grappling with across advanced economies. Given the international nature of many digital markets, leading international co-ordination in these areas will also be beneficial for businesses, allowing solutions to be established and adopted that work across national boundaries. International leadership in this area can be achieved through a number of measures. One is to engage internationally on the recommendations it chooses to adopt from this review, encouraging closer cross-border co-operation between competition authorities in sharing best practice and developing a common approach to issues across international digital markets. A second measure will be to promote the UK’s existing competition policy tools, including its market studies and investigation powers, as flexible tools that other countries may benefit from adopting. A third recommendation is that the UK should use its voice internationally to prevent patent rights being extended into parts of the digital economy where they are not currently available A fourth measure is to support closer co-operation between national competition authorities in the monitoring of potential anti-competitive practices arising from new technologies and in developing remedies to cross-border digital mergers. A last measure is to ensure platforms and businesses have a simple landscape in which to operate, government should encourage countries to consider using pro-competition tools in digital markets. As part of this work, government should work with industry to explore options for setting and managing common data standards.

Finally, Chapter V concludes.

How could digital markets and digital services look in the future, if these recommendations are implemented? It is impossible to predict how digital markets will change, but it is possible to make an educated guess. In many digital markets, the platforms that currently hold large market shares are likely to remain at the head of the field.  In other markets, significant new competitors may emerge and contest platform services that currently appear unassailably dominant or become the leaders in entirely new services that no one today can imagine. Across digital markets, implementing the recommendations will enable more new companies to turn innovative ideas into great new services and profitable businesses. Some will continue to be acquired by large platforms, where that is the best route to bring new technology to a large group of users. Others will grow and operate alongside the large platforms. Digital services will be more diverse, more dynamic, with more specialisation and choice available for consumers wanting it.

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