On 13 March, the Chancellor announced during his Spring Statement that the Digital Competition Expert Panel (“the Panel”), led by Barack Obama’s former Chief Economist – Professor Furman, had published its Report reviewing competition in the digital market place.

The competition law landscape more generally has also been subject to review. At the start of this month the Chair of the Competition & Markets Authority (“CMA”), Lord Tyrie, announced a set of preliminary proposals to revamp competition enforcement powers (see our article here).

Panel’s conclusions

Digital Markets Unit: The Panel’s central conclusion was that competition in digital markets should be sustained and promoted through an ex ante approach. The Panel recommended that the Government establish and resource a pro-competition “Digital Markets Unit”, to be tasked with securing competition, innovation and beneficial outcomes from consumers and businesses.

The Digital Markets Unit should be tasked with three functions:

  1. Code of Conduct – the Unit should work with industry and stakeholders to establish a ‘digital platform code of conduct’ which would apply to digital platforms that have been designated as having a “strategic market status” (being businesses in a position to exercise market power over a gateway or where they control others’ market access). The Panel argues that a Code of Conduct would provide clarity on the rules, rather than relying on the competition rules;
  2. Data mobility: the Panel considered that the Open Banking initiative showed the potential for data mobility to provide new opportunities for businesses to compete and innovate. As such, the Panel proposes that the Digital Markets Unit should be given the tools to allow consumers greater control of their personal data – allowing for it to be moved or shared between digital platforms.
  3. Data openness: access to data, the Panel considers, is a key driver for creating barriers to entry in digital markets. As such, the Report notes that it may be necessary for access to data, held by digital businesses, to be provided on reasonable terms. The Panel acknowledge, however, that such access would need to be in a form which protects personal privacy.

Merger control: In recent years, there has been a significant number of acquisitions in digital markets but only a handful of these have been reviewed by the European Commission or the CMA and resulted in the imposition of remedies. In the Panel’s view, this suggests that there has been under-enforcement of digital mergers.

The concern is that some of these acquisition may have involved the acquisition of potential competitors or have strengthened the acquirers position in an adjacent market which also strengthens their position in the core market.

The Panel concluded that there are three areas where the UK’s merger regime could be improved:

A. Prioritisation: the CMA itself considers that digital mergers have not been given sufficient priority. The Panel therefore recommended that the CMA should further prioritise the scrutiny of mergers in digital markets and consider harm to innovation and the impacts on potential competition when selecting cases.

B. Notification: Unlike Lord Tyrie, who called for all large mergers to be subject to a mandatory notification regime, the Panel considered that digital companies which have been identified as having a strategic market status should make the CMA aware of every intended acquisition. Unlike the mandatory notification regime, this would allow the CMA to make an informed decision on whether to investigate while avoiding the need for the CMA to investigate transactions unlikely to raise competition concerns.

C. Assessment Under the current merger regime, the CMA will assess whether a transaction is likely to reduce competition. The Panel consider that this does not allow the scale of any harm to be accounted for, alongside its likelihood. As such, the Report recommends a legislative change so the CMA can test whether a merger is expected to be on balance beneficial or harmful, taking into account the scale of impacts as well as their likelihood.

An interesting point is that the Panel did not consider there to be sufficient evidence to justify amending the UK’s jurisdictional thresholds, in order to capture transactions where the acquired business fails to generate revenue. The CMA, in its response, argued that such transactions are typically caught by the ‘share of supply’ test.

Anti-competitive conduct tools – the Report considers that, given the fast-changing nature and increased innovation, digital markets create a number of challenges for competition authorities. The Report does not, however, propose radical change to the competition rules to resolve these challenges. Instead, the Report make a number of proposals which are broadly in line with those set out by Lord Tyrie:

  1. interim measures – the CMA was given enhanced powers to impose interim measures in 2014 but has not yet used them. The Panel therefore recommends that the CMA intervene earlier by making greater and quicker use of interim measures to protect competitors from on-going harm; and
  2. standard of review – in 2013, the Government consulted on reforms to the standard of review in Competition Act cases, proposing a move away from full merits review to a judicial review standard. The Panel propose that the Government should revisit this, indicating that appeals should be on more limited standards and grounds. If such changes were to be adopted, the Panel also argues for the introduction of more independent decision making at the CMA, to protecting the parties’ rights of defence.

Algorithms - The Panel also acknowledged the on-going international debate as to whether algorithms, and other forms of artificial intelligence, may lead to increased anti-competitive practices. The concern is that pricing algorithms may make it easier for competitors to enter into collusive agreements (explicit collusion) or these technologies may automatically learn to collude without input from the business (tacit collusion).

The Panel considered that the CMA’s existing tools are sufficient to capture explicit agreements and there is insufficient evidence to support a change in competition law to capture tacit collusion. However, it does recommend that the CMA, and the newly formed Centre for Data Ethics and Innovation, continue to monitor the use of machine learning algorithms and artificial intelligence to ensure that it does not lead to anti-competitive activity.

Digital Advertising Market Study

Over the last couple of months, there have been increasing calls for the CMA to investigate the online advertising market. The Digital Culture Media and Sport Committee has, for example, recommend that the CMA open a market study focussing on the major search and social media companies. The Panel considered the digital advertising market to be opaque and also recommended that the CMA conduct a market study covering the entire supply chain, in order to assess whether competition is working effectively to the benefits of consumers. The CMA in response notes that it has been considering whether to undertake work in the digital advertising market but the launch of new projects is heavily dependent on the outcome of the Brexit negotiations.

Comment

The CMA has welcomed the recommendations set out in the Report, which is considers to be broadly in line with Lord Tyrie’s proposals. The recommendations of the Panel are likely to be subject to a detailed consultation process and businesses will have the opportunities to comment.

The UK is not unique in focusing its attention on the digital economy. The French and German competition authorities have, for example, announced a joint-study into the use of algorithms and artificial intelligence. These authorities are also considering their approach to mergers in digital markets

Notwithstanding the UK’s exit from the EU, we would anticipate that the UK will seek to actively engage in international debates regarding the digital economy to ensure that the UK’s rules are not out of kilter with the rest of Europe.