A New Institution to Oversee Successful Digital Companies?
This post is part of a series covering different studies on antitrust enforcement of digital services released by various academics, think tanks, and regulatory agencies. The third in the series is a review of the “Furman Report” titled “Unlocking digital competition.”
The Furman Report (discussed on DisCo previously) comes in response to the UK government’s request for recommendations on changes to competition policy to allow for growth in the digital economy. The Report is centered on the basic premise that competition in the digital economy is beneficial and possible, but that policies needed to be updated in order to protect and increase it. The Report makes recommendations which aim to create or increase benefits for consumers, start-up businesses, and predictability for incumbent digital firms. The key recommendation from the Report is the creation of a “digital markets unit,” which would have three main functions: a pro-competitive code of conduct exclusively for firms that have achieved “strategic market status”, personal data mobility and open standards, and data openness.
In addition to the proposal to create a new digital markets unit, the Furman Report’s most important recommendations are the following:
- Reviewing the merger control rules to ensure that the Competition and Markets Authority (CMA) can better stop digital mergers that are likely to damage future competition, innovation and consumer choice.
- Revamping antitrust enforcement powers, including the use of interim measures and other powers to tackle anti-competitive harms faster.
- Conducting a market study on the digital economy that covers digital advertising.
Unfortunately, the Report fails to provide more details on how this unit will be governed or interact with other existing agencies. Overall, the Report does a substantial job of explaining unique aspects of the digital economy and why the nature of the digital economy poses new challenges to competition. However, the Report fails to dive deeper into questions regarding the cost of proposed competition policy changes when it comes to questions on consumer privacy and firms’ data security.
Further analysis is provided below on the Report’s breakdown of competition challenges with a special focus on the proposed digital markets unit.
A New Digital Markets Unit
One of the unique recommendations from the Furman Report is the proposal to create a new digital markets unit. This new unit will have as its main objective to support greater competition and consumer choice in digital markets. According to the Furman Report, this new unit will have to (i) develop a code of competitive conduct; (ii) pursue personal data mobility and open standards including access to anonymized data; and (iii) work on updating the regulatory framework to ensure challenges to a fast paced digital economy can be tackled timely.
While the Furman Report seems to have a clear idea of what deliverables the new unit should work on, it seems not to have thought about its institutional design. According to the Report, the proposed digital markets unit could either function as a unit within the CMA or the Office of Communications (Ofcom), or as an independent body. This lack of deep analysis of the proposed digital markets unit raises some important questions: If the new unit is set within one of the existing agencies, to whom would it be accountable? Who, for example, will approve the code of competitive conduct? What is so unique about this unit and how will it interact with existing units within the CMA or Ofcom? Would there be increased funding for these agencies if they have to create this unit? On the other hand, if the proposed unit is created as an independent body to whom would it be accountable? How you would secure funding so the agency works beyond the short term and amidst big political changes taking place in the UK? More importantly, how will it coordinate its mandate with the CMA or Ofcom especially in those areas where there is overlap?
Reading between the lines, it seems the Furman Report wants to ensure that there is sufficient oversight of companies that become successful in the digital space, which might be difficult to enforce for various reasons. The Furman Report suggests that the code of competitive conduct that the new agency will draft will only be applicable to those stakeholders that are “particularly powerful companies” and defines these companies as those that have “strategic market status.” In an economy transitioning further towards the digital, it seems odd to suggest that a new agency should focus on the most powerful companies in the digital space. This could artificially create an unnecessary distinction between digital and non digital companies, when the trend indicates that everything will be digital even in the short term. Another challenge will be how to determine whether a company in a market has a strategic market status. In order to determine this, would the new unit use antitrust parameters to define markets or is it going to create its own market definition standards? This proposal could raise many discriminatory issues that would likely harm the UK antitrust system.
Beyond the Digital Markets Unit
Through the Furman Report it is explained that competition challenges in the digital market are due to several factors, some of which go beyond what the Report claims to be incumbent firms’ “anti-competitive behavior and acquisition strategies.” The Report initially focuses on the network based and data-driven nature of digital market platforms, two main factors that the Report (and the previous two covered in this series) says stifle competition.
The network-based nature of platforms reportedly make it difficult for start-up firms to break into the market because of “network effects.” According to the Report, “network effects” are evident when a platform becomes more valuable to the user as the platform grows. However the Furman Report fails to account for other opinions such as that from David S. Evans and Richards Schmalensee in Failure to Launch: Critical Mass in Platform Businesses, if a platform loses users or fails to reach “a critical mass”, it is unlikely to survive because consumers have no reason to join a platform that lacks a network.
The Report also considers data as a barrier to entry in the digital economy due to data-driven platform models. According to the Report, incumbent firms holding significant amounts of data and the ability to collect such data is a cited barrier of entry to the digital economy. Incumbent firms hold these datasets exclusively and also use them for targeted services. In turn, these datasets are also used for leverage in acquiring advertisers because the firm holds data that will allow for more targeted, and therefore more profitable investment.
The Report claims that both of these features – network effects and data-driven models – tend to “tip” markets towards a single winner, making it harder or near impossible for smaller firms to compete against the incumbent firms. The proposed digital market unit would apparently combat these issues and would usher in a new approach aiming to change these features in digital markets, so competition can be allowed to thrive. But shouldn’t the CMA be doing this already, if actual consumer harm is demonstrated? It seems that the challenge goes beyond theoretical discussions over network effects and big data. The reality is that to date, the CMA hasn’t been able to prove that consumers have been harmed by companies that the Furman Report seems to refer to.
The Road Ahead
As mentioned before, the Furman Report suggests reviewing the existing merger control rules and launching a market study on digital advertising. The CMA has already started implementing these recommendations and opened consultations earlier in June and July inviting all interested stakeholders to submit their views.
Among all the recommendations included in the Furman Report, analyzing and studying these markets through consultations seem to be a good road ahead. The results of these consultations will probably be released in 2020. Until then, it might be more prudent to be patient and wait to understand in a deeper fashion what the challenges raised by the digitalization of the economy are, before investing in creating new agencies, or delivering new regulatory tools not fit to tackle potential challenges.