Preserving innovation and customer choice whilst preventing the abuse of market power.

The UK government is legislating for new powers to regulate large digital firms. One proposal includes plans to stop the introduction of all new and improved services within a large firm’s ecosystem – unless and until the firm gets approval from the new digital regulator. This puts lots of beneficial innovation activity at risk, in areas where large digital firms have no market power and are having a pro-competitive impact. Blanket regulation isn’t needed. Leveraging from one market into another only harms competition under specific circumstances – it makes sense for regulators to target their efforts on those cases. The UK is currently an attractive place to launch and experiment with digital innovation. Regulation should ensure that these incentives are preserved.

Introduction

The UK Government plans to legislate to give new regulatory powers to the CMA’s Digital Markets Unit (DMU). The proposals respond to “a growing international consensus that the concentration of power in a handful of the largest digital companies is crowding out competition by erecting barriers to entry for other firms”, whilst at the same time “making sure regulation is not overly burdensome and supports responsible innovation”. A key part of the reforms is measures to prevent anti-competitive leveraging, where a firm uses its strong position in one market to exclude rivals in another market. The reforms contain several proposals aimed at addressing this concern.

We believe that one of the proposals being considered expands the scope of regulation too far and would run counter to the policy’s overall objective to support digital innovation. The proposal in question requires large digital firms with Strategic Market Status (SMS) to “not […] make changes to non-designated activities that further entrench the firm’s position in its designated activity/ activities unless the change can be shown to benefit users”. (See principle 2(e)). This proposal limits a firm’s ability to operate even in areas where they have no market power whatsoever.

This proposal risks making the UK a less attractive place to launch and experiment with new and better products:

• It throws the net of regulation over a wide range of pro-competitive innovation that benefits UK consumers, and puts those well-recognised benefits at risk.
• It could stop innovation, entry or improvement anywhere in a firm’s product range, unless and until it approached the DMU for approval. It creates a model where firms have to seek permission to innovate.
• Placing the burden on large firms to demonstrate user benefits to the DMU ex ante is disproportionate. It presumes innovation is problematic until proven otherwise, rather than supporting innovation until a problem is proven to exist. This could prevent UK consumers from accessing new products and services.
• It risks jeopardising the UK’s reputation as a pro-innovation economy. It creates a higher regulatory burden on innovation than has historically existed in the EU or beyond.

The large digital firms that may fall under the scope of the new regime play a key role in innovation. The government’s own study on innovation in digital markets notes that these firms “have delivered exceptional breakthrough and disruptive innovations which have improved consumers’ lives, created thousands of jobs for employees and…have intensified competition and increased consumer welfare”.

Regulating to require permission for all of this activity cannot be the right approach. The fact that a firm offers new and better products in a market that is not working for consumers, or where the new firm faces strong competition, is unlikely to be a problem. Legislation should instead ensure that the DMU takes a more targeted approach, and focuses its efforts on identifying those cases where leveraging might raise genuine concerns.

Below we explore in more detail why the current proposal to regulate non-designated activities puts innovation, UK consumers and the UK economy at risk. Section 2 first explains what leveraging is, and the limited circumstances in which it can lead to competition concerns. Section 3 then sets out how leveraging can lead to greater innovation and competition in the market. Section 4 explains how the DMU proposals put those significant benefits at risk.

This briefing paper represents the authors’ own views. It was funded and produced in collaboration with Amazon UK.

Read the full briefing paper here: