New IEA briefing highlights potential unintended consequences of proposed regulatory interventions in digital markets

• Government proposals to reform competition law will, if implemented, mark a significant expansion of the regulatory state.


• The proposals will hand the Digital Markets Unit huge powers over a large part of the economy, by making it a specialist regulator for firms with “Strategic Market Status” (SMS).


• SMS businesses would have to adhere to a legally-binding, prescriptive code of conduct.


• The proposals are divorced from the government’s aim of prioritising innovation, reducing regulatory burdens to ensure the UK attracts investment and digital trade.

The Meaning of Competition in the Digital Age, edited by IEA Head of Regulatory Affairs Victoria Hewson, compiles four speeches from a conference held by the Institute of Economic Affairs in partnership with the Information Technology and Innovation Foundation. It explores how – and to what extent – competition authorities should intervene in digital markets.  This comes after the government published for consultation its proposals to reform competition law earlier this year, aimed at establishing a ‘pro-competitive framework’ for the digital economy.

At the conference hosted by the IEA in November 2021, the Minister for the Digital Economy, Chris Philp MP, claimed the new regulatory framework would be a ‘light touch’ regime.  However, as Victoria highlights in her introduction to the paper, the scope for the consultation document and the associated impact assessment and background reports suggest the draft legislation, which is expected to be published in early 2022, will be far from ‘light touch’.

Under the proposals, a Digital Markets Unit within the Competition and Markets Authority (CMA) will become a specialist regulator for firms with Strategic Market Status (SMS). These are firms deemed to have ‘substantial’ and ‘entrenched’ market power in at least one digital activity, where this market power gives the firm a ‘strategic position’.

The regulations proposed, for conduct of business, merger control and remedies, are far-reaching. If implemented, they would constitute a considerable expansion of the regulatory state.  Each SMS firm would be given a legally binding code of conduct, prescribing how it is to operate to ensure fair trading, open choices and trust and transparency for users, and to anticipate and prevent exploitation of consumers and businesses or the exclusion of innovative competitors.

As the (undefined) concept of ‘digital markets’ covers a wide and increasing proportion of services and activities, the new framework would hand powers over a huge part of the economy to a regulator that is assumed to know how to run these complex, dynamic businesses fairly and competitively.

The paper includes contributions from Dr Michael Grenfell, an executive director of the Competition and Markets Authority (CMA); Dr Cento Veljanovski, founder and Managing Partner of Case Associates, IEA Law and Economics Fellow and Visiting Lecturer at the University of Buckingham; Professor Philip Booth, Senior Academic Fellow at the IEA and Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University; and Dr Aurelien Portuese, Director of the Schumpeter Project on Competition Policy at the Information Technology and Innovation Foundation.

Dr Michael Grenfell makes the case for the regulation of firms that are considered to have Strategic Market Status. His view is that the new framework is necessary to protect competition and innovation from being stifled by exploitation of market power by the most successful firms. We have seen recently the CMA stepping up its precautionary approach to digital platforms, by ordering Meta, the parent company of Facebook, to undo its acquisition of Giphy.

Professor Philip Booth challenges some fundamental assumptions about how market failures demand regulation by the state, when markets themselves can develop regulatory institutions to address some of the so-called failures. And Dr Cento Veljanovski explores what Hayek would have made of competition in the digital age, concluding that Hayek may have been more supportive of intervention than many may assume.

Victoria Hewson, IEA Head of Regulatory Affairs and editor of The Meaning of Competition in the Digital Age, said:

“2022 is going to see major regulation of online and digital services. Many supporters of free markets might be inclined to welcome this, if they feel that large successful tech companies are too dominant, threatening competition and innovation. That is the case made by the CMA in our paper published today. 

“There is a risk, though, that a precautionary approach – breaking up and regulation of firms by a regulator peering into the future – will have counterproductive effects and stifle innovation and investment, at a time when the UK will need them most as we emerge from Covid restrictions. 

“The new competition framework proposed by the government, together with the Online Safety Bill, seem likely to undermine the government’s commitments to digital trade and cutting regulatory burdens on businesses. The effects will be felt not just by the digital giants that they are aimed at but by entrepreneurs, start-ups, and consumers. This legislation needs close scrutiny and analysis by lawmakers.”

 

ENDS

Notes to editors

Contact: Emily Carver, Head of Media, 07715 942 731

IEA spokespeople are available for further comment.



All contributions from the conference will be available on the IEA YouTube channel, including from experts Aurelien Portuese, Director of Antitrust and Innovation Policy at ITIF; Christian Ahlborn, Global Head of Linklaters’ Antitrust & Foreign Investment Group; Joe Perkins, Head of Research and Senior Vice President at Compass Lexecon; Benedict Evans, independent technology analyst; Thibault Schrepel, Associate Professor of Law at VU Amsterdam University; Diane Coyle, Bennett Professor of Public Policy at the University of Cambridge; Mikolaj Barczentowicz, lecturer in public law and legal theory at the University of Surrey; and Renato Nazzini, Professor of Law at King’s College London.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.