Research

Powering Up: How will the Digital Markets Unit affect competition and innovation?


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Economic Affairs
Tax and Fiscal Policy
https://iea.org.uk/wp-content/uploads/2022/07/IEA-_Regulatory-Affairs_Powering-up_web.pdf
Summary

  • The government proposes to give a new Digital Markets Unit (DMU)
    powers to regulate firms in digital markets. This new ex ante regulatory
    approach is designed to overcome the claimed inadequacies of existing
    competition law to regulate the digital sector yet will be housed in the
    Competition and Markets Authority (CMA).

  • Digital firms will be regulated if they have Strategic Market Status (SMS).
    SMS ‘will be applied to a small number of firms which have at their core
    substantial and entrenched market power in an activity, giving the firm a
    “strategic position”’.

  • We believe that the CMA already has the tools (which will be enhanced
    by concurrent reforms of the UK’s competition laws) to adequately regulate
    competition in the digital sector.

  • Furthermore, we believe that the basis for a new regime is weak. The
    proposals view network effects and big data as inevitably entrenching the
    market power of large digital platforms which will under-invest and underinnovate unless the government acts. There is little empirical evidence to support these claims and the theoretical grounding is weak.

  • Given the central role played by SMS status, its vagueness reduces legal
    certainty and gives the DMU excessive discretion.

  • The proposed codes of conduct will allow the CMA to substitute its
    ‘business models’ for those of SMS firms, to a level of detail that includes
    their terms of business, and mandatory data sharing and interoperability.
    Firms will require approval for changes to their business models and
    technologies.

  • This ‘central planning’, reminiscent of the regulation of
    old-style utility industries, is likely to reduce innovation, investment and UK start-ups, create security risks and harm consumers, who will receive
    reduced services.

  • The DMU will instil a precautionary mentality to regulation that is at odds
    with the disruptive and innovative nature of digital platforms. The government should re-examine the evidence for, and possible unintended consequences of, the proposed regime before bringing forward legislation.


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