DCMS and BEIS Pro-competition Regime for Digital Markets - Which? response

Summary

Which? welcomes the opportunity to respond to this consultation. It is clear that there are a small number of digital markets in which a severe lack of competition is causing harm to consumers. For example, in its Market Study on online platforms and digital advertising, the CMA made an incontrovertible case that Google and Facebook are not subject to sufficient competitive pressure in the online search and display advertising markets. These and some other digital markets are characterised by having a single firm that not only has substantial market power, but its position in the market means that it acts as a gatekeeper between consumers and other businesses, giving it a strategic role in determining market outcomes.

The harms caused to consumers by a lack of competition in some digital markets include:

• higher prices, as the gatekeeper charges higher prices to other businesses and these are passed through to the prices paid by consumers; 
• a lack of competition on quality;
• consumers giving up more personal data than they would like;
• reduced innovation, and ultimately lower economic growth through reduced productivity improvements.

These digital markets play an integral part in the lives of most consumers, and so intervention is needed to increase competition and deliver better outcomes for consumers. However, the current competition regime does not have sufficient powers to do this, which means that these harms grow all the while and economic damage becomes entrenched. We are therefore pleased that the Government is consulting on a set of sensible and proportionate remedies to address the sources of market power and their consequent harms in these markets.

We support the principle of creating a bespoke regime for a very small number of the largest online platforms that are designated as having Strategic Market Status. We also agree that the right way to address the problem of limited competition in these markets is to create a specialist regulator within the CMA, the Digital Markets Unit (DMU), and to empower it to be able to intervene with remedies to increase competition. The DMU will need the authority to be able to apply a wide range of interventions so that it can create the conditions for competition to increase in these markets. Inevitably though, the nature of these markets means that some platforms will always have market power that will be open to abuse and so we agree there is a compelling case for an enforceable code of conduct to manage their behaviour ex ante. Clear ex-ante rules and guidance to provide clarity over what represents acceptable behaviour when interacting with consumers, other businesses and competitors will help to prevent and address harms to consumers and competition more rapidly.

While we agree with many of the specific proposals, there are three areas where we feel the Government’s proposals are likely to fall short, so that there will remain a substantial risk of consumer harm. These are:

• An inadequate consideration of consumer harms. We are concerned that the proposals to only allow the DMU to implement remedies for harms that arise directly from competition will reduce its potential effectiveness. The Government is right that the focus of the DMU must be to improve the competitiveness of key digital markets, but we feel the proposed duty jeopardises the DMU’s ability to fulfill its role and fails to take advantage of the opportunity to address a systemic weakness of the UK’s consumer protection regime in digital markets. The first problem is that a focus purely on competition harms will not allow the DMU to look at consumer harm in the round, making it unable to take a balanced view on issues where there may be a trade-off to consumers in benefits and costs. For example, pro-competitive interventions requiring the sharing of data held by SMS firms will also need to protect consumer privacy. Further, the DMU is likely to uncover a range of harms during its investigations for SMS designations and pro-competitive interventions. Some will be competition harms, but others will be issues of consumer protection. An overly narrow duty would prohibit it from acting to address these. A long-standing failure of the UK’s competition and consumer regimes is that public enforcement for consumer protection issues has been considerably weaker than for competition issues. The Government’s other consultation - Reforming Competition and Consumer Policy - goes some way to address this, but still leaves the CMA with limited powers to address new and emerging consumer protection harms in digital markets. Empowering the DMU to be able to tackle consumer protection issues with SMS firms would go some way to addressing this shortcoming. Finally, the overly narrow focus even risks the DMU being unable to protect consumers from harms that could be broadly interpreted as competition harms. We fear that the duty as currently suggested may leave an opportunity for SMS firms to challenge the decisions of the DMU in the courts on the basis that a harm may not be directly linked to a lack of competition. We therefore recommend that:
  • The DMU is given a duty that gives prominence to addressing competition harms, but which allows the DMU to look at consumer harm in the round. For example, a duty ‘to further the interests of consumers in digital markets, in particular by promoting competition’.
  • The test for a pro-competitive intervention should be an adverse effect on competition or consumers (AECC), as recommended by the Digital Markets Taskforce.

• Super-complaint powers. To ensure that the regime is sufficiently accountable, designated bodies should have the power to make a super-complaint to the DMU on the basis that the conduct of one or more services meet the SMS test, and/or are in breach of the principles of the Code. Which? (The Consumers' Association) would expect to be made such a designated body equivalent to its status under the Enterprise Act 2002, and financial services legislation.

• Not pushing ahead with reform of the mergers regime. We agree with the Government that the concentration of market power in SMS firms comes in part from their extensive acquisition of smaller companies, and that the nature of digital markets means that addressing this will require a bespoke merger regime that would only apply to firms designated with SMS. However, we are concerned that the Government’s current preferred option, according to the Impact Assessment published alongside the consultation, does not include the creation of this bespoke merger regime. We fear that if the Government fails to take this opportunity then the UK will be left with a merger regime that is inadequately designed for the demands of assessing acquisitions in digital markets. We risk being left behind other jurisdictions, with the consequence that UK consumers will continue to suffer harm from excessive concentration in some markets. 

As we set out below in our answers to specific questions, we are deeply sceptical that the proportionate reform of the merger regime as described in the consultation could lead to a ‘chilling’ of investment and innovation. The lack of intervention by competition authorities in digital mergers is well known. The consultation notes that the largest digital firms have collectively bought close to 300 companies over the past five years, of which only seven were reviewed by the CMA or European Commission and none to date have been blocked. Given this, it seems that only the most partial of commentators could argue that the bigger risk is over rather than under-enforcement. The Government should seize the opportunity to implement much-needed changes to the merger regime at the same time as enacting the other changes to empower the DMU. Overall, we urge the Government to push forward with this agenda at pace and to legislate to strengthen the competition regime for digital markets as soon as possible. The longer it takes to implement the proposed measures the greater the risk that the harms caused by the lack of competition will become irreversible and the UK’s digital economy will be scarred by this. By contrast, swift action to improve competition in these markets would not only protect UK consumers, but could encourage greater investment from businesses seeking to compete on more even terms with the largest tech companies and be a boon to the UK economy.